Accounting requirements and practical reality
Every company must keep books as per Companies Act and ICAI standards. AS deals with principles and disclosures. Listed companies face stricter norms. Small and private companies often neglect. Auditors face difficulties and Satyam case showed limits of audit. When there is no proof for entry, allegation becomes easy. This creates opening for dispute in closely held companies where one group knows all internal details.
Allegation of mismanagement through accounts
In 397/398 petition, minority often pleads mismanagement and asks for inspection of books and independent auditor. Accounting lapse is easiest ground. But law does not say defective books automatically mean mismanagement. Mismanagement must affect company affairs and shareholder rights. CLB can direct production of books under its powers. But it must not decide case only on that. It must see whether lapse caused diversion, unjust enrichment, or denial of dividend. If company is profitable and minority is not prejudiced, drastic order is not warranted.
Clb approach: substance over form
Company Law Board has wide powers under 397/398. It can look at equity and logic. If books are bad but business is running and no loss to minority, Board may order compliance, not removal of management. If books show siphoning or suppression, then relief follows. Thus books are evidence, not conclusion. Relying only on books will encourage technical petitions. Ignoring books will encourage fraud. Balance is needed. Board must also consider impact on creditors, employees and going concern.
Constitutional court guidance
Courts have held that irregularity in books will not by itself lead to mismanagement unless other events prove so. The object is to protect company and minority. If accounting defect is used as tool to harass majority, it defeats object. Therefore CLB must examine motive, conduct, and consequence. Appointment of independent auditor can be ordered to verify truth. This gives Board neutral material without shutting company.
Conclusion
Section 397 mismanagement books of accounts evidence must be read together. In 2010, with more disputes in private companies, CLB must avoid mechanical approach. Accounting compliance is must, but relief under 397 depends on proof of prejudice. Books help, but final decision rests on totality of circumstances. This ensures Act protects genuine grievance and not technical fault-finding.
