Family Companies And The Understanding Breakdown
Most 397/398 cases come from family companies or closely held companies. They are run on "mutual understanding", not on compliance. Minutes not written. Resolutions not filed. When understanding breaks, minority runs to CLB. They allege oppression using gaps in compliance. Because records are bad, it is easy to make prima facie story. CLB, not wanting to shut door, grants interim relief and asks for counter. Result: Majority spends years defending. Even if they win finally, company is damaged.
The Wrong Approach: "Let Final Hearing Decide
"Many argue: all contentious issues must be decided at final. So admit petition, take counter, take rejoinder, then decide. This is wrong if petition itself has no legs. Blancatex says CLB must first see if pleadings disclose prima facie case. If not, dismiss. Do not waste time.
Example: Petition says "majority is mismanaging". No resolution attached. No date. No loss to company. That is not prima facie. That is fishing.
Ex-Parte Orders: Necessary Evil Or Weapon
Ex-parte order is needed when asset is being siphoned today. But it is misused to freeze company. Better practice: grant short interim, 2 weeks, with direction to file counter. After hearing both sides, confirm or vacate. Do not keep ex-parte order for 3 years.
Presiding Officer must also record reasons. "Urgency shown" is not reason. "Petitioner showed resolution dated X transferring asset without consideration" is reason.
Section 399 And Section 397: Two Different Gates
CLB often looks only at 399: do you have 10% or 100 members. If yes, admit. But 397 also has threshold: oppression. Blancatex reminds: prima facie under 397/398 must be seen. Qualification does not mean automatic admission.
Majority should file application: "dismiss for no prima facie". Cite Blancatex. Attach documents to show business is fine.
Reform Needed In 2011 And Beyond
Screening Bench: One member to screen petitions. If no prima facie, dismiss in 30 days.
Affidavit of verification: Petitioner must verify each allegation with document.
Costs regime: If petition dismissed, pay costs to company.
Disclosure after prima facie: Do not order inspection to find case.
New Companies Act 2013 NCLT must adopt this. Otherwise 241/242 will also become harassment tool.
Conclusion
397 398 petition dismissal prima facie calcutta hc is wake up call. Minority protection is important. But protection cannot become extortion. Blancatex 2011 says look at papers first. If no case, send them out. At Nathan & Associates we draft replies focusing on "no prima facie" with documents. That saves years of litigation
