Object of section 397 398
Section 397/398 of Companies Act 1956 deals with oppression and mismanagement. It is meant to protect minority against majority. Lawmakers did not expect majority will be harassed by minority, but it happens. These provisions give relief when rights are violated or company property is mismanaged. At same time, promoters also need protection when minority resort to illegality. CLB has complicated job to balance both sides and meet object of the section.
Practical difficulties before clb
When petition is filed, it takes long time to understand case. Often Board passes interim order with liberty to vacate if no prima facie case. Reading hundreds of papers is difficult unless counsels assist properly. Technicalities, attitude of parties, transfer of presiding officers cause delay. Special tribunal was expected to be fast, but 397/398 cases still run for months or years. In some cases only exit option at valuation by auditors works, but even that fails when books are not proper.
Why private companies face more issues
Most 397/398 petitions are in private or closely held companies. Listed companies are regulated by SEBI, listing agreement and shareholding pattern. Private companies often do not maintain proper books. There is undervaluation, overvaluation and tax evasion. True transactions are not recorded. So exit valuation becomes impossible. Petitioners then ask for corrective orders. Execution of CLB orders is also problem. Even HC orders are violated sometimes and contempt is only remedy.
Case study 1: promoter thrown out
Promoter technocrat held 100%. Outsider promised investment and debt. MOU and share purchase agreement signed. Outsider made additional director but did not invest. He filed fictitious forms with ROC showing board meetings, mortgage and further allotment. Promoter could not run company and had to approach CLB to set aside charge. Case went on for months. Time is critical for companies. Some 397/398 cases can be disposed in days, some take years.
Case study 2: apparent mismanagement
Family company. Mr.A had 50%, brother had 50%. Mr.A lived abroad and did not focus on affairs. Valuable company property was sold at throwaway price. Mr.A challenged but buyer started development as no restraint came. Majority engaged costly lawyers and filed applications. Case pending for years. Board finds it hard to read all papers and pass final order. Mr.A has clear case of violation of AOA and law, but rights are still not secured.
Complications and questions under 397 398
Key issues: Nature of remedy, who can approach, can majority approach, maintainability, membership dispute, conditions precedent, meaning of oppression and mismanagement, public interest, particulars needed, composite petition, subsequent events, res judicata, CPC applicability, disputed facts, legal representatives, subsidiary affairs, difference with 433, arbitration clause, limitation, approach for s.25 companies, role of precedents, consent under 399, powers under 402. List is long and each point needs careful handling.
Conclusion
Section 397 398 company law board role 2010 shows law is good but procedure is heavy. CLB must protect minority without harassing majority. Delay defeats purpose. NCLT may help, but complications will remain unless books are proper and execution is strong. Reforms are needed to make 397/398 effective.
