Why 397/398 Is Called Ineffective: Practical Problem
Shareholder often say remedy under Section 397/398 is not effective. Main reasons: execution of CLB orders is hard, parties defy orders, and disposal takes years. CLB says "natural justice" and "priority" but minority needs urgent relief.
Another issue is simultaneous proceedings. If minority files 397/398 for protective relief and also goes to Civil Court to cancel agreement, majority pleads "parallel litigation". Civil Court lacks company law expertise. Winding up is not option if company is going concern. So CLB/NCLT is only forum. If that forum is restrictive, minority has no real remedy.
Holding And Subsidiary: Separate Legal Entities But Real Problem
Law says holding and subsidiary are separate. Subsidiary may not transact with holding frequently. In listed companies, disclosure in financials and SEBI compliance is all that happens. But in closely held groups, subsidiaries are created for specific purpose. Funds, contracts, assets move between them. Diversion happens through subsidiary. Minority in holding company sees value leaking out. Question: can they attack subsidiary directly in 397/398?
Strict answer: No. Shareholder of holding is not member of subsidiary. Legal relation is missing. Section 235 allows investigation, but that needs the Central Govt. That takes years.
Amalgamations Ltd 2011 Madras HC: Restrictive View
Key case: Amalgamations Limited Vs Shankar Sundaram, CDJ 2011 MHC 4938. Issue was deletion of subsidiaries from 397 petition. HC upheld CLB. Court said "affairs of company" does not automatically mean affairs of subsidiary. To treat holding shareholders as subsidiary members creates legal fiction. That can be done only under Section 235 + 214(2) for investigation, not for 397/398.
Court relied on Hungford and Vijay Narayan Thatte 2009 9 SCC 92: plain grammatical meaning must prevail. CLB rightly deleted subsidiaries because petition had no prima facie allegations against them. Court said if investigation into holding is ordered, then under Section 239 inspectors can decide if subsidiary also needs probe. Or file separate application under 214(2) read with 235.
Problem With Restrictive Interpretation
If we read 397/398 this strictly, minority is remediless. Majority can route all diversion through subsidiary. Holding company becomes shell. Minority cannot wait for 235 investigation by Govt. Section 402 gives CLB power to pass any order to end matters complained. Courts have said look at substance, not form. If transaction between holding and subsidiary is oppressive, CLB should look at it. Otherwise 397/398 becomes meaningless.
Balance is needed. Frivolous petitions impleading 10 subsidiaries must be discouraged. But where prima facie diversion is shown, CLB should not shut door.
Practical Way Forward For Minority
File 397/398 against holding company. Plead specific facts of diversion to subsidiary with documents.
Ask CLB to look at subsidiary transactions as part of "affairs of holding company".
Simultaneously file application under 235 for investigation if needed. Seek interim relief: restrain further transfer to subsidiary, appoint observer.
CLB should not insist on technical membership in subsidiary. It should see economic reality.
Conclusion
Section 397 398 subsidiary company oppression mismanagement requires flexible approach. Amalgamations 2011 is correct on law that subsidiary is not automatic party. But if prima facie case of diversion exists, CLB must have power to grant relief touching subsidiary. Otherwise corporate governance fails. At Nathan & Associates we plead both 397/398 and 235 together to cover all bases.
