The Viewpoint: ‘Consent under Oppression and Mismanagement’ – 1913 to 2013

The Viewpoint: ‘Consent under Oppression and Mismanagement’ – 1913 to 2013
Pavan Kumar

Oppression and Mismanagement was a concept unknow to Indian law until 1915. Like many other provisions of the Indian companies law, Oppression and Mismanagement is also borrowed from the English Companies Act, 1948.

The purpose of Oppression and Mismanagement was to give an alternative remedy to winding up in cases where it was not in the interest of the shareholders that the company should be wound up. This concept of Oppression and Mismanagement became a part of Indian company law for the first time with the introduction of Section 153-C [1] in the Indian Companies Act, 1913. This section 153-C was continued as Section 397 in the Companies Act, 1956 and as Section 241 of the Companies Act, 2013 (Act).

While the concept of oppression and mismanagement has existed for over a century now, the law still does not define what “Oppression” is, and leaves it open for the court to decide on the facts of each case whether there exists oppression as alleged.

Section 241 of the Act provides the right to any member of a company to approach the Tribunal when the affairs of the company have been or are being conducted in a manner prejudicial to public interest or in a manner prejudicial or oppressive to him or any other member or members or in a manner prejudicial to the interests of the company provided however that such member can approach the Tribunal only when the requirement under Section 244 of the Act are met.

An application under Section 244 of the Act can be filed only by the following members i.e:

(a) in the case of a company having a share capital, not less than one hundred members of the company or not less than one-tenth of the total number of its members, whichever is less, or

(b) any member or members holding not less than one tenth of the issued share capital of the company, subject to the condition that the applicant or applicants has or have paid all calls and other sums due on his or their shares.

Section 244(2) of the Act provides that in situations where a group of members chose to initiate an action under Section 241 of the Act, any one member can maintain an application on behalf of and for the benefit of the other members, provided the consent in writing of the rest of the members has been obtained. The object of prescribing a qualifying percentage of shares in the petitioners and their supporters to file petitions under Sections 241 is clearly to ensure that frivolous litigation is not indulged in by persons who have no real stake in the company.

The requirement of obtaining a consent in writing is not new. Section 153-C (3) of the Companies Act, 1913 and Section 399 (3) of the Companies Act, 1956 also had similar requirements.

The table below contains the provisions of the 1913 Act, 1956 Act and 2013 Act in relation to Oppression and Mismanagement.

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The provisions of the 1913 Act, 1956 Act and 2013 Act in relation to Oppression and Mismanagement..pdf
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In addition to the requirement of obtaining a consent under the 1956 Act, the erstwhile Company Law Board Regulations, 1991 also required that where the petition is presented on behalf of members, under Section 397, the letter of consent given by the other members be filed along with the petition.[2]

The year 1953 witnessed probably the first challenge to the maintainability of a petition for Oppression and Mismanagement on the ground of lack of “consent in writing” from the other petitioners. Hon’ble Justice Brij Mohan Lal of the Allahabad High Court in the case of Makhan Lal Jain v Amrit Banaspati Co. [AIR 1953 All 326] while dealing with the “consent in writing” as appearing in section 153 C of the Indian Companies Act, 1913 held that:

“the expression ‘consent in writing’ obviously implies that the writing itself should indicate that the persons who have affixed their signatures have applied their minds to the question before them and have given their consent to certain action being taken.”

The court went on to hold that the “obtaining of the consent is a condition precedent to the making of the petition. In other words, consent must have been obtained prior to the presentation of the application.”

The Court dismissed the petition holding that a subsequent consent is not a valid consent under sub section 3 of section 153-C of the Indian Companies Act, 1913 as the law requires that the consent should be in writing i.e., in the form of a document. Therefore, the document itself should prove that the consent has been given. No evidence either by way of affidavit or of oral sworn statement in court, can be given to prove that such consent was given.

The Madras High Court was faced with a similar situation in 1978 in the case of M.C. Duraiswami V. Sakthi Sugars Ltd (1980) 2 Mad LJ 77. This was a case under the Companies Act, 1956. In this case the applicant filed a petition under Sections 397 and 398 on behalf of and for the benefit of 147 persons. The company took an objection that the petitioner violated the condition precedent prescribed under the statute and hence the petition was not maintainable. The consent given by the member read as follows:

“We the undersigned, the members of Sakthi Sugars Limited, whose particulars are given below give consent for M.C. Duraiswamy (the applicant herein) a member of the Company for filing a petition in the high Court of Judicature Madras on their behalf under section 397 and 389 of the Companies Act of 1956.”

The Court having examined the provisions of the 1956 Act held that:

“before a member can be said to have consented to a particular action, the said member should have known what was the action to be taken, what was the relief to be prayed for and what was the ground to be urged in support of the relief. A mere consent for filing an application under section 297 and 398 of under both, without any particulars, such as the nature of allegation or complaint to be made in the petition and the nature of the relief sought to be claimed in the petition, cannot be the result of any application of mind to the question before them and therefore such a consent cannot be a valid consent. Therefore the consent contemplated under section 399(3) is an intelligent consent, in the sense, a consent given for the purpose of making particular allegation in the petition and for the purpose of claiming a particular relief and therefore a blanket consent as in the present case cannot be a consent as contemplated under section 399(1) and (3) of the Act.”

Nine years later, Justice G C Jain of the High Court of Delhi, in the case of Omni India Limited & Ors. vs Balbir Singh [1989 66 CompCas 903 Delhi], while reiterating the above position as enumerated by the Allahabad and the Madras High Court observed that:

“had the intention been that the writing should not indicate the application of mind, then there was no necessity for using the term ‘consent in writing’ and mere word ‘consent’ could have been used. To hold that the requisite members can give their consent in writing without applying their minds or without considering the nature of the allegations and the reliefs sought would frustrate the entire purpose of section 399 which prohibits the filing of an application under section 297 and 398 of the Act.”

The Supreme Court of India however differed from the above position taken by the Allahabad, Madras and Delhi High Courts. In the case of J.P. Srivastava & Sons Ltd. & Ors. vs Gwalior Sugar Co. Ltd & Ors. [(2005) 1 SCC 172] while dealing with a challenge to maintainability to a petition under Section 397 on the grounds of lack of consent in writing, while rejecting the contention of the appellants the Court made the following observation “the object of prescribing a qualifying percentage of shares in the petitioners and their supporters to file petitions under Sections 397 and 398 is clearly to ensure that frivolous litigation is not indulged in by persons who have no real stake in the company. However, it is of interest that the English Companies Act contains no such limitation. What is required in these matters is a broad common-sense approach. If the court is satisfied that the petitioners represent a body of shareholders holding the requisite percentage, it can assume that the involvement of the company in litigation is not lightly done and that it should pass orders to bring to an end the matters complained of and not reject it on a technical requirement. Substance must take precedence over form. Of course, there are some rules which are vital and go to the root of the matter which cannot be broken. There are others where non-compliance may be condoned or dispensed with. In the latter case, the rule is merely directory provided there is substantial compliance with the rules read as a whole and no prejudice is caused.”

The Hon’ble Supreme Court after examining the provisions of the 1956 Act and the Regulation 18 of the Company Law Board Regulations went on to hold that:

Section 399 of the Act has replaced Section 153-C (3) of the Indian Companies Act, 1913 with some major differences. Section 153-C (3) of the 1913 Act itself provided that the consent of the shareholders supporting the petition should be obtained in writing. Sub Section (3) of Section 399 of the 1956 Act, however, contains no such requirement. It only speaks of "obtaining" of the consent. It does not speak of consent in writing nor does it require any such writing to be annexed with the petition.

Regulation 18 also does not itself contain the requirement for filing the consent letters. The requirement has been prescribed in Annexure III, which is referred to in Regulation 18. Serial No. 27 of Annexure III contains a list of several documents required to be annexed to petitions relating to the exercise of powers in connection with prevention of oppression or mismanagement under Sections 397, 398, 399(4), 400, 401, 402, 403, 404 and 405. The documents required to be annexed to such petition include “where the petition is presented on behalf of members, the letter of consent given by them”. Other documents required to be filed include “documentary and or other evidence in support of the statements made in the petition, as are reasonably open to the petitioner(s)”, as also “three spare copies of the petition”.

These requirements can hardly be said to be mandatory in the sense that non-compliance with any of them would ipso facto result in the dismissal of the petition.

Apart from this, Regulation 18 itself is subject to the powers of CLB under Regulations 44 and 48.

Given these powers in CLB, we cannot hold that non-compliance with one of the requirements in Sl. No. 27 in Ann. III of Regulation 18 goes to the very root of the jurisdiction of CLB to entertain and dispose of a petition under Sections 397, 398.

All that Regulation 18 requires by way of filing of documents, is proof that the consent of the supporting shareholders had in fact been obtained prior to the filing of the petition in terms of Section 399(3). It cannot be gainsaid that it is open to the persons opposing the application under Sections 397 and 398 to question the correctness of an assertion as to consent made by the petitioner. It is equally open to the petitioner to provide evidence in support of the plea taken in the petition. If of course the objection to the maintainability is taken by way of demurrer, CLB can decide the issue on the basis of the averments contained in the petition alone, accepting the pleas therein as correct. But where CLB takes into consideration facts outside the petition as it has done in this case, it cannot foreclose the petitioner from supporting its case in the petition on the basis of evidence not annexed thereto.

This view finds support from Regulation 24.”

The Hon’ble Supreme Court held that the decision in Makhan Lal Jain would no longer be apposite having regard to the change in the language in Section 399(3) and the shifting of the requirement from the Act to Regulation 18 of the Company Law Board Regulations, 1991.

The National Company Law Tribunal, Hyderabad, in C.P. No. 310/241/HDB/2019, was also faced with a similar challenge wherein the maintainability of the company petition on grounds of violation of Section 244(2) of the 2013 Act was challenged. The petition was challenged in the ground that Section 244(2) read with Rule 81 National Company Law Tribunal Rules, 2016 (“NCLT Rules") mandated that the consent in writing of the other petitioners had to be filed at the time of filing the petition under Section 241 of the 2013 Act and in the absence of the same the petition had to be dismissed for failure to comply with the requirements under the 2013 Act and NCLT Rules.

The NCLT, Hyderabad without adverting to any of the above the judgements dismissed the challenge to the maintainability by holding that “…It is a well settled principal of law that, when a petition is filed, containing facts and law, the same cannot be dismissed at the threshold… It is pertinent to note here that the Hon’ble Apex Court in several judgements has laid down that non-compliance with any procedural requirement relating to memorandum of appeal, pleading or application, should not lead to automatic dismissal or rejection. It is trite law that procedural laws are nothing but handmaiden of justice and should never be made a tool to deny justice or perpetuate injustice.”

The above judgement opens for debate the question whether the requirement of “Consent in Writing” under section 244(2) of the 2013 Act is a substantive requirement or a procedural requirement.

To examine the same it would be relevant to examine the provisions of the erstwhile Company Law Tribunal Regulations, 1991 and National Company Law Tribunal Rules, 2016 vis a vis Section 379 of the 1956 Act and 241 of the 2013 Act as mentioned in the table below.

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Company Law Tribunal Regulations, 1991 and National Company Law Tribunal Rules, 2016 vis a vis Section 379 of the 1956 Act and 241 of the 2013 Act as mentioned in this table.pdf
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A reading of the above Rules, will show that the National Company Law Tribunal Rules, 2016 are identical to the Company Law Board Regulations, 1991 and hence it can be argued that the ratio as laid down by the Hon’ble Supreme Court in the case of J.P. Srivastava & Sons Ltd. & Ors. vs Gwalior Sugar Co. Ltd & Ors. that obtaining a “consent in writing” from the other petitioners is not mandatory. However, such an argument may not be entirely correct for the following reasons:

  1. The Hon’ble Supreme Court, in J.P. Srivastava & Sons erred in its finding that there was a change in the language in Section 399(3) of the 1956 Act and that Section 399 (3) of the 1956 Act contains no requirement of obtaining the “Consent in Writing” and only speaks of obtaining of the “consent”.

  2. The Hon’ble Supreme Court erred in its finding that the change in language of Section 399(3) resulted in a shift of the requirement from the 1956 Act to Regulation 18 of the Company Law Board Regulations, 1991. Assuming the same to be true in light of Section 244(2) of the 2013 Act clearly providing for obtaining “Consent in Writing” there is a shift back thus making “Consent in Writing” a condition precedent to the filing of the petition.

  3. The Hon’ble Supreme Court in J.P. Srivastava & Sons proceeded on the basis that Regulation 18 of the CLB Regulations did not itself contain the requirement for filing the consent letters; the requirement of submitting the letter of consent was prescribed in Serial No. 27 of Annexure III of Regulation 18 which dealt with documents required to be annexed to petitions relating to the exercise of powers in connection with prevention of oppression or mismanagement under Sections 397. In contrast to the above, Rule 81 of the NCLT Rules categorically provides for the filing of signed letter of consent along with the petition thereby reinforcing the relevance and importance of the “Consent in Writing”.

  4. Rule 81 may be subject to Rule 11 and Rule 14 of the NCLT Rules which are akin to Regulations 44 and 48 of the CLB Regulations, however, it is settled law that Courts ought not to interpret the requirements of a rule or regulations in a manner to render the requirements under the section redundant.

  5. The object of prescribing a qualifying percentage of shares in the petitioners or minimum number of members being eligible to file petition under Section 241 of the 2013 Act is to ensure that frivolous litigation is not indulged in by persons who have no real stake in the company. Section 241 categorically states that “Any member of a company …. may apply to the Tribunal, provided such member has a right to apply under Section 244”. To hold that the requirement of a ‘consent in writing’ as required under Section 244 of the 2013 Act it not substantive and merely directory or procedural would defeat the objective of Section 241 of the 2013 Act in stipulating a minimum requirement and would open up the possibility of frivolous litigation being initiated by unhappy shareholders who do not meet the requirement under Section 244.

For the above reasons, ‘consent in writing’ must be considered a condition precedent to ensure that the purpose and object of the 2013 Act is met and not abused.

Duvva Pavan Kumar is an advocate based out of Hyderabad practising before the High Court and NCLT. He is the founder of The Law Chambers.

He was assisted by Shraddha Gupta.

[1] Section 153-C was inserted in the Indian Companies Act, 1913 by amending Act (LII of 1951).

[2]Regulation 18 Company Law Board Regulations, 1991

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