Legal Blog: Cause of Action and Limitation to File a Petition under Section 397/398 of Companies Act, 1956

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Wednesday, February 16, 2011

Cause of Action and Limitation to File a Petition under Section 397/398 of Companies Act, 1956

Guest Post : V.Durga Rao, Advocate.

No lis lies when there is no live claim or the cause of action and it is settled legal principle. The requirement of having a live claim for seeking relief is also been highlighted by the Hon’ble Apex Court while dealing with the scope of powers of Chief Justice under section 11 of Arbitration and Conciliation Act, 1996. Again, there were many judgments under SARFAESI Act, 2002 on the issue of cause of action despite the specific provision in the Act that the borrower can approach the Debt Recovery Tribunal under section 17 of the SARFAESI Act, 2002 if he has any grievance at the Bank’s action. Thus, the issue of cause of action and law of limitation is very significant in any lis. Section 397/398 of the Companies Act, 1956 provides a remedy to the minority shareholders or the shareholders qualifying under section 399 to approach the Company Law Board and the Company Law Board has wide powers in passing orders in order to put an end to the matters complained of or in order to regulate the affairs of the Company. While section 399 of Companies Act, 1956 deals with the issue of qualification, section 397/398 itself speaks about ‘cause of action’ and the issue of limitation. Dealing with the issue of ‘cause of action’ and law of limitation under section 397/398 of Companies Act, 1956 is infact very complicated. It is settled that a minority shareholders can question the harsh and burdensome acts of the majority in the Company. It is also settled that the oppression or the mismanagement sought to be alleged should be a continuous one if the minority should approach the Company Law Board under section 397/398 of the Companies Act, 1956. In fact, the issue of ‘cause of action’ and law of limitation can not be separated while dealing with the law under section 397/398 of the Companies Act, 1956 and the issue of limitation has little significance. The provisions of law of limitation will have no application to a petition under section 397/398 of Companies Act, 1956. Its all depends upon the facts and circumstances of the Case.

There are different views as to how section 397/398 of Companies Act, 1956 is to be interpreted when it comes providing a remedy to the minority shareholders. There is a view that unless there exists act which is harsh and burdensome in the company against the minority, minority is not entitled for any relief under section 397/398 of Companies Act, 1956. There is another view that even if there is no oppression or mismanagement in the Company in stricto senso, the Company Law Board can still pass appropriate orders under section 402 of the Act in order to regulate the affairs of the Company and in order to put and end to the matters complained of. It is also settled that there can not be any hard and fast rule while entertaining and passing appropriate orders in a petition by the minority against the majority under section 397/398 of Companies Act, 1956. Going by the precedents and the complications in corporate affairs, it can be understood that an order of the Company Law Board under section 397/398 of the Companies Act, 1956 should be reasonable, towards the object of the chapter, in adherence to the principles of natural justice. This is a very complicated proceeding and it acts as a sharp weapon in the hands of minority shareholders to protect their interests and also the provisions of the chapter can conveniently be misused with ulterior motive. Thus, the Company Law Board carries a greater responsibility while entertain petitions under section 397/398 of Companies Act, 1956. Coming back to the issue of ‘cause of action’ and the issues of limitation, the Hon’ble High Court of Delhi, in Surinder Singh Bindra Vs. Hindustan Fasteners (P) Limited, was pleased to observe as follows:

“(12) These can be looked into if they form part of a continuous process continuing up to the date of petition showing that the affairs of a company are being conducted in a manner stipulated in Ss. 397 and 398 of the Act. This, in fact, is the requirement of these provisions. Further, if the acts complained of form part of the same transaction constituting oppression or mismanagement these acts can also be looked into even if they occurred three years prior to the institution of the petition. Same will be the case if the conduct arising from even a single wrongful act in a given case is such that its effect will be a continuous course of oppression or mismanagement though the wrongful act occurred three years earlier to the date of filing of the petition. It is something akin to the terminology 'continuing cause of action'. Whether events complained of form part of continuous acts or not or form part of the same transaction constituting oppression of mismanagement or effect of a particular wrongful act is continuous course of oppression or mismanagement or the wrongful act is stale or is an isolated event, would all be different questions to determine. To this extent, therefore, the preliminary objection regarding maintainability of the present petition on the ground of limitation is overruled. This exercise about the applicability of the provisions of the Limitation Act, 1963 to the application under Ss. 397 and 398 of the Act, would now appear to be academic as after the Companies (Amendment) Act, 1988, applications under these sections lie before the Company Law Board.” 

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