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Minority Shareholders In A Company – the protection?

By : Member (Account Deleted) on 06 February 2011 Report Abuse Print Print this
 



 

I have been continuously focusing at the complications in the corporate world and especially about the protection to the shareholders in a Company. I have seen cases where the majority does everything in order to deny the rightful share of the minority shareholders or the group; or to make the company a shell company. I have seen the cases where companies with huge asset base functioning like a proprietorship concern without any regard to the corporate regulations or the provisions of the Companies Act, 1956. I know many instances and I have heard many shareholders alleging that their interest in the Company running to several crores is at stake with the oppressive attitude of the majority and the activities of mismanagement. Though it is felt that the listed Public Companies function well in view of the SEBI regulations, the role of SEBI in addressing the grievances of the shareholders and the listing agreement; there are serious grievances to the minority shareholders or group even in a listed Public Company. However, in view of the compulsory shareholding patterns in a listed Public Company in view of SEBI (DIP) Guidelines etc., the situation of the shareholders in a listed Public Company is different from a Private Limited Company. When it comes to the listed Public Companies, there is a chance of disposing their shares in the open market; but the same right is subject to regulations when it comes to the transfer of shares in a Private Limited Company. Again, it is a fact that no investor will be interested to buy the shares in a Private Limited Company if they do not trust at the existing shareholders. As such, there are serious issues concerning the rights of the minority shareholders in a Company though we feel that the rights are well protected with the clear provisions in the Companies Act, 1956 and other regulations.

 

I think that we have very good law dealing with the incorporation, formation and functioning of the companies in India though it requires few reforms. We have a law expecting the auditor to be independent and protection is given to his appointment considering the interests of all shareholders. We have the provisions of the Companies Act, 1956 as to how the books of accounts are to be maintained and every Company is supposed to follow the Accounting Standards prescribed by the ICAI while presenting the financial statements and other connected documents. We have the provisions where the minority or the shareholders of the Company can ask for the winding-up of the Company too when they feel that it is just and reasonable. We have a specialist forum like Company Law Board which can be approached under section 397/398 of the Companies Act, 1956 when there is oppression and mismanagement in the Company. The Company Law Board is provided with enormous powers in order to put an end to the matters complained of and in order to regulate the affairs of the Company. The Company Law Board can even order investigation into the affairs of the Company upon the specific request from the Petitioners in a Petition under section 397/398 of the Companies Act, 1956. Again, even if a shareholder is not qualified to approach the Company Law Board under section 397/398 of the Companies Act, 1956, he can very well approach the Company Court or can approach even the Civil Court asking for remedial measures at times. The legal framework may appear to be very clear, but, the practical issues deserve special consideration. In practice, many rules and regulations are violated in closely held companies especially and it is also very difficult to allege some malafides just because a Company could not follow the procedure strictly. As such, the issue of rights of shareholders and the protection to their interest is very complicated in view of the ‘majority rule’ and the protection to the minority against the oppression and mismanagement. I would like to expose my views as to what happens to the minority shareholders or the group when they approach the competent forum seeking relief and it is as follows.

 

Approaching Company Court:

Minority shareholders may approach the High Court or the Company Court when there exist a just and reasonable cause for asking to wind-up the Company. It is a fact that the High Court intervention in Company disputes has been exercised so cautiously and in many cases the remedy is effective. For example, handling any winding-up petition is a difficult thing and the Court consider the issue as to whether the Company is a going concern, the future prospects and the interests of the many other stake holders too. Despite the complications, the High Court has been exercising the power to wind-up the Company very cautiously. However, if the High Court entertains the petition to wind-up the Company from the Share holders very freely, then, the provisions providing for revival and rehabilitation and also the powers conferred on the Company Law Board to address the issues of oppression and mismanagement may not be justified at all. As such, in a very cautious approach, when the shareholders raise the issue of oppression and mismanagement by the majority before the Company Court, the Company Court may ask the shareholders to avail the alternative remedy of approaching the Company Law Board to put an end to matters complained of or to regulate the company affairs. As such, it will be difficult for the minority shareholders to convince the Company Court and get the redressel for oppression and mismanagement in the Company. This is the factual position according to me and my view. High Court, infact, has the track-record of providing speedy and effective remedies in corporate disputes. Due to technicalities as pointed-out, the minority shareholders may be asked to approach the Company Law Board very often when they raise the issue of oppression and mismanagement before the High Court.

 

Approaching Civil Court:

According to me, there is no bar on the shareholders of a Company in approaching the Civil Court seeking redressel at times. There is an attempt to make a specific provision to bar the jurisdiction of the Civil Court to entertain the corporate disputes in the proposed new Companies Act. However, as the law stands today, the shareholders can approach the Civil Court asking for a remedy against the management or the majority in the Company. The problem with approaching the Civil Court is that it is time consuming and technicalities to be followed at any cost. Again, the Civil Court may lack the expertise in dealing with the corporate disputes and there is a possibility of applying the provisions of the Companies Act, 1956 strictly and the result can be disastrous at times. As such, though there is no bar in approaching the Civil Court, the shareholders normally hesitate to approach the Civil Court and even if they approach Civil Court, at times, they may simultaneously approach the Company Law Board under section 397/398 of the Companies Act, 1956. As such, the minority may not get immediate and effective relief by approaching the Civil Court. 

 

Approaching Company Law Board:

If the minority shareholders are qualified to approach the Company Law Board under section 399 of the Companies Act, 1956, they often approach the Company Law Board for oppression and mismanagement. The Company Law Board is provided with enormous powers to put an end to the matters complained of and to regulate the affairs of the Company. It is true that many may feel that the relief before the Board is not speedy and effective. It is also true that technicalities overtake the subjective scrutiny before the Board at times. There are complications and those are inevitable and to be addressed by the Board with the co-operation from the professionals and parties concerned. Based on the developments with the interpretation of Constitutional Courts, technicalities are now ignored under section 397/398 of the Companies Act, 1956. Again, even the Board gives lot of preference to ensure that the company functions smoothly if it is a going concern. Despite the complications and limitations, the only effective legal recourse available to the minority shareholders against oppression and mismanagement now is to approach the Company Law Board under section 397/398 of the Companies Act, 1956. I do strongly feel that the Company Law Board can put an end to matters complained of and can regulate the affairs of the Company. The issues pertaining to execution of the orders of the Company Law Board and the issues of contempt are to be looked into and to be addressed in the proposed new Companies Act. If the minority shareholders failed to get the protection from the Board and if the proceeding gets delayed without protection, then, the minority shareholders can never get justice and they may be forced to compromise with their rights and they may forced to agree for a settlement. I most of the cases, the minority shareholders leave the company by opting to sell their shares to the majority. 

 

Approaching Arbitral Tribunal:

The issue as to whether the jurisdiction of the Company Law Board under section 397/398 of the Companies Act, 1956 be ousted upon showing some Arbitration Clause is a complicated issue to deal with. According to me, the issue of opting to approach the Arbitral Tribunal to settle the disputes between or among the shareholders is a complicated thing. It depends upon the facts and circumstances of the case. If all the stake-holders are agreed to get their disputes settled to a mutually acceptable Arbitration, then, there can not be any problem. However, there can be argument that the Arbitrator may not effectively consider the issue of public interest if he is provided with the powers of the Company Law Board under section 3976/398 of the Companies Act, 1956. The issue as to whether approaching an Arbitrator or Arbitral Tribunal is effective or not, will depend upon the facts and circumstances of each case. No hard and fast rule can be laid in this regard. 

 

In view of laying emphasis on majority rule and in view of considering the functioning of the Company when the Company is a going concern, the minority shareholders should convince the appropriate and chosen forum as to the importance of their interest and should get the relief. There is also a criticism that the most comfortable way of stealing huge money is through relying on the technicalities in the provisions of the Companies Act, 1956 and is through misusing the settled principles of Company Law. 

 

Note: the views expressed are my personal and a view point of view. 

 

Author:

V.DURGA RAO, Advocate, Madras High Court.

Email: vdrao_attorney@yahoo.co.in

 

 


Source : http://indiancorporatelaws.blogspot.com,http://indiancorporatelaws.blogspot.com



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