This section gives the provision to apply to Tribunal (substituted for ‘Company Law Board’ by the Companies Second Amendment Act, 2002) for relief in cases of oppression.

Subsection (1) of section 397 states that any members of a company who complain that the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members (including anyone or more of themselves) may apply to the Tribunal for an order under this section, provided such members have a right so to apply under section 399.

Subsection (2) of section 397 has 2 clauses:

Clause (a) of subsection (2) states that if, on any application under subsection (1), the Tribunal is of the opinion that the company’s affair are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members, the Tribunal may, with a view to bringing to an end the matters complained of, make such order as it thinks fit.

Clause (b) of subsection (2) says that if, on any application under subsection (1), the Tribunal is of opinion that to wind-up the company would unfairly prejudice such member or members, but that otherwise the facts would justify the making of a winding-up order on the ground that it was just and equitable that the company should be wound-up, then the Tribunal may with a view to bringing to an end the matters complained of, make such order as it thinks fit.

The key terms in subsection (1)

I. prejudicial to public interest,

II. oppressive to any member/members

I. prejudicial to public interest:

The words “in a manner prejudicial to public interest” were inserted in section 397 and also in section 398 and section 408, by the Companies Amendment Act of 1963.The insertion of these words provides for the court or the Central Government to have jurisdiction to interfere in cases where even though there may be no prejudice to any shareholders but yet may be prejudicial to public interest.

The meaning of ‘public interest’ is an elusive abstraction, meaning general social welfare or ‘regard for social good’ and implying ‘interest of the general public in matters where regard for the social good is of the first moment’. In State of Bihar v. Kameshwar Singh,1952(sc) it was observed that the expression is not capable of precise definition and has not a rigid meaning, and is elastic and takes its colour from the statute in which it occurs, the concept varying with the time and state of society and its needs. The expression cannot be considered in vacuo but must be decided on the facts and circumstances.

In N.R.Murty v. Industrial Development Corporation of Orissa, it was observed that the concept of “public interest” takes the company outside the conventional sphere of being a concern in which the shareholders alone are interested. It emphasizes the idea of the company functioning for the public good.

However, it is important to note that it is difficult to sustain an application under section 397on the ground of being prejudicial to public interest as the condition in clause(b)of subsection(2) cannot be satisfied in such case, as conducting the affairs of a company in a manner prejudicial to public interest cannot be a just and equitable ground for ordering the winding up of the company, unless it should be considered illegal or opposed to public policy.

Clause(h) to section 433 provides for winding up if the company has acted against the interests of the sovereignty and integrity of India, the security of the state, friendly relations with foreign states, public order, decency or morality.

It has been held that proceedings by a company against a government company for recovery of huge amounts due from it have been held to be enforcement of contractual rights and not an act against public interest-Maharashtra Power Development Corporation Limited v. Dabhal Power Company. In the same case, the Bombay high court, on appeal, observed that to invoke section 397 proof has to be established that the affairs of a company are being conducted in a manner prejudicial to public interest or in a manner oppressive to the complainant.

According to the dictionary meaning, oppression is any act exercised in a manner burdensome, harsh and wrongful. Oppression under section 210(the corresponding section of the English Companies Act of 1948)[sections 459-461 of the Act of 1985]may take various forms.In Elder v. Elder and Watson Limited(1952) Scottish cases,it was observed that oppression implies a lack of probity and fair dealing in the affairs of a company to the prejudice of some portion of its members.

II The term ‘oppression’ is not specifically defined in the Companies Act. Its interpretation may be extracted from the judicial pronouncements of case-laws.

In Scottish Corporation case, it was held that Oppression may result from not acting as much as by acting. It means that oppression may arise from doing a particular act and also from avoiding to do certain act which should have been done.

However, inefficient management will not amount to oppression though it may amount to mismanagement under section 398. Nor will oppression not relating to the company’s affairs but directed towards a third person come under this section ---Kanika Mukherji v. Rameshwar Dayal Dubey

Where a majority of members exercise their rights as shareholders in the conduct of the company’s affairs, the fact that there is oppression , lapse or impropriety on the part of an officer not pertaining to or unconnected with the exercise of voting rights by a majority of shareholders, will not justify invocation of jurisdiction under section 397.---Chaturgun Ram Maurya v. U.P. Builders(p) Ltd.

Oppression may take different forms and need not necessarily be for obtaining pecuniary benefit. It may be due to a desire to obtain power and control, or be merely vindictive.—In Re, H.R.Harmer Ltd..

Where no pvt. Agreement or understanding among members of a pvt.company as to appointment of directors is provable, the fact that the majority shareholders appointed all directors does not amount to oppression.---V.M.Rao v. Rajeshwari.

Unwise, inefficient or careless conduct of a director in the performance of his duties cannot give rise to a claim for relief under s.397. The person complaining of oppression must show that he has been constrained to submit to conduct which lacks in probity, conduct which is unfair to him and which causes prejudice to him in the exercise of his legal and proprietary rights as a shareholder.--- Needle Industries case, S.P.Jain v. Kalinga Tubes, Scottish co-operative case, Elder v. Elder and Watson.

The Court starts with the presumption that the directors are acting in the best interest of the company. The court cannot adjudicate upon the wisdom of the Board of Directors if they decide to terminate a distribution agreement.The burden lies on those to prove the fact who allege that powers have been exercised in personal interest, or not in the interest of the company or with a view to injuring the interest of the complaining shareholders.—M.L.Thukral v. Krone Communications Ltd.

Decisions relating to the operation of company’s bank accounts are a part of the managerial powers of the directors .The mere fact that a director is not being associated with operation of the company’s banking accounts does not constitute oppression and mismanagement---Sudha M.Singh v. Eagle P.Ltd

An isolated and single act of ouster from directorship would not entitle the aggrieved person to ask for company’s winding up by way of relief against oppression invoking clause (b) of sub-section (2) of s.397 as there is appropriate remedy for it by way of company suit—Bagree Cereals Pvt.Ltd v. Hanuman Prasad Bagri.

It has also been held that merely because the majority are carrying on a competing business does not necessarily mean that the minority are being oppressed in relation to their own company, unless the majority are diverting corporate opportunities away from the company or are using the company’s facilities for the purposes of their competing business without proper payment. In many instances, it may be desirable to prevent the majority from competing and to cause them to devote substantially all of their time to the affairs of the company by—

These provisions become particularly important where the company is a quasi-partnership and it is intended that all the participants including the majority should work in the business.

The scope and meaning of the expression ‘oppressive’ with reference to the corresponding section of the English Act(s.210) are explained by Jenkins, L.J., in H.R.Harmer Ltd---

1)The person permitted to apply to the court under section 210 is ‘any members of the company’ and he must show that the affairs of the company are being conducted in a manner oppressive to some part of the members (including himself). This indicates that the oppression complained of must be complained of by a member of the company and must be oppression of some part of the members, in their or his capacity as members or member of the company as such.

2) The section does not purport to apply to every case in which the facts would justify the making up of a winding_up order under the just and equitable rule, but only to those cases of that character which have in them the requisite element of oppression.

3)The ‘affairs of the company are being conducted’ suggests prima facie a continuing process and is wide enough to cover oppression by anyone who is taking part in the conduct of the affairs of the company, whether de facto or de jure.

4) The section gives no guidance as to the meaning of the word ‘oppressive’, although it does indicate that the victim or victims of the oppressive conduct must be a member or members of the company as such. Primafacie, therefore, the word ‘oppressive’ must be given its ordinary sense and the question must be whether in that sense the conduct complained of is oppressive to a member or members as such.

In the Scottish case of Elder v. Elder and Watson, the following observation was made—

The phrase ‘oppressive to some part of the members’ aquires a certain colour from its collocations with such stronger expressions as ‘intent to defraud’, ‘fraud’, ‘misfeance’, or ‘other misconduct’, and the essence of the matters seems to be that the conduct complained of should at the lowest involve a visible departure from the standards of fair dealing, and of violation of conditions of fair play on which every share-holder who entrusts his money to company is entitled to rely.

The oppression dealt with by this section is only oppression of members in their character as such; and it is only in that character that they can invoke this section. For instance, harsh treatment of a member, who is a Director or other officer or employee, by the Board of Directors or management does not come within the section. The oppression of a person as a director and not as a member is thus outside the purview of this section. If the majority of the Board override the minority directors the latter cannot resort to this section.

Further, mere illegal, invalid or irregular acts by themselves, unless they are oppressive to any shareholder or prejudicial to the interests of the company or to public interest, cannot support a petition under s.397.--- Needle Industries case, Sheth Mohanlal v. Shri Sayaji.

A conduct in breach of company law is not necessarily to be regarded as causative of unfair prejudice. In such cases an alternative company law remedy should be considered. ---Anderson v. Hogg (2000) Scotland.

The appointment of a director at an extraordinary general meeting of which no proof was offered by the respondents showing that a notice was given to the petitioner,was held to be void. It also constituted an act of oppression.

With respect to the length of notice, as the provisions of the Act in this regard are only directory and not mandatory, the Courts have held all along that short notice will not invalidate the meeting and its proceedings, unless prejudice is caused to a substantial number of shareholders. Hence short notice does not amount to an act of oppression unless it is aimed to overpower the interest of the minority shareholders. --- Shantidevi v. Sangramsingh P.Gaekwad. Thus, it was held in Palak Kumar Mondal v. Cine and Supply Corpn and Ltd. that where there was no proof of despatch of notice and there was proof that items other than those mentioned in the notice were taken up and passed at the meeting, these acts were held to be sufficient to justify an application for prevention of oppression and mismanagement.

Another important aspect of sub-section (1) of s.397 is that the act of oppression should be of continuous nature. The term ‘are being conducted’ are used in the section and this implies an action which is still continuing. Mere isolated acts do not amount to oppression. It was held in Shanti Prasad Jain v. Kalinga Tubes Ltd. that there must be continuous acts on the part of the majority shareholders, continuing upto the date of petition, showing that the affairs of the company are being conducted in a manner oppressive to some part of the members.

Some other instances which have been held to be act of oppression are —

The case of Needle Industries was distinguished in Kamal K.Dutta v. Ruby General Hospitals Ltd. because in that case the Board’s decision was in overall and larger interests of the company and the circumstances were such that even if adequate notice was given to the foreign corporate member it could not have taken advantage of the further issue of capital.

The fact that, by issue of shares, the directors incidentally acquire or maintain control over the company does not amount by itself to an abuse of their fiduciary power. What would be considered objectionable would be use of such powers merely for an extraneous purpose like maintenance or acquisition of control over the affairs of the company.

A mere apprehension that the minority shareholders will be oppressed in future is not sufficient to invoke this section --- Krishna Prasad v. Andhra Bank Ltd.

Depending upon the facts and circumstances, single act can also amount to oppression. For instance, a majority shareholder gets reduced to the position of minority by allotting the new issue of shares wholly to the minority group. The circumstances were such that if the aggrieved majority shareholder was called upon to dispose of his stake in the company to the other group, he would not be able to get adequate compensation because the business which he had built in the name of the company was of great value to him. The Court held it to be an act of oppression.

In Ramashankar Prasad v. Sindri Iron Foundry (P) Ltd it was held that a position under s.397 would be maintainable even if the oppression was of a short duration and of a singular conduct if its effects persisted indefinitely.

It is well-settled that the directors could not utilise the fiduciary powers over the shares purely for the purpose of destroying an existing majority or creating a new majority. If the power to issue further shares was exercised by the directors, not for the benefit of the company, but simply and solely for the purpose of consolidating and improving their voting power to the exclusion of the existing majority shareholders, such use of the power could not be allowed, it being a power of fiduciary nature delegated by the company to the Board of Directors to be used for the benefit of the company.

Where the increase of capital and its allotment was necessitated by the Supreme Court’s directions, there could be no complaint.

However, in Suryakant Gupta v. Rajaram Corn Products (Punjab) Ltd. it was held that allotment to one group to the exclusion of the other group was held to be justified because of the company’s need for funds and the assurances given to the Tribunal that the original shareholding percentage to the petitioner group in the company would be restored.

The remedy under s.397 is an alternative to winding up. The interests of the company are paramount in moulding the relief. Where each side is equally strong, and one is unable to oppress the other, there may be a deadlock but not oppression. It is not a case for winding up.

Where there is loss of substratum of the company’s business, it was held to be fit case for ordering winding-up. The phenomenon of continuous losses cannot be regarded by itself as oppression to any shareholder. Some other instances which make up for winding-up order are--- loss of mutual trust, misuse and siphoning of funds provided that such allegation is supported by a statement of particulars, manipulation of accounts in a pvt. Company so as to be unable to pay its debts and capital being wiped out because of losses.

In a two-members two-directors company,with one of them as managing director, the other being the minority shareholder-director, the latter can file a petition in his capacity as a minority shareholder for prevention of oppression and mismanagement. However, he would be estopped from raising any such decision for proof of his suffering in which he participated as a director at the meetings of the board.

In case of a charitable company, no personal interest of members and directors is involved. They have only right and duty to see that the objects of the company are carried out. Thus, even if there is allegation that the funds have been misappropriated by the management, the remedy would lie elsewhere and not by way of prevention of oppression.

With respect to sub-section (2) of s.397, both conditions in clauses (a) and (b) must exist before the Tribunal can entertain an application. Where there is no allegation to support a winding-up, the petition cannot be entertained. Clause (b) of sub-section (2) implies that though it is necessary that facts should justify winding-up, instead of winding-up, an alternative relief is provided if the facts are such that the winding-up would unfairly prejudice the interest of the complaining members. The words ‘in a manner which is unfairly prejudicial’… connote that there must be harm or prejudice and that such harm must be unfair harm. It plainly implies that there may be harm which is not unfair, and harm, to be within the section, must be alleged to b unfair to the interest of some part of the members.

It is important to point out that in certain instances petitions are motivated and amounts to abuse of process of the court and are not contemplated by this section. For example, if the object of the petition is to recover money from the controlling shareholders; if the petition aims at redressal of any personal grievance of a member, and so on.

Under the 1940 Arbitration Act, proceedings under this section cannot be barred or defeated by any provision in the articles or any agreement that any matters relating to winding up or disputes between the company and its shareholders or any of them should only be referred to arbitration. No arbitration can give relief to the petitioner under section 397 or section 398 or to pass any order under sections 402 and 403. ----------O.P.Gupta v. Shiv General Finance (p) ltd.

However the effect of an arbitration clause is different under Arbitration and Conciliation Act, 1996, from that under Arbitration Act of 1940.Under the 1996 Act, the parties are bound by their arbitration agreement and the court has no discretion to relieve them of it. Thus, it was held in Naveen edia v. Chennai Power Generation Ltd. (1999) that proceedings under sections 397 and 398 would become affected under the 1996 Act by the existence of an arbitration clause.

In Pinaki Das Gupta v. Maadhyam Advertising Private Ltd.(2002), it was held that where the foundation of the petition for relief against oppression and mismanagement was an agreement which contained an arbitration clause and the relief arising under the petition and that arising under the agreement were also the same and in both cases non-performance of the agreement was involved, it was held that the matter had necessarily to be referred to arbitration.

Another important point is that the Tribunal cannot make an order of reference unless the affected party applies for it. Moreover, it cannot stay the proceedings before it, it can only order a reference. Even where reference to arbitration is asked for, the Tribunal must see that the requirements of reference under section 8 of the Arbitration and Conciliation Act , 1996 are satisfied.

By virtue of the provisions of the Arbitration and Conciliation Act,1996, an order of the judicial authority under section 8 of the Act ordering the parties to make a reference to arbitration or refusing to do so is not appealable. The same would hold good for an order of the Tribunal.

Matters which are subject-matter of a petition but which are not covered by the arbritration clause, have to be decided by the Tribunal, as the arbritration could not go into them for lack of jurisdiction. Again, the affidavits filed must comply with the requirements of Rule 3 of Order 19 of the C.P.C. However, allegations in a petition under s.397 or s.398 about fraud, misconduct, misappropriation, etc. need not be supported by an affidavit on personal knowledge of the deponent or by supporting affidavits of other persons having personal knowledge. The deponent is entitled to lead oral evidence to prove allegations.

Burden of proof--

Burden lies on the petitioner to prove his allegations. Where the allegations were not substantiated with cogent evidence, nor a case of winding-up was made out, which is a prerequisite for relief, the petition was dismissed.

A petition may be allowed to me amended for the purpose of including any other relief which was not included earlier. Events occurring subsequent to the filing of the petition can be brought on record by the process of an amendment of the petition ---Jer Rutton v. Gharda Chemicals Ltd.(2000)

With respect to the question of composite petition under s.397,398 and 433(f), the Supreme Court had observed in Shanti Prasad Jain v. Kalinga Tubes that it is maintainable.

Sections 397 and 408 do not confer exclusive jurisdiction on the Tribunal to grant relief against oppression and mismanagement. Suits by minority shareholders against oppression and mismanagement is a time honoured exception to the majority rule established in Foss v. Harbottle. A petition lies against the person who is in effective control of the company though he may not be a majority shareholder.

Right of Central Government—

Central Government has a right to apply, under section 399(4), suo moto or at the instance of the shareholder or shareholders or any other person, irrespective of the conditions required by sub-section(1) of section 399. Explaining the position and involvement of the Central Government in petitions for oppression and mismanagement the Delhi High Court observed in Sakthi Trading Ltd. v. Union of India—

The reading of the sections 397 to 409 makes it clear that no action can be taken by the Tribunal under section 397 or 398 without giving adequate opportunity to the Central Government to make submissions before the Tribunal. The powers of the Tribunal under s.397 or 398 read with s.402 are of the widest amplitude.

In Hungerford Investment Trust Ltd. v. Turner Morrison and Co. Ltd. the Court observed that powers under section 397 and section 398 confers upon the Court discretion of wide nature, so it must be exercised with care and not so as to substitute management by the Tribunal for the existing management for every difference of opinion between the shareholders.

According to the Delhi High Court, in exercising its jurisdiction, the Tribunal will be guided by three important considerations---

1) the need to maintain democratic rights of the majority of members to manage the affairs within the limits laid down by the constitutional documents of the company;

2) need to protect the minority from any possible onslaught by the majority so that their vital interests are safeguarded;

3) the Tribunal should limit its interference to the actual needs of the occasion so as to make sure that useful social services being provided by the company are not jeopardized. Moreover, the procedure established for the protection of minorities should not be permitted to be misused for exploitative purposes.

Where the membership of any person making the application is disputed, the application cannot be admitted unless the applicant is prima facie entitled to membership or his right to membership is indisputable or unchallengeable. --- Gulabrai Kalidas Naik v. Lakshmi Patel.

Good faith and conduct of petitioner are other important considerations. The right to petition is a product of equity and, therefore, there must not be such conduct as would disqualify the plaintiff from proceeding against the company. For instance, if he participates in the wrong complained of by him, he would be disqualified from applying for relief. It has been held by Supreme Court in Needle Industries (India) Ltd. case that the court’s power to exercise jurisdiction under section 397 or 398 cannot be defeated by mere technicalities. The petitioner cannot succeed merely by showing that a ground for relief exists. His good faith is a necessary aspect of the jurisdiction and it can be gauged not only by looking at his conduct in a proceeding under this section but also in parallel proceedings in Civil Courts and in other civil litigations.

Limitation:-

In the case of Hungerford Investment Trust Ltd. it was held that Article 137 of the Limitation Act, 1963 applies to applications under sections 397 and 398 that a petitioner cannot rely upon events more than 3 year prior to the date of filing of the petition. However, this view is upon to doubt as the schedule to Limitation act, 1963, applies to suits and application in suits before a court and not before a quasi-judicial authority like Company Law Board or Tribunal. Further, if the oppression is of continuing nature, bar of limitation cannot come in the way of admitting the petition. Again, Article 123,Limitation Act,1963,which prescribed the period of 30 days for an application to have an ex parte decree set aside does not apply to ex parte orders passed under sections 397 and 398 as no decree is passed in these petitions.

It was also held in Mahendra Singh v. Lake Palace Hotels and Motels Private Ltd. that Limitation Act, 1963 is not applicable to proceedings before CLB.

Evidence Act:-

In Rajinder Kumar Malhotra v. Harbans Lal Malhotra (1996) it was held that the Company Law Board or the Tribunal has to act within the framework of the principles of natural justice and also in accordance with its own Regulations. Hence, the provision of Evidence Act and those of C.P.C do not apply to proceedings before the tribunal.

Code of Civil Procedure:-

The position of withdrawal of petition as per Regulation 38 of Company Law Board Regulations 1991 is as follows—A petition under section 397 or 398 shall not be withdrawn without leave of the board, and where the petition has been presented by a member or members authorized by the Central Government under sub-section (4) of s.399, notice of the application for leave to withdraw shall be given to the Central Government.

Rule 88 (2) of the Company Court Rules ensures that no petitioner of an application filed under s.397 of the Act may withdraw the application without leave of the court.

Rule 6 of the Companies Court Rules, 1959 permits the application of Order XIII, the Rule 1 of the Code of Civil Procedure Code 1908. Because Rule 88(2) of the Companies Court Rules prohibits the withdrawal of the petition without the leave of the court, that does not in any way affect the applicability of Order XXII of the Code of Civil Procedure. The expression ‘as far as applicable’ in Rule 6 means as far as reasonably applicable. Leave of the Court is necessary because otherwise the machinery constituted under the provisions relating to oppression and mismanagement would be abused.

Before applying any provision of the Code of Civil Procedure to the proceedings under the Act, it would be necessary to find out the nature of the proceedings and the relief claimed therein and the effect of the applicability of the concerned procedural provisions of the Code to these proceedings, meaning thereby, whether the applicability of procedural provisions would in any way thwart or stultify these proceedings and the reliefs claimed therein.

Since the CPC is not applicable to the proceedings before the Company Law Board, it is not necessary that all types of compromise should be reduced to writing and signed by the parties in accordance with the provisions of Order XXIII, Rule 3 of the Code. It is, however, necessary that a compromise should be signed on behalf of the company by an authorized functionary. The secretary of the company who was authorized to seek only adjournment of the proceedings and who had no express or implied authority to authenticate the compromise, the same was held to be not valid. A consent order would also not be valid if it is against the interests of the company and also affects the interests of persons who were not parties to the proceeding before Company Law Board or the Tribunal.

This section provides for application to Company Law Board/Tribunal for relief in cases of mismanagement. Unlike section 397, this section has no counterpart in the English act. It was recommended by the Company Law Committee to provide relief against mismanagement which cannot otherwise be suitably dealt with under any other provision of the Act. In order to grant relief under this section, it is not necessary for the Court that there are facts to justify the making up of a winding-up order. It is enough if the affairs of the company are conducted in a manner prejudicial to the interests of the company or to the public interest.

Section 398 has two facets. The first is the positive acts done by the management which result in prejudice being caused to the company; secondly, even where no action at all is taken by the management, such non-action results in prejudice being caused to the company. The non-conduct may arise for a variety of reasons including serious disputes amongst the Board of directors of the company which results in a complete deadlock or stalemate. In cases falling under section 398(1)(b), action can be taken to prevent even likelihood of injury in future either to the interest of the company or to public interest.

When a party is charged with acts of mismanagement, misappropriation or improper conduct, full particulars of the acts complained of must be set out in the pleading and unless so set out, such charges should be ignored and no reliance should be placed on them. Applying this legal requirement to petitions under sections 397-398 in Clive Mills Company Ltd., Re, the court said –It is not only in the case of fraud, but in case of all other allegations relating to mismanagement, misappropriation or other improper conduct with which a party is charged in applications under sections 397 and 398 of the Act, full particulars must be set out in order to enable the party charged to understand what he is charged with, and also to enable him to answer such charges.

The Tribunal is not concerned with past management except where the past ‘projects itself as a continuous wrong that pervades the conduct of the company’s affairs’. The powers under this section cannot be exercised against a person who has ceased to be a director at the date of the petition for compensation of tortuous acts committed in the past, even if the acts complained of constitute misfeance under section 543.

1.Conduct of affairs to the company’s prejudice—Conditions that prevent the proper functioning of the company, according to the provisions of the Indian Companies Act, the uncertainty as to the de jure character of the Board and difficulty of having the state of affairs rectified in the usual way, the patent fact that the company was being run by the Board in their own interest overriding the wishes and interest of the majority of shareholders which inevitably involved the company in costly litigations where facts from which the court could include that the affairs of the company were being conducted in the interest of a group and certainly not in the interest of the company. These acts would bring the case within section 398 of the Companies Act.

2. Continuation in office after expiry of term and infighting amongst directors---Where the Managing Directors of a company continued in office after their terms had expired, without a meeting being held to re-appoint them prior to making a fresh application to the Central Government under s.269, the continuation in office under these conditions was held to be mismanagement within the purview of this section and s.397.It was so held in Sishu Ranjan Dutta v. Bhola Nath Paper House Ltd. .So also infighting among the directors resulting in serious prejudice to the company constitutes mismanagement under s.398.

3. Preventing directors from functioning—Where a set of properly appointed directors were not permitted to join or function as director, the court said that the complaint of such appointees could be regarded as a symptom of mismanagement and entertained a petition under section 398 for providing appropriate relief.—Ador-Samia Ltd. v. Indocan Engineering Systems Ltd(1999).

4. Absence of records and losses:-Where the directors were not taking any interest in the affairs of the company, the management failed in protecting the company’s records causing prejudice to the company and the business was also seriously prejudiced because of the infighting among the directors and the company had started incurring losses, the court held that this was a fit case for orders under s.398.

5. Sale of assets at low price and without compliance with the Act—In Malayalam Plantations (India) Ltd.Re one of the estates of a tea and rubber plantations company was sold by the director at a low price to another tea plantation company without complying with the requirements of s.293(1) which demands approval by shareholder and without giving adequate notice under section 173 and relevant information giving delivery of possession before general body meeting and accepting consideration in instalment. It was held to be mismanagement.

Similarly, in another case it was held that sale of the company’s assets was in gross neglect of the interest of the company and the management was different to the affairs of the company after the sale of assets, grant of relief under sections 397 and 398 was held to be proper.

6. Company doomed to trade unprofitably--- There can be no doubt that if the directors of a company continue to trade when the company is making losses and when it should have been apparent that there was no real prospect that the company would return to profitability, the court may draw inference that the directors’ decision was improperly influenced by their desire to continue in office and in control of the company and to draw remuneration and other benefits for themselves and others connected with them.

7. Violation of statutory provisions and those of articles---Transferring shares without first offering them to the existing members in accordance with their rights under the articles, holding meetings without sending notice to members; issue of shares for a consideration other than cash not represented by corresponding assets and burdening the company with additional rental by shifting the company’s office have been held to be acts constituting mismanagement of affairs so as to attract the preventive jurisdiction of the Tribunal under s.398.

8. Misuse of funds---Where a company of four brothers was provided with funds by a bank for its business and three of the four brothers started using the money in breach of the agreement between them for the use of that money, it was held that the fourth brother had legitimate ground for making a complaint of financial management under s.398. It was so held in Narain Das v. Bristol Grill (P) Ltd. (1997).

9. Affairs of subsidiary---A probe into the affairs of a company so as to find out the existence of mismanagement would include an enquiry in the affairs of the company’s subsidiaries.

Some instances of cases not involving mismanagement:

1 Bonafide decisions consistent with the company’s memorandum and articles are not to be equated with mismanagement even if they turn out to be wrong in the circumstances or they cause temporary losses.

2. The change in the control and management of the company and the appointment of new directors as a result thereof cannot be questioned under this section, and the court will not interfere with the affairs of a company in a case where the act complained of is not ultra-vires the company. The section is only concerned with acts prejudicial to the interests of a company, whether caused by conduct lawful or unlawful.

3. Allegations of financial excesses and irregularities which were not substantiated by evidence were not regarded as sufficient either for an order of investigation or for any relief against mismanagement—Picksonic Electronics P.Ltd. v. Indira Singh (1998)

4. A bonafide shifting of the registered office of a company, causing no loss to the company, has been held to be as not amounting to mismanagement.--- Bagree Cereals P.Ltd. v. Hanuman Prasad Bagri (2001)

5. Removal of existing directors from office and appointment of new directors, which was valid, cannot be challenged in a position under section 398. To amount to a case of mismanagement, it must be shown that the removal had prejudicially affected the company’s interest or the public interest.

Pendency of civil proceedings

A petition was filed by the majority shareholder of family company alleging acts of mismanement against those in control of the affairs. He had also filed a civil suit on the same facts and seeking similar relief. He had not withdrawn the earlier proceedings. The Company Law Board ordered the stay of the proceedings before ir till the civil suit was disposed of.—Iqbal Singh v. Gurbaksh Singh (2000)