Company Law Board
Syed Musharraf Mehdi And Syed Iqbal ... vs Frontline Soft Limited And Ors. on 9 August, 2006
Equivalent citations: [2007]135COMPCAS280(CLB), [2007]75SCL329(CLB)
ORDER
K.K. Balu, Vice-Chairman
1. The petitioners together holding 6.5% of the paid up share capital of M/s Frontline Soft Limited ("the Company") and constituting less than one-tenth of the total number of its members, aggrieved by a series of purported acts of oppression and mismanagement in the affairs of the Company have invoked the jurisdiction of the Company Law Board under Sections 397 and 398 of the Companies Act, 1956 ("the Act'") for appropriate directions, with a view to bringing to an end the matters complained of in the petition.
2. Shri Rakesh Sanghi. learned Counsel. while forcefully advocating his plea that an application under Section 397/398 would be maintainable. notwithstanding the requirements prescribed under Section 399. submitted:
• The respondent Nos. 4 & 5. being brothers are promoters of the Company. The second respondent company is a group company of the respondent Nos. 4 & 5 and the third respondent company is subsidiary company of the first respondent company. The respondent Nos. 4 & 5 generated a huge sum of Rs. 10 to 12 crores by way of public issue of equity shares of the Company. but diverted the entire amount to their group companies. namely the respondent Nos. 2 & 3. in connivance with the respondent Nos. 6 & 7. being the Auditor and Company Secretary respectively of the Company. by making fictious debit entries of capital and revenue expenditure in the books of the Company. which compelled the petitioners to invoke under Section 402. the jurisdiction of the CLB for equitable relief of recovery of the looted capital of the Company from the respondent Nos. 2. 3. 4 & 5. in the interest of the Company and its members.
• The petitioners do not hold the requisite percentage of share holding or constitute one-tenth of the total number of members of the Company. meeting the requirements of Section 399 to apply before the CLB. But the genuine grievances of the petitioners should not be declined merely on account of the procedural or technical objections. The petitioners will be able to show in due course of the present proceedings that they have support of several other share holders. thereby the petitioners would be able to satisfy. in future. the requirements of Section 399.
• The requirements of Section 399 are directory and not mandatory. as held in J.P. Srivastava & Sons Private Limited v. Gwalior Sugar Co. Limited . The breach of directory requirements can be overlooked. in support of which reliance has been placed on Pratap Singh v. Shri Krishna Gupta . wherein it has been held thus:
Tendency of the Courts towards technicality is to he deprecated; it is the substance that counts and must take precedence over mere form. Some rules are vital and go to the root of the matter; they cannot he broken; others are only directory and a breach of them can be overlooked provided there is substantial compliance with the rules read as whole and provided no prejudice ensues; and when the legislature does not itself state which is which judges must determine the matter and exercising a nice discrimination, sort out one class from the other along broad based, commonsense lines • The Supreme Court while dealing with the interpretation of statutes in Shreenath v. Rujesh held that "In interpreting any procedural law, where more than one interpretation is possible, the one which curtails the procedure without eluding the justice is to he adopted The procedural law is always subservient to and is in aid to justice. Any interpretation which eludes or frustrates the receipient of justice is not to he followed". "Procedural law should not ordinarily be construed as mandatory - It is always subservient to and is in aid to justice - Am' interpretation which eludes or frustrates the recipient of justice is not to be followed' as held in Shaik Salim Haji Abdul Khayumsab v. Kumar . The Supreme Court in Delhi Development Authority v. Skipper Construction Company Private Limited AIR 1966 SC 2005. held that "procedural or technical objections should be overruled to ensure justice between the parties ".
• Section 399 is only a procedural provision. The Supreme Court in Dove Investments Private Limited and Ors. v. Gujarat Industrial Inv. Corporation and Sterling Holiday Resort (India) Limited v. Gurajat Industrial Inv. Corporation and Ors. held that "Ordinarily a procedural provision would not be mandatory even if the work "shall" is employed therein unless a prejudice is cuased. Shri Rakesh Sanghi. learned Counsel pointed out that by invoking the jurisdiction of Section 397/398. no prejudice would be caused to the respondents herein.
3. The short issue before me is whether the provisions of Section 399 are mandatory or directory in nature. If the requirements are mandatory, the present petition is liable to be dismissed in limini. I shall now proceed to consider whether the petition is maintainable in view of the embargo contained in Section 399 of the Act.
Section 399 dealing the right to apply for relief in cases of oppression or mismanagement reads thus:
(1) The following members of a Company shall have the right to apply under Section 397 or 398:
(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 any member or members holding not less than one-tenth of the issued share capital of the company, provided that the applicant or applicants have paid all calls and other sums due on their shares;
(b) in the case of a Company not having a share capital, not less than one-fifth of the total number of its member.
(2) For the purposes of Sub-section (1), where any share or shares are held by two or more persons jointly, they shall be counted only as one member.
(3) Where any members of a company are entitled to make an application in virtue of Sub-section (1), any one or more of them having obtained the consent in writing of the rest, may make the application on behalf and for the benefit of all of them.
(4) The Central Government may, if in its opinion circumstances exist which make it just and equitable so to do, authorise any member or members of the company to apply to the Company Law Board under Section 397 or 398. notwithstanding that the requirements of Clause (a) or Clause (b). as the case may be, of Sub-section (1) are not fulfilled.
(5) The Central Government may, before authorising any member or members as aforesaid, require such member or members to give security for such amount as the Central Government may deem reasonable, for the payment of any costs which the Court dealing with the application may order such member or members to pay to an other person or persons who are parties to the application.
A perusal of the provisions of Section 399(1) would show that (a) in the case of a company having a share capital, members constituting 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 members holding not less than one-tenth of the issued share capital of the company: and (b) in the case of a company not having a share capital, not less than one-fifth of the total number of its members, shall have the right to apply under Section 397 or Section 398. It is. therefore, far from doubt that Section 399 stipulates minimum qualifications, which members should possess such as their numerical strength or the extent of their share capital. Sub-section (3) of Section 399 provides that any member or more of them having obtained the consent in writing of the rest may make the application under Section 397/398 on behalf and for the benefit of all of them. Section 399 engrafts an important exception to this rule of competence to make an application under Section 397/398. The exception lies in the special dispensation, which the Central Government may give to any person to make an application despite the fact that the person concerned is not eligible to make an application in terms of Section 399(1). The Supreme Court in J.P. Srivastava and Sons Private Limited v. Gwalior Sugar Co. Limited (supra) while confirming the directory nature of requirement of letters of consent given by supporting shareholders, tit the time of making the application under Section 397 & 398 as contemplated in Section 399(3). categorically held thus: "The object of prescribing a qualifying percentage of shares in 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 commonsense 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. " The Supreme Court while making abundantly clear that the shareholders holding the requisite percentage can maintain an action under Section 397/398 in order to bring to end the matters complained of. held that the requirement of filing consent letters of members as well as documents required to be annexed to petitions relating to the exercise of powers in connection with prevention of oppression or mismanagement is not mandatory, but merely directory. Thus, this decision of the apex court does not go in aid of the petitioners. In this connection beneficial reference is invited to Mahendra Singh Rathore v. Rajput Hotel ami Resorts P. Ltd. (1998) 1 C.L.J 160. wherein it has been held that the applicant, while applying under Section 397/398 must hold the requisite number of shares at the time of filing the petition. While this is the legal position, the petition would be dismissed even if his shareholding is increased subsequent to filing of the application. Therefore, the plea of the petitioners that they will be in a position to muster the requisite percentage shareholding subsequent to filing of the present company petition does not at all merit any consideration. The requirement of requisite percentage is vital and go to the root of the matter, which cannot be broken and overlooked as envisaged in Pratap Singh v. Shri Krishna Gupta (supra) and therefore, cannot be directory. The nature of the provisions of Section 399(1) is not procedural, but it is a part of substantive law and therefore, applying the principles enunciated by the Supreme Court in Shaik Salim Haji Abdul Khayumsab v. Kumar (supra), the requirements of Section 399(1) should be construed as mandatory. Section 399(1) is not a procedural provision. Furthermore, the word "shall" used therein is considered to be imperative in nature and it has to be interpreted as mandatory having regard to the text and context of the statute, irrespective of the fact whether any prejudice is caused. This is all the more evident from Sub-section (4) of Section 399. which empowers the Central Government to exercise its discretion to permit a lesser number of members to file an application than that prescribed by Sub-section (1) of Section 399. A combined reading of Sub-section (1) and (4) would show that the CLB has no option but to reject the application made under Section 397/398. not being supported by the requisite number of members as at the time of filing the application before the CLB. Thus, the requirements of Section 399(1). being statutory are not directory in nature, breach of which cannot be waived by the CLB. This being the settled legal position, the present company petition, not satisfying the mandatory requirements of Section 399(1) is liable to be dismissed, in which case there is no need to elaborate and go into the other procedural and technical defects contained therein. In this background, the decision in Dove Investments Private Limited and others v. Gujarat Industrial Inv. Corporationand Sterling Holiday Resort (India) Limited v. Gurajat Industrial Inv. Corporation and Ors. (supra) holding that procedural provisions are not mandatory is inapplicable to the facts of the present case. Similarly, the decisions in (a) Shreenath v. Rajesh (supra) and (b) Delhi Development Authority v. Skipper Construction Company Private Limited (supra) having been rendered in the context of interpreting procedural law and procedural/technical requirements will be of little assistance to the petitioners. For these reasons, the petitioners do not possess the requisite locus standi to maintain the petition. Accordingly, the company petition is dismissed without considering its merits. The petitioners are at liberty to initiate appropriate action under the relevant provisions of the Act. redressing their grievances, if so advised. Accordingly, the unnumbered petition stands disposed of.