Why 397 398 matters in private companies
Listed companies have SEBI and listing agreement to regulate them. Private and closely held companies have no such strict regime. Most Indian businesses start as family companies. Shareholding is often split between two groups. When trust breaks, one group tries to oppress other. Sometimes minority tries to trouble majority to take over. Section 397/398 gives remedy to qualified minority under section 399. Even majority files in some cases. Proceeding is complicated because CLB must look at company concept and stakeholders not before it. Technical applications for condonation are easy, but oppression cases are not. Case study facts: consent for 10 years
Group A holds 85%, Group B holds 15%. Company is 10 years old and doing well. Board had directors from both groups. All decisions in Board and AGM were with consensus. No concealment. Both groups knew all transactions. After 10 years, difference arose. Minority filed 397/398 listing all past transactions and alleging oppression. All those transactions happened with minority’s consent and knowledge. There were few irregularities in filing and compliance, also known to minority. Issue: Can minority take advantage of irregularities which they knew and consented to?
Legal test for oppression from sc and hc
Bombay HC in Mauli Chand Sharma 1977 47 Com Cases 92 said Chapter VI deals with emergent situations where normal management failed and oppression exists. SC in Sangramsinh Gaekwad 2005 123 Comp Cases 566 held oppression means burdensome, harsh and wrongful conduct. It must relate to conduct of affairs and oppress minority. Must be continuous, not isolated. Majority must abuse dominant position for pecuniary advantage. Relief is extraordinary. If only statutory breach is there, civil suit is proper. SC in Dale and Carrington 2004 122 Comp Cases 161 stressed directors’ fiduciary duty. In private company, directors must act with utmost good faith and disclosure. Standard is finer. These cases show substance matters, not just technical breach.
Bonafides and consent bar relief
In my opinion, no judgment directly says minority can allege their own consented acts as oppression. If minority had knowledge for 10 years and participated in decisions, they cannot turn around and call it oppressive. That defeats object of Chapter VI. Section 397/398 is to protect minority from majority abuse, not to allow minority to use own acts to blackmail. Irregularities in ROC filing are common in private companies. Ministry itself proposes schemes to compound. Using those to claim oppression when you were part of it is not bonafide. CLB must see who benefited, who participated, and whether there is real prejudice now. Shareholding pattern and other stakeholders also matter.
Conclusion
Oppression mismanagement 397 398 bonafides minority consent must be tested on facts. Gaekwad and Dale principles apply. Consent and delay kill claim. If minority was part of management for 10 years and now cries foul, petition should fail unless new oppressive act is shown. CLB must filter such cases to prevent misuse. In 2010, with more private company disputes, this approach will protect genuine minority and company.
