Oppression in private limited companies
Oppression and mismanagement cases are common in private and closely held companies. When trust breaks between substantial shareholders, one group tries to take control. Winding up on just and equitable ground in High Court is harsh for going concern. So aggrieved group approaches CLB under section 397/398 for preventive relief. Proceeding is complicated and many principles are settled. But new complications arise when dispute is also based on Share Purchase Agreement and parallel arbitration is pending. Which forum will decide? Who is shareholder now? These questions make CLB’s job difficult.
Case study facts: d vs f
"ABC" Pvt Ltd fully held by family "D". They agreed to sell entire shares to "F" through written Share Purchase Agreement with time limit. Shares were transferred and "F" took control. "D" alleges "F" failed obligations and transfer is invalid. SPA had arbitration clause, so dispute is before Arbitrator. Meanwhile "D" files 397/398 before CLB alleging oppression. "F" objects on two grounds: matter is pending in arbitration, and "D" is no longer shareholder after transfer. Creditors and suppliers are also involved but not party. This is typical high stake dispute seen in practice.
Complications of maintainability
Two issues arise. First, can CLB entertain 397/398 when validity of share transfer is subject of arbitration? Second, can "D" maintain petition if they transferred all shares? Section 397/398 protects minority against majority. But here "D" claims to be oppressed after ceasing to be shareholder. If share transfer is valid, "D" has no locus. If invalid, "D" may still be shareholder. But that issue is in arbitration. CLB is not civil court and follows summary procedure. It cannot decide disputed title easily. At same time, object is to protect company and stakeholders. Winding up will hurt creditors and employees. So CLB faces dilemma.
Clb approach in such complicated cases
In my opinion CLB can entertain matter if interests of justice warrant. It may not rely only on phrase "in order to put an end to matters complained of" because finality is with Arbitrator on SPA validity. But CLB can look at interim conduct. Is "F" mismanaging company during pendency? Are minority rights being affected? Are creditors at risk? CLB can pass interim orders to protect company without deciding title. It can also await arbitration award and then decide. Entertaining petition does not mean deciding SPA dispute. It means regulating company affairs to prevent harm. This balances jurisdiction and object of Act.
Conclusion
Share purchase agreement 397 398 companies act 1956 maintainability is tricky. In D vs F type cases, CLB must be careful. It should not decide arbitration issue, but can protect company from oppression during dispute. If "D" is not shareholder, maintainability fails. If arbitration finds transfer invalid, CLB can proceed. Till then interim measures are possible. In 2010, with more M&A in private companies, this approach helps avoid deadlock and protects all stakeholders.
