Object of 397 398 and scope beyond shareholders
Section 397 and 398 of Companies Act 1956 are meant to protect minority shareholders against oppression and mismanagement by majority. But proceedings before Company Law Board are not limited to shareholders alone. CLB can pass any order under section 402 to put an end to matters complained of and regulate affairs of company. In doing so, orders may affect agreements with outsiders, workmen, creditors or other third parties. Therefore role of third parties cannot be ignored. The issue becomes complicated when validity of company contracts or dues are questioned in 397/398 petition. Law balances shareholder protection with fairness to outsiders.
Right of third parties under section 405
Section 405 specifically gives right to any person to apply to CLB for permission to state his case in 397/398 petition. This is based on natural justice that no one should be affected unheard. Bombay High Court in Company Appeal No.51 of 2009 Ravi Kiran Agarwal & Others Vs. Moolchand Shah held that words “any other person” in section 405 are wide and not restricted to persons having agreement with company under section 402(e). If relief sought will affect interest of third party, impleadment is proper. CLB can add parties to enable full and final adjudication. Principle of ejusdem generis cannot limit section 405 to categories in section 402. Thus third parties whose interest may be affected can seek to be heard.
Limits on third party relief in 397 398
While third parties can be heard, they cannot use 397/398 to seek independent relief for their own claims. Madras High Court in T. P. Sokkalal Ram Sait Factory Pvt Ltd 1978 48 CC 503 clarified that section 402 is for internal management of company. It does not cover ordinary debts or tax liability of company. Clause (g) is residuary and must be read with object of regulating company affairs. If third party wants to recover dues, proper forum is civil suit. CLB cannot be used to settle third party debts. Therefore right to participate does not mean right to get separate relief. Third party can only express views on issues connected to oppression and mismanagement.
Practical complications and natural justice
In practice CLB may deal with agreements between company and outsiders, termination or modification under section 402(e) and (f). Before passing such orders, principles of natural justice require affected third party be heard. This is where section 405 becomes important. Workmen, creditors or contracting parties may apply to be impleaded if order will affect them. CLB has discretion to allow if sufficient cause is shown. The power is wide and not confined to predefined categories. Purpose is to ensure order is effective and does not create new disputes. At same time, CLB must not convert 397/398 into general debt recovery forum.
Conclusion
Third party rights section 397 398 companies act 1956 are limited but important. Third parties can intervene under section 405 if affected, but cannot seek independent relief. CLB must balance shareholder protection with fairness to outsiders. Madras and Bombay HC judgments show that natural justice demands hearing, but jurisdiction of CLB remains focused on oppression, mismanagement and regulation of company. This approach prevents misuse while ensuring orders are just and workable.
