Thursday, December 10, 2009

"Consent in writing" and Standing for Oppression and Mismanagement: Section 399(3)

Having discussed the apparent relaxation in standing requirements under Section 399(1), this post will now consider what the requirements under Section 399(3) are. In particular, the effect of the Justice Ruma Pal’s decision in J.P. Srivastava v. Gwalior Sugars will be considered. Section 399(3) states:
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.

The controversy in this regard has focussed around the meaning of the words “consent in writing”. For instance, assuming that in a petition under Section 397/398 it is stated that the petition is filed with the consent of a 100 members, is that itself sufficient? Is it sufficient if an annexure is added saying that “the following consent to a petition being filed” followed by a list of 100 names and signatures? What exactly is required by the words “consent in writing”? This is a question which can have some importance, given the frequency of petitions for oppression and mismanagement based on consent of the requisite number of shareholders.

The leading case on the point was a decision of the Delhi High Court, Omni India v. Balbir Singh, [1989] 69 Comp Cas 903 (Del). In that case, the petitioners had annexed the consent letters of 129 shareholders. Most of these letters were in the form, “… I consent to your proposed action that you want to take against the management of Omni India Limited for the gross mismanagement of the company's affairs and the oppression of members…” The issue was whether this was sufficient to meet the requirements of Section 399(3). It was held that it was not so sufficient.

Previously, the issue has been decided by a few High Courts – particularly in Makhan Lal Jain v. Amrit Banaspati, AIR 1952 All 326 and M.C. Duraisamy v. Sakhti Sugars, [1980] 50 Comp Cas 154. The ratio of the previous decisions was that Section 399(3) requires consent to the filing of a particular petition with particular allegations for particular reliefs under Sections 397/398. Further, the writing should indicate application of mind while giving consent. Relying on these cases, the Delhi High Court in Omni formulated the principle as follows:

… keeping in view the purpose for enacting section 399… the expression ‘consent in writing’ used in section 399(3) means conscious approval of the action proposed to be taken by the persons to whom the consent has been given. We are also of the view that the writing itself should indicate that the persons who have signed the consent letters have applied their minds to the question before them and on application of minds have given consent for a certain action… This is apparent from the expression ‘consent in writing’. Had the intention been that the writing should not indicate the application of mind, then there was no necessity for using the term ‘consent in writing’ and mere word ‘consent’ could have been used…

Thus, what the Court seems to have held is that not only must the consent form reveal ‘consent’, it must also reveal a conscious application of mind to the particular allegations and particular reliefs.

The issue was reconsidered by the Supreme Court in J.P. Srivastava v. Gwalior Sugars. In a rather strange passage, the Court commented, “Section 399 of the Act has replaced Section 153C(3) of the Indian Companies Act, 1913 with some major differences. Section 153-C (3) of the 1913 Act itself provided that the consent of the shareholders supporting the petition should be obtained in writing. Sub Section (3) of Section 399 of the 1956 Act, however, contains no such requirement. It only speaks of ‘obtaining’ of the consent. It does not speak of consent in writing nor does it require any such writing to be annexed with the petition…

It is not clear why the Court though that Section 399(3) does not speak of consent in writing. The Section specifically requires this – similar to what the old Section 153C required. However, based on the conclusion (or assumption) that Section 399(3) does not speak of consent in writing, the Court stated that the reasoning of the decision in Makhan Lal Jain v. Amrit Banaspati would no longer be apposite. Following from here, the Court held that the object of prescribing standing requirement was to ensure that “frivolous litigation is not indulged in by persons who have no real stake in the company.” Furthermore, “Substance must take precedence over form. Of course, there are some rules which are vital and go to the root of the matter which cannot be broken. There are others where non- compliance may be condoned or dispensed with. In the latter case, the rule is merely directory provided there is substantial compliance with the rules read as a whole and no prejudice is caused. In our judgment, Section 399(3) and Regulation 18 have been substantially complied with in this case…

Thus, the Court seems to have decided that substantial compliance with Section 399(3 is sufficient – the provision is not mandatory but is directory in nature. The basis for this – that Section 399(3) does not require “consent in writing” – may be open to question; yet this is the position of law laid down by the Supreme Court.

Subsequent decisions of the Company Law Board limit this to Section 399(3) alone. The Board seems to have suggested that the provisions of Section 399(1) are mandatory; but those of Section 399(3) are directory – see Syed Masharraf Mehdi v. Frontline Soft, [2007] 135 Comp Cas 280 (CLB); Re Kerala Chamber of Commerce and Industry, MANU/CL/0017/2008. To make matters slightly more complicated, the latter of these decisions cites Makhan Lal Jain v. Amrit Banaspati as well as M.C. Duraisamy v. Sakhti Sugars. Amrit Banaspati was specifically held to be “no longer apposite” by the Supreme Court. Arguably, the same should be the fate of Duraisamy and Omni.

The new Companies Bill does not do much in terms of clarifying this area as it uses the same language. One area where the Companies Bill does introduce a change is in the substantive provisions of oppression and mismanagement. That will be discussed in a separate post later.

2 comments:

Mihir Naniwadekar said...

In the post I mentioned that “One area where the Companies Bill does introduce a change is in the substantive provisions of oppression and mismanagement.”

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By way of clarification, the proposed Section 212 of the Companies Bill, 2009, states:

212. (1) Any member of a company who complains that—

(a) the affairs of the company have been or are being conducted in a manner prejudicial to public interest or in a manner prejudicial or oppressive to him or any other member or members; or

(b) the material change, not being a change brought about by, or in the interests of, any creditors, including debenture holders or any class of shareholders of the company, has taken place in the management or control of the company, whether by an alteration in the Board of Directors, or manager, or in the ownership of the company’s shares, or if it has no share capital, in its membership, or in any other manner whatsoever, and that by reason of such change, it is likely that the affairs of the company will be conducted in a manner prejudicial to its interests or its members or any class of members,

may apply to the Tribunal, provided such member has a right to apply under section 215, for an order under this Chapter.

(2) The Central Government, if it is of the opinion that the affairs of the company are being conducted in a manner prejudicial to public interest, it may itself apply to the Tribunal for an order under this Chapter.


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The basic difference is that the proposed Section 212 allows actions in cases where the affairs of the company are being conducted in a manner “prejudicial” to the public interest or “prejudicial or oppressive” to the shareholders. Under the present Act, the acts complained of must be “prejudicial” to the public interest or “oppressive” to the shareholders (and not “prejudicial or oppressive”). The effect of this – whether this indeed changes the legal position, or whether it is clarificatory of existing judicial practice – is something which will be considered in the next post.

Mndar Kagade said...

Looking forward to the next one and to see if the amendment changes the legal position or if it merely clarifies the existing judicial practice.

Looking at the change purely from a statutory prism though, it seems to me that adding "prejudicial" to the grounds will provide a "lower threshold" for the equity-owners to commence action. (Standalone) "Oppressive" would be a stricter test in comparison under a textualist prism.