The provision and the proposition - Section 399 of the Companies Act, 1956

Provision

Section 399 of the Companies Act, 1956 states that a person holding not less than 10% of the issued share capital of the Company or who constitutes not less than one-tenth of the total number of members of a company is entitled to applying to Company Law Board praying for necessary action / relief against cases of oppression and mismanagement. The provision is very simple and clear. If a person does not hold even 10% of issued capital of the company, he / she cannot approach for relief in respect of cases of oppression and mismanagement.

Proposition

Though at the time of presenting a petition under Sections 397 and 398 of the Companies Act, 1956, the Petitioner or Petitioners may not be holding the minimum number of shares as prescribed under Section 399 of the Act entitling them to be eligible to maintain a petition under those sections, they could still maintain their petition if the reason for their holding shares less than the minimum eligibility qualification under Section 399 of the Act is actually the or one of the acts of oppression. For instance a particular transfer or allotment or refusal to allotment or refusal to register a share transfer could be a matter or one of the matters under challenge in the petition filed by them. In such case, the Company Law Board cannot throw their petition as a preliminary issue.

The Precedent

In Mr. Vijayan Rajes and Others v M.S.P. Plantations Private Limited and Others, ILR 2009 KAR 3576, the Karnataka High Court held in its decision on 12/08/2009 that for the purpose of examining as to whether the petitioning members qualify for maintaining a petition under Section 399 of the Act, the question to be looked into is as to whether the petitioners constitute the requisite number of members or they had the requisite shareholding in the company prior to the acts complained of. If the date of presentation of the petition should be looked into in a technical way, it could defeat the very purpose of the legislative enactment of Sections 397 and 398 of the Act, as the overbearing majority shareholders can simply by highhanded action or even for other purpose and by oppressive methods, dismember minority shareholders and leave them with no remedies, as the dismembered minority shareholders technically do not qualify for maintaining a petition under Section 399 of the Act, being not member at all. As the minority shareholders will be complaining only after the acts occurred and when they have been removed from the membership of die company, the understanding and interpretation to be given to Section 399 is only so as to advance the object of relief to be given in a situation governed by Sections 397 and 398 of the Act and not to foreclose the options to an aggrieved person and to deny the very relief sought to be extended to a complaining minority shareholder/s envisaged under Sections 397 and 398 of the Act.

 

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