Companies Act 1956 | Entry In Register Of 'Members' Not Necessary To Maintain Plea Against Oppression/Mismanagement: Supreme Court

The Supreme Court recently upheld a stakeholder's locus to maintain a petition before the Company Law Board alleging oppression and mismanagement, holding that entry in the register of "members" is not the only mode of acquiring membership.The Court observed that even in the absence of a formal entry in the appellant-company's register of members, respondent No.1 was entitled to be treated as a member for the purpose of maintaining proceedings under Sections 397 and 398 of the Companies Act, 1956 (against oppression and mismanagement). A bench of Justice PS Narasimha and Justice Alok Aradhe passed the judgment, stating,"The requirement that an agreement to become a member be “in writing”, introduced by the Amendment Act of 1960, was intended to ensure reliable proof of consent and to prevent fraudulent inclusion of names in the register, and not to impose entry in the register as the sole or exclusive mode of acquiring membership."It was further noted that the jurisdiction under Sections 397 and 398 has been recognized by Courts as equitable in nature. That is, these provisions are meant to afford remedies to minority stakeholders against oppression and mismanagement. As such, construing them in a restrictive manner, confined only to formal entry in the register, would frustrate the legislative intent.The Court held that Sections 397 and 398 ought to be construed with reference to Section 2(27) of the Act, which is broader in scope, and not Section 41(2). In this regard, it also placed reliance on Section 399 of the Act, which prescribes the eligibility criteria for maintaining an application under Sections 397 and 398."the relevant enquiry, while determining maintainability, must center on whether the applicant satisfies the conditions prescribed under Section 399, rather than on a mechanical application of the procedural requirements found in Section 41(2). The equitable foundation of Sections 397 and 398 must be a guiding factor to not construe the expression “member” in an unduly restrictive or technical manner confined solely to formal entry in the register, thereby frustrating the remedial purpose underlying the legislative scheme."To briefly put facts of the case, in 2001, respondent No.1 instituted a case against the appellants alleging acts of oppression and mismanagement. His primary grievance was that despite payment of share application money, he was not issued share certificates. The appellants contested the same on the ground of locus, contending that respondent No.1 was not a "member" and therefore could not maintain an application under Sections 397 and 398.In 2004, the Company Law Board allowed respondent No.1's petition. On the footing that he was a "member", it directed the appellants to either allot him shares corresponding to his investment or refund the investment amount with interest.In 2009, the High Court dismissed the appellants' appeal against the Company Law Board judgment. It held respondent No.1 entitled to be treated as a "member" for the purpose of maintaining an application under Sections 397 and 398.The High Court observed that the word "member" had to be understood in light of the definition clause ie Section 2(27) of the Act, not Section 41(2). Aggrieved by the decision, the appellants filed the present appeal.After hearing the parties, the top Court examined the distinction between Section 2(27) and 41(2) of the Act. It noted that the former employs language of wide amplitude, while the latter recognizes the modes by which membership may arise (one of which is entry in the register of members).The Court observed that the requirement of entry in the register was introduced by the Parliament as a safeguard. The intention was not to impose it as the only mode of acquiring membership.In the facts and circumstances of the case, the Court took note of a contemporaneous letter issued by appellant No.2 recognizing respondent No.1 as a co-owner. It further referred to the conciliation proceedings between the parties, whereupon the Conciliator had issued a communication acknowledging respondent No.1's entitlement to a substantial shareholding.The Court also noted that induction of respondent No.1 as the Managing Director was an admitted fact and the appellant-Company's hospital was rebranded as a heart institute, which was a reflection of the identity of respondent No.1's trading concern.It also considered the High Court finding that respondent No.1's investment was accepted by the appellants and used to expand the company's business. In this backdrop, the Court dismissed the appeal and upheld the impugned judgments. The amount deposited before the Court by the appellants was directed to be released to respondent No.1, alongwith interest.HeadnoteCompanies Act, 1956 — Sections 2(27), 41(2), 397, 398 and 399 — Maintainability of Oppression and Mismanagement Petition — Absence of Formal Entry in Register of Members — Deemed Membership by Conduct — Jurisdictional Fact — The Supreme...

Companies Act 1956 | Entry In Register Of 'Members' Not Necessary To Maintain Plea Against Oppression/Mismanagement: Supreme Court

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Companies Act 1956 | Entry In Register Of 'Members' Not Necessary To Maintain Plea Against Oppression/Mismanagement: Supreme Court

Debby Jain

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