397/398 - Private Limited Companies - Share Purchase Agreements - Complications - a Case Study

397/398 - Private Limited Companies - Share Purchase Agreements - Complications - a Case Study

I have heard some corporates who are in dilemma as to which forum to be approached for protection of their corporate rights. We tend to see cases of oppression and mismanagement very frequently in Private Limited Companies or closely held companies. When there exist serious difference of opinion between or among substantial shareholders in the Company and when the required trust is lost, then, one group tries to oppress other in order to take control in the Company. For many reasons, when there is oppression and mismanagement in the Company, the aggrieved shareholders or the group may not resort to High Court for winding-up the Company on just and equitable ground. Instead, the minority or the majority in some cases approaches the Company Law Board seeking preventive and remedial measures in order to put an end to the matters complained of. The proceeding before the Company Law Board under section 397/398 is very complicated and there are many legal principles laid-down.

I have seen some typical Share Purchase Agreements and connected litigation. If a petition under section 397/398 of the Companies Act, 1956 is based on a Share Purchase Agreements and its validity, then, despite the pendency of a civil dispute or arbitration proceeding simultaneously, the proceeding under section 397/398 becomes so complicatedand dealing with issue is really challenging. I would like to present a case study with typical facts. The analysis and my opinion on the issue follow the presentation of facts.

Facts of the case:

1. "ABC" is a Private Limited Company and entire shareholding is held by a family called "D". The Company is a going concern.

2. The Family "D" wanted to sell the Company and they were approached by "F" to buy the entire shareholding in the Company.

3. After thorough discussions, "D" and "F" agreed to enter into a written agreement listing out the respective rights and liabilities of Share Transfer.

4. The Written Share Purchase Agreement between "D" and "F" had a time-limit to complete the entire transactions.

5. "D" had transferred all the shares to "F" pursuant to the Share Transfer Agreement and "F" had taken actual control of the Company.

6. According to "D", "F" failed to fulfill the obligations in the Share Purchase Agreement and as such contend that the "Share Transfer" is not valid at all.

7. As the Share Purchase Agreement contained an Arbitration Clause, the dispute between "D" and "F" was referred to Arbitrator and the adjudication was going on.

8. "D" now alleges oppression and mismanagement in the Company and filed a Petition before the Company Law Board under section 397/398 of the Companies Act, 1956.

9. "F" contends that the petition filed by "D" under section 397/398 of the Act is not maintainable in view of the pendency of the dispute before Arbitrator and in view of the fact that "D" has transferred all their shares and not a shareholder of the Company at all.

Analysis:

In the case presented above, the issue was so complicated. "D" can approach the High Court to wind-up the Company on just and equitable cause, but, they did not want to wind-up the Company. Apart from "D" and "F", the interests of the creditors, suppliers and other interested parties to be taken note of. But, basically, the object of section 397/398 of the Companies Act, 1956 is to provide protection to the rights of the minority against oppression and mismanagement by the majority in the Company. There was no substantial reference to the other interested parties unlike the liquidation proceedings where the interested parties are taken note of in each and every liquidation proceeding. Can the Company Law Board favour entertaining the Petition in view of other interested parties despite the complicated issue of maintainability of the Petition in view of Arbitration Proceeding? The facts are so complicated and it would be challenging task for any adjudicatory forum to take a decision on the issue and to resolve the same. It may be difficult for the Company Law Board to give an instant finding on the issue if it chooses to entertain the issue in view of pendency of Arbitration Proceedings on the issue of validity of Share Purchase Agreement.

My opinion:

The facts are really complicated and in my opinion, the Company Law Board can certainly entertain the matter if it is satisfied that the interests of justice warrants. The Company Law Board, while entertaining such a petition, may not rely on the phrase "in order to put an end to the matters complained of". Because, the Company Law Board, in the given case, may find it difficult to put an end to the matters complained in view of the pendency of simultaneous Arbitration Proceeding. The issue is really complicated and these types of cases are practically seen and in many cases, stakes are high.

Note: the case study does not represent the facts of any case and the views expressed are my personal.

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