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TMI Blog2014 (7) TMI 1349X X X X Extracts X X X X X X X X Extracts X X X X ..... lso became the share holders. The total authorised capital of the company is 700 equity shares @ Rs. 1,000/- per share for a total amount of Rs. 7 lakhs. Plaintiff and defendants 2 to 5 are holding 100 shares each, while defendants 6 to 8 together hold 100 shares. Plaintiff alleged that, the 2nd defendant who was the Managing Director of the Company in collusion with defendants 3 to 8 are conducting the affairs of the company in a manner oppressive to the plaintiff, who is a member of the company, without convening a general body, without supplying the audited accounts etc. despite her request for the same. Thus the 2nd defendant executed a sale deed No. 3381 dated 29.06.2001 of Kundara S.R.O. on behalf of the 1st defendant in respect of the plaint schedule property in favour of the 9th defendant without any authority and without complying the procedural formalities. Alleging that the said sale deed is a sham document, that no consideration has been received from the 9th defendant and he is only a name lender and the sale deed was executed with the intention of transferring the plaint schedule property to somebody else for higher consideration, the plaintiff approached the Sub Cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e decisions reported in K.K. Subramoniam Vs. M.P. Sreenivasan and Another, , Walton v. Cochin Stock Exchange Ltd. [ 1995(1) KLT 81 ], Raja Ram Kumar Bhargava (Dead) by Lrs. Vs. Union of India (UOI), and Dwarka Prasad Agarwal (D) by Lrs. and Another Vs. Ramesh Chandra Agarwala and Others, , the learned counsel submitted that the jurisdiction of the civil court to entertain a civil suit cannot be assumed to be excluded as long as there is no absolute bar under the Companies Act. In the case on hand, the suit is filed by a single share holder. The relief sought is for a declaration as to the validity of the sale deed executed in favour of strangers. The remedies before the Company Law Board or Company Court will not be effective at least as against the strangers to the company. In this context, an examination of the provisions contained in Section 397 is necessary. The relevant provisions (as it stood before amendment of Act 11/2003, read as follows: "397. Application to Company Law Board for relief in cases of oppression:--(1) Any member of a company who complain that the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner oppressive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cation in the case of oppression, whereas Section 398 provides for application in cases of mismanagement on conditions specified in Section 399. Section 10 of the Companies Act does not exclude the jurisdiction of the civil court. Section 10 only deals with the courts having jurisdiction under the Companies Act. The court below has found that the application is not maintainable in the light of the provisions contained in Sections 397, 398 and clause (f) of Section 402. Clause (f) of Section 402 reads as follows: "402. Powers of Court on application under section 397 or 398 :-- Without prejudice to the generality of the powers of the Court under section 397 or 398, any order under either section may provide for-- xxx xxx xxx xxx xxxxx xxx xxxx xxx xxxx xxx xxx xxx xxx xxxxx xxx xxxx xxx xxxx (f) the setting aside of any transfer, delivery of goods, payment, execution or other act relating to property made or done by or against the company within three months before the date of the application under section 397 or 398, which would, if made or done by or against an individual, be deemed in his insolvency to be a fraudulent preference." The above provision provides that the Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gainst third persons who have wronged the company, and where the plaintiffs are supposed to be the champions of the companys interests, is an equally recognised exception to the second. In para. 9 it was held as follows: 9. Suppose, for instance, that directors of a company decide, with support of the majority, to use its funds for purposes not authorised by the memorandum and articles of association. The decision, if carried out, will not only be injurious to the company but also beyond its powers. It is settled law that in such an event, even a minority of shareholders can sue to restrain the company from giving effect to the decision. Ultra vires is the first and most well-recognised exception to the rule in Foss v. Harbottle. xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxxxx Further in para. 9, the observations in the judgment in C.P. 1/79 were also reiterated in support of the conclusion. The relevant portion in paragraph read as follows: Apart from corporate rights which are but rights to get remedied wrongs done to a company, a member has also personal rights to sue for wrongs done to himself in his capacity as a member. Those individual rights s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had raised the contention that the civil court has no jurisdiction to entertain the suit in view of the provisions contained in the Companies Act. While considering the question of jurisdiction of civil court, on a reference, the Division Bench found as follows: "Under Section 9 of the Code of Civil Procedure, civil courts have jurisdiction to try all suits of a civil nature except those of which cognizance by the civil court is either expressly or impliedly excluded. Such exclusion is not to be readily inferred, the rule of construction being that every presumption should be made in favour of the existence rather than the exclusion of jurisdiction of the civil courts. In Dhulabhai and Others Vs. The State of Madhya Pradesh and Another, , a five-judge Bench of the Supreme Court considered the earlier decisions on this aspect and laid down the following propositions: "(1) Where the statute gives finality to the orders of the special tribunals, the civil courts jurisdiction must be held to be excluded, if there is adequate remedy to do what the civil courts would normally do in a suit. Such a provision, however, does not exclude those cases where the provisions of the particular ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) to set aside or interfere with past or concluded transactions between a company and third parties which are no longer continuing wrongs. The provisions are essentially intended to control and prevent oppression of the rights of the minority shareholders and mismanagement by the majority. xxxx xxx xxxx xxxxx xxx xxx xxxx xxxx xxxx xxxx xxxx xxx xxxx xxxxx xxx xxx xxxx xxxx xxxx xxxx xxx xxxx xxx xxxx xxxxx xxx xxx xxxx xxxx xxxx xxxx xxx xxxxxxx xxx xxxx xxxxx xxx xxx xxxx xxxx xxxx xxxx In this case, it is pointed out that the plaintiffs in O.S. No. 723 of 1992 and O.S. No. 41 of 1993 have the requisite shareholding qualification to apply under sections 397 and 398. But, as noticed above, the scope of an application under Sections 397 and 398 is limited. It is intended to prevent only continuing wrongs and does not enable the shareholders to challenge concluded transactions. Moreover, the provisions, as already noticed, are essentially intended against the tyranny of the majority against the minority shareholders. But, in this case, the complaint is that the managing director and some of the directors of the company who do not have the backing of the majority, have conducted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was held that the rights and liabilities of the parties arise out of the General Law of Contract and not from the provisions of the Companies Act and the suit was held maintainable with the following observations: "xxx xxx xxxx xxxx xxx xxxx xxxxx xxxx xxx xxx xxxx xxxx xxx xxxx xxxxx xxxx xxx xxx xxxx xxxx xxx xxxx xxxxx xxxx Suits by minority shareholders against oppression and mismanagement have been, as noticed earlier, a time-honoured exception to the rule in Foss v. Harbottle, and in the absence of words expressly or clearly barring them, it is not possible to hold that sections 397, 398 and 402 of the Companies Act exclude the jurisdiction of the ordinary courts." 7. In the present case, appellants allegation is that the 2nd respondent Managing Director, executed sale deeds, which are sham documents without consideration, in respect of the property of the Company, in collusion with other Directors, in the absence of any special resolution for the same. The relief sought for in the suit is a declaration that the sale deeds executed by the Managing Director on 29.06.2001 and 23.06.2002 are null and void and not binding upon the Company. Going by the nature of the rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dly barred. Unlike some statutes, the Companies Act does not contain any express provision barring the jurisdiction of the ordinary civil courts in matters covered by the provisions of the Act. In certain cases like winding up of companies, the jurisdiction of civil courts is impliedly barred. In the light of the above observations, it can be seen that there is neither any specific exclusion nor any exclusion by implication, to entertain a suit as in the present case wherein relief is sought against the sale deeds entered into by the Directors, even though there are allegations as to mismanagement and oppression. The appellant is therefore free to choose the forum which is capable of granting her effective relief. 9. The next case relied on is the decision reported in Raja Ram Kumar Bhargava (Dead) by Lrs. Vs. Union of India (UOI), wherein also the question of jurisdiction of the civil court was considered in a case where payment of interest was sought on refund of taxes and objection has been raised by the department of Income Tax in the light of Section 297 of the Income Tax Act. Even though it was ultimately found that the matter was governed under Section 297(2)(i) and the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e provisions in the Act. It was held that the mere fact that the plaintiff could complain to the authorities created by that Act cannot be said to bar the right of the plaintiff to approach the civil court for the redressal of its grievances. It was held that there was no express or implied bar created by the Securities Contracts (Regulation) Act regarding maintainability of the suit in the civil court. Para. 5 of the judgment reported in K.K. Subramoniam Vs. M.P. Sreenivasan and Another, was also relied on wherein this Court held as follows: 5. If a person has a right at common law and in regard to this matter a statute is enacted which statute provides a machinery for working out the remedy if the right is infringed, still such person will be entitled to resort to a civil court to seek his remedies in regard to the infringement of his rights unless the statute excludes such resort to the civil court and confines his remedies to that provided by the statute. This is because even de hors the statute such a person had a civil right and unless the provisions of the statute are to be so read as excluding resort to the civil court for vindicating such civil right ouster of jurisdictio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... June 2001 and 2002. Moreover there is no provision for granting a declaratory relief, which would necessarily require further consequential reliefs also, which the civil court alone can grant. There cannot be any dispute that there is no express bar created under the Companies Act. It cannot be said that the jurisdiction of the civil court is ousted by implication also. The appellant cannot be non suited on the ground of maintainability of the suit, as long as there is no provision under the Companies Act providing for an effective remedy in like circumstances, under which the Company Law Board or authorities constituted under the Companies Act are empowered to grant the relief sought for. The provisions contained in Section 397 and 398 do not stand in the way of the civil court granting a declaratory relief as to the validity of the sale deeds executed in favour of 3rd parties, the first of which was executed in June, 2001, i.e. beyond 3 months of filing the suit. The winding up proceedings envisaged under the Companies Act will not by itself be an effective remedy in the circumstances of the case, especially when the impugned action is already done and is not being done. Therefor ..... X X X X Extracts X X X X X X X X Extracts X X X X
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