P.V. Asha, J.@mdashThe suit filed by the appellant was dismissed on the preliminary issue of maintainability. According to the appellant/plaintiff, she is a share holder of the 1st defendant company. Defendants 2 to 8 are also share holders. Defendants 9 and 10 are third parties. The plaint schedule properties were assigned to them by way of sale deeds executed in 2001 and 2002. Suit was filed praying for a decree for declaration that sale deed Nos. 3381 dated 29.06.2001 and 1232 dated 23.06.2002 of Kundara S.R.O. are null and void and not binding upon the 1st defendant company and plaint schedule properties. The 1st defendant company was incorporated initially with 3 Directors, i.e. defendants 2, 3 and late Sri K. Raju, as a private limited company with Registration No. 2616/1974. Thereafter defendants 4, 5 and the plaintiff became share holders of the company. Consequent to the death of Sri K. Raju in 1997, defendants 6 to 8, who are his legal heirs, also 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 Court, Kollam, praying for a declaration that such sale deed is void and not binding on the company. During the pendency of the suit, the 2nd defendant executed another sale deed No. 1237/02 dated 26.03.2002 in favour of the 10th defendant, in collusion with defendants 3 to 8. That was also challenged, by way of amendment.
2. The defendants filed a written statement raising a preliminary objection that the suit is not maintainable in view of Sections 397 and 398 of the Companies Act.
3. On consideration of the preliminary issue, the court below found that the remedy available to a share holder of a company, when the affairs of the company are managed in a manner oppressive and if there is mismanagement to other share holders, is to make an application before the Company Law Board under Sections 397 and 398 as provided under Section 399 of the Act on which the Company Law Board can make orders under Sections 397 and 398. It was further found that the Company Law Board is empowered to pass orders including for setting aside of any transfer, delivery of goods, payment, execution or other act, under Section 402(f) and thus the power of the Company Law Board is very wide with powers including those to set aside any transfer, delivery of goods, payment, execution or other act relating to property made or done by or against the company; even on a mere complaint of a small share holder, if there is evidence enough to justify the interference. Further an appeal is provided to the High Court under Section 10(f) of the Companies Act, against the orders of the Company Law Board. In view of the provisions in Sections 397, 398, 402(f) and Section 10(f), the court below held that the jurisdiction of the civil court is barred by necessary implication.
4. The plaintiff has approached this Court against the above decision by which the suit was dismissed. We heard Sri D. Kishore, the learned counsel appearing for the appellant and Sri T.G. Rajendran, the learned counsel appearing for the respondents. Relying on the judgments reported in M/s. Marikar (Motors) Ltd. v. Ravikumar [1982(1) ILR Ker. 68], Antony v. T. Plantations (Pvt.) Ltd. [1995(2) KLT 512 (F.B. )],
"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 to any member or members (including any one or more of themselves) may apply to the Company Law Board for an order under this section, provided such members have a right so to apply in virtue of section 399.
(2) If, on any application under sub-section (1), the Court is of opinion--
(a) that the company''s affairs are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members; and
(b) that to wind up the company would unfairly prejudice such member or members, but that otherwise the facts would justify the making of a winding-up order on the ground that it was just and equitable that the company should be wound up, the Company Law Board may, with a view to bringing to an end the matters complained of, make such order as it thinks fit.
398. Application to Company Law Board for relief in cases of mismanagement:--(1) Any members of a company who complain--
(a) that the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner prejudicial to the interests of the company; or
(b) that a 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 its 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 public interest or in a manner prejudicial to the interests of the company, may apply to the Company Law Board for an order under this section, provided such members have a right so to apply in virtue of section 399.
(2) If, on any application under sub-section (1), the Company Law Board is of opinion that the affairs of the company are being conducted as aforesaid or that by reason of any material change as aforesaid in the management or control of the company, it is likely that the affairs of the company will be conducted as aforesaid, the Company Law Board may, with a view to bringing to an end or preventing the matters complained of or apprehended, make such order as it thinks fit."
Thus it can be seen that Section 397 provides for application 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--
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(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 Company Law Board can issue orders which may provide for setting aside of any transfer, delivery of goods, payment, execution or other act relating to property made or done against the company within 3 months before the date of application under Sections 397 and 398. Sections 397 and 398 provide for the remedies when the Company''s affairs are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members. The relief under Section 402(f) is provided for only in respect of the transactions which took place within a period of 3 months, that too, when affairs of the company are being conducted in a manner oppressive or prejudicial to public interest. Therefore, it can be seen that remedy is not provided for only in respect of continuing wrongs and not in respect of past transactions.
5. We will examine the decisions cited by the learned counsel for the appellant in support of his contention as to maintainability of the suit. In the decision reported in M/s. Marikar (Motors) Ltd. v. Ravikumar [1982(1) ILR Ker. 68], a learned Single Judge of this Court was considering the question of maintainability of a suit before a civil court in a case where the plaintiff sought for a declaration that the 37th and 38th annual general meetings and the decisions taken therein were illegal and for removing defendants 2 to 6 therein from the Board of Directors as unfit for holding the office by reasons of mismanagement and oppression. The defendants raised the question of maintainability in the light of the provisions under Sections 397, 398 and 408 of the Companies Act. The trial court held that the suit was maintainable. While considering the question in the appeal, Sri M.P. Menon J, as he then was, after referring to the history of legislation leading to the Companies Act, 1956, found that the Parliament has only attempted to consolidate the law relating to companies and it has not attempted to codify the same. The broad contention that the Act is a complete code was not accepted. Further referring to the contention raised on behalf of the appellant therein based on Foss v. Harbottle [(1843) 2 Hare 461], it was held that "an action by some of the members, notionally in the interests of all, to enforce the rules of conduct governing the conduct of the company''s affairs, is a recognised exception to the first principles, and an action against third persons who have wronged the company, and where the plaintiffs are supposed to be the champions of the company''s 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 stem partly from contract, express or implied, and partly from the general law. A contract is implied between a company and a member who joins it. And this gives him the right to have his name properly entered in the register of members with all correct particulars, to vote at meetings of members, to receive dividends and to have his capital returned to him in whole or in part, in the event of winding up; and he can therefore sue for enforcing these rights. Under the general law, he has an individual right to restrain the company from doing ultra vires acts, to have a reasonable opportunity of attending and speaking at meetings, to move amendments at such meetings, to transfer his shares and not to have his financial obligations to the company increased without his consent. The Companies Act also gives him some personal rights such as rights to inspect documents, to get a share certificate issued and to appoint proxy at meetings. The Act however confers on him no general right to have all the provisions of the memorandum or articles duly observed, or to initiate action for violation of all the obligations the statute imposes on the company.
It was held that Sections 397 and 398 only provide that members "may apply to Court for an order under this sub-section" and that in the absence of words expressly barring them, it is not possible to hold that Sections 397, 398 and 408 of the Companies Act exclude the jurisdiction of the ordinary courts. The intention of the provisions contained in Chapter VI of the Companies Act, 1956, is therefore not to exclude all other remedies. In the light of the above circumstances, the learned counsel submitted that the suit was maintainable.
6. In the decision reported in
"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
"(1) Where the statute gives finality to the orders of the special tribunals, the civil court''s 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 Act have not been complied with or the statutory tribunal has not acted in conformity with the fundamental principles of judicial procedure.
(2) Where there is an express bar of jurisdiction of the court, an examination of the scheme of the particular Act to find the adequacy or the sufficiency of the remedies provided may be relevant but is not decisive to sustain the jurisdiction of the civil court. Where there is no express exclusion, the examination of the remedies and the scheme of the particular Act to find out the intendment becomes necessary and the result of the inquiry may be decisive. In the latter case, it is necessary if the statute creates a special right or liability and provides for the determination of the right or liability and further lays down that all questions about the said right or liability shall be determined by the Tribunals so constituted, and whether remedies normally associated with action in civil courts are prescribed by the said statute or not...
An exclusion of the jurisdiction of the civil court is not readily to be inferred unless the conditions above set out apply."
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The provisions in Sections 397 and 398 were first introduced in the Indian Companies Act, 1913, as section 153C by the Amendment Act LII of 1951, following the enactment of section 210 of the English Companies Act, 1948. Section 397 provides against oppression of minority shareholders and section 398 provides for relief against mismanagement. The scope and ambit of sections 397 and 398 has been elaborately dealt with by Sri P.N. Bhagwati J. (as he then was) in
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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 themselves in such a manner to tilt the scales and create a majority for themselves. Some of the allegations may amount to mismanagement also within the meaning of section 398 giving jurisdiction to the Company Law Board to give appropriate reliefs under section 397, 398 or 402 of the Act, but there too it is restricted to bringing to an end or preventing the matters complained of or apprehended.
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The remedies sought for by way of declaration and injunction in the above suits can normally be granted only by the civil courts. Some of the acts complained of are not continuing wrongs also. That being the case, it is not possible to accept the argument that the appropriate remedy available to the plaintiffs was to approach the Company Law Board and the suits are barred by the provisions in sections 397 and 398 of the Companies Act."
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The Division Bench found that the decisions under challenge were in respect of leasing out the hospital and taking all the equipments from defendants 2 and 3, as detrimental to the interest of the company. The remedies were sought for by way of declaration and injunction, which can normally be granted only by civil courts and some of the acts complained of were not continuing wrongs. In these circumstances, it was found that the above suits cannot be held to be barred by provisions contained in Sections 397 and 398 of the Companies Act and those provisions cannot be understood as excluding the jurisdiction of the civil court to entertain the suit and grant reliefs such as declaration, injunction etc. The Division Bench also relied on the observations of M.P. Menon J, in M/s. Marikar (Motors) Ltd. v. Ravikumar [1982(1) ILR Ker. 68] wherein it was held that the Companies Act is not a complete and self contained code and it only collects the statutory provisions relating to a particular topic and embodies it in one enactment. The judgment in Avanti Explosives Ltd. Case [(1987) 62 Com Case 362 (Ker)], was also relied on, in which it 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:
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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, appellant''s 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 relief sought in the suit, it cannot be said that the complaint of the appellant was in respect of a continuing wrong or that the Company Court will be able to grant an effective relief sought for, by her as against the third parties, that too in respect of past transactions. It can be seen that there is no specific exclusion to seek remedies from a civil court. At the most it can be said that remedies are available under the Companies Act as well as under General Law of Contract from the civil court and there is an element of election for the party to approach appropriate forum, considering the nature of the relief he is seeking.
8. In the decision reported in
"22. The dispute between the parties was eminently a civil dispute and not a dispute under the provisions of the Companies Act. Section 9 of the Code of Civil Procedure confers jurisdiction upon the civil courts to determine all disputes of civil nature unless the same is barred under a statute either expressly or by necessary implication. Bar of jurisdiction of a civil court is not to be readily inferred. A provision seeking to bar jurisdiction of a civil court requires strict interpretation. The court, it is well settled, would normally lean in favour of construction, which would uphold retention of jurisdiction of the civil court. The burden of proof in this behalf shall be on the party who asserts that the civil court''s jurisdiction is ousted. Even otherwise, the civil court''s jurisdiction is not completely ousted under the Companies Act, 1956.
24. Yet again in Maharaja Exports v. Apparels Exports Promotional Council, the Delhi High Court held: (Comp Cas learned Public Prosecutor 361-62)
Under Section 9 of the Code of Civil Procedure, 1908, civil courts have jurisdiction to try all suits of a civil nature excepting suits of which their cognizance is expressly or impliedly 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
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Generally speaking, the broad guiding considerations are that wherever a right, not preexisting in common-law, is created by a statute and that statute itself provided a machinery for the enforcement of the right, both the right and the remedy having been created uno flatu and a finality is intended to the result of the statutory proceedings, then, even in the absence of an exclusionary provision the civil courts'' jurisdiction is impliedly barred. If, however, a right preexisting in common law is recognised by the statute and a new statutory remedy for its enforcement provided, without expressly excluding the civil courts'' jurisdiction, then both the common law and the statutory remedies might become concurrent remedies leaving open an element of election to the persons of inherence. To what extent, and on what areas and under what circumstances and conditions, the civil courts'' jurisdiction is preserved even where there is an express clause excluding their jurisdiction, are considered in Dhulabhai''s case."
It was thus found that in cases where there is no express bar on the jurisdiction of the civil court, remedies are available both under common law and under statute and the forum can be selected by the parties in the light of the circumstances of the case.
10. In Walton v. Cochin Stock Exchange Ltd. [1995(1) KLT 81 ], a learned Single Judge of this Court has considered the question of maintainability of a suit filed for enforcing a right to prevent another organization from carrying on a similar business within the area of its operation. Suit was filed by a recognised stock exchange within its area of operation, on the ground of violation of provisions of Security Contracts (Regulation) Act. A contention was raised as to the maintainability saying that the plaintiff was claiming the said right by a special statute and remedies were available for it by moving the authorities under the statute. After an analysis of various provision in the Securities Contract (Regulation) Act, it was found that no machinery was provided for adjudication of a grievance relating to violation of the 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
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 jurisdiction of civil courts cannot be assumed. But this rule does not hold good where the statute creates rights for the first time. In such cases it is the machinery prescribed by the statute which creates such rights that will be available to the person. In such a case unless right is conferred on the civil courts it will not be open to a person to resort to such civil remedies. xxx xxx xxx xxx xxx xxx.
11. In the decision reported in Antony v. T. Plantations (Pvt.) Ltd. [1995(2) KLT 512 (F.B.)], the Full Bench was considering the issue as to the maintainability of a petition under Section 155 of the Companies Act, before the Company Court, alleging that respondents 2 and 3 acquired shares in violation of agreement executed with the petitioner. Company Court dismissed the case. But MFA was allowed declaring the title of appellant to 1/3rd right into shares acquired in the name of respondents 2 and 3 and to get his name included in the share register. SLP was dismissed. Thereafter, Company Application was filed to implement the direction in M.F.A. It was opposed saying that Company Court lacked jurisdiction and hence judgment in MFA was a nullity. The Full Bench of this Court did not accept that contention, on the ground that the issue was already decided without any objection from any corner and therefore respondents cannot re-agitate the issue already decided. Para 9 of the judgment reads as follows:
9. The exclusion of the jurisdiction of the civil courts to entertain a civil cause cannot be assumed unless a particular statute contains an express provision to that effect or leads to a necessary and inevitable implication of that nature. Merely because the Companies Act provides for certain remedies it cannot be said that the jurisdiction of civil courts to deal with a case brought before it in respect of some of the matters covered by the Act is barred. xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx
12. The court below held that the Company Law Board has got very wide powers under Section 402(f) to set right the issue and has got the jurisdiction to declare the invalidity of the document executed in favour of strangers. But it is to be noted that the power to pass orders under Section 402(f) is to set aside transfers, etc., made within 3 months before the date of application under Section 397 or 398. The sale deeds in question were executed in 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''. Therefore the prerequisites to approach the Company Law Board and for grant of an effective remedy under the Companies Act are not available in the present case. The appellant is seeking a relief against all the remaining Directors of the company against a past transaction, which does not amount to a continuing wrong. Therefore, an effective remedy is available to her only before the civil court, for which there is no specific ouster in the Companies Act. Moreover when the appellant can invoke her statutory rights under the Company Law as well as the rights under the common law, she has got every freedom to elect the forum which is more appropriate. The suit filed by her cannot therefore be dismissed as not maintainable.
Therefore, we allow the appeal and set aside the judgment dated 20.12.2003 in O.S. No. 326 of 2001 on the file of the Additional Subordinate Court, Kollam. As the suit was dismissed on a preliminary issue, the same is remanded to the court below for further proceedings. Appellant shall be entitled to refund of the entire court fee paid in this appeal.