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Mismanagement in family companies - a case study - Company Law in India



Ozg Sarfaesi / DRT Lawyer
Ahmedabad | Pune | Kolkata | Bangalore | Delhi | Mumbai
VoIP Text / Phone # 09811415837-61-72-84-92-94
Email: debt@liaisoning.com



Management of any company will be seriously considering two issues viz., winding-up proceedings and proceedings under section 397/398 of the Act against the Company. Both the winding-up proceedings and the proceedings under section 397/398 of the Act are very very complicated as those proceedings can bring the very functioning to halt. Its a challenging task even for the concerned adjudicatory forum to deal with those matters. For example, a winding-up petition can be filed by a creditor against the company with the help of deeming provision after sending the statutory notice containing a demand for return of debt money, but, merely because the company do not consider the statutory notice, the adjudicatory forum may not wind-up the company unless other issues are considered. Company Law is a nice subject to study and dealing with company issues are always challenging and also interesting. There are many interesting areas in Company Law and many to be explored.
Case:
There was a closely held company floated by all family members. All the family members own shares in the Company. The family has active participation in other companies too. In the company as referred to, few members are actively involved in day-to-day management of the company and few other members are not involved in day-to-day management. While this is the case, one of the family members who are qualified to approach the Company Law Board under section 399 of the Companies Act, 1956, approaches the Company Law Board alleging some mismanagement in the Company. The applicant before the Board refers to many irregularities and especially the action of the majority in selling the company properties for throw away price. The majority has taken a stand denying the allegation that the properties of the company are sold for a throw away price and also specifically alleges that the applicant before the CLB did not participate in the day-to-day affairs of the Company. The Board has given an exit option to the applicant rather looking into the issue of irregularities.
The issues for consideration in the above case are like:
1. Will the majority be allowed to contend that they are privileged in the company as they run the company and participate in the day- to-day affairs of the company?
2. How to deal with the issue of undervaluation of company properties in the given case?
3. Whether the applicant before the Board be forced to exercise exist option on the ground that he did not participate in the day-to-day affairs of the Company.
Study of case and the issues:
With regard to the first issue, barring the rights provided under the Companies Act, 1956, the majority can never contend that it is privileged as it is involved in day-to-day affairs of the Company. It is same even in family companies as company is a company irrespective of its shareholding pattern or kind. The Act deal with the issue of incorporation and functioning of the company and in a family companies, the understanding and the regulations contained in the Articles matters more. But, no where it is provided in the Act that the a person or a group which is taking care of the day-to-day affairs of the Company is privileged over the minority keeping the provisions of the Act apart. A shareholder is a shareholder and he has every right to question the misdeeds in the company and he need not participate in day-to-day affairs of the company thinking that the directors are expected to act fairly in the interest of all the shareholders. As such, in my opinion, the issue of non-participation in the affairs of the company or its functioning can not be given significance under company law.
The second issue is very very complicated. Some companies over values its properties and procures loan. Few other companies under values the company properties in order to get away from paying taxes to the Government. The overvaluation may not create much problem to the shareholders and the creditors are duty bound to inquire and looking into the issue of overvaluation when the company approaches them for a loan. But, the issue of undervaluation is very very dangerous. The problem with the undervaluation is that most of the money goes unaccounted. The minority may allege that the valuable properties of the company are sold for a throw away price and the majority may show the guideline value at the area. It is very very complicated issue to deal with. Because, once the properties are sold, then, the purchasers' interests are also to be considered. The issue of Board's power in setting aside the deeds to be looked into so carefully. Its one of the very complicated areas under section 397/398. The applicant before the Board who alleges oppression and mismanagement in the company should be able to prove that the properties are sold for a throw away price and for that he should resort to the enquiry as is being done by the Rent Control Courts while fixing the fair rent. What I feel is that the second issue as referred to above is always complicated.
With regard to the third issue, though the Board is empowered with many powers in the interests of the Company and as provided under section 397/398 of the Act, I don't think that it is right to force the applicant to exercise exist option on the ground that the applicant did not participate in the day-to-day affairs of the Company.


Ozg Sarfaesi / DRT Lawyer
Ahmedabad | Pune | Kolkata | Bangalore | Delhi | Mumbai
VoIP Text / Phone # 09811415837-61-72-84-92-94
Email: debt@liaisoning.com