JAMIA MILLIA ISLAMIA

Faculty of Law

Assignment

PREVENTION OF MISMANAGEMENT

Corporate Law

Submitted to: Dr. Qazi Usman

Submitted by: Zuhair Khalid Siddiqui

BA.LLB (Regular) 7th Semester

Batch: 2017 - 2022

ACKNOWLEDGMENT
First and foremost, praises and thanks to the God, the Almighty, for His showers of

blessings throughout my research work to complete the research successfully.

I would like to express my deep and sincere gratitude to my Professor, Dr. Qazi M.

Usman for giving me the opportunity to do research and providing invaluable guidance

throughout this research. His dynamism, vision, sincerity and motivation have deeply

inspired me. He has taught me the how to carry out the research and to present the research

works as clearly as possible. It was a great privilege and honor to work and study under his

guidance. I would also like to thank him for his friendship, empathy, and great sense of

humor.

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PREVENTION OF MISMANAGEMENT

The provisions relating to prevention of mismanagement in a company are contained in Section

398 of the Companies Act. An application may be made under this section to the Tribunal, by
any member or members of a company complaining that,

(1) the affairs of the company are being conducted in a manner prejudicial to the
public interest or the company: or

(2) a material change has been introduced in the management or control of the company where it
is likely that the affairs of the company may be conducted in a manner prejudicial to public
interest or the company.

For the purposes of Section 398, the material change in the management or control of the
company will be deemed to have taken place, if there is an alteration:

(i) in the Board of Directors; or

(ii) in the ownership of shares in the company, or

(iii) in the membership, in case the company has no share capital; or

(iv) in its manager; or

(v) in any other manner, whatsoever.

On receiving such an application, the Tribunal, shall, after taking into consideration the
representation, if any, made by the Central Government under Section 400, is of the opinion that
the affairs of the company are being conducted as complained of, or material change has taken
place in the management or control of the company which is likely to be prejudicial to it, may
pass any order as it thinks fit with a view to bring to an end the matters complained of in the

PREVENTION OF MISMANAGEMENT
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petition. The decision in Rajahmundry Electric Supply Corporation v. Nageswara Rao, 1 is an
illustration of mismanagement under Section 398 of the Act.
In this case a petition was brought against a company by certain shareholders on the ground of
mismanagement by the directors. The Court found that the Vice-President grossly mismanaged
the affairs of the company and had drawn considerable sums for his personal purposes and that
large amounts were owed to the Government as arrears for the supply of electricity and the
machinery was in a depleted condition and "powerful local junta was ruling the roost," and that
the shareholders outside the group of the chairman were powerless to set the matters right. The
Court held this to be sufficient evidence of mismanagement and accordingly, appointed two
administrators for the management of the company for the period of six months vesting in them
all the powers of the Board of Directors.

The following points need to be particularly noted in context of relief against mis management
as provided under Section 398 of the Companies Act,

1. The relief is available to the company and not to any particular member or members.

2. There should be a present and continuing mismanagement. The charge of past

mismanagement even if proved, shall not be enough to establish an existing injury to the public
or the company.2

3. The section enables the Tribunal to take into consideration the outside interests affected by
corporate operations. Thus, in Richardson & Cruddas Ltd. v. Haridas Mundhra3, the High
Court of Calcutta refused to order the winding up of a grossly mismanaged company and
appointed special officers to manage its affairs because the company was engaged in special
industry necessary for the implementation of the country's Five-Year Plans.

DISTINCTION BETWEEN SECTION 397 AND SECTION 398

1
AIR 1956 SC 243
2
R.S. Mathur v H.S. Mathur (1970) 1 Comp. LJ 35
3
(1959) 29 Comp Cas. 547
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It has been stated earlier that Section 397 deals with relief against oppression whereas Section
398 relates to prevention of mismanagement. It is important to note the relief available under the
two sections differs in the following aspects:

1. In case of oppression under Section 397, there should be facts to justify the making of an
order for winding up, but no such facts are necessary in case of claiming relief against
mismanagement under Section 398.

2. Under Section 397, the Tribunal acts to prevent injustice being done to the member or
members in capacity of member, but under Section 398, the Tribunal acts in order to prevent
injustice being done to the interests of the company as a whole.

3. The provision of Section 398 is preventive in nature whereas under Section 397, the Tribunal
seeks to end the oppression complained of by the petitioner.

The provisions of both these sections, however, do not seek to exclude the jurisdiction of
ordinary Civil Court to grant relief in appropriate cases 4. The Supreme Court has, however,
decided in the case of Sri Ramdas Motor Transport Ltd. v. Tadi Adhinarayana Reddy & others 5,
that where a petition complaining mismanagement of affairs of company has already been filed
to the Company Law Board (now substituted by Tribunal), under Section 397/398 of the Act,
and the CLB has not yet passed any order, this will not be a sufficient ground for the parties to
resort to the remedy of writ petition under Art. 226 or 32 of the Constitution of India. The Court
further observed that in the instant case the company in question was only a deemed public
limited company and its shareholding was very closely held therefore it could not be said that
the petition to investigate the affairs of the company involves public interest' so as to make it
entertainable through a writ petition. The fact that the company has borrowed moneys from
public institution is also no ground to invoke the doctrine of public interest under the
circumstances it cannot be said to be a valid excuse for the shareholder to bypass the specific
provisions of the Companies Act and move the High Court under Art. 226 of the Constitution.

4
Maralkar Motors v. Ravi Kumar, (1982). 52 Comp Cas. 362
5
Second Case. AIR 1997 SC 2189

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INSTANCES OF MISMANAGEMENT

A very clear illustration of mismanagement under Section 398 appears in Rajahmundary Electric
Corporation v. Nageshwara Rao . Here, a petition was brought against a company by certain
shareholders on the ground of mismanagement by directors. Court found that vice-chairman
grossly mismanaged the affairs of the company and had drawn considerable amounts for his
personal purposes, the shareholders outside the group of chairmen were powerless to set matters
right. This was held to be sufficient evidence of mismanagement. The court accordingly
appointed two administrators for management of company for period of 6 months vesting in
them all the powers of the directorate.
Where the managing directors of the Company continued in office after expiry of their terms,
without a meeting being held to re-appoint them prior to making fresh application to Central
Government under Sec 269, the continuation of office under these conditions was held to be
mismanagement.- Sishu Ranjan v. Bholanath Paper House
Where bank account was operated by unauthorized person. Kuldip Singh Dhillon v. Paragon
Utility Financers Ltd. In this case, a certified copy of a resolution had been sent to the bank
authorizing certain persons to operate the account. No such resolution was found recorded in the
minutes book; rather the resolutions passed on the particular date and recorded in the minutes
book; rather the resolutions passed on the particular date and recorded in the minutes book were
different.
Sale of assets at low price and without compliance with the Act- One of the estates of a tea and
rubber plantation company was sold by the direction at a low price to another tea plantation
company without complying with the requirements of sec 293(1) which demands approval by
shareholders and without giving adequate under Sec 173 and relevant information, giving
delivery of possession before general body meeting and accepting consideration in instalment. It
was held that all these acts constituted mismanagement of affairs and sale was set aside. The
Board of directors and the purchasers were held liable for the company’s losses and were
required to submit an account of the income of the estate from the date of delivery of possession
to the date of its actual return to the company- Malayalam Plantations Ltd.
Violation of statutory provisions and those of articles- Transferring shares without first offering
them to the existing members in accordance with their rights under the articles, holding meetings
without sending notice to members; issue of shares for consideration other than cash not
PREVENTION OF MISMANAGEMENT
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represented by corresponding assets and burdening the company with additional rental by
shifting the company’s office- Akbar ali Kalveri v. Konkan Chemicals Ltd.
Other instances include Gross neglect of interest of the company by sale of its only assets and
total inattention thereafter to the affairs of the company; Violation of conditions of company’s
memorandum etc.
The famous Satyam fiasco is a very good example of mismanagement of funds of the company
and fraudulent accounting, where the Chairman of Satyam Computer Services- Ramalinga Raju
in his letter to the Board of Directors confessed to India’s biggest corporate fraud worth Rs
7,000 crore on the company.
Effect of Arbitration Clause– Provisions in the Articles of Association of a company for
reference of disputes between Company and director, or between directors or between members
cannot oust the jurisdiction of the Court to try petition by member for winding up or petition
against oppression and mismanagement.
Partnership- The Supreme Court has laid down that a relief cannot be granted under S 397 and
398 on the analogy of principles applicable partnership and the application of this has to be
confined to rare cases for invoking the jurisdiction under S.433 for ordering winding up of small
private company. 
Banking- A banking company can be wound up only under Part III of Banking Regulation Act
and not under the just and equitable clause in Sec 433(f). Consequently, no application is
maintainable under sec 397 in respect of banking company.

LOCUS STANDI FOR FILING PETITION UNDER SECTION 398

The use of the legislative expression that “any person interested in the affairs of the company”
may draw the attention of the Tribunal to a situation which warrants Tribunal's intervention,
clearly suggests that the question of locus standi hardly arises in case of application under
Section 398 for prevention of mismanagement in a company. It would therefore, appear that the
connotation 'any person interested in the affairs of the company' has a much wider application
than merely a member, creditor or liquidator of a company. Tribunal can even act suo motu. As
pointed out in S.K. Gupta v. K.P. Jain 6, it is immaterial as to who drew the attention of the
Tribunal to a situation which necessitated Board's intervention. There is no reason to
6
AIR 1979 SC 734
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circumscribe the expression on the application of any person interested in the affairs of the
company' so as to limit it to mere creditor or a member.
However, while moving an application under Section 398 for prevention of mismanagement in
a company, the petitioner must indicate the relief sought for but he need not show what interest
he has in claiming the relief against mis-management. Thus, in a nutshell unlike Section 392
there is no requirement of locus standi in an application under Section 398.

POWER OF THE CENTRAL GOVERNMENT TO PREVENT CENTRAL

GOVERNMENT TO PREVENT OPPRESSION OR MISMANAGEMENT
[Section 408]

Besides the powers of the Company Law Board to provide relief in cases of oppression and
management as contained in Sections 397 to 407 of the Act, the Central Government also has
the power to prevent oppression or mis-management under Sections 408 and 409 of the Act.
Prior to the Companies (Amendment) Act, 1988, the power to grant relief against oppression or
mis-management was vested in the Court7 and the power to prevent oppression or mis-
management was vested in the Central Government.

Section 408 (1) provides that the Central Government may appoint such numbers of directors on
the Board of a company as the Company Law Board may, by order in writing, specify as being
necessary to effectively safeguard the interests of the company or its shareholders or the public
interest. The directors so appointed shall hold office for a period not exceeding three years on
any one occasion as the Company Law Board may think fit.
The Company Law Board may make such order on receipt of (1) a reference from the Central
Government; or (2) on an application from not less than one hundred members of the company;
or (3) on an application from members holding not less than one-tenth of the total voting power
therein. The Company Law Board, however, may make such inquiry as it deems fit in order to
decide whether such appointment is necessary to prevent the affairs of the company being
conducted in a manner which is oppressive to any members of the Company or which is
prejudicial to the public interest or company's interest. The Board has to mention the period for

7
Consequent to the enactment of the Companies (Amendment) Act, 1988 this power is now vested in the
Company Law Board
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which such an appointment may be made, but the same is not to exceed three years in any case.
In Peerless General Finance & Investment Co. Ltd. v. Union of India 8 it has been held that the
provisions of this section i.e. Section 408 must be construed strictly and it does not extend to
regulating the financial schemes of the company.
Instead of passing an order for the appointment of directors, the Company Law Board may
order the company to amend its articles to provide for the appointment of directors by
proportional representation in accordance with the provisions of Section 265 of the Act and
make fresh appointments of directors within the specified time limit. 9 Pending the appointment
of new directors, the Company Law Board may ask the Central Government to nominate certain
additional directors on the company's Board of Directors. Such additional directors need not
hold the qualification shares if any, nor shall he be liable to retire by rotation. The Central
Government may, however, remove or replace him. After such appointment any change in the
Board of Directors can only be made with the consent of the Company Law Board. 10 The object
of this provision is to prevent the company from altering the composition of its Board of
Directors to frustrate the action of the Central Government.
Where the Central Government appoints any director or additional director on a Company's
Board of Directors, it may issue such directions to the company as it may consider necessary or
appropriate in regard to its affairs.11 Such directions may include directions to appoint or replace
an auditor, to alter the articles etc.

The Central Government may require the persons appointed by it as directors or additional
directors to report to that Government from time to time with regard to the affairs of the
company.12

It must, however, be pointed out that the powers of the Central Government under Section 408
are essentially preventive in nature and therefore an order made under this section may not be
able to cure the illegal or prejudicial acts which may have already been performed by the

8
(1989) 1 Comp. L.J. 56 Cal.
9
Sec. 408 (1)
10
Sec. 408 (5)
11
Sec. 408 (6)
12
Sec. 408 (7)
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company and its directors, but it can surely prevent repetition of such acts in future by
appointing directors or additional directors on the Company's Board of Directors.13
It is further to be noted that it is not necessary that there must be oppression to the minority
shareholders to invoke the provisions of Section 408 of the Act. The section may be used even
where the majority shareholders are carrying on business in a manner which is earning profits
for the company and is not oppressive to the minority shareholder, but it is being carried on in a
manner which is prejudicial to the public interest or the company's interest. 14 The Central
Government should, however, exercise the power under Section 408 very sparingly and only
when requisite conditions of the section are fully complied with since it seriously affects the
reputation and credibility of the management of the company. In South India Viscose Ltd. v.
Union of India15, it has been held that mere non-compliance with some of the provisions of the
Companies Act or certain unwise decisions on the part of company's management are not
enough to invoke the provisions of Section 408 and make an order thereunder.
Further, while making an order under Section 408 the Company Law Board, has to comply with
the principles of natural justice and therefore must give an adequate opportunity to the affected
parties to show cause as to why the Government directors should not be appointed or re-
appointed. The Company Law Board has the discretion as to the number of directors to be
appointed or re-appointed and who should be so appointed or re-appointed.

PROCEDURE FOR APPLYING TO THE CENTRAL GOVERNMENT TO

PREVENT OPPRESSION OR MISMANAGEMENT.

Pursuant to Section 640 (B) (2) of the Companies Act, 1956, the members fulfilling the
requirements of Section 408(1) of the Act should publish a general notice indicating the nature
of the application proposed to be made at least once in a newspaper in the principal language of
the district in which the registered office of the company is situate and circulating in that district
in that language and at least once in English language in an English newspaper circulating in
that district. Three copies of the notice published in the newspaper should be forwarded to the
Stock Exchange, in case the company is listed on recognized Stock Exchange.

13
Sakthi Trading Co. Pvt. Ltd. v Union of India, (1985) 57 Comp Cas 789 Del
14
Sakthi Trading Co. Pvt. Ltd. v Union of India, (1985) 57 Comp Cas 789 Del
15
(1982) 52 Comp Cas 247 Del.
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The application to the Central Government should be made in Form No. 23-D of the Companies
(Central Government’s) General Rules and Forms, 1956 giving full details and indicating
clearly the eligibility of the applicant to make such an application. Usually, the application is
made by one or two members on behalf of other members authorised by them in writing to do
so. This is an application in representative capacity and cam be trial directly by the members
complaining of oppression and mismanagement. But the Central Government can authorise a
member or members of the company if satisfied that circumstances existed which make it just
and equitable to do so.
The application should be accompanied by: -

(a) a copy of the memorandum and articles of the company

(b) a list of names and addresses of all the members applying;
(c) a treasury challan evidencing payment of requisite fee as prescribed under the Companies
(Fees and Application) Rules, 1968;

(d) an affidavit in support of the statements made in the application; and (e) copies of the
notices published in the newspapers together with certificate as to the due publication thereof.

A copy of the application along with each of the documents annexed to it should simultaneously
be delivered to the Registrar of Companies.

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