Properties not in Company’s name – litigation?

While some closely held Private Limited Companies do strictly adhere to the provisions of the Companies Act, 1956, many closely held Private Companies completely ignore the provisions of the Companies Act and these companies are often run as if those are proprietorship concerns. There are closely held Private Limited Companies which simply follow the advice given by the Company Secretaries and Chartered Accountants. The promoters and the management of these companies which depend upon the advice of the

Company Secretaries and Chartered Accountants, may not even aware of the provisions as to how to run the company, manage the company, maintain the records and file the returns. If a Company follows the advice of Company Secretaries and Chartered Accountants as to how to comply with the corporate regulations, then, it is good for the shareholders, management of the Company and the creditors dealing with the Company. However, in many closely held Private Limited Companies, the transactions are very typical and it is very difficult to resolve the disputes if any dispute goes to the Court or the Company Law Board. There can be some 10 group companies run by the same family and there can be umpteen financial dealings or the transactions among these companies keeping some objective in mind. Again, there are family companies or the closely held Private Limited Companies which will not record the transactions of the Company in its Books and on the contrary, these companies can benefit the individual shareholders in their individual names upon an understanding.

When a family company or the closely held Private Limited Company functions without any dispute among the shareholders or the groups in the Company, there may not be any difficulty. The problem starts when the trust is lost among the shareholders or the groups. It is likely that in any business concern or the closely held Private Limited Company, problems will come and the shareholders or the group start questioning others and there can be fears that their interests in the company is being oppressed. The Company’s property might have been registered in the name of an individual shareholder who is part of the management of the Company. The other shareholders or the people in the management might be silent at that time and the understanding to share the interests of the Company gradually may appear well for some time. But, if the problem starts and if the shareholder or other group intends to question a particular transaction and expresses the concern in the rights of the Company and the due management of the Company, then, the Court or the Company Law Board may not accept such a contention.

In most of the cases of Oppression and Mismanagement under section 397/398 of the Companies Act, 1956, there can be allegations against the transactions of the Company in the past. The Company Law Board may consider all the transactions, may look into equity at times, but, may not be able to set-aside an illegal transaction entered into between the Company and the Shareholder or between the Company and the outsider. The Company Law Board will look into the whole background of the transactions of the Company, the background of a particular sale transaction, the knowledge of the transaction, the financial statements of the Company and especially will consider the bonafides of the person or the group of shareholders raising the issue in a petition under section 397/398 of Companies Act, 1956.

Case-study:

In a typical case, the Company was silent about a transaction infavour of an individual happened some 15 years ago and the Company tried to question the past transaction in a petition under section 397/398 of the Companies Act, 1956. The Company Law Board has ruled infavour of the Company challenging the transaction occurred about some 15 years ago and an appeal was filed to the High Court under section 10 (F) of the Companies Act, 1956. After noting all the facts and analyzing the legal position under section 397, 398 and section 402 of the Companies Act, 1956, the High Court has set-aside the order of the Company Law Board relying on the knowledge and the issue of bonafides. The relevant observations of the Madras High Court are as follows:

Madras High Court in Comp. Appeal No.24 of 2009 between T. Vinayaka Perumal Vs. T. Balan & Others (CDJ 2011 MHC 2868):

“30. This proposition again cannot be disputed. In the present case, admittedly, sale deed was executed in favour of the 6th respondent in the year 1989, while purchasing the land on behalf of the company. The property was mortgaged by the 6th respondent in his individual capacity. The parties also came to know about the property being in the name of the 6th respondent, when the suit was filed and got settled by the 6th respondent, by redeeming the property. Therefore, it was not open to the company to challenge the sale, that too, in the Company Law Board, after lapse of 15 years. It seems that the object of moving the Company Law Board was, that the respondents 1 to 4 thought that the civil suit for claiming the property would not be competent, as the property not only was registered in the name of 6th respondent, but he acted as the absolute owner thereof throughout all these years, to the knowledge of the company and other Directors and members of the company.

39. The Company Law Board failed to notice that the material placed on record showed that the respondents 1 to 4 was estopped by their conduct to challenge the sale, as they permitted the 6th respondent to mortgage the property as collateral security by projecting him to be the owner. Even in the suit filed in the year 1995, the 6th respondent was shown to be the owner of the property mortgaged to the Bank, but no steps were taken by the respondents 1 to 4 to seek remedy of getting the sale set aside in favour of the 6th respondent.”

Note: the views expressed are personal and a view point only.