Civil court jurisdiction barred in company matters

In HB Stockholdings Ltd v DCM Shriram Industries Ltd & Others Delhi High Court recently interpreted the scope and ambit of provisions in sections 397, 398 and 402 of the Companies Act, 1956. The main questions in the case were whether issues arising out of the management of the affairs of a company can be adjudicated in a civil suit, and whether such suit is impliedly barred in view of the remedies available under the Companies Act.

The board of DCM Shriram Industries (DSIL) had passed a resolution allowing its promoters to allot 700,000 preferential warrants to themselves. HB Stockholdings filed a petition with the Company Law Board (CLB) seeking a stay on the move to issue warrants, claiming that it could have a negative impact on the interests of minority shareholders, but this was not granted.

HB Stockholdings then filed a suit before Delhi High Court seeking: (i) a decree declaring DSIL’s annual report and accompanying accounts null and void; (ii) an injunction directing the appointment of an independent and qualified chartered accountant to carry out a fresh audit of DSIL’s accounts; and (iii) an injunction restraining DSIL from passing the proposed resolutions and from acting upon the annual report and audited accounts.

The legislative and regulatory update is compiled by Nishith Desai Associates, a Mumbai-based law firm. The authors can be contacted at nishith@nishithdesai.com. Readers should not act on the basis of this information without seeking professional legal advice.