Civil court jurisdiction barred in company matters

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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.

DSIL held that these allegations were in the nature of a complaint of oppression and mismanagement, for which a remedy was already provided under the Companies Act. Alternatively, the alleged violations were covered by the provisions of the Securities and Exchange Board of India (SEBI) Act, 1992, and the regulations framed under it. Therefore remedies were available to HB Stockholdings, either before the CLB or before the SEBI and the Securities Appellate Tribunal (SAT).

DSIL also argued that the jurisdiction of the civil court is barred by section 9 of the Code of Civil Procedure read with section 41(h) of the Specific Relief Act, 1963, and section 15Y of the SEBI Act. It also pointed out that the matter raised in the suit was already the subject of proceedings before the CLB, SEBI and the SAT. DSIL said that the suit should be dismissed as a case of forum shopping.

The court agreed with DSIL’s contentions and rejected the suit, holding that since a 1988 amendment to the Companies Act, jurisdiction to determine matters pertaining to sections 397 and 398 lies with the CLB.

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