The judgment establishes the mandatory nature of the 1/10th shareholding requirement and the need for valid consent before filing an application under Section 397 of the Companies Act, 1956.

Sharad Kumar Sharma, J.

1. Member of the Company has been defined under Subsection 27 of Section 2 of the Act, which means a Member in relation to the Company but does not include a bearer of share warrant of the Company issued in pursuance to Section 114 of the Companies Act.

2. The instant Company Appeal involves a consideration of interplay of Sections 397 and 398 of the Companies Act, 1956 read with Section 399 of the said Act.

3. As per Chapter 6 of the Companies Act which deals with the prevention of operation and mis-management and the manner in which it would be redressed before the Company Law Board. Initially, the word, powers which were vested with Tribunal has thereafter been substituted by the word Company Law Board in accordance with the Companies (Second Amendment) Act 11 of 2003.

4. Section 397 of the Act, deals with the application which could be made to the Company Law Board for relief in case of operation of Company is against Company interest. For initiation of the proceedings under Section 397, it has to be initiated by any a member who complains about the affairs of the Company alleging that it is detrimental to the company or prejudicial to the public interest.

5. Section 397 is the substantive provision for redressal of the grievances and dealing with application for redressal under Section 397 is provided that under Section 398, yet again, as a right to a member of the Company. Under Subsection (1) of Section 398, for invoking an application to the Company Law Board, for the relief in cases of Section 397, it stipulates a pre-condition to the following effects :

1. That the affairs of the company is conducted against the interest of the public.

2. The Affairs are prejudicial to the interest of the company itself.

3. Any material change in the interest of the creditors including the debenture holders of class of share holder of the company which has taken place in the management and control of the company.

Sub-section (1) of Section 398 reads as under :-

“(1) Any members of a company who complain -

(a) that the affairs of the company [are being conducted in a manner prejudicial to public interest or] in a manner prejudicial to the interests of the company; or

(b) that a material change not being a change brought about by, or in the interests of, any creditors including debenture holders, or any class of shareholders, of the company) has taken place in the management or control of the company, whether by an alteration in its Board of directors, [or manager], or in the ownership of the company's shares, or if it has no share capital, in its membership, or in any other manner whatsoever, and that by reason of such change, if is likely that the affairs of the company [will be conducted in a manner prejudicial to public interest or]in a manner prejudicial to the interests of the company;

may apply to the[Tribunal] for an order under this section, provided such members have a right so to apply in virtue of section 399.

Meaning thereby, the stipulations of Section 399 is a pre-condition to have a right to apply under Section 397 by virtue of 399.

Section 399 of the Companies Act reads as under :-

“Section 399 -Right to apply under sections 397 and 398:-

(1) The following members of a company shall have the right to apply under section 397 or 398:-

(a) in the case of a company having a share capital, not less than one hundred members of the company or not less than one-tenth of the total number of its members, whichever is less or any members or members holding not less than one-tenth of the issued share capital of the company, provided that the applicant or applicants have paid all calls and other sums due on their shares;

(b) in the case of a company not having a share capital, not less than one-fifth of the total number of its members.

(2) For the purposes of sub-section (1), where any share or shares are held by two or more persons jointly, they shall be counted only as one member.

(3) Where any members of a company a