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One Case, Two Courts: RES JUDICATA

Published on Fri, Jul 10,2015 | 23:24, Updated at Mon, Jul 13 at 23:02Source : CNBC-TV18 |   Watch Video :

Certain provisions of the Code of Civil Procedure aim to prevent multiple litigation between the same parties. Simply put, the same guys can’t be fighting about the same thing in different courts. And yet, in a recent interim order the New Delhi bench of the Company Law Board or CLB held that parties to a dispute need not withdraw a civil suit before they approach the CLB under section 397 & 398 of the Companies Act, 1956.  Aayush Ailawadi has more on this unique decision that clarifies the powers of the CLB.

Under Sections 397 and 398 of the erstwhile Companies Act, a party can approach the CLB alleging oppression or mismanagement by the majority in the company, and that’s precisely what Mr. Singh chose to do in this case…

Notam India is a real estate company incorporated by Mr. Singh and his brother. Both brothers were Directors in the company. Mr. Singh alleged that his brother fraudulently increased the company’s share capital and also manipulated the company records. The brother also allegedly appointed his own wife as a Director in the company. This prompted Mr. Singh to file a company petition under Sections 397 & 398 of the Companies Act, alleging oppression & mismanagement, and conducting the affairs of the company in a prejudicial manner. What’s interesting about this case is that before filing this company petition at the CLB, Mr. Singh had also filed a suit in a civil court on the same cause of action.

The civil suit was withdrawn only after the CLB petition was filed, prompting the brother to argue that the petition is not maintainable as Mr. Singh has sought similar relief in the suit and that his interim application had been dismissed by the District court. The brother said that due to the denial of interim relief, Mr. Singh approached another forum. The brother accused Mr. Singh of approaching the CLB with ‘unclean hands’ and of violating the principles of res judicata.

Res Judicata means “a matter already judged” and the legal doctrine is well established and codified in Section 11 of the CPC. Nikhil Sakhardande, who practises at the Bombay HC explains how Res Judicata bars continued litigation of cases that have already been decided between the same parties.

Nikhil Sakhardande
Advocate, Bombay High Court

“To put it very briefly, Res Judicata is founded on public policy and there has to be a finality to judgments and a litigant shall not be harassed again and again by vexatious claims and repeated claims. Therefore, there is this concept of Res Judicata that has been evolved so that there is finality and everything is put to an end.

So far as this case is concerned, it would not apply to CLB, because in CLB what is sought to be canvassed is an infraction of shareholder rights and oppression, even if not proven, the CLB has the power to ask any order which it deems fit. In a civil court, on the other hand, you have to make out the infringement of a legal right. So, the scope of inquiry before the CLB and the civil court being different, this principle would not apply.”

That’s exactly why the CLB allowed the company petition to proceed, even though a suit had been filed in the civil court. The CLB also held that Order 23 of the CPC does not stop it from hearing the case. Order 23 says that if a plaintiff abandons or withdraws a suit, he shall be liable for costs and be precluded from filing any fresh suit in the same matter.

Advocate at the Bombay High Court, Tushad Cooper agrees that order 23 does not bar the CLB from hearing the case, but such a situation could have been an abuse of the court process instead…

Tushad Cooper
Advocate, Bombay High Court

“In this case, cause of action is a petition for mismanagement and oppression under 397/398 of companies act which was not the subject matter of the civil proceeding and the reliefs which were being sought for appeared to be distinct from those that were being sought and could be sought! Again I believe that the CLB was right in holding that the principles of order 23 would not bar the CLB from looking into the issue. But, what was more fundamental and which the CLB seems to have omitted from consideration was the fact that, this petition was filed before the withdrawal from civil court. Given the fact that it was filed before the withdrawal, the question of the applicability of Order 23 would not arise. What would arise would be, that in event of a party seeking to prosecute proceedings in two different fora, which is like saying he would be attempting to ride two different horses at the same time, and the fora would respectively insist that he elect as to which proceeding he wishes to pursue and on the basis that prosecuting both proceedings tantamount to an abuse of the process of the court.”

Experts point out that it isn’t uncommon for people to approach different fora for redressal as Mr. Singh did in this case. Parties often approach a writ court like the Supreme Court then also file a civil suit in another court. In such cases, the decision to entertain the case is usually left to the discretion of the court.

Tushad Cooper
Advocate, Bombay High Court

“I must point out, that for example if a person files a writ. Sometimes the writ court might throw him out, that there are disputed questions of fact and therefore not entertain this writ or that there is an alternate remedy. Now a party, then on the basis of that goes and file a civil suit. You cant be told then that you’ve agitated it there, he may even withdraw his writ petition.. forget the fact that it’s disimissed, he may simply withdraw his petition, that doesn’t debar him from filing a suit!! So yes, to that extent under different statutes, different considerations may apply, reasons may be different from either being allowed or disallowed to maintain another proceeding. You may file the proceeding and the court may say this amounts to being an abuse! It could throw it out, not on the basis of 11 or 23 but it may do so on the basis of abuse!”

Why then did the CLB not dismiss this case? Well that’s what makes this an interesting order. The CLB said that the relief it could offer was unique and hence the case shall proceed…

The CLB draws its exclusive powers from the Companies Act of 1956 and the scope of these powers is extremely wide. That’s why the CLB has held that this petition is still maintainable before it and the bar on proceedings due to the principles of res judicata does not apply in a case like this one...

Nikhil Sakhardande
Advocate, Bombay High Court

“The bar would not apply because the nature of the power which is exercised by a civil court is completely different from that exercised by the CLB. The withdrawal of the case in this case would not in any manner impinge upon the rights of the petitioner to petition the CLB and say that I have been oppressed, where the nature of the controversy and the nature of the enquiry is totally different. And therefore this could proceed further in the CLB.”

Tushad Cooper
Advocate, Bombay High Court

“So if the question is does the CLB order make legal sense in invoking their jurisdiction, answer is yes. It could perhaps have been open for someone to urge that this is an abuse, which the CLB would then consider on the facts and circumstances of the case, that this gentleman has indulged in forum shopping, that he moved the civil court, he was rejected reliefs, his suit would have been dismissed had he proceeded with it and he therefore just at the penultimate stage seeks to withdraw it and come running here and try to initiate round 2. That is a factor which the CLB could’ve taken into account. Then there’d be an absolute bar to the CLB maintaining the petition on the basis that a civil suit had been filed not seeking the same reliefs and not on the same cause of action.”

Although, Mr. Singh’s brother contended that the subsequent dismissal of the original civil suit would affect the filing of the company petition and that Mr. Singh had approached the CLB with ‘unclean hands’, Mr. Singh argued that the CLB’s jurisdiction under Sections 397 and 398 is unique and unlike a civil court, its orders are passed based on equity. This brings us to a key distinction relating to the jurisdiction of a court of law and that of the CLB…

Nikhil Sakhardande
Advocate, Bombay High Court

“The CLB, as I said, even if you do not make out a case of oppression, can still order a buyout or pass any orders because the aim and object of the CLB proceedings is to put an end to the dispute. The civil court on the other hand is bound by law and unless you show the infraction of a legal right, the civil court's jurisdiction cannot be invoked. Therefore even if you have withdrawn a case from the civil court on whatever ground without obtaining leave, because if you don’t obtain such leave then the principles of Res Judicata apply, you can still go to the CLB because the CLB is not so much concerned with the legality of the issue, it is more concerned with the conduct in an equitable nature, whether it is oppressive. The civil court is concerned with the legality! What may be legal may not be oppressive and what may be illegal can be oppressive.”

Tushad Cooper
Advocate, Bombay High Court

“It is not as if the CLB proceeds only on equitable consideration, it has to proceed within the framework of law! It is empowered to grant equitable reliefs under 397, 398 which the civil court is not so empowered. It is not that a civil court will not consider equitable considerations, in fact the law requires that principles of justice, equity and good conscience ought to be considered especially In cases of tort etc, the court will consider them in arising at its conclusion. So, it’s not as if equity is divorced from the civil courts and equity is only considered by the CLB, nor can the CLB go exclusively on equity, it has to take account equitable consideration within the framework of law and perhaps if it deems fit, given legal sanction can pass equitable reliefs.”

The CLB held that parties to a dispute are not obliged to withdraw a suit from a civil court when approaching the CLB under s. 397 & 398 of the Companies act of 1956, since the CLB provides a unique statutory remedy that isn’t available with any other forum or court of law. This case is noteworthy because it defines the scope and application of the principles of Res Judicata in commercial cases of oppression and mismanagement and also clearly defines the powers conferred on the CLB by this statute.

In Mumbai, Aayush Ailawadi

 
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