Mismanagement under Section 398 requires material change in control; prior merits participation also bars belated arbitration objection.

A petition alleging mismanagement under Section 398 of the Companies Act, 1956 failed because the record did not show a material change in management or control sufficient to attract the provision. The arbitration objection also failed since the respondent had participated on merits without making a timely Section 8 application under the Arbitration and Conciliation Act, 1996. The earlier withdrawn civil suit did not bar the statutory petition, but the declarations sought as to who was Managing Director or director were outside the proper scope of Section 398 on these facts, so no substantive relief was granted and the interim orders were vacated.

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Issues: Whether the petitioners had made out a case of mismanagement under Section 398 of the Companies Act, 1956 and were entitled to the reliefs sought; whether the dispute had to be referred to arbitration under the MOU; and whether the petition could be rejected because of the earlier withdrawn civil suit.

Analysis: The petitioners' grievance was founded on alleged alteration of the Board and interference with management, but the record did not establish a material change in the composition or control of the company sufficient to attract Section 398. The Court held that withdrawal and nomination issues arising from the MOU did not, on the facts, amount to the kind of material change contemplated by the section. The objection based on arbitration failed because the second respondent had participated in the proceedings on merits without making a timely application under Section 8 of the Arbitration and Conciliation Act, 1996. The earlier civil suit, having been withdrawn, did not bar the shareholders from invoking statutory remedies. Nevertheless, the reliefs sought, including declarations as to who was Managing Director and who was a director, were held to lie outside the proper scope of Section 398 in the circumstances.

Conclusion: The petitioners were not entitled to substantive relief under Section 398, and the petition was disposed of without granting the declarations sought. The interim orders were vacated, and the second respondent was given an option to exit on terms stated in the order.

Final Conclusion: The statutory mismanagement petition failed on merits, while the dispute was not referred to arbitration and the parties' management rights were left to the company's shareholders after termination of the MOU.

Ratio Decidendi: A petition under Section 398 succeeds only where there is a material change in management or control causing the company's affairs to be conducted prejudicially, and a party who has already participated on merits cannot subsequently invoke the arbitration clause without a timely application under Section 8 of the Arbitration and Conciliation Act, 1996.

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