• Devesh Saxena

Oppression & Mis-management under Companies Act: Power to the Powerless

Updated: Jun 16

INTRODUCTION


As India is a democratic country, hence the companies being a legal citizen are also vested with the power of democracy. Corporate democracy is more vulnerable because it is reckoned with the number of shares and not with the number of individuals involved. 'Majority rule' is what governs the management of a company, but at the same time, the minority interests also can’t be completely overlooked. The terms majority and minority referred to above don't intend to mean in the numerical sense but refer to the voting or the shareholding strength. Even a small group of shareholders may hold the majority shareholding whereas the majority of shareholders may collectively hold a very small percentage of share capital. Once the majority acquires control, they can do whatever they want to do with the Company with practically no control or supervision, because even if they are questioned on their acts in the general meeting, they always come out winners because of their greater voting strength.


Hence, the central problem in Indian corporate governance is not a conflict between management and owners, but a conflict between the dominant shareholders and the minority shareholders. The Board cannot even in theory resolve this conflict, as it is composed of those very dominant shareholders upon whom this control needs to be exercised.

So, in order to ensure checks and balances, the modern Companies Acts contain a large number of provisions for the protection of the interests of minorities in companies. The subject matter of our discussion in this article is Chapter XVI which covers section 241 to section 244 read with NCLT Rules. This section corresponds to section 397 and section 398 of the Companies Act, 1956 (‘the 1956 Act’), and section 153C of the Indian Companies Act, 1913. (‘The 1913 Act’). As such, the cases decided under the provisions of the 1956 Act and under the 1913 Act would have relevance for the purposes of the requirements set out in sections 241 and 244.


WHAT IS OPPRESSION & MISMANAGEMENT?

Black Law Dictionary defines the term ‘oppression’ as ‘the act or an instance of unjustly exercising power.


"The word 'oppressive' meant burdensome, harsh and wrongful. It was also held that the section does not purport to apply to every case...The conduct must be burdensome, harsh and wrongful and mere lack of confidence between the majority shareholders and the minority shareholders would not be enough unless the lack of confidence springs from the oppression of a minority by a majority in the management of the company's affairs, and such oppression must involve at least an element of lack of probity or fair dealing to a member in the matter of his proprietary rights as a shareholder."[1]


The essence of the matter seems to be that the conduct complained of should, at the lowest, involve a visible departure from the standards of their dealing, and a violation of the conditions of fair play on which every shareholder who entrusts his money to the company is entitled to rely. The most important element of oppression is that it should be a continuous act, which means that the act must be continued by the majority shareholder till date the petition is filed with the Tribunal.


The term 'mismanagement' refers to the process or practise of managing ineptly, incompetently, or dishonestly. It also refers to a situation when the affairs of the company are being conducted in a manner prejudicial to the public interest or the company's interest, or, when by a reason of material change in the management or control of he company the affairs of the company are likely to be conducted in a manner prejudicial to the public interest or the company's interest.


The terms “oppression” and "mismanagement" are not defined in the Act as the same is not capable of a formal definition within four walls of a statute. Therefore, it is left upon courts to identify the oppressiveness as per the facts and circumstances of each case.


Instances held as Oppression:

The following are the few acts which are said to be as oppression through various pronouncements:

  1. Not calling a general meeting and keeping shareholders in dark.

  2. Non-maintenance of statutory records and not conducting affairs of the company in accordance with the Companies Act.

  3. Depriving a member of the right to dividend.

  4. Refusal to register transmission under will.

  5. Issue of further shares benefiting a section of shareholders.

  6. Failure to distribute the amount of compensation received on nationalisation of business of company among members, where required to be so distributed.

Instances not held as Oppression:

The following are the few acts which were denied as oppression through various pronouncements:

  1. An unwise, inefficient or careless conduct of director.

  2. Non-holding of the meeting of the directors.

  3. Not declaring dividends when company is making losses.

  4. Denial of inspection of books to a shareholder.

  5. Lack of details in notice of a meeting.

  6. Non-maintenance/Non-filing of records.

  7. Increasing the voting rights of the shares held by the management.

Instances held as Mismanagement:

  1. Serious in fight between the director.

  2. Illegal constitution of the board of directors.

  3. Gross neglect of interest of the Co. by sale of its only assets.

  4. Sale of assets at low price & without compliance with the Act.

  5. Violation of statutory provisions & those of articles.

  6. Violation of the condition of the Co’s memorandum.

  7. Diversion of the fund to benefit the majority.

  8. Operation of bank A/C by an unauthorized person.

  9. Advance of loans without execution of a document.

  10. Continuation of managing director in office after the expiry of his term.

Instances not held as Mismanagement:

  1. Building up of reserves or non-declaration of dividend especially when it does not result in devaluation of shares.

  2. Merely because the company incurs loss, it can not be said that it is mismanaged.

  3. Removal of the secretary by a majority decision of the board of directors unless it is shown that the removal has prejudicially affected the interest of the Co. or the public interest.

  4. Removal of the Director & termination of the works manager’s service.

  5. Arrangement with creditors in Company's bonafide interest.


APPLICATION TO TRIBUNAL FOR RELIEF IN CASES OF OPPRESSION AND MISMANAGEMENT


WHO CAN APPLY?


1) Any Member/Members of a Company:

a. In case of a company having share capital [2] -

  • Not less than 100 members, OR

  • 1/10th of total numbers of its members, whichever is less, OR

  • Any member/members holding not less than 1/10 of the issued share capital.

One important condition which needs to be fulfilled is that the applicant or applicants has or have paid all calls and other sums due on his or their shares.


b. In case of a company not having a share-capital [3] -

  • Not less than 1/5th of the total number of its members,

However, the Tribunal has been vested with a discretionary power to waive all or any of the aforementioned requirements so as to enable the members to apply [4].


2) The Central Government (Ministry of Corporate Affairs to be more precise) may itself apply to the Tribunal.[5]


RELIEF MAY BE SOUGHT AGAINST


1) Affairs of the company, if [6]-

a. prejudicial to public interest, or

b. prejudicial or oppressive to the complainant member, or

c. prejudicial to the interest of the company.


2) Material Change [7]-

a. not being a change brought about by or in the interest of creditors (including debenture holders or any class of shareholders).

b. which has resulted in an alteration in the board of directors or managers or in the ownership of the companies share, or even in its membership (in case a company has no share capital).

c. in any other manner, which is likely to cause prejudice.


POWERS OF THE TRIBUNAL


Section 242 gives enormous power to the tribunal. Sub section (1) is generality of powers and Sub section (2) gives inclusive list of powers. Sub-clause (m) gives residual powers to the tribunal to pass order as it deems fit to be “just and equitable”. Section 243 is clarificatory in nature and it lays down that termination or modification of an agreement vide an order passed under Section 242 will not give rise to any compensation. Sub section (1B) is a non-obstante clause which has made it expressive that no compensation can be claimed if order under Section 242 result into termination, etc. of Directors.


The appeal against order of Section 241 application is available under Section 421 before National Company Law Appellate Tribunal.


RELEVANT JUDICIAL PRONOUNCEMENTS:

Only after deciding question of maintainability of the Company Petition under Sections 241-242 and 245 of the Companies Act, 2013, if it is answered in affirmative i.e. the petition is maintainable at New Delhi, it is open to the Tribunal to pass appropriate order under Section 242(4) of the Companies Act, 2013[8].

Arbitrator would have no jurisdiction to pass a winding up order on the ground that it is just and equitable which falls within the exclusive domain of the Tribunal under Section 271(e). That apart acts of non-service of notice of meetings, financial discrepancies and non-appointment of Directors being matters specifically dealt with under Companies Act and falling within the domain of the Tribunal to consider grant of relief under Section 242 of Companies Act render the dispute non-arbitrable though it cannot be disputed as a broad proposition that the dispute arising out of breach of contractual obligations referable to the MOUs or otherwise would be arbitrable.[9]

A further reading of Section 442, more particularly sub-section (3) of Section 442 also gives suo motu powers to this Tribunal to refer any matter pertaining to the proceedings to the Mediation and Conciliation Panel.[10]

I&B Code is a special law having an overriding effect on any other law as mandated under Section 238 of I&B Code. Triggering of Insolvency Resolution Process cannot be defeated by taking resort to pendency of internal dispute between Directors of Corporate Debtor on allegations of oppression and mismanagement. The statutory right of a Financial Creditor satisfying the requirements of Section 7 of the I&B Code to trigger Insolvency Resolution Process cannot be made subservient to adjudication of an application under Section 241 and 242 of the Companies Act, 2013. I&B Code is supreme so far as triggering of Insolvency Resolution Process is concerned and same cannot be eclipsed by taking resort to remedies available under ordinary law of the land[11].

The admitted facts of the present matter show not only oppression on the part of original respondents Nos. 2 to 6 but also mismanagement as in the name of clearing loans, the whole company itself has been transferred without letting the other shareholders know. [12].

In the cases where an applicant alleges that his shareholding has been brought down by way of oppression and mismanagement below 1/10th of the total shareholding without notice and knowledge then it is the duty of the Tribunal to determine whether the applicant had 1/10th of the shareholding prior to the date of alleged oppression and mismanagement. Such petition cannot be dismissed on the ground that the applicant’s shareholding is below 1/10th of the total shareholding of the Company on the actual date of presentation of the Company Petition[13].

The right of the persons to use the word "Ex-Director" cannot be denied as it would represent their experience as well. Therefore, we do not see that there is enough ground to object to use of the word "Ex-Director". We see no irregularity in this matter. In any case, it cannot be matter for consideration of the question of oppression. A well-established name had come through being successful in the competition. It would not be desirable that others are denied the same opportunity. After the agreement has been terminated there is no basis for this demand[14].

Not providing the copy of the Power Purchase Agreement relates to operation of the company and does not come under oppression and mismanagement.[15]


CONCLUSION


Thus, the new Companies Act, 2013 in many ways ensures that the rights of the minority shareholders are protected in every possible manner and that the balance between the executive brain of the company and the minority holders is held even. It is the duty of the law to ensure that the system of management must not behave oppressively for which it is to be seen that the stake held by minority shareholders in a company is not in any manner subservient to the majority. The provisions contained in the Act and the pronouncements by Tribunals/Courts indicate the importance of corporate democracy and further highlight the need to strike a fine balance between the 'rights to govern' of the majority shareholders and the 'protection of interests' of the minority shareholders. [1] Shanti Prasad Jain vs Kalinga Tubes Ltd.,(1965) 2 SCR 720. [2] Section 244(1)(a) of Companies Act, 2013.

[3] Section 244(1)(b) of Companies Act, 2013.

[4] Proviso to Section 244(1)(b) of Companies Act, 2013.

[5] Section 241(2) of Companies Act, 2013.

[6] Section 241(1)(a) of Companies Act, 2013.

[7] Section 241(1)(b) of Companies Act, 2013. [8] Brij Nandan Industries Pvt. Ltd. and Ors. v. Abhimanyu Singh II(2019)BC 157. [9] Dhananjay Mishra v. Dynatron Services Private Limited and Ors. [2019]156SC L824. [10] Harman Singh Arora v. Axestrack Software Solutions (P.) Ltd. [2019]151SC L113. [11] Jagmohan Bajaj v. Shivam Fragrances Private Limited and Ors [2018]149SC L598.

[12] M.A.S. Subramanian and Ors v. T.S. Sivakumar and Ors [2018]209 CompCas473.

[13] Montreaux Resorts (P) Ltd. and Ors. v. Ascot Hotels & Resorts Ltd. and Ors [2018]211CompCas205. [14] Triumphant Institute of Management Education Pvt. Ltd. and Ors v. Inspire Educational Services Pvt. Ltd. and Ors. (2019)3CompLJ559. [15] Venigalla Naveen v.Dr. Rama Krishna Prasad Power Ltd. and Ors (2019)4CompLJ330.


(This article is authored by Mr. Devesh Saxena, Managing Partner at S&D Legal Associates)

(Relevant Inputs and Research work were provided by Mr. Shubham Budhiraja, Intern at S&D Legal Associates)

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