This article deals with aspects relating to Oppression and Mismanagement under the Companies Act, 2013. Though the Act per se does not define the terms ‘oppression’ and ‘mismanagement’, the general meaning of both the terms is considered for all practical purposes. The meaning of ‘Oppression’, with respect to minority shareholders, is prolonged unjust/unfair/cruel treatment or exercise of authority by a person in position of power. Whereas, ‘Mismanagement’ is conducting affairs in some dishonest or inappropriate manner which may not be beneficial for some/ part of the shareholders while being detrimental to the company itself.
1. Concept of Majority & Minority Shareholders:
Rule of majority applies to the management of a company. A company is run as a democracy of shareholders/members that vote on the management’s decisions (which are presented in the form of board resolutions) by a simple majority or by a three fourths (“special”) majority. Once such a resolution is passed by the requisite majority, it is binding on all the members of the company. As a result of this fact, the court will not intervene in protecting the individual rights of the minority shareholder(s)/member(s). The reasoning behind this is that as soon as one becomes a member of a company, that person impliedly consents to submit to the will of the majority of the members of the company. If a wrong is done to the company by a result of a resolution passed by the majority that results in a loss for the minority members of the company, the correct person to initiate action against the management of the company will be the company itself and not its members.
Indian Company law legislations trace its origins from the English laws. A company, itself being a juristic personality, will be the correct person to initiate actions for the losses it has suffered. This is known as the rule of Foss v. Harbottle. In this case, two shareholders filed a petition, on behalf of all the shareholders, to initiate action against the directors and solicitors of the company for the wrongs done by them to the company. The court held that the company, being a juristic personality, was the correct party to initiate actions for any wrongs done to it.
Actions brought by the minority shareholders against the directors/company to protect their interests is an exception to the rule of Foss v. Harbottle. These actions derive their power from Section 241-246 of the Companies Act, 2013. Section 244 of the Companies Act, 2013 lays down the conditions where a 2 member/ a number of members may constitute a minority in order to bring action before the National Company Law Tribunal against a company in cases of oppression and mismanagement.
Section 244 reads as follows:
244. Right to apply under section 241.— (1) The following members of a company shall have the right to apply under section 241, namely:—
(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 member or members holding not less than one-tenth of the issued share capital of the company, subject to the condition that the applicant or applicants has or have paid all calls and other sums due on his or their shares; (b) in the case of a company not having a share capital, not less than onefifth of the total number of its members: Provided that the Tribunal may, on an application made to it in this behalf, waive all or any of the requirements specified in clause (a) or clause
(b) so as to enable the members to apply under section 241. Explanation. —For the purposes of this sub-section, where any share or shares are held by two or more persons jointly, they shall be counted only as one member.
(2) Where any members of a company are entitled to make an application under subsection (1), any one or more of them having obtained the consent in writing of the rest, may make the application on behalf and for the benefit of all of them.
According to this section, a minority section of the members, to apply before a tribunal, consists of at least 10% of the company’s shareholders or at least 100 members of the company. In case a company does not have a shareholding/share capital at least 20% of its members should form the minority to appear before a tribunal. But this section is not absolute, according to the proviso, the tribunal has the power to allow applications by waiving off these requirements partly or in full. In case, if the shares are held by two or more persons jointly, it will be considered as a single member in the company.
According to subsection (2), any one of the minority shareholders who has the consent of the other shareholders in the minority bracket according to subsection (1) can make an application before the tribunal on behalf of the minority.
In case, the shareholding of the minority falls below the prerequisite brackets after the filing of the application, the tribunal still allows the maintainability of the application alleging oppression and mismanagement. [Kishan Khairwal v Ganganagar Industries, Anup Kumar Agarwal v Crystal Thermotech Ltd.]
2. Common actions which constitute oppression:
The shareholders are vested with specific rights in the affairs of the company. Denial of those rights by the majority shareholders’ amounts to oppression. Common instances are as follows:
a) Denial of Rights to Shares/Dividends/Profits, Non Allotment of Shares
Issuing new shares to only a fraction of shareholders in order to benefit their group and detriment the other shareholders will make for a valid petition for oppression of minority shareholders.
In the case of Mohan Lal Chandu Mal v. Punjab Company Ltd, it was decided that by taking away the rights to dividend of non-voting members in a company amounts to non-voting members being subjected to unnecessary hardships by the majority voting members.
In the case of Col. Kuldeep Singh Dhillon v. Paragoan Utility Financiers (P.) Ltd., transfer of shares held by the company to some selected shareholders instead of offering transfer of shares to all the shareholders was held as oppression.
In case of Gluco Series (P.) Ltd., an allotment of share made in such a way by the board of directors that the existing majority is reduced to a minority thereby diluting the voting power and control in the company was considered as oppression.
Similarly, in case of Mrs. Rashmi Seth v. Chemon (India) (P.) Ltd. differential allotment of shares was made to benefit one section of the shareholders.
If the shares are not allotted as per promoters’ agreement, even the majority can move to court against the minority for the allotment of shares, such was the case in Sajal Dutta v. Ruby General Hospital Ltd.
In case of Hindustan Cooperative Insurance Society Ltd., it was held that failure to distribute the amount of compensation received on the nationalisation of the business will be considered oppression by the management.
b) Cheating the shareholders/non-disclosure of facts to the shareholders
In case of Hindustan Cooperative Insurance Society Ltd., it was held that not calling a general meeting will be deemed as keeping shareholders in the dark. 4 In case of H. R. Harmer Ltd., revocation of decisions of the board by a director who has majority voting power and not allowing the board to perform its functions will amount to oppression.
c) Illegal actions by the Company:
In Mar Jacob Thoomkuzhy v. Jeevan Telecasting Corporation Ltd., the Court held that when dubious actions of the directors and the majority shareholders result in violation of due process laid down either by the Companies Act or the Articles of Association of Company, it amounts to oppression of the minority shareholders.
In Smt. Hema Singh v. ANC Construction (P.) Ltd., the Court held that illegal appointment of directors, misallocation of shares and manipulation of accounts amounts to oppression of minority shareholders.
Removal of directors from the office by way of extraordinary general meeting held by the board without notice to shareholders or the directors will amount to oppression, as held in case of Ozhukil Achuthan Kutty Shanthi v. Ashwini Health Care Ltd.
In Kumar Exporters P. Ltd v. Naini Oxygen and Acetylene Gas Ltd., it was held that refusal by the company to register the shares with an ulterior motive to retain control over the affairs of the company amounts to oppression.
3. Common actions which constitute Mismanagement:
a) Violation of Memorandum of Association/Articles of Association of Company
In case of S.M. Ramakrishna Rao v. Bangalore Race Club Ltd. it was held that violation of Memorandum was a ground for mismanagement of company. Similarly, in case of Akbarali A. Kalvert v. Konkan Chemicals (P.) Ltd. it was upheld that violation of statutory provisions of the Companies Act and that of articles of Association will amount to mismanagement.
b) Disputes between higher management of the company.
In case of Suresh Kumar Sanghi v. Supreme Motors Ltd. it was held that serious infighting between the Board of Directors will be considered as mismanagement.
c) Expenses Causing loss to the Company:
Mismanagement of funds and their diversion for the benefit of the majority group will constitute mismanagement – Bhaskar Stoneware Pipes (P.) Ltd. v. Rajindernath Bhasker
d) Misconduct by management or the Board of Directors:
In Sishu Ranjan Dutta v. Bholenath Paper House Ltd., it was held that if the Board of Directors is not legal and the illegality is being continued will be deemed as mismanagement.
Removal of a director from the board in violation of the provisions of Section 169 of the Companies Act, 2013 was held to be mismanagement in case of Basudev Bagchi v. Shasi Kumar Tea Co. (P.) Ltd.
e) Neglect of affairs of the company
Selling off the assets of the company and after that paying no heed to the affairs of the company by the directors was held to be mismanagement in case of M. Moorthy v. Drivers and Bus Conductors Bus Service (P.) Ltd.
In case of Col. Kuldip Singh Dhillon v. Paragoan Utility Financiers (P.) Ltd., the directors took no action to recover the amounts embezzled from the company was held to be mismanagement.
f) Related Party Transactions by management not in interest of the company.
Collusive sale of assets to lending institutions by the directors was held to be mismanagement in case of Mittal Dal Mills Ltd.
4. Remedy available to minority shareholder:
If any minority shareholder or a group of minority shareholders deciphers that there is an act of mismanagement which is taking place, then such minority has the right to approach the National Company Law Tribunal (NCLT) by filing an Application under section 241 of the Companies Act, 2013, this section of the act gives the power to any member of the company to file a case against the company, if the affairs of the company are conducted in a prejudicial manner to the interest of any member. Furthermore, Section 242 (1) & (2) of the Companies Act, 2013 provides for power of the tribunal in deciding an 6 Application under section 241 of the Act. The tribunal has the authority to allow relief to the complaining shareholders in case of oppression and mismanagement. The tribunal has the authority to regulate the future affairs of the company. The tribunal can also undertake to transfer the shares of the company to another member. The tribunal can also adjudicate for the removal of any member of the management or it can also direct the imposition of the costs. The tribunal can also wind up the company on the grounds that the conduct of the company is prejudicial or oppressive to any members or prejudicial to the public interest or in a manner prejudicial to the interest of the company.
5. Exception to Oppression and Mismanagement i.e. when the minority shareholders would not be considered as oppressed at the hands of the majority shareholders:
Not all acts by the majority, which may not be beneficial for the minority, can be constituted as a basis for oppression and mismanagement. The acts must be beneficial for the company and not just to a part of shareholders. Section 242 of the Companies Act, 2013 puts heavy onus on the petitioning shareholders to prove that there was oppression and mismanagement.
In case of Tata Consultancy Services (P.) Ltd. v. Cyrus Investments (P.) Ltd., it was held that Section 242 of the 2013 Act places heavy burden on petitioning shareholders to prove two conditions before claiming the winding up of a company under the Companies Act, 2013:
i. The affairs of the company are oppressive and prejudicial to any member or in public interest.
ii. Winding up the company would unfairly prejudice such members, but that the facts would otherwise justify winding up of the company on just and equitable ground.
The management of the company is carried out based on majority rule. But, with the introduction of modern corporate law, the opinion and interests of minority shareholders were not overlooked. Many remedies were introduced to help minority groups who hold a little share in the company. It is found that their interests are being discriminated against based on holding shares or voting rights. Due to the introduction of these new laws, the management of the company is required to exercise higher degree of diligence in handling their internal matters. The minority shareholders or the individual shareholders are now empowered to raise their voices against the abuse of prejudice, oppression, and mismanagement of the affairs of the company.
This article has been written by Hemanshu Shinde and Sajid Sayed – Dispute Resolution Team, AAK Legal, Advocates & Solicitors.
Disclaimer – This article is meant for informational purposes only. The contents of this article are not to be construed as legal advice. The views expressed in the article are those of the authors and do not necessarily reflect the views of the firm. The copyright to the article rests solely with the authors and the firm.