Prevention of Oppression & mismanagement - Majority Rule & Minority Rights, Company Law | Company Law - B Com PDF Download

Prevention of Oppression and Mismanagement

[Section 241 to 246] of the Companies Act, 2013 deals with Prevention of Oppression and Mismanagement. However, only Section 241, 242[except clause (b) of sub-section (1), clause (c) & (g) of sub-section (2)], 243, 244 and 245 has come into force with effect from 1^st June, 2016 vide Notification No. S.O.1934(E ).

As explained in the preceding topic that one of the exceptions to the majority rule laid down in Foss v. Harbottle is the right of the oppressed minority to get relief against the wrongful conduct of the majority. This protection to the oppressed minority is also statutorily provided under Sections 241 and 242 of the Companies Act, 2013. This statutory protection for prevention of oppression and mismanagement is an alternative remedy for winding up of the affairs of the company. The reason is that the oppressed minority may file application with the NCLT to wind up the company. However, the company may be a sound and profitable concern.

Meaning of Oppression

The words ‘Oppression’ and ‘mismanagement’ are not defined in the Act. The meaning of these words for the purpose of Company Law should be used in a broad generic sense and not in any strict literal sense.

The meaning of the term ‘oppression’ as explained by Lord Cooper in the Scottish case of Elder v. elder & Western Ltd. [(1952) Scottish Cases 49], which has been cited with approval by Wanchoo. J (afterwards C.J.) of the Supreme Court in Shanti Prasad v. Kalinga Tubes [(1965) 1 Comp L.J. 193 at 204], is as under:

‘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 fair dealing, on which every shareholders who entrusts his money to the company is entitled to rely.’

The complaining shareholder must be under a burden which is unjust or harsh or tyrannical. [Lord Simonds in Scottish Co-operative Wholesale Society v. Meyer (1959) AC 324 at p. 342] ‘A persistent course of unjust conduct must be shown’ [In Re. H.R. Harmer Ltd . [(1958) 3 All ER 689]]. ‘The result of application under Section 210 of English Companies Act, 1948, in different cases must depend on the particular facts of each case, the circumstances in which oppression may arise being infinitely various that it is impossible to define them with precision.’

An attempt to force new and more risky objects upon an unwilling minority may in circumstances amount to oppression. This was held in Re. Hindustan Co-operative Insurance Society Ltd, [AIR. 1961 Cal. 443] wherein the life Insurance business of a company was acquired in 1956 by the Life Insurance Corporation of India on payment of compensation. The directors, who had the majority voting power, refused to distribute this amount among shareholders, rather they passed a special resolution changing the objects of the company to utilize the compensation money for the new objects, and this was held to be ‘Oppression’. The court observed: ‘The majority exercised their authority wrongfully, in a manner burdensome, harsh and wrongful. They attempted to force the minority shareholders to invest their money in different kind of business against their will. The minority had invested their money in a life insurance business with all its safeguards and statutory protections. But they were being forced to invest where there would be no such protections or safeguards.’

Application to Tribunal for relief in cases of oppression, etc (Section 241).

Section 241 of the Act provides the relief in case of oppression and mismanagement. Further, the Central Government may also file application to the Tribunal, if it is satisfied that the affairs of the company are being conducted in a manner prejudicial to the public interest. According to this Section:

(a) Any member of a company who complains that:

1. The affairs of the company have been or are being conducted in a manner prejudicial to public interest or in a manner prejudicial or oppressive to him or any other member or members or in a manner prejudicial to the interests of the company, or 
2. the 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 the 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, it is likely that the affairs of the company will be conducted in a manner prejudicial to its interests or its members or any class of members, may apply to the Tribunal, provided such member has a right to apply under Section 244, for an order under this Chapter.

(b) The Central Government, if it is of the opinion that the affairs of the company are being conducted in a manner prejudicial to public interest, it may itself apply to the Tribunal for an order under this Chapter. 

Powers of Tribunal (Section 242)

Section 242 of the Act deals with the Powers of the Tribunal. This Section provides more powers to the Tribunal for the purpose of bringing to an end the oppression or mismanagement in a company.

Under Section 242 (2) (k) of the Act the Tribunal may appoint such number of persons as directors, who may be required to report to the Tribunal on such matters as the Tribunal may direct. There are no overriding provisions governing this appointment.

According to this Section:

(a) If, on any application made under Section 241, the Tribunal is of the opinion:

1. That the company’s affairs have been or are being conducted in a manner prejudicial or oppressive to any member or members or prejudicial to public interest or in a manner prejudicial to the interests of the company, and
2. That to wind up the company would unfairly prejudice such member or members, but that otherwise the facts would justify the making of a winding-up order on the ground that it was just and equitable that the company should be wound up, the Tribunal may, with a view to bringing to an end the matters complained of, make such order as it thinks fit.

(b) Without prejudice to the generality of the powers under Sub-Section (1), an order under that Sub-Section may provide for: 

1. The regulation of conduct of affairs of the company in future.
2. The purchase of shares or interests of any members of the company by other members thereof or by the company.
3. In the case of a purchase of its shares by the company as aforesaid, the consequent reduction of its share capital.
4. Restrictions on the transfer or allotment of the shares of the company.
5. The termination, setting aside or modification, of any agreement, howsoever arrived at, between the company and the managing director, any other director or manager, upon such terms and conditions as may, in the opinion of the Tribunal, be just and equitable in the circumstances of the case.
6. The termination, setting aside or modification of any agreement between the company and any person other than those referred to in clause (5): Provided that no such agreement shall be terminated, set aside or modified except after due notice and after obtaining the consent of the party concerned.
7. The setting aside of any transfer, delivery of goods, payment, execution or other act relating to property made or done by or against the company within three months before the date of the application under this Section, which would, if made or done by or against an individual, be deemed in his insolvency to be a fraudulent preference.
8. Removal of the managing director, manager or any of the directors of the company.
9. Recovery of undue gains made by any managing director, manager or director during the period of his appointment as such and the manner of utilisation of the recovery including transfer to Investor Education and Protection Fund or repayment to identifiable victims.
10. The manner in which the managing director or manager of the company may be appointed subsequent to an order removing the existing managing director or manager of the company made under clause (8).
11. Appointment of such number of persons as directors, who may be required by the Tribunal to report to the Tribunal on such matters as the Tribunal may direct.
12. Imposition of costs as may be deemed fit by the Tribunal.
13. Any other matter for which, in the opinion of the Tribunal, it is just and equitable that provision should be made. 

(c) Further, Sub-Section (1) provides that, a certified copy of the order of the Tribunal shall be filed by the company with the Registrar within thirty days of the order of the Tribunal. [Sub-Section 3]

(d) The Tribunal may, on the application of any party to the proceeding, make any interim order which it thinks fit for regulating the conduct of the company’s affairs upon such terms and conditions as appear to it to be just and equitable. [Sub-Section 4]

(e) Where an order of the Tribunal under Sub-Section (1) makes any alteration in the memorandum or articles of a company, then, notwithstanding any other provision of this Act, the company shall not have power, except to the extent, if any, permitted in the order, to make, without the leave of the Tribunal, any alteration whatsoever which is inconsistent with the order, either in the memorandum or in the articles. [Sub-Section 5]

(f) Subject to the provisions of Sub-Section (1), the alterations made by the order in the memorandum or articles of a company shall, in all respects, have the same effect as if they had been duly made by the company in accordance with the provisions of this Act and the said provisions shall apply accordingly to the memorandum or articles so altered. [Sub-Section 6]

(g) A certified copy of every order altering, or giving leave to alter, a company’s memorandum or articles, shall within thirty days after the making thereof, be filed by the company with the Registrar who shall register the same. [Sub-Section 7]

(h) If a company contravenes the provisions of Sub-Section (5), the company shall be punishable with fine which shall not be less than one lakh rupees but which may extend to twenty five lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to six months or with fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupees, or with both. [Sub-Section 8]

Consequence of termination or modification of certain agreements (Section 243)

This Section deals with the situations arising out of termination/modification of certain agreements. According to this Section:

(a) Where an order made under Section 242 terminates, sets aside or modifies an agreement such as is referred to in Sub-Section (2) of that Section:

1. Such order shall not give rise to any claims whatever against the company by any person for damages or for compensation for loss of office or in any other respect either in pursuance of the agreement or otherwise;
2. No managing director or other director or manager whose agreement is so terminated or set aside shall, for a period of five years from the date of the order terminating or setting aside the agreement, without the leave of the Tribunal, be appointed, or act, as the managing director or other director or manager of the company: Provided that the Tribunal shall not grant leave under this clause unless notice of the intention to apply for leave has been served on the Central Government and that Government has been given a reasonable opportunity of being heard in the matter.

(b) Any person who knowingly acts as a managing director or other director or manager of a company in contravention of clause (b) of Sub-Section (1), and every other director of the company who is knowingly a party to such contravention, shall be punishable with imprisonment for a term which may extend to six months or with fine which may extend to five lakh rupees, or with both. 

Right to apply (Section 244)

Under this Section members shall have right to apply under Section 241 of the Act. Accordingly:

(a) The following members of a company shall have the right to apply under Section 241, namely:

1. 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;
2. In the case of a company not having a share capital, not less than one-fifth 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

(b) Where any members of a company are entitled to make an application under Sub-Section (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. 

Class action (Section 245)

The conception of Class Action Suit is one of the many improvements introduced in the Companies Act, 2013 under Section 245. It is relevant to mention here that, the 'class action' suit first time came to the highlight in the context of securities market was when the Satyam scam broke out in year of 2009. According to this Section:

(a) Such number of member or members, depositor or depositors or any class of them, as the case may be, as are indicated in Sub-Section (2) may, if they are of the opinion that the management or conduct of the affairs of the company are being conducted in a manner prejudicial to the interests of the company or its members or depositors, file an application before the Tribunal on behalf of the members or depositors for seeking all or any of the following orders, namely:

1. To restrain the company from committing an act which is ultra vires the articles or memorandum of the company.
2. To restrain the company from committing breach of any provision of the company’s memorandum or articles.
3. To declare a resolution altering the memorandum or articles of the company as void if the resolution was passed by suppression of material facts or obtained by mis-statement to the members or depositors.
4. To restrain the company and its directors from acting on such resolution.
5. To restrain the company from doing an act which is contrary to the provisions of this Act or any other law for the time being in force.
6. To restrain the company from taking action contrary to any resolution passed by the members.
7. To claim damages or compensation or demand any other suitable action from or against: 
   • The company or its directors for any fraudulent, unlawful or wrongful act or omission or conduct or any likely act or omission or conduct on its or their part.
   • The auditor including audit firm of the company for any improper or misleading statement of particulars made in his audit report or for any fraudulent, unlawful or wrongful act or conduct, or
   • Any expert or advisor or consultant or any other person for any incorrect or misleading statement made to the company or for any fraudulent, unlawful or wrongful act or conduct or any likely act or conduct on his part. 
8. To seek any other remedy as the Tribunal may deem fit. 

(b) Where the members or depositors seek any damages or compensation or demand any other suitable action from or against an audit firm, the liability shall be of the firm as well as of each partner who was involved in making any improper or misleading statement of particulars in the audit report or who acted in a fraudulent, unlawful or wrongful manner. 

(c) The requisite number of members provided in Sub-Section (1) shall be as under:

1. In the case of a company having a share capital, not less than one hundred members of the company or not less than such percentage of the total number of its members as may be prescribed, whichever is less, or any member or members holding not less than such percentage of the issued share capital of the company as may be prescribed, subject to the condition that the applicant or applicants has or have paid all calls and other sums due on his or their shares.
2. In the case of a company not having a share capital, not less than one-fifth of the total number of its members.
3. The requisite number of depositors provided in Sub-Section (1) shall not be less than one hundred depositors or not less than such percentage of the total number of depositors as may be prescribed, whichever less or any depositor is or depositors to whom the company owes such percentage of total deposits of the company as may be prescribed.

(d) In considering an application under Sub-Section (1), the Tribunal shall take into account, in particular: 

1. Whether the member or depositor is acting in good faith in making the application for seeking an order.
2. Any evidence before it as to the involvement of any person other than directors or officers of the company on any of the matters provided in clauses (a) to (f) of Sub-Section (1).
3. Whether the cause of action is one which the member or depositor could pursue in his own right rather than through an order under this Section.
4. Any evidence before it as to the views of the members or depositors of the company who have no personal interest, direct or indirect, in the matter being proceeded under this Section.
5. Where the cause of action is an act or omission that is yet to occur, whether the act or omission could be, and in the circumstances would be likely to be:
   • Authorised by the company before it occurs. or
   • Ratified by the company after it occurs.
6. Where the cause of action is an act or omission that has already occurred, whether the act or omission could be, and in the circumstances would be likely to be, ratified by the company.

(e) If an application filed under Sub-Section (1) is admitted, then the Tribunal shall have regard to the following, namely: 

1. Public notice shall be served on admission of the application to all the members or depositors of the class in such manner as may be prescribed.
2. All similar applications prevalent in any jurisdiction should be consolidated into a single application and the class members or depositors should be allowed to choose the lead applicant and in the event the members or depositors of the class are unable to come to a consensus, the Tribunal shall have the power to appoint a lead applicant, who shall be in charge of the proceedings from the applicant’s side.
3. Two class action applications for the same cause of action shall not be allowed.
4. The cost or expenses connected with the application for class action shall be defrayed by the company or any other person responsible for any oppressive act.

(f) Any order passed by the Tribunal shall be binding on the company and all its members, depositors and auditor including audit firm or expert or consultant or advisor or any other person associated with the company.

(g) Any company which fails to comply with an order passed by the Tribunal under this Section shall be punishable with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to three years and with fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupees.

(h) Where any application filed before the Tribunal is found to be frivolous or vexatious, it shall, for reasons to be recorded in writing, reject the application and make an order that the applicant shall pay to the opposite party such cost, not exceeding one lakh rupees, as may be specified in the order.

(i) Nothing contained in this Section shall apply to a banking company.

(j) Subject to the compliance of this Section, an application may be filed or any other action may be taken under this Section by any person, group of persons or any association of persons representing the persons affected by any act or omission, specified in Sub-Section (1).