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Oppression and Mismanagement – the Indian scenario

August 24, 2018

Although, a company has an existence independent from its members, its affairs are carried on by its management. Difficulty arises when the interests of shareholders vary. However, the management of companies depends upon the majority.

Although, a shareholder cannot bring action relating to the internal disputes between the shareholders as per the Foss v Harbottle Rule, there arise certain exceptions to this provision. This includes the cases of oppression and mismanagement in a company.

Oppressive Acts

The following acts constitute oppression:

  • Company’s conduct is against the principles of fair dealing
  • Imposition of new and risky objects which are being opposed by the other faction of the shareholders
  • Depriving a member of his membership
  • Exercise of undue/harsh burden on a member
  • Acts of the company are against the provisions of the law

Acts of Mismanagement

The following acts constitute mismanagement:

  • Differences between the directors
  • Serving of the office by the director after the expiration of the term
  • Neglect/ breach of duty by the director
  • Improper appointment of the director
  • Group in power intends to defraud

Remedy at law

The Companies Act, 2013 under Section 241 provides the rights to any member of the company to apply to Tribunal for relief in case of: –

  1. Oppression – where the affairs of the company are being conducted in a manner prejudicial to the public interest or oppressive to member or prejudicial to the company’s interests. [Section 241 (1A)];
  2. Mismanagement – if it is established that the affairs of the company are being conducted in a manner prejudicial to the company or public interests or by reason of change of the control of the company [Section 241 (1B)]

Powers of the Tribunal

Under the provisions of Section 242 (2), the Tribunal may allow relief to the complaining shareholders in case of oppression or mismanagement, some of which include:

  • Regulation of the company’s future affairs;
  • Direction to purchase the company’s shares by other members;
  • Restriction on transfer of allotment;
  • Termination, setting aside, modification of any agreement between the company and its management;
  • Termination, setting aside, modification of any agreement between the company and any third person;
  • Setting aside of any transaction of transfer, delivery, payment, execution, etc.;
  • Removal of any member of the management;
  • Recovery of undue gains made by the management;
  • Appointment of the members of the management;
  • Imposition of costs.

The Indian legal system safeguards the interests of the shareholders who may suffer the impact of any oppression or mismanagement by providing recourse to appropriate remedy. The companies in order to avoid actions against oppression and mismanagement shall formulate policies for prevention of oppression and mismanagement.

Oppression and Mismanagement Case Study

Few case studies the law pertaining to oppression and mismanagement have been discussed hereunder:

Shanti Prasad Jain v. Kalinga Tubes Limited

In the present case, the Appellant alleged that the Company’s affairs were being conducted in an oppressive manner against him and certain other members. The point of law discussed was regarding the scope of Section 397 of the Companies Act 1956, wherein it was held by the Supreme Court that for something to be an oppression by the majority shareholders over minority, the acts of oppression has to continuous of the part of majority shareholder, till the date of petition. Mere lack of confidence between shareholders is not enough, unless oppression of a minority involves lack of an element of fair dealing to a minority member in the matter of his proprietary rights as a shareholder.

Sangramsinh P. Gaekwad & Ors. v. Shantadevi P. Gaekwad

In the present case, the Supreme Court interpreted Section 397 read with Section 402 of the 1956 Act and principles with respect to court jurisdiction, for deciding on the issue of additional shares and fiduciary duties of directors. The Supreme Court observed that Section 402 confers wide powers to the court for relief. However, Court can grant relief subject to the exigencies of the situation. Furthermore, it was observed that the jurisdiction of the court to grant appropriate relief under S. 397 is wide. Court is not bound by the terms contained in S. 402 if a particular situation warrants further relief(s).

Cyrus Investments Pvt. Ltd. v. Tata Sons Ltd.

The issue before the National Company Law Appellate Tribunal (NCLAT) was regarding waiver under the Proviso of Section 244 of the 2013 Act. The following factors were discussed before the Appellate Tribunal:

  1. Whether the appellants are member of the Company?
  2. Whether the application under section 241 pertains to “Oppression & Mismanagement” ?
  3. Whether the similar allegation of oppression & mismanagement was earlier made and decided?
  4. Whether there is an exceptional circumstance made out to grant waiver?

The Appellate Tribunal held that the NCLT is not required to decide the merit of application at this stage but required to record grounds to suggest that the application has made out some exceptional case for waiver of all or any of the requirements specified in clauses (a) and (b) of sub-section (1) of Section 244 and such opinion required to be formed on the basis of application and to form an opinion whether application pertains to oppression & mismanagement.

The merit cannot be decided till the NCLT waives the requirement and enables the members to file application under section 241. The Appellate Tribunal noted that there is clear departure from earlier provision i.e. sub-section (4) of Section 399 where under the Central Government was empowered to permit to the ineligible members to file an application by its executive power. Now, the NCLT is required to decide the question of waiver by an order which is judicial in nature and therefore, the same can be passed only by speaking a reasoned order.

To form an opinion as to whether the application merits waiver, the NCLT is not only required to form its opinion objectively but also required to satisfy itself on the basis of pleadings as to whether the application merits consideration.

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