oppression and mismanagement- India

Oppression and Mismanagement

Oppression and Mismanagement under Companies Act, 2013

Every entity works well whenever there is a balanced approach of the minority view holders and the majority view holders. An enterprise functions properly only if the two interests are harmonized.  There should be an endeavor to strike a balance between the interests of the members of a company for it to function properly. In pursuance of the same, Chapter XVI of Companies Act, 2013 was enacted, which endeavors to deal with the prevention of oppression and management in a company.

Prevention of oppression and mismanagement- India

The principle of prevention of oppression and mismanagement was unveiled in the landmark precedent of Foss v. Harbottle[1]. In the impugned case, the Hon’ble court for the first time enumerated upon the aspect of Rule of Majority. It pointed towards a resolution being binding upon the company whenever it is passed by the 3/4th majority of the members of the company. Initially, the decision of the majority members (shareholders) was given primacy over the will of the minority members/shareholders. However, there was a paradigm shift in this view through the provisions of the Companies Act, 2013. The provisions of the mandate are encompassed so as to favor the ultimate development of the company and to even protect the minority shareholders of the company. The case of Foss was rebutted by the Hon’ble Court on the ground of wrongdoers in control, in the case of Daniels v Daniels[2]  as well as Greenhalgh v. Arderne Cinemas Ltd[3] on the ground of fraud on minority.

Oppression- Meaning

The meaning of oppression can be understood by the analysis of Lord Cooper in the precedent of Elder v. Watson Ltd[4], whereby, the Hon’ble Court defined the term ‘oppression’ as, “Oppression is a misdemeanor committed by majority shareholders who under the color of their majority power, wrongfully inflict upon the minority shareholder or minority shareholders any harm of injury.”

Candidly, oppression refers to giving primacy to one large group over the interests of a smaller group in such a way that it becomes arduous for them to express their opinion or survive in a company.

Oppression is specifically dealt in the Section 241 of The Companies Act, 2013. It covers continuing acts and the acts which have been concluded. Moreover, ‘mismanagement’ indicates the working of a company in a manner which is prejudicial to the public interest or the interest of a company.  

What constitutes an act of Oppression in a Company?

An act of oppression generally constitutes an act which is against the principle of fair dealing or partaking any act which deprives the members of their rights as well as performing any act which is derogatory to the acts as well as objectives of the company or undertakes to make a highly risky decision. Additionally, the acts of mismanagement are rather wide and cannot be designated into air-tight compartments but any act which is against the public at large or the objectives of the company then such an act can be encompassed under the ambit of mismanagement. Furthermore, the act of improper appoint of director or breach of duty by the director can also be constituted as mismanagement. Mismanagement would also be constituted under any intention to defraud the public.

Case laws on Oppression and Mismanagement in India

If any member deciphers that there is an act of mismanagement which is taking place then the member has the right to approach the tribunal by the virtue of Section 241 of The Companies Act, 2013. Oppression is defined under the Section 241 (1A) of The Companies Act, 2013, while on the other hand Section 241 (1B) of The Companies Act, 2013 defines the ambit of mismanagement. Subsequently, the powers of the tribunal are defined under Section 242 (2) of The Companies Act, 2013. The tribunal has the authority to allow relief to the complaining shareholders in case of oppression or 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. It can also adjudicate for the removal of any member of the management or it can also direct the imposition of the costs.[5] If the conduct of the officials of the company is arbitrary and prejudiced it is oppression and mismanagement.

The Hon’ble Court has also taken an active role in defining the premise of oppression and mismanagement. The same is apparent through the case of Rajahmundary Electric Corporation v. Nageshwara Rao.[6] In the impugned case, the vice chairman of the company made the misdeed of drawing the money for his personal use from the company and also did several acts which could not be constituted as anything buy mismanagement. The Hon’ble Court was in favor of the view that the Chairman and the vice-chairman of the company were in fact liable for mismanagement.

The discussion of oppression and mismanagement is a part of the aspect of lifting of the corporate veil, whereby one can make the person liable for misdeed instead of making the company liable as a whole for the acts of its members who are really behind the oppression and mismanagement.

According to the Section 245(3), Companies Act 2013, an application for mismanagement and oppression can only be applied by:

  1. Members in case of company which has a share capital of not less than 100 members or not less than per cent of total members as prescribed.
  2. Member holding not less than per cent  of issue capital as prescribed
  3. Members in case of company does not have share capital- not less than 1/5 of total members
  4. Depositors – not less than 100  or not less than such percentage of depositors as may be prescribed
  5. Any depositors to whom the company owes such percentage of total deposits of the company.

In the aforementioned scenario only a person can make an application to the tribunal for a complaint against oppression and mismanagement. After the application is admitted then a public notice has to be made, serving all members and depositors for the admission of the matter. Similar applications can be considered as one and tried as a class action suit.[7] Furthermore, a person needs to be designated who would work as the lead applicant. If the applicant fails to specify one person as the lead applicant then the tribunal may be under the obligation to appoint one person as the lead. It should be duly noted that in the same cause of action there cannot be more than one application.[8] The cost of litigation is to be borne by the person who is liable for oppression or mismanagement or the company itself.[9] The tribunal would have a final say in the matters and every order of the tribunal is binding upon the parties.[10] However, if the parties fail to adhere with it then they would be liable for fine or imprisonment.[11]

According to the Section 241 (8) of The Companies Act, 2013; the tribunal should decipher whether an application is made in good faith. If an application is found to be frivolous or vexatious, then for the reasons to be recorded in writing, the tribunal may reject the application and may make an order that the applicant shall pay to the opposite party such cost that may be prescribed from time to time.

Furthermore, in the case of Cyrus Investments (P) Ltd. v. Tata Sons Ltd.,[12] the case was with regard to the reinstatement of Mr. Cyrus Pallonji Mistry as Executive Chairman of Tata Sons Limited as he was involved in the conversion of company illegally from a ‘Public Company’ to a ‘Private Company’. National Company Law Appellate Tribunal assented to the reinstatement of Mistry for the remaining of his term first as an ‘Executive Chairman’ and consequently as the ‘Director’ of Tata Group of companies.

The aforementioned deliberations work as an analytical note to deliberate upon the aspect of oppression and mismanagement in a company. The evil of oppression and mismanagement is bound to exist in the every organization. However, it should be timely checked that it can be eliminated and it does not harm the interest of the company as well as the public at large.

[1] (1843) 2 Hare 461, 67 ER 189.

[2] [1978] 2 All E.R. 89.

[3] [1951] Ch 286, [1950] 2 All ER 1120.

[4] 1952 SC 49 (Scotland).

[5] Vikram Bakshi and Ors. Vs. Connaught Plaza Restaurants Limited and Ors, [2017]140CLA142, [2017]143SCL37.

[6] 1956 AIR 213, 1955 SCR (2)1066.

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

[8] Section 241 (5)(c) of The Companies Act, 2013.

[9] Section 241 (5)(d) of The Companies Act, 2013.

[10] Section 241 (6) of The Companies Act, 2013.

[11] Section 241 (7) of The Companies Act, 2013.

[12] 2018 SCC OnLine NCLT 24460.

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