DOCTRINE OF OPPRESSION QUA MEMBERS

This article aims to discuss the Doctrine of Oppression of Minor shareholders who get dominated by the majority of other shareholders in a company. It also discuss the remedies of oppression, prejudice and mismanagement under the Companies Act of 2013.
Estimated Reading Time: 9 minutes

Introduction

The term oppression is not entirely defined in company law. There is no clear definition of it under the law, but the courts term the definitions and basic understanding in various cases. The court of law defines oppression as conduct that involves a visible departure from the standards of fair dealing and a violation of condition that require fair, especially concerning the right of shareholders. The word oppression in common understanding refers to a situation or an act or instance of oppressing the subject to cruel or unjust imposition or restraint.[1]

According to Lord Keith, “Oppression means, lack of morality and fair dealings in the affairs of the company which may be prejudicial to some members of the company”. If the shareholders of a company are not dealing fairly and only looking for their interest despite the company, it is known as oppression. As stated above, the term oppression is not defined under the Company’s Act and is entirely left to the court’s discretion.

On the other hand, the term Mismanagement means conducting company affairs in a prejudicial, dishonest or inept manner. According to Lord Keith, the term mismanagement refers to the process or practice of managing ineptly, incompetently, or dishonestly. This term is also not defined under the Companies Act of 2013. It is left open to the court’s discretion, which shall be decided on the facts of the cases whether there is any oppression mismanagement of minority or not.

Some instances can be termed as mismanagement in a company. Namely:-

  1. They are preventing directors from functioning.
  2. Violation of statutory provision.
  3. Violations of the provisions of MOA & AOA of the company.
  4. Misuse of Funds, etc.

Hence, this is the essential meaning and a form to describe the term oppression and mismanagement.

Purpose of Company Act

As we know, a company is a distinct entity separate from the owners of the company, where we can see a thin line drawn between the management and the ownership. The thin line consists of the roles and responsibilities bestowed upon them. A company, in simple terms, means a group of people who have together and invested some amount of money for some of their everyday purposes and now have incorporated themselves as a distinct legal entity who will be carrying out specific responsibilities and roles and will fulfil them for the benefit of not only themselves but for other as well.

The Companies Act’s whole purpose is to ensure that the company’s proper conduct of affairs in public interest and preservation of the image of the country in the public interest. As India is a democratic country, the companies being a legal entity and a legal citizen also bestows the power of democracy.

Hence, we can see that the whole purpose of the Company Act of 2013 regarding oppression and mismanagement is to keep a check on the companies and provide the minority shareholders with some rights and powers that they can use in some instances.

Position of Minority Shareholders

In a company, a major and a minor can be a shareholder and can exercise his/her rights accordingly. A minority shareholder is a person in a company who, even though he is a part of the team but does not enjoy all the rights and powers of the other members of the company. Defining the minority shareholders, a minority shareholder is a person who are the equity holders of a company and who does enjoy the voting power of the firm by his or her below 50% of the ownership of the firm’s equity capital. A minority shareholder does not enjoy the power in management, and its decision of the company and their interest are disregarded.

There have been provisions made under the Company Act of 2013 where the minority shareholders can exercise them whenever they want. Still, despite being provided under the company law, the minority shareholders find themselves either not capable enough to hold a firm decision in the company or lack resources and time are incapable of exercising their rights. Due to their incapacity because of being a minor, the minor shareholders find themselves either dominated by the majority of the shareholders or face suppression in the company in terms of making any decision related to the company’s management. To overcome these problems and provide the minority shareholders with a better place and position in the company, the Company’s Act of 2013 came with several provisions and a solution to tackle the problems faced by the minority shareholder.

Remedies for Oppression & Mismanagement

It is clear from the above discussion that a minority shareholder is at a disadvantageous position compared to other shareholders. Talking about English legal system, this disadvantageous position of the minority shareholders was discussed and recognised in the Report of Committee on Company Law Amendment, presented in 1945.[2] Later, this report was pressed for legislative intervention on behalf of minorities, a recommendation that later got acted upon in the year 1948 with passing the consolidated companies act.[3]

Under the Indian company Act of 1956, the protection for the minority shareholders from any oppression or mismanagement was provided under section 397 and section 398 of the said Act. Section 399 of the 1956 Act provided the right to apply to the company board for oppression and mismanagement by meeting 10% of the shareholders or 100 members. Under their discretionary powers, Central Government allowed any shareholders to apply for the company board for the relief.

Coming to the Indian Law system of Company Act, 2013, they have incorporated the remedies of version for the minority shareholders since the mid-20th century. Still, the law’s current standing can be seen through Section 241 and Section 242 of the company act. The company act talks about oppression and mismanagement of the shareholders from section 241 to section 246 all-together.

Section 241 of the Company’s Act, 2013, if read from the bare act, states that-

Application to Tribunal for relief in cases of oppression, etc.— (1) Any member of a company who complains that—

(a) the affairs of the company have been or are being conducted in a manner prejudicial to the 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

(b) 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.

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

In the 2013 Company Act, the provision from section 241 (1) talks about a company member and this member is not subjected to any restriction. Still, it is written: “any member” from the company who raises a complaint. Hence, the law has made the complaint area vast enough for all the company members and not restricted to any one person. From the bare reading of the provision, it is clear that how section 241 covers the interest of all the shareholders if they are subjected to any oppression.

Section 244 of the Act talks about the Right to Apply Under Section 241, as stated under section 241(1)(b).

Section 244(1) provides the Right to Apply to Tribunal with the same minority limit mentioned in the Company Act of 1956. However, the Tribunal, while exercising discretionary powers, may allow any numbers of shareholders and which are to be considered as a minority.

Section 242 of the companies Act, 2013 talks about the powers of the Tribunals that they can exercise during a filed under Section 241 of the said Act. The Tribunal will look at certain aspects of the case. Its related facts, like if any prejudicial or oppressive manner is conducted towards a member and what kind of oppression they have been facing, etc. based on all the observations. After getting satisfied, the Tribunal has the power under section 242 to take any action against that company or a particular shareholder.

Further, Under section 245 of the Companies Act 2013, the new action of class concept has been introduced, which was not in existence in the Companies Act of 1956, wherein it provides for class action suits to be instituted against the company as well as against the auditors of the company. Section 245 of the Act also talks about any act which is ultra vires in nature and that a class action can be brought against any such action.

From the above-discussed provisions of the Companies Act, 2013, it can be clearly stated that the primary purpose of enacting these provisions was to safeguard the interest of the minority shareholders and that proper implementation of the plan should be made through provisions.

LANDMARK CASE

As soon as these provisions took effect, they faced a challenge in one of India’s fiercest corporate battles of recent times. In the year 2016, the Tata Sons Limited board, the Tata group of companies, ousted its executive chairman, Mr Cyrus Mistry, from the position. Mr Mistry, a part of the Shapoorji Pallonji Group, is a minority shareholder in Tata Sons. The Shapoorji Pallonji group initiated action under section 241 and 242 of the Companies Act, 2013 against Tata sons and its controlling Shareholders under two of the Tata Trusts. The group challenged many decisions of the TATA group (sons), which included various business decisions.

The dispute was pending adjudication, and at that time, Tata sons converted themselves from a public company to a private company.[4] The Mumbai Bench of National Company of Law Tribunal (NCLT) issued a 368-page judgement which declined any relief to Minority Shareholder. After this, the Appellant Tribunal was approached, who rules out this decision to be illegal and the removal of Mr Mistry to be unlawful and called for reinstatement to that position.[5] In doing so, the NCLAT overturned the NCLT decision, which had not found any case of oppression in the conduct of the board and majority shareholders of the company or the need to grant the minority shareholders of Tata Sons any remedy.

CONCLUSION

After the above discussion, it is clear that the provisions under the Companies Act of 2013 have been made for safeguarding the interest of Minority Shareholders and for that, the oppression face by them is still evident in many of the cases. It can also be concluded that the minority shareholders in the Companies Act of 1956 were not considered a significant part of the company due to the suppression of the company’s majority rules and regulations. The Companies Act of 2013 took various crucial steps to safeguard the interest of the minority rights of the company’s shareholders even though there has been the existence of oppression and mismanagement of the minorities in the company, which affects their rights.


[1] CS Suman Gupta, “Oppression and mismanagement under Companies Act”, 2013, Tax Guru. Published on Dec,2017.

https://taxguru.in/company-law/oppression-mismanagement-companies-act-2013.html

[2] The Cohen Report of 1945, United Kingdom.

[3] H. RAJAK, “The oppression of Minority Shareholders”, The Modern Law Review, Vol.135. Published on March, 1972.

https://onlinelibrary.wiley.com/doi/pdf/10.1111/j.1468-2230.1972.tb01325.x

[4] Umakanth Varottil, “Unpacking the Scope Of Oppression, Prejudice And Mismanagement Under Company Law In India”, NUS Law Working Paper,  Published in July 2020.

https://law.nus.edu.sg/wp-content/uploads/2020/07/020_2020_Umakanth.pdf

[5] Cyrus Investment Pvt. Ltd. v. Tata Sons Ltd., C.P. No. 82(MB)(2016). (India)

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