What Does Prevention of Oppression and Mismanagement Mean

This article discusses the relevant provisions under the Companies Act to strike a fine balance between the Rights of Majority to rule and the protection of interests of the minority shareholders through the prevention of Oppression and Mismanagement. The article also discusses the landmark case laws on the same.
Estimated Reading Time: 12 minutes

Introduction

The words “oppression” and “mismanagement” are not defined in the Companies Act. The meaning of these words for Company Law should be used in a broad generic sense and not in any strictly literal sense. The word oppression in common parlance refers to a situation or an act or instance of oppressing or subjecting to cruel or unjust impositions or restraints. 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”. The term mismanagement refers to the process or practice of managing ineptly, incompetently, or dishonestly.[1]

Case Law

Hindustan Co-operative Insurance Society Ltd. Case[2]

An attempt to force new and more risky objects upon an unwilling minority may in circumstances amount to oppression. Here, 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. 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 kinds 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”. [3]

Oppression involves at least an element of lack of probity or fair dealing with a member in the matter of his proprietary right as a shareholder. Persons concerned with the management of the company’s affairs must, in connection therewith be guilty of fraud, misfeasance or misconduct towards the members. It does not include mere domestic members and another section in the matter of policy of administration.

Section 241 of Companies Act 2013, covers oppression and mismanagement is and chapter XVI which corresponds to a clubbed section of 397 and 398 of the erstwhile Companies Act, 1956 .

It should not be supposed that these special remedies against oppression or mismanagement are available only to minorities. “In an appropriate case, if the court is satisfied with the act of oppression or mismanagement, relief can be granted even if the application is made by a majority, who have been rendered completely ineffective by the wrongful acts of a minority group. “Accordingly, a relief under the section was allowed to a majority group by Sindhri Iron Foundry (P) Ltd. Case, 1963[4]. The court observed that if the court finds that the company’s interest is being seriously prejudiced by the activities of one or the other group of shareholders, that two different registered offices at two different addresses have been set up, that two rival Boards are holding meetings, that the company’s business, property and assets have passed to the hands of unauthorized persons who have taken wrongful possession and who claim to be the shareholders and directors there is no reason why the court should not make appropriate order to put an end to such matters.

Prevention of oppression

Any members of a company, who complain that the affairs of the company are being conducted in a manner prejudicial to public interest or a manner oppressive to any member or members, may apply to the Tribunal for an order, provided such members have a right to apply. The Tribunal, on being satisfied of the genuineness of such complaint, may make the necessary orders for ending the matters complained of.

Prevention of mismanagement

Any members of a company, who complains-

  1. That the affairs of the company are being conducted in manner prejudicial to public interest or in a manner prejudicial to the interest of the company; or
  2. That a material change has taken place in the management or control of the company, and that because of such change, the affairs of the company will likely be conducted in a manner prejudicial to public interest or a manner prejudicial to the interests of the company may apply to the Tribunal for an order; provided such members have a right to apply.

The Tribunal, on being satisfied of the genuineness of such complaint, may make the Reorganization necessary orders for ending the matters complained of.

Majority Rule and Minority Rights under Companies Act

The Principle of Non-interference

The general principle of company law is that every member holds equal rights with other members of the company in the same class. The scale of rights of members of the same class must be held evenly for smooth functioning of the company. In case of difference(s) amongst the members the issue is decided by a vote of the majority. Since the majority of the members are in an advantageous position to run the company according to their command, the minorities of shareholders are often oppressed. The company law provides for adequate protection for the minority shareholders when their rights are trampled by the majority.

But the protection of the minority is not generally available when the majority does anything in the exercise of the powers for internal administration of a company. The court will not usually intervene at the instance of shareholders in matters of internal administration and will not interfere with the management of a company by its directors so long they are acting within the powers conferred on them under the articles of the company. In other words, the articles are the protective shield for the majority of shareholders who compose the Board of directors for carrying out their object at the cost of minority of shareholders.

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The basic principle of non-interference with the internal management of company by the court is laid down in a celebrated case of Foss v. Harbottle that no action can be brought by a member against the directors in respect of a wrong alleged to be committed to a company. The company itself is the proper party of such an action.

CASE LAW

In Foss v. Harbottle[5], two shareholders, Foss and Turton brought an action on behalf of themselves and all other shareholders against the directors and solicitor of the company alleging that by their concerted and illegal transactions they had caused the company’s property to be lost to the company. It was also alleged that there was no qualified Board. Foss and Turton claimed damages to be paid by the defendants to the company. It was held by the court that the action could not be brought by the minority shareholders although there was nothing to prevent the company itself, acting through the majority of its shareholders, bringing action.

The wrong done to the company was not which could be ratified by the majority of members. The company (i.e., the majority) is the proper plaintiff for wrong done to the company, so the majority of members are competent to decide whether to commence proceedings against the directors.[6]

Indian laws to maintain a balance between the rights of majority and minority shareholders

 In India, the Companies Act attempts to maintain a balance between the rights of majority and minority shareholders by admitting in the rule of the majority but limiting it at the same time by a number of well-defined minority rights, and thus protecting the minority shareholders. Companies Act, 1956 provided for protection of the minority shareholders from oppression and mismanagement by the majority under Section 397 (Application to Company Law Board for relief in cases of oppression) and 398 (Application to Company Law Board for relief in cases of mismanagement).

Oppression as per Section 397(1) of Companies Act, 1956 was defined as ‘when affairs of the company are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members’ while the term mismanagement was defined under Section 398(1) as ‘conducting the affairs of the company in a manner prejudicial to public interest or in a manner prejudicial to the interests of the company or there has been a material change in the management and control of the company, and by reason of such change it is likely that affairs of the company will be conducted in a manner prejudicial to public interest or interest of the company’.

Right to apply to the Company Law Board in case of oppression and/or mismanagement was provided under Section 399 to the minority shareholders meeting the ten percent shareholding or hundred members or one fifth members limit, as the case may be. However, the Central Government was also provided with the discretionary power to allow any number of shareholders and/or members to apply for relief under Section 397 and 398 in case the limit provided under Section 399 was not met.[7]

Minor acts of mismanagement, however, are not to be regarded as oppression. As far as possible, shareholders should try to resolve their differences by mutual readjustment. Moreover, the courts will not allow these special remedies to become a vexatious source of litigation. For example, in Lalita Rajya Lakshmi v. Indian Motor Co.[8], the petitioner alleged that the Board of directors was guilty of certain acts detrimental to the minority of the shareholders. The allegations were that the income of the company was deliberately shown less by excessive expenditure; that passengers travelling without ticket on the company’s buses were not checked; that petrol consumption was not properly checked; that secondhand buses of the company had been disposed of at low price, that dividends were being declared at too low a figure. It was held that even if each of these allegations were proved to the satisfaction of the court, there would have been no oppression.[9]

Powers of Tribunal

  1. If the tribunal is of the opinion that – a) 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 (b) 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.
  2. The tribunal can pass an order under that sub-section may provide for—

(a) the regulation of conduct of affairs of the company in future;

(b) the purchase of shares or interests of any members of the company by other members thereof or by the company;

(c) in the case of a purchase of its shares by the company as aforesaid, the consequent reduction of its share capital;

(d) restrictions on the transfer or allotment of the shares of the company;

(e) the termination, setting aside or modification, of any agreement as in the opinion of the Tribunal, be just and equitable;

(f) the termination, setting aside or modification of any agreement between the company and any person;

(g) 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;

(h) removal of the managing director, manager or any of the directors of the company;

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(i) recovery of undue gains made by any managing director, manager or director during the period of his appointment as such and the manner of utilization of the recovery including transfer to Investor Education and Protection Fund or repayment to identifiable victims;

(j) 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

(k) 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;

(l) imposition of costs as may be deemed fit by the Tribunal;

(m) any other matter for which, in the opinion of the Tribunal, it is just and equitable that provision should be made.

  • A certified copy of the order of the Tribunal under sub-section (1) shall be filed by the company with the Registrar within thirty days of the order of the Tribunal.
  • 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.  At the conclusion of the hearing of the case in respect of sub-section (3) of section 241, the Tribunal shall record its decision stating therein specifically as to whether or not the respondent is a fit and proper person to hold the office of director or any other office connected with the conduct and management of any company.
  • 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.
  • 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.
  • 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.
  • 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.[10]

Class Action Suits (Section 245)

The initiation of class action suits is one of the major changes introduced by the Companies Act, 2013. The major objective behind the provision of class action suits is to safeguard the interests of the minority shareholders. So, class action suits are expected to play an important role to address numerous prejudicial and abusive acts committed by the Board of Directors and other managerial personnel as it has been statutorily recognized under the Companies Act, 2013. A class action suit is a lawsuit where a group of people representing a common interest may approach the Tribunal to sue or be sued. It is a procedural instrument that enables one or more plaintiffs to file and prosecute litigation on behalf of a larger group or class having common rights and grievances.

Application of Certain Provisions to Proceedings under Section 241 Or Section 245

According to Section 246, the provisions of sections 337 to 341 (both inclusive) shall apply mutatis mutandis, in relation to an application made to the Tribunal under section 241 or section 245.

  • Penalty for fraud by officers (Section 337):
  • Liability for proper account not kept (Section 338):
  • Liability for fraudulent conduct of business (Section 339):
  • Power of Tribunal to assess damages against delinquent directors, etc. (Section 340):
  • Liability under Sections 339 and 340 to extend to partners or directors in Firms or companies (Section 341).

Conclusion

The companies Act, 2013 ensures that the rights of the minority shareholders are protected in every possible manner. In broader sense, a company is a group of persons who have come together or who have contributed money for some common purpose and have incorporated themselves into distinct legal entities. The whole scheme of the Companies Act is to ensure proper conduct of the affairs of the company in public interest and preservation of image of country in public interest. Corporate democracy is more vulnerable to it because it is reckoned with the number of shares and not with number of individuals involved.

The rule of majority has been made applicable to the management of the affairs of the company the stake held by them in a company is not in any manner subservient to the majority and it is the duty of the law to protect their interests from any odious activity of the latter. The Act and the Courts try to strike a fine balance between the Rights of Majority to rule and the protection of interests of the minority shareholders through the prevention of Oppression and Mismanagement.


[1] Shanti Prasad V. Kalinga Tubes, 1965

[2]  (Air 1961 Cal 443, 65 CWN 69)

[3] Hindustan Co-Operative Insurance Society LTD, 1961

[4] [1964] 34 Comp Cas 510

[5] (1843) 67 ER 189

[6] WWW.ICSI.EDU/PORTALS

[7] Taxguru Journal for Corporates

[8] (A.I.R. 1962 Cal 127)

[9] Lalita Rajyalaxmi V Indian Motors, AIR 1962 CAL 127

[10] WWW.ICSI.EDU/PORTALS

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