Oppression & Mismanagement

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oppression and mismanagement

These terms are not defined under the companies act 2013 and are left to be decided by the court on the facts and merits of the case. The term mismanagement refers to the process or practices of managing ineptly, incompetently, or dishonesty. Some of the instances which can be termed as mismanagement are a violation of MOA, AOA, Statutory provisions etc

The whole scheme of the Companies Act is to ensure proper conduct of the affairs of the company in public interest and preservation of the image of the country in public interest.

The section which covers oppression and mismanagement is 241 of companies Act 2013 and chapter XVI which corresponds to a clubbed section of 397 and 398 of the erstwhile Companies Act, 1956.With reference to the management of the company the rule of the majority is followed and thereby courts ordinarily, do not interfere to protect the minority rights affected by such resolutions. However, Prevention of Oppression and mismanagement is an exception to this rule. This section can be invoked only and only when prejudice is caused to the public interest or companies interest or member’s interest.

Sec 241: Application to the tribunal for relief in case of oppression

Any member of a company who is of opinion that the affairs of a company are conducted in prejudice to public interest, any member or company’s interest or any Material change, not being a change brought about by or interest of creditors that can be through

  • An alteration in the board of directors or managers or in the ownership of the 8 shares,
  • If it has no share capital, in its membership, or
  • In any other member

Which will be prejudicial to the interest of Company/members

Sec 242: The power of the tribunal

The tribunal upon receiving an application under section 241 may order for winding up of the company or may pass any order as it deems fit. Other than the general powers, the tribunal may also provide for

  • Regulation of the conduct of affairs of the company in future
  • Purchase of shares /interests of any members of the company by other members
  • If any shares purchased its consequent reduction of share capital
  • Restriction on the transfer/allotment of shares
  • Termination, setting aside or modification of any agreement between the company and its Managing Director, any other director or manager
  • Termination, setting aside or modification of any agreement between the company and any other person
  • The setting aside of any transfer, delivery of goods, Payment, execution or Other act relating to property Made /done by/against the company within 3 months before the date of the application which would if made /done by/against an individual, be deemed in his insolvency to be a fraudulent preference.
  • Removal of managing director, manager or any director of the company
  • Recovery of undue gain made by any managing director , manager or director and the manner of utilization of the recovery.
  • Manner of appointment of managing director or manager of the company may subsequent to an order removing
  • Appointment of the such number of persons as directors.
  • Imposition of costs as may be deemed fit by the tribunal.
  • Any other matters which the Tribunal thinks it is just and equitable

For the first time companies act has introduced the concept of the representative suit as provided in order 1 rule 8 of CPC in the form of Class Action Suits under section 245. The Requisite number of depositors for Class Action.

  • Shall not be less than 100 depositors/ such % of total number of a depositor, whichever is less OR
  • Any depositor/depositors to whom such company owes such % of total deposits of the company

The members /depositors/any class of them are of the opinion that the management or conduct of the affairs of the company being conducted in a manner prejudicial to the interests of the Company, or its members/depositors is when an application is to be filed

Purpose of application

  • Restrain the company from committing act ultra vires to MOA/ AOA of the company
  • Breach of any provisions of MOA/AOA
  • To declare a resolution altering MOA/AOA of the company
  • Restrain the company and its directors from acting on such resolution
  • Restrain from an act contrary to the provisions of the act or any other law for the time being in force.
  • Restrain from taking action contrary to any resolution passed by the member
  • To claim damages /compensation/demand/suitable action from or against

a. Company/Directors for any fraudulent, unlawful or wrongful or omission or conduct or it’s or their part

b. The auditor including audit firm of the company for any improper misleading statement of particulars made in his audit report

c. 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 or his part

  • To seek any other remedy as the tribunal may deem fit

Liability of Audit Firm

The liability shall be of the firm and 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.

Considerations to the Tribunal

  • Whether member/members acting in good faith or making an application for seeking an order.
  • Whether there is any involvement of persons other than directors or officers of the company on any of the matters specified.
  • Cause of action is one which the member or depositor could pursue in his own right rather than through an order.
  • Views of the members/depositors of the company- no personal interest (direct or indirect) in the matter being proceeded.
  • Whether 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 likely to be

– Authorised by the company before it occurs, or

– Ratified by the company after it occurs.

  • Where the course of action is an act or omission which is already occurred whether act or omission could be an act in the circumstances would be likely to be ratified by the company

Acceptance of application by Tribunal

  • Issue public notice to all the members/ depositors of the case
  • Consolidate all the similar application prevalent in any jurisdiction and appoint the lead applicant.
  • Two class action application for the same cause of action shall not be allowed.
  • Cost of expense shall be borne by the defrayed company/person responsible for an oppressive act.
  • Any other order passed by the tribunal shall be binding

Thus the new Companies Act 2013 in many ways ensures that the rights of the minority shareholders are protected in every possible manner. 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. Here is a study of Tata vs Mistry, a case based on oppression and mismanagement chapter of Companies Act.

Scrutinising ‘The Tata vs. Mistry’ feud

Mistry, whose family is the single biggest shareholder in Tata group, was named group chairman in November 2011 and took over in December 2012 after the retirement of Ratan Tata.

It was 24 October’2016 when Ratan Tata took over as the interim chairman and the board of Tata Sons dismissed Mistry. Mistry claimed that Articles of association of Tata Sons were biased against the minority shareholders’ rights whereas Tata Sons called it as a victimisation stunt. This came into light following a huge conflict of interest wherein Mistry wanted to raise funds for Orissa elections but the board had provisions regarding parliamentary elections only. Mistry also had an objection to the fact that Crores of Rs were being paid to the directors of loss-making companies but minority shareholders were not paid dividends in the name of loss. Further while taking charge of Tata company Mistry had promised that Tata & sons will no longer engage with Shapoorji Pallonji for engineering contracts(which belongs to Cyrus family),so as to avoid conflict of interests but contrary to this it was Mistry who was instrumental in awarding contracts worth Rs 2000 crores to the very same business  corporation. There were many instances where Mistry had tried to concentrate power and took decisions without the prior approval of the board. It was to end this feud between Tata and Mistry that he was ousted. Mistry’s investment firms Cyrus Investments Pvt Ltd and Sterling Investment Corp. Pvt Ltd on 20 December 2016, filed the NCLT petition under Sections 241 and 242 of the Companies Act, which dealt with oppression and mismanagement. The Mistry camp had alleged that his removal as chairman, and subsequently as director, of Tata Sons was a result of oppression by Tata Sons, the company in which Tata Trusts owns 66%.

The second part of the plea focused on the professed mismanagement by the Tata Sons board and Ratan Tata, which provoked revenue loss to the group. The Mistry family owned 18.4% stake in Tata Sons, though it is holding with voting rights was less than 4%. According to Mistry’s petition, Tata Sons abused the articles of association and the governance framework was abused by Tata Sons in order to enable Ratan Tata to attain control of the company.

Mumbai division bench of NCLT presided over by B.S.V. Prakash Kumar and V. Nallasenapathy, dismissed the petition filed by the Mistry family’s investment firms on merits. It was concluded that he lost his position as a chairman from India’s largest conglomerate because its shareholders had lost trust in him. All allegations of Mistry were outrightly rejected by the tribunal and was attributed as a right to remove him

There was no merit found on issues raised pertaining to minority shareholder u/s 241 and 242 of companies act. “We have not found any purported merit or issues raised by the minority shareholder in his petition under Section 241 and 242 of The Companies Act, 2013,” the NCLT bench ruled. It also found no merit in Mistry’s argument that Ratan Tata and Tata Sons’ trustee N.A. Soonawala interfered in the governance of Tata Sons

The tribunal reaffirmed that corporate governance is a collective responsibility and Mistry’s charge of lacuna in it finds no place of merit. The Tata group welcomed the ruling, saying it substantiates the position of Tata Trusts and Tata Sons.

Chandrashekharan said that the Tata group had been always committed to transparency and corporate governance and will continue the same. Ratan Tata said that the judgement justified actions that Tata Sons took in October 2016.

Mistry termed the ruling disappointing and assured that an appeal of merits will be pursued. He also said that he will continue to strive for the protection of minority shareholders from the brutal oppression of the majority. This judgement concluded a phase of  Mistry’s continuing battle with Tata Sons, where he had questioned the rationale behind the sale of Tata Communications to Bharti Airtel Ltd, debt-driven acquisitions by Tata Steel Ltd and its European merger with ThyssenKrupp AG, among others Mistry’s investment firms have the option of challenging the ruling at the National Company Law Appellate Tribunal (NCLAT) and later at the Supreme Court.

Sanjay Asher, the senior partner at law firm Crawford Bayley & Co said that the board had the power to replace its non-executive chairman and the shareholders had the power to appoint or remove a director and no court can take away that power from the shareholder.

According to Asher, this ruling would allow the group to pivot more on the business without worrying about any other further adverse impact of the dispute.

To evaluate as to what went wrong, the inside sources say the feud revolved around 3 major issues. First, one being the Irish citizenship of Mistry which he was not willing to give up despite multiple requests by the Tata’s. Tata always wanted a complete Indian identity to take over this job and stated that this was the prime reason why Mr. John Thain of USA was not offered this place in the company despite his humanguous qualifications. Secondly, it was awarding of huge contracts from Tata &sons to Mistry’s own business group ‘Shapoorji Paloonji’.It became an important major reason for conflict of interests and poor governance by Mistry. Thirdly Mistry tried breaking the age-old supremacy of Tata sons by making 5 members of GEC (group executive council), which was set up by Mistry himself, to supervise the CEOs of the individual group companies. The foremost learning in this conflict was all about TRUST. Mistry did not trust Tata’s choice and then lost confidence in his own choice as well.He fell short of Tata’s yardstick. His job was not limited to pursuing the vision alone but to also win the confidence and faith of the shareholders along. A leader must also stand up and quit if the situation so demands. Perhaps Tata could have found a better exit for their own chairman had the internal conflicts not found a place in the public arena.

Frequently Asked Questions(FAQ’S)

1. Where are minority shareholders defined? 

Minority shareholders are not defined under any law but still under section 235(power to acquire shares of dissenting shareholders) and section 244(right to apply for oppression and mismanagement) of companies act, 2013 have been given 10% shares or minimum hundred shareholders whichever is less in companies with share capital and 1/3rd of the total number of its members in case of companies without share capital.

2. What is the status of such minority rights in case of reconstruction and amalgamation of the company? 

In case of reconstruction and amalgamation, minority shareholders may be suppressed in taking decisions of the company and therefore the Courts, while approving the scheme must follow judicial approach by making the public aware about the proposed scheme in newspapers to seek any objections, against the scheme from the shareholders. If any objections are found, then any interested person (including a minority shareholder) may appear before the court to initiate a class action.

3. What are various minority rights?

  • Right to apply for application under section 241
  • Rights Of Shareholders To Be Informed Through Correct Disclosures
  • Right Of Minority To Be Heard
  • Rights Of Minority Shareholders During Meeting Of The Company
  • Right Of Minority Shareholders To Seek Information
  • Right to file Class Action suit

4. What are the exceptions to majority rule?

It may be concluded that though minority shareholder views were not being considered due to the suppression of the majority rule in the company in the previous companies act, 1956. But if we see today’s scenario in the companies act 2013, then various steps have been taken to protect the minority rights of the shareholder in the company irrespective of the fact whether there is any oppression or mismanagement or any other affected rights of the minority shareholders

5. What is a class action suit?

A class action suit is a lawsuit where a group of persons approach the company law tribunal to represent a common interest. It may be filed either by the members or depositors of the company. Class action suits help minority shareholders as a redressal tool to approach the company law tribunal having the common interest.

Edited by – Sakshi Agarwal

Approved & Published – Sakshi Raje

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Shipra Sayal
I am Shipra Sayal from Nirma University, Institute of Law pursuing B.Com LLB (Hons.) Corporate law, Company law and Securities law form part of my core interest area. I love to keep myself updated with news, law and politics. I participate in Moots and Trial Advocacy competitions. My leisure time activities are playing badminton and cricket. I also enjoy watching sci-fi series and movies. I love to read, write and research as this helps a lot in shaping one’s personality and honing skills. I believe in smart work and efficient time management to get success at any work