A company which is a legal institution comprising of individual running a business together is maintained by appropriate management and ownership. But as it is an institution run by individuals and humans are not infallible, errors are bound to be committed. It may happen that the interests of some members of the company are being overlooked and compromised by the action of directors or any authority which may lead to oppression and mismanagement. Therefore to strike a balance between the interests of various individuals involved in managing a company, Chapter XVI of Companies Act, 2013 deals with prevention of oppression and management. Earlier in the Companies Act there were well defined different sections of possible oppression and mismanagement in the company but now they have been combined in chapter XVI with sections 241-246 of the Act dealing with the same.
Apart from provisions in the Act, active role is also been played by Judiciary in mandating some guidelines that are requirements for a case of oppression and mismanagement taking place in a company. [i]Moreover the Courts have helped in distinguishing between acts of oppression and mismanagement and the ones which are not. For instance, in case of ‘Sidhartha Gupta and Ors Vs. Getit Infoservices Private Limited and Ors’[ii]it was held that only violation of rules and articles of the company is not act of oppression and management.
The Act and Courts try to strike a balance between right of majority rule and right of shareholders who are in minority as laid down in Foss v. Harbottle[iii].
Oppression and mismanagement
Oppression refers to subjecting someone (generally a minority) to maltreatment and abuse and burdening them with troubles. It is the exercise of authority or power in a burdensome, cruel, or unjust manner.[iv] It is a situation in which the person is troubled mentally or physically which lead to adverse condition and anxiety. Mismanagement, on the other hand, refers to poor management of the affairs of the company with inclusion of possible favouritism and bias. The Companies Act 2013 does not clearly define two terms but states it as the situation when “the affairs of the company have been or are being conducted in a manner prejudicial to 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.” [v]If the conduct of the officials of the company is arbitrary and prejudiced it is oppression and mismanagement.
The judiciary has defined oppression in Supreme Court’s judgement as “lack of probity and fair dealing in the affairs of the company to the prejudice of some portion of its members. A clear illustration of mismanagement was in Rajahmundary Electric Corporation v. Nageshwara Rao where the vice chairman mismanaged affairs and drew amount from company for his personal use. [vi] To prevent such misuse of powers the Act lays down various guidelines.
Application to tribunal to seek relief
Section 241and 242 of the Act provides for relief in cases of oppression which is done by making application to the tribunal. [vii]The Act provides that under section 241 of the Act an application can be made to the tribunal in case one of the following conditions is fulfilled[viii]:
- If a member complains that affairs of the company are being conducted in manner prejudicial to public interest or interests of a particular member of the country.
- There is a material change in interests of creditors, debentures, or any shareholders of the company by action of board of directors which is likely to be arbitrary and prejudiced. One of the landmark cases which expanded the scope of rights of shareholders who are oppressed by other shareholders was Vikram Bakshi and Ors. Vs. Connaught Plaza Restaurants Limited and Ors[ix].it was one of the major cases involving oppression and mismanagement in companies.
- The central government believes that the interest of general public is thwarted by the conduct of company.
These conditions are necessary to be fulfilled to prove oppression and mismanagement.[x]
Powers of tribunal
The tribunal has been granted with powers under section 242 of the act to act and solve matters on its own discretion if it thinks that company affairs are prejudiced in any manner. [xi]. The reliefs are only provided depending on exigencies of the situation.[xii]
Reliefs granted by the tribunal –
The tribunal might take following steps against oppression of interests and might give orders which are as follows[xiii]:
- It might instruct the company to regulate it’s affairs in future.
- It might put restrictions on transfer or allotment of shares of the company.
- It may provide for purchase of shares or interests and consequent reduction of share capital.
- It may terminate or set aside an agreement between company and directors after obtaining consent of the concerned party.
- It might provide for removal of managing directors or any directors. Cyrus Mistry on the order of NCLAT lost his position as chairman of Tata sons as his shareholders lost trust in him. [xiv]
- It may set aside transfer, delivery of goods, payment, execution or any other activity related to property within 3 months of the application made.
- It might provide for recovery of undue gain by any director or managing director of the company which can include utilisation of protection funds or payment to identifiable victims.
- It might provide for appointment of such number of people as directors who have to report to tribunal as required.
- It may impose costs and fines as deemed fit.
Aftermath of order of tribunal
After the tribunal pronounces a verdict, there are certain steps that have to be followed by the company which are as follows[xv]:
1. The company has to file a certified copy of the order given by tribunal with the registrar within 30 days of the order.
2. If the order of the tribunal makes an alteration in rules of the company than the company cannot make any alteration inconsistent with the order given without seeking permission of tribunal.
3. The alteration made by tribunal in memorandum and rules shall have same force and effect as made by the company and has to compulsorily follow.
4. The order altering the companies’ memorandum should be registered with the registrar within thirty days.
5. If the company alters without the permission, than it is likely to be penalised for its conduct extending from 1 lakh to 25 lakh. Also the officer responsible is likely to be imprisoned or penalised with a fine or might face both.
Consequences of order given under section 242(2)
After the tribunal grants these orders there are some consequences of the same which the company has to strictly adhere to[xvi] –
- The order set aside has no claims against the company or whatsoever by a person who has lost his office or severely affected by it.
- The MD or director who has been terminated from his position does not have any claim and cannot be appointed back to the position before 5 years.
- But if the central government claim any right to be heard related to order given, then it is granted the permission for the same.
- If the directors contravene with the order given and continue to hold position, then they and other people involved are punishable with imprisonment or fine whatever is suitable.
Apart from all these the tribunal may also make an interim order in order to regulate the affairs of the company which it may deem fit. [xvii]
Right to apply- Individual action
The Act specifies on who can apply under section 241 individually against the oppression and mismanagement of the company[xviii]:
If the company has share capital, than –
- Not less than one hundred or not less than 1/10 of total members whichever of two is less.
- The members having share in the capital of company not less than 1/10 of issued share capital.
- The members have paid their dues and calls on their shares obediently.
If the company does not have share capital, than –
- Not less than 1/5 of the total members.
- Tribunal waves off the requirements mentioned earlier to apply for the application.
The Act provides that all the members may appoint their representative who on the behalf of others makes application for the benefit of all.[xix]
Entitlements to one or all order[xx] –
The individuals can seek one or all orders from the tribunal in case of oppression and prejudice which are as follows –
- Restraining the company from committing act which is ultra vires to the articles or memorandum of company
- Restraining the company from breaching the rules in memorandum of the company
- If any alteration in articles of the company is made by suppression of facts or mis-statement, such amendment is said to be declared void
- Refrainment on the action by the company and its directors.
- Restraining company from doing an act contrary to the provisos of Companies Act 2013
- Restraining the company from performing against the resolution passed by the members
- Claim damages or compensation against the conduct of the company.
- The tribunal may pass any other order it deems fit.
Who can apply?[xxi] –
The Act lays down guidelines for people who are entitled to apply under this section-
- Members in case of company having share capital-Not less than 100 members or not less than per cent of total members as prescribed.
- Member holding not less than per cent of issue capital as prescribed
- Members in case of company does not have share capital- not less than 1/5 of total members
- Depositors – not less than 100 or not less than such percentage of depositors as may be prescribed
- Any depositors to whom the company owes such percentage of total deposits of the company.
Procedure after admission of complaint[xxii]–
A public notice has to be serving to all concerned members and depositors after the admission of complaint.
- Similar applications shall be taken as one and the class members have to select a representative who would be the lead applicant. If no decision can be made than the tribunal may appoint one.
- If there is same cause of action, there cannot be more than one application.
- The cost is to be borne by company or the person responsible for committing oppression and mismanagement.
- All orders passed by tribunal are enforceable and binding. If a company fails to comply it is punishable with a fine or imprisonment.
- This section is not applicable to banking companies.
Important aspects to be considered by tribunal[xxiii]–
The tribunals are required to keep in mind some aspects while admission complaints of class action:
- Whether the application is made in good faith.
- Whether it is made by some other person rather than the directors. It was observed in one of the cases that “That the oppression complained off must affect a person in his capacity…a director or a creditor is outside the purview of the section.” [xxiv]
- Whether the matter is to be taken as right of the depositor or member.
- Whether there is possibility of some personal interest of member making application.
- Whether the cause of action is yet to occur and has the scope of being ratified or authorised. Mere declaration of low dividend which does not affect the value of the shares of the petitioner was neither oppression nor mismanagement in the eyes of law.[xxv]
Oppression and misconduct are bound to occur and are part and parcel of business. It is not uncommon in corporate world. In order to prevent the same and facilitate smooth functioning of the companies, the provisions have been made in the Act to save the members from oppression and mismanagement. The provisions are powerful tool to prevent and punish for the same.
Frequently Asked Questions
What are the sections in the act for Prevention of Oppression and Mismanagement?
Unlike the previous Acts, Company Act 2013 does not provide for separate section relating to provisions of oppression and mismanagement. They have been collectively covered under chapter 16 of the act. The concerned sections are 241-246.
What may constitute the acts of oppression?
The Act does not define the acts of oppression but it has been noted in various Judgements of the court that following may constitute the same:
- Inefficient conduct of director in keeping shareholders in dark.
- Corruption and personal gains by director or members.
- Hiding of substantial facts from concerned shareholders or depositors.
- Lack of providing relevant details.
- Not conducting affairs of the company according to Companies Act.
Are the orders of tribunal binding?
The sections provide various relief that tribunal could grant all of which are binding. Any alteration to be made in order has to be done after seeking permission of the tribunal.
What is a class action?
A class action is a provision in section 245 of the Act where a group of persons approach the tribunal to represent a common interest against oppression and mismanagement. It is filed either by the members or depositors of the company.
Edited by Shikhar Shrivastava
Approved & Published – Sakshi Raje
[i]S. P. Jain vs. Kalinga Tubes Ltd, AIR 1535, 1965 SCR (2) 720
[ii]Sidhartha Gupta and Ors vs. Getit Infoservices Private , CA. No. 128/C-II of 2014 & CP. No. 64(ND) of 2014
[iii]Foss v. Harbottle(1843) , 67 ER 18
[iv] Available at https://www.merriam-webster.com/dictionary/oppression, (last visited on 24 January, 2020)
[v] Section 241(1), Companies Act 2013
[vi]Rajahmundary Electric Corporation v. Nageshwara Rao , AIR 213, 1955 SCR (2)1066
[vii] Section 241, Companies Act 2013
[viii] Supra, note 7
[ix] 140CLA142, 143SCL37
[x]Shanti Prasad Vs. Kalinga Tubes Ltd, AIR 1535, 1965 SCR (2) 720
[xi] Section 242(1) ), Companies Act 2013
[xii]Sangramsinh P. Gaekwad& Ors.VsShantadevi P. Gaekwad 6360 AND 6361 OF 2001
[xiii] Section 242(2), Company Act 2013
[xiv]Cyrus Investments Pvt. Ltd. v. Tata Sons Ltd,C.P. Nos. 82/241, 242,244/NCLT
[xv] Section 242(3-8)) , Companies Act 2013
[xvi] Section 243), Companies Act 2013
[xvii] Section 242(4), Companies Act 2013
[xviii] Section 244 , Companies Act 2013
[xix] Section 245, Companies Act 2013
[xx]Section 245(1), Companies Act 2013
[xxi]Section 245(3), Companies Act 2013
[xxii]Section 245(5), Companies Act 2013
[xxiii]Section 245(6-10), Companies Act 2013
[xxiv]Rao (V.M) v. RajeswariRamakrishnan , 61 CompCas 20 Mad
[xxv]JaledharChakraborty v. Power Tools Appliances Co. Ltd.,(1994) 79 Comp. Cas. 505