PREVENTION OF OPPRESSION AND MISMANAGEMENT IN CORPORATE AFFAIRS

Advertisements

Spread the love

Post Views: 1,186

This article is written by Amrita Parida of 5^th Semester of University Law College, Utkal University, an intern under Legal Vidhiya

ABSTRACT

The occurrence of oppression and mismanagement in the corporate world are of prejudicial or oppressive nature against the interest of the company, its shareholders, any of its members, and/or the public interest. In light of this, the provisions relating to regulating, preventing, and redressing oppressive and improper management issues become significant and form a fundamental part of good corporate administration. Such provisions ensure that the company’s interests remain safeguarded and that neither any shareholder nor any company member is subjected to the tyranny of the majority. Currently, in India, the provisions governing the issue of either any kind of oppression or of mismanagement are well integrated within Chapter VI of 2013 enacted Companies Act. This particular act has considerably expanded the scope of relief provided by its precursor that is S. 397 and S. 398 of the 1956 enacted Companies Act of India. The paper aims to briefly understand the meaning and various forms of oppression and mismanagement, the provisions relating to them, and possible remedies available under the provisions to the aggrieved.

Keywords: Oppression and Mismanagement, Company’s Act 2013, Statute

INTRODUCTION

Corporate governance is fundamental for the functioning of a company as it lays down a set of well-defined rules and regulations employed by a company’s board of directors to govern and promote the principles of fairness, equity, accountability, and transparency. Good corporate governance is characterised by corporate democracy, which is further marked by the salient feature of the principle of majority rule. This rule was laid down in the landmark case of Foss vs. Harbottle^[1] and is well observed in every company, regardless of size. The majority rule enforces the contractual bargain, which becomes binding on every member recognized in the conduction of affairs of a company, whether he chooses to vote in favour of or in opposition to the resolution or abstain from casting a vote. Though this rule may somewhat act as an element of efficiency in corporate decision-making, on the flip side, it could also serve as an instrument of tyranny in the hands of the majority that may impugn or prejudice the interests of minority shareholders or even the company itself because of the much concerned issue of oppression and as well as mismanagement. In the said scenario, the law provides necessary recourse to address and seek appropriate relief against it. Hence, the rule of the majority is marked by the following exceptions:

Conduct ultra vires company or/and statues
Acts needing particular consensus
Wrongdoers having the upper hand
A violation of a member’s rights
Fraud against Minorities
Event of Oppression and Mismanagement

Meaning of Oppression and Mismanagement

The term ‘oppression’ has not been defined under Company’s Act, 2013. According to the Black Laws dictionary, oppression is a ‘malicious or unjust use of powers or exercise of their authority.’ In the case of Elder v. Elder & Watson^[2], the court took the view that it “involves a visible departure from the standards of fair dealing and a violation of the conditions of fair play on which every shareholder who entrusts his money to a company is entitled to rely. “In view of the contested arguments put forth concerning the case of Scottish Co-operative Wholesale Society Ltd. v. Meyer^[3], the House of Lords resorted to it being “burdensome, harsh, and wrongful” conduct. However, it needs to be noted that mere loss of confidence or pure deadlock does not amount to oppression. Further, there is no statutory definition pertaining specifically to mismanagement as well, however, we application of judicious sensibility may conclude it to be a way of administering the affairs of a company in any manner that could be of dishonest, or inefficient or prejudicial nature. It may also imply conduct which is much against the interest of Public at large or is simply prejudicial in nature to that of the interest of either the shareholder or the company.

Determination of oppression

What concludes in oppression depends much on the circumstances and facts of the case, as there are no exhaustively laid down rules regarding it. The Calcutta High Court noted the following in the Bagri Cereals Pvt. Ltd. case^[4] about the issue of determining oppression. :

This is for the court to determine if any existing instance of oppression requires action based on merit in the case.
The act in question must be harsh, wrongful, and burdensome.
The charge of wrongful and harsh acts or the fact of the minority being oppressed by the majority cannot be proved by mere lack of confidence.
An element of lack of fairness or probity on a member concerning the member’s rights as a shareholder.

Additionally, in the matter of V.S. Krishnan v. Westfort Hi-tech Hospital Ltd.^[5] Supreme Court, after referring and duly analysing a considerable number of judgements^[6], concluded that instances of oppression could be found where-:

There’s any conduct amounting to being harsh, wrong, or burdensome.
When an act has not been done in good faith and has been done for a secondary goal, even though the ultimate goal is in the company’s best interests, the short-term objective benefits some shareholders over others.
The act pertains to good conduct and integrity.
The test for determining if the conduct stands oppressive or it does not may be established based off the fact that whether it is of such nature which is lawful or not because though the conduct proves to be legal, if it is still harsh, wrong, or against good conduct, probity, or mala fide or burdensome or is in view of a secondary motive, it may result in oppression.
The discretionary authority granted to the Law Board of Company u/s 402 to rectify, put an end to or remedy the conduct that has been determined to be oppressive in sections 397 and 398 is quite broad when the conduct is satisfied as oppressive.
Determining the facts that constitute or lead to an oppressive act is a factual issue. Hence, the determination of an act being oppressive or not also comes down to it being a question of fact.

LEGAL FRAMEWORK

The primary law which governs the affairs of Companies in India is the Companies Act, 2013. Sections 241-246 concern oppression and mismanagement in companies. Before the enactment of the 2013 Act, the concern of oppression and mismanagement was dealt with by sections 397 and 398, respectively, of the Companies Act, 1956. Both of these sections were inserted for the very first time in the 1956 Act in light of the findings of the ‘Bhabha Committee’ as the only remedy against oppression and mismanagement in companies was available under the ‘just and equitable clause,’ which was insufficient and there was an apparent consensual necessity for statutory provision to control power abuse in the form of oppression and poor management and offer significant relief from the same. Though the 2013 Act substantially retained much of its predecessor, it has also deviated much on some counts and is in effect both of expanding and contracting nature concerning shareholder remedies. The principal statutory remedy to the oppressed or sufferer of mismanagement (be it investor, depositor, and/or minority shareholder) is to approach the Tribunal. The various sections of the 2013 Act with regards to the oppression and mismanagement are explained as follows-

Section 241: Application to Tribunal for Relief

It deals with the prevention of oppression and mismanagement and allows the aggrieved to approach the Tribunal of NCLT. Any person who believes that the affairs are administered or in an oppressive or in any manner that may be of prejudicial nature to any of its members or its shareholders, or the company’s interest. The grounds needed for applying for relief to the Tribunal are set forth under this section. This is as provided below

Anyone from the company who complains that—
conduct of activities of the company was performed or isbeing performed in any way which is-
Detrimental to the larger interest of public; or is
Unfavourable or in any way oppressive
Detrimental much to the business’s interests
As a result, there has been a significant change in the company’s management or control, which could have resulted from changes to the owners of its shares, manager, board of directors, membership, or any other aspect of the company’s operations.

However, such a change should not be in the best interests of any class of the company’s shareholders or any creditors, including debenture holders. Given that as a result of the change, the operations of the company are most likely to be managed with such an approach that it is disadvantageous to its own interests, or of its members. Such a member may seek to obtain from the appropriate Tribunal for issuance of fitting order under this Chapter, provided they are eligible u/s 244. Based upon the Delhi High Court’s observation about the type of relief under the former Section 398 (currently, the new section is 241^[7]) in the matter of Suresh Kumar Sanghi v. Supreme Motors Ltd.^[8], it is to be concluded that it must be kept in mind that the section 241 is only pertinent to genuine cases of mismanagement.

Section 242: Powers of Tribunal

Under this section, the Tribunals are accorded extensive authority to examine and decide upon the allegations of oppression and improper management. Here, ‘Tribunal’ refers to ‘National Company Law Tribunal’(NCLT) constituted under S. 408. Under the law, the Power vested upon the tribunals is broad, as the tribunal may make any necessary order to control and regulate the operation of any company and uphold the values relating to good conduction of corporate practice. The provisions under this section are as follows-

If the Tribunal determines, after considering any application made as per Section 241, that-
Activities of a Company are carried out in a certain way that is detrimental or oppressive to the member’s interest or interests of the company or the public. And-
The concerned Tribunal may make the appropriate decisions as it deems necessary if the Company is winded up, even if doing so would unfairly disadvantage some. However, making a winding-up order because doing so is just and equitable for the company is supported by the facts otherwise.
The Tribunal may make the following orders without impairing the broad scope of its powers under subsection (1): –
Control over how the business will be carried out in the future. Purchasing by the company/ other member of a member’s shares and interests of the company.
Or A decrease in the share capital due to the company’s acquisition of shares and interests.
Limitations on the transfer or distribution of company shares.
Under just and equitable conditions, terminating by dismissing or modifying the agreement agreed upon and being enforceable between a company and its director.
The termination of, modification of, or dismissal of the agreement the company has with another party.
Excluding any property-related conduct made within three months of the application by or against the company date, including any transfer, payment, execution, delivery of goods, or other act.
If such an act is committed by or against an individual, that person will be regarded as fraudulently insolvent.
The dismissal of the company manager, managing director, or other directors.
Recovering any unauthorized gains made during the appointment period.
Procedure for appointing the company’s subsequent manager or managing director.
The appointing of the appropriate no. of Directors who are to report to the Tribunal on any matter as may be directed by the Tribunal.
The imposing of any costs/fees.
Any other issue at hand.

A certified copy of the order required to be filed before the registrar within a period of thirty days of issuing of order.

In response to an application from any party to the proceeding, the tribunal may pass an interim order as required.
Further, Sub-Section (5), (6), (7) of this section deals concerning alteration of Memorandum or Articles.
Sub-Section (8) provides a scheme of punishment with a fine in case of contravention of any sub-section provisions (5). This is as follows
Fine for Company: Rs 1 Lakh as Minimum; Rs 25 Lakh as Maximum
Fine for non-compliance by Officer Rs 25,000 as the Minimum; Rs 1 lakh as the Maximum
Notably, the ‘scope of powers under this section is not subject to any limitation and relief seeking members need not be sent elsewhere for getting the reliefs.’^[9] This is because the power conferred to tribunals under this section is comprehensive. This indicates that NCLT may issue whatever order it deems to fit in the exercise of its discretion to expunge the continued mismanagement or oppression. Apart from this, it was also observed in the case of Muthusamy v. S. Balasubramanian^[10] that the powers given in this section are administrative and can be exercised suo motu.

Section 243: Result of Terminating or Modifying Certain Agreements

When an agreement is terminated, overturned, or modified as mentioned in 242(2) by any order made under Section 242-
any potential claims for damages or monetary compensation in respect of loss of loss should not arise.
For five years following the date of the ruling, the officer so terminated or is kept aside cannot be hired to such a post without the Tribunal’s permission.
For a term of five years following the date of issue order, the person who does meet the requirement of section 242(4A) shall not occupy any office related to the operation and administration of day to day affairs of the firm.
For 5 years following the date of issue order, if any person does not meet the requirement of section 242(4A) then he shall not occupy any office related to the conduct and administration of any firm.
The individual removed from office has no entitlement to any compensation. Contravention of (1)(b) or (1A), is to be fined up to Rs 5 lakh.

Section 244: Right to apply to Tribunals

According to the section, certain conditions must be met before applying for relief to the tribunal. The following are the provisions:

Any of the following corporate members can apply in line with Section 241:
If a Company has the following:
A minimum of 100 Company members OR
A minimum of 10% of the entirety membership, whichsoever is lesser
Members owning a minimum of 10% of share capital
The applicant(s) must have paid all calls and other amounts owed on his shares, among other requirements.
If the Company is lacking in share capital:
Minimum 1/5th of the total members
To facilitate the members to apply to Section 241, the provision further states that the Tribunal may, upon request, may do away with all or any of the conditions aforementioned.
The following are ineligible to apply for relief under section 241:
Any member(s) whose calls are past due;
Possessor of a partially paid share allocation letter;
Possessor of an equity warrant;
The bearer of a share certificate;
Shareholder who has transferred shares without registering them for the transfer to the corporation;
A holding company’s shareholders cannot bring a petition against its subsidiaries.

Section 245: Class Action

If members or depositors believe that the overall operation of the company’s affairs is being done in a way that is detrimental to the company’s interest or to them, they may file an application with the NCLT seeking relief in a class suit, also being referred as a representative action, or class-action lawsuit. In light of this, an application may be submitted for all or some of the following the orders:

In order to prevent from engaging in an act ultra vires
To prevent from violating any of the MOA/AOA
To prevent the directors from acting in accordance with a null resolution
Refusing to take any action that is against any Act or other law.
To refrain from acting in a manner that is inconsistent with any resolution passed by any member.
Declaring a resolution null and void
To pursue restitution or damages against the: Corporation and its directors for any illegal, fraudulent, or unlawful acts committed, etc.
The auditor of a company, including as well the audit firm, for deceptive or improper statements put forth in a report of audit or for any act amounting to be wrong, illegal or a fraud.
Any related experts, advisors, consultants, or other people for false or deceptive statements made by them or for any possible conduct on their part;
Or any other remedial measure that is deemed appropriate.

Moreover, Subsection (2) of this section makes a company and as well as each partner liable in the event that an auditor or audit firm is sued if they have participated in making any statements of misleading or incorrect nature in the audit report or if they did an act amounting to be wrong, illegal or a fraud. Analysing Sub-section (1) and (2), it may be concluded that class action may be can be filed by The members/ depositors/ or any class of them can seek order from the tribunal against:

The company or directors for any fraudulent, unlawful or wrongful act or omission or conduct.
Auditor, including as well the audit firm, for the possible inappropriate or deceptive statements of specifics in audit report or for any illegal, fraudulent, or wrongful act/conduct; or
Any advisor, expert, consultant, or anybody else for the false or deceptive statements given to the corporation or for any illegal, fraudulent, wrongful act/conduct, or for any act or conduct which is likely to be committed by him.

Sub-section (3) provides for the requisite no. of members for filing of a class action- (I)

In the event of the Company having a share capital of:
Mandatory bare requirement of 100 members or
bare requirement of one-tenth no of members of the total (which so ever is minimum here)
Or A minimum of 1/10^th of the total amount of share capital
Further, all other outstanding amounts on the shares must be met. At least one-fifth of the total no. of members
If the Company is marked by lacunae of share capital, then at least one-fifth of the entirety of members is the bare requirement.
Depositors:
Mandatory bare requirement of one hundred depositors or
Mandatory bare requirement of the prescribed % of the entirety of depositors (whichsoever is lesser here) or
To whomsoever such prescribed % of the entirety of deposits of the company is owed to.

Sub-Section (4) outlines the information that the Tribunal must consider when it receives a class-action lawsuit. These are as follows-

whether the depositor or member is making the application for an order with bona fide intention;
any evidence brought before it regarding the engagement of anybody except for the directors or officers involved in any of the issues.
whether the cause of action on their own without the need for a court’s direction under this section.
any proof before it regarding any opinions of the aggrieved not having a neither direct or indirect personal stake in the issues being examined.
when the alleged wrongdoing involves a potential conduct or omission that, under the given circumstances, has the highest probability of being approved by the firm even before it could happen or confirmed once it occurs.
If the reason for action rests on an earlier act or omission, whether the act or omission could have been, and under the conditions, is likely to have been confirmed by the company.

Sub-Section (5) provides for the procedure after the admission of filed application, which are-

The public notice shall be served to the members or depositors.
Combining all applications that are prevalent in any jurisdiction into one application, along with the class members and depositors being permitted to choose the lead applicant. If there is a lack of consensus on this issue, it is for the discretion of the Tribunal to choose a lead applicant.
For same cause of action, two different applications of class action are not to be permitted.
Corporation or any other who is accountable for any act of oppression will have the burden of cost/expenses associated with class action application.

Sub-Section (6) makes order of Tribunal binding , and sub-section (7) makes provides for scheme of punishment for non-compliance of it which is as follows-

Fine payment by Company: Not any less than Rs 5 Lakh; Not any more than Rs 25 Lakh
Fine payment by Officer in default: Not any less than 3yr Imprisonment + Rs 25,000; Not any more than 3yr Imprisonment + Rs 1 lakh

Under Sub-Section (8), the applicant may have to pay about Rs 1 lakh to the opposite party in case of the rejection of its application on the ground of it being vexatious or frivolous.

Section 246: Application of Certain Provisions to Proceedings under Section 241 and Section 245

“The provisions of sections 337, 338, 339, 340 and 341 (both inclusive) shall apply mutatis mutandis, in relation to an application made to the Tribunal under section 241 or section 245.”

CONCLUSION

Globally, corrupt and oppressive corporate practices, along with mismanagement, have not only proved to be oppressive and prejudicial to the interests of minority shareholders but have also been a significant reason behind the collapse of large companies and corporations. Hence, increased accountability and maintenance through statutory provisions become inevitable. The power vested with tribunals enables them to exercise a wide range of authority to curb practices that are prejudicial or oppressive in nature. It has been well regarded by the Apex Court that “Parliament, while enacting a statute, cannot think of all situations that may emerge in giving effect to the statutory provision,” thus all dispensaries of law require to embrace “a holistic approach to the matter”. Thus, the courts of India might need to “adjust, adapt, limit, or extend”. This equally applies to the Tribunals in the redressal of complaints concerning oppression and mismanagement under the wide power conferred upon them.

REFERENCES

https://www.mondaq.com/india/shareholders/1077784/some-recent-trends-in-oppression–mismanagement-cases-under-the-companies-act-2013#_ftn1 , last seen on 04/08/2023

https://blog.ipleaders.in/prevention-of-oppression-and-mismanagement/ , last seen on 05/08/2023

https://www.mca.gov.in/ , last seen on 06/08/2023

https://cleartax.in/s/opression-mismanagement , last seen on 04/08/2023

^[1] (1843) 2 Hare 461

^[2] (1952) Scottish Case. 49

^[3] (1959) AC 324

^[4] Bagree Cereals (P.) Ltd. And Ors. vs Hanuman Prasad Bagri, 2001 105 CompCas 465 Cal

^[5] (2008) 3 SCC 363

^[6] Needle Industries (India) Ltd. and Others vs. Needle Industries Newey (India) Holding Ltd. and Others, (1981) 3 SCC 333; M.S. Madhusoodhanan & Anr. vs. Kerala Kaumudi (P) Ltd. & Ors., (2004) 9 SCC 204; Dale and Carrington Investment (P) Ltd. & Anr. vs. P.K. Prathapan & Ors., (2005) 1 SCC 212; Sangramsinh P. Gaekwad & Ors. Vs. Shantadevi P. Gaekwad (Dead) Through L.Rs. & Ors. (2005) 11 SCC 314; Kamal Kumar Dutta & Anr. vs. Ruby General Hospital Ltd. & Ors. (2006) 7 SCC

^[7] Companies Act, 2013, s.241

^[8] 1983 54 CompCas 235 Delhi

^[9] Harikumar Rajah vs Sovereign Dairy Industries Ltd, 2001 106 CompCas 191 CLB

^[10] (2011) 167 Comp Cas (167) (Mad)