1. Abstract
Shareholders and creditors are one of the most important people in a company. A company will be only allowed to work efficiently if these set of people are happy and satisfied. Whenever a company gets involved in a situation where there is oppression or mismanagement against the creditors or shareholders of the company, then such a situation is a pitfall for the company. In this paper, the author would discuss the concept of oppression and mismanagement in an elaborate manner. Further, it would also discuss certain remedies which the shareholders can claim in a situation where there are circumstances like oppression or mismanagement. The paper will also delve into the representative actions and derivative actions that can be taken by the shareholders. Further, the paper will conclude by discussing class action suits.
2. Introduction
Before understanding the concept of operation and mismanagement, it is very important to delve into the very fact that what is Majority Rule. This rule is crucial to understand the decision-making process in a company surrounding its affairs and management. Two groups have invested the money Minority Share Holders and majority Share Holders. Two kinds of majorities one is a special majority [also called qualified majority] and the second is a simple majority.
When a majority takes up a decision then it becomes binding upon all the members of the company, this includes the majority shareholders, minority shareholders, key managerial position holders, directors, etc. But there can be a situation where minority shareholders are oppressed by the majority shareholders. and hence the protection of their interest is very crucial for the company to survive effectively. Hence the concept of oppression and mismanagement comes into the picture. Chapter XVI sections 241 to 246 allows the minority shareholders their requisite amount of protection which they deserve as the shareholders against the majority shareholders by preventing oppression and mismanagement.
3. Majority Rule and Minority Rule
To understand the concept of majority rule, we must refer to the case of Foss v. Harbottle upheld in the case of Shanti Prasad Jain v. Kalinga Tubes[1], in this case, there were two significant guidelines made by the court, first but the court in general circumstances would not interfere in the internal affairs of the company. Second, if the court must interfere, then it is the company that would act as the proper plaintiff in the case as it is the company that has the actual right to sue to be a separate legal entity.
In another case of Shanti Prasad Jain v. Kalinga Tubes[2], it was seen that there were 2 sets of respondents and petitioner {equal shareholders}] and an arrangement was made that further issues will be done among the original 3 current shareholders only. Later the 2 respondents’ majority vies decided to give the shares to the public, the minority considered it to be oppression and filed the case. The court held that since it’s not mentioned in AOA hence the tribunal can’t interfere.
It is important here to note that it is the duty of the directors towards the company and not to the shareholders. But when the majority tries to violate its power, then minority rights must be protected. Hence, this rule of the majority is not the absolute rule or standalone rule and has certain exceptions granted to protect the rights of the shareholders. This allows the protection of the rights of minorities.
4. Rights granted to the Shareholders: Individual Rights vis a vis corporate right
1. Individual Rights
These are the rights that arise either due to contractual obligation or general law [for example granted by the Companies Act, 2013]. In the present case, the contract is between the shareholders and the company. Here certain individual rights pop out.
Some of the contractual rights are, the right that the shareholders have that the name should be registered in the register of members and under no circumstances unauthorized alterations all addition can be done in such register. Another example can be to receive a dividend duly declared by the company.
Some of the rights which come out of the general law [Company Law 2013] are included to stop the company from doing any act which is an ultra vires act to the memorandum or articles of the company. The shareholders also have the right to be hard in the meeting and not to have financial obligations increased without the consent of the shareholders under the Companies Act 2013. Other includes the right to have a share certificate issued and the right to inspect the register maintained by the company.
2. Corporate Rights
These are the rights that come out at the level of the corporation which you derive as a matter of your allocated shares. For example, voting rights or partnership rights. In the case of Foss vs Harbottle, it was held that it is the company that has the corporate right to be the rightful claimant in case of mismanagement.
5. Two types of Actions
1. Representative Action
When members act on behalf of the company as a representative, this is for the interest and other members. It does not matter whether the majority wants to take action or not. In certain circumstances, an individual member may bring to remedy the wrong done against the company can compel them to act according to the constitution, rules, and bylaws of the company. This representative action can be taken even if no wrong has been done to the complaining member personally. Furthermore, such an action can also take place even though majority shareholders do not wish to take the action under such circumstances. Here the company will act as a defendant or who defendant.
2. Derivative Action
Under derivative action takes place against the 3rd party for the benefit of the company. So, in this present action ideally, it is the company’s right to sue however the member derives such right from the company and sues the third party.
6. The exception to the Rule of Majority was given in the case of Foss v. Harbottle.
1. Ultra vires / Illegal Activity – a single shareholder in its capacity of a member can proceed against the wrongdoer of the company. For example, if there is a member then automatically as default he or she gets the right to sue, any person who works in a manner prejudicial to the affairs of the company, member(s), or public interest.
2. Breach of fiduciary duty – the director or any person holding the position of the key managerial has a duty y towards the company, and not towards the shareholder. However, there have been several cases where the court has reiterated many times that when a director or KMP acts against his or her fiduciary duty then in such cases the shareholders can sue.
3. Oppression and fraud on minority – when any activity is done in such a manner that it acts as prejudicial to the company at large or public interest or members of the company then every shareholder or member can take action against such an act. In many cases, it was held that where the majority members of the company used the power to defraud or oppressed a minority then their conduct can be questioned in a court of law even by a single shareholder.
7. Statutory Exceptions
1. Variation of class rights [u/s 48]
Class of Shareholders can include, equity and preferential Shareholders. This classification allows to give rights to the shareholders. The variation here can happen once it is mentioned in MOA + ¾ of the majority motion for variation. The remedy available here is that the total number of issued classes of shareholders apply for the variation. And this way this can be cancelled. [u/s 48 {2}].
2. Request for Investigation [u/s 213]
Here 100 or more members or not less than 1/10th share of voting power can request an investigation.
3. Scheme of Compromise or Arrangement [u/s 230]
{270(7)(c)} – This can be done with members/ creditors in accordance with the scheme.
4. Rights of dissent Shareholder under takeover bid [u/s 235]
Dissent shareholders are those shareholders who do not agree to the motion. And do not approve it. For example, when the offeror offers to purchase 100 percent shares of the company then the offeree that is the company takes a meeting and comes out that 90 percent agree to such offer but 10 percent dissent. So, the proposal is that 10% percent is to be taken on the same terms and conditions. Here the notice by the company has to be given to the minority i.e., 10% and then they can apply to the tribunal that their shares should not be purchased at the same terms and conditions.
5. Class Rights [u/s 245]
This means discussing class action. This means particular members have the right to approach the tribunal if they feel that anything is happening against the company or the rights of the members which in its essence is a prejudicial act.
8. Prevention of Oppression and Mismanagement
General meaning – Two components help to determine whether this case is of oppression or not.
1. Injury or harassment caused by the unjust exercise of power. And Unauthorized discretionary use of authority
2. Collaborated with unjust intention
This oppression can be done by a majority shareholder or by a person acting in a managerial position.
9. What is oppression?
Depriving a shareholder of his legitimate expectation of rights and not acting in an ultra vires manner.
In the case of Shanti Prasad Jain v. Kalinga Tube[3] where Elder v. Elder and Watson Ltd, was taken as a precedent, Lord Cooper in Scottish defined oppression as “The essence of the matter seems to be that the conduct complained of should be at the lowest and should involve a visible departure from the Standards of Dealing and violation of fair play.”
10. What is Mismanagement?
It is a Transactional Irregularity done within 4 corners of the law but misusing the loopholes. R. Electric supply co. v Nageshwar Rao[4] defined mismanagement. Mismanagement by the VP of the company. He transferred the fund for personal interest and the court held it to be mismanagement. and hence the court defined mismanagement to be an Atrocious act of majority shareholders on the minority. For example, diversion of funds or fraud.
In the case of Shanti Prasad Jain v. Kalinga Tube[5], oppression involves at least a lack of the element of probity or fair dealing to a member in a matter of his property rights as his shareholders.
In the case of Re, Lundi Bros Ltd case it was seen that the minority shareholder was removed from his position from the office of a working director. And thus, he claimed it to be the oppression by the majority for the minority. The court rejected the plea on the following grounds.
1. You are not a member
2. You suffered injury as a working director.
11. Provisions under company law are Section 241 tells who can apply.
1. Any Member {241[1]} eligible under section 244.
Any Member – who complains that Affairs of the company are is or has been conducted prejudicial to the company, member[s], public interest OR Material change in the management or control of the company in such a manner that Affairs of the comp. are likely to be conducted in a manner prejudicial to the company, member[s], and public interest.
2. Central government can file under {242[2 and 3]}
If the central government thinks that the affairs of the Company are being conducted in a manner prejudicial to the interest of the company, member[s], and public interest. The central government may apply to the tribunal.
Here the case will go to the Principal Bench which is in New Delhi. Further, if the central gov. feels that there is a circumstance where a member is Guilty of fraud, misfeasance is conducting unsound business practices or imprudent commercial practice or is causing serious injury or damage to the interest of trade or industry or business or has the intention to defraud the creditors, members or any other person for a fraudulent or unlawful purpose or in a manner prejudicial to the interest of the company.
Then the central government may refer the same to the Tribunal & they will inquire into the case and check whether such a person is fit and proper to hold the office of the Director or any other position.
Besides members, there are others as well who can apply to section 241. They include the Central government or person authorized, the Legal representative of the deceased member, the Trustee of the shareholder or member, and any person authorized by the Central government under circumstances mention in 224 in pursuance of the police report, and even the majority can apply.
12. Class action
Under section 245 members/ members, depositors, or any class of them as indicated by sub-section 2 of 245 can file the class action suit. This can be done whenever they feel the matters are being conducted in a manner prejudicial to the interest of Members, the company, or depositors.
I. They can ask for the following orders from the tribunal –
-
- to restrain the company from committing an act that is ultra vires the AOA or MOA;
- to restrain the company from committing a breach of any provision act, moa or aoa
- to declare a resolution altering the memorandum or articles of the company as void if the resolution was passed by suppression of material facts or obtained by misstatement to the members or depositors;
- to restrain the company and its directors from acting on such a resolution;
- to restrain the company from doing an act that is contrary to the provisions of the act or law
- to restrain the company from taking action contrary to any resolution passed by the members;
II. Against whom such orders can be made?
1. The company or its directors for any fraudulent, unlawful, or wrongful act.
2. The auditor including the audit firm of the company for any improper or misleading statement.
3. Expert or advisor or consultant or any other person for any incorrect or misleading statement made to the company
The requisite number of members in case of a company having share capital, not less than 100 or not less than such percentage as prescribed of total members whichever is less. And in the case of a company not having a share capital, 1/5 of the total number of members.
The requisite number of depositors is not less than 100 or not less than such percentage as prescribed of total members whichever is less
13. Conclusion
Minority shareholders even though have a very small piece in the administrative and voting power of the company yet it affects the company a lot. Their presence makes the working of the company efficient and democratic. Therefore their rights must be protected enough so that the company works efficiently. Chapter XVI sections 241 to 246 allows the minority shareholders their requisite amount of protection which they deserve as the shareholders against the majority shareholders. It allows aggrieved shareholders to protect their rights by taking actions in the form of representative, derivative, and class action suits. It is an efficient tool to bring check and balance within the company and prevent any abuse of power which may lead to unsound practices and fraud against the members, company, and public at large.
* 3rd year BA LLB [Hons.] Student at UPES Dehradun [Authored on(30.04.2023)].
[1] MANU/SC/0368/1965.
[2] MANU/SC/0368/1965.
[3] MANU/SC/0368/1965.
[4] MANU/SC/0008/1955.
[5] MANU/SC/0368/1965.
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