Overview
The terms oppression and mismanagement are not defined under the Companies Act, 2013. These terms are to be interpreted by the court depending upon the facts of each case. Mismanagement refers to practices of managing the company incompetently and dishonestly. Violation of Memorandum of Association, Articles of Association, or other statutory provisions would amount to mismanagement. In the case of Elder v. Watson Limited [1952 SC 29 (Scotland)], the term oppression was defined. Oppression refers to a misdemeanor committed by majority shareholders upon the minority shareholders of the company.
Chapter XVI of the Companies Act, 2013 deals with the prevention of oppression and mismanagement. The majority rule is normally followed in the company and thereby, courts do not interfere to protect minority rights. However, prevention of oppression and mismanagement is an exception to the rule.
Section 241
Section 241 states that an application to the Tribunal for relief in cases of oppression, etc can be made. Any member of the company can file an application under section 241 subject to fulfilling the requirement under section 244. The complaint can be made when the company affairs have been conducted in a manner prejudicial to the public interest or against the company’s interests, or oppressive to a particular member or other members of the company.
A material change has been brought in the company that is prejudicial to the company or its members. Material change can include a change in the number of Board of Directors, any class of shareholders, ownership of the company’s shares, etc. Any member of the company who is eligible to apply under section 244 of the Act may apply to the Tribunal.
If the Central Government believes that the company affairs are being conducted in a manner prejudicial to public interest it may apply to the Tribunal. An application under this section should be made to the Principal bench of the Tribunal.
If the Central Government believes that:
- Any Person Concerned In The Management Of The Company Is Guilty Of Fraud, Misfeasance, Persistent Negligence, Default In Carrying His Obligations, Breach Of Trust
- Sound Business Practices Have Not Been Used
- The Company Has Been Managed By A Person Who Is Likely To Cause Damage To The Interest Of Trade And Business To Which The Company Pertains
- The Company Has Been Managed By A Person Who Intends To Defraud The Creditors, Members, Or Another Person For A Fraudulent Or Unlawful Purpose Or In A Manner Prejudicial To The Public Interest
The Central Government may initiate a case against such person and refer him to the Tribunal and request the Tribunal to enquire into the case. The Tribunal will inquire and record its decision as to whether such person is fit and proper to manage the company or not. Section 241(4) provides that the person against whom the case is filed becomes a respondent to the application. Section 241(5)(a) states that the application filed by the Central Government must contain concise statements of circumstances and materials necessary for an inquiry. Section 241(5)(b) states that the application shall be signed and verified in the manner provided under the Code of Civil procedure, 1908.
Right to apply under section 241
The members who have a right to apply under section 241 are:
When a company has a share capital the following members can apply under section 241:
- Not Less Than One Hundred Members Or Not Less Than One-Tenth Of The Total Number Of Its Members, Whichever Is Less
- Any Member Or Members Holding Not Less Than One-Tenth Of The Issued Share Capital
The applicant or applicants must have paid all call money and other sums due on them before applying. When a company does not have a share capital at least one-fifth of the total number of its members shall apply under section 241. In addition, the Tribunal may waive any of the requirements under section 244 to enable members to apply under section 241.
Section 242
Section 242 of the Act provides powers of Tribunal. The Tribunal is empowered to pass an order as it deems fit. The order may provide for:
- Regulation Of Company’s Conduct In Future
- Purchase Of Shares Or Interests Of Any Members By Other Members Of The Company
- The Consequent Reduction Of Share Capital If A Company’s Shares Are Purchased By The Company Itself
- Limitation On Transfer And Allotment Of Shares
- Termination, Setting Aside, Or Modification Of An Agreement Between The Company And Managing Directors Or Another Person
- The Agreement May Be Terminated, Set Aside, Or Modified Only After Giving Due Notice And Obtaining The Consent Of The Concerned Person
- Removal Of Managing Director Or Other Directors
- Recovery Of Undue Gains Made By Managing Director, Manager, Director During His Employment; Recovered Funds Must Be Utilized By Transferring To Investor Education And Protection Fund Or Repayment To Identified Victims
- Manner As To The Appointment Of A New Managing Director After The Previous Director’s Removal
- Appointment Of Members Who May Report To The Tribunal On Matters Directed By It
- Imposition Of Costs
In addition, Tribunal can make any provisions that it deems just and equitable.
Under section 242(3) the company is required to file a certified copy of the order of Tribunal before the Registrar within 30 days of passing the order. Under section 242(4) the Tribunal may pass an interim order fit for regulating the company’s conduct.
Under section 242(4A) the Tribunal must record its decision specifying whether the respondent is a fit and proper person to manage the company affairs or not. Under section 242(8) if a company contravenes the Tribunal’s order it shall be liable to pay a fine of one lakh rupees which may extend to twenty-five lakh rupees. Every defaulting officer shall be liable to pay a fine of twenty-five thousand rupees which may extend up to one lakh rupees.
Conclusion
To conclude, section 241 provides the procedure for oppressed shareholders to file an application to the Tribunal for relief in cases of oppression and mismanagement. Only members who fulfill the criteria can apply under section 241. Section 244 provides the members who may apply under section 241. Companies having share capital have different criteria in comparison to the company without share capital. Section 242 deals with the powers of the Tribunal. The Tribunal has many powers to provide relief to the minority shareholders. Thus, oppression and mismanagement can be checked by the Tribunal and relief may be granted.
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