The word oppression in common parlance refers to a situation or an act or instance of oppressing or subjecting to cruel or unjust impositions or restraints.
According to Lord Keith,” Oppression means, lack of morality and fair dealings in the affairs of the company which may be prejudicial to some members of the company
The term mismanagement refers to the process or practise of managing ineptly, incompetently, or dishonestly.
However it is to be noted that the terms are not defined under the companies act and is left to the discretion of the court to decide on the facts of the case whether there is oppression or mismanagement of minority or not.
Instances which can be termed as mismanagement
1. Preventing directors from functioning
2. Violations of statutory provisions
3. Violations of provisions of MOA & AOA of the company
4. Misuse of funds etc
A company is a distinct entity separate from the owners of the company where management and ownership is separated by a thin line of roles and responsibilities bestowed upon themselves. In a broad sense it is a group of persons who have come together or who have contributed money for some common purpose and have incorporated themselves into distinct legal entity. The whole scheme of the Companies Act, is to ensure proper conduct of the affairs of the company in public interest and preservation of image of 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 .
As India is a democratic country, the companies being a legal citizen also bestows in itself the power of democracy. Corporate democracy is more vulnerable to it because it is reckoned with the number of shares and not with number of individuals involved. The rule of majority has been made applicable to the management of the affairs of the company. The members pass resolution on various subjects either by simple or three-fourth majority. Once resolution is passed by majority it is binding on all members. As a result, court will not ordinarily intervene to protect the minority interest affected by resolution. However there are exceptions to this rule- Prevention of Oppression and mismanagement being one such ground.
Hence, it is to be noted that this section can be invoked whenever there is oppression of the minority or there is mismanagement of the affairs of a company which is prejudicial to the public interest or to the interest of the company and its members. Thus, where a director is oppressed he does not have remedy under this section unless he is also a shareholder of the company. This section also specifies the circumstances in which an application may be made to the Tribunal by an member of a company or by the central Government for relief in cases of oppression and mismanagement.
Application to Tribunal for Relief (Section 241)
1. Application can be filed if it is likely that the affairs of the company will be conducted in a manner prejudicial to
i. Its interests or
ii. Its members
iii. Any class of members
2. The Central government in its own opinion apply to the tribunal
i. Any affairs have been /being conducted in a manner
-Prejudicial to public interest ,
-Prejudicial or oppressive to any member or
-Prejudicial to the interest of the company .
Material change, not being a change brought about by or interest of creditors (inclusive debenture holders or any class of shareholders)
Change may be through
Which will be prejudicial to the interest of Company/members
Application can be filed to the Tribunal by:
|Company having share capital||-Not less than 100 members or 1/10th of total members, whichever is less or
-Any member/members holding not less than 1/10th of issued capital subject to no dues in respect of those share held
|Company not having share capital||Not less than 1/10th of total members|
Powers of Tribunal (Section 242)
1. If the tribunal found that the affairs of the company is being conducted in a manner prejudicial to the interests of the company / its members/ to public interest and if wind up is unfairly prejudice to such member /members and the facts would justify that it is just and equitable to wind up the company- Tribunal may make such order as it thinks fit.
2. Other than the general powers specified , an order may provide for ,
i. Any transfer , delivery of goods
ii. Payment, execution or
iii. 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.
3. A certified copy of the Order of the tribunal to be filed with ROC within 30 days of the order of the tribunal
4. Tribunal has the power to make interim order.
5. Alteration to MOA/AOA through the order of the tribunal
6. Altered provisions shall apply
7. Certified copy of the altered order shall be filed with the registrar.
Contravention of Section 242(5) Company ‘ Fine of Rs. l,oo,ooo to Rs. 25,oo,ooo Every officer in Default ‘ imprisonment up to 6 months ‘ Fine of Rs. 25,000 to Rs. 1,oo,ooo
Consequences of termination/modification of certain agreements (sec, 243)
Where an order made under section 242 terminates, sets aside or modifies an agreement, such order shall not give rise to any claims whatever against the company by any person for damages or for compensation for loss of office or in any other respect either in pursuance of the agreement or otherwise .No managing director or other director or manager whose agreement is so terminated or set aside shall, for a period of five years from the date of the order terminating or setting aside shall, for a period of five years from the date of the order terminating or setting aside the agreement, without the leave of the Tribunal be appointed or act, as the managing director or other director or manager of the company.
Consequences of termination/modification of certain agreements Contravention of Section 243(1)(b)
The person knowingly acting as Managing Director/ Director/Manager and every other director who is knowingly as party to contravention shall punishable with imprisonment up to 6 months or fine up to Rs. 5,00,000 or both .
Class Action (Section 245)
Class action can be initiated by such number of member/members, depositor/depositors,or any class of them indicated under sub section (2) of section 245
Requisite number of member for class Action
|Company having share capital||-Not less than 100 members or such % of its total number of members of the company whichever is less or
-Any member/members holding not less than such % of the issued share capital of the company
|Company having no share capital||Not less than 1/5th of the total number of its members.|
Requisite number of depositors for Class Action
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
a. Company/Directors for any fraudulent, unlawful or wrongful or omission or conduct or its 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
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
– Authorised by the company before it occurs, or
– Ratified by the company after it occurs.
Acceptance of application by Tribunal
Contravention of section 245 by:
|Company||Fine of Rs 5,00,000 to Rs. 25,00,000|
|Every officer in default||-Punishment with imprisonment up to 3 years
– Fine of Rs.25,000 to Rs.1,00,000
|If any application filed to tribunal is found to be frivolous or vexatious||-Reasons to be recorded in writing
-Reject the application
-Make an order that the applicant shall pay the opposite party such cost, not exceeding Rs 1,00,000
Application of certain provisions to proceedings under section 241 or section 245 (Section 245)
The provisions of section 337 to 341 (both inclusive) shall apply mutatis mutandis, in relation to an application made to the tribunal under section 241 or section 245.
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.
Author: ACS Suman Gupta.
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