Oppression And Mismanagement under Companies Act, 2013

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

Relief against;

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

• An alteration in the board of directors or managers or in the ownership of the companies share,
• If it has no share capital, in its membership, or
• In any other member

Which will be prejudicial to the interest of Company/members

Application can be filed to the Tribunal by:

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 ,

• Regulation of the conduct of affairs of the company in future
• Purchase of shares /interests of any members of the company by other members
• If any shares purchased its consequent reduction of share capital
• Restriction on the transfer/allotment of shares
• Termination, setting aside or modification of any agreement between the company and its Managing Director , any other director or manager
• Termination, setting aside or modification of any agreement between the company and any other person
• The setting aside of

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.

• Removal of managing director ,manager or any director of the company
• Recovery of undue gain made by any managing director , manager or director and the manner of utilization of the recovery.
• Manner of appointment of managing director or manager of the company may subsequent to an order removing
• Appointment of such number of persons as directors.
• Imposition of costs as may be deemed fit by the tribunal.
• Any other matters which the tribunal thinks it is just and equitable

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

Requisite number of depositors for Class Action

• Shall not be less than 100 depositors/ such % of total number of depositor, whichever is less OR
• Any depositor/depositors to whom such company owes such % of total deposits of the company

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

• Restrain the company from committing act ultra vires to MOA/ AOA of the company
• Breach of any provisions of MOA/AOA
• To declare a resolution altering MOA/AOA of the company
• Restrain the company and its directors from acting on such resolution
• Restrain from an act contrary to the provisions of the act or any other law for the time being in force.
• Restrain from taking action contrary to any resolution passed by the member
• To claim damages /compensation/demand/suitable action from or against

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

• To seek any other remedy as the tribunal may deem fit

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

• Whether member/members acting in good faith or making an application for seeking an order.
• Whether there is any involvement of persons other than directors or officers of the company on any of the matters specified.
• Cause of action is one which the member or depositor could pursue in his own right rather than through an order.
• Views of the members/depositors of the company- no personal interest (direct or indirect) in the matter being proceeded.
• Whether the cause of action is an act or omission that is yet to occur ,whether the act or omission could be , and in the circumstances would likely to be

– Authorised by the company before it occurs, or

– Ratified by the company after it occurs.

• Where the course of action is an act or omission which is already occurred whether act or omission could be an act in the circumstances would be likely to be ratified by the company

Acceptance of application by Tribunal

• Issue public notice to all the members/ depositors of the case
• Consolidate all the similar application prevalent in any jurisdiction and appoint the lead applicant.
• Two class action application for the same cause of action shall not be allowed.
• Cost of expense shall be borne by the defrayed company/person responsible for an oppressive act.
• Any other order passed by the tribunal shall be binding

Contravention of section 245 by:

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.

Conclusion

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.

Disclaimer: This is only a knowledge sharing initiative and author does not intend to solicit any business or profession. I assume no responsibility for the consequences of use of such information.

About the author: Miss Suman Gupta is a Company secretary from Guwahati region of India. She is into whole time employment in a company with a post qualification experience of three plus years. She can be reached out at [email protected]. Any suggestions or queries can be mailed.