CONCEPT OF OPPRESSION AND MISMANAGEMENT

Section 241-246 of the Companies Act, 2013 lays down the provisions to effectively deal with oppressing and mismanagement in a company.

The provisions regulating oppression and mismanagement in companies are an integral part of corporate governance. They ensure that interests of a company are protected and that no shareholder or member of the company faces undue bias or prejudice.

Corporate democracy finds its roots in the concept of majority rule. The principle of majority originated in the rule of Foss v Harbottle which provided that the individual shareholders have no cause of action in law for any wrongdoing by the corporation and the action brought about in respect of such losses shall be brought either by the corporation itself or through a derivative action.

While majority rule is the common norm, it often overshadows minority rights. The objective is to strike a balance between the interest of the small/individual shareholders and the effective control of the company. Therefore, the Indian company law, 2013 has put in place section 241 to 246 to safeguard minority rights.

The term ‘oppression’ 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. Whereas mismanagement implies that the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner prejudicial to the interests of the company.

Provisions relating to oppression and mismanagement are found in Sections 241-246 of the Companies Act, 2013. The relevant provisions and their operation are discussed hereinunder.

Any member of the company who has a complains that the affairs of the company are being conducted in an oppressive manner or any material change has taken place which is not in the interest of its members then he has a right to apply to the tribunal.

Such an application can also be made by the Central Government to the tribunal. If the tribunal is of the opinion that the company’s affairs are being conducted in a manner prejudicial to the interest of the public, members or company then the tribunal shall make such orders as he may deem fit on whether the company should be wound up or not.

Where in the opinion of the Central Government there exist circumstances suggesting that––

(a) any person concerned in the conduct and management of the affairs of a company is or has been in connection therewith guilty of fraud, misfeasance, persistent negligence or default in carrying out his obligations and functions under the law or of breach of trust;

(b) the business of a company is not or has not been conducted and managed by such person in accordance with sound business principles or prudent commercial practices;

(c) a company is or has been conducted and managed by such person in a manner which is likely to cause, or has caused, serious injury or damage to the interest of the trade, industry or business to which such company pertains; or

(d) the business of a company is or has been conducted and managed by such person with intent to defraud its creditors, members or any other person or otherwise for a fraudulent or unlawful purpose or in a manner prejudicial to public interest, the Central Government may initiate a case against such person and refer the same to the Tribunal with a request that the Tribunal may inquire into the case and record a decision as to whether or not such person is a fit and proper person to hold the office of director or any other office connected with the conduct and management of any company.

The person against whom a case is referred to the Tribunal under sub-section (3) of section 241 of companies act 2013, shall be joined as a respondent to the application.

Every application under sub-section (3) of section 241 of companies act 2013––

(a) shall contain a concise statement of such circumstances and materials as the Central Government may consider necessary for the purposes of the inquiry; and

(b) shall be signed and verified in the manner laid down in the Code of Civil Procedure, 1908, for the signature and verification of a plaint in a suit by the Central Government.

Functioning of companies, of any significant size in terms of issued shares, is based on the broad rule of corporate democracy, i.e., the company makes decisions on its various affairs based on the rule of majority voting, in one form or another, with votes being cast by its shareholders to approve or disapprove of a particular course of action. However, it may sometimes be the case that the decisions of the majority are prejudicial to the company or to the public interest, or prejudicial or oppressive to any of its members. The provisions relating to oppression and mismanagement are included in company law as exception to the majority rule, with a view to prevent misuse or abuse of the voting power of the majority shareholders.

APPLICATION CAN BE MADE:

Section 241 provides that members can approach the National Company Law Tribunal (“Tribunal”) in two cases.

First, if the affairs of the company have been or are being conducted in a manner prejudicial to public interest or in a manner prejudicial or oppressive to them or any other member(s), or in a manner prejudicial to the interests of the company.

Secondly, if there is a material change in the management and control of the company by an alteration in the board of directors, membership or share capital, or in any other manner, and the change is likely to cause the affairs of the company to be conducted in a manner prejudicial to the affairs of the company or to its members or any class of members. However, if such change is brought about in the interest of creditors, debenture-holders, or any class of shareholders of the company then the change will not qualify as a material change.

WHO CAN MAKE THE APPLICATION?

Section 244 gives the following people the right to apply for an action under Section 241: in case of a company having a share capital,

not less than one hundred members of the company or

not less than one-tenth of the total number of its members, whichever is less,

or any member or members holding not less than one tenth of the issued share capital of the company, subject to the condition that the applicant or applicants has or have paid all calls and other sums due on his or their shares;

in the case of a company not having a share capital,

not less than one-fifth of the total number of its members.

The Tribunal however can waive the aforementioned numerical requirement if it deems such waiver to be necessary. The National Company Law Appellate Tribunal (“NCLA T”) in case of Cyrus Investments Pvt. Ltd. & Anr. v. Tata Sons Ltd.& Ors. devised a four-step analysis to determine whether the numerical requirement of Section 244 should be waived or not. The four-steps proposed by NCLA T are:

Whether the applicants are member(s) of the company in question? If the answer is in negative i.e., the applicant(s) are not member(s), the application is to be rejected outright. Otherwise, the Tribunal will look into the next factor.

Whether (proposed) application under Section 241 pertains to ‘oppression and mismanagement’? If the Tribunal on perusal of proposed application under Section 241 forms opinion that the application does not relate to ‘oppression and mismanagement’ of the company or its members and/or is frivolous, it will reject the application for ‘waiver’. Otherwise, the Tribunal will proceed to notice the other factors.

Whether similar allegation of ‘oppression and mismanagement’, was earlier made by any other member and stands decided and concluded?

Whether there is an exceptional circumstance made out to grant ‘waiver’, so as to enable members to file application under Section 241 etc.?

Therefore, in light of the four-step analysis applied to the facts of the case, NCLAT granted waiver to the Appellant/Applicant though it fell short of the 10% requirement.

Further, under Section 241(2) the Central Government can also make an application to the Tribunal if it is of the opinion that the affairs of the company are being conducted in a manner prejudicial to the public interest.

WHAT CAN THE TRIBUNAL DO?

Section 242 of companies act 2013, (1) If, on any application made under section 241, the Tribunal is of the opinion—

(a) that the company’s affairs have been or are being conducted in a manner prejudicial or oppressive to any member or members or prejudicial to public interest or in a manner prejudicial to the interests of the company; and

(b) that to wind up the company would unfairly prejudice such member or members, but that otherwise the facts would justify the making of a winding-up order on the ground that it was just and equitable that the company should be wound up,

the Tribunal may, with a view to bringing to an end the matters complained of, make such order as it thinks fit.

(2) Without prejudice to the generality of the powers under sub-section (1), an order under that sub-section may provide for—

(a) the regulation of conduct of affairs of the company in future;

(b) the purchase of shares or interests of any members of the company by other members thereof or by the company;

(c) in the case of a purchase of its shares by the company as aforesaid, the consequent reduction of its share capital;

(d) restrictions on the transfer or allotment of the shares of the company;

(e) the termination, setting aside or modification, of any agreement, howsoever arrived at, between the company and the managing director, any other director or manager, upon such terms and conditions as may, in the opinion of the Tribunal, be just and equitable in the circumstances of the case;

(f) the termination, setting aside or modification of any agreement between the company and any person other than those referred to in clause (e):

Provided that no such agreement shall be terminated, set aside or modified except after due notice and after obtaining the consent of the party concerned;

(g) the setting aside of any transfer, delivery of goods, payment, execution or other act relating to property made or done by or against the company within three months before the date of the application under this section, which would, if made or done by or against an individual, be deemed in his insolvency to be a fraudulent preference;

(h) removal of the managing director, manager or any of the directors of the company;

(i) recovery of undue gains made by any managing director, manager or director during the period of his appointment as such and the manner of utilisation of the recovery including transfer to Investor Education and Protection Fund or repayment to identifiable victims;

(j) the manner in which the managing director or manager of the company may be appointed subsequent to an order removing the existing managing director or manager of the company made under clause (h);

(k) appointment of such number of persons as directors, who may be required by the Tribunal to report to the Tribunal on such matters as the Tribunal may direct;

(l) imposition of costs as may be deemed fit by the Tribunal;

(m) any other matter for which, in the opinion of the Tribunal, it is just and equitable that provision should be made.

(3) A certified copy of the order of the Tribunal under sub-section (1) shall be filed by the company with the Registrar within thirty days of the order of the Tribunal.

(4) The Tribunal may, on the application of any party to the proceeding, make any interim order which it thinks fit for regulating the conduct of the company’s affairs upon such terms and conditions as appear to it to be just and equitable.

(4A) At the conclusion of the hearing of the case in respect of sub-section (3) of section 241, the Tribunal shall record its decision stating therein specifically as to whether or not the respondent is a fit and proper person to hold the office of director or any other office connected with the conduct and management of any company.

(5) Where an order of the Tribunal under sub-section (1) makes any alteration in the memorandum or articles of a company, then, notwithstanding any other provision of this Act, the company shall not have power, except to the extent, if any, permitted in the order, to make, without the leave of the Tribunal, any alteration whatsoever which is inconsistent with the order, either in the memorandum or in the articles.

(6) Subject to the provisions of sub-section (1), the alterations made by the order in the memorandum or articles of a company shall, in all respects, have the same effect as if they had been duly made by the company in accordance with the provisions of this Act and the said provisions shall apply accordingly to the memorandum or articles so altered.

(7) A certified copy of every order altering, or giving leave to alter, a company’s memorandum or articles, shall within thirty days after the making thereof, be filed by the company with the Registrar who shall register the same.

Section 242 lays down the powers of the Tribunal: it states that on receipt of application if the Tribunal is of the opinion that the affairs of the company are being conducted in a manner prejudicial or oppressive to any member(s), or prejudicial to the public interest or interest of the company, and that the Tribunal would be justified in winding up the company on just and equitable grounds but doing so will unfairly prejudice such members or members of the company, then it can pass any order as it may deem fit with a view to end the matters being complained of in the application. Further, Section 242(2) provides a non-exhaustive list of actions that the Tribunal can take against companies if their actions are found to be oppressive. The list in Section 242(2) includes powers to regulate the conduct of affairs of the company in future, or restrict the allotment or transfer of the shares of the company, or remove managing director or directors of the company etc. Further, Section 242(4) allows the Tribunal to pass an interim order and thereafter a final order.

Interlink between Section 241-246 with section 206-229

Chapter XIV (Sections 206 – 229) of the Companies Act, 2013 (CA 2013) deals with the provisions related to Inspection, Inquiry and Investigation. Section 226 of CA 2013 provides for voluntary winding up of company, etc., not to stop investigation proceedings.

As per section 210. (1) Where the Central Government is of the opinion, that it is necessary to investigate into the affairs of a company, —

(a) on the receipt of a report of the Registrar or inspector under section 208;

(b) on intimation of a special resolution passed by a company that the affairs of the company ought to be investigated; or

(c) in public interest, it may order an investigation into the affairs of the company.

(2) Where an order is passed by a court or the Tribunal in any proceedings before it that the affairs of a company ought to be investigated, the Central Government shall order an investigation into the affairs of that company.

(3) For the purposes of this section, the Central Government may appoint one or more persons as inspectors to investigate into the affairs of the company and to report thereon in such manner as the Central Government may direct.

The Tribunal may as per section 213,—

(a) on an application made by—

(i) not less than one hundred members or members holding not less than one-tenth of the total voting power, in the case of a company having a share capital; or

(ii) not less than one-fifth of the persons on the company’s register of members, in the case of a company having no share capital, and supported by such evidence as may be necessary for the purpose of showing that the applicants have good reasons for seeking an order for conducting an investigation into the affairs of the company; or

(b) on an application made to it by any other person or otherwise, if it is satisfied that there are circumstances suggesting that—

(i) the business of the company is being conducted with intent to defraud its creditors, members or any other person or otherwise for a fraudulent or unlawful purpose, or in a manner oppressive to any of its members or that the company was formed for any fraudulent or unlawful purpose;

(ii) persons concerned in the formation of the company or the management of its affairs have in connection therewith been guilty of fraud, misfeasance or other misconduct towards the company or towards any of its members; or

(iii) the members of the company have not been given all the information with respect to its affairs which they might reasonably expect, including information relating to the calculation of the commission payable to a managing or other director, or the manager, of the company,

order, after giving a reasonable opportunity of being heard to the parties concerned, that the affairs of the company ought to be investigated by an inspector or inspectors appointed by the Central Government and where such an order is passed, the Central Government shall appoint one or more competent persons as inspectors to investigate into the affairs of the company in respect of such matters and to report thereupon to it in such manner as the Central Government may direct:

Provided that if after investigation it is proved that—

(i) the business of the company is being conducted with intent to defraud its creditors, members or any other persons or otherwise for a fraudulent or unlawful purpose, or that the company was formed for any fraudulent or unlawful purpose; or

(ii) any person concerned in the formation of the company or the management of its affairs have in connection therewith been guilty of fraud, then, every officer of the company who is in default and the person or persons concerned in the formation of the company or the management of its affairs shall be punishable for fraud in the manner as provided in section

As per section 226 of companies act 2013, An investigation under this Chapter may be initiated notwithstanding, and no such investigation shall be stopped or suspended by reason only of, the fact that

(a) an application has been made under section 241;

(b) the company has passed a special resolution for voluntary winding up; or

(c) any other proceeding for the winding up of the company is pending before the Tribunal:

Provided that where a winding up order is passed by the Tribunal in a proceeding referred to in clause (c), the inspector shall inform the Tribunal about the pendency of the investigation proceedings before him and the Tribunal shall pass such order as it may deem fit:

Provided further that nothing in the winding up order shall absolve any director or other employee of the company from participating in the proceedings before the inspector or any liability as a result of the finding by the inspector.

SOME SIGNIFICANT RULINGS:

The recent case of Tata Consultancy Services Limited v. Cyrus Investments Pvt. Ltd. & Ors. is a landmark decision on oppression and mismanagement. In this case Mr. Cyrus Mistry was replaced from the position of non-executive director with Mr. Ratan Tata on the board of Tata Sons, by a resolution of the companies’ Board of Directors. Further, he was also removed from directorship in various companies of the Tata Group, by resolutions passed at shareholder meetings. Upon his removal, two companies by the name of Cyrus Investments Private Limited and Sterling Investment Corporation Private Limited that held shares of Tata Group of Companies filed a complaint under Sections 241, 242 and 243 alleging prejudice, oppression and mismanagement. Mr. Mistry had controlling shareholding in both these companies.

The NCLT held that there was no oppression or mismanagement on a mixture of facts and law. The NCLAT on appeal reversed the judgement, went one step further and reinstated Mr. Mistry as the director of Tata Sons and few other companies in the Tata Group. Various companies from Tata Group filed appeals to the Supreme Court (“SC”) which were clubbed and heard together. While holding that affairs of the Tata Group do not amount to oppression, the SC made the following important observations:

Removal from position of directorship is not sufficient to make out a case of oppression and mismanagement, and the NCLT can dismiss such complaints. However, relief under Section 242 can be granted if the removal is carried out in accordance with law but “forms part of a larger design to oppress or prejudice the interest of some members.”

Winding up of a company upon finding of oppression/mismanagement can only take place when there is a justifiable lack of confidence in the conduct and management of the company’s affairs. A mere lack of confidence between majority and minority shareholders will not be sufficient.

Sections 241 and 242 do not give the Tribunal powers of reinstatement.

Court while deciding a case under Section 241 can only look at past conduct or conduct which is going on. An apprehension of future misconduct arising out of the Articles of the company cannot be looked into by the Tribunal under a Section 241 complaint.

Power of Government to make complaints:

Review of opinion formed by the Central Government under Section 241(2):

Another remarkable judgement relating to oppression and mismanagement was the 2021 judgement of Union of India v. Delhi Gymkhana Club. In this case the petition for oppression and mismanagement was filed by Government of India under Section 24 1(2). The NCLAT discussed the scope of Section 24 1(2) and made the following observations:

when the Central Government files a complaint under Section 24 1(2), it is required to record its opinion as regards affairs of the company being conducted in a manner prejudicial to public interest, and recording of such opinion is a sine qua non for applying to the Tribunal under Section 24 1(2).

The Tribunal cannot review sufficiency or otherwise of material based on which the government has formed its opinion, more so when no mala fide is attributed to the Central Government.

The phrase ‘public interest’ cannot be stretched so far as to include all Indian citizens. It would suffice if the rights, security, economic welfare, health and safety of even a section of the society -like the candidates seeking membership from the category of common citizen- are affected notwithstanding the fact that they are only a few individuals.

Power of Tribunals under certain circumstances:  Power to pass interim order:

In Smt. Smruti Shreyans Shah v. The Lok Prakashan Ltd. & Ors the NCLAT held that Tribunal can issue interim orders under Section 242, if a prima facie case is made out. It observed that the making of an interim order by the Tribunal across the ambit of Section 242(4) postulates a situation where the affairs of the company have not been or are not being conducted in accordance with the provisions of law and the Articles of Association. For carving out a prima facie case, the member alleging oppression and mismanagement has to demonstrate that he has raised fair questions in the Company Petition and which require a probe.

Power to decide matter pending before civil court:

The SC in Aruna Oswal v Pankaj Oswal & Ors., held that since questions relating to right, title, and interest in shares as a result of nomination were pending before a civil court which had ordered status quo in relation to the SC matter, it would not be open to a shareholder whose title to the shares had been disputed and who was not eligible to maintain a petition under Section 244, to agitate matters relating to the disputed shares, by way of a petition for oppression and mismanagement, including by seeking a waiver of the requirements under Section 244.

Power to decide matters in presence of arbitration clause:

In Dhananjay Mishra v Dynatron Services Private Limited & Ors. the NCLAT held that acts of non-service of notice of meetings, financial discrepancies and non-appointment of directors being matters specifically dealt with under Companies Act and falling within the domain of the Tribunal to consider grant of relief under Section 242 of Companies Act render the dispute non-arbitrable though it cannot be disputed as a broad proposition that the dispute arising out of breach of contractual obligations referable to the MOUs or otherwise would be arbitrable.

Power to implead auditors of the company under investigation:

In Deloitte Haskins & Sells LLP v Union of India, NCLAT allowed the government to implead auditors of a company in case of fraud and mismanagement. In this case, a petition was filed by the Central Government against Infrastructure Leasing & Financial Services (“IL&FS”) and IL&FS Financial Services (IFIN) inter-alia under Section 24 1(2) alleging fraud and mismanagement and conduct of affairs which were prejudicial to public interest. The Central Government also sought to implead IL&FS and IFIN’s statutory auditing firms and the partners of the firm who were involved in the audit (those who were still working with the firm or who had resigned). This was assailed by the auditors on the grounds that they were not necessary parties to the proceedings and that they had resigned as auditors prior to the institution of the proceedings by the Central Government. Rejecting the contention, the NCLAT held that the powers of the Tribunal under Section 242 are very wide and it would be open to the Tribunal to hear any party including the former auditors, before passing an order, in order to protect public interest or the interests of the company.

Concluding remarks:

Although the Tribunal has wide powers under Section 242 to pass any order as it may deem fit to bring an end to the matters complained of, its capability to do so is conditioned by Sections 241, 242 and 244. For obtaining orders under Section 242, the applicant has first to pass the test of meeting the numerical requirement under Section 244, and then to satisfy the Tribunal on the requirements of Sections 241 and 242 –viz. oppressive or prejudicial conduct, and a just and equitable case for winding up of the company.

These requirements have thresholds that are somewhat high since the numerical requirement can only be waived in exceptional cases, and a mere lack of confidence between members and directors will not amount to just and equitable grounds for winding up. The provisions of oppression and mismanagement coupled with precedents set by the courts can thus be seen to strike a balance between the rights of the majority and minority shareholders in a company. They provide a way to set the house in order.

AD V. AKASH TYA GI CS, LLM

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