Relevant Chapter: Chapter XVI

Relevant Sections: Sections 241- 246 of the Companies Act, 2013

SYNOPSIS

1. The terms Oppression & Mismanagement are not defined under the Companies Act.

2. It is decided by the Court on the basis of facts & merits of the cases.

3. Oppression & Mismanagement refer to the practices of managing dishonestly, or any violation of MOA & AOA, Statutory Provisions, Rules, Regulations, or Any fraudulent Practices etc.

The provision of these section invoked only when something prejudice is caused-

(a) to the interest of the Company, or

(b) to the interest of the members.

SECTION:241- Application to the Tribunal for relief in case of Oppression-

Any member of a company who is of opinion that-

(a) The affairs of a company are conducted in prejudice to public interest, any member or company’s interest, or

(b) any Material change, not being a change brought about by or interest of creditors that can be through-

  • An alteration in the board of directors or managers or in the ownership of the Company’s shares,
  • If it has no share capital, in its membership, or
  • In any other manner.

which will be prejudicial to the interest of Company/members, may apply to the Tribunal, provided such member has a right to apply under section 244, for an order under this Chapter.

(3) 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-

(i) guilty of fraud,

(ii) misfeasance,

(iii) persistent negligence or

(iv) 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.

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

(5) Every application under sub-section (3)

(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.

SECTION:242 – The Power of the Tribunal

On receipt of the application u/s 241 the Tribunal may pass the order of the winding up of the Company on the basis of grounds which are just and equitable to the Winding up of the Company or may pass any other order as it deems fit.

The Tribunal may pass the following orders other than to windup the company.

1. Regulation of the conduct of affairs of the company in future

2. Purchase of shares /interests of any members of the company by other members

3. If any shares purchased its consequent reduction of share capital

4. Restriction on the transfer/allotment of shares

5. Termination, setting aside or modification of any agreement between the company and its Managing Director, any other director or manager

6. Termination, setting aside or modification of any agreement between the company and any other person

7. The setting aside of any transfer, delivery of goods, Payment, execution or 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.

8. Removal of managing director, manager or any director of the company

9. Recovery of undue gain made by any managing director, manager or director and the manner of utilization of the recovery.

10. Manner of appointment of managing director or manager of the company may subsequent to an order removing

11. Appointment of the such number of persons as directors.

12. Imposition of costs as may be deemed fit by the tribunal.

13. Any other matters which the Tribunal thinks it is just and equitable

A CTC of the order of the Tribunal shall be filed by the company with the ROC within 30 days of the order of the Tribunal.

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.

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.

Where an order of the Tribunal 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.

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.

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.

If a company contravenes the provisions of sub-section (5), the company shall be punishable with fine-

(A) which shall not be less than one lakh rupees

(B) but which may extend to twenty-five lakh rupees

(C) and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to six months or with fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupees, or with both.

SECTION:244- Right to apply U/S 241

(1) The following members of a company shall have the right to apply to the Tribunal u/s 241

(a) in the case of a company having a share capital,

(i) not less than one hundred members of the company or

(ii) not less than one-tenth of the total number of its members, whichever is less, or

(iii) 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;

(b) in the case of a company not having a share capital, not less than one-fifth of the total number of its members:

Provided that the Tribunal may, on an application made to it in this behalf, waive all or any of the requirements specified in clause (a) or clause (b) so as to enable the members to apply under section 241.

Explanation. —For the purposes of this sub-section, where any share or shares are held by two or more persons jointly, they shall be counted only as one member.

(2) Where any members of a company are entitled to make an application under subsection (1), any one or more of them having obtained the consent in writing of the rest, may make the application on behalf and for the benefit of all of them.

‘The Tata vs. Mistry’

(1) Mistry, whose family is the single biggest shareholder in Tata group, was named group chairman in November 2011 and took over in December 2012 after the retirement of Ratan Tata.

(2) It was 24 October 2016 when Ratan Tata took over as the interim chairman and the board of Tata Sons dismissed Mistry. Mistry claimed that Articles of association of Tata Sons were biased against the minority shareholders’ rights whereas Tata Sons called it as a victimisation stunt.

(3) This came into light following a huge conflict of interest wherein Mistry wanted to raise funds for Orissa elections, but the board had provisions regarding parliamentary elections only.

(4) Mistry also had an objection to the fact that Crores of Rs were being paid to the directors of loss-making companies, but minority shareholders were not paid dividends in the name of loss.

(5) Further while taking charge of Tata company Mistry had promised that Tata & sons will no longer engage with Shapoorji Pallonji for engineering contracts(which belongs to Cyrus family),so as to avoid conflict of interests but contrary to this it was Mistry who was instrumental in awarding contracts worth Rs 2000 crores to the very same business corporation.

(6) There were many instances where Mistry had tried to concentrate power and took decisions without the prior approval of the board. It was to end this feud between Tata and Mistry that he was ousted. Mistry’s investment firms Cyrus Investments Pvt Ltd and Sterling Investment Corp. Pvt Ltd on 20 December 2016, filed the NCLT petition under Sections 241 and 242 of the Companies Act, which dealt with oppression and mismanagement. The Mistry camp had alleged that his removal as chairman, and subsequently as director, of Tata Sons was a result of oppression by Tata Sons, the company in which Tata Trusts owns 66%.

(7) The second part of the plea focused on the professed mismanagement by the Tata Sons board and Ratan Tata, which provoked revenue loss to the group. The Mistry family owned 18.4% stake in Tata Sons, though it is holding with voting rights was less than 4%. According to Mistry’s petition, Tata Sons abused the articles of association and the governance framework was abused by Tata Sons in order to enable Ratan Tata to attain control of the company.

(8) Mumbai division bench of NCLT presided over by B.S.V. Prakash Kumar and V. Nallasenapathy, dismissed the petition filed by the Mistry family’s investment firms on merits. It was concluded that he lost his position as a chairman from India’s largest conglomerate because its shareholders had lost trust in him. All allegations of Mistry were outrightly rejected by the tribunal and was attributed as a right to remove him

(9) There was no merit found on issues raised pertaining to minority shareholder u/s 241 and 242 of companies act. “We have not found any purported merit or issues raised by the minority shareholder in his petition under Section 241 and 242 of The Companies Act, 2013,” the NCLT bench ruled. It also found no merit in Mistry’s argument that Ratan Tata and Tata Sons’ trustee N.A. Soonawala interfered in the governance of Tata Sons

(10) The tribunal reaffirmed that corporate governance is a collective responsibility and Mistry’s charge of lacuna in it finds no place of merit. The Tata group welcomed the ruling, saying it substantiates the position of Tata Trusts and Tata Sons.

(11) Chandrashekharan said that the Tata group had been always committed to transparency and corporate governance and will continue the same. Ratan Tata said that the judgement justified actions that Tata Sons took in October 2016.

(12) Mistry termed the ruling disappointing and assured that an appeal of merits will be pursued. He also said that he will continue to strive for the protection of minority shareholders from the brutal oppression of the majority. This judgement concluded a phase of Mistry’s continuing battle with Tata Sons, where he had questioned the rationale behind the sale of Tata Communications to Bharti Airtel Ltd, debt-driven acquisitions by Tata Steel Ltd and its European merger with ThyssenKrupp AG, among others Mistry’s investment firms have the option of challenging the ruling at the National Company Law Appellate Tribunal (NCLAT) and later at the Supreme Court.

(13) Sanjay Asher, the senior partner at law firm Crawford Bayley & Co said that the board had the power to replace its non-executive chairman and the shareholders had the power to appoint or remove a director and no court can take away that power from the shareholder.

(14) According to Asher, this ruling would allow the group to pivot more on the business without worrying about any other further adverse impact of the dispute.

(15) To evaluate as to what went wrong, the inside sources say the feud revolved around 3 major issues. First, one being the Irish citizenship of Mistry which he was not willing to give up despite multiple requests by the Tata’s. Tata always wanted a complete Indian identity to take over this job and stated that this was the prime reason why Mr. John Thain of USA was not offered this place in the company despite his humanguous qualifications. Secondly, it was awarding of huge contracts from Tata &sons to Mistry’s own business group ‘Shapoorji Paloonji’.

(16) It became an important major reason for conflict of interests and poor governance by Mistry. Thirdly Mistry tried breaking the age-old supremacy of Tata sons by making 5 members of GEC (group executive council), which was set up by Mistry himself, to supervise the CEOs of the individual group companies. The foremost learning in this conflict was all about TRUST.

(17) Mistry did not trust Tata’s choice and then lost confidence in his own choice as well.He fell short of Tata’s yardstick. His job was not limited to pursuing the vision alone but to also win the confidence and faith of the shareholders along.

(18) A leader must also stand up and quit if the situation so demands. Perhaps Tata could have found a better exit for their own chairman had the internal conflicts not found a place in the public arena.

*TO BE CONTINUE…………….

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