Bala Guru Dheeraj
In general, the Company functions through the decisions of the Board of Directors who are guided by the wishes of the majority subject to welfare of the company. The general principle of company law is that every member holding shares of a particular class will have equal rights to vote. It has therefore become a ‘Cardinal Rule’ of Company Law that prima facie, a majority of members of a company are entitled to exercise the powers of the company and generally control its affairs.
It is settled that the actions and decisions of the majority in a company as long as their decisions are within the framework of law and the articles of the company, those are also binding on the shareholders of the company
Due to Majority rules over company, there is a possibility that majority may adopt measures which are not favorable to others. The Company law had given a protection to such minority shareholders by giving an option to go to Tribunal for relief and the tribunal on such application shall take to prevent such oppression and mismanagement. The rules and provisions laid down under the Companies Act, 2013 is for the statutory protection of Investors
Meaning of Oppression:
The term Oppression has not been defined in the Act.
According to the dictionary meaning of word, it is any act exercised in a manner burdensome, harsh & wrongful.
The term ‘Oppression’ has been explained by Lord Cooper as, “The essence of the matter seems to be that the conduct complained of should at the lowest involve 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 the company is entitled to rely”
Explanation to the above:
- The complaining member must show that he is suffering from oppression in his capacity as a member and not in any other capacity.
- To constitute oppression, persons concerned with the management of the company’s affairs must in connection therewith be guilty of fraud, misfeasance or misconduct towards the members.
- But oppression, does not include mere domestic disputes between directors and members or lack of confidence between one set of members and others
Mere application for relief to the Tribunal doesn’t amount to oppression.
In Shanti Prasad Vs Kalinga Tubes Ltd. Case, it was held that any person claiming relief on the ground of oppression has to prove on the part of majority, the following
- lack of probity
- unfair conduct
- prejudice to him in the exercise of legal and proprietory rights as a shareholder
Acts / circumstances which were held to be Oppressive, according to the different cases and judgment:
1) Denial to shareholder of his right to vote and receive dividend
2) Appointment of a director at an EOGM of which no notice was offered to the minority.
3) An attempt to force new and more risky objects upon an unwilling minority
4) Exclusion of minority from profit participation
Acts / circumstances which were not held to be Oppressive, according to the different cases and judgment:
1) Failure to declare dividend
2) Refusal to declare more than moderate rate of dividend even if the profits earned could justify a higher rate of dividend
3) Denial of right of inspection to books of accounts
4) Failure to comply with formalities required in the matter of giving notice of general meeting
5) Drawing of salary by the director for his services rendered, even though the company is suffering losses
Meaning of mismanagement:
Mismanagement is the situation when there is gross misconduct and deviation from company’s original course of action which leads to substantial failures of company / loss to public / to company
Explanation to the above:
Mismanagement is said to be done
- If the affairs of the company are being conducted in a manner prejudicial to the interests of the company, or
- any material change has taken place in the management of control of the company,
- whether by an alteration in its Board of directors, or in the ownership of the company’s shares etc or in any other mode and
- that by reason of such change, it is likely that the affairs of the company will be conducted in a manner prejudicial to the interests of the company.
Acts / circumstances which were held to be mismanagement, according to the different cases and judgment:
1) Preventing directors from complying with their responsibilities and duties
2) Absence of company’s records causing prejudice to company’s business
3) Sale of assets at a low price and without compliance with the act
4) Non filing of documents with the Registrar of Companies
5) Violation of provisions of memorandum and articles of the company
6) Erosion of companies substratum due to irregularities in conduct of affairs
7) Misuse of funds
8) Continuation in office even after expiry of term of managing director
9) In fighting among the directors resulting in serious prejudice to the company
Acts / circumstances which were not held to be Mismanagement, according to the different cases and judgment:
1) Change in control and management of the company and the appointment of new directors which is not ultra vires to the company
2) Directors’ bona fide decision not to declare dividend and to accumulate available profits into reserves
3) Where directors of a company in financial difficulties arranged with the company’s creditors that the creditors may become shareholders and directors instead of being creditors
Study of famous case of Foss Vs Harbottle:
Context of the Case: The action was brought by two minority shareholders of a company against the directors by claiming that the property of the company had been misapplied and various mortgages were taken improperly over the company’s property
Judgment: The court dismissed the claim
Reasons for dismissing the claim:
Reason 1: The “proper plaintiff rule” is that a wrong done to the company may be vindicated by a company alone, as company has a separate legal entity
Reason 2: The “majority rule principle” states that if the alleged wrong can be confirmed or ratified by a simple majority of members in a general meeting, then the court will not interfere
Exceptions to the Rule in Foss vs Harbottle –
For protecting the rights of minority, certain exceptions to the above rule are recognized and applied
These exceptions are as follows:
1) Ultra Vires Acts
2) Fraud on the minority
3) Wrongdoers in Control
4) Resolution requiring Special Majority
5) Individual membership rights
6) Prevention of Oppression and Mismanagement
So the exception has been provided separately for prevention of oppression and mismanagement for protecting the rights of minority shareholders.
Sections covered under Prevention of Oppression and Management of Companies Act, 2013
Section 241: Application to Tribunal for relief to the Tribunal
The Central Government may on it is own, if it is of own opinion that the affairs of the Company are being conducted in a manner prejudicial to public interest, it may itself apply to the Tribunal for an order.
Section 242: Powers of Tribunal
If the tribunal is of the opinion that
- the company‘s affairs have been or are being conducted in a manner prejudicial to public interest or members or company; and
- to windup the company would unfairly prejudice such member or members, but that otherwise the facts would justify the making of 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 settle the matters that were applied for, make such order as it thinks fit.
Process after completion of an order by Tribunal:
General Powers to the Tribunal:
Some of the General powers and orders of the tribunal 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) Impose restrictions on the transfer or allotment of the shares of the company
d) the termination, setting aside or modification, of any agreement, entered between the company and the managing director, any other director or manager
e) 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 by the members to the Tribunal
f) removal of the managing director, manager or any of the directors of the company
g) recovery of undue gains made by any managing director, manager or director during the period of his appointment
h) 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
i) 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
j) imposition of costs as may be deemed fit by the Tribunal
k) any other matter for which, in the opinion of the Tribunal, it is just and equitable that provision should be made.
If Company contravenes any order of the Tribunal,
1) Company shall be punishable with fine which shall not be less than one lakh rupees but which may extend to twenty-five lakh rupees and,
2) 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 243: Consequences of termination or modification of certain agreements
Section 244: Right of members to apply for Tribunal
Section 245: Class Action
A class action suit refers to a lawsuit that allows a large number of people with a common interest in a matter to sue or be sued as a group.
It is a procedural device enabling one or more plaintiffs to file litigation on behalf of a larger group or class, wherein such class has common rights and grievances.
Members or depositors or any class of them, may file a class action suit if they are of the opinion that the management or conduct of the affairs of the company are being conducted in a manner prejudicial to the interests of the company or its members or depositors seeking all or any of the following orders, namely:-
a) to restrain the company from committing an act which is ultra vires the articles or memorandum of the company
b) to restrain the company from committing breach of any provision of the company’s memorandum or articles
c) to declare a resolution altering the memorandum or articles of the company as void if the resolution was passed by suppression of material facts or obtained by mis-statement to the members or depositors
d) to restrain the company and its directors from acting on such resolution
e) to restrain the company from doing an act which is contrary to the provisions of this Act or any other law for the time being in force
f) to restrain the company from taking action contrary to any resolution passed by the members
g) to claim damages or compensation or demand against the Company or its directors, auditor, expert or advisor
The Act and the Courts try to maintain a fine balance between the Right of Majority to rule (i.e. the Rule laid down in Foss v. Harbottle) and the protection of interests of the minority shareholders through the prevention of Oppression and Mismanagement.
Upon careful examination of the provisions of the Companies Act, 2013 it can be ascertained that legislative intent in Companies Act, 2013 is to safeguard the minority interest in a more comprehensive manner. The provisions of Companies Act, 2013 not only requires proper implementation upon addressing the present gap, but also requires creating confidence in the minority shareholders with respect to the institutional and regulatory mechanism which ensures that interest of minority shareholders shall be given due consideration.