Study Notes: Oppression and Management: Meaning, Rights and Remedies

By Anish Sinha 13 Minutes Read

Introduction

Oppression and mismanagement in a company’s affairs have ample and vital consequences for its shareholders and stakeholders. The Companies Act, 2013 provides a statutory remedy under Sections 241 and 242, not only this provides a legal solution but also empowers the National Company Law Tribunal (NCLT) to intervene and take appropriate action to protect the interests of the company and its members.

One important piece of legislation, the Companies Act[1] passed with the intention of bolstering corporate governance and safeguarding the interests of a business entity’s stakeholders. The main goal of the act is to defend both the public interest and the interests of investors in businesses, with modern business statutes. It further includes specific measures to combat oppression and mismanagement. In addition it provides protection to the minority by giving exceptions to the majority’s supremacy norm.

Chapter XVI of the company act contains Section 241-246, which has a self-contained code that addresses mismanagement and oppression. Apart from this Indian Companies (Amendment) Act, 1951 was introduced as the first remedies against oppression and mismanagement in India. These remedies were widely adopted in the Companies Act, 1956 (“CA, 1956”), Chapter VI.

What is Oppression?

The word ‘oppression’ was introduced for the first time in the Companies Act, 1913 but still there is no clear definition provided in the companies act. However, if we go with dictionary meaning of the word, then ‘oppression’ is defined as an unjust act exercised in a manner which led to burdensome, harsh and wrongful consequences.[2] In the corporate association, it states of a situation in which majority shareholders by an abuse of their predominant voting power cause prejudice to the minority shareholders. To address this, Section 153-C was introduced[3], which was based on Section 210 of the English Companies Act, 1913. The main aim of this Section 210 was to give an alternative remedy to wind-up the company in case of mismanagement or oppression if required.

The most well-defined definition of oppression is mentioned in case Elder v. Watson Ltd[4], which defined it as “Oppression is a misdemeanor committed by majority shareholders who under colour of their majority power, wrongfully inflict upon the minority shareholder or minority shareholders any harm of injury” and the same definition is also cited with approval by Wanchoo J (afterwards CJ) of the Supreme Court of India in Shanti Prasad Jain v. Kalinga Tubes Ltd[5].

What is Mismanagement?

The most relied definition of mismanagement is mentioned in old companies act[6] as form of illustration of judicial pronouncement[7] where court ruled that if authorities like vice chairman or chairman is indulged in gross mismanagement in affairs of the company and had drawn considerable amounts for this personal purposes, then that large amounts owing to anyone else then it is considered as mismanagement.

Calcutta High Court in Ramashankar Prosad and Ors. v. Sindri Iron Foundry (P) Ltd. And Ors.[8] dived in the management of the Company from the Board of Directors and ordered for the appointment of administrators.  Mitra J., ruled that “if the court finds that the company’s interest is being seriously prejudiced by the activities of one or other group of shareholders, that two different registered offices at two different addresses have been set up, that two rival boards are holding meetings, that the company’s business, property and assets have passed into the hands of unauthorized persons who have taken wrongful possession and who claim to be shareholders and directors, that the bank accounts of the company have been practically frozen, there is no reason why the court should not make appropriate orders to put an end to such matters.”

So, likewise the definition of mismanagement is getting its shape with regular court pronouncement and considered as organic in nature: like Supreme Court in Chatterjee Petrochem (I) Private Limited v. Haldia Petrochemicals Limited[9], highlighted that the arena of law has not been able to define as to what led to ‘oppressive’ for the purposes of Section 397 and it is for the courts to decide on the facts of each case as to whether such oppression exists which would call for action under Section 397 of CA, 1956 (now Section 241 of CA, 2013).

Structure of oppression and mismanagement

Mismanagement includes:

• Transferring shares without first offering to existing shareholders in accordance with their rights under the articles, holding meetings without sending notice to members.
• Issuing of shares for a consideration other than cash not represented by corresponding assets and burdening the company with additional expenses by shifting company’s office which have been held to be acts constituting mismanagement of the affairs so as to attract the preventive jurisdiction of Tribunal.
• The members or shareholders of a company do not have carte blanche power to carry on affairs of the company in any manner they wish to and if any proposal is made to undertake something which would be per se illegal under the law then initiating the very proposal would constitute mismanagement and oppression and would justify shareholders action in form of an application under Section 241 of CA, 2013.

Oppression includes:

Courts are vested with numerous issues to be addressed pertaining to the scope of oppression,

• Question arising whether a petitioning shareholder has the burden to prove illegality of the offending shareholder’s conduct before it can succeed in an oppression action, and here the courts have been categorical that illegality is not a sine qua non for oppression and in same manner Gujarat High Court clarified in an early case under section 397 of the 1956 Act[10].
• If we talk of timing and frequency, then courts have clarified that in determining oppression the “events have to be considered not in isolation but as a part of a consecutive story”.[11]

Legal framework of oppression and mismanagement

As per Section 241 of The Companies Act of 2013, a member may lodge a complaint with the tribunal if they identify instances of mismanagement. Further Section 241(IA) of the Companies Act of 2013 defines oppression, whereas Section 241 (1B) of the same Act specifies the extent of mismanagement. The jurisdiction of the tribunal is thus defined in Section 242(2) of The Companies Act, 2013. The tribunal has the authority to provide remedies to the shareholders who have submitted complaints in cases of mismanagement or oppression. Rules governing the company’s future activities may be imposed by the tribunal. Transferring the company’s shares to another member is an extra action that the tribunal is able to take.

Court in Cyrus Investments (P) Ltd. v. Tata Sons Ltd.[12], the matter concerned the reinstatement of Mr. Cyrus Pallonji Mistry as Executive Chairman of Tata Sons Limited due to his involvement in the unlawful conversion of the company from a “Public Company” to a “Private Company.” For the remainder of his tenure, Mistry will be reinstated as an “Executive Chairman” and subsequently as a “Director” of the Tata Group of Companies, according to the National Company Law Appellate Tribunal.

Further it is the responsibility of the Tribunal to ascertain whether the complainant had a 1/10th shareholding prior to the date of the alleged oppression and mismanagement, in the event that the complainant member alleges oppression and mismanagement in bringing his shareholding below the requirement of 1/10th of the total shareholding of the company without notice and knowledge. A petition of this kind cannot be denied on the grounds that the petitioner owns less than one-tenth of the firm’s total shares as of the date the petition was actually presented to the corporation. It is adhered to because it is impossible to take away a majority shareholder’s ability to litigate when they are reduced to a minority.

Conclusion

The oppression and mismanagement legal framework inculcated in sections 241 and 242 attempt to be most vital components of shareholders remedies under Indian company law and anecdotal evidence suggests that reliance by petitioning shareholders on those remedies far exceed other shareholder remedies such as derivative actions and class actions.

Despite nearly 70 years of legislative and judicial activity seeking to shape the contours of the oppression and mismanagement remedies, a number of concerns is still unsolved and unanswered.

English law has witnessed reforms to mitigate the harshness of the oppression remedy by transitioning to the concept of unfair prejudice and jettisoning the conditional limb to make it a standalone remedy. However, while Indian law has sought to expand the remedies by retaining the concept of mismanagement and introducing the notion of prejudice, the fact that as a species they cohabit with the continued existence of the oppression remedy may have the effect of muddying the waters.

[1] The Companies Act, 2013 (Act No. 18 of 2013).

[2] A. Ramaiya, Guide to the Companies Act 4022 (18^th edn. 2015).

[3] The Companies Act, 1913 (Act No. 7 of 1913).

[4]  1952 SC 49 (Scotland).

[5] 1965 SC 1535.

[6] The Companies Act, 1956.

[7] Electric Corporation v. A. Nageshwara Rao, AIR 1956 SC 213.

[8] Re, (1964) 34 Comp. Cas. 510

[9] (2014) 14 SCC 574.

[10] Mohanlal Ganpatram v. Shri Sayaji Jubilee Cotton and Jute Mills Co. Ltd., (1964) 34 Comp. Cas. 777 (Guj) at para. 25.

[11] Hanuman Prasad Bagri v. Bagress Cereals Pvt. Ltd., (2001) 4 SCC 420.

[12] 2008 SCC Online NCLT 2446.

Anish Sinha