Oppression & Mismanagement

The management of a company is completely based on the majority voting strength, however, at the same time, the interests of the minority voting strength can’t be completely neglected. Once the majority can acquire control for all practical purposes and do whatever they want with the Company because even if minorities are questioned on their acts in the general meeting, the majority always comes out winners because of their greater voting strength. Once a resolution is passed by a majority of shareholders it is binding on all shareholders. In such a situation the Court will not ordinarily intervene to protect the interest of the minority affected by the resolution. The provisions relating to oppression and mismanagement under the Companies Act, 2013 as an exception to the majority rule, to prevent misuse of the voting power of the majority shareholders. There is no concrete definition of oppression under the Company Act. According to the Oxford English Dictionary, oppression is the ‘exercise of authority or power in a burdensome, harsh or wrongful manner. An act may amount to oppressive conduct if it is designed to achieve an unfair advantage. In layman's language, ‘oppression’ can be defined as the business of the company being conducted with the intent to defraud its minority members as well as principles of fair dealing, and imposition of risky objects which are being opposed by the other faction of the shareholders. Based on the various Landmark Judgment, the following acts amount to oppression: The term ‘Mismanagement’ is also not defined under the Companies Act, 2013. It can be described as controlling the affairs of the company dishonestly or unjustly. The following acts have been considered mismanagement Section 241 to 246 under Chapter XVI of the Companies Act, 2013 governs the prevention of oppression and mismanagement. Generally, the majority rule is followed in the company so that courts do not interfere to protect minority rights. However, the prevention of oppression and mismanagement is an exception to the rule. However, The Tribunal (NCLT) may waive the aforementioned numerical requirement if it deems such waiver to be necessary. The National Company Law Appellate Tribunal just in the case of Cyrus Investments Pvt. Ltd. & Anr. v. Tata Sons Ltd.& Ors. provided a four-step analysis to determine whether the numerical requirement under Section 244 should be waived or not. The four steps proposed by NCLAT are: However, the above said factors are not exhaustive. Tribunal may consider another factor unrelated to the merit of the case for forming an opinion as to whether the application merits “waiver” Section 241 specifies that members can approach the National Company Law Tribunal ("Tribunal") in circumstances. However, if such a material change is brought about in the interest of creditors, debenture-holders, or any class of shareholders of the company then the change will not be considered a material change. An application against the acts of the majority shareholders before the Hon’ble National Company Law Tribunal (“Tribunal”), having appropriate jurisdiction shall be filed in form NCLT 1 along with proof of payment of the application fee, which is Rs.10,000/- The application shall be mentioned the following matters: The reliefs sought, are divided into two parts, i.e. interim relief and main reliefs. Interim relief, which the applicant sorts from the Tribunal during the proceedings of the case, and main reliefs, which the applicant sought from the Tribunal as a final order. It is important to note that the interim relief and main relief shall not be similar, or else they might get rejected. There must be a nexus between the reliefs sought and the facts of the case. Application has to be prepared in form NCLT -1 and accompanied by MOA, AOA, and share certificates of the applicant member along with affidavits, a notice of admission, and all admissible documents with the application, which would be evidence to the allegations put forth in the application against the respondents. Any one or more applicants may make the application on behalf of any qualified members of a company, the consent letter signed by the rest of the members so entitled authorizing the applicant to present the application on their behalf shall be annexed to the application. If the Tribunal thinks that the affairs of the company are being conducted in a manner prejudicial to members, public interest, and company, then it has the power to pass any of the following the order as deemed fit Shareholders have been empowered with various rights including the right to elect directors. However, shareholders are often incompetent to exercise effective control over the affairs of companies and particularly in big-sized companies whose shareholders are widely scattered, the shareholders are sleeping and passive partners, and the affairs of such companies are managed by its Board of directors to the exclusion of a predominant majority of shareholders. As a result, the situation leads to abuse of power by persons in control of the affairs of the company. Class action suits will be a platform for members and depositors to raise their common grievances against the management of a company including directors, advisors, consultants, and auditors for acts or omissions or wrongful acts that are prejudicial to the interest of the company. The major purpose behind the concept of class action suits is to safeguard the interests of the minority shareholders. Class action suits can be undertaken as a redressal tool by minority shareholders or depositors having a common interest in the promotion of transparent corporate governance. This form of lawsuit is also termed a Representative Action. 1. Members: a) In the case of a company having a share capital not less than 10% of the total number of its members whichever is less or b) In case of a company not having a share capital 2) Depositors: not less than 10% of the total number of its depositors, whichever is less or Before whom a class action suit can be filed? Application for a class action suit can be filed before the National Company Law Board Tribunal (NCLT). Against whom a Class Action Suit can be sued? A class action suit can be sued against the following authorities: The high-profile corporate dispute case of Tata Consultancy Services Ltd. v. Cyrus Investment Pvt. Ltd. & Ors and popularly known as the Tata-Mistry dispute. The fact of the case: Cyrus Mistry was appointed as the Executive Deputy Chairman on the board of Tata Sons for five years. He was also removed from directorship in Tata Industries Ltd., Tata Consultancy Services Ltd., and Tata Teleservices Ltd, by resolutions passed at shareholder meetings. After Cyrus Mistry resigned from the Directorship of a few other companies. Upon his removal, Cyrus Investments Pvt. Ltd. and Sterling Investment Corporation Pvt. Ltd. applied sections 241, 242, and 244 of the Companies Act, 2013, on the grounds of oppression, mismanagement, and unfair prejudice. Mr. Cyrus Mistry had controlling shareholding in both above companies. The petition also objected to the conversion of Tata Sons from a Public Ltd. to a Private Ltd. Company. The ground of Appeal: The petition had contended oppression and mismanagement on the grounds of abuse of Article of Association of the Company, unlawful removal of Cyrus Mistry from the position of Executive Chairman, Mr. Ratan Tata treating the company as a proprietorship firm while other directors acting as puppets and disastrous projects of the Company. Judgment/Order The NCLT dealt with all the contentions and held that there was no oppression or mismanagement. The removal of Cyrus Mistry was on account of trust deficit, not account of purported legacy issues. The NCLT also did not find any merit in the fact that the re-conversion of Tata Sons from Public limited to Private limited. With this, the NCLT order is in the favour of Tata Sons Ltd. The order of NCLT was reversed by NCLAT, reinstated Mr. Cyrus Mistry as the director of Tata Sons and a few other companies in the Tata Group. Some companies from Tata Group filed appeals to the Supreme Court against the order of NCLAT which were clubbed and heard together. The Court observed the following matters: Union of India v. Delhi Gymkhana Club, a landmark case of oppression and mismanagement. Here the Government of India filed a petition for oppression and mismanagement under Section 241(2). The NCLAT considered the scope of Section 241(2) and made the below observations: - Onlinexbrl.com provide advisory related to company law matters. Contact us now. OPPRESSION:
Acts Which Are Considered Oppressive:
MISMANAGEMENT
Acts Which Are Considered Mismanagement:
Applicable legislation:
Points to be remembered:
When can an application against Oppression and Mismanagement be made?
How to apply on grounds of oppression:
Powers of Tribunal (section 242)
CLASS ACTION SUIT:
Who is eligible to file class action suits?
Landmark Judgment related to Oppression and Mismanagement: