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.

OPPRESSION:

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. 

Acts Which Are Considered Oppressive:

Based on the various Landmark Judgment, the following acts amount to oppression:

• Not holding a general meeting and keeping shareholders in the dark side. 
• Non-maintenance of statutory records and not conducting affairs of the company following the Companies Act.
• Depriving a member of the right to dividend. 
• Refusal to register transmission as per will. 
• Rights issue of shares benefiting a section of shareholders.

MISMANAGEMENT

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. 

Acts Which Are Considered Mismanagement:

The following acts have been considered mismanagement

• Where there is a serious dispute between directors. 
• Where the bank account was managed by an unauthorized person.
• Where directors of the company were not taking serious steps to recover amounts embezzled. Continuation in office of directorship after the expiry of the term of directors.
• Sale of assets of the company at a low price and without compliance with the Act. 
• Violation of Memorandum and Article or statutory provisions 

Applicable legislation:

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.

 Points to be remembered:

• applicants have paid all calls and other sums due their shares.
• where any share is held by two or more persons jointly, they will be counted only as one member.
• Any one or more applicants may make the application on behalf and for the benefit of all of them if consent in writing has been obtained from other members.

1. Further, Section 241(2) provides that Central Government can also make an application to the Tribunal if it thinks that the management of the company is being conducted in a manner prejudicial to the public interest or with intent to defraud its creditors, members, or the other person.

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:

1. Whether the applicants are a member(s) of the company? the applicant is not a member, the application is to be rejected outright. Otherwise, the Tribunal will check out the next factor.
2. Whether application under Section 241 relating to 'oppression and mismanagement? If the Tribunal on perusal of the proposed application under Section 241 forms an opinion that the application does not relate to 'oppression and mismanagement of the company or is frivolous, it will reject the application for 'waiver'. Otherwise, the Tribunal will proceed to note the other factors.
3. Whether a similar allegation of 'oppression and mismanagement, was earlier filed by any other member and stands decided and concluded?
4. Whether there is an extraordinary circumstance made out to grant a 'waiver', to enable members to apply to Section 241, etc.?

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”

When can an application against Oppression and Mismanagement be made?

Section 241 specifies that members can approach the National Company Law Tribunal ("Tribunal") in circumstances.

1. Affairs of the company have been being conducted in an oppressive manner 
2. A material change in the management and control of the company by an alteration in the share capital, membership, or board of directors, or any other manner is prejudicial to the company interests or its members, or any class of members.

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.

1. Notably, the right to apply to the Tribunal is available also to the Central Government, if the Central Government believes that the affairs of the company are conducted in a manner prejudicial to the public interest or with intent to defraud its creditors, members, or the public at large.

How to apply on grounds of oppression:

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:

• Complete details of the applicants 
• Complete detail of respondents
• jurisdiction of the Tribunal
• declaration about any limitation
• facts of the case, the ground of appeal, and the reliefs sought
• proof of payment of the application fee

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.

Powers of Tribunal (section 242)

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

• Regulation of conduct of affairs of the company in future
• The purchase of shares or interests by other members of the company
• Restrictions on the transfer or allotment of the shares of the company
• The termination, setting aside, or modification, of any agreement between the company and the managing director, any other director or manager upon such terms and conditions as deemed fit
• The termination, setting aside, or modification of any agreement between the company and any person is possible only after due notice and consent from the concerned party.
•  The setting aside of any transfer, delivery of goods, payment, execution, or other act relating to the property is done within three months before the date of the application.
• Removal of the managing director, manager, or any of the Directors of the company
• Recovery and manner of undue gains made by the managing director or manager or director during the period of his appointment
• Appointment of such number of persons as directors who are required to report to the Tribunal
• Levy of costs as Tribunal deemed fit. 

CLASS ACTION SUIT:

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.

Who is eligible to file class action suits?

 1. Members:

a) In the case of a company having a share capital

1. not less than 100 members of the company or

not less than 10% of the total number of its members

whichever is less

or

1. any member or members singly or jointly holding not less than 10% of the issued share capital of the company.

b) In case of a company not having a share capital

• not less than 1/5th of the total number of its members.

2) Depositors:

1. not be less than 100 depositors of the company or

not less than 10% of the total number of its depositors,

whichever is less

or

1. any depositor or depositors singly or jointly holding not less than 10% of the total value of outstanding deposits of the company.

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:

• A company or its directors for any unlawful, fraudulent, or wrongful act or omission;
• an auditor or audit firm of a company for any incorrect or misleading statement of particulars made in the audit report or for any unlawful or fraudulent conduct.
• an advisor or expert or consultant for an incorrect statement or misleading statement made to the company.

Landmark Judgment related to Oppression and Mismanagement:

1. Tata Consultancy Services Ltd. v. Cyrus Investment Pvt. Ltd. & Ors

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:

• Removal from a position of directorship is not considered a case of oppression and mismanagement, and the NCLT can dismiss such complaints.
• A mere lack of confidence between majority and minority shareholders will not be sufficient ground for oppression/mismanagement for the Winding up of a company, which takes place when there is a justifiable lack of confidence in the management of the company's affairs.
• Sections 241 and 242 of the companies Act, 2013 do not give the Tribunal powers of reinstatement.
• The court while deciding a case of oppression or mismanagement under Section 241 can only look at past conduct or conduct which is going on, not an apprehension of future misconduct arising out of the Articles of the company.

1. Power of Government to make complaints under section 241(2)

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: -

• When the Government of India files a complaint u/s 241(2), it is required to record its opinion as to whether the company’s affairs are being conducted in a manner prejudicial to the public interest, and recording such an opinion is an essential requirement for filing a complaint with the Tribunal as per Section 241(2).
• The Tribunal can’t review the material on which the government has formed its opinion, particularly where no malafide is ascribed to the Central Government.
• The term 'public interest' cannot have a wide scope so far as to include all Indian citizens. It’d be sufficient if the rights, security, economic well-being, health, and safety of even a small section of society – such as applicants seeking membership in the category of common citizen are affected, even though they are a few people.

 

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