Oppression and Mismanagement-Law Notes-Company Law
Introduction
The terms ‘opperession’ and ‘mismanagement’ are not defined anywhere in the Act but Dictionary meaning of oppression is unjust or excessive exercise of authority or power and mismanagement means, to manage something wrongly or poorly. So for Company Law we can say that, oppression relates to unfair treatment or discrimination against certain shareholders, while mismanagement refers to the conduct of company affairs in a prejudicial, dishonest manner, affecting the company’s reputation and public interest.
The minority shareholders are empowered to bring action with a view to preventing the majority from oppression and mismanagement. These are the statutory rights of the minority shareholders.
The rule in Foss v. Harbottle (1843) states, ‘the principle that the will of the majority should prevail over the will of the minority in matters of internal administration of the company.’ The rule in Foss v. Harbottle is not absolute but is subject to certain exceptions.
The principle contained in section 241 of the Companies Act, 2013 which relates to prevention of oppression and mismanagement in a company is one of the exceptions to the rule in Foss v. Harbottle.
Meaning of Oppression
The Supreme Court in Shanti Prasad Jain v. Kalinga Tubes Ltd., has interpreted the term ‘oppression’ as “The essence of the matters seems to be that the conduct complained of should at the lowest, involve a visible departure from the standards of fair dealings, and violation of the conditions of fair play on which every shareholder who entrusts the money to the company is entitled to rely.”
From the different decesions given by the Supreme Court in various cases, the oppression would be made out :
1 Where the affairs of the company have been conducted or being conducted in a manner oppressive or prejudicial to some of the members.
2 Where the conduct is harsh, burdensome and wrong.
3 Where the conduct is malafied and is for a collateral purpose where although the ultimate objective may be in the interest of the company, the immediate purpose would result in an advantage for some, select shareholders.’
4 The action is against reliability and good conduct.
5 The oppressive act complained of may be fully permissible under law but may yet be oppressive like for a collateral purpose.
6 As to what are facts which would give rise to or constitute oppression.
“ The complaining shareholder must be under a burden which is unjust or harsh or tyrannical. A persistent or persisting course of unjust conduct must be shown.”
Prevention of Oppression and Mismanagement (Section 241)
It is well established that, the supremacy of the majority is the fundamental rule governing company law administration. But sometimes the majority shareholders may tend to abuse their powers to the detriment of the minority shareholders. So it becomes necessary to maintain a proper balance between the rights of majority and minority shareholders for the smooth functioning of the company. Though the many decesion powers are vest in AGM which can decide certain issues by an ordinary resolution and some other issues by a special resolution. However in order to ensure adequate protection to minority shareholders, some additional safeguards are provided in under the Companies Act.
Under the Companies Act, 1956, section 397 for relief in cases of oppression was available to a member of the company only when the affairs of the company were being conducted in a manner oppressive to such member or other members. But under section 398, an application for relief in cases of mismanagement could lie even on complaint that affairs of the company were being conducted in a manner prejudicial to the interests of the company. The change which has been brought about by section 241 of the Companies Act, 2013 is that the separate remedies of oppression and mismanagement under section 397 and 398 of the Act of 1956 have been combined.
Application to Tribunal for relief in cases of oppression, etc. (Section 241)
1) Any member of a company who complains that— a) the affairs of the company have been or are being conducted in a manner prejudicial to public interest or in a manner prejudicial or oppressive to him or any other member or members or in a manner prejudicial to the interests of the company; or b) the material change, not being a change brought about by, or in the interests of, any creditors, including debenture holders or any class of shareholders of the company, has taken place in the management or control of the company, whether by an alteration in the Board of Directors, or manager, or in the ownership of the company’s shares, or if it has no share capital, in its membership, or in any other manner whatsoever, and that by reason of such change, it is likely that the affairs of the company will be conducted in a manner prejudicial to its interests or its members or any class of members, may apply to the Tribunal, provided such member has a right to apply under section 244, for an order under this Chapter.
2) The Central Government, if it is of the 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 under this Chapter.
Who can Apply (section 244)
Section 244 of the Companies Act, 2013 highlights the conditions for members of a company to apply for relief under Section 241 for mismanagement and oppression, requiring a minimum number of members.
In case of a company having share capital, the application must be signed by at least 100 members of the company or by one tenth of the total number of its members, whichever is less, or by any member or members holding one tenth of the issued share capital of the company.
If the company is without share capital the application should be signed by one-fifth of the total numbers of it members. Once the requisite number has signed the application, the application may be proceeded.
Provided that the Tribunal may, on an application made to it in this behalf, waive all or any of the requirements specified above so as to enable the members to apply under section 241.
Powers of Tribunal (Section 242)
Section 242 of the Indian Companies Act, 2013, grants the National Company Law Tribunal (NCLT) the power to pass orders to end oppression and mismanagement within a company, as filed under Section 241.
Section 242 : Sub-section (1) provides that, if, on any application made under section 241, the Tribunal is of the opinion— (a) that the company’s affairs have been or are being conducted in a manner prejudicial or oppressive to any member or members or prejudicial to public interest or in a manner prejudicial to the interests of the company and (b) that to wind up the company would unfairly prejudice such member or members, but that otherwise the facts would justify the making of a 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 bringing to an end the matters complained of, make such order as it thinks fit.
Sub-section 2 of section 241 provides different grounds under which Tribunal may provide an order to put an end to the matters complained of.
Class Action (Section 245)
Section 245 provides the provisions related to ‘Class Action’ where, a group of people having a common interest and to protect the common interest, may sue or may be sued. In this member can file a suit on behalf of large group or class of a group.