INDIAN JUDICIARY ON PREVENTION OF OPERATION AND MISMANAGEMENT VIS-À-VIS COMPANIES ACT, 2013
INDIAN JUDICIARY ON PREVENTION OF OPERATION AND MISMANAGEMENT VIS-À-VIS COMPANIES ACT, 2013
INTRODUCTION
Majority rule is the hallmark of democracy and like any other countries democracy, corporate democracy is equally vulnerable to its pitfalls and abuses. Today the Indian corporate sector faces a massive problem of protecting minority shareholders from the dominant(majority) ones. The real problem lies with controlling the majority shareholders and preventing oppression and mismanagement[1] at the same time. With a view to check and prevent the abuse of power by the majority, the Companies Act, 2013(hereinafter referred as ‘Act of 2013’ or ‘2013 Act’) (Chapter XVI- Section 241-246) contains special provisions for Prevention of Oppression and Mismanagement.
The term ‘Minority Shareholders’ has not been defined in Companies Act but by virtue of section 241 of 2013 Act, minority shareholders have been set out as ten percent (10%) of shares or minimum hundred (100) shareholders, whichever is less, in companies with share capital; and one-fifth (1/5) of the total number of its members, in case of companies without share capital.
Even though the provisions for prevention of oppression and mismanagement were under the Act of 1956 as well. But the minority shareholders have been incapable or unwilling due to lack of time, recourse or capability- financial or otherwise. This has resulted in letting the majority dominate and suppress them (minority) or squeeze them out of the decision-making process of the company and eventually out of the company. Companies Act, 2013 has also sought to provide protection to the minority shareholders rights and can be regarded as a game changer in the tussle between the majority and minority shareholders due to the addition of the option of getting monetary compensation or damages owing to the fraudulent actions of a company[2] in class action suit filed under section 245.
On analysing the relevant provisions of the Companies Act, 2013 it is seen that to constitute Oppression and Mismanagement facts of the case would be relevant and the result of a complaint would depend on situation to situation. What would be ‘Oppression & Mismanagement’ in one situation may not be in another. This paper aims to analyse the role of the judiciary in India with reference to Oppression and Mismanagement by discussing various case decided over the years. It further seeks to interpret various provisions of the Companies Act, 2013 relating to Oppression and Mismanagement and how it has helped in protecting the interest of the minority shareholders.
OPPRESSION & MISMANAGEMENT – DEFINITION
The words ‘Oppression’ and ‘Mismanagement’ are not defined in the 2013 Act. The meaning of these words for the purpose of Company Law is used in a broad generic sense and not in any strict literal sense.
Oppression under section 397(1)[3] of Companies Act 1956 (hereinafter referred to as ‘1956 Act’) has been stated as 'when affairs of the company are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members'. Similarly, the term Mismanagement has been stated under section 398(1)[4] of 1956 Act as 'conducting the affairs of the company in a manner prejudicial to public interest or in a manner prejudicial to the interests of the company or there has been a material change in has taken place in the management or control of the company, whether by an alteration in its 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 public interest or in a manner prejudicial to the interests of the company.’[5]
The meaning of the term “oppression” as explained by Lord Cooper in the Scottish case of Elder v. Elder & Watson Ltd.[6] which was cited with approval by Wanchoo J (later CJ) of the Supreme Court of India in Shanti Prasad Jain v. Kalinga Tubes[7] 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 their 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.”[8] The complaining shareholder must be under a burden which is unjust or harsh or tyrannical. [Lord Simonds in Scottish Co-operative Wholesale Society v. Meyer[9]] ‘A persistent course of unjust conduct must be shown’ [In Re. H.R. Harmer Ltd.[10]].
SECTION 244 – WHO CAN APPLY
To move to the Tribunal is the first statutory remedy for the oppressed shareholders. The application can be made by[11]-
1. By signature of at least 100 members of company; or
2. 1/10th of the total number of its member or whichever is less.
3. Member or members holding 1/10th of the issued share capital of a company.
However, if a company is without share capital, the application should be signed by 1/5th of the total number of its members. Once the requisite no. has signed the application, the application may be proceeded with, even if some of the signatories have withdrawn their consent[12] or dispose of their shares[13]. Representative of deceased shareholder[14] and Central Government also has the power to apply [see section 241(2)]. On application to the Tribunal, the above conditions may be waived by it, so that section 241 can be made applicable.
However, the following cannot apply for the relief: a member(s) whose calls are in arrears, a holder of a letter of allotment of a partly paid share, a holder of a share warrant, a holder of a share certificate to bearer, a transferee of shares who has not lodged the shares for transfer to the company.[15]
GROUNDS FOR MAKING APPLICATION UNDER SECTION 241
Following are the grounds for making application u/s. 241:
a. Affairs of the company are being conducted in a manner prejudicial or oppressive to a member or some members or in a manner which is prejudicial to the public interest or in a manner prejudicial to the interests of the company; or
b. A material change has taken place in the management or control of the company, either in Board of Director, manager, ownership of company shares or its membership; or
c. By the reason of such change, affairs of the company are conducted in such a way that is prejudicial to the companies & members interest.
CASE LAWS ON OPPRESSION
The Foundation to the exceptions to the majority rule was laid down in Foss v. Harbottle in 1843, according to Palmer[16] the rule in Foss v. Harbottle case is what referred to as two distinct, but linked, propositions of law. The first proposition, which is that the court will not ordinarily intervene in the case of an internal irregularity if the matter is one which the company can ratify or condone by its own internal procedure. The second is that where it is alleged that a wrong has been done to a company, prima facie, the only proper plaintiff is the company itself.
The facts of the Foss v. Harbottle case are as follows: An action was brought by two shareholders, ‘F’ & ‘T’ of a company, on behalf of themselves and all other shareholders against the directors and solicitor of the company, alleging that by concerted and illegal transactions they had caused the company’s property to be lost. It was alleged that the directors were acting in concert and effecting various fraudulent and illegal transactions whereby the property of the company was misapplied and wasted. It was prayed that the defendant might be decreed to make good to the company the losses. The question was as to the maintainability of the suit. The court held that the action could not be brought by a majority shareholder(s). The wrong done to the company was one which could be ratified by the majority of the members. The complaint was one which could be ratified by the majority of members. The company was the proper plaintiff for wrongs done to the company, and the company can act only through its majority shareholders. The majority of the members should be left to decide whether to commence proceedings against the directors.
L.J Mellish explains it in his words as: “In my opinion, if the thing complained of is a thing which in substance the majority of the company are entitled to do, or if something has been done irregularly which the majority of the company are entitled to do regularly, or if something has been done illegally which the majority of the company are entitled to do legally, there can be no use in having litigation about it, the ultimate end of which is only that a meeting has to be called and then ultimately the majority gets its wishes. It is not better that the rule should be adhered to so that if it is a thing which the majority are the masters of, the majority in substance shall be entitled to have their will followed?”
Nevertheless, in following cases the rule of Foss v. Harbottle does not apply i.e. the minority shareholders may bring an action to protect their interest in the case of: -
i. Ultra vires and illegal acts.
ii. Breach of fiduciary duties.
iii. Fraud or Oppression against minority.
iv. Inadequate notice of a resolution passed at a meeting of members.
v. Qualified majority.
vi. Where the personal rights of an individual member have been infringed.
Further, there must be continuous acts constituting oppression up to the date of the petition. The events have to be considered not in isolation but as a part of a continuous story.
Supreme Court in Chatterjee Petrochem (I) (P.) Ltd. v. Haldia Petrochemicals Ltd.[17] held that section 397 r/w sec. 3398 & 402 of 1956 Act require that in respect of oppression and mismanagement, for relief under sec. 397, an applicant must prove that conduct the majority of shareholders lacked probity and was unfair so as to cause prejudice to the applicant in exercising his legal and proprietary right as a shareholder. The Supreme Court further observed that for purpose of section 397 oppressive manner in which company’s affairs were being conducted could not be confined to one isolated incident, but such acts would have to be continuous so as to be part of a concerted action to cause prejudice to minority shareholders whose interests were prejudiced thereby.
An attempt to force new and more risky objects upon an unwilling minority may in circumstances amount to oppression - held In Re, Hindustan Co-operative Insurance Society Ltd.[18]. It was observed in V. M. Rao v. Rajeswari Ramakrishnan[19] that the oppression complained off must affect a person in his capacity or character as a member of the company; harsh or unfair treatment in other capacity, e.g., complaint as a director or a creditor is outside the purview of these sections.
An attempt to deprive a member of his ordinary membership rights is “oppression", held in the case of Mohan Lal Chandumall v. Punjab Co. Ltd.[20] In the instant case, a public company doing forward contract business amended its articles of association under statutory directions, so as to deprive its nontrading members their right to vote, to call meetings, to elect directors and receive dividends. Court held that “the company in doing so trampled upon valuable rights of such members by unjust exercise of its authority and power, and this amounted to oppression within Section 377”.
In Kumar Exporters (P) Ltd v. Naini Oxygen and Acetylene Gas Ltd.[21] it was held that suppressing notices of meetings to some of the members amounts to oppression. Casual omission may not be oppression, but systematic elimination of notices to some of the members is serious deprivation of their most important right. Continuous refusal by company to register shares with an ulterior motive of retaining control over the affairs of the company. Though the refusal once by the company may not be oppressive, but a continuous refusal by the company to register the shares with an ulterior motive of retaining the control over the affairs of the company where CLB will have to grant relief under Sec 397.
Other acts of oppression as held by various courts as follow: Not calling a general meeting, and keeping shareholders in dark[22], Non-maintenance of statutory records and not conducting affairs of the company in accordance with the Companies Act[23], Transfer of shares held by a company to some shareholders otherwise than by making an offer to all[24], Countermanding decisions of Board by a director who controls majority voting power, and not allowing Board to perform its functions, is oppression[25], Diversion of a business opportunity from one company to another controlled by a director of the former[26], Illegal appointment and removal of directors, allotment of shares and manipulations of accounts, amounts to oppression and mismanagement in the affairs of the company[27].
This statutory protection for prevention of oppression and mismanagement is an alternative remedy for winding up of the affairs of the company.[28] It may also be noted that remedies against oppression or mismanagement are available not only to the minorities but, in appropriate cases, if Tribunal is satisfied, relief can be granted even if the application is made by a majority.[29] The Delhi High Court has held that a petition against minority shareholders is maintainable under Section 397 & 398 (of 1956 Act) depending upon the facts and circumstances of the case.[30]
CASE LAWS ON MISMANAGEMENT
Mismanagement can be termed as - the affairs of the company are being conducted or will be conducted in a manner which is – prejudicial to public interests; or prejudicial to the interest of the company.[31]
Where there is serious infighting between directors resulting in serious prejudice being caused to the company[32], Board of Directors is not legal and the illegality is being continued, it will amount to mismanagement prejudicial to public interest[33], Diversion of fuds of the company for the benefits of majority group[34], Advance of loans without execution of a document which is not repaid and even interest is not realised[35], Sale of assets of at low price and without compliance with the Act.[36]
In Rajahmundary Electric Corporation v. Nageshwara Rao[37] on the ground of mismanagement by directors. Court found that vice-chairman grossly mismanaged the affairs of the company and had drawn considerable amounts for his personal purposes, the shareholders outside the group of chairmen were powerless to set matters right thus the court appointed two administrators for management of company for period of 6 months vesting in them all the powers of the directorate.
Where the managing directors of the Company continued in office after expiry of their terms, without a meeting being held to re-appoint them, the continuation of office was held to be mismanagement. - Sishu Ranjan v. Bholanath Paper House[38]
The famous Satyam fiasco is a very good example of mismanagement of funds of the company and fraudulent accounting, where the Chairman of Satyam Computer Services- Ramalinga Raju in his letter to the Board of Directors confessed to India’s biggest corporate fraud worth Rs. 7,000 crores on the company. [39]
POWER OF TRIBUNAL – SECTION 242
If on any application under section 241, the Tribunal is of the opinion:
i. 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
ii. 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 think fit.
Thus, the Tribunal has the power to make any order for the regulation of the conduct of the company’s affairs and upon such terms and conditions as it thinks fit.[40] The power under this section is not affected by the existence of an arbitration clause though the matter may be referred to arbitration pending further action. An agreement cannot arrogate to the arbitrator the question whether a winding up order should be made, which remains a matter for the Tribunal to decide in any subsequent proceedings. But the arbitrator can decide whether the complaint for an unfair prejudice is made out and whether it would be appropriate for winding up proceedings to take place or whether the complainant should be limited to some lesser remedy.[41]
It is the duty of the Tribunal to recognize the corporate democracy of a company in managing its affairs. It is not for the court or tribunal to restrict the powers of the Board of Directors. It is not open to the Tribunal to interfere with the day to day functions, management and administration of a company unless it is established that the decisions taken by the Board of Directors are ultra vires the Companies Act or the Article of Association of the Company. It is not for the Court/Tribunal to dictate to the Board of Directors as to how it functions. When the matter comes before the court, the court is not concerned with inter se relationship of the parties.
Where the Board of Directors in various board resolutions appointed the executive Directors and the Chairman, the Court will not interfere in the internal management of the company or interdict the functions of the Board managed company. In a suit for restoration of powers as joint managing director by the plaintiff that the company had step by step stripped him of his powers and humiliated him. It was held that no injunction could be granted to restrain their acting as Executive Directors. If the grievance of the plaintiff was that this was a case of oppression of the minority by the majority, then he could move the Company Court for appropriate relief. The Company Law Board in M. L. Thukral v. Kone Communication Ltd[42] refused to interfere in a matter concerning termination of distributorship agreement which it felt was the powers of Board of Directors and outside the purview of Sec. 397/398.
The question sometimes arises as to whether an act in contravention of law is per se oppressive. In Neeedle Industries (India) Ltd. v. Needle Industries Newey (India) Holdings Ltd.[43] Supreme Court observed that “The true position is that an isolated act, which is contrary to law, may not necessarily and by itself support the inference that the law was violated with a malafide intention or that such violation was burdensome, wrong and harshful. But a serious or illegal act following upon alone another can, in the context, lead justifiably to the conclusion that they are a part of the same transaction, of which the object is to cause or commit the oppression of persons against whom these acts are directed.”
CONCLUSION
Courts will not allow these special remedies to become a vexatious source of litigation.[44] On close reading of Section 245 of the Companies Act, 2013, it can be seen that the intent of the section is not only to empower the minority shareholder and/or members of the company but also the depositors. Unlike Section 399 of 1956 Act which provides for protection to only shareholder/members of the company, Section 245 of 2013 Act also extends this protection to the class of depositors as well.[45]
By the various interpretations of the Courts, Company Law Board & Tribunal it is clear that the court should have power to impose upon the parties’ whatever settlement the they consider just and equitable in the best interest of the shareholders and the company.[46] However, proper execution of provisions related to Oppression and Mismanagement is the need of the hour so that the confidence of the minority shareholders in regulatory mechanism (i.e. Company Law Tribunal and Courts) is established.
Thus, in the end I will conclude by saying that the court should keep in mind the position of company as whole and the interest of shareholders and see that they do not suffer in the fight for power.
*Disclaimer: The contents of the blog are not intended to convey any legal advice to the reader neither the blog creates an attorney-client relationship. You may contact an enrolled legal practitioner for assistance with your legal needs.*
[1] Rituparna Duttagupta, Oppression and Mismanagement under the Companies Act (Published on April 6, 2016) available online at: https://www.linkedin.com/pulse/oppression-mismanagement-under-companies-act-rituparna-duttagupta/ (last accessed on 9th Oct., 2017).
[2] Post of Shreeja Sen, Class action suits in Indian company law, explained (Published on June 10, 2016) available online at http://www.livemint.com/Companies/OhvhdZ4oAPmUCy5Ji9bWjM/Class-action-suits-in-company-law-explained.html (last accessed on 15th Oct., 2017 at 2210 hrs).
[3] Now Sec. 241 under 2013 Act.
[4] Ibid.
[5] Refer bare Act – see Section 397 & 398 of Companies Act, 1956.
[6] 1952 SC 49 Scotland.
[7] AIR 1965 SC 1535.
[8] Chatterjee Petrochem (India) (P) Ltd. v. Haldia Petrochemicals Ltd. (2011) 10 SCC 466.
[9] (1959) AC 324 at p. 342.
[10] (1958) 3 All ER 689.
[11] Kishan Khariwal v. Ganganagar Industries Ltd. (2004) 50 SCL 567.
[12] Rajahmundry Electric Supply Corp. Ltd. v. A. Nageshwara Rao AIR 1956 SC 213.
[13] Bhagwati Developers (P) Ltd. v. Peerless General Finance Investment Co. Ltd. (2013) 5 SCC 455.
[14] Bayswater Trading Co, re, (1970) 1 All ER 608.
[15] A. K. Majumdar & Dr. G. K. Kapoor, Company Law, Taxmann Publication, 16th Ed. (pg. 489) 2013.
[16] Palmer’s Company Law, 24th Ed. Para 65-03.
[17] [2011] 14 taxmann.com 179.
[18] AIR 1961 Cal. 443.
[19] 1987 61 CompCas 20 Mad, available online at: https://indiankanoon.org/doc/333120/ (last accessed on12.10.2017 at 1130 hrs).
[20] 1962 32 CompCas 937 P H, available online at: https://indiankanoon.org/doc/457439/ (last accessed on12.10.2017 at 2200 hrs).
[21] 1986 60 Comp.Cas. 984 All, available online at: https://indiankanoon.org/doc/1599937/ (last accessed on12.10.2017 at 2200 hrs).
[22] In re, Hindustan Co-operative Insurance Society Ltd. [1961] 31 Comp.Cas. 193 (Cal.).
[23] Bhajirao G. Ghatke v. Bombay Docking Co. (P.) Ltd. [1984] 56 Comp.Cas. 428 (Bom.).
[24] Col. Kuldip Singh Dhillon v. Paragaon Utility Financiers (P.) Ltd. [1988] 64 Comp.Cas. 19 (Punj. & Har.).
[25] In re, H.R. Harmer Ltd. [1959] 29 Comp.Cas. 305 (CA).
[26] In re, London School of Electronics Ltd. [1985] BCLC 273.
[27] Smt. Hema Singh v. ANC Construction (P.) Ltd. [2013] 32 taxmann.com 81 (CLB-New Delhi).
[28] Paper 13, Corporate Laws & Compliance, published by ICAI (Aug. 2016).
[29] See Supra note 15 at pg. 490.
[30] Radhe Shyam Gupta v. Kamal Oil & Allied Industries Ltd. [1999] 19 SCL 271.
[31] Suresh Kumar Sanghi v. Supreme Motors Ltd. [1988] 54 Comp.Cas. 235 (Delhi).
[32] Ibid.
[33] Sishu Ranjan Dutta v. Bholanath Paper House Ltd. [1988] 53 Comp.Cas. 888 (Cal.).
[34] Bhaskar Stoneware Pipes (P.) Ltd. v. Rajindernath Bhaskar [1988] 63 Comp.Cas. 184 (Delhi.).
[35] See Supra note 24.
[36] In Re, Malayalam Plantation (India) Ltd. [1991] 5 Corpt. LA 361 (Ker.).
[37] 1956 AIR 213 available online at https://indiankanoon.org/doc/961006/ (last accessed on 15th Oct., 2017 at 2226 hrs.).
[38] 1983 53 Comp.Cas. 883 Cal available online at https://indiankanoon.org/doc/1038148/ last accessed on 15 Oct., 2017 at 2300 hrs).
[39] For reference see - Satyam Scandal: Who, what and when, http://www.thehindu.com/specials/timelines/satyam-scandal-who-what-and-when/article10818226.ece (last accessed on 15th Oct, 2017 at 2235 hrs).
[40] Dr. Avtar Singh, Business Law, 10th Ed. (2014), Eastern Book Company, pg. 703.
[41] See Supra note 40 at pg. 704.
[42] M. L. Thukral v. Kone Communication Ltd. (1996) 86 Comp. Cases 643 (CLB
[43] Neeedle Industries (India) Ltd v. Needle Industries newey (India) Holdings Ltd., (1981) 3 SCC 33: (1981) 51 Comp.Cas.743: AIR 1981 SC1298.
[44] See Supra note 15 at pg. 485.
[45] Akshat Sulalit, Companies Act, 2013: Rise of the Minority Shareholder, http://www.indialawjournal.org/archives/volume6/issue-2/article5.html
[46] Dr. Sukhvinder Singh Dari, Indian Judiciary On Prevention Of Oppression And Mismanagement Vis A Vis Companies Act 1956, International Journal of Research (IJR), November Vol-1 Issue-10, pg. 612 (2014).
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