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Oppression and Mismanagement under Companies Act, 2013

By May 1, 2020 No Comments
Oppression and Mismanagement under Companies Act, 2013

Oppression and Mismanagement under Companies Act, 2013

A. INTRODUCTION:

It is a known fact that the management of a company is completely based on the majority rule, however, at the same time the interests of the minority can’t be completely neglected. While discussing with regard to majority and minority, let us be clear that we are discussing about majority or minority voting strength. The reason for this distinction is that a small group of shareholders may hold the majority shareholding whereas the majority of shareholders may, among them, hold a very small percentage of share capital. Once they acquire control, the majority can, for all practical purposes, do whatever they want with the Company with practically no control or supervision, because even if they are questioned on their acts in the general meeting, they always come out winners because of their greater voting strength. Once resolution is passed by majority it is binding on all members. As a result, court will not ordinarily intervene to protect the minority interest affected by resolution.

While we discuss on Oppression and Mismanagement in this article, it is important to quote the landmark judgement which paved a way to the exception to the majority rule, i.e., oppression and mismanagement.

Now, the main question that arises in light of the above is, what is the definition of oppression and mismanagement? Well, the answer is that there is no concrete definition of oppression and mismanagement, however the Companies Act, 2013 (“Act”) states that ‘oppression[1] constitutes when the company’s conduct is against the best interest of public interest as well as principles of fair dealing, imposition of new and risky objects which are being opposed by the other faction of the shareholders, depriving a member of his membership, exercise of undue/harsh burden on a member and acts of the company are against the best interest of the company as well as against the provisions of the law, 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.

B. APPLICATION TO NCLT:

The immediate remedy available to the minority shareholders against the oppressive act as defined herein-above is to file an application against the acts of the majority shareholders before the Hon’ble National Company Law Tribunal (“Tribunal”), having appropriate jurisdiction[2].

1. Qualification to file an application of oppression:

In order to maintain an application filed on the grounds of oppression and mismanagement, the applicant should hold either 10% or more shares of the issued capital or should constitute 1/5th or more of the members of the company or the application shall be filed by at least one hundred members of the company[3]. However, the Tribunal has been vested with a discretionary power to waive all or any of the afore-mentioned requirements so as to enable the members to apply. However, it is pertinent to note that a member whose calls or other sums due on their shares have not been paid or a mere share warrant holder does not qualify to file an application on grounds of oppression and mismanagement[4].

Further, the Central Government has been vested with the right to initiate a case against such person and refer the same to the Tribunal with a request that the Tribunal may inquire into the case and record a decision as to whether or not such person is a fit and proper person to hold the office of director or any other office connected with the conduct and management of any company[5].

2. Procedure to file an application on grounds of oppression:

The qualified applicants, if desires to file an application on grounds of oppression under section 241 of the Act, it is pertinent to note and comply with the following:

a. The application shall be filed in Form 1 of the National Company Law Tribunal Rules, 2016 (“Rules”). The application shall be clear in relation to the particular and details of the applicants or respondents and their details. The application shall establish the jurisdiction of the Tribunal, declaration in relation to any limitation, facts of the case and the reliefs sought[6] and proof of payment of the application fee, which, as on the date of this article is Rs. 10,000/-[7].

While mentioning the reliefs sought, it is important to divide the reliefs into two (2) parts, i.e., (i) interim relief, which the applicant desire to sought during the proceedings of the case; and (ii) main reliefs, which the applicant sorts from the Tribunal as final order. It is pertinent to note that the interim relief and main relief shall not be similar and identical in nature, else it might get rejected.

In the event of an application filed on behalf of any qualified members of a company, by any one or more of them, the letter of consent signed by the rest of the members so entitled authorising the applicant or the applicants to present the application on their behalf, shall be annexed to the application, and the names and addresses of all the members on whose behalf the application is presented shall be set out.

b. The Rules have clearly mentioned the formatting of the contents of the application and that it shall be in the English language[8].

c. Apart from MOA, AOA and share certificates of the applicant along with affidavits swearing the contents of the application along with the annexures are true, it is important to attach all relevant document with the application, which would be an evidence to the allegations put forth in the application against the respondents. The evidences attached to the application may be either in form of oral, written or electronic[9]. However, the Tribunal gives more preference to written and electronic evidences.

However, it is pertinent to note that in the event, an evidence is required to be admitted before the Tribunal in electronic form, it needs to be accompanied with a certificate identifying the electronic records, details of the electronic records, etc.[10] It is been observed that most of the Tribunals do not have the setup in the court to watch videos, if admitted as evidence. Therefore, for the ease of the Hon’ble Judges of the Tribunal, it is advised that a document shall be accompanied with such video evidence, along with the details of the of the video and the time lapses that constitutes an evidence to the allegations made in the application.

d. It is advised that all the documents, including the annexures but except for the Board Resolution, in order to file the application shall be one sided printed on green ledger papers, where the Board Resolution (if required[11]) shall be printed on the company letter head, shall be duly signed by the authorized representative and the original application shall be filed with the registry of the Tribunal along with two (2) copies of the application. Further, a copy of the application shall be simultaneously served to the respondents, preferably through registered post[12] and the proof of service shall be filed with the respective Tribunal, failing which the Tribunal may not list the case for admission/hearing.

e. Once the application is filed without any defects, the application is numbered and listed for hearing. In the first hearing, the Tribunal observes whether the applicant is qualified to file the application, and being satisfied in relation to the qualification of the applicant, the Hon’ble Tribunal admits the case for further pleadings and hearings.

f. Once the pleadings and arguments are over, it is a common practice that the Hon’ble Tribunal directs the parties to file written arguments based on the arguments put forth before the Tribunal and reserves the case for orders.

It is pertinent to note that all relevant documents are filed before the Tribunal at the pleading stage itself and before the arguments starts, as the Tribunal may reject any document that the parties intend to file during the argument stage. Further, in the event any party desires to file additional documents relevant to the case after the completion of the pleadings or during the arguments, the parties would be required to seek prior permission of the Tribunal through filing an interlocutory application (‘IA’).

C. JUDICIAL APPROACH TO OPPRESSION APPLICATIONS:

The Supreme Court of India held that hat the conduct complained of should, at least, involve a visible departure from the standards of their dealing, and violations of conditions of fair play on which every shareholder who entrusts his money to company is entitled to rely. The complaining member must establish the fact through evidences that he/she is suffering from oppression in his/her capacity as a member and not in any other capacity[13]. This gives further explanation that oppression involves as least an element of lack of probity or fair dealing to a member in the matter of his/her proprietary right as a shareholder. Persons concerned with the management of its affairs must in connection therewith guilty of fraud, misfeasance or misconduct towards the members, it does not include mere domestic disputes between directors or members or lack of confidence between the section of members and another section in the matter of policy and administration.

In another circumstance, where a life insurance business of a company was acquired by Life Insurance Corporation in 1956, the directors of the company, who had majority voting powers, refused to distribute this amount among shareholders and passed a special resolution changing the objects of the company and use compensation money for new objects, therefore the majority forced the minority shareholders to invest money in different kind of business against their will. The Calcutta High Court held the act to be oppressive in nature and against the best interest of the company and the minority shareholders[14].

In another instance, the Hon’ble Supreme Court has observed drawing considerable amounts for personal purposes by a majority shareholder as an act of oppression and mismanagement[15].

In similar lines, through judgements, various Courts and Tribunals have considered the following instances, without limitation as oppressive in nature:

  1. Act of fraud;
  2. Violations of statutory provisions as well as AOA of the company;
  3. Preventing directors from functioning;
  4. Misuse/misappropriation of funds;
  5. Improper appointment of a director or allotting shares to third parties intending to dilute other members and to obtain a dominant position in the company.

D. POWERS OF TRIBUNAL:

1. Upon observation of the instances of the case and based on the merits, the Tribunal reserves the right to provide certain limits to the applicants including[16]:

a. Regulation of the conduct of affairs of the company in future;

b. Purchase of shares /interests of any members of the company by other members;

c. If any shares purchased its consequent reduction of share capital;

d. Restriction on the transfer/allotment of shares;

e. Termination, setting aside or modification of any agreement between the company and its managing director, any other director or manager;

f. Termination, the setting aside of any transfer, delivery of goods, payment, execution or other act relating to property made or done by or against the company within three months before the date of the application under this section, which would, if made or done by or against an individual, be deemed in his insolvency to be a fraudulent preference;

g. Removal of managing director, manager or any director of the company;

h. Recovery of undue gain made by any managing director, manager or director and the manner of utilization of the recovery;

i. Manner of appointment of managing director or manager of the company may subsequent to an order removing;

j. Appointment of such number of persons as directors;

k. Imposition of costs as may be deemed fit by the Tribunal;

l. Any other matters which the Tribunal thinks it is just and equitable.

2. After the tribunal pronounces a verdict, there are certain steps that have to be followed by the company which are as follows:

a. The company has to file a certified copy of the order given by Tribunal with the registrar within 30 days of the order[17];

b. If the order of the tribunal makes an alteration in rules of the company then the company cannot make any alteration inconsistent with the order given without seeking permission of Tribunal[18];

c. The alteration made by Tribunal in memorandum and rules shall have same force and effect as made by the company and has to compulsorily follow[19];

d. The order altering the companies’ memorandum should be registered with the registrar within thirty days[20];

e. If the company alters without the permission, then it is likely to be penalised for its conduct extending from Rupees 1 lakh to Rupees 25 lakhs. Also the officer in-charge is likely to be personally liable for imprisonment upto six (6) months or penalised with a fine of R. 25.00 Thousand to Rs. 1.00 Lakh or both[21].

E. CONCLUSION:

 Although the provisions of oppression have played a vital role to check the powers and actions of the majority members in a corporate to ensure fair and good governance in a company, and without any doubt is powerful enough to fulfil its objects, it is pertinent to note that the procedure is time taking and at times, it takes years to obtain the reliefs. Therefore, in order to curb the mal-practices of few parties who intends to delay the process on one pretext or other and seeks extended dates, it is necessary that required amendments may be introduced to make the proceedings under section 241 of the Act time-bound.

Authors: Prashant Jain, Co-Founder & Partner; Abhishek Gupta, Associate

Disclaimer: The content of this article is intended to provide a general guide to the subject matter. For any queries, the authors can be reached at (i) prashant@samistilegal.in (ii) abhishek@samistilegal.in.

Updated as on May 01, 2020

Image generation credits: https://www.canva.com/templates/

References:

[1] Section 241 of the Act

[2] Section 241 of the Act

[3] Section 244 of the Act

[4] Section 244 (1) of the Act

[5] Section 241 (3) of the Act

[6] Rule 81 of the Rule

[7] Schedule of Fees of the Rules

[8] Rule 20 of the Rules

[9] Section 3 of the Indian Evidence Act, 1872

[10] Section 65B (4) of the Indian Evidence Act, 1872

[11] Depends upon case to case basis, that is if the minority member is corporate entity

[12] Rule 81(3) of the Rules

[13] S. P. Jain vs Kalinga Tubes Ltd on 14 January, 1965, 1965 SCR (2) 720

[14] Hindusthan Co-Operative … vs Unknown on 8 July, 1960, AIR 1961 Cal 443

[15] Rajahmundry Electric Supply Corporation Limited vs A. Nageswara Rao And Others, 1956 AIR 213

[16] Section 242 (2) of the Act

[17] Section 242 (3) of the Act

[18] Section 242 (5) of the Act

[19] Section 242 (6) of the Act

[20] Section 242 (7) of the Act

[21] Section 242 (8) of the Act

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