PREVENTION OF OPPRESSION AND MISMANAGEMENT Flashcards
Application to the Tribunal
The first remedy in the hands of oppressed minority is to move the Tribunal. Whenever the affairs of a company have been or are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members, an application can be made to the Tribunal under sub-clause (a) of section 241(1). Alternatively, an application can be made under sub-clause (b) on the grounds that material change has taken place in the management or control of the company which is not in the interest of any creditors, debenture holders or class of shareholders of the company. The change may be due to 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. The applicant has reasons to believe that due to such change the affairs of the company are likely to be conducted in a manner prejudicial to the interest of the company or its members or class of members. The application under clause (a) or (b) is required to be made in Form NCLT-1 and accompanied with documents as mentioned in the National Company Law Tribunal Rules, 2016. A copy of the application is required to be served on the company, other respondents and all such persons as the Tribunal may direct (Rule 81).
It may be noted that an application under Section 241(1) for grant of relief may be made both for the past acts as well as continuing matters as the words used relating to the alleged affairs ‘have been or are being’. Furthermore the complaint is tenable if the affairs have been or are being conducted in a manner prejudicial to him or any member or members or to the interest of the company not amounting to oppression.
Who can apply [Section 244]
1.In case of a company having a share capital, the application must be signed by : (i) at least one hundred members, or (ii) by at least 1/10th of the total number of its members, whichever is less.
In the alternative, a valid application may be made by any member(s) holding not less than 1/10th of the issued share capital of the company.
The application to be valid, the applicant or applicants must have paid all calls and other sums due on their shares. Joint holders of shares shall be counted as one member. The CLB [now Tribunal] in Kishan Khariwal v. Ganganagar Industries Ltd. [2004] 50 SCL 567 has held that if a person’s shareholding which was 10% or more gets below 10% by issue of further shares, such person can maintain the petition provided he has challenged further issue in his petition.
2. In case of a company not having share capital, application will be valid if signed by at least 1/5th of the total number of members of the company.
The Tribunal has the right to waive all or any of the requirements as aforesaid to enable the members to make the application under section 241
EXPLANATION
Sub-section (1) of section 244 states that in the case of a company having share capital, not less than one hundred members of the company or not less than one- tenth of the total number of its members, whichever is less, can make the application to the Tribunal for relief against oppression and/or mismanagement. Where the company does not have share capital, the application can be made by not less than one-fifth of the total number of its members. This criterion is based on numerical strength of the applying members. In the case of a company having share capital, an alternative is available in terms of shareholding strength. The sub-section enables holders of not less than one-tenth of the issued share capital of the company to make the application. Issued share capital is not restricted to only the equity share capital of the company; it covers the preference share capital also. In other words, the calculation of not less than one-tenth of the issued capital of the company has to be done taking into account both the types of share capital that have been issued. It is to be ensured that the applying member or members have paid all calls and other sums due on their shares.
Who cannot apply
(i) a member/(s) whose calls are in arrears [Section 244(1 (a)].
(ii) a holder of a letter of allotment of a partly paid share*
(iii) a holder of a share warrant*
(iv) a holder of a share certificate to bearer*
(v) a transferee of shares who has not lodged the shares for transfer to the company.
(vi) Shareholders of a holding company cannot file petition against a subsidiary of the holding company. Herbertson Ltd. v. Kishore Rajaram Chhabria [1999] 21 SCL 99 (CLB). Also the Board of Directors of the holding company, where the directors did not hold shares in the subsidiary cannot make petition under section 397/398 (now section 241), BDA Ltd. v. Kishore Rajaram Chhabria [1999] 22 SCL 284 (CLB).
Power of Tribunal
Members of a company who complaint that the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members including one or more of themselves may apply to the Tribunal.
Under Section 242(1) the Tribunal is empowered to make any order as it may thinks fit to with a view to end the matters complained off in Section 241. Before passing an order the Tribunal needs to satisfy itself that -
(a) 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) to wind up the company would unfairly prejudice such member or mem- bers, 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.
Conditions for relief under section 242
In K.P. Chackochan v. Federal Bank [1989] 66 Comp. Cas. 953 (Ker.), it was observed that in order to grant relief under section 397 [now Section 241], a petitioner must show three things:
1. The affairs of the company are being conducted in a manner oppressive to some part of the members/shareholders including the petitioners. It is to be noted here that the section does not require that the oppressed members should be the minority. ‘Shareholders with a minority beneficial interest may, by having control over voting, be able to oppress those with majority beneficial interest.’
2. The facts pleaded justify the making of a winding-up order on the ‘just and equitable’ ground. In case, winding up of the company is not justified, the Supreme Court in Kilpest (P.) Ltd. v. Shekhar Mehra [1996] 10 SCL 233 held that the petition for oppression and mismanagement shall not be maintainable.
3. To wind up the company would unfairly prejudice the oppressed members.
Relief under Section 242
The Tribunal is empowered to make an order under Section 242(1) to bring an end to the matter complained of. Sub-section (2) of Section 242 that without prejudice to the generality of powers under sub-section (1), the Tribunal’s order may provide for the followings:
(a) the regulation of the conduct of affairs of the company in the future;
(b) the purchase of shares or interests of any members of the company by other members thereof or by the company;
(c) in the case of a purchase of its shares by the company as aforesaid, the consequent reduction of its share capital;
(d) restrictions on the transfer or allotment of the shares of the company;
(e) the termination, setting aside, or modification, of any agreement, howsoever arrived at, between the company and the managing director, any other director or manager, upon such terms and conditions as may, in the opinion of the Tribunal, be just and equitable in the circumstances of the case;
(f) the termination, setting aside, or modification of any agreement between the company and any person other than those referred to in clause (e):
However, no such agreement shall be terminated, set aside, or modified except after due notice and after obtaining the consent of the party concerned;
(g) 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;
(h) removal of the managing director, manager or any of the directors of the company;
(i) recovery of undue gains made by any managing director, manager or director during the period of his appointment as such and the manner of utilization of the recovery including transfer to Investor Education and Protection Fund or repayment to identifiable victims;
(l) imposition of costs as may be deemed fit by the Tribunal;
(m) any other matter for which, in the opinion of the Tribunal, it is just and equitable that provision should be made.
Meaning of oppression
The expression “Oppression” has not been defined by the Companies Act, 2013. In general oppression means causing harm or injury by unjust exercise of power or discretionary authority, specially with unjust motives. In the context of a company it may mean depriving of one or more shareholders of their legitimate expectations or other unfair treatment by the controlling shareholder(s).
However, an act to constitute oppression need not be illegal or violative of any statutory provision. Oppression is a phenomenon which one has to infer from facts and circumstances of the case by examining impact of the act on complaining members - Vijay Kumar Narang v. Prakash Coach Builders (P.) Ltd. [2012] 114 SCL 132 (Kar.).
The complaining member must show that he is suffering from oppression in his capacity as member and not in any other capacity.
Oppression may be past or continuing nature
Under Section 241(1)(a) any person having a right to apply to the Tribunal if the affairs of the company “have been” or “are being” conducted in a manner prejudicial to public interest or prejudicial or oppressive to him or any member or members of the company or prejudicial to the interest of the company. It may be noted that even the past affairs are also covered by this clause. Relief may be granted by the Tribunal even against past acts of oppression.
Acts held as oppressive
- Not calling a general meeting, and keeping shareholders in dark - Hindustan Co-operative Insurance Society Ltd., In re [1961] 31 Comp. Cas. 193 (Cal.). In this case, the shareholders were left completely in the dark, because no annual general meeting was called, with no information regarding the manner in which the affairs of the company were being conducted, while those men who purported to act as directors dealt with the company’s money in any fashion they liked and prejudicial to the interest of the company. It was held that these acts of the respondent who had the majority backing no doubt amounted to oppression by them of the minority shareholders and also, oppression in the conduct of the affairs of the company and these were to the detriment of both the company and its members.
- Non-maintenance of statutory records and not conducting affairs of the company in accordance with the Companies Act - Bhajirao G. Ghatke v. Bombay Docking Co. (P.) Ltd. [1984] 56 Comp. Cas. 428 (Bom.).
- Depriving a member of the right to dividend - Mohan Lal Chandu Mal v. Punjab Company Ltd. [1962] 32 Comp. Cas. 937 (Punj.) - The Court in this case held that if the non-voting members were being dominated and had to submit to excessive use of authority, such a conduct amounted to unjust hardship. “To take away the right of partaking of dividends earned by their contribution is not merely oppressive but even confiscatory”. Therefore, such a case calls for an interference by the CLB under section 397 [now Tribunal under section 241].
- Transfer of shares held by a company to some shareholders otherwise than by making an offer to all - In Col. Kuldip Singh Dhillon v. Paragaon Utility Financiers (P.) Ltd. [1986] 60 Comp. Cas. 1075 (Punj. & Har.) at a board meeting, the shares held by the company were transferred to some of the directors although it had earlier been resolved that they would be offered to all the shareholders. It was held that before deciding to whom the shares should be sold, an offer of sale should have been made to all the shareholders; shares should have been transferred to one who made the highest offer.
Acts held as not oppressive
- An unwise, inefficient or careless conduct of a director - Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. [1981] 51 Comp. Cas. 743 (SC) - The Supreme Court in this case ruled that on a true construction of section 397 [now Section 241], an unwise, inefficient or careless conduct of a director in the performance of his duties cannot give rise to a claim for relief under that section. The person complaining of oppression must show that he has been constrained to submit to a conduct which lacks in probity, conduct which is unfair to him and which causes prejudice to him in the exercise of his legal and proprietary rights as a shareholder.
- Non-holding of the meeting of the directors - It may affect the rights of the petitioner as a director but his rights as a minority shareholder would not be affected - Chander Krishan Gupta v. Pannalal Girdhari Lal (P.) Ltd. [1984] 55 Comp. Cas. 702 (Delhi).
- Not declaring dividends when company is making losses - Chander Krishan Gupta v. Pannalal Girdhari Lal (P.) Ltd. (supra) - Delhi High Court in this case observed that if the company makes profit and the management for ulterior reasons and motives, primarily with a view to deprive the shareholders of any share of the profits, does not declare dividend, then it may possibly be argued that non-declaration of dividend may amount to an act of oppression. But where the company has been making losses, the question of the company declaring dividends cannot arise.
If the company continues to run in losses and its substratum is wiped off, it may be a good ground for winding-up the company but the non-declaration of dividend, under such circumstances, when the company is not making profit, cannot be a ground for invoking section 397 [now Section 241] .
Meaning of public interest
The expression ‘public interest’ is not capable of precise description. It has been held to be an elusive abstraction meaning general social welfare or regard for social good and predicating interest of the general public in matters where a regard for the social good is of the first moment. In the words of Frankfurter, J. of the United States Supreme Court, “the idea of public interest is a vague, impalpable, but all controlling consideration”. A thing is said to be in public interest where it is or can be made to appear to be contributive to the general welfare rather than to the special privilege of a class, group or individual - N.R. Murty v. Industrial Develop- ment Corporation of Orissa Ltd. [1977] 47 Comp. Cas. 389 (Ori.)
Thus, what is public interest today may not be so considered a decade later. It cannot be considered in value but must be decided on the facts and circumstances of each case. In the case of a company intended to operate in a modern welfare state, the concept of public interest takes the company outside the conventional sphere of being a concern in which the shareholders alone are interested. It emphasises the idea of the company functioning for the public good or general welfare of the community, at any rate, not in a manner detrimental to the public good.
True scope of section 241
In Shanti Prasad Jain v. Kalinga Tubes Ltd. (supra), the Supreme Court considered four important English cases20 and quoted the following summary given in Meyer’s case which lays down certain important considerations to be kept in view in determining the scope of section 397 [now Section 241]
1) The oppression of which a petitioner complains must relate to the manner in which the affairs of the company concerned are being conducted; and the conduct complained of must be such as to oppress a minority of the members (including the petitioners) qua shareholders.
2) It follows that the oppression complained of must be shown to be brought about by a majority of members exercising as shareholders’ predominant voting power in the conduct of the company’s affairs.
3) Although the facts relied on by the petitioner may appear to furnish grounds for making of a winding up order under the ‘just and equitable’ rules, those facts must be relevant to disclose also that the making of a winding up order would unfairly prejudice the minority members qua shareholders.
4) Although the word ‘oppressive’ is not defined, it is possible, by way of illustration, to figure a situation in which majority shareholders, by an abuse of their predominant voting power, are ‘treating the company and its affairs as if they were their own property’ to the prejudice of the minority sharehol- ders and in which just and equitable grounds would exist for the making of a winding up order but in which the ‘alternative’ remedy provided by this section by way of an appropriate order might well be open to the minority shareholders with a view to bringing to an end the oppressive conduct of the majority.
5) The power conferred on the court to grant a remedy in an appropriate case appears to envisage a reasonably wide discretion vested in the court in relation to the order sought by a complainant as the appropriate equitable alternative to a winding up order.
6) In proceedings under section 397 [now Section 241] it is not legality or illegality of action complained of is of primary importance but whether the act(s) is oppressive is of paramount importance - K.N. Bhargava v. Track Parts of India Ltd. (supra). It is also permissible in petition under sections 397 and 398 [now Section 241] to bring further facts and grounds before the final hearing of the petition provided such facts/grounds disclose additional cause of action and the same is arguable - Jer Rutton Kavasmaneek v. Gharda Chemicals Ltd. [2000] 23 SCL 71 (Bom.).
Instance of mismanagement
A very clear illustration of mismanagement contemplated under section 241 appears in Rajahmundry Electric Corporation v. A. Nageshwara Rao (supra)
A petition was brought against a company by certain shareholders on the ground of mismanagement by directors. The court found that the vice-chairman grossly mismanaged the affairs of the company and had drawn considerable amounts for his personal purposes, that large amounts were owing to the Government for charges for supply of electricity, that machinery was in a state of disrepair, that the directorate had become greatly attenuated and “a powerful local junta was ruling the roost” and that the shareholders outside the group of the chairman were powerless to set matters right. This was held to be sufficient evidence of misman- agement. The Court, accordingly, appointed two administrators for the manage- ment of the company for a period of six months vesting in them all the powers of the directorate.
The directors of the company were carrying on other personal businesses. The disputes amongst the directors of the company had resulted in the records of the company not being available. The management of the company had miserably failed in protecting the company’s records and this failure resulted in prejudice being caused to the company. Moreover, the constant fight amongst the directors, who were also the shareholders of the company, had an adverse effect on the conduct of the company’s business with the result that the company started incurring losses. Held that, it was a fit case where appropriate orders under section 398 [now Section 241] should be passed.
Conditions precedent for obtaining relief
Section 241 can be invoked in either of the two circumstances :
1. that the affairs of the company are being conducted in a manner which is—
(a) prejudicial to public interest; or
(b) prejudicial to the interest of the company.
OR
2. it is likely that the affairs of the company will be conducted in a manner—
(a) prejudicial to public interest; or
(b) prejudicial to the interest of the company.
due to a material change that has taken place in the management or control of the company. Such change may take place due to alteration in the company’s Board of directors or Manager or in ownership of its shares or membership or in any other manner whatsoever. (Such change not being a change brought about or in the interests of any creditors including debenture holders or any class of shareholders of the company).
