Unraveling Oppression And Mismanagement Under The Companies Act, 2013

The Chapter XVI of CA, 2013 consolidates the remedies which were earlier found under Sections 397, 398, 401, 402, 403 and 404 of CA, 1956 which gave power to Company Law Board (“CLB”) to grant reliefs to protect the minority shareholders. After the advent of CA, 2013, the provisions of the oppression and mismanagement have been combined. In order to expeditiously dispose of the matters pertaining to the oppression and mismanagement, the CA, 2013 has provided exclusive jurisdiction to National Company Law Tribunal (“NCLT”) and appellate jurisdiction to the National Company Law Appellate Tribunal (“NCLAT”). Section 241 and 242 of CA, 2013 are the relevant provisions that give power to an individual member or members to apply for relief against the oppressive conduct being carried out against them by the majority members. Section 242 of CA, 2013 empowers NCLT to pass such orders to put an end to the oppression, mismanagement and prejudicial conduct that is complained of under the application filed under Section 241. This includes passing of orders for regulating the conduct of the affairs of the company in future, restrictions on the transfer or allotment of shares of the company, removal of the managing director, manager or any of the directors of the company etc.

OPPRESSION:

According to the dictionary meaning of the word, 'oppression' is an act exercised in a manner which is burdensome, harsh and wrongful.^[1] In the corporate democracy, it refers to a situation in which majority shareholders by an abuse of their predominant voting power cause prejudice to the minority shareholders. The word 'oppression' was introduced for the first time in the Companies Act, 1913 (“CA, 1913”) as Section 153-C which was based on Section 210 of the English Companies Act, 1948. The purpose of introducing Section 210 in the English Companies Act was to give an alternative remedy to wind-up the company in case of mismanagement or oppression.

Initially the definition of 'oppression' was deliberated upon in the case of Elder vs Elder & Watson Limited^[2] wherein it was held that 'oppression' would amount to lack of probity and fair dealing in the affairs of a company and to the prejudice of some of its members. The scope and meaning of the expression 'oppression' was also explained in the case of Re Harmer (H.R.) Limited^[3] wherein it was held that the oppression complained of must be complained by the members of the company and it must involve oppression of some part of the members (including himself) in their/ his capacity as member(s). It was also observed in Harmer (Supra) that it was not enough that only a just and equitable case for winding up of the company should be made out. It must also be accompanied by the conduct of majority shareholders having an element of oppression against the minority members. Further, 'oppression' may take different forms and need not necessarily be for obtaining pecuniary benefit, it may be due to a desire to obtain power and control, or merely vindictive.

As per Section 241 of CA, 2013, if the affairs of the company have been or are being conducted in a manner prejudicial to public interest or interests of the company or in a manner oppressive to any member or members and amounts to 'oppression', Section 241(1)(a) of CA, 2013 gives right to the members to move an application to NCLT. Section 241 entitles only the member of the company to seek redressal and any unfair treatment in a capacity other than a member, such as a creditor or director, is outside the purview of Section 241 of CA, 2013. The Supreme Court in the landmark ruling of Shanti Prasad Jain vs Kalinga Tubes Limited^[4] had held that in the case of 'oppression', the majority shareholders must be oppressing the minority as members and the events have to be considered not in isolation but as part of a consecutive story. Hence, there must be continuous acts on the part of the majority shareholders and the conduct must be burdensome, harsh and wrongful. Mere lack of confidence between the majority shareholders and minority shareholders would not be enough unless the lack of confidence springs from oppression of a minority by a majority in management of the affairs of the company.

The aforesaid principles as laid down by the Supreme Court were reiterated in Needle Industries (India) Limited vs Needle Industries Newey (India) Holding Limited^[5] wherein the Apex Court held that an unwise, inefficient or careless conduct of a director cannot give rise to a claim for relief under Section 397 of CA, 1956 (now under Section 241 of CA, 2013). A conduct which lacks in probity, which is unfair and which causes prejudice to the member who is the petitioner in exercise of his legal and proprietary rights as a shareholder must be shown to exist. In Rao (V.M.) vs Rajeshwari Ramakrishnan^[6], firstly, it was observed that the oppression complained of must affect a person in his capacity or character as a member of the company; harsh or unfair treatment in any other capacity is outside the scope of the section. Secondly, there must be continuous acts constituting oppression up to the date of the petition. Thirdly, the events have to be considered in a continuous story and not in isolation. Fourthly, it must be shown as a preliminary to the application of Section 397 of CA, 1956 [now Section 241 read with Section 242(1) of the CA, 2013] that there is a just and equitable ground for winding up the company. Fifthly, the conduct complained of can be said to be 'oppression' only when it could be said that it is burdensome, harsh and wrongful.

It is necessary to show not merely that there has been some sort of oppression of any shareholders but that the affairs of the company are being conducted in an oppressive manner. A mere general allegation that the affairs of the company are conducted in an oppressive manner against any part of its members including one or more of its applicants is not enough. Nor is it enough that an isolated act or incident is oppressive. The application under Section 241 of CA, 2013 must provide the particulars as regards the oppressive behavior. In Hungerford Investment Trust Limited, Re vs Turner Morrison & Co. Limited^[7], it was held that the phrase 'affairs of the company are being conducted' indicated a continuous wrong. The proceedings are intended to be in public interest or in commercial interests of the company. The proceedings are not for feeding the private grudges of warring groups of directors or individual shareholders.

Some instances of oppression include illegal allotment and transfer of shares, appointment of additional directors and removal of existing directors, siphoning off of funds, conducting board meetings without notice, shifting of registered office etc. The said instances resort to gaining control and resulting in mismanagement and oppression of the minority. It has been noted by the Supreme Court in Chatterjee Petrochem (I) Private Limited vs Haldia Petrochemicals Limited^[8], that the law has not defined as to what amounts to 'oppressive' for the purposes of Section 397 and it is for the courts to decide on the facts of each case as to whether such oppression exists which would call for action under Section 397 of CA, 1956 (now Section 241 of CA, 2013). The alleged oppressive conduct of the majority of the shareholders to the minority must be burdensome, operating harshly and should be up to the date of the petition.

Allotment of additional shares for creating new majority:

There are instances when no notices for the board meetings are issued to certain directors and the shareholding of the minority members is reduced by the majority members by allotment of shares. In the case of Dale and Carrington Invt. P. Ltd. & another v. P.K. Prathapan & others^[9], the question that came up for consideration before the Supreme Court was whether the majority shareholder being reduced to minority shareholder by a mala fide act of the company or the board of directors against the articles of association amounts to oppression or not. It was observed that a majority member is entitled by virtue of his majority to control, manage and run the affairs of the company in accordance with the provisions of company law. It was held by the Apex Court that if a member who holds the majority of shares in a company is reduced to the position of minority shareholder in the company by a malafide act by the board of directors by issuing further share capital, the said act would be considered to be an act of the oppression to the said member. In the case of Rajendra Kumar Tekriwal vs Unique Construction Private Limited^[10], the notices for the board meetings in which the shares were to be allotted were issued to the directors selectively with the sole intention of ensuring that certain directors do not attend the meeting. The Court held that the same constitutes the worst type of oppression especially when the said allotment of shares have reduced the petitioners to a frail minority and the said allotments were cancelled.

Illegal removal of director:

In terms of law, a special notice under section 169 of the CA, 2013 is required to be given before removing a director from his position as an opportunity of hearing is to be provided to him. In the case of Ms. Varshaben S. Trivedi vs Shree Sadguru Switch Gears (P) Limited, ^[11] the petitioner complained of illegal removal from the directorship of the company without following due procedure under Section 284 CA, 1956 (now Section 169 of CA, 2013). The Court held that the right given under Section 284 CA, 1956 is a statutory right which cannot be taken away by memorandum and articles of association. In the present case, there was illegal appointment of new directors to gain control in the management of the company which is oppressive. The removal of member-director without such notice has been held to be an act of oppression and mismanagement.^[12]

Board Meeting without quorum:

A board meeting held without quorum as required by articles of association would be bad in law and the appointment of additional directors at such board meeting and any transaction undertaken at such meeting is also void.^[13] In the case of Sushma Harish Sharma vs Hotel Hoxicon Private Limited ^[14], a director was removed on account of alleged ground of his failure to attend three consecutive meetings. Further, there was no evidence of notice of meetings having been sent. The Court held that the removal in the said case is oppressive as no notice was served to the director to attend the meeting to transact the business.

MISMANAGEMENT:

Section 241 of CA, 2013 encompasses both reliefs under Sections 397 and 398 of CA, 1956 for oppression and mismanagement and Section 242 of CA, 2013 which deals with the powers of the Tribunal while passing orders in the matters of oppression and mismanagement. Section 241(1)(b) provides an additional ground for filing the application, i.e., on account of gross mismanagement of the affairs of the company. It involves material change that has taken place in the management or control of the company not being brought by or in the interests of any creditors, debenture holders or any class of shareholders of the company whether by alteration in the Board of Directors, manager or in the ownership of the shares of the company. If the company has no share capital then material change in its membership or in any other manner and it is likely that the affairs of the company will be conducted in a manner prejudicial to its interest or its members or any class of members would amount to mismanagement.

The CA, 2013 extended the scope to also include any material change that is prejudicial to the shareholders of any class thereof. This section allows the minority shareholders a pre-emptive remedy which shall be granted only if it is proved that such change will lead to injury to their interests. Mismanagement encompasses the incompetent, dishonest and fraudulent management practices such as violation of company's Memorandum and Articles of Association. It is pertinent to point out that mere unwise or loss-making business decisions or mere change in the management or inefficient management cannot amount to mismanagement.

One of the examples of mismanagement include the sale of the assets of the company at a low price. In the case of Re: Malayalam Plantations (India) Limited.^[15], it was observed that one of the estates of the company engaged in tea and rubber plantation was sold by a director at a low price to another tea plantation company without complying with the requirements of Section 293(1) of CA, 1956 (now Section 180 of CA, 2013) which demand approval of the shareholder, without giving adequate notice under Section 173 of CA, 1956 (now Section 102 of CA, 2013) and the relevant information before the board meeting. There was also acceptance of consideration in installment. It was held that the said acts amounted to mismanagement of affairs and the sale was set aside. The Court held the Board of Director and the purchaser liable for the company's losses.

Some other instances of mismanagement include transferring shares without first offering to existing shareholders in accordance with their rights under the articles, holding meetings without sending notice to members; issue of shares for a consideration other than cash not represented by corresponding assets and burdening the company with additional expenses by shifting company's office which have been held to be acts constituting mismanagement of the affairs so as to attract the preventive jurisdiction of Tribunal. The members or shareholders of a company do not have carte blanche power to carry on affairs of the company in any manner they wish to. If a proposal is made to undertake something which would be per se illegal under the law then initiating the very proposal would constitute mismanagement and oppression and would justify shareholders action in form of an application under Section 241 of CA, 2013.

In the case of Kuldip Singh Dhillon (Col) vs Paragaon Utility Financiers Private Limited^[16], a certified copy of a resolution was sent to the bank authorizing certain persons to operate the bank accounts of the company, however, no such resolution was found in the minutes book as maintained by the company. It was held by the Court that the operation of bank accounts by unauthorized persons and unreasonable delay in taking action against the manager who had misappropriated the funds of the company amounted to mismanagement.

The bona fide decisions which are consistent with the company's memorandum and articles are not to be equated with mismanagement albeit they turn out to be wrong in the circumstances or they cause temporary losses. The Court shall not allow the machinery created by Section 241 of CA, 2013 to be used by the minority for compelling the majority to come to terms where the company is honestly managed.

In a well-known corporate battle in the matter of Tata Consultancy Services Limited vs Cyrus Investment Private Limited^[17], Cyrus Pallonji Mistry was removed from the position of Executive Chairman from Tata Sons Limited vide resolution passed by the Board of Directors dated 24.10.2016. Upon removal of Cyrus Mistry from the post of Executive Chairman, Cyrus Investments Private Limited and Sterling Investment Corporation Limited, the minority group of shareholders moved an application under Sections 241-242 of CA, 2013 alleging prejudicial and oppressive behaviour of Tata Group, the majority shareholders. The NCLT dismissed the company petition filed by Cyrus Mistry. Upon the appeal by Cyrus Investments Private Limited, the NCLAT reversed the decision of NCLT and held that the removal and other actions taken against Cyrus Mistry were oppressive and prejudicial and directed the reinstatement of Mistry as Executive Chairman of Tata Sons and consequently as Director of Tata Group of Companies. Tata Sons preferred the appeal before the Supreme Court against the order of NCLAT. The critical aspects in respect of oppression and mismanagement that were duly observed by the Supreme Court are as follows:-

1. Removal from Directorship- The Court held that the act of removal of Cyrus Mistry as Executive Chairman of Tata Sons was not oppressive to the interests of the minority group. It was noted by the Apex Court that the findings recorded by NCLAT primarily revolved around the removal of Cyrus Mistry and conversion of Tata Sons into a private company. The Court noted that the removal of Mistry was only from the Executive Chairmanship and not the directorship of the company as on date of filing of the petition. Further, the Court emphasized that mere removal from directorship cannot be held to be an oppressive or prejudicial conduct.
2. Just and equitable ground for winding up- The Court noted that majority shareholders of Tata Sons were not individuals or corporate entities who are interested in the declaration of dividends, rather majority shareholding was vested with philanthropic trusts. Further, it was clarified that winding up a company due to findings of oppression and mismanagement is opted only when there is a justifiable lack of confidence in the management of affairs of the company. A mere lack of confidence between the majority and minority members is not sufficient to trigger an action of winding up. The Court in the present case noted that the standard of just and equitable clause for winding up was not triggered and the NCLAT erred in its decision.
3. Reinstatement Power- Further, it was observed by the Court that the architecture of Section 241-242 of CA, 2013 do not vest power in the Tribunal to make an order for reinstatement. Therefore, all the accusations of oppression and mismanagement that were levelled against Tata Sons were rejected by the Supreme Court.

NUMERICAL THRESHOLD AND THE WAIVER:

Section 244(1) of CA, 2013 provides the minimum threshold to file an application under Section 241 for challenging an action for oppression and mismanagement before NCLT. In case of company having shareholding , at least 100 members or not less than 1/10^th of the total number of its members, whichever is less or any member or members holding not less than 1/10^th of issued share capital of the company have right to apply to the Tribunal provided that applicant/ applicants has or have paid all calls and other sums dues on his or their shares. In case of companies not having share capital, not less than 1/5^th of the total number of members have the right to apply. Thereby meaning that 10% criteria in case of companies having share capital and 20% criteria in case of other companies has been provided to reflect the interest of minority.

Section 244 of CA, 2013 came into force from 01.06.2016. Prior to the same, eligibility clause was laid down under Section 399(1) of the CA, 1956 which is pari-materia as that of Section 244(1) of CA, 2013. In CA, 1956, there was no provision of waiver, however, under Section 399(4), on an application filed by any ineligible member(s) of a company, the Central Government was empowered to form an opinion whether circumstances exist which make it just and equitable to do so and authorize the member(s) of the company to apply before CLB under Sections 397-398 of CA, 1956, notwithstanding that requirements of Section 399(1) (a) &(b) are not fulfilled. At present, there is a clear departure from the earlier provision of Section 399(4) of CA, 1956 whereby the Central Government was empowered to permit ineligible member(s) to file an application for oppression and mismanagement. Under the proviso to Section 244(1) of CA, 2013, the Tribunal is required to decide the question whether the application merits waiver of all or any of the requirements as specified in clauses (a) &(b) of Section 244(1) of CA, 2013.

The waiver under the proviso is an extraordinary statutory exemption which allows an ineligible member or members to avail the remedies under Section 241 read with Section 242 of the Act. The NCLAT in Cyrus Investments Private Limited & another vs Tata Sons Limited & others^[18], held that the Tribunal is required to take into consideration the relevant facts and evidence as pleaded in the application for waiver and proposed application under Section 241 and is required to record reasons reflecting its satisfaction. The merits of the application cannot be decided till the Tribunal waives the requirement and enables the members to file application under Section 241 of CA, 2013.

In the case of Brookefield Technologies Private Limited vs Shylaja Iyer & others,^[19], it was held that the exercise of power by the Tribunal to waive the requirements to file a petition under Section 241 of CA, 2013 is discretionary. The pertinent factors to be taken into consideration for projecting an application for waiver are interest of applicant in the company whether it is substantial or significant; issues raised in the company petition under Section 241 are under appropriate/competent jurisdiction to be dealt by the Tribunal and whether the case projected in the petition is of primordial importance to the applicant or to the company or to any class of member. When no case is made out by the petitioner relating to the oppression and mismanagement of the affairs of the company, the concerned Tribunal has the requisite power not to grant the relief of waiver.

In case wherein the complainant member alleges oppression and mismanagement in bringing down his shareholding below the requirement of 1/10th of the total shareholding of the company without the notice and knowledge, then it is the duty of the Tribunal to determine whether the complainant had 1/10th shareholding prior to the date of alleged oppression and mismanagement. Such a petition cannot be dismissed on the ground that the petitioner's shareholding is below 1/10th of the total shareholding of the company on the actual date of presentation of the company petition.^[20] It is followed on the account of the fact that a majority shareholder who has been reduced to the minority cannot be deprived of his right to sue.

In the nutshell, the rights of the minority shareholders under Indian corporate regime have been protected under CA, 2013 by plethora of reliefs that can be granted by NCLT to redress the oppression and mismanagement being faced by the minority members. Even though the stake held by the minority members is not subservient to the majority members, however, the CA, 2013 has clearly regarded the duty to protect their interest from the oppressive conduct and mismanagement that is being carried on by the latter.

Authors: Sandeep Bhuraria (Senior Partner) and Nishtha Grover (Associate) at ZEUS Law Associates. Views are personal.

1. A. Ramaiya, “Guide to the Companies Act”, 18^th Edition, Volume-3 (2015), 4022 ↑

2. (1952) Scottish Cases 49 ↑

3. (1959) 1 WLR 62 ↑

4. AIR 1965 SC 1535 ↑

5. (1981) 3 SCC 333 ↑

6. (1987) 61 Comp Case 20 (Mad) ↑

7. ILR (1972) 1 Cal 286 ↑

8. (2014) 14 SCC 574 ↑

9. (2005) 1 SCC 212 ↑

10. (2010) 98 CLA 205(Guj.) ↑

11. (2013) 116 CLA 153 (CLB) ↑

12. Manmohan Singh Kohli (Capt.) vs Venture India Properties P. Limited (2005) 123 Com Cases 198 ↑

13. Murari Mohan Kajriwal vs Shree Hanuman Cotton Mills Limited (2013) 116 CLA 50 ↑

14. (2007) 139 Com Cases 261 ↑

15. (1991) 5 Corpt LA 361 (Ker) ↑

16. (1988) 64 Com Cases 19 ↑

17. (2021) 9 SCC 449 ↑

18. (2017) SCC Online NCLAT 261 ↑

19. (2020) SCC Online NCLAT 829 ↑

20. Anup Kumar Agarwal & another vs Crystal Thermotech Limited & others, CA(AT) No. 17 of 2016 ↑