Oppression and Mismanagement of Minority Shareholders

Originally published by Manupatra

By-Abhinav Bishnoi , Shruti Khanna and Aryan Singh Chouhan

Introduction

In any company there are two types of shareholders, one is majority shareholder and the another is minority shareholders, but the management of a company is governed by the majority rule. This doesn’t mean that the minority shareholders be overlooked. This concept of majority and minority is not based upon numerical value but upon the voting strength because sometime the small group of people holds most of the shares in a company whereas the large number of people get hold on to very small percentage of share capital. So, this leads to a problem where the majority shareholders control and regulate the company as per their own whims and fancies and no one could stop them. Even if someone question upon their any act they come out as a winner because in the general meeting they could prove it by means of voting. Therefore, the companies act 2013, contains various provisions that protects the interest of the minority shareholders. And in this paper, we are going to address some of the means through which the minority shareholders are get overlooked, contentions given in the court by the majority stake holders and how does judiciary acted upon such issues and interpreted the companies act for the sake of justice and protecting the interest and rights of the minority shareholders.

The concept of oppression and mismanagement is given in the section 241 of the Companies Act, 2013 as an application to tribunal for relief from cases of oppression. This provision was earlier there in section 397 (1)[1] of the Companies Act, 1956 “Any members of a company who complain 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 any one or more of themselves) may apply to the 1 [Tribunal] for an order under this section, provided such members have a right so to apply in virtue of section 399.”

Whereas in 2013 Act, same section is been carried forward , with an addition of clause ‘b’ which says that “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,”

Mismanagement u/s 398 of the Companies Act 2013, is said to be done if affairs of the company are prejudice towards the interest of the company. Mismanagement is basically a material change that had been bought in the management and control of the company. It is not being a change which is bough by or in the interest of the shareholders, creditors or debenture holders. The change is by alteration in the board of directors, or managing agents or secretary and treasurers, or in the shareholding pattern, or if it has no share capital or in any manner which could show the interest of the company.     

As per section 241 of the 2013 Act, it allows either 100 shares or 1/10^th of the total shares of the company, whichever is less holding member of a company to file a suit in the NCLT (National Company Law Tribunal) is the matter is prejudice or oppressive to any particular minority shareholder. Such member has the right to apply to the court of law by virtue of section 399 of the Act.

But following persons cannot apply for the relief u/s 397:

· Member whose calls are not been paid or any dues are not been paid
· Holder of letter of appointment of a partly paid share
· Transferee of shares who has not lodged the shares for transfer to the company

Section 400 of the Act requires the Company Law Tribunal to give notice of every application made u/s 397 to the Central Government made before it. “The tribunal also had the power to waive of the minimum number criteria of members if it receives application from members for such waiver”[2].

The legislation has very specifically described the powers of tribunal under Section 242 as how much punishment can tribunal give and up to what extent a tribunal can go if it finds that the company is indulging in activities related to oppression and mismanagement. “A tribunal if it finds that the company had functioned in an oppressive or prejudicial way can in order to solve the problem can make any order as it thinks fit and can direct the company to run in a way which is not oppressive or prejudicial and if the company specifically contravenes any order of tribunal related to alteration in memorandum or articles of company then the company can be fined with a minimum of one lakh and maximum of 25 lakh and penal provisions such as imprisonment for a maximum of 6 months can be given to every officer who contravenes tribunal’s order.”[3]

Also the decision of tribunal is not final and can be challenged in the appellate tribunal within 45 days starting from the day on which copy is being provided to the aggrieved party and any aggrieved party if still not satisfied with the order of appellate tribunal on any question of law can directly appeal to the Supreme Court of India within 60 days starting from the day on which copy is being provided to the aggrieved party.

Rule of Foss v. Harbottle[4]

In this case, the plaintiff who were two shareholders of the company filed a suit against the directors of the company. They were alleged for various fraudulent and illegal transaction and the directors have miss appropriately used the company assets and wasted them. The defendant prayed to make the good of the company losses. But the action was rejected on the ground that those transactions majority of the shareholders have the power to confirm and the court also held that the injury is not to solely took place against the plaintiff exclusively but to the corporation as a whole. Therefore, the members of the corporation shall not have the right to file a suit in the name of the corporation. Thus, maintaining the different identity of the aggregate of members to that of the company.
In the line of above judgement, a similar case happened in India which was Bhajekar v. Shinkar[5]. In this case, the board of directors passed a resolution with full-fledged knowledge of appointing a managing agent. Some directors of the company filed a suit against the resolution on the ground that it had certain irregularities within itself and hence be invalid. But the court held that the it is open for any company to ratify its resolution even if there is any irregularity. The plaintiff under such circumstances were not entitled to file a suit and ask to court to interfere. This rule helped in maintain the separate legal entity of the company and for preserving the right to majority rule in the corporation.

But there are certain exceptions to the following rule (rule of majority) for protecting the rights of the minority:

1) Ultra vires act
2) Fraud on minority
3) Act requiring special majority
4) Wrongdoers in control
5) Individual membership rights
6) Oppression and mismanagement

In this paper we are dealing with this last exception only. 

There are certain acts which as per various pronouncements held as oppressive and non-oppressive. So, the oppressive act would include acts such as[6]:

· Not calling general meeting and keeping the shareholders in dark
· Depriving the member from his right to dividend
· Refusal to register transmission under will
· Issue of further which would be benefiting certain class of people 
· Not maintaining the statutory records
· Not conducting affairs of company as prescribed in the Companies Act

And the non-oppressive acts include such as:

· Inefficient, unwise and careless conduct of the directors
· Not declaring dividends when the company is making losses
· Denial of inspection of book to a shareholder
· Lack of detail in notice of meeting
· Non-holding of meeting of directors
· Increasing voting of the shares owned by the management

The relief available against such complaints against oppression, is that if court if of the viewpoint that the conduct was oppressive and the winding up of company would unfairly prejudice such member, the court can pass any order as it thinks fit.

As per the various pronouncements these are the basic mismanagement acts of a company:

· Serious infighting between the directors
· Board of directors is not legal and that is being continued
· Where the company’s bank accounts being operated by unauthorized person
· Violation of the memorandum or any statutory provision
· Sale of assets at low price, without compliance with the Act
· Continuance of directors even after term’s expiry

And these are the basic acts of the company which would not tantamount to mismanagement:

· Company cannot be challenged merely on the ground that it is not making profits
· Removal of director and termination of works manager’s office
· Arrangements with creditors in company’s bonafide interest
· Making of reserves or non-declaration when it does not affect the devaluation of the shares itself. 

Oppression and Mismanagement Faced by the Minority Shareholders

The topic of oppression and mismanagement was again in the news with NCLAT ordering that in the case of Cyrus Investments V. Tata Sons there was oppression and mismanagement done by the Tata Sons on its minority shareholders group consisting of Cyrus Investments, which raises the question that what exactly means oppression and mismanagement and under which law it is covered and what is the judicial approach on oppression and mismanagement.
The law does not specifically defines what does oppression means but references can be drawn from different sources to understand what does oppression means, according to “the Black Law dictionary oppression means oppression means  the act or an instance of unjustly exercising power”[7] whereas the House of Lords  in the Harmer's case held that oppression means “burdensome, harsh and wrongful". The legal provisions for the same had been discussed above in depth now we will certainly at the judicial developments that has evolved over the years.

Judicial Development of Oppression and Mismanagement

1. Shanti Prasad Jain v. Kalinga Tubes [AIR 1965 SC 1535][8]- It is one of the oldest company law case dealt in India related to oppression of shareholders which was filed 2 years after the company law 1956 was passed scrapping the older company law of 1913. “The older company law of 1913 had no adequate remedy given to the appellant in the case of oppression where the remedy available with court was to give order of liquidation if a case of oppression comes which was not just and fair”[9]. In the present case the facts was that the appellant in the case was the member of Kalinga Tubes who was with Patnaik Group and Loganathan group held the majority of shares and only a few shares were held by outsiders and remaining all the shares was divided by these 3 groups equally but disputes arose when the company in need of more capital took the decision of converting into a public company and has to issue more share capital and as per section 81 of companies act if new shares are issued then it has firstly to be issued to existing shareholders and then to outsiders , if something else is not written in their article of association but in this case the Patnaik Group and Loganathan Group  wanted to sell those share to outsiders and thus they changed the articles of company in a meeting and sold those shares to outsiders to which thought that his majority over company would end and that he would not remain in a  position to take the decisions and thus the appellant filed the case of oppression as per section 397 and section 398 of Companies Act 1956, and court in its landmark judgment compared the newly added section of oppression that is section 397 to British company act’s section 210 and refereed to 4 British cases and held that it has to be shown as an preliminary that winding up of company is just and equitable and held that the act of oppression must be in continuance and any single act of oppression will not be included as oppression against the applicant. The conduct of majority must be burdensome, harsh and wrongful against minority
The court in this case held that there was no such oppression done as the act done by respondents was done to improve the condition of company and that though with the act of respondents the appellant would lose his majority in the company that act would not means that it is oppression against him.

2. NCLT held in the case of, Sidharth Gupta & Ors. v. M/s Getit Infor services Pvt Ltd & Ors[10], that the mere violation of the article of association of the company does not amount to oppression and mismanagement. The act must be continuous with the motive of the oppression and mismanagement.  The meaning of Oppression was explained by Lord Cooper in Elder v. Elder & Watson Ltd[11], as the essence of the of the matter seems to be a conduct about which a complaint is filed should be of lowest involve a visible departure from the fair standards of dealing, and be a clear cut violation of fair play relying upon which every share holder put his money into the corporation.

3. Needle Industries (India)Ltd and Ors. V. Needle Industries Newey (India) Holding Ltd. And Ors AIR 1981SC1298[12]- It is the case where the majority shareholder has put the allegation of oppression over the minority shareholders in India that they have appointed additional directors and issued further shares. It is one of the most important case in the corporate jurisprudence whereby it was contended that the majority shareholders of the company were facing oppression against minority shareholders and whereby the “supreme court held that even if the case for oppression is not proved it does not stop the courts to provide justice to aggrieved”[13]. The court in this case also referred to section 210 of English companies act and held that section 397 of Indian Companies Act is similar to section 210 of English Companies act, the court in this case also held that the oppressive act against minority must consist of a series and it should not be a single isolated act against which a complaint for oppression can be filed the court also held that if a director of the concerned company does some negligent acts then such carelessness of director would not give a reason to minority to file a case of oppression and that the member or members against whom oppression happened had to prove that the company is working in a manner which is unfair to them or which causes a prejudice against members to use their rightful legal and proprietary rights. In another case of Sangramsinh P. Gaekwad & Ors v. Shantidevi P. Gaekwad (dead) through L.R.s and Ors[14] that the court has the wide powers to give order and not bound by the terms contained in the section 402 of the Act. If deemed fit relief must be provided which depend upon the circumstances. And the same principle was reiterated in the case of M.S.D.C. Radharamanan v. M.S.D. Chandraskara Raja and Anr[15]

4. M/s Venture India Properties P. Ltd and Ors. V. Capt. Manmohan Singh Kholhi and Ors. [ 2011 ] 164 CompCas 251 ( Delhi ) [16]- In the present case the Delhi high court held that the provision of oppression and mismanagement given in companies act 1956 give a very wide powers to court and  that it has full jurisdictional power as conferred by section 397 ad section 398 that jurisdiction of company law board is very wide and they can pass any order to stop the oppression faced by the minorities.

5. In the Vikram Bakshi and Ors. v. Connaught Plaza Restaurants Limited and Ors.[17] case, the Bakshi and the McDonald has a joint venture agreement with equal interest in the CPRL and there has to a MD for the period of 2 years and MD could only be a person who holds 50% share of the joint venture. Clause 32 of the agreement states that if Bakshi was not to be to be MD of the CPRL then McDonald has the option of purchasing his shares at fair market value according to formula specified in the agreement. McDonald offered to buy it at $5 million, whereas Bakshi held the fair market value to be $100 million. NCLT held that the because this agreement is incorporated in AoA, hence would fall into its jurisdiction and it’s not an issue of private contract.   NCLT held that Bakshi was sincerely building the brand through his efforts but the McDonalds had blocked the reappointment of Bakshi with malafide and premediated intention. This is an act of oppression to buy the shares of Bakshi and reinstated Bakshi as the MD.

6. Cyrus Investments Pvt. Ltd. V. Tata Sons. Ltd [2020] 154CLA47[18].- The very recent and controversial case where on 24^th October 2016 the Tata Group in a board meeting removed Cyrus Mistry from the post of executive chairmanship to which the Shapoorji Pallonji group who owns 18% share capital of tata group filed for oppression and mismanagement which was rejected by nclt Mumbai and thus they came to appellant tribunal whereby it was contended by the applicants that without any proper reason Cyrus Mistry was removed as the chairmen of Tata Group and it was further alleged that it was done just to save the legacy of tata group and also alleged that Mr. Ratan Tata and Mr. N.A. Soonawala kept on interfering with the functioning of company thus not allowing Cyrus to work freely and also alleged that the Article 121 and Article 75 written in A.O.A of the company was oppressive and prejudicial which allowed the interference as it gives a veto to board of Tata sons limited which oppresses the rights of minority.
The appellant tribunal in the present case held that the removal of Cyrus Mistry as executive chairman was indeed oppressive and there was gross mismanagement and that Cyrus Mistry to be reinstated as executive chairman of Tata Group and in this judgment one of the major debatable point was the reinstatement of Cyrus as executive chairman of tata sons and other companies of tata group whereby it was not prayed by Cyrus in the application that he wants to be reinstated in the company but tribunal with virtue of section 242 gave the order it thinks fit and thus it became debatable but courts in previous judgment had also held that the sections of oppression and mismanagement gives a very wide power to the courts and tribunal and that they can pass any order that they deem fit to stop the oppression
So this is how the judiciary has constructed the provisions of oppression and mismanagement whereby they had assumed that a very wide range of powers through these legal provisions the main theory that the judiciary had developed is that one single act cannot be called as oppression and that it must be a series of act which should hinder the minority to use their legal or proprietary rights and in that case court or tribunal can pass any order that they deems fit to stop such oppression

Rights of Minority Shareholders in respect of Oppression and Mismanagement

1. OPPRESSION AND MISMANAGEMENT

While it is already a known and discussed fact that the members, and the shareholders face problems of oppression and mismanagement by the company and sometimes by the majority shareholders, what remains important in such cases is what are the rights and the remedies available to such minority classes. Mostly all the decisions are made with the majority rule and the same be just and fair. However, the problem that it creates it that it overlooks the opinions of the minority shareholders. Problems like these often lead to suppression of such class of shareholders who do not get the rights to make decisions according to their wishes. To prevent such scenarios of majority domination over the minority, the Companies Act, 2013 came up with the solutions in the form of making several sections that give the rights to the minority shareholders to approach the tribunals and the necessary authorities when the same happens for their betterment.    

While the Companies Act 1956 covered the elements of Oppression and Mismanagement in sections 397 and 398. However, the circumstances for granting relief has been given only for mismanagement and not for oppression. Section 397 of the Companies Act, 1956 says that when any affair of the company is being conducted to any member or members by the way of prejudice to public interest or oppressive then any one or more than one member has right to apply to the tribunal by the virtue of Section 399 of the 1956 Act.[19] Just like 2013 Act, the 1956 Act also provided for the requisite number of members who must sign the application.
Under section-241 & 244 of the Companies Act, 2013 the shareholders if they believe that the affairs of the company are conducted in a manner oppressive to their rights then under section-241 they can apply to the tribunal provided that the criteria as mentioned under section-244 is satisfied by such shareholders.[20]

What is to be noted is that, as per section 244 even though the there is a requisite number provided for filing an application, the tribunal may waive all or any of the requirements so as to enable the members to apply under section 241. That is if the tribunal finds that the case is of some grave nature or that there is serious oppression against the class, the tribunal can then waive the requirement of minimum number of people and file the application. In the case of Cyrus Investments Pvt. Ltd. V. Tata Sons Ltd. & Ors[21]., the Appellants filed a petition for waiver under section 244 of the Companies Act, 2013. The same was initially dismissed by the National Company Law Tribunal, Mumbai Bench, saying that their application was not maintainable. However, when the same was challenged, the Appellate Tribunal of Delhi taking into considerations the exceptional circumstances including the fact that out of Rs. 6,00,000 crores of total investment in Tata Sons Limited, the Appellants- Cyrus Investments Private Limited & Anr. had invested a huge sum of about Rs. 1,00,000 crores. By providing the above reason and the fact that the allegations against the Tata Sons Limited were serious, the Appellate Tribunal held that it was a fit case for waiver and remitted permission under sections 241-242.

2. CLASS ACTION SUITS

A class action suit can be filed under Section 245 of the Companies Act to the NCLT directly by any such class, depositors and member of the Company when they are of an opinion that the management and conduct of the affairs of the Company are being conducted in a manner prejudicial to the interests of the Company or members or depositors seeking following orders-

1. To declare a resolution altering the memorandum or articles of the company as void as the resolution was passed by suppression of material facts or obtained by misstatement to the members or depositors.[22]  
 
2. To restrain the company from doing an act which is contrary to the provisions of this Act or any other law for the time being in force.[23]

The Class Action Suit can be filed against a Company, any of its directors, auditor or audit firm or any expert/advisor/ consultant of the Company.

In considering the Application under the Tribunal shall consider whether the member or the depositor is acting in good faith in making the application and whether the cause of action is one which could be pursued individually instead of class action.

The orders that are passed by the tribunal are of binding nature and any company that fails to implement the order may be fined between Rs. 5-25 Lakhs and every officer responsible is liable for imprisonment besides a personal fine.

Rule 84 - Right to apply under section 245 (NCLT RULES 2016)

1. An application under section 245 of the Act, shall be filled in Form NCLT-9.

2. A copy of every application shall be served on the company, other respondents and all such persons as the Tribunal may direct.

3. In case of a company having a share capital, the requisite number of member or members to file an application under section 245 shall be -

I. (a) at least five per cent. of the total number of members of the company; or
(b) one hundred members of the company,
whichever is less; or

II. (a) member or members holding not less than five per cent. of the issued share capital of the company, in case of an unlisted company.
(b) member or members holding not less than two per cent. of the issued share capital of the company, in case of a listed company.[24]

4. The requisite number of depositor or depositors to file an application under section 245 shall be -
I. (a) at least five per cent. of the total number of depositors of the company; or
(b) one hundred depositors of the company,
whichever is less; or.

II. Depositor or depositors to whom the company owes five per cent. of total deposits of the company.

Conclusion

The words oppression and mismanagement is not defined in the act but through the reading of the section we can assume that 3 things would means oppression that is any act of the company that is (i) prejudicial to public interest (ii) Prejudicial or oppressive to the member or any other member or members (iii) Prejudicial to interests of the company whereas for mismanagement to be proved it must be proved that a material change has been done by the company which is prejudicial to the interest of its members and further the provisions in the act gives a very wide range of powers to courts and tribunals when they decide a matter related to oppression and mismanagement. The need to have such sections that deal with oppression and mismanagement of certain classes in the Company Law becomes essential as the corporate world run on the majority decisions. There are times when the majority often exercises such power and misuses them leaving the opinions and the views of the minority shareholders disregarded. What eventually happens is that these minority shareholders are dominated and suppressed with respect to decision making and the management of the Company. Therefore, the Companies Act, 1956 and the Companies Act 2013 came up with sections that could help in implementing and tackling such a situation and gave a much clearer understanding of the same. There have been certain requirements that are to fulfilled to file an application and yet there is tribunal’s power to waive those requirements.  This concludes that the company law has set some limits so that nobody misuses or accuses the other with mala fide intent. At the same time tribunal can use its power to give justice to ones at serious and actual harm.

Also read - OBJECTIONS THAT CAN BE RAISED BY MINORITY SHAREHOLDERS IN CASE OF REDUCTION OF SHARE CAPITAL IN THE TRIBUNAL

---

* III Year, B.A.LL.B(Hons), Institute of Law, Nirma University.

* III Year, B.A.LL.B(Hons), Institute of Law, Nirma University.

* III Year, B.A.LL.B(Hons), Institute of Law, Nirma University.

[1] Substituted for "Company Law Board" by the Companies (Second Amendment) Act, 2002 (w.e.f. a date yet to be notified).

[2] Section 244 The Companies Act, 2013, No. 18, Acts of Parliament, 2013(India).

[3] Section 242 The Companies Act, 2013, No. 18, Acts of Parliament, 2013(India).

[4] Foss v. Harbottle, (1843) 67 ER 189).

[5] Bhajekar v. Shinkar, (1934) 4 Comp Cas 434.

[6] Dixit, K. R. “MINORITY OPPRESSION: CORPORATE CONTROL.” Journal of the Indian Law Institute, vol. 9, no. 2, 1967, pp. 223–236.

[7] S Aditya, Prevention of Oppression and Mismanagement Under the Companies Act, 2013, IPleaders(Mar.30.2020, 10:00PM),https://blog.ipleaders.in/prevention-of-oppression-and-mismanagement/#Application_against_oppression_and_mismanagement.

[8] Shanti Prasad Jain v. Kalinga Tubes, A.I.R. 1965 S.C. 1535.

[9]K. R. Dixit, Minority Oppression: Corporate Control, 9 JILI 223,224(1967).

[10] Sidharth Gupta & Ors. v. M/s Getit Infor services Pvt Ltd & O, 2016.

[11] Elder v. Elder & Watson Ltd, 1952 SC 49 (Scotland).

[12] Needle Industries (India) v. Needle Industries Newey (India) Holding Ltd. A.I.R 1981 S.C. 1298.

[13] Rishi Kumar Dugar, Minority Shareholders Buying Out Majority Shareholders - An Analysis Author, 22 NLSIR 105,105(2010).

 

[14] Sangramsinh P. Gaekwad v. Shantidevi P. Gaekwad, (2005) 11 SCC 314.

[15] M.S.D.C. Radharamanan v. M.S.D. Chandraskara Raja, AIR 2008 SC 1738.

[16] 3. Venture India Ltd v. Capt. Manmohan Singh Kholhi (2011) 164 CompCas 251.

[17] Vikram Bakshi v. Connaught Plaza Restaurants Limited, 2017 AIR 143 SCL 37.

[18] Cyrus Investments Pvt. Ltd. V. Tata Sons. Ltd (2020) 154 CLA4 7.

[19] Section 397 Companies Act, 1956, No. 01, Acts of Parliament, 1956(India).

[20] Section 241(1)(b) The Companies Act, 2013, No. 18, Acts of Parliament, 2013(India).

[21] Cyrus Investments Pvt. Ltd. V. Tata Sons. Ltd (2020) 154 CLA4 7.

[22] Section 245(1)(c) of the Companies Act,2013, No. 18, Acts of Parliament, 2013(India).

[23] Section 245(1)(e) of the Companies Act,2013, No. 18, Acts of Parliament, 2013(India).

[24] Inserted by National Company Law Tribunal (Second Amendment) Rules, 2019 vide Notification No. GSR351(E) dated 08.05.2019.