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This article is written by Anith Johnson, Diploma in Companies Act, Corporate Governance and SEBI Regulations from LawSikho.com. Here he discusses “Eligibility to file a petition under Oppression and Mismanagement”.

Introduction

Companies were run by democratic process and most of its operation was run by majority rule and Rule of Majority was followed in taking important decisions. The majority is often considered as the solution to all the problems and the same principle was applied to companies. It is important to maintain shareholder democracy in a Company for effective control. Hence, it is necessary to protect the rights of Minority shareholders for the smooth functioning of Companies. The principle of Majority rule in internal administration of the Company was established in Foss v. Harbottle and it was held that majority rule will prevail over minority rule. It was held that once a resolution is passed it is binding on all its members. 

What leads to oppression and mismanagement?

Usually, top-level management and directors of the company hold significant shareholding in the company and it is very common that the directors misuse their powers for their personal benefit. When majority shareholders act in a manner which is not in the best interest of the company and is violating the Articles of Association (AOA), Memorandum of Association (MOA) and statutory provisions then it leads to oppression and mismanagement.  

Changes in provision relating to Oppression and Mismanagement from Companies Act, 1956 to Companies Act 2013

Section 241- Application to Tribunal for relief in cases of Oppression

Section 241(a) defines Oppression as the affairs which are conducted in a manner prejudicial to public interest, members of the Company or in a manner to the interests of the Company. Section 241(b) defines Mismanagement as any material change which is conducted in a manner prejudicial to public interest by altering the ownership of the Company. 

An Application can be made to the National Company Law Tribunal under section 241(1) if the members of the Company believe that affairs of the Company are done in a manner which is detrimental towards the members of the Company and against public interest. 

If the Central Government feels that the activities of a Company are conducted in a manner which is prejudicial to public interest it may itself apply to the tribunal.

Section 244- Eligibility criteria for filing an Application under Section 241  

Section 244 provides for the eligibility criteria for the members to file an application with the National Company Law Tribunal who complains that activities of the company conducted in a manner which is prejudicial to public interest and to the members of the Company. The required number of shareholders to file an application is given under Section 244. The requirement differs depending on whether the company has a share capital or not. These requirements are discussed below:

  1. In case of a company having share capital, the application must be filed by a member after obtaining the consent of at least one hundred members or one-tenth of the total number of members, whichever is lesser. Any member holding one-tenth of the issued share capital can also make valid applications. To make a valid application will be subject to the condition that the applicants must have paid all calls and other sums due on his shares or their shares. 
  2. In case a company does not have share capital, not less than one-fifth of the total number of members.

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. In case of joint holding of the shares, the joint holders will be counted as one. A member after taking consent of the requisite number of members may take the application on behalf of them all.

Powers of Tribunal to prevent Oppression and Mismanagement under section 242

Section 242 of the Companies Act confers power upon the National Company Law Tribunal to take action if it is of the opinion that the conduct of the company is prejudicial and oppressive to the members of the Company. Apart from winding up of the Company, it can take:

  1. Regulation of affairs of the company in future.
  2. Other members purchase the shares or interests of any member of the company.
  3. Purchase of its shares by the company resulting in reduction of its share capital.
  4. Restrictions can be imposed on the transfer or allotment of the shares.
  5. The termination, setting aside or modification of any agreement, between the company and the managing director, any other director or manager which is deemed necessary by the Tribunal. 
  6. The termination, setting aside or modification, of any agreement, between the company and any person other than those referred above which is deemed necessary by the Tribunal.
  7. 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 3 months before the date of 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.
  8. Removal of the managing director, manager or any other director of the company.
  9. Recovery of undue gains made by any managing director, manager or director and utilisation of the recovery by transfer to Investor Education and Protection funds or repayment to identifiable victims.
  10. The procedure to appoint a new Managing Director or Manager after the removal of an existing Managing Director or manager. 
  11. Appointment of persons as directors, who may be required to report the Tribunal.
  12. Pass an interim order as the Tribunal may deem fit for regulating the conduct of the Company.
  13. Pass an order to alter the Memorandum or Article of Association of the Company and it should be in accordance with the order of the Tribunal.
  14.  Other Steps as it may deem necessary by the Tribunal.

Cyrus Mistry v. Tata Sons

NCLT

The petitioner namely Cyrus Investments Pvt. Ltd. and Sterling Investment Corporation Pvt. Ltd. filed a petition against Tata Sons for Oppression and Mismanagement under Section 241. The feud started when the Board of Directors removed Cyrus Mistry as Tata Sons’ ‘executive chairman’. The petitioners’ contended that removal of Cyrus Mistry as the Executive Chairman of the Tata Sons’ as oppressive and prejudicial to minority members of the Tata Sons as the petitioner 18.37% of the total equity share capital. The Respondent contended that petitioner is holding only 2.7% of the total share capital inclusive of Equity and Preference share capital and thus is not eligible to file a petition under section 244 of the Companies Act, 2013. 

The NCLT dismissed the petition stating that Share Capital is inclusive of both Equity and Preference shares and the petitioners do not have the cause of action as envisaged under Section 244.

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NCLAT

Soon after Mr. Cyrus Pallonji Mistry was removed as the executive chairman of Tata Sons’, it converted itself into a private company. Whereas in NCLAT it was held that Mr. Ratan Tata and Mr. Nitin Nohria, nominee directors of Tata Trusts has abused their power and removed Mr. Cyrus Pallaonji Mistry as the executive chairman hastily and without following the normal procedure. The court also held that conversion of Tata Sons’ as a Private company was illegal and it reinstated Mr. Cyrus Pallaonji Mistry as the executive chairman. 

Tata Sons has approached the Supreme Court against the order of NCLAT.

Class Action Suits

Class action suits enable a group of aggrieved people with common grievance to collectively file a suit against the company. Even though it was inserted in the Companies Act, 2013 but only got notified in June 2016. The concept of Class action suits was introduced after the Satyam scam where shareholders were unsuccessful in getting compensation as it was dismissed by the Apex court due to lack of provisions. The Class Action Suits instill confidence in shareholders and investors and also increases the competence of the legal process. 

Section 245 of the Companies Act, 2013 provides for Class Action Suits and it can be instituted by any member, depositor or any class of them if they are of the opinion that the management or conduct of the affairs of the company is prejudicial to the interests of the company. Class action suits protect the interests of the shareholders when the management commits any activity which is prejudicial to the interests of the shareholders. 

Who can file Class Action Suit?

Company having Share Capital

  • Not less than one hundred members; or
  • Not less than 10% of the total members of the company, whichever is less, or
  • Any member or members holding more than 10% of the issued share capital of the Company.

All the members should have paid all calls and arrears on their shares.

Company not having Share Capital

  • Not less than one fifth of the total members.

Depositor

  • Not less than one hundred depositors;
  • Not less than 10% of the total depositor of the company, whichever is less; or
  • Any depositor or depositors holding more than 10% of the issued share capital of the Company.

Reliefs available under Class Action Suits

  1. To restrain the company from committing any act which is unlawful and against the AOA or MOA.
  2. To restrain the company from violating any of the provisions of AOA or MOA.
  3. To declare the resolution void if it was passed by concealing of material facts or obtained by mis-statement. Also to restrain the company and directors from acting on such resolution.
  4. To restrain the company from doing any act which is in conflict with the provision of this Act.
  5. To restrain the company from doing any act which is contrary to the resolution passed by the members. 
  6. To claim damages or compensation or demand any suitable action from or against:
  • The company or its directors from any fraudulent, unlawful or wrongful act.
  • The auditor including the auditing firm for misleading statements.
  • The expert, advisor or consultant or any person for misleading statements.

Penalty

According to section 245(6) of the Companies Act, an order which has been passed by the tribunal is binding on the company and all its members or any other person associated with the company whom the tribunal deems fit for any of the activities under section 245(1).

Any company which fails to comply with the order which has been passed by the tribunal shall be punishable under section 245(7) with:

  • Fine which is not less than five lakh rupees and which may extend to twenty-five lakh rupees,
  • Imprisonment for the officers in default which may extend to 3 years with a minimum fine of Rupees Twenty-Five thousand and it may also extend to One Lakh rupees.

Conclusion

Companies Act, 2013 has taken several important steps to safeguard the interest of shareholders in the minority rights in the Company. The introduction of a class action lawsuit is a step in the right direction. Efforts must be made to raise awareness that the parties involved are using this mechanism and gaining justice. Companies should not indulge in activities which are in violation of AOA and MOA and should opt for transparent administrative practices. The main intention of a company should be to maximize shareholder value.


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