minority protection
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This article is written by Kartikeya Kaul, a first-year student pursuing a BA.LLB. from Symbiosis Law School, Noida. This is an exhaustive article dealing with the Minority Protection under Company Law.

 

Introduction 

Historically, we have seen the majority shareholders in the company have the absolute right and power in the operations and the working of a company. This may also lead to abuse of power by the majority and the minority shareholders suffer because of this. This often leads to mismanagement of the company and oppression of the minority.

Despite the provisions laid out in the Companies Act 1956, the minorities didn’t have enough time and resources, so they found themselves incapable of exercising their rights. So, this leads to the formation of Companies Act 2013, in which the interests of minority shareholders were taken into consideration and they were protected.

So, if in case, the minority has been treated unfairly in the company, the freedom to approach an appropriate body should be established in the course of law in order to protect the interests of the minority shareholders.

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The rule in Foss v Harbottle

A Rule of Corporations law: shareholders do not have a separate course of action for anything wrong which may be inflicted by a corporation.

Acts Ultra Vires

The doctrine of ultra vires is a fundamental rule in company law. It states that the affairs of the company has to be in accordance with the clauses in the memorandum of association and cannot contravene its provisions.

Fraud on minority

Fraud on minority refers to the unjust exercise of voting powers done by the majority shareholders of the company. It is based on the evidence of failure to cast votes that would benefit the company as a whole. As the majority of the company commits a fraud on the minority, a resolution is passed which makes the voting voidable.

Acts requiring a special majority

This happens in Section 114 of the Companies Act 2013, where a resolution becomes a special resolution when the intention to propose a resolution as a special resolution has been duly specified in the notice calling, the notice calling or other resolution given by the members. Also, if a notice under this act is duly given and whether the votes are cast in favour of the resolution, whether by show of hands/electronically/ballot paper or in any form of a poll, as the case may be, by members who vote in person or proxy or by ballot post, are needed to be three times the number of votes, if any, cast against the resolution of members so entitled to voting.

Wrongdoers in control

It has been seen that where the wrongdoers control the company and thus prevent it from bringing into action, the courts will allow shareholders to do so, on the company’s behalf in order to obtain redress by way of a derivative action. By liberalising and adapting an extensive reading into the scope of the wrongdoer control test, this decision provides useful judicial clarification on the rights and the remedies present in a true deadlock situation.

Individual membership rights

There are certain rights of members of a company which they can enjoy in their individual capacity. These rights are contractually based and cannot be taken away except with the written consent of the concerned member. The individual rights of a member arise in part in the form of a contract between the company and a member who is known to be a member of the company, and in part from the general law. Under the contract of his membership, some individual/personal rights are- 

  • He is entitled to have his name and shareholdings entered in the registrar of members and to stop unauthorised additions or alterations to entry, to vote at meetings of members. 
  • To receive dividends which have been duly declared or which have become due under the article.
  • The execute pre-emption rights over other members shares which are conferred by the articles. 
  • To have his capital returned in the proper order of priority in the closing of a company or a mere reduction of the capital that is authorised.
  • Under the general law, he is restrained from such acts which are ultra wires. 
  • He should have a reasonable opportunity to speak at the meeting of members. 
  • To move amendments to resolutions at such meetings to transfer his shares.
  • The supreme court in the case of LIC v. Escorts Ltd., the rights of the shareholders was recognised in the court to elect directors, to participate in the management, to enjoy the profit, to hare on winding up etc.

Prevention of Oppression and Mismanagement

Prevention of oppression

Section 397(1) of the Companies Act provides that any member of a company who complains that the affairs of the company are being conducted in a manner prejudicial to the public interest or it is oppressive to any member or members may apply to the tribunal for order thus to protect his or her statutory rights.  

Section 397(2) of the Companies Act states that the tribunal may grant relief in Section 397 if it is of the opinion that-

  • If the company’s affairs are handled in a manner prejudicial to the public interest or in a manner oppressive to any member or members. 
  • To wind up the company that would be unfair to its member or members, 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. 

The tribunal with the view of all the matters that were complained to them, may then afterwards give their final decision as they may deem fit.

Who can Apply?

Section 397 of the Companies Act states the members of an organization shall have the right to use under Section 397 or 398 of the Companies Act. According to Section 399 wherever the company is with the share capital, the application should be signed by a minimum of a hundred members of the company or by a tenth of the total range of its members, whichever is a smaller amount, or by any member, or members holding a tenth of the issued share capital of the company.

Where the company is without share capital, the application needs to be signed by a fifth of the entire range of its members. A single member cannot gift a petition under Section 397 of the Companies Act. The personal representative of a deceased member whose name is once more on the register of members is entitled to petition under Section 397 and 398 of the Companies Act.

Under Section 399(4) of the Companies Act, the Central Government if the circumstances exist authorizes any member or members of the corporate to apply to the court and also the demand cited above, may be waived. The consent of the requisite number of members is needed at the time of filing the application and if a number of the members withdraw their consent, it will in no way build any impact within the application. The other members may very well continue with the proceedings.

Meaning of oppression

Oppression is the exercise of authority or power during a heavy, cruel, or unjust manner. It may also be outlined as associate act or instance of oppressing the state of being oppressed, and the feeling of being heavily burdened, mentally or physically, by troubles, adverse conditions, and anxiety.

The Supreme Court in Daleant Carrington Investment (P) Ltd. v. P.K. Prathapan, held that increase of the share capital of a company for the sole purpose of gaining control of the company, where the majority shareholder is reduced to a minority, would amount to oppression. The director holds a fiduciary position and will not issue shares on his own. In such cases, the oppressor wouldn’t be given a chance to buy put the oppressed.

Prevention of Mismanagement 

The present Companies Act 2013 provides the meaning of the term “mismanagement”. When the affairs of the company are conducted in a manner to be prejudicial to the interests of the company or its members against the public interest, it amounts to mismanagement.

Power of Central Government to appoint directors 

The power to appoint a director of a company when his position is vacant falls under Section 167(3) of the company Act, where the promoters of the company, or their absence, the government at the centre shall hold the power of the appointment of the required number of directors to hold the office until the directors are appointed by the company in a general meeting. 

Although the standard operating procedure does not mention anything about where the central government shall call for such a general meeting to get the required number of directors appointed, it states that the shareholders can appoint the minimum number of directors.

Power to prevent change in board 

Here, we are referring to Section 409 company law – Power of Company Law Board to avoid change in the Board of directors prone to influence company preferentially or prejudicially: 

  1. Where a complaint is made to the Company Law Board by the overseeing director or some other director or the administrator, of a company so that because of a change which has occurred or is probably going to happen in the ownership of shares held in the company, an adjustment in the Board of directors is probably going to happen which (whenever permitted) would influence preferentially the issues of the company, the Company Law Board may, whenever fulfilled, after such request as it might deem fit to make that, it is simply and legitimate so to do, by request, direct that no resolution passed or that might be passed or no move made or that might be produced to results an adjustment in the Board of directors after the date of the grievance will have impact except if affirmed by the Company Law Board; and any such request will have impact despite anything unexpectedly contained in some other arrangement of this Act or in the notice or articles of the company, or in any concurrence with, or any goals cruised all in all gathering by, or by the Board of directors of, the company. 
  2. The Company Law Board will have control when any such protest is gotten by it, to make a between time request with the impact set out in subsection (1), preceding making or finishing the request previously mentioned. 
  3. Nothing contained in sub-section (1) and (2) will apply to a privately owned business, except if it is an auxiliary of an open company.

Investigations

The Companies Act 1956 provides for investigation of companies under Sections 235 – 250A of this act. The central government may appoint investigators to focus on issues regarding public interest or on the basis of a special resolution, or on the request of courts/tribunals or from members of the company having a specific amount of shares, as specified.

Power of Investigation 

On members’ application

When an investigation has been ordered with the request of an applicant, the central government will recover the expenses of the investigation from the applicant itself.

On the report given by Registrar 

The registrar may also have the power to call for documents, records as required under the law. If from some random scrutiny, sufficient grounds arise warranting investigation of the company, the same may be considered by the central government.

Power of Inspectors

The Central government may select any official of government, any private expert or gathering/firm of experts as an inspector for examination. It ought to anyway be guaranteed that there is no irreconcilable situation. The Inspector/Investigator or his accomplices ought not have any material association with the corporate entity or its holding or auxiliary elements.

The present arrangements identifying with forces of the inspector, duties of directors, officials or different people throughout the investigation, discipline for non-creation of records and furnishing of bogus data and other related issues might be held. The Act may accommodate appropriate punishment for wrecking or ravaging company’s records by its director or officials. The arrangements of examination ought to likewise be stretched out to remote organizations which are doing business in India.

Investigation of ownership of the company 

The law should lay down the liability for compliance for management/owners controlling the interests of the companies, combined with a system of oversight through random scrutiny of the filing of documents by the companies.

Investigation of ownership of shares

The central government may also hire investigators and may investigate the company having a requisite number of shares as may be specified.

Restrictions upon transfer of shares and debentures 

Section 250, the imposition of restrictions upon shares and debentures and prohibition of transfer of shares or debentures in certain cases.

  1. Wherever it seems to the company Law Board, whether or not on a reference made to it by the Central Government in reference to any investigation under Section 247 or on a complaint filed by any person in this behalf, that there’s a sensible reason to seek out the relevant facts regarding any shares (whether issued or to be issued) and therefore the Company Law Board is of the opinion that such facts can’t be identified unless the restrictions laid out in sub-section (2) are imposed, the company Law Board could, by order, direct that the shares shall be subject to the restrictions obligatory by subsection (2) for such period not exceeding 3 years as could also be laid out in the order.
  2. So long as any shares are directed to be subject to the restrictions imposed by this sub-section –
  • Any transfer of these shares shall be void;
  • Wherever those shares are to be issued, they shall not be issued; and any issue thereof or any transfer of the right to be issued thereupon, shall be void;
  • No right shall be exercisable in respect of these shares;
  • No additional shares shall be issued in right of these shares or in pursuance of any supply created to the holder therefrom, and any issue of such shares or any transfer of the right to be issued thereupon shall be void; and
  • Except during a liquidation, no payment shall be made from any sums due from the company on those shares, whether or not in respect of dividend, capital or otherwise.

Wherever a transfer of shares in a company has taken place and as a result therefrom a change within the composition of the Board of administrators of the company is probably going to take place and therefore the Company Law Board, is of the opinion that any such amendment would be prejudicial to the general public interest, it may, by order, direct that –

  • the voting rights in respect of these shares shall not be exercisable for such period not exceeding 3 years as could also be laid out in the order;
  • no resolution passed or action taken to impact an amendment within the composition of the Board of Directors before the date of the order shall have an impact unless confirmed by the Company Law Board.
  1. Wherever the corporate Law Board has reasonable grounds to believe that a transfer of shares in a company is probably going to require place whereby an amendment within the composition of the Board of directors of the corporate is probably going to require place and therefore the Company Law Board is of the opinion that any such change would be harmful to the general public interest, the company Law Board could, by order, direct that any transfer of shares within the company throughout such amount not exceeding 3 years as could also be laid out in the order, shall be void.
  2. The company Law Board could, by order at any time, vary or repeal any order created by it under sub-section (1) or sub-section (3) or sub-section (4).
  3. Any order created by the Company Law Board under sub-section (5) shall be served on the company among fourteen days of the creation of the order.
  4. Someone who:
    • Exercises or purports to exercise any right to get rid of any shares or of any right to be issued with any such shares when to his knowledge, he’s not entitled to try and do therefore by reason of any of the aforementioned restrictions applicable to the case under sub-section (2).
    • Votes in respect of any shares whether or not as holder or proxy, or appoints a proxy to vote in respect thereof, once to his knowledge he’s not entitled to try and do this, by reason of any of the aforementioned restrictions applicable to the case under sub-section (2) or by reason of any order created under sub-section (3).
    • Transfers any shares in dispute of any order created under sub-section (4).
    • Being the holder of any shares in respect of that an order in sub-section (2) or sub-section (3) has been created, fails to provide notice of the very fact of their being subject to any such order to someone whom he doesn’t know to be aware of that fact however whom he is aware of to be otherwise entitled to take respect of these shares, whether or not as holder or as a proxy, shall be punishable with imprisonment for a term which can reach six months, or with fine which can reach fifty thousand rupees, or with both.

Wherever shares in any company are issued in dispute of such of the restrictions as could also be applicable to the case in sub-section (2), the company, and each officer of the corporate who is in default, shall be punishable with fine which can reach fifty thousand rupees. A prosecution shall not be instituted under this section except by, or with the consent of the Central Government. This section shall apply in regard to debentures because it applies in reference to shares.

Administrative and Quasi-judicial Controls

Administrative and quasi-judicial controls imply that the company may have such controls over the member’s shareholdings.

National Company Law Tribunal and Appellate Tribunal

National company law tribunal is a quasi-judicial body that relates to issues regarding Indian companies.

Advisory Committee 

An advisory committee is also set up by the government of India, giving its advice regarding the problems faced based on company law.

Power of Securities and Exchange Board of India

Securities and Exchange Board of India (SEBI) is a statutory administrative body entrusted with the responsibility to direct the Indian capital markets. It screens and directs the protections to advertise and ensures the premiums of the financial specialists by authorizing certain standards and guidelines.

Conclusion 

Hence, we can say that Company Law is one of the most important laws in the country as it helps in protecting the interest of people, especially minority shareholders. Now, after the amendment of the company act, we can see that minorities can no longer be exploited against and are fully protected under this Act. 

References


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