prevention of oppression and mismanagement
Image source - https://bit.ly/30fnpSE

This article is written by S. Aditya, an alumnus of KLE Society’s Law College, Bengaluru. This article focuses on the provisions regarding the prevention of oppression and mismanagement under the Company legislation of India.

Meaning Of Oppression

Oppression is the exercise of authority or power in an unjust manner against the consent of the other party. In the Black Law Dictionary, the term ‘oppression’ is defined as ‘the act or an instance of unjustly exercising power.’ It can also be viewed as an act or instance of oppression and the feeling of being heavily burdened, mentally or physically, by troubles, adverse conditions, and anxiety.

In the case of Dale and Carrington Investment Pvt Ltd. v P. K. Prathapan, it was held that increasing the capital of a company with the sole purpose of gaining control over can be termed as oppression.

Application to Tribunal for relief in cases of Oppression

The aggrieved shareholder may approach the National Company Law Tribunal set up under the Company legislations. 

Application against oppression and mismanagement

Earlier under the Companies Act, 1956 section 397 dealt with the application against oppression and mismanagement. The Companies Act, 2013 lays down the provision to make an application against the oppression under section 241. The chapter XVI of the Company Act clearly specifies who can raise a complaint and under which circumstances a complaint may be raised of oppression and mismanagement. 

First let’s consider a situation when a member of the company makes a complaint regarding the affairs of the company when the affair may seem shady affecting the interest of the public at large or the company,  or when the affairs of the company is oppressive in nature and against the member making the complaint or any other member of the company. The member may also make a complaint regarding the material change in the management or control of the company which may seem to be prejudicial to the company. The Central government may, by itself, file the oppression and mismanagement application before the tribunal against a company if it believes that the affairs of the company are prejudicial in nature. 

Who can file an application against Oppression and Mismanagement?

The Provision of Section 244 of Companies Act is also crucial as it describes who has a right to file such an application. The right is broadly divided between the company and entitlement to one member, to file on behalf of the other members. In a company, the right may further be differentiated based upon the companies having a share capital and companies not having a share capital. The share capital of the member complaining, may be calculated based upon share capital’s number or its value. When it comes to number, it should be 100 or 1/10 of the total members and when it comes to the value, it must be the members holding 1/10th of the share capital value.  In companies not having a share capital, 1/5th of the total members may apply. Coming back to the entitlement to one member, to file on behalf of the other members, it is posed with only one precondition that the person doing so must have the consent of others in written form.

Power of Tribunal: Section 242 of the Companies Act, 2013

The tribunal is the special adjudicatory body brought about to deal with the matters pertaining to the Companies Act in order to get efficient and immediate relief. Section 242 deals with the powers of the tribunal and the same have been examined and explained for your kind perusal. 

  • The first power granted upon it by the legislation is to pass an order. Such order may be passed if it is of the opinion that the affairs of the company have been or are being conducted in a prejudicial manner. It has been mentioned that the winding up of the company will not be ordered radically, but it is the oppression and mismanagement which is aimed to be stopped. 
  • The same provision also confers powers upon the tribunal regarding three issues which are concerning the 1) shareholders 2) Company and 3) others. 
  • With respect to shareholders, a tribunal may order to purchase shares of members by other members or by the company. 
  • A tribunal may as well order a reduction of the share capital or even enforce restriction on transfer of shares because oppression and mismanagement at root cause depends upon the coagulation of shares at the hands of individual or few members. 
  • Regarding the management of the company which is a crucial part of a company, a tribunal may terminate or modify agreements made between company and management or agreement between the company and any other person.  
  • The tribunal in case of management of the company may even remove the Managing Director, Manager, and Director, the tribunal may recover undue gains made by such official and also appoint another MD, manager, and director. 
  • In certain cases, the tribunal may appoint a person who shall report to the tribunal regarding the activities of oppression and mismanagement by the management to curb such oppression from taking place further. 
  • Lastly, the tribunal has certain other powers such as regulation of the conduct of the affairs of the company, setting aside the transfers of any property of the company and the tribunal may even impose costs. The procedural details are that the tribunal has to send a copy of its order to the registrar and if the order has not been finalised, it may provide an interim order to the registrar. Pertaining to changes made in MOA (Memorandum of Association) and AOA (Article of Association) the changed documents must be submitted to the registrar. The punishment prescribed in abeyance of the law is set at 1 Lakh to 25 Lakh for a company and 25000 to 1 Lakh for an officer in default and such officer may also be liable for a term of imprisonment of 6 months.  

Oppression of the Minority

The management of a Company is based on the majority rule, but at the same time, the interests of the minority can’t be completely overlooked. While talking of majority and minority, we are not talking of numerical majority or minority but of the majority or minority voting strength. The reason for this distinction is that a small group of shareholders may hold the majority shareholding whereas the majority of shareholders may, among them, hold a very small percentage of share capital. Once they acquire control, the majority can, for all practical purposes, do whatever they want with the Company with practically no control or supervision, because even if they are questioned on their acts in the general meeting, they always come out winners because of their greater voting strength. So, the modern Companies Acts contain a large number of provisions for the protection of the interests of minorities in companies.

Appeals against the Orders of the Tribunal and variation of the Order of the Tribunal

The Award pronounced by the NCLT (National Company Law Tribunal) may be appealed before the NCLAT (National Company Law Appellate Tribunal). The procedure and provision granting such right to appeal is Section 421 and the same is explained below.

  • The appeal may be preferred by any person who is aggrieved by the decision of the tribunal. 
  • No appeal shall be entertained when the decision is given by the tribunal based upon the consent of the parties. 
  • Appeals must be made within a period of forty-five days from the disputed order passed by the tribunal and the extension may be given only when sufficient cause for such delayed filing is brought before the court by such party and such extension shall only be for another 45 days. 
  • On receiving such appeal, the appellate tribunal must give a reasonable opportunity to the parties and then pass an order confirming or modifying or setting aside the order appealed against.
https://lawsikho.com/course/certificate-course-in-advanced-civil-litigation-practice-procedure-and-drafting
               Click above

Maintainability of Petitions under Sections 241 & 421

  • The validity of a petition must be judged from the facts as they were, at the time of its presentation, and a petition which was valid when presented cannot cease to be maintainable by reason of events subsequent to its presentation. 
  • For the purposes of the petition under Sections 241 and 421, it was only necessary that members who were already constructively before the court should continue the proceedings. The provision under the Companies Act provides substantive provisions regarding an application that is to be made when there is complaint of oppression and mismanagement. It clearly specifies who may complain and when. 
  • As discussed before, member shareholders may make a complaint when the company affairs are conducted prejudicial to the company and its shareholders. 
  • The central government may even take suo-moto action regarding the same under the aforementioned provisions. Under the provision Section 421 of Company Act, one could make an appeal from an order of the tribunal if such a person is aggrieved by the decision. 
  • The time duration of 45 days has been fixed as maximum period within which appeal shall lie from the order of company tribunal, but the appeal may be further extended to a maximum of another 45 days on convincing court of the sufficient cause of delay.
  • Then the appellate tribunal finally gives the appellant a reasonable opportunity to present their case again, to either uphold or overrule the previous decision of the tribunal. This appeal provision is based upon the intrinsic right to appeal, which is provided to the aggrieved party in order to do complete justice. 

Class action

The word class action is defined under Section 245 of Company Act.  A class action is where number of claimants with common grievance against the company are allowed to file a lawsuit against the company. Claimants can collectively use their resources such as share attorney’s services and save their litigation costs to a great extent. The financial scale attached to the class action suit is perceived as a saving grace for individuals with limited resources. 

The  funding of a class action suit is usually made from the Investor Education Protection Fund. This funding is subject to the feasibility of reimbursement from the IEPF which is usually considered an acid test under the Company Act, 2013. The application is usually made regarding the conduct of the affairs of the company being prejudicial to the interest of the company or the members and its depositors. A class action may even be filed against the directors or auditors of the company for misleading the members by furnishing misleading reports.

Under the Security Class Action, group of people affected by the changes made to the MOA/AOA must bring a suit of class action instead of filing application of class action. 

Numbers of members/ depositors who may bring class action suit:

  • In case of companies having a share capital, not less than 100 members of the company may bring a class action suit; or not less than 10% of the total number of members whichever is less may bring a class action suit, or any member individually or jointly holding 10% of the share may bring a class action suit provided, all such shareholder members have paid up all the share dues.
  • If the company is not having a share capital, then not less than 1/5th of the members can bring a class action.
  • For a company having deposit capital, a class action suit may be brought by not less than 100 depositors of the company or by a minimum of 10% of the total depositors whichever is less, or a class action suit may also be brought by any depositor individually or depositors jointly who are holding 10% of the outstanding deposit of the company.

Conclusion

The recent collapse of large companies and corporations globally has made such entities to carefully ponder over their actions towards affairs of the company. Accountability has increased by the tool of class action suits that are filed against the management personnel regarding their deeds of oppression and mismanagement. The individual shareholder of the company and the minority shareholders have been empowered to take up action against the unjustified abuse of power and authority by the managerial personnel under the law regarding oppression and mismanagement. An individual may file an application before the tribunal informing about the oppression and mismanagement carried out by any key personnel, against him or any other shareholder of the company.

References 

  1. The Companies Act, 2013

Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skill.

LawSikho has created a telegram group for exchanging legal knowledge, referrals and various opportunities. You can click on this link and join:

https://t.me/joinchat/J_0YrBa4IBSHdpuTfQO_sA

Follow us on Instagram and subscribe to our YouTube channel for more amazing legal content.

Did you find this blog post helpful? Subscribe so that you never miss another post! Just complete this form…

LEAVE A REPLY