This article is written by Anjali Sinha, a legal professional. The article talks about oppression and mismanagement as provided under Chapter XVI of the Act, the related provisions, its application, and landmark judgements supporting and explaining the contentions.
It has been published by Rachit Garg.
Table of Contents
Chapter XVI of the Companies Act, 2013, comprising Sections 241-246 incorporates the statutory provisions for intercepting oppression and mismanagement in a company.
Although the Act does not specifically outline the terms ‘oppression’ or ‘mismanagement’, an aggrieved shareholder may make a motion to the National Company Law Tribunal (hereinafter referred to as the NCLT) under Section 241 if there is a reason to believe that the affairs of the company are being carried out in a manner prejudicial to the concern of the company/public or is prejudicial to it or any other member(s).
Similarly, such a motion may also be initiated if the shareholder believes that there has been a minimal change in the company’s management or control, which is not the concern of shareholders and can also lead to the company’s affairs being carried out in a manner prejudicial to the interests of the company or its members. This consists of a turnaround or substitution in the Board, managers, or alteration in the ownership of the company’s shares.
A detailed explanation of Section 241
An analysis of clause (1) provides that Section 241 can be described as:
- A misuse of powers by a person in charge of the administration of the company.
- An insufficient administration does not result in oppression but may amount to mismanagement of the company under Section 241 of the Act.
- When the company is operated against the views and concerns of the majority shareholders, involving the company in expensive litigations, the management might be deemed to be prejudicial to the company’s interest.
- If there is any such unusual practice, then members of the company may approach the tribunal. However, it is pertinent to note that the member should have a right under Section 244 of the Act to an order under this Chapter.
An analysis of clause (2) provides that if the Central Government is of the opinion that the company’s affairs or other practices are contrary to the public interest, then an approach to the Tribunal can be made to resolve the issue or to take legal action under the provisions mentioned under this Act. Further, an application under this subsection may be made before the Principal Bench of the Tribunal, and those applications should relate to the company or class of companies that may be specified.
An analysis of clause (3) provides that if the Central Government is of the opinion that under certain circumstances, a person is a fit and proper person to hold and be connected with the conduct and management of the companies, the Central Government may initiate a proceeding and refer the same to the Tribunal with a request to inquire into the case and record a decision regarding the fitness of the person. The circumstances are as follows:
- Any person involved with the management and function of the company is or has been guilty of fraud, misconduct or negligence and failure to perform duties and functions.
- Affairs of the company are not being managed by a person having sound knowledge of business principles and practices.
- Affairs of the company being managed by the person having malafide intentions.
An analysis of clause (4) provides that any person against whom an application by virtue of sub-section (3) is made shall be added as a respondent to the application.
Likewise, clause (5) provides that every application made by virtue of sub-section (3) contains a brief description of facts and circumstances that the central government takes into consideration while investigating. Also, the signature and verification procedures will be as per the Civil Procedure Code, 1908).
How can an application be made under Section 241
If any of the members authorised, depositors, or classes of them believe that the company’s management is acting in a way that is prejudicial to the company’s interests, an application must be submitted to the tribunal.
The statutory remedy envisaged in Section 241-242 is an effective option for an aggrieved investor whose interests have been harmed. However, it is not a time-barred procedure. The action envisaged as the statutory remedy under the Section may be effective until an interim or final measure is granted.
Also, an aggrieved party may approach the NCLT for immediate relief in the course of such proceedings. If any such immediate or final relief is granted during the course of action, it would be applicable as such.
The NCLT has a wide range of powers within the meaning of the Act,the most important of which is the power to grant just and equitable reliefs. In addition, there is no restriction on the persons who may be the parties to the proceedings. The reliefs granted by the NCLT are also not limited to particular persons and may operate on a substantive basis.
Who can file an application under Section 241 of the Companies Act, 2013
Earlier in the Companies Act, 1956, Section 397 dealt with applications against oppression and mismanagement. The Companies Act, 2013, provides for the provision of an application against oppression under Section 241. Chapter XVI of the Companies Act clearly sets out who may make a complaint and under what circumstances a complaint of oppression or mismanagement may be made.
Consider first a situation where a member of the company files a complaint about the affairs of the company when the matter appears to affect the interest of the general public or the company, or when the company’s affairs are oppressive in nature and against the complainant member or any other member of the company.
The member may also file a complaint in relation to a material change in management or control of the company that could appear to be prejudicial to the company. The Central Government itself can bring an application for oppression and mismanagement in a tribunal against a company if it considers that the company’s affairs are prejudicial .
Further, Section 244 of the Companies Act, 2013, describes who has the right to make such an application. The right is widely shared between the company and the entitlement of a member to make applications on behalf of other members.
In a company, the right can be further differentiated between companies holding share capital and companies not holding share capital. In numerical terms, it should be 100 or 1/10 of the total members, and in terms of value, it must be the members holding 1/10 of the share capital value. In the case of companies without share capital, ⅕ of the total number of members can apply.
Besides, a member’s authority to make requests on behalf of the other members, the only condition is that the person doing so has the written consent of the others.
Landmark rulings related to Section 241 of the Companies Act, 2013
Tata Consultancy Services Limited v. Cyrus Investments Pvt. Ltd. & Ors. (2021)
In this landmark case, the Supreme Court examined the issue of oppression and mismanagement.
Facts- Mr. Cyrus Mistry was removed as the non-executive director of Tata Sons, along with directorships in other companies of the Tata Group, following resolutions passed at shareholder meetings. Subsequently, two companies holding shares in the Tata Group filed a complaint under Sections 241, 242, and 243 for discrimination.
Issue- On a complaint being made under sections 241, 242, and 243, the NCLT found no evidence to uphold these allegations, but this was reversed by the NCLAT, which reinstated Mr. Mistry as director of various companies within the group.
Judgement- Further, on appeal to the Hon’ble Supreme Court, it was held that no matter existed for winding up under Section 242 due to a lack of justifiable confidence in management, and mere lack of confidence between majority and minority shareholders would not be sufficient grounds; nor did Sections 241 and 242 provide power for reinstatement; nor could an apprehension of future conduct arising from the company’s Articles be adjudged by a Tribunal under Section 241.
Union of India v. Delhi Gymkhana Club (2021)
This is yet another notable judgement relating to oppression and mismanagement.
Facts- Delhi Gymkhana is a 107-year-old club registered under Section 8 of the Companies Act. The main objective of clubs other than those mentioned in the MOA is to promote sports and pastimes. The club has a limited membership of 5600 permanent members.
Issue- Following a complaint from the government, the Ministry of Corporate Affairs decided to take penal action against the club and moved to NCLT, alleging mismanagement of the club and affairs being conducted in a manner prejudicial to the public interest.
Judgement- In this case, an application for oppression and mismanagement was filed by the Government of India under Section 241(2). The NCLAT discussed the scope of Section 241(2) and made the following observations:
If the Central Government lodges a complaint under the aforementioned Section, it is required to record its position on the company’s affairs being conducted in a manner prejudicial to the public interest, and the recording of such position is a necessary condition for making an application under Section 241(2).
The Tribunal cannot review the sufficiency or otherwise of the material on the basis of which the government has formed its opinion, more so when no mala fide intention is imputed to the Central Government.
The phrase ‘public interest’ cannot be extended to include all citizens of India. It would be enough if the rights, safety, economic well-being, health and safety of even a fraction of society – such as candidates seeking membership from the category of ordinary citizen – were affected, regardless of the fat that only a few individuals are involved.
Smt. Shreyans Shah v. The Lok Prakashan Ltd. & Ors.
The NCLAT held that the tribunal can pass interim orders under Section 242 if a prima facie case is made out. He pointed out that the issuance of a preliminary injunction by the tribunal beyond the scope of Section 242(4) postulates a situation where the affairs of the company were not or are not conducted in accordance with the provisions of law and the articles of association. In order to make out a prima facie case, a member alleging oppression and mismanagement must demonstrate that he has raised justiciable issues in the company petition that require examination.
Aruna Oswal v. Pankaj Oswal & Ors.
In this case, the Hon’ble Supreme Court held that since the questions of right, title, and interest in the shares by virtue of the nomination were pending before the civil court, which ordered status quo in relation to the SC matter, the shareholder, whose title to the shares was in dispute and would be ineligible to stand on a Section 244 motion, would not be able to agitate matters relating to the disputed shares through a motion for oppression and mismanagement, including seeking a waiver of Section 244.
The management of the company is based on the majority rule, but at the same time, the interests of the minority cannot be completely ignored. When we talk about majority and minority, we are not talking about numerical majority or minority, but about majority and minority voting powers. The reason for this distinction is that a small group of shareholders may hold a majority share, while the majority of shareholders may hold a very small percentage of the share capital between them.
Once in control, the majority can, for all practical purposes, do whatever they want with the company with virtually no control or oversight, because even when they are questioned about their actions at a general meeting, they always come out victorious because of their great voting power. Thus, modern company laws contain a large number of provisions to protect minority interests in companies.
The recent downfall of major companies and corporations around the world has made such entities think carefully about their actions towards company affairs. Liability has increased through the use of class action lawsuits brought against executives for their acts of oppression and mismanagement. The company’s individual shareholders and minority shareholders were empowered to take action against the unauthorised abuse of power and authority by executives under oppression and mismanagement. An individual can file an application with the court reporting oppression and mismanagement committed by key employees towards him or another shareholder of the company.
Frequently Asked Questions (FAQs)
Can a suit be filed without notice?
There is no mandatory requirement of issuing a notice before filing a suit. It is optional as there is no statutory requirement of service nor there is statutory fixed period for such notice.
Can a company file a case against an employee?
A lawsuit can be filed in a civil court or labour court against an employee by the employer who is negligent in performing his duties and functions for the interests of the affairs of the company.
What action can be taken against a director?
If a director is found to have breached their fiduciary duties towards the company, the company may initiate legal action against the director.
Can directors be personally held liable to pay?
Generally, the liability of the company is not transferred to the directors. However, the directors can be held personally liable within the provisions of the Companies Act, 2013, if there is a breach of fiduciary duty or an instance of fraud.
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