Prevention Of Oppression & Mismanagement under Companies Act,2013

    According to the Black Law Dictionary, “oppression means an act of unjustly exercising power”. Whereas, mismanagement entails the process of managing is incompetent, dishonest or deceptive. It is to be noted that both these terms are not mentioned in the Companies Act, 2013 and it is decided by the varied facts of each case whether there is any oppression or mismanagement of the minority or not.

    Introduction:

    It is a well-established rule that the administration of an organization is founded on the majority rule, notwithstanding that simultaneously the interests of the minority cannot be fully dismissed. While examining the majority and minority rule, let us get straight to the point that we are examining about majority share or minority voting strength. The explanation behind this differentiation is that a small number of investors may hold the greater part shareholding though most the investors may, among them, hold a small amount of share capital. When they secure control, the majority can do anything they desire with the Company with basically no control or management. Whenever a resolution is passed by the majority it is authoritative on all individuals. Accordingly, the Court would not usually mediate to ensure the minority interest affected by the resolution. According to Lord Keith, oppression means an absence of ethical quality and reasonable dealings in the issues of the company which might be biased to certain members of the organization. 

    Oppression and Mismanagement

    The Companies Act, 2013[1] deals with the application against oppression and mismanagement, as to who can file the complaint and under which circumstances the complaint can be filed. Earlier it was mentioned under section 397 of the Companies Act, 1956.

    There are some instances which can be called as mismanagement:

    1. Misuse of company’s fund,
    2.  Non- compliance with the provisions of AOA and MOA of the company,
    3. Non- compliance with the provisions of the Companies Act, 2013,
    4. Preventing directors from performing its functions or duties.

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    Company is an artificial person, all its functions are executed by the Board of Directors. But as we know that the Board of Directors are not the owners of the company hence they act on the wishes of the shareholders of the company. As of the cardinal rule, the shareholders voting is decided by the majority of members vote. So, directly or indirectly the majority is controlling the affairs of the company.

    There can be a possibility that the majority can perpetuate fraud or mismanagement to affairs to fulfil their interest. The Court of Chancery in the case of Foss v. Harbottle[2] said it is not going to interfere with the management of the company. Because the basic intention of the organization is a separate legal entity and interference of court can defeat the basic intention of the separate legal entity. Secondly, there is a possibility that many small or trivial cases which are of no importance can approach the court and this could lead to inefficiency of the court.

    Exceptions to the rule laid down in the above case are if there is ultra vires act, or it is proved that there is certain fraud done by the majority members to the minority or if there are oppression and mismanagement in the affairs of the company, then the Court can give any decision which deems to be fit. The minority shareholders have the power to raise an application to prevent the majority from oppression and mismanagement. The relief is not only available to minorities, but it can also be granted on the application of the majority when the court is satisfied with the act of oppression and mismanagement. 

    Provisions in the Companies Act, 2013[3] pertains to prevention of oppression and mismanagement. Any member who raises complaints that the affairs or management of the company are being conducted in a manner which is prejudicial to the public interest which is harmful to the public interest or oppressive to any other member or members or prejudicial to the company’s interest or, any material change which is not in the favour of any creditors or any class of shareholders of the company by the process of alteration in the Board of Directors or manager or the ownership of a company’s share, that material change shall not be in the favour of its members or any class of shareholders. Further Central Government can suo moto initiate application to the Tribunal if it is proven that the affairs of the company are being conducted in a prejudicial way.

    Section 244 provides for the right to raise the application in the tribunal against the prejudicial activities of oppression and mismanagement in case- the applicant or member or members collectively 10% or more shares of issued capital or not less than 100 members of the company or not less than 1/10th of the total number of its members whichever is less. But the applicant must have paid all called up shares or sums due on their shares, or those companies which are not having share capital then, not less than 1/5th of the total membership of its members in the company. 

    Any share which is held by two or more persons jointly, then they shall be counted as one or single-member. If a hundred persons are said to be the minimum then only one person can apply but it has to take the consent of all the other ninety-nine members in writing. Then only they may raise an application for the benefit of all of them.

    Powers of the Tribunal:

    It is provided under Section 242 of the Companies Act, 2013 that if any application is made to the tribunal under section 241 and if the Tribunal forms an opinion that the company’s affairs are being conducted in a manner which is prejudicial to the member or the members or against public interest or prejudicial to the affairs of the company itself. Then it can pass an order for granting of relief and the order contains any such matter which deems fit.  

    If the tribunal believes that the facts are seen apparent then the facts are being shown in such a manner that the winding up of the company seems to be just and equitable. However, the actual scenario that the winding-up will harm the interest of the members of the company is wound up at this time then it would be harmful to the members specified above. In this case, the tribunal can pass the order. 

    Section 242(2) without harming those powers of the tribunal under section 242(1) and the order passed by the tribunal may provide that the order may include the regulation of the conduct of affairs of the company, the shares or interest of any members can be purchased by the other members of the company.

    However, if the company purchases its shares then, in that case, the consequent reduction of its share capital included in the order, the tribunal can pass that there are some restrictions on the transfer or allotment of the shares to restrict the affairs of the company to bring relief to the members who have raised the complaint.

    If there was an agreement then the tribunal may set aside, terminate or modify that agreement. And that agreement can be between the company and the Managing Director, any other director or manager or any other person.

    Since the agreement involved two parties, so, the agreement cannot be terminated or set aside or modified if the due notice is not given and the consent of the parties has been obtained.

    Transfer of Property, payment, delivery of goods or other act relating to property which has been done or made by the company before three months from the date of application. If the above application is made against a person then it is deemed in insolvency as a fraudulent preference which is done intentionally to set aside his liability. That above act can be set aside by the order of the Tribunal.

    The order may contain the removal of the manager, managing director or any other directors of the company or can pass an order to recover any undue profits earned by any managing director, manager or any director during the period of their appointment. The interim can make any interim order as per section 242(4) which it deems to be fit.

    Conclusion:

    The Act and the Courts attempt to find some kind of harmony prevalent between the Right of Majority to rule and the preservation of interests of the minority investors through the prevention of Oppression and Mismanagement.

    References:

    1. The Companies Act, 2013, s.241.
    2. Foss v. Harbottle (1843) 67 ER 189.
    3. The Companies Act, 2013, s.242, 243,244,245,246.

    BY ANUKRITI | INSTITUTE OF COMPANY SECRETARY OF INDIA

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