COMPANY LAW (THE COMPANIES ACT,2013)

[An Assignment submitted to Himachal Pradesh National Law University]

AN ANALYSIS ON PREVENTION OF OPPRESSION AND

MISMANAGEMENT UNDER COMPANY LAW

SUBMITTED TO : SUBMITTED BY :

Dr. Pushpanjali Atithi Dev Singh

Assist. Professor of Law 1120202177

HPNLU SHIMLA B.B.A LLB(Hons.)

HIMACHAL PRADESH NATIONAL LAW UNIVERSITY, SHIMLA 16 MILE, SHIMLAMANDI

NATIONAL HIGHWAY, GHANDAL DISTRICT SHIMLA, HIMACHAL PRADESH-171014 Ph.
0177-2779802, 0177-2779803, Fax: 0177-2779802

1| AN ANALYSIS ON PREVENTION OF OPPRESSION AND MISMANAGEMENT UNDER

COMPANY LAW
 ACKNOWLEDGEMENT

I wish to take this opportunity to offer my sincere gratitude to my academic supervisor, Dr.
Pushpanjali , Assistant Professor of law of Himachal Pradesh National Law University,
Shimla. Without her kind direction and proper guidance, this study would have never come to
fruition.

I am also greatly indebted to Himachal Pradesh National Law University’s e-library resources
for providing me with the necessary online subscriptions in order to conduct this research
which helped me in making this assignment.

Last but not the least; I would want to thank everyone who guided me throughout the process
of making this study a successful venture.

2| AN ANALYSIS ON PREVENTION OF OPPRESSION AND MISMANAGEMENT UNDER

COMPANY LAW
 TABLE OF CONTENTS
1. INTRODUCTION
2. RESEARCH PROBLEM
3. RESEARCH METHODOLOGY
4. GROUNDS FOR FILING OF COMPLAINT AGAINST MISMANAGEMENT
AND OPPRESSION
5. JURISDICTION OF COURTS
6. COMPARITIVE STUDY AND CHANGES IN THE COMPANIES ACT, 2013
7. CONCLUSION AND SUGGESTONS
8. REFERENCES

3| AN ANALYSIS ON PREVENTION OF OPPRESSION AND MISMANAGEMENT UNDER

COMPANY LAW
 INTRODUCTION

According to Lord Keith,” Oppression means, lack of morality and fair dealings in the affairs of the
company which may be prejudicial to some members of the company.” The term mismanagement
refers to the process or practice of managing ineptly, incompetently, or dishonestly. The terms
mismanagement and oppression are nowhere defined in the Companies Act (“CA”) and it is the
discretion of the Court to decide whether the facts of the case amounts to mismanagement and
oppression.

Mismanagement and oppression are covered under Section 241, Chapter XVI of the Companies Act,
2013 which corresponds to Section 397 and 398 of the earlier Companies Act, 1956. A company is a
separate legal entity different from the directors, shareholders and members which has roles and
responsibilities given to each of them for conducting the day to day business. The Companies Act
has been incorporated by the government and is in effect for the protection of the interest of the
members, shareholders and the public at large against any activities which result in the violation of
the rights of the members, shareholders, etc. Sections 241 to 246 comprise of the application to the
tribunal in cases of mismanagement, oppression, etc., powers of tribunal, right to apply, class action
and application of certain provisions to proceedings1.

The members holding the maximum shares are considered to be the majority shareholders in a
company. The Company Law does not define the term „minority shareholder‟. But generally, it is
understood that those holding the minor shares are known as Minority shareholders. It can also be
understood by saying that minority shareholders are those who hold such amount of shares which
does not give them the control over the company.

The management of a company is usually based on the majority rule. The general rule in any
company is that the directors are the elected representatives of the company and hence, they have
the right to manage the affairs of the company. Those rights that are not given to the directors are
exercised by the members in their general meeting. This decision is usually decided on the basis of
majority. Thus, the majority rule means the right of the majority shareholders to run the company
and manage its affairs. This in turn means that the majority has its way in the general meeting. The
1
AVATAR SINGH, COMPANY LAW 526 (16th ed. 2016).
4| AN ANALYSIS ON PREVENTION OF OPPRESSION AND MISMANAGEMENT UNDER
COMPANY LAW
 rights of the minority shareholders are hence, limited in any company and their rights have been
violated many a times.

This principle is that the will of the majority should prevail and bind the minority is known as the
principle of majority rule. This is also known as the Foss v. Harbottle Rule. 2 Foss v Harbottle is a
leading English precedent in corporate law. Thus, injuries allegedly caused to the corporation alone
and not to its members, must be remedied not by the members but by corporate action. This is
known as the proper plaintiff rule and it is applicable here because the company is considered a
separate legal entity and hence only it can approach in case of any wrong committed to the company
and not individual shareholders. This was the rule followed in India too since it is derived from
common law. But there are few exceptions to this rule but they were not proper redressal
mechanisms. Presently, the rule has been diluted to suit the changing needs and offer protection to
the minority shareholders as well. The principle given from Foss v. Harbottle is that the will of the
majority should prevail and bind the minority. This is known as the principle of majority rule which
has been long since followed in Company law.

2
(1843) 67 ER 189

5| AN ANALYSIS ON PREVENTION OF OPPRESSION AND MISMANAGEMENT UNDER

COMPANY LAW
 Research problem

Oppression and mismanagement of minority shareholders and protection of shareholders with

possible redressal mechanism under the companies act, 2013.

Research Methodology

The researcher has followed secondary data collection. This is a doctrinal study. The researcher has
also utilized commentaries, books, treatises, articles, notes, comments and other writings to
incorporate the various views of the multitude of jurists, with the intention of presenting a holistic
view. The researcher has made extensive use of Case Laws in this project, so as to discern a trend in
the judicial pronouncement.

6| AN ANALYSIS ON PREVENTION OF OPPRESSION AND MISMANAGEMENT UNDER

COMPANY LAW
 GROUNDS FOR FILING OF COMPLAINT AGAINST
MISMANAGEMENT AND OPPRESSION

Any act of the management which has been exercised wrongfully, which is harsh, burdensome,
unwarranted, etc. and does not safeguards the interest of shareholders amounts to oppression.
Considering various judicial pronouncements, the acts which amounts to oppression is summarized
as:

a. Not keeping a general meeting and keeping shareholders in dark

b. Not maintaining the statutory records, books of accounts and not abiding by the Companies Act

c. Depriving the right to dividend of a member

d. Issuing of shares only benefiting a few shareholders, etc.

“Section 241(1) (b) of the 2013 Act provides for relief in cases if mismanagement. If the acts of the
company are conducted in a manner which is prejudicial to the interest of the company or public
interest, or any alteration or addition in the board of directors could amount to mismanagement,
depending the facts and evidence of the case. 3 Where directors preferred objects of their liking and
made a huge allotment of shares for a consideration other than cash, this was held to be a
mismanagement of affairs.4

The following acts have been held as amounting to mismanagement:

a. Serious infighting between directors

3
Suman Gupta, Oppression And Mismanagement under Companies Act, 2013, Tax Guru, https://taxguru.in/company-
law/oppression-mismanagement-companies-act-2013.html?amp
4
Akbarali A Kaveri v. Konkan Chemicals (P) Ltd, (1997) 88 CLB 245

7| AN ANALYSIS ON PREVENTION OF OPPRESSION AND MISMANAGEMENT UNDER

COMPANY LAW
 b. Violations of the MOA & AOA of the company

c. Sale of assets at low price without complying with the Act

d. Directors continuing in office after expiry of the term

The first remedy available to oppressed minority is to move to the Tribunal. Whenever the affairs of a
company are being conducted in a manner pre-judicial to public interest or in a manner oppressive to
any member or members, an application can be made to the Tribunal u/s 241 of the Act. The requisite
number of members who must sign the application is given in Section 399. The requirement varies
with the fact as to whether the company has a share capital or not and is as follows:

a. In the case of a company having a share capital, not less than one hundred members of the company
or not less than one tenth of the total number of its members, whichever is less, or any member or
members holding not less than one-tenth of the issued share capital of the company, provided that the
applicant or applicants have paid all calls and other sums due on their share.

b. In the case of a company not having a share capital, not less than one-fifth of the total number of its
members.

c. The Tribunal may, if in its opinion circumstances exist which make it just and reasonable so to do,
authorise any member or members of the company to apply to the court under section 241,
notwithstanding that the two abovementioned requirements are not fulfilled depending on the merits
of the case.

After the coming up of the Companies Act, 2013, CLB was abolished and Tribunals were created,
National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT).
If the party is not satisfied with the decision of the tribunal then an appeal can be filed at NCLAT
following which the tribunal will scrutinize the case and check for any quintessential question of law,
if ignored by the tribunal.

8| AN ANALYSIS ON PREVENTION OF OPPRESSION AND MISMANAGEMENT UNDER

COMPANY LAW
 JURISDICTION OF COURTS

The first remedy in the hands of an oppressed minority is to move to the Tribunal. Whenever “the
affairs of the company are being conducted in a manner oppressive to any member or members or
prejudicial to public interest”, an application can be made to the NCLT under Section 241 of the
Companies Act, 2013. Under the Companies Act, 2013, NCLT has been empowered for trying of
suits for mismanagement and oppression. No civil court has jurisdiction to entertain any proceeding
or suit with regard to matters which the NCLT or Appellate Tribunal have been given the power to
entertain by or under Companies Act, 2013.

In the recent judgment, by the Bombay High Court in the case of Madhu Ashok Kapur and ors. v.
Rana Kapoor and ors.5 , the Hon’ble Court reaffirmed that the jurisdiction of the civil court is not
barred for seeking the remedy against grievances which is not covered under the Companies Act.
In the early period, the Court followed the Majority rule completely and allowed even the irregular
acts of the majority shareholders to be made regular through resolution. This was seen in the case
Bhajekar v. Shinkar6 where the board of directors of a company passed a resolution appointing
certain persons as managing agents. The resolution was confirmed by the company in the general
meeting with the complete knowledge of all the material facts. Some minority directors brought a suit
claiming the resolution to be declared invalid since it was irregular. The court held that it was the
right of the company to ratify any type of agreement even if it was irregular and the Court will not
interfere in the internal affairs at any cost.

Similarly, in Rajahmundry Electric Supply Corpn Ltd. v. Nageshwara Rao 7, it was observed that the
Courts will not interfere in the internal affairs of the Company or the management of the directors as
long as they act within the ambit of the powers conferred on them under the Articles of Association
of the company. Over the years, the Judiciary has deviated from the strict sense of the majority rule,
so as to safeguard the interest of minority over majority shareholders.
5
Mrs. Madhu Ashok Kapur V. Mr. Rana Kapoor, (2014) 183 Company Cases 339 (Bombay).
6
(1934) 36 BOMLR 483
7
1956 AIR 213

9| AN ANALYSIS ON PREVENTION OF OPPRESSION AND MISMANAGEMENT UNDER

COMPANY LAW
The Court in Sri Ramdas Motor Transport Ltd. v. Tadi Adhinarayana Reddy and Ors. 8 has stated that
under section 397 of the Companies Act 1956 any member of the company who complains that the
affairs of the company are being conducted in a manner prejudicial to public interest or in a manner
oppressive to any member or members may apply to Company Law Board for an order under that
section. However, the majority shareholders are not deprived of their democratic rights due to
minority activism.

The Court in Miheer H. Mafatlal v. Mafatlal Industries Ltd.9 held that the Court cannot intervene if
the scheme is sanctioned by the majority of shareholders and if it is lawful. Court can only go through
the scheme and examine if it has complied with all the requirements under Section 391 (2) and if it is
passed by the requisite majority. If the scheme passed by the company with majority is just and fair,
then the Court will not interfere. But it will interfere if the the majority shareholders‟ action affects
the class interest of such equity shareholders.

Another recent trend is the concept of minority shareholders buying out the majority as opposed to
the minority squeeze out. In the case, Needle Industries (India) v. Needle Industries Newey (India)
Holding Ltd10, the foreign majority alleged oppression by the Indian minority shareholders. This was
because the minority shareholders appointed additional directors and also issued further shares. The
Supreme Court in this case rejected the plea of oppression and directed the minority Indian
shareholders to purchase the shares that were held by the foreign majority shareholders, so that
substantial justice can be done.This is seen as a landmark case in the Indian history. In this case, one
should also keep in mind that the majority shareholders were not from India. So there is every
possibility that there existed a bias towards the Indian minority shareholders.
There has not been any other case where such a decision has been taken. Generally, minority squeeze
out is common as the belief is that the company can still survive without the minority shareholders
and that majority is the hallmark of democracy.

8
AIR 1997 SC 2189
9
AIR 1997 SC 506
10
AIR 1981 SC 1298

10| AN ANALYSIS ON PREVENTION OF OPPRESSION AND MISMANAGEMENT UNDER

COMPANY LAW
 COMPARITIVE STUDY AND CHANGES IN THE COMPANIES ACT,
2013
The democratic decisions are taken mostly with respect to the majority keeping in mind the utilitarian
principle which is deemed to be justified and somehow, overshadows the rights of the minority.
Despite the fact, provisions have been in place under the CA, 1956 to protect the interest of the
minority shareholders, the minority has been incapable or unwilling due to lack of time, recourse or
capability- financial or otherwise. This has resulted in the minority to either let the majority dominate
and suppress them or squeeze them out of the decision making process of the company and eventually
the company. CA, 2013 has sought to invariably provide for protection of minority shareholders rights
and can be regarded as a game changer in the tussle between the majority and minority shareholders.
Various provisions have been introduced in CA, 2013 to essentially bridge the gap towards protection
and welfare of the minority shareholders under CA, 1956.

The primary provision in the CA, 1956 was S. 397. The section prescribes certain criteria for
maintainability of application for relief in cases of oppression. The impugned act should be prejudicial
to the interest of the company or oppressive upon a member or group of members; or the act may be
prejudicial to general “public interest”. It is also the burden of the applicant to satisfy before the Board
that winding up the company would “unfairly prejudice” him or the class he is representing; but
otherwise the facts prima facie would justify that the company be wound up on just and equitable
grounds. The right to apply is given to members as specified in the definition of “minority”. Both
conditions under this section should subsist in order to entail relief from the Board. Where there are no
allegations to support a winding up, a petition u/s 397 cannot be entertained.

Section 241 of the Companies Act, 2013 is related to the application to tribunal for the relief in cases
of oppression, etc. Under the 1956 Act, the CLB was empowered to grant relief against oppression and
mismanagement. The 2013 Act transferred the power to the tribunal. Under the 2013 Act, “members
can seek relief against the conduct affairs in a manner which is prejudicial to him or any other member
or members of the company even though it may not amount to oppression which was not the case
under the Act of 1956.

11| AN ANALYSIS ON PREVENTION OF OPPRESSION AND MISMANAGEMENT UNDER

COMPANY LAW
Under Section 242 of the 2013 Act, powers of the tribunal has been given. Earlier Company Law
Board used to entertain the petition but now the NCLT and NCLAT has been empowered to it. Earlier
the Central government was given the right to waive off the requisite number of shareholders for filing
of the petition but in the Act of 2013, it has been given to the Tribunal.

Further, under Section 245 of the 2013 Act, class action suit can be filed which is a totally new
concept in India as well has no precedents for it. It can be seen that the intent of the section is not only
to empower the minority shareholder and/or members of the company but also the depositors whose
right also gets violated if any act of mismanagement or oppression takes place. The requisites for filing
of class action suit is as follows: a company with share capital, 100 members of the company or 10 per
cent of the total number of members of a company may file a class action suit, only if the members
filing a class action suit have paid all calls and dues on their shares. On the other hand, for a company
without share capital, this number increases to one fifth of the total number of members of the
company. In addition to shareholders, other stakeholders like depositors have also been granted this
right. The directors, auditors or the advisers of a company can be sued if any practice of
mismanagement, fraudulent acts, suppression of material facts, etc. has been found out.

Class action suits first made headlines in India in the year 2009 when the Satyam scam came into
limelight. The investors in India were not in the legal position to file a suit or even get their money
back whereas in the United States of America, the investors through class action suits and demanded
compensation from Satyam. This class action suit was felt to be the need of the hour and the
legislature incorporate it under the 2013 Act as it reduces multiplicity of cases, benefits a larger sect
which is related to the problem. NCLT order is punishable with fine between INR 5,00,000 and
25,00,000. The lawsuits might also result in officers or directors being imprisoned up to three years
and/or fined between INR 25,000 and 1,00,000. This section benefits the investors in terms of
compensation as for any fraudulent or any unlawful acts arising from any third party, the suit will be
entertained.

12| AN ANALYSIS ON PREVENTION OF OPPRESSION AND MISMANAGEMENT UNDER

COMPANY LAW
 Conclusion & Suggestions
The rule in Foss v. Harbottle is actually rule of majority supremacy. It means that once a resolution is
passed by the majority, it is binding on all the members. This principle was earlier considered as the
symbol of democracy. But as far as India is concerned, this principle stands diluted and is not followed
in its strict sense.

The Companies Act of 1956 gave some provisions to protect the minority shareholders from the
majority shareholders. It was the first step taken by the legislature to recognize the rights of the
minority shareholders in India. In the Companies Act, 1956, the minority shareholders were not
considered as a major part of the company due to the suppression by the majority in the company. But
Companies Act of 2013 has taken various crucial steps to safeguard the interest of the minority rights
of the shareholders in the company irrespective of the existence of oppression and mismanagement of
the company affecting the rights of the minority shareholders. It can also be ascertained that the core
intention of the legislation is to safeguard the interests of the minority shareholders.
But the challenge to this is the enforcement of these rights. The minority shareholders rights
guarantees proper administration only when it is implemented successfully by giving importance to the
minority shareholders in the management of the company.

Another major flaw in the Companies Act of 2013 is that the numerical threshold that is mentioned
under Section 244 of the Companies Act of 2013. While it is understood that there should be some
filters to ensure that frivolous suits are not filed and the Court,’s time is not wasted, it is difficult to
meet the requisite number mentioned. This came into light after the recent Tata and Cyrus Mistry
conflict where the Mistry group’s plea was initially rejected as they did not fulfill the numerical
threshold. Though the power of waiver is given to the NCLT, there is no clarity on when the NCLT
can exercise that right and what is the criteria for the same. Generally, having filters for direct actions
such as for oppression, which the shareholders bring in their own names and to assert their rights
(rather than that of the company), goes against the spirit of corporate law and also ends up enfeebling
the minorities.

13| AN ANALYSIS ON PREVENTION OF OPPRESSION AND MISMANAGEMENT UNDER

COMPANY LAW
The introduction of class action suit is one step in the right direction. Efforts must be taken to create
awareness regarding the same, so that the affected parties use this mechanism and get justice. This will
also lead to reduction in the number of lawsuits since it has allowed a group of people to file the case
against one defendant on common grounds.Further, the companies have started taking steps to ensure
that the rights of the minority shareholders are not violated.

The concept of “piggybacking” is being followed presently. Accordingly, if the majority sells their
shares then the minority shareholder right has to be included in the deal. Moreover, it also requires the
party to consider the purchase of the business, in order to sell 100% of the outstanding shares.

14| AN ANALYSIS ON PREVENTION OF OPPRESSION AND MISMANAGEMENT UNDER

COMPANY LAW
 Refrences

1. Shakya, S., 2014. Minority Shareholders’ Protection in Corporate Governance: The Rule in Foss
v. Harbottle. SSRN Electronic Journal. Available at: http://dx.doi.org/10.2139/ssrn.2399314.

2. Sulalit, A., Companies Act, 2013: Rise of the Minority Shareholder, Indian Law Journal.
Available at http://www.indialawjournal.org/archives/volume6/issue2/article5.html.

3. Wedderburn, K.W., 1957. Shareholders’ Rights and the Rule in Foss v. Harbottle. The Cambridge
law journal, 15(02), p.194.

4. Debnath, S., Oppression of Majority by Minority Shareholders, Sashwaat Society of Education

and Research, Available at http://www.researchatsashwaat.com/about-us.php.
5.Minority Shareholders, Indian Law Watch, Available at
http://indianlawwatch.com/practice/minority-shareholders/.
6. Varottil, U., Minority Shareholder Protection As A Numbers Game. Bloomberg Quint, Available
at https://www.bloombergquint.com/law-andpolicy/2017/03/18/minority-shareholder-protection-as-
a-numbersgame.
7. Suman Gupta, Oppression And Mismanagement under Companies Act, 2013, Tax Guru,
https://taxguru.in/company-law/oppression-mismanagement-companies-act-2013.html?amp

15| AN ANALYSIS ON PREVENTION OF OPPRESSION AND MISMANAGEMENT UNDER

COMPANY LAW
16| AN ANALYSIS ON PREVENTION OF OPPRESSION AND MISMANAGEMENT UNDER
COMPANY LAW