MAHARASHTRA NATIONAL LAW UNIVERSITY, MUMBAI

COMPANY LAW: MISMANAGEMENT AND OPPRESSION UNDER COMPANIES ACT

WITH REFERENCE TO FAMILY-CENTRED COMPANIES

Submitted to: Prof. Damodar Hake

Submitted by: Harshita Verma
Section: A
Enrolment No.: 2021 030
 TABLE OF CONTENTS

ABSTRACT: ........................................................................................................................... 3

INTRODUCTION:.................................................................................................................... 3

STATEMENT OF PROBLEM: ................................................................................................... 4

RESEARCH QUESTION: ......................................................................................................... 4

RESEARCH OBJECTIVE:........................................................................................................ 4

RESEARCH METHODOLOGY ................................................................................................. 5

CHAPTERS ............................................................................................................................ 5

Oppression and Mismanagement Claims under The Companies Act, 2013 .............................. 5
Ebrahim’s ‘just and equitable’ test ....................................................................................................... 6

Family centred Companies & The Challenges ........................................................................... 7

Instances of Oppression and Mismanagement Claims ............................................................... 9

COMPARATIVE STUDY: ....................................................................................................... 11

CONCLUSION AND SUGGESTIONS:....................................................................................... 12

 1. ABSTRACT:

The Prevention of Oppression and Mismanagement is a critical clause in the Companies Act
that strives to protect minority shareholders’ rights and prevent firm management from abusing
authority. However, the phrases “oppression” and “mismanagement” are not defined directly
in the act, allowing flexibility for interpretation based on the facts of each individual instance.
This provision allows shareholders to sue the company’s management or majority shareholders
in court if they consider their rights have been infringed or the firm has been mishandled. The
article examines the relevant portions of the Companies Act, notably portions 241 to 2461,
which describe the scope, purpose, and application of the Anti-Oppression and
Mismanagement provisions. The study dives into several acts that may constitute oppression
and mismanagement, and it gives insight into how minority shareholders might seek legal
redress. By separating the idea of “prejudice” from “oppressive” action, Parliament has
possibly lowered the threshold for petitioning shareholders to seek a remedy. However,
regardless of the nature of the objectionable behaviour by the accused shareholders, the
necessity for a "just and equitable" foundation for winding up a firm remains intact.

Overall, the paper presents a thorough examination of the Companies Act’s Prevention of
Oppression and Mismanagement clause, emphasising its significance in protecting minority
shareholders and encouraging good corporate governance.

2. INTRODUCTION:
Corporate democracy, like sovereign democracy, relies on the majority rule premise. This
means that choices are made with the majority of shareholders or voting members in mind.
This method maintains impartiality and promotes efficient decision-making inside a company.
However, there is concern about the possibility of majority tyranny, which might harm minority
shareholders. To solve this, company law is critical in regulating the behaviour of dominant
owners in order to preserve the interests of minority shareholders.
Company law imposes fiduciary responsibility and fairness obligations on dominant
shareholders. They must operate in the best interests of the corporation as a whole while also
being fair to minority shareholders. Transparency and disclosure standards encourage
accountability, while the existence of independent directors acts as a check on dominant

1
The Companies Act, 2013, §§ 241, 246.
shareholders’ authority. Furthermore, minority owners can protect their interests through
derivative lawsuits, oppressive remedies, and shareholder agreements. Corporate democracy is
critical in India, the world's largest democracy. For the management of corporate affairs, the
Companies Act emphasises adherence to the majority rule. Resolutions, which become binding
on all shareholders, including minorities, often need a three-fourths or simple majority. Courts
normally do not intervene in these cases unless there is evidence of oppression and
mismanagement and minority rights are jeopardised.
Overall, successful corporate governance seeks to maintain a balance of power, safeguard all
shareholders’ interests, and foster a sustainable and ethical business environment. The Cyrus
Mistry case, which involved Tata Sons and many other case laws, is a current example of how
insights and proposals for efficient corporate governance may be generated and adopted by
other organisations in order to protect the interests of their members and shareholders.

3. STATEMENT OF PROBLEM:
Analyse instances of mismanagement and oppression inside organisations, as well as the legal,
regulatory, and governance deficiencies that contribute to such concerns, for effective
resolution and prevention.

4. RESEARCH QUESTION:
1. What important causes lead to organisational oppression and mismanagement, and how
may they be avoided?
2. How can organisations build an inclusive and diverse culture in order to prevent
oppression and mismanagement, and what specific policies and practices are most
successful in accomplishing this goal?
3. How can businesses properly explain their rules and processes to their personnel in
order to avoid tyranny and mismanagement?

5. RESEARCH OBJECTIVE:
The purpose of this paper is to examine the 2013 Act’s shareholder remedies for oppression,
bias, and mismanagement. The emphasis will be on sections 241 and 241(1) 2, which will
discuss the evolution of the legislation. Furthermore, whether or not the petitioning shareholder
can discharge the burden of demonstrating the substantive and conditional limbs affects the

2
The Companies Act, 2013, §§ 241, 241(1).
remedies that adjudicatory bodies can issue in such circumstances. Finally, I will compare the
law to other countries’ laws.

6. RESEARCH METHODOLOGY

This study takes a qualitative research method, examining important court judgements and
legal provisions under the Indian Companies Act through legal case analysis and
jurisprudential investigation. Primary sources include significant court decisions, whereas
secondary sources include legal comments, scholarly publications, and legislative documents.

7. CHAPTERS
1. OPPRESSION AND MISMANAGEMENT CLAIMS UNDER THE COMPANIES ACT, 2013
The National Company Law Tribunal (NCLT) has the power to adjudicate cases of oppression
if it concludes that the affairs of the company are being conducted in an oppressive manner to
any member or member. The law does not provide a specific definition of “oppression,’ giving
the NCLT wide discretion to determine on a case-by-case basis whether the conduct amounts
to oppression under the Companies Act.

In determining whether acts amount to oppression, Indian courts have adopted broad tests
based on jurisprudence in other common law jurisdictions. In the case of Shanti Prasad Jain v.
Kalinga Tubes Ltd3., the Supreme Court of India interpreted “oppression” to mean a series of
events that demonstrate the burdensome, harsh, and wrongful conduct towards minority
shareholders. It also involves a lack of probity or fair dealing towards the minority shareholders
who have entrusted their capital to the company. A mere lack of confidence in the majority
shareholders is not considered oppressive under Indian companies’ law.

To establish oppression, minority shareholders must show that they were subjected to
continuous acts or omissions that were (a) unfair, (b) lacked probity, and (c) prejudiced their
legal and proprietary rights as shareholders. The legality or illegality of the action does not
determine whether it is regarded as oppressive. Conduct that is legal can still be considered
oppressive, while conduct that is illegal but in the interests of the company may not be
considered oppressive. Therefore, courts need to consider the business realities of the situation
and not limit themselves to a narrow legalistic view.

3
Shanti Prasad Jain v. Kalinga Tubes Ltd., AIR 1965 SC 1535.
However, it is not enough to show oppression alone. Minority shareholders must also
demonstrate that there are just and equitable grounds for winding up the company, but the
winding-up order would cause unfair prejudice to them. This requirement is derived from UK
companies’ law and other common law jurisdictions, and Indian courts have relied on these
jurisdictions to determine what constitutes just and equitable grounds for winding up the
company.
1.1.Ebrahim’s ‘just and equitable’ test

In common law jurisdictions, including India, the circumstances that constitute 'just and fair'
grounds for dissolving a business differ. To identify these grounds, courts have developed wide
criteria, such as Ebrahimi's ‘fair and equitable’ test. This test is based on the case of Ebrahimi
v. Westbourne Galleries Limited4, which was later cited by the Supreme Court of India in Hind
Overseas (P) Ltd v. Raghunath Prasad Jhunjhunwalla. 5

According to this test, a company can be ordered to be wound up if its operations are in line
with company law and constitutional documents but violate shareholder understanding.

Some frequent instances of ‘fair and equitable’ reasons for dissolution include:

1. Loss of the company’s business substratum: When circumstances arise that make it
difficult for the company to achieve its principal purpose or mission, such as a
corporation created to work on an invalid patent. 6
2. Deadlock in management affairs: When the company’s business is brought to a halt
owing to a factor other than a shareholder dispute over the company's policies. For
example, if management's decision-making process is completely paralysed, as in the
instance of the Re Yenidje Tobacco Company Limited.7
3. Full lack of confidence: A case proving minority shareholders’ lack of trust in the
board's management is legitimate when the discontent stems from a lack of probity in
managing corporate affairs, rather than just being outvoted on business considerations.
In Loch v. John Blackwood Limited8, for example, the majority shareholder’s conduct

4
Ebrahami v. Westbourne Galleries Limited, 1973 AC 360.
5
Hind Overseas (P) Ltd. v. Raghunath Prasad Jhunjhunwalla, (1976) 3 SCC 259.
6
In Re Suburban Hotel Co., L.R., 2 Ch. 737.
7
In Re Yenidje Tobacco Company Limited, [1916] 2 Ch. 426, 429-432.
8
Loch v. John Blackwood Limited [1924] AC 783.
 plainly demonstrated that they saw the firm as their own invention and sought to
undervalue the minority owners. In such circumstances, the court ordered the
corporation to be wound up owing to blatant disrespect for recognised commercial
administration norms stipulated in the legislation.

These are not exhaustive examples, and other circumstances may also justify the dissolution of
a business on ‘just and fair’ grounds. However, in order to satisfy the authorities regarding the
claims, the shareholders must show (a) that the business's affairs are oppressive, harsh, and
unlawful, and that winding up the company would be in the best interests of justice and equity.
(b) and it would be ‘fair and equitable’ to wind up the firm, but such an order would
disadvantage them.

2. FAMILY CENTRED COMPANIES & THE CHALLENGES

In India, family-centred enterprises are defined as businesses that are principally owned and
controlled by members of a single family or a closely connected group of persons under the
Enterprises Act. These businesses often feature a concentrated ownership structure in which
family members control the bulk of the stock and are often managed by family members as
well. Within the organisation, the family's influence and decision-making authority are crucial.
In family-centred businesses, ownership and control are frequently passed down through
generations, and family members may occupy crucial roles such as directors or executives.
These businesses frequently place a high focus on family values, traditions, and long-term
sustainability, which influences the company’s culture, vision, and management strategy.

The Companies Act of India does not specifically identify or distinguish family-centred
businesses. Rather, it establishes a legal framework for the governance, administration, and
operation of all sorts of businesses, including family-owned enterprises. These businesses must
follow the regulations and procedures outlined in the Companies Act, such as performing
regular financial audits, issuing annual reports and financial statements, adhering to corporate
governance standards, and maintaining transparency in their operations.

Under the Companies Act, family-centred businesses have special obstacles in terms of
persecution and mismanagement. These difficulties develop as a result of the mixing of family
dynamics and corporate activities. The following are the main challenges:
 1. Nepotism: Family-centred businesses frequently hire and promote family members
over outsider prospects. As a result, qualified non-family workers may be ignored or
feel marginalised. Nepotism causes a lack of variety, unfair perceptions, and anger
inside the organisation.9
2. Lack of Professional Boundaries: It can be difficult to establish and maintain clear
professional boundaries between family and non-family members in family-centred
businesses. Conflicts of interest, favouritism, and challenges in making objective
business judgements might result from this. Personal ties and emotions might get in the
way of good management practices.
3. Communication and Conflict Resolution: Family dynamics make communication and
conflict resolution more difficult. Open and honest talks may be hampered by sensitive
family issues or a desire to maintain unity. Disagreements and conflicts may grow,
resulting in unhealthy power relations and potentially severe corporate effects.
4. Transition Planning: Family-owned businesses confront difficulties in planning for
leadership transition. Balancing family members’ goals and abilities with the
company's long-term performance can be difficult. Power disputes, animosity, and a
lack of direction can result from poorly handled succession transfers, jeopardising the
company's stability and progress.10
5. Professional Development: Non-family employees in family-centered businesses may
perceive restricted prospects for career advancement and professional development.
This view may lead to low morale, high turnover rates, and challenges in hiring top
talent from beyond the family circle. Transparent policies about career growth and
training are required for all employees.
6. Resistance to Change: Because of the concern of upsetting established family
traditions and relationships, family-centred businesses may be resistant to change. This
can stymie innovation, market trend adoption, and the deployment of best practices. In
quickly changing business settings, such organisations may struggle to develop and
compete successfully11.

9
Mitali Kshatriya & Kumar Sudeep, Some Recent Trends in Oppression & Management Cases Under The
Companies Act, 2013, 9 June (2021).
10
Vikram Singh Sirohi, Prevention of Oppression & Mismanagement under Companies Act, 2013, 29 January,
2020.
11
Aditya Vikram Jalan & Urvashi Misra, Action against Oppression & Mismanagement – An effective tool,
June 7 (2022).
To solve these issues, family-owned businesses can prioritise professionalism, objectivity, and
effective governance systems. Clear policies, open communication, chances for non-family
members to advance professionally, and fair and transparent decision-making procedures are
required.

3. INSTANCES OF OPPRESSION AND MISMANAGEMENT CLAIMS

In India, the lack of thorough statistical studies assessing the exact grounds on which minority
shareholders file oppression, mismanagement, and bias claims shows a substantial research
need. Nonetheless, an examination of published decisions reveals that the National Company
Law Tribunal (NCLT)'s authority is routinely claimed in matters involving.

1. Management Exclusion: A significant proportion of businesses in India are family-owned,

and family members often have an active part in both ownership and day-to-day
management.12 In such instances, the absence of a family member from active corporate
management is sometimes considered "oppressive." This is especially true in family
enterprises, where relationships are defined by partnerships or personal links founded on
mutual trust and confidence.

As an illustration, consider the case of Vikram Bakshi v. Connaught Plaza Restaurants

Ltd.13 In this case, Vikram Bakshi and McDonald’s India formed a joint venture to open
McDonald's restaurants in India. Mr. Bakshi was named Managing Director of Connaught.
Under certain conditions, the agreement required McDonald’s India to vote for Mr Bakshi's
re-election as Managing Director. McDonald's India has the right to buy his and his
affiliates' shares if his job is terminated. Mr. Bakshi was removed as Managing Director
when McDonald's India did not vote for his re-election and exercised its purchase right.
The NCLT concluded that this non-election was oppressive because it was driven by
unrelated factors, resulting in Mr Bakshi’s reinstatement as Managing Director.

Another instance is the case of Cyrus Investments Pvt. Ltd. v. Tata Sons Ltd., 2019 SCC
OnLine SC 272. Tata Sons fired its executive chairman, Mr Cyrus Mistry, in 2016,

12
Forbes India, It’s all in the family (business), http://www.forbesindia.com/article/indias-family-businesses/its-
all-in-the-family-(business)/49443/1 (last visited on May 16, 2018).
13
Vikram Bakshi v. Connaught Plaza Restaurants Ltd., 2017 SCC OnLine NCLT 560 : (2017) 140 CLA 142, ¶
13.
 sparking a court fight begun by the minority shareholder, the Shapoorji Pallonji group,
under sections 241 and 242 of the 2013 Companies Act.14 Various commercial choices
were at issue, as were modifications to Tata Sons' articles of association and Mr Mistry's
dismissal. The minority owners were first refused remedy by the National Company Law
Tribunal (NCLT). They were dissatisfied and filed an appeal with the National Company
Law Appellate Tribunal (NCLAT), which decided Mr Mistry’s dismissal was unlawful,
reversing the NCLT's ruling. Tata Sons filed an appeal with the Supreme Court, which
resulted in a stay of the NCLAT's decision. This case is noteworthy because it is the first
substantial disagreement under Sections 241 and 242 of the Constitution and provides a
chance for the Supreme Court to clarify India’s oppression, mismanagement and prejudice
provisions.

2. Shareholding Dilution: Majority shareholders in India have the legal authority to oversee
and operate a firm. Their rights, however, can be reduced in different ways, such as the
issuing of new capital or rights shares, decreasing their majority position to a minority
position. Such acts are frequently seen as "oppressive" under the Indian Companies Act of
2013.

In the case of Dale & Carrington Investment (P) Ltd. v. P.K. Prathapan15, for example,
the company's managing director unilaterally issued and assigned more share capital to
himself without following required legal procedures or reason. As a result, the majority
stockholders became a minority. The Supreme Court of India judged this behaviour
"oppressive" and overturned the allocation of extra shares in favour of the Managing
Director.

It is important to remember, however, that not every extra issue of share capital is
considered onerous. Even if the majority shareholders lose control of the firm, the issue
may not be considered oppressive if it serves legitimate goals, such as allowing the
corporation to execute statutory rights or comply with legal requirements. The Supreme
Court ruled in Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holdings
Ltd.16 that the issuing of extra share capital (by rights issue) was not oppressive. It was
done to guarantee that development operations that had stagnated owing to noncompliance

14
The Companies Act, 2023 § 241 & § 242.
15
Dale & Carrington Investment (P) Ltd. v. P.K. Prathapan, (2005) 1 SCC 212.
16
Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holdings Ltd., (1981) 3 SCC 333.
 with exchange control legislation may resume. The subsequent decrease of majority
stockholders to a minority did not constitute oppression in this scenario.

3. Mismanagement of Company Assets: In addition to exclusion and dilution claims,

minority shareholders in India file oppression and mismanagement claims relating to the
sale of company assets in violation of Indian law. When such sales are performed
incorrectly, the company's essential business base might be lost.

In summary, charges of oppression, mismanagement, and discrimination in India's family-

owned businesses frequently revolve around concerns of exclusion from management,
shareholder erosion, and asset misuse. The Indian legal landscape and court rulings reflect the
intricacies and nuances of dealing with these issues within a legal framework.

8. COMPARATIVE STUDY:

The provisions of the Companies Act in India and Singapore governing oppression and
mismanagement have certain parallels and variances.
1. Shareholders in both India and Singapore have the power to seek remedy if they
consider the company's affairs are being managed in an oppressive or unjustly
detrimental way. This application is brought to the National Company Law Tribunal
(NCLT) in India, and to the Singapore Court in Singapore.17
2. In both nations, the grounds for seeking relief are similar. Shareholders can file a
complaint if the company's operations are oppressive or unjustly harmful to the interests
of shareholders in general or the applicant in particular. In Singapore, shareholders can
also petition if the company's act or omission is or would be oppressive, detrimental, or
disregards the applicant's interests.
3. Both countries provide solutions to oppression and mismanagement. The NCLT has the
authority in India to issue appropriate orders to regulate the company's conduct, such
as regulating the conduct of the company's affairs, the purchase of shares by members
or the company, restrictions on the transfer or allotment of shares, the removal of
managing directors or directors, and the imposition of costs.18 If a claim for oppression
is successful in Singapore, the court may impose remedies such as injunctions,

17
Singapore Legal Advice, Oppression of Minority Shareholders, November 27 (2015).
18
Manish Kumar, Oppression & Mismanagement of Companies Act, 2013, 24 March 2022.
 modifications to the company's articles of association, damages, buyouts of minority
shareholders' shares, or, as a last option, the company’s winding up.
4. There are some distinctions in the specific legal structure and applicable remedies. The
regulations of oppression and mismanagement in India are defined in Chapter XVI of
the Companies Act. The phrases "oppression" and "mismanagement" are not defined in
the Act, but the court interprets them depending on the facts of each case. In Singapore,
however, the provisions are found in Section 216 of the Companies Act 19, and in order
to establish a claim for oppression, it is necessary to demonstrate that the wrongdoer's
actions resulted in commercial unfairness and a breach of a written contract or
legitimate expectations between the shareholders.
5. Furthermore, the prerequisites for submitting an application vary. In India, any member
of the corporation can file an application, and there are certain conditions for the
number of members or issued share capital that can file an application. Any shareholder,
including minority shareholders, can ask for relief in Singapore.20
In conclusion, while the provisions concerning oppression and mismanagement aim to
protect shareholders' interests and provide legal recourse in cases of unfair treatment or
disregard for their interests in both India and Singapore, there are some differences in the
specific legal framework and remedies available. It is critical that shareholders in both
nations understand their rights and the processes for obtaining remedies in situations of
tyranny and exploitation.

9. CONCLUSION AND SUGGESTIONS:

The Indian Legislature has enacted a number of safeguards to protect the interests of minority
shareholders under the Companies Act, 2013. These procedures are intended to establish a
framework of fair and equitable corporate governance. To begin, the legislation includes
measures such as the nomination of independent directors, which aids in guaranteeing impartial
decision-making. Minority shareholders have the right to vote in general meetings, ensuring
that their opinions are heard and their interests are taken into account.
Furthermore, the laws of the Securities and Exchange Board of India (SEBI) play an important
role in preserving the rights of minority shareholders in listed firms. These rules include
material information disclosure, insider trading, fair treatment, and equitable voting rights.

19
The Companies Act, 2023 § 246.
20
Team Farallon, Minority Shareholder Oppression in Singapore, June 13 2022.
Class action lawsuits may be filed under Section 245 of the Companies Act of 2013 21. It enables
investors, even minority shareholders, to sue a firm jointly for fraudulent or unfair practices.
This clause gives investors a legal mechanism to seek restitution for any violation, permitting
them to take collective action against the company's oppressive behaviour.

In India, many measures jointly contribute to the preservation of minority shareholders’

interests. The rules and regulations strive to create a transparent and responsible corporate
governance structure that protects the interests of all stakeholders. However, effective
execution and active shareholder involvement are critical in establishing and safeguarding their
rights.

21
The Companies Act, 2023 § 243.