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MODULE – VI:
Unfair Prejudice

SYNOPSIS –

INTRODUCTION
UNFAIR PREJUDICE IN THE TATA V. MISTRY CASE
EVOLUTION OF THE PRINCIPLE OF UNFAIR PREJUDICE REMEDY
CONCLUSION

INTRODUCTION

Corporate structures in India are quite peculiar and exhibit a feature of common owner and
manager in most of the cases. This is because number of the corporate groups in India are
privately held by business families exercising close control. Whereas, in the western
companies, the managers and its owners are separate. Such unique corporate structures in
India give rise to unique corporate governance issues. The most prominent one is the tussle
between the majority shareholders and the minority shareholders of a corporate entity. Unlike
western companies where central problem of governance revolves around conflict between
owners and managers, in India, the core issue is that of constant disciplining of dominant
shareholders and protecting minority shareholder’s interest. The rule of corporate democracy
is that the “majority will rule” as was laid down in the case of Foss v. Harbottle[i]. This rule
allows majority to impose and perpetuate its will on the minority. However, there are certain
exceptions to this rule and the law against minority shareholders’ oppression and
mismanagement of company is one such relief.

The relief for oppression and mismanagement finds its origin under section 210 of the United
Kingdom’s (“UK”) Companies Act, 1948. The said provision was adopted in the Companies
Act, 1956 of India under section 397. Presently section 241-244 of Companies Act, 2013
provides for relief against such oppression. However, the language under the new Act has
undergone a little modification. The erstwhile legislation provided for cases when the affairs
of the company are being conducted “prejudicial” to the public interest or “oppressive” to
the member of the company. On the other hand, the new legislation of 2013 provides for
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cases where the affairs of the company are being conducted “prejudicial” to the public
interest or “prejudicial” or “oppressive” to the member of the company, giving wider relief
to the minority shareholders. A parallel can be drawn from the English company law
jurisprudence where the language under section 210 of the 1948 Act underwent a similar
change albeit not exactly like that of India. The erstwhile English Act provided relief against
“oppressive” conduct which was interpreted widely and which ultimately led to its
substitution by the word “unfair prejudice” to give even wider relief to the minority
shareholders by giving enough room for court interference.

UNFAIR PREJUDICE IN THE TATA V. MISTRY CASE

The National company law tribunal (“NCLAT”) in the well-known recent case of Cyrus
Investment Pvt Ltd. v. Tata Sons Ltd & Co.[ii] has dealt with the issue whether the
Companies Act, 2013 provides for relief against unfair prejudice under section 241-242. The
answer is in affirmative as per NCLAT. This is contrary to the earlier and prevalent view
taken by NCLT, Mumbai bench in the same case that no legal act can be declared as
oppressive on the mere ground its unfairness.

NCLAT, setting the premise of its judgment on the fact that a relationship of mutual trust and
confidence existed between the Tata sons and Shapoorji Pallonji group (minority
shareholders in the case) for more than four decades, held that structure of the company is in
nature of quasi-partnership. The appellate tribunal took the view that the Indian law does not
use the word unfair under section 241 and the real test is whether the alleged act is
“prejudicial or oppressive” to the minority shareholder interest. In continuation of this view,
the appellate court interpreted the word “oppressive” by relying on some landmark English
cases namely; Elder v. Elder[iii], Scottish co-op wholesale society v. Meyer[iv] and In re HR
Harmer Ltd. [v] NCLAT observed the ruling of these cases wherein it was held that “the
word oppressive meant burdensome, harsh & wrongful”. “The circumstances must be such
as to warrant the interference that there had been at least, an unfair absence of powers and
an impairment of confidence in the probity with which the affairs of the company are being
conducted, as distinguished from mere resentment on the part of minority being outvoted on
some issue of domestic policy.” The word oppressive should suggest that the conduct
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complained of “involve a visible departure from standards of fair dealing, and a violation of
conditions of fair play on which every shareholder who entrusts his money to a company is
entitled to rely”. Furthermore, the appellate court referred to ruling in the Meyer’s case
wherein it was ruled “effect of section 210 of the Companies Act, 1948 warrants the court in
looking at the business realities of situation and does not confine to a narrow legalistic
view.”

In the light of the aforementioned English rulings, the appellate tribunal interpreted the term
“unfairness” as an outcome of word “oppressive” itself and held that affairs of Tata sons are
both “prejudicial and Oppressive” to the minority shareholders. The judgment has read the
words prejudicial and oppressive conjunctively and since unfairness flows out of
oppressiveness as per English rulings, the judgment in effect provides an unfair prejudice
remedy to the minority shareholders.

EVOLUTION OF THE PRINCIPLE OF UNFAIR PREJUDICE REMEDY

Initially UK’s Companies Act, 1948 stated that in order to succeed the applicant must show
that the affairs of the companies are being conducted in a manner “oppressive” to the interest
of some members (including himself). According to Meyer’s case, oppressive meant
“burdensome, harsh & wrongful”. But the question that cropped in the case was that what
should be the degree of wrongfulness? Does it prescribe for actual illegality or conduct which
are not actually illegal but can be described as reprehensible. The outcome of Meyer’s case
supported the broader view. The effect of this judgment and few other cases which follow
similar principles was that section 210 should not be interpreted narrowly for oppressive
conduct, but should involve that conduct also which has the effect of being “unfairly
prejudicial”. This meant that though the act is legal, if it causes unfair prejudice to
minorities, it will be termed as oppressive. To give better effect to section 210, the Jenkins
committee[vi] suggested amendment of the section by substituting the word “oppressive”
with “unfair prejudice”. This suggestion was tardily adopted in the Companies Act, 1985 and
was later on retained under section 994 of English Companies Act, 2006. The word “unfair
prejudice” has an elastic quality enabling the court to mould its concept to provide
appropriate relief in given circumstances. [vii]

The Indian framework against majority oppression was adopted under section 397 of
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Companies Act, 1956 inspired by the English Act. The Supreme Court of India in cases like
Kalinga tubes[viii]and Needle Industries[ix] approved the English rulings in respect of the
interpretation of the word “oppressive”. The law in India was further tweaked in the year
2013, when under the new Companies Act, it allowed applicant to approach the tribunal when
the affairs of the companies are being conducted in a manner “prejudicial” or “oppressive”
to the minority shareholders. This modification for remedy under section 241 suggested a
movement away from oppression based test to prejudice based test which led to widening of
the scope of court intervention. With the judgment of NCLAT, the unfairness aspect has also
been touched signifying another leap towards unfair prejudice regime that is prevalent in
United Kingdom.

CONCLUSION

A wide interpretation of section 241 may have its own pros and cons from the aspect of
corporate law jurisprudence. But even after all this, the only question that remains is that if
Indian Parliament really wanted to envisage unfair prejudice remedy, then why have they
incorporated the word “prejudicial” or “Oppressive” instead of “unfair prejudice” like in UK.
The question will surely be answered by the Supreme Court, as an appeal has been filed
against the NCLAT judgment and the matter is sub judice as of now. It’ll be interesting to see
whether the apex court will follow the footsteps of UK or develop its own jurisprudence in
this matter considering the Indian corporate structures.

END-NOTES
[i] Foss v. Harbottle, 67 ER 189 (1843)

[ii]Cyrus Invetsements Pvt. Ltd. v. Tata Sons Ltd & Co., CA No. 254/2018 (NCLAT)

[iii] Elder v. Elder & Watson ltd., AC 49 (1952)

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[iv] Scottish Co-op wholesale society v. Meyer, AC 324 (1959)

[v] In re HR Hammer, 1 WLR 6 (1959)

[vi] Lord Jenkins, Protection of Minorities, Report of the Company Law Committee, June
1962, Board of Trade (January 3, 2019, 5 PM),
https://www.takeovers.gov.au/content/Resources/other_resources/downloads/jenkins_
committee_v2.pdf

[vii] In re Macro (Ipswich) Ltd, 2 BCLC 354, 404 (1994)

[viii] S. P. Jain v. Kalinga Tubes ltd., AIR 1535 (SC 1965)

[ix] Needle Industries (India) Ltd & ors. v. Needle Industries newey (India) holding ltd. &
ors., 3 SCC 333 (SC 1981)