The Indian Companies Act, 2013

Oppression and Mismanagement - Past, Present and Future

by

Mr. B.V. Satish Kumar, Practicing Company Secretary & Insolvency Professional

Hyderabad, Telangana, India. Phone Number: 9618320999 / Email Id: "s.kumarhyd999@gmail.com"

I know Mr. Satish since July 2012, when I was working as a finanace manager in a mining company. He was my company secretary then. He is a thorough professional - honest, efficient and hardworking. Even after I changed my job, I kept in touch with him for both academic and professional reasons. He is currently specialising in National Company Law Tribunal (NCLT) affairs. He writes articles occasionally. I had once come to know about this skill and interest of his and, hence, requested him to contribute some articles for my blog. This article titled "Oppression and Mismanagement - Past, Present and Future" is his first contribution. I hope he will continue to take time out from his busy professional work to write more articles and share with me so that I would be able to publish on my blog.

If any of the readers have any requirement for legal consulting related to NCLT or engaging a company secretary for Indian company law purposes then they may contact Mr. Satish personally. I have provided his contact details above. I must state here that Mr. Satish has not sought for my recommendation or advertisement on my blog. I am recommending him on my own accord as a satisfied client of his business.

The Companies Act, 2013 has given a choice of statutory rights to the shareholders of a company to file petition before the National Company Law Tribunal (NCLT) for relief against the acts of oppression and mismanagement. Shareholders can file petitions to bring to an end the past acts, to curate, prohibit the existing acts and to prevent the future or apprehended acts which are prejudicial to the interest of the company, its members or to public interest. Section 241 to 245 of the Companies Act, 2013 has given ample powers to the shareholders to seek remedy against various acts of oppression and mismanagement.

The word oppression is defined as any action or decision taken by the board or members of the company which is burdensome, harsh and wrongful to the other members of the company or some of them and lacks the degree of probity which they are entitled to expect in the conduct of the company's affairs. Similarly, the word mismanagement is defined as the process or practice of managing the affairs of the company in an inept manner, incompetently, or in dishonest way which is causing loss/prejudice to the company or its members.

A shareholder who is aggrevied by the oppressive and mismanagement acts, can file petition either under Section 241 or under Section 245 of the Companies Act, 2013. For past, present oppresive/mismanagement acts, he can file under Section 241(1) (a) or under Section 245 of the Companies Act, 2013. For a future or apprehended oppresive or mismanagement acts, he can file under Section 241(1) (b) or under Section 245 of the Companies Act, 2013.

Section 241(1) has two clauses. Clause (a) deals with present oppression and mismanagement and clause (b) deals with future apprehended mismanagement.

241. (1) Any member of a company who complains that -

the affairs of the company have been or are being conducted in a manner prejudicial to public interest or in a manner prejudicial or oppressive to him or any other member or members or in a manner prejudicial to the interest of the company; or

the material change, not being a change brought about by, or in the interests of, any creditors, including debenture holders or any class of shareholders of the company, has taken place in the management or control of the company, whether by an alteration in the Board of Directors, or manager, or in the ownership of the company's shares, or if it has no share capital, in its membership, or in any other manner whatsoever, and that by reason of such change, it is likely that the affairs of the company will be conducted in a manner prejudicial to its interests or its members or any class of members, may apply to the Tribunal, provided such member has a right to apply under Section 244, for an order under this Chapter.

Section 241(1) (a) deals with a situation where in the affairs of a company are being conducted in a manner prejudicial to public interest or in a manner prejudicial or oppressive to member or members or in a manner prejudicial to the interest of the company. In otherwords, the action contemplated is against the persons present in control/management of the company.

Section 241(1) (b) deals with the situation where it is likely that the affairs of the company will be conducted in a manner prejudicial to the company or its members on account of change in the control or management of a company either on account of change in the board of directors or in the ownership of shares. In otherwords, this clause provides for a preventive action for an apprehended future mismanagement by persons who will gain control over the company.

Can past acts constitute oppression?
Oppression must be a continuous process. A member can file petition if the oppressive acts (or at least their effect) ought to exist at the time of the filing of the petition. Isolated acts of oppression or mismanagement will not give to an action against oppression and mismanagement.

In Shanti Prasad Jain vs. Kalinga Tubes Limited (1965) 35 Comp Cas 351 (SC), Supreme Court opinioned that "there must be continuous acts on the part of the majority shareholders", continuing up to the date of this application, showing that the affairs of the company were being conducted in a manner oppressive to some part of the members." This is suggested by the words "are being conducted in a manner ..." used in Section 397 of the Companies Act, 1956.
On isolated acts, Calcutta High Court held that mere increase of authorised capital could not be faulted unless the petitioners could prove that the sole motive for seeking such increase in the capital of the company was to oppress the petitioners. (Jaladhar Chakraborty vs. Power Tools and Appliance Ltd., (1994) 79 Comp Cas 505(Cal)).

Continuing Effect - Whether constitute oppression?
If the effects of the single and isolated acts are perpetual and continuing, they will constitute oppression. The wrongful act complained of may be a single act, but its effect may be continuous and resulting into persistent oppression of the minority. A classic example is an act of issue of shares by a company to only one or few of the company's shareholders or a group of shareholders that enhances the shareholding of that shareholders or the group and thereby control over the company and this situation subsists for some time. As a result, the shareholders which as acquired an enhanced control manages the company to suit its wishes, gets more dividend and more shares (if further or bonus shares are issued meanwhile), more directors form them are appointed and the minority is ignored or reduced to the position of mere figureheads. (adopted from Dr. K.R. Chandratre's book Law & Practice related to oppression and mismanagement).

Even if the fraudulent allotment of share was a single act, its consequences are continued and amounted to oppression. (Malleswara Finance and Investments Co. Pvt. Ltd vs. Company Law Board (1995) 82 Comp Cas 836(Mad)).

Thus sometimes a single act may constitute as an act of oppression sufficient to grant a relief under Section 241 if its effect lasts over time or its results into a number of acts which are oppressive.

Changes brought by The Companies Act, 2013

The Companies Act, 2013 has brought more clarity by inserting the words "have been" in the first line of Section 241(1) (a) of the Companies Act, 2013, by which NCLT can now deal with past acts or single/isolated acts, the effects of which are continuing in present, with much freedom.

Applicability of Limitation Act, 1963

Section 433 of the Companies Act, 2013 speaks about applicability of the provisions of the Limitation Act, 1963 to the proceedings before NCLT and NCLAT. Continuation of the wrong is the sine qua non for filing the petition against oppression and mismanagement. A fresh period of limitation would begin to run at every moment of the time during which the breach or wrong continue as provided under Section 22 of the Limitation Act, 1963. Hence the limitation act is not applicable to the proceedings of oppression and mismanagement. The words "as far as may be" in the Section 433 also suggests that the provisions of the Limitation Act, 1963 shall not be applicable strictly in case of oppression and mismanagement proceedings. In all other proceedings, the provisions of the limitation act will apply before the NCLT and NCLAT.

How to prevent future oppression or mismanagement

To prevent future mismanagement acts, a shareholder can file petition under Section 241(1) (b) or under Section 245 of the Companies Act, 2013. To prevent future oppressive acts, a shareholder can file petition under Section 245 of the Companies Act, 2013.

Section 241(1) (b) is a special provision. The object of the section is to prevent future mismanagement of the company. To invoke the provisions of this section, the complaining shareholders shall establish that a material change has taken place in respect of its management or control of the company either by way of an alteration in the Board of Directors or in the ownership of the company's shares and as a result of which the affairs of the company is likely to be conducted in a manner prejudicial to the interest of the company or its members. The thrust is on the prevention of prejudicial acts. Prejudicial conduct of affairs is the conduct that is harmful, detrimental, deleterious, damaging or injurious to the interest of the company or its members.

The Companies Act, 2013 has redefined the scope of actions on which the shareholders can file petitions under Section 241 (1) (b). Section 398 (1) (b) of the Companies Act, 1956 gave powers to the shareholders to file a petition, if it is likely that the affairs of the company will be conducted in a manner prejudicial to the interests of the company or its members or any class of members. The element of public interest is completely removed and concerns of the shareholders is included.

Prevention of future oppression or management acts under Class Action suits

The Companies Act, 2013 has introduced new concept called class action suits by inserting Section 245 to the Companies Act, 2013. It has given very wide powers to the shareholders and deposit holders of a company to file petition against the acts of oppression or mismanagement. Now shareholders or deposit holders of a company can file petition on the basis of an anticipated or likely oppression or mismanagement acts or a threat of oppression/mismanagement. Unlike Section 241 (1) (b), Section 245 did not put any pre-condition of occurence of material change in the management or control of the company.

By invoking Section 245 of the Companies Act, 2013 the eligible shareholders or deposit holders can restraint or prevent a company from passing a resolution or to restrain the company from acting on the resolution which is already passed. Now the shareholders or deposit holders can claim damages not only against the company but also against the auditors and other experts/advisors of the company.

Is it necessary to justify winding up of the company under clause just and equitable for getting relief?

Tribunal while dealing the oppression and mismanagement petitions has to form an opinion that the company's affairs have been or are being conducted in a manner prejudicial or oppressive to any member or members or prejudicial to public interest or in a manner prejudicial to the interests of the company and such conduct would justify the winding up of the company under the just and equitable clause. However, to get relief under Section 241 (1) (b) of the act, the applicant need not prove that the affairs of the company would justify the making of a winding-up order on the ground that it was just and equitable that the company should be wound up. Section 242 (1) (a) speaks about the provisions of Section 241 (1) (b) from its ambit and thereby suggesting that making of winding up order is not necessary in case of prevention of future prejudicial acts of the company.

Conclusion

The rights of the shareholders of a comapny to get relief in case of oppression and mismanagement is subject to conditions imposed under Section 241, 244 and 245 of the Companies Act, 2013. Now, shareholders can file a petition before National Company Law Tribunal against past, present, and future acts of oppression and mismanagement. By virtue of Section 245 of the Companies Act, 2013, shareholders can file petition on the basis of an anticipated or likely oppression or a threat of oppression. National Company Law Tribunal will restraint a company from holding a general meeting or board meeting if prejudicial acts has been proposed or preventing a company from committing an act which is ultra virus the articles or memorandum of the company or to restrain the company from committing breach of any provisions of the company's memorandum or articles. NCLT may pass orders of curative, prohibitive and preventive in respect of existing and apprehended acts prejudicial to the interest of the company or members.