An Overview on Prevention of Oppression and Mismanagement in India

This article discusses prevention and mismanagement in Chapter XVI, of the Company Act, 2013. Their aim is to safeguard the interests of investors in companies and to protect the public interest. In addition to the protection afforded to the minority by the exceptions to the rule of the supremacy of the majority, the modern company acts contain special provisions for the prevention of oppression and mismanagement.

The rights conferred on shareholders by this chapter are also known as “qualified minority rights.” These provisions not only provide for judicial remedies but also administrative remedies. The company is a juristic person. It can sue or be sued in its own name. Companies usually get incorporated to get certain profits for their shareholders. It will help the companies undergo smooth administration.

Certain powers are delegated to the company’s directors and other executive officers, who are again subject to the decisions of the majority shareholders. This can be depended upon for democratic principles. The decision of a majority of shareholders can be considered the oxygen of democracy.

The policy decisions shall be taken according to majority decisions, sometimes it may wrongfully inflict upon the minority shareholders by several other means. This is known as Oppression and Mismanagement. Minority shareholders should not be let to suffer by a blind majority shareholders.

Definition of Oppression and Mismanagement

What is Oppression in Company Law?

Lord Cooper explained the meaning of oppression in the case Elder v. Watson Ltd[1], “Oppression is a misdemeanour committed by majority shareholders who under colour of their majority power, wrongfully inflict upon the minority shareholder or minority shareholders any harm of injury” was also cited with approval by WANCHOO J (afterwards CJ) of the Supreme Court of India in Shanti Prasad Jain V. Kalinga Tubes Ltd[2],

The following are the grounds for making an application under Section 241:

(a) that the company’s affairs are being conducted in a manner that is prejudicial or oppressive to a member or members, or in a manner that is prejudicial to the public interest, or in a manner that is prejudicial to the company’s interests;

(b) that a material change has occurred in the company’s management or control, whether by an alteration in the Board of Directors or management;

What is Mismanagement in Company Law?

Mismanagement occurs when a company’s affairs are conducted in a manner that is detrimental to the public interest or the company’s interests. Mismanagement is also said to occur when there has been a material change in the ownership of the company’s shares or if it has no share capital in its membership or in any other way, and it is likely that the company’s affairs will be conducted in a manner prejudicial to public interest or in a manner prejudicial to the company’s interests as a result of that change. Palmer explains that a proper balance of majority and minority rights is necessary to run a smooth functioning of the company.

The Rule of Foss v. Harbottle

The rule of Foss v. Harbottle recognizes the majority rule and its exceptions recognizes judicial as well as administrator remedies against oppression and mismanagement as the minority rights. These minority rights are well known and famous as “Qualified Minority Rights”.

Facts – In Foss v. Harbottle case, Richard Foss and Edward Starkie Praton were two minority shareholders in the Victoria Park Company, an Act of Parliament incorporated the company. The allegation of the claimant was that “Property of the Company had been misapplied and wasted and various mortgages were given improperly over the Company’s propety”. They asked that the guilty parties be heard accountable to the company and that a receiver is appointed. The 5 company directors are the defendants of this case.

Judgement – Their claim was dismissed by the court for two reasons, firstly, the “proper plaintiff rule” is that a wrong done to the company may be indicated by he company alone, corporation gas a separate legal entity. Secondly, the “Majority Rule Principle” states that if the alleged wrong can be confirmed or ratified by a simple majority of members in a general meeting, then the court will not interfere.

Exceptions to the Rule of Foss v. Harbottle

• Ultra vires and illegality
• Actions requiring a special majority
• Invasion of individual rights
• Frauds on the majority.

Provisions dealing with Prevention of Oppression and Mismanagement under under the Companies Act, 2013

• In providing the remedies to the minorities the tribunal plays an important role.
• Section 241 – empowers the minority shareholders to file an application to the tribunal for relief in case of oppression etc.
• Section 242 – narrates the powers about the tribunal
• Section 243 – states about the consequences of termination of modification of certain agreements.
• Section 244 – gives the right to apply under section 241.
• Section 245 – states about the Class Action.
• Section 246 -lays down the provisions of secty377- 341. Liability under 339 and 340 to extend to partners or directors in firms or companies. Shall apply Mutatis Mutandis in relation to an application made to the tribunal under section 241 or 245.
• Section 337- Penalty for frauds by officer.
• Section 338- Liability where proper accounts are not kept.
• Section 339- Liability for fraudulent conduct of business.
• Section 340- Power of tribunal to assess damages against delinquent directors etc.
• Section 341- Liability under section 339 and 340 to end to partners or directors in firms or company.

Cases dealing with Prevention of Oppression and Mismanagement in India

i. Hindustan Co-operative Insurance Society Ltd In Re

The insurance business was nationalized in 1956. A Life Insurance Company was acquired y the Life Insurance Corporation of India, and also paid certain amount of compensation to the company. The majority of shareholders did not want to distribute that compensation to the minority shareholders. To achieve their object, they changed the objective clause of the company by a majority.

Calcutta High court held that it was a clear instance of oppression of the part of majority shareholder against minority and quashed the newly inserted objective clause and also ordered for the payment of appropriate share amount to the majority shareholders.

ii. Rajahmundry Electric Corporation v. A. Nageswara Rao

The directors had support of majority shareholders. They had a great extent of influence over them. The VC of the company had political influence. The chairman was helpless. The group of VC misappropriated the funds of the company for its personal use.

As a result, the company could not supply electricity to the parties as per agreement. The machinery required repairs, which were not attached. As the results of all these consequences, the company was put into loss. The petitioner sued the company for the mismanagement.

The Supreme Court admitted with the contention of the petitioner and appointed 2 administrators for the management of the company for a period of 6 months vesting in them all the powers of the directors and outstanding the powers of VC and his group of directors.

Conclusion

The contemporary issue which is going on is the collapse of companies and corporations. These large companies and corporations had globally made such entities to carefully ponder over their actions towards affairs of the company. Class action suits are being filed against the management regarding the oppression and mismanagement. Both the individual shareholders and minority shareholders of the company have been empowered to take up action against the unjustified abuse of power and authority under the managerial under personnel law. If any key personnel commits any mistake individual can file an application before the tribunal against him.

[1] 1952 SC 49 (Scotland)

[2] (1965) 1 Comp LJ 193, 204: AIR 1965 SC 1535: (1965) 35 Comp Case 351.

Author Details: Roshini R (Tamil Nadu Dr. Ambedkar Law University, School of Excellence in Law)

The views of the author are personal only. (if any)