January 17, 2022

Minority Protection against Oppression and Mismanagement

Companies Act

The majority rule finds in roots in the Foss V Harbottle[1] case which states that an individual shareholder has no claim of action for any losses or misconduct caused in the company. Also known as the proper plaintiff rule, it highlights that in a situation of misconduct or malpractice by the directors, the proper plaintiff to sue would be the company itself, being a separate legal entity or through any other derivative action. Although importance was placed on the common majority, very little was done to protect the minority, this case, however, paved the way for minority protection.

To maintain the balance of interests between majority and minority shareholders, the Indian Companies Act of 2013, effectively brought Sections 241 and 242 to safeguard such rights. Exceptions of the Proper-Plaintiff rule recognized by laws were-

a. Breach of the fiduciary duty of the directors of the company,

b. Personal rights of shareholders being affected

c. Acts done beyond the Article of Association (AOA) and Memorandum of Association (MOA) (Ultra Vires)

d. Fraud on Minority

The concepts of oppression and mismanagement falls under part d (as mentioned above); originally a part of Sections 397 and 398 of the old Companies Act respectively, has been combined under Section 241 of the new Act. Simply put, mismanagement would be a singular event of misconduct or poor management of the company by the directors, however, oppression is the continuous series of events that are burdensome, harsh, and wrongful. Section 241(a) and (b) are the subsections that deal with oppression and mismanagement accordingly, however, it is pertinent to note that the said sections also uses the phrase “Prejudicial to the interest” which encapsulates it (oppression and mismanagement) in the widest and broadest way possible. The language is such that it refrains from using the terms ‘majority’ and ‘minority’ so that there is no arbitrary concentration of power. These terms must be read in conjunction with the other principle of corporate governance, like that of the Proper purpose rule highlighted in the Howard Smith[2] case.

The Rajahmundry Electric Supply Corporation Ltd. Vs Nageswara Rao[3]and Shanti Prasad Jain Vs Kalinga Tubes Ltd.[4] cases helped determine the scope and components to identify a case of oppression and mismanagement. Lack of confidence in the majority must not stem from resentment of dissatisfaction, however should be due to lack of probity in the conduct by the majority in the company’s affairs[5]. The Court in the Rajahmundry case additionally stated that winding up of the company should be in the interests of the shareholders. Winding up is the last resort taken up by the directors when they are left with no other alternatives/solutions that could improve the condition of the company. This is the reason the courts place importance on ‘just and equitable’ conduct so that it would not operate harshly on the rights of the shareholders even in a winding up scenario. Usually, the courts are prohibited from looking into the internal affairs of the company, provided that the directors are working well within the powers as conferred under the AOA, however, winding up would be the exception to the rule.

Moreover, the Shanti Prasad case determines the components of oppression and mismanagement. Mismanagement would consist of an isolated event wherein the directors act poorly, however, oppression would be a consecutive story, wherein the majority acts in a manner that is burdensome, harsh and wrongful, that lacks bonafide intent.

Because of the high standards and narrow interpretation of oppression, mismanagement is easier to prove, hence used more often. Grounds for filing a complaint under section 241 to prove oppression should show that the affairs of the company are being handled in a manner that is prejudicial to- public interest, the interest of the company, and most importantly prejudicial/oppressive to the member filing said complaint. Grounds for mismanagement are relatively easier, the member filing such complaint must prove, that the material change alters the working of the company and is most likely to be prejudicial to the interests of the member and conduct of the company. Moreover, Section 241 also enables the Central government to file a complaint against a company if it finds that the affairs are being conducted in a manner that affects the company and the interest of the shareholders.

Generally, oppression constitutes a series of continuous events that are harsh, burdensome, lack probity, and wrongful. However, there is an exception to the said rule- if one singular act is so grave in nature it can amount to oppression. This was seen in the case of Dale and Carrington Invt. (P) Ltd. Vs P.K Prathapan and Ors.[6], wherein the singular act of a rights issue resulted in the majority shareholders becoming the minority. Although the procedure of the rights issue was followed properly, the method for which it was obtained was fraudulent and malafide. The implication of this singular event was enough to change the dynamics of the company majorly which was burdensome, harsh, wrongful, and lacked complete probity which was enough to amount to an act of oppression.

Once oppression or mismanagement has been proved to the court, the Companies Act places power on the tribunal to take the actions as they deem fit; reliefs and decision could vary from- regulation of the conduct of the company’s affairs, selling/purchasing the shares of the company to termination of directors or winding up of the company.

The new Companies Act tries to maintain the balance between the majority and minority, to ensure that they both have the right to safeguard their interest, right to be heard and the right to take necessary actions when deemed necessary. Oppression and Mismanagement are just one of the many methods that protect the minority’s interest. Moreover, the addition of section 241 ensures companies comply with their AOA, MOA ad other necessary regulations to run a legitimate business, hence it can also be viewed as guideline to running good businesses.

[1] (1843) 2 Hare 461

[2] Howard Smith Ltd. Vs Ampol Petroleum Ltd. And Others (1974) 2 W.L.R. 689

[3] AIR 1956 SC 213

[4] AIR 1965 SC 1535

[5] Rajahmundry Case

[6] AIR 2005 SC 1624

Author Details: Janavi Venkatesh (OP Jindal Global University)

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