December 6, 2020

Oppression And Mismanagement- Is Law Enough?

Companies Act

Oppression refers to the exercise of power or authority in an unjust way against the consent of the other parties. According to Black Law Dictionary, the term ‘oppression’ has been given a meaning as, “the act or an instance of unjustly exercising power”. In Daleant Carrington Investment Pvt. Ltd. v P.K. Prathapan[1], it was elucidated that increasing the capital of company with the idea of gaining control or power can be termed as oppression. On the other hand, mismanagement means process or practice done ineptly or dishonestly. However, these terms have not been defined in the Companies Act 2013 and left for court’s interpretation from facts and circumstances.

The provisions of oppression and management is adumbrated in Section 241 of the Companies Act, 2013[2] and Chapter XVI which includes the clubbed Section 397 and 398 of Companies Act, 1956. In generality the rule of majority is being followed by management of company as specified in Foss v Harbottle[3] and courts do not interfere to protect minority rights. However, this principle is an exception to the rule. Hence, this section can be invoked when individual, public, member or company’s interest is being hampered. This distinction was made deliberately to cater situation. For example, if majority of the shareholders hold a smaller percentage of share and minority holds a major percentage of share but since the shareholders are in majority hence, they always win their stake because of more number of by votes by majority.

The court in Elder v Elder & Watson Ltd[4], explained the term oppression as;

“The essence of the matter seems to be that the conduct complained of should at the lowest involve a visible departure from the standards of fair dealing, and a violation of the conditions of fair play on which every shareholder who entrusts his money to the company he is entitled to rely.”

The Supreme Court in India has defined the term in Needle Industries (India) v Needle Industries Newey (India)[5] and further in Shanti Prasad Jain v Kalinga Tubes[6], empathized on the essentials of case of oppression and mismanagement. It stated that there should be misconduct but such an act should not be an isolated one. The court in Sidharth Gupta & Ors. v. M/s. Getit Inforservices Pvt. Ltd. & Ors[7], mere violation of article of association does not lead to oppression and mismanagement.

In Hindu Coop Insurance Society Ltd. case[8], the idea of forcing minority shareholders to channelize their money against their will in different kinds of business. Even an attempt to deprive an individual of right of membership is said to be oppression in Mohan Lal Chandumall v Punjab Co. Ltd.[9] Also, refusal by company to register shares with the idea to retain control over the company was held to be oppression by court in Kumar Exporters (P) Ltd v Naini Oxygen and Acetylene Gas Ltd.[10] Further in Rajahmundary Electric Corporation v Nageshwar Rao[11] the directors were held for mismanagement for using the company’s fund for personal uses. Continuance of office after expiry of term is also held as mismanagement in Sishu Rajan v Bholanath Paper House[12]. The court in Akbarali Kalveri v Konkan Chemicals Ltd.[13] held that violation in statutory provisions like transfer of shares without offering, holding meetings without notice etc. are held to be mismanagement. Therefore, there lies a need to protect the interest of such minorities and hence, Companies Act 2013 has successfully taken cognizance of this.[14]

Another infamous example is that of Satyam Scam. There was mismanagement of accounting along with fraudulent auditing which was confessed by Ramalinga Raju in his letter to board of directors.[15]

The Tribunal under Section 242 of the Act has following powers: to regulate affairs of conduct of company, purchase of shares by any members, restrictions on allotment of shares, removal of managing director, manager or director of the company along with others.

There is an important provision of right to file such an application as elucidated in Section 244 of Companies Act. This is divided between company and one member on behalf of others. The right under companies can further be categorized as companies having share capital and companies not having share capital. Whereas in case of individual filing on behalf of others must a written consent form.

The Companies Act provides a substantive provision regarding application of complaint regarding oppression and mismanagement. It clearly spells out who are eligible to complain and when. Even the Central Government may take suo moto action with reference to the provisions. Also, within 45 days which can further be extended to another 45 days if court is convinced with the sufficient and reasonable cause of delay, one can file an appeal against the decision of the tribunal under Section 421 of the Act.

The concept of ‘class action’ has taken shape in under Section 245 of Companies Act which throws light on the principle that any number of claimants with same, similar or common grievance can file a suit against the company. In this way, it can be cost effective too as individual’s resources are limited. The funding of such suit can also be made from Investor Education Protection Fund. The power of class action is so much extended that they can file a suit against the directors, auditors or managers of company due to mismanagement or giving false reports or details.[16]

Unfolding of Tata v. Mistry clash

In 2016, Ratan Tata took over as interim chairman and removed Mistry as interim chairman of Tata Sons. Mistry claimed that they are oppressing minority as their articles of association was biased to which Ratan Tata responded by calling it as a victimization card. Conflict also arose as Mistry wanted to raise funds for Orissa election but could not as it was mentioned in articles of association as claimed by Tata that it could be done for parliament elections only. He further stated that a lot of amount was given diverted to companies running in losses and not paid dividends to minority shareholders. On the other hand, Mistry had taken many decisions without consulting the board. Hence, Mistry’s firm filed petition in NCLT under section 241 and 242.[17]

Mumbai bench of NCLT held that Mistry has lost his position as its chairman since the shareholders has lost trust in him. The allegations made by him were rejected and his removal was upheld.[18]

Recently in 2018, Vikram Bakshi v McDonald’s India Private Limited[19], Vikram Bakshi and McDonald’s entered into a joint venture through which they held 50% equity stake in Connaught Plaza Restaurants Private Ltd. The clause 32 stated that if Mr. Bakshi was not MD then McDonalds will have the option to purchase shares as per market value to be determined through formula mention in the agreement. In 2007-08 McDonalds decided to buy the shares at $5 million. But Mr. Bakshi demanded 100 million dollars. Hence, he was terminated on ground of for mismanagement and misuse of funds. He claimed that the act to remove him from his office was malafide and hence approached NCLT. The tribunal gave judgment in petitioner’s favor and called removal of him from office as malafide and oppression since financial statements were healthy amongst other reasons.

The recent downfall of large corporations has made such companies to think and take steps cautiously. Transparency and accountability of the management has been increased due to increasing suits of oppression and mismanagement of the company. The unjustified and irrational use of power by few have now been diluted since individual now are also empowered to take an action against such management. Because despite provisions, the corporations and companies are taking benefit of their influential powers and the cases of such oppression and mismanagement have increased.

The Companies Act, 2013 has ensured in many ways for the protection of minority rights. Starting from class suit to with other rights of oppression and management has been added. However, the right given to tribunal in letting off requisite number of people for petition filing should be used prudently. In Cyrus Mistry case too, the tribunal believed that requisite number should depend on merits of the case and evidences put forward. Further, the protection of independent director and minority shareholders goes hand in hand. But unfortunately, directors are removed by board for their meticulous and prudent behavior. A powerful legislation is required for protection of independent directors. The board should provide proper reasons and rationale for removal of directors.

The principle of audi alteram partem should be followed. The government must keep a check on company’s mismanagement and oppression acts. Also Special Fraud Investment Office, must be made independent from government intervention and must be allowed to take suo moto cognizance of the cases as working on advice of government might lead to favoritism. Such organization can release reports periodically, listing companies with mismanagement and oppression activities. Hence, legislations on paperwork are not that effective as the legislation with stricter implementation in practical aspect.

References
[1] Daleant Carrington Investment Pvt. Ltd. v P.K. Prathapan 2004 CompCas 161 SC.

[2] Avtar Singh, Company Law, 526, 16th edition 2016.

[3] Foss v Harbottle (1843) 67 ER 189.

[4] Elder v Elder & Watson Ltd, 1952 SC 49 (Scotland).

[5] Needle Industries (India) v Needle Industries Newey (India), (1981) 3SCC 333.

[6] Shanti Prasad Jain v Kalinga Tubes, (1965) 2 SCR 720.

[7] Sidharth Gupta & Ors. v. M/s. Getit Inforservices Pvt. Ltd. & Ors, MANU/CL/0010/2016.

[8] Hindu Coop Insurance Society Ltd., [1961] 31 Comp Cas 193 (Cal).

[9] Mohan Lal Chandumall v Punjab Co. Ltd., [1962] 32 Comp Cas 937 (Punj).

[10] Kumar Exporters (P) Ltd v Naini Oxygen and Acetylene Gas Ltd., 1983 SCC OnLine All 928.

[11] Rajahmundary Electric Corporation v Nageshwar Rao, MANU/SC/0008/1995.

[12] Sishu Rajan v Bholanath Paper House, MANU/WB/0097/1980.

[13] Akbarali A Kaveri v. Konkan Chemicals (P) Ltd, (1997) 88 CLB 245.

[14] Akshat Sulalit, Companies Act, 2013: Rise of the Minority Shareholder, India Law Journal, Available at: http://www.indialawjournal.org/archives/volume6/issue-2/article5.html/, Last Accessed: 25.04.2020.

[15] Manu Balchandran, The satyam scandal: how India’s biggest corporate fraud unfolded, Quartz India, Available at: https://qz.com/india/379877/the-satyam-scandal-how-indias-biggest-corporate-fraud-unfolded/, Last Accessed: 25.04.2020.

[16] Section 229, Companies Act, 2013.

[17] FE Bureau, why was Cyrus Mistry sacked by Tata Sons? Here is Answer, Financial Express, Nov.24, 2017, Available at: https://www.financialexpress.com/industry/why-was-cyrus-mistry-sacked-by-tata-sons-here-is-answer/945451/, Last Accessed: 25.04.2020.

[18] Cyrus Investments Pvt. Ltd. V. Tata Sons Ltd. & Ors., (2018) 35 NCLT 82.

[19] Vikram Bakshi v McDonald’s India Private Limited, MANU/NC/0600/2017.


Author Details: Naina Agarwal (Rajiv Gandhi National University of Law, Patiala)

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

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