Prevention of Oppression &Mismanagement: Does anything change from 1956 to 2013?

As known, company can be said to be a group, or an association of individuals which also constitutes as a separate legal entity, who work toward a common aim, which is to achieve a collective purpose of the members of the association, and to generate maximum profits. This article is a research piece, on the Oppression and Management in the Corporates, and how have the provisions evolved and manifested from 1956, to 2013.

Concept

Oppression and Management, of the minority shareholders as well as the other members is not an uncommon phenomenon in the Corporates, specifically companies. Therefore in order to curb such practices legislations have been formulated, and have been incorporated into then Companies Act, 1956 and later has been amended in the Companies Act, 2013.

Oppression, predominantly is the suppression or the dominance of the members in authority over the minority shareholders, which leads to several violation of their rights. Mismanagement, on the other hand is the mishaps done which are done behind the member’s backs, such as misappropriation of funds by the directors for personal benefits, violation of the Memorandum, etc.

Therefore, in order to provide relief to the minority shareholders in and to safeguard their interests, the provisions were so added in the Companies Act, 1956. These provisions were amended and the legislation was made more lucid for the relief seekers, and manifested in the Chapter XVI of the Companies Act, 2013.

Rule of minority

In this particular rule, the members pass resolutions on several subjects. Those members can of majority as well as a minority, and these members have the power to give consent for the specific subject in order to get the resolution passed. The rationale behind this rule, is because since a company is a separate legal entity, any mishap in the management, the company has the right to institute a separate suit against the wrongdoer, and not the shareholders separately. This rule specifically has been laid down in the case of Foss v Harbottle[1].

In some exceptional cases, such that of oppression and mismanagement, the individual shareholders can institute a suit against wrongdoer.

Under the Companies Act, 1956

Oppression, simply put, is the exercise of authority in an extremely arbitrary manner, and to infringe the rights of the minority shareholders. The term has also been explained in the case of Elder v. Elder & Watson Ltd[2], cited in Shanti Prasad Jain v. Kalinga Tubes,[3] as, that the conduct of the majority shareholders should not be up to the standards of their dealings, and that the violation of this trust, as well as the “conditions of fair play’ .

The concept of Oppression, which is primarily of the minority shareholders, usually takes place when the majority shareholders dominate the boardroom and control the management, and is considered an act or omission on the part of the management. Dale & Carrington Investment Pvt. Ltd v. P.K Prathapan[4], it was held, that increasing the capital of a company with the sole purpose of gaining control over it, can be considered as oppression. The most important element remains, that it should be a continuous act by the majority shareholders, and that it should be observed till the date of the petition filed.[5]

Mismanagement, on the other hand is very lucidly the mismanagement of the resources of the company. This implies:

• Absence of records of the company,
• Drawing expenses for personal purposes, predominantly by the directors, or the management of the company,
• Non-filing of the documents, with regard to the Registrar of the Companies in relation to compliance, under the Companies Act, 1956,
• Misusing the company assets, or selling them at a low price,
• Violating the provisions of article of association, memorandum or the law.[6]

Under this Act, the §397, 398 and 399 of the act, mentions the relief for the Operation and the Mismanagement.

• 397- Specially highlights the application to the Company Law Board for the relief in cases of oppression.
• 398- Grounds in which the Application in case of a mismanagement to the Company Law Board.
• 399- Right to apply under the section these respective sections, mentioned above.

And in accordance to the section 399, which highlights who can apply:

• In a company, if it has share capital, not less than 1/10th of the total members, or not less than 100 members, or any member for that matter of fact holding less than 1/10th of the share capital, have the right to apply in the NCLT/CLB.
• The companies not having share capital, no less than 1/5th of the members are fit to apply.
• To constitute a minority shareholder, a 10% of the companies having chare capital and 20% otherwise.

Companies Act 2013

The concept is consolidated together in the Chapter XVI. This Chapter, contains six sections specifically, and new provisions have been added in order to fill in the loopholes and the gaps in the previous legislation. Such as:

• 242: Specifying the powers of tribunals
• 243: The following section lays down the situations is an order, which is made under the Section 242 if are terminated, or modified or set aside.
• 245: Specifically mentions about the class action suits that can be instituted by the member, or the depositor.

Key differences in the two acts

• In the Companies Act of 1956, the provision for relief granted for the Mismanagement, is mentioned in the section 397 and the 398 of the Act.
• Also, in the 1956 Act, the rights of the minorities are not mentioned explicitly. The orders for which the applicants seek relief, and even the orders of Tribunals that can be granted with relief.
• In the Companies Act of 2013, the provision for the same has been mentioned in the section 241 of the Act, which combines the relief for both, Oppression as well as Management.
• Also, a new addition to the Act was observed, as the §245 was added, which states that, not only the members, but the depositors belonging to any class can institute a suit as well. Also, the orders from which the members or the depositors can seek relief, as well as the orders which the Tribunals can grant relief are also mentioned in an extremely lucid manner.
• The §241 provides more of the minority rights, and has better defined scope for Operation, as well as mismanagement.[7]

 Conclusion

Therefore, after much deliberation, and the discussion over the topics, the key differences drawn, and it is observed, that the concept of providing relief for the Oppression and the Mismanagement, and the violation of the rights of the minority shareholders, has been tackled with in its full entirety, as the loopholes in the legislations have now been filled, and the aspects as well as the scope have been defined effectively, giving birth to an even more structured legislation. Earlier, in the 1956 Act, only three sections covered the entire concept. In the new Act of the 2013, the entire concept has been elaborated in a comprehensive manner. Therefore, it is safe to conclude that we have come a long way from 1956, and the rights of the minority shareholders are much better protected and their interests are safeguarded.

References

[1] (1843) 67 ER 189 Foss v. Harbottle [2] 1952 AC 49 Elder v. Elder & Watson Ltd. [3] 1965 AIR 1535 Shanti Prasad Jain v. Kalinga Tubes [4] 2005 1 SCC 212 Dale & Carrington Investment Pvt. Ltd v. P.K Prathapan [5] Anar Parikh, A comparative Analysis as to the changes that have been adopted in the Companies Bill, 2011.Legal Services India, Visited on 24/4/20( http://www.legalservicesindia.com/article/1534/Minority-Rights-on-Oppression-and-Mismanagement-Under-Companies-Act,-1956-And-Companies-Bill,-2011.html) [6] Shilpi Thapar and Associates, Prevention of Oppression and Mismanagement in Companies, ICSI, Visited on 25/4/20 (http://www.shilpithapar.com/prevention-of-oppression-and-mismanagement-in-companies-an-overview#) [7] Supra note 5

Author Details: Manasi Singh (Symbiosis Law School, Hyderabad)

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