The term “oppression” means taking away legal right of members. Oppression is the act of authority or power in unjust manner against the consent of other party. Oppression refers to a misdemeanor committed by majority shareholders upon the minority shareholders of the company.
Mismanagement refers to practices of managing the company incompetently and dishonestly. Violation of Memorandum of Association, Articles of Association, or other statutory provisions would amount to mismanagement.
Chapter XVI of the Companies Act, 2013 deals with the prevention of oppression and mismanagement. The majority rule is normally followed in the company and thereby, courts do not interfere to protect minority rights. However, prevention of oppression and mismanagement is an exception to the rule.
Section 241 of Companies act, 2013 deals with the applications of the oppression. Any member of the company can file an application under section 241 subject to fulfilling the requirement under section 244. The complaint can be made when the company affairs have been conducted in a manner prejudicial to the public interest or against the company’s interests, or oppressive to a particular member or other members of the company.
Section 241: When a company has a share capital the following members can apply under section 241:
Not Less Than One Hundred Members Or Not Less Than One-Tenth Of The Total Number Of Its Members, Whichever Is Less
Any Member Or Members Holding Not Less Than One-Tenth Of The Issued Share Capital The applicant or applicants must have paid all call money and other sums due on them before applying. When a company does not have a share capital at least one-fifth of the total number of its members shall apply under section 241. In addition, the Tribunal may waive any of the requirements under section 244 to enable members to apply under section 241.
Section 242:
Section 242 of the Act provides powers of Tribunal. The Tribunal is empowered to pass an order as it deems fit. The order may provide for:
– Regulation Of Company’s Conduct In Future
– Purchase Of Shares Or Interests Of Any Members By Other Members Of The Company
– The Consequent Reduction Of Share Capital If A Company’s Shares Are Purchased By The Company Itself
– Limitation On Transfer And Allotment Of Shares
– Termination, Setting Aside, Or Modification Of An Agreement Between The Company And Managing Directors Or Another Person
– The Agreement May Be Terminated, Set Aside, Or Modified Only After Giving Due Notice And Obtaining The Consent Of The Concerned Person
– Removal Of Managing Director Or Other Directors
– Recovery Of Undue Gains Made By Managing Director, Manager, Director During His Employment; Recovered Funds Must Be Utilized By Transferring To Investor Education And Protection Fund Or Repayment To Identified Victims
– Manner As To The Appointment Of A New Managing Director After The Previous Director’s Removal
– Appointment Of Members Who May Report To The Tribunal On Matters Directed By It
– Imposition Of Cost.
RELEVANT CASE LAWS
Foss v. Harbottle (1843) 67 ER 189 (1943) 2 Hare 461
Facts: In September 1835, the Victoria Park Company was established to acquire 180 acres of land near Manchester. However, instead of fulfilling the company’s objectives of developing the land for ornamental and park-like purposes, constructing houses with gardens and fields and then selling or renting them, certain individuals, including the directors and others, engaged in unlawful misappropriation of the company’s property.
Richard Foss and Edward Starkie Turton, both minority shareholders, brought attention to this matter.The aforementioned minority shareholders instituted legal proceedings against the directors of the company, contending on three distinct grounds.Firstly, they alleged fraudulent transactions leading to the misappropriation of the company’s assets.Secondly, they raised concerns regarding the insufficiency of qualified directors within the company to constitute a proper board. Thirdly, they asserted that the company lacked a clerk or office, thereby rendering the shareholders powerless to reclaim property from the directors, necessitating the initiation of legal action. The Court, however, dismissed the action on the basis that majority shareholders possessed the authority to ratify said transactions.
Issue: Whether minority shareholders can file a suit on behalf of the company against the directors?
Judgement: The court held that individual shareholders or outsiders of the company could not bring legal action against wrongs done to the corporation, as the company and its shareholders are considered separate legal entities. A company may sue and be sued in its name, and a member cannot take legal action on behalf of the company. If the company has a right against a party under a contract, it is the company’s responsibility to sue.
The ruling emphasized that shareholders lack standing to sue because it is the company, not its members, that has suffered the injury; thus, the company is responsible for legal actions against those who misappropriate its assets.
The court established two pivotal rules.
Firstly, the “Proper Plaintiff Rule” mandated that only the company itself can sue if it incurs losses due to fraudulent or negligent acts by directors or outsiders.
– Members and outsiders are barred from suing due to the “Separate Legal Entity” principle, which views the company as a distinct legal entity capable of suing and being sued independently.
– Consequently, only the company can initiate legal proceedings to address its losses.
Secondly, the “Majority Principal Rule” stipulated that if a majority of members in a general meeting can confirm or ratify alleged wrongs, then court will not intervene in those cases.
The action of the shareholders was rejected and held that shareholders can bring an action against the company only if the company spent money ultra vires of the company’s transaction.
Shanti Prasad Jain v. Kalinga Tubes Ltd.AIR 1965 SC 1535
Facts: In this case, the shareholders of the company originally consisted of two groups.
There were some financial difficulties for the company, and the petitioner agreed to supply finance on the terms that he would be allotted shares equal to those held by the two groups after sharing the capital.
The company was not party to the agreement, so it converted into a public limited company to obtain advances from Industrial Finance Corporation. The majority of shareholders, who were respondents, issued fresh shares after conversion to outsiders also, whereas the petitioner suggested in the meeting of the Board of Directors that fresh shares should be allotted to the existing shareholders according to Section 80 of the Companies Act, 1956.
The petitioner applied under Section 397 of the Companies Act, 1956 (corresponding to Section 241(1)(a)), on the grounds of oppression. The Single Judge Bench declared that it was oppressive and mismanagement due to continuing oppression of minority shareholders. The Division Bench held that the agreement of 1954 did not have any binding effect on the company irrespective of its nature in 1957 when it was converted into a public company from a private company. Then the appeal was filed before the Supreme Court.
Issue: Whether the majority power was exercised in good faith would be oppression of mismanagement?
Judgement: The SC’s ruling highlighted that the public company formed in 1957 was not obligated by the 1954 agreement and could allocate shares as decided in general meetings under Section 81 of the Companies Act, 1956.
Merely opting to offer shares to others instead of existing shareholders, as decided in the 29th March 1958 meeting, didn’t inherently oppress minority shareholders. Majority shareholders weren’t obliged to adhere to the minority shareholders’ stance on share allotment. The Court noted the apprehension of the Patnaik group during the issuance of new shares that the appellant group might seize majority control. Consequently, shares were designated to others in the general meeting to prevent this.If new shares were not allotted to existing shareholders due to this concern, it could not be deemed oppressive to the minority. Regarding the lack of confidence and differences among shareholders in early 1958, it was emphasized that mere distrust does not constitute oppression unless it demonstrates unfair treatment of minority rights.
The Court, while dismissing the appeal, ultimately determined that the allotment of shares to outsiders by the majority shareholders would not constitute oppression against the minority appellant group.
Bharat Insurance Co. Ltd. v. Kanhaya Lal Gauba AIR 1935 Lah. 792
Facts: The plaintiff was a shareholder. He approached the court for correct construction of a particular object of the company embodied in the memorandum of association pertaining to application of the assets of the Company. The plaint was opposed on the ground that the shareholder, if dissatisfied with the acts and deeds of the directors, should have raised the question before the general body of shareholders. The broad rule in such cases is, no doubt, that in all matters of internal management of a company, the company itself is the best judge of its affairs and the court should not interfere in such matters.
Issue: Whether, on the facts and in the circumstances of the case, a single member of the company can maintain a suit for a declaration as to the true construction of the Article 3(d) of the MOA?
Judgement: It was held that the suit in so far as related to declaration of meaning of the clause,i.e. article 3(d) was concerned, the main point involved was the interpretation of a certain clause in the MOA relating to application of the assets of the company. Such a question was not a matter of internal management. A single member of the company could maintain a suit for declaration as to the true construction of the AOA.
Regarding the true meaning of the impugned clause, the distinction was clearly drawn in the clause between “advancing money at interest ” and “investing money”. If the intention of the directors was to make a “temporary loan” it was clear that the transaction would fall under the head of advancing money at interest as mentioned in the first portion of the clause and would not be an investment. Such loans could only be made on the security of land, houses, machinery and other property situated in India. If however, the directors intended to invest money; e.g., in government securities or other stock, the directors would have full liberty to decide whether the nature of the security for the investment was or was not adequate, without reference to the kind of security required for loans covered by the first portion of the clause.
Court held that, the key point involved was the interpretation of a certain clause of an object in the memorandum relating to the application of the assets of the company. Such a question is not a matter of mere internal Management. It was alleged that certain directors whose good faith had not been questioned had misunderstood the clause in question and were in consequence acting ultra vires in their application of the funds of the company.
Tata Consultancy Services Limited v. Cyrus Investments Private Ltd.
Facts: Cyrus Mistry was redesignated as the Executive Chairman of Tata Sons. Ratan Tata replaced Cyrus Mistry for the position of Executive Chairman. This was done by passing a board resolution to that effect. Thereafter, a petition was filed before the National Company Law Tribunal (Hereinafter referred to as “the NCLT”) under sections 241, 242 read with section 244 of the Companies Act, 2013 (Hereinafter referred to as “The 2013 Act”) by the Shapoorji Pallonji Group (Hereinafter referred to as the “SP Group”), one of the leading conglomerate companies of India in which Cyrus Mistry has controlling interest. The petition filed by the SP Group was rejected by the NCLT as it failed to fulfill the eligibility criteria to file an application for oppression and mismanagement as provided under section 244 of the 2013 Act. SP group filed a waiver application which was also rejected. Then an application was filed before NCLAT against previous order which was accepted and was in favour of the SP group. Thereafter, an appeal was filed by Tata Consultancy Services against the order of the NCLAT.
Issue: Whether the NCLAT has the power to reinstate Cyrus Mistry back to the positions he held in Tata Sons and other Tata companies?
Whether approval under section 14 of the 2013 Act was required to effect the conversion of Tata Sons into a private company from a public company?
Judgement: The Supreme Court (SC) has stayed the decision of NCLAT to restore Cyrus Mistry as Executive Chairman. The SC stated “the fact that the removal of CPM was only from the Executive Chairmanship and not the Directorship of the company as on the date of filing of the petition and the fact that in law, even the removal from Directorship can never be held to be an oppressive or prejudicial conduct was sufficient to throw the petition under Section 241 of Companies Act, 2013 out, especially since NCLAT choose not to interfere with the findings of fact on certain business decisions.” It is significant that Sections 241 and 242 of the Companies Act, 2013 do not specifically confer the power of reinstatement, nor we would add that there is any scope for holding that such a power to reinstate can be implied or inferred from any of the powers specifically conferred.
Regarding the third issue, the SC observed that NCLAT was completely wrong in holding as though Tata Sons, in connivance with the Registrar of Companies did something clandestinely, contrary to the procedure established by law. The request made by Tata Sons and the action taken by the Registrar to amend the Certificate of Incorporation were perfectly in order (conversion of private company from public company).
All the questions were answered in favor of Tata Sons and all the previous observation against Tata Sons (appellant) are set aside by the SC.SC determined that a removal of person from the post of Executive Chairman is not a subject matter under Section 241 of the Companies Act, 2013 unless it is proved that it was oppressive or detrimental.
PRESENT CASE
Q. 4/2020. Fiqara Ltd. has a strong legal case to challenge the change in shareholding pattern. By invoking Sections 241, 242, and 62 of the Companies Act, 2013, Fiqara can argue oppression, mismanagement, and a violation of its pre-emptive rights. The legitimate expectation doctrine can also be cited as an additional ground. The primary remedies would be the restoration of shareholding, injunction against further dilution, or monetary compensation.
Q. 5a/2019. Mere lack of confidence between shareholders does not per se brings section 241 into play. The section does not cover private animosity between shareholders. Further, the private agreement members is not binding on company.
