Minority Shareholders Remedies Against Oppression And Mismanagement

INTRODUCTION

This article is a study of the remedies available to the minority shareholders against mismanagement and oppression under the Companies Act, 2013. The main aim of the remedies is to safeguard the interest of the investors in the company and protect the minority shareholders. The people who have the majority control of the shares can abuse their power and the minority shareholders can suffer loss. These remedies provide judicial as well as administrative remedies to the minority shareholders.

To gain certain profits for the shareholders the company gets incorporated. It helps the companies for its smooth administration. The directors and other executives of the company have certain powers and are controlled by the decisions of the shareholders who are in majority. The decisions are taken by the majority shareholders are considered as exercising democracy. The policy decisions taken by the majority shareholders sometimes may harm the minority shareholders which are known as Oppression and Mismanagement.

OPPRESSION

Oppression has been explained by Lord Cooper in the case Elder v. Watson Ltd Exercising of power in an unjust manner without the consent of the other party is oppression. Oppression in common language refers to an act or situation of subjecting to cruel or unjust impositions.

In the Supreme Court case, Dale and Carrington Investment Pvt. Ltd. v. P. K. Prathapan, it was held that with the sole purpose of gaining control over by increasing the capital of the company is also oppression.

According to section 241 of the Companies Act, 2013, the grounds on which application can be made for relief in case of oppression are:

The complaints made by the member of the company that-

1. The affairs of the company have been made by oppressing him or other members or  in a manner prejudicial to the interests of the company, or
2. A material change has been taken place in the management of the company, whether by the change in the Board of directors, or manager, or in the ownership of the company’s share or its membership, or in any manner by the reason of such change, it is likely that the affairs of the company will be conducted in a manner prejudicial to its interests or its member or any class of members.
3. The Central Government may apply to the Tribunal itself if it is of the opinion that the company is conducting any affair in a manner which is prejudicial to the public interest.

MISMANAGEMENT

Mismanagement means the company operation conducted in a manner which harms the public interest or the company. It is the process or practice of managing badly or dishonestly. Mismanagement is the lack of fair dealing in the works of the company which can be harmful to some of the members of the company or the shareholders.

The term mismanagement has not been defined in the companies act and it is the power or the right of the court to decide whether the act is oppression or mismanagement of minority shareholders or not.

CASES WHICH CAN BE SAID AS MISMANAGEMENT

1. Prevention of Directors of the Company from functioning.
2. Violation of statutory provisions
3. Violations of provisions of Memorandum of Associations and Article of Association of the company.
4. Funds misuse etc.

MAJORITY RULE OF THE COMPANY- FOSS V. HARBOTTLE

In the 1843 case of Foss v. Harbottle, there were two minority shareholders, Richard Foss and Edward Starkie Praton in the company. The allegation by them on the company was that the directors of the company made an illegal transaction which caused heavy loss to the company. The directors sold their own land to the company at a higher price and raised money for which they were not authorized. And when the company held a meeting they the decisions taken by the majority were that there should not be any action taken against the directors.

The court dismissed the claim of the minority shareholders and decided that they are bound to follow the decisions given by the majority shareholders. The court gave another reason for dismissing the case is that the company can only itself file a case by stating the “proper plaintiff rue” which is that any wrong done to the company can only be indicated by the company only as it is a separate legal entity. Thus the court laid down the ‘majority rule’.

ADVANTAGES OF MAJORITY RULE

The advantages of the Majority Rule for the company are:

1. The company recognizes a separate personality by exercising this rule.
2. It is an easy decision-making policy.
3. It avoids the multiplicity of the suits.

EXCEPTION TO THE MAJORITY RULE

1. Ultra vires acts – When the majority is not acting within its powers then the majority rule shall not be followed.
2. Fraud on minority – Discriminatory action which is the majority shareholders given an advantage over the minority shareholders. The fraud must involve unreasonable use of the majority power resulting huge loss to the minority shareholders. Thus, the majority power must be exercised in a good faith and for the benefit of the company.
3. Actions requiring a special majority – When in a company, special resolution is required but it is done by ordinary resolution then it could be challenged.
4. Wrongdoers in control – When a wrong is done to a company and is obvious and the majority shareholders takes a decision to not permit an action to be taken against them, then it could be challenged.

THE NEED FOR PREVENTING OPPRESSION AND MISMANAGEMENT

The provisions for preventing oppression and mismanagement in the company are required for:

1. Protecting the rights of the minority shareholders of the company.
2. Maintaining the proper balance of rights of minority and majority shareholders.
3. Preventing the abuse of power by the majority shareholders as the company is operated on the Majority Rule.

REMEDIES AVAILABLE TO THE MINORITY SHAREHOLDERS

Tribunal plays an important role in providing remedies to the minority shareholders. Section 241 of the Companies Act, 241 empowers and encourages the minority shareholders to file an application to the tribunal for relieve in case of oppression.

The application can be filed to the tribunal when the company conducted any affair in a manner prejudicial to:

1. Its interests
2. Its members
3. Any class of members

The Central Government can apply to the tribunal in its own Relief against; any affair conducted in the company in a manner prejudicial to public interest, oppressive to any member or to the interest of the company.

If any act of Oppression or Mismanagement is committed under section 241 of the companies act, 2013 then any member of the company can make an application to the Tribunal for an order under Section 244 of the companies act.

POWER OF TRIBUNAL

Section 242 of the Companies Act, 2013, states the powers of the tribunal. If the tribunal found out that the affairs of the company are conducted in a manner prejudicial to the interests of the company or it members or to the public interest and the wind up is unfair prejudice to such members and the facts would justify that it is just and equitable to wind up the company then Tribunal will take such order as it thinks is fit.

The tribunal’s order may provide for:

1. The regulations to the company for conducting any affair in the future
2. Purchase of shares of any member of the company by other members.
3. It can restrict the transfer and the allotment of shares
4. Terminate of any director of the company or terminate any modification of the agreement between the company and any other person.
5. Set aside and delivery of goods, payment, execution relating to property.
6. Appoint number of directors who may be required to be present at the tribunal to give report on such matters.
7. Imposing cost
8. Any matter which the tribunal thinks is just or equitable.
9. Within 30 days of the order of the tribunal, ROC has to be filed with the certified copy of the tribunal’s order.
10. Tribunal can make an interim order.
11. Alteration to MOA/AOA through the order of the tribunal.
12. Penalty of Rs. 1 lakh to Rs. 25 lakhs are imposed on the company if it alters without the permission. And the officer in charge is liable for imprisonment up to 6 months or a penalty of Rs. 25 thousand to Rs. 1 lakh or both.

Section 399 of the Companies Act, 2013, deals with the liability for fraudulent conducted in the business.

CONCLUSION

The rights of minority shareholders in Indian companies have been protected if the company is involved in oppression or mismanagement, prejudicial to the affairs of the company and public interest. The Companies Act, 2013, ensures the rights of the minority shareholders and protects it in every possible manner. The Act and Courts try to keep a balance between the Rights of Majority and protection of the interests of the minority shareholders in the company from Oppression and Mismanagement.

This article is authored by Manisha Singh, 5th-Year, B.A. LL.B student at Heritage Law College, Calcutta University

Also Read – Powers of Minority Shareholders