THE LEGAL BRIDGE

Judiciary & Law Notes Series

THE COMPANIES ACT, 2013

CHAPTER XVI

Prevention of Oppression and Mismanagement

Sections 241–246

For Judicial Service Aspirants & Law Students

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Oppression • Minority Protection • Class Action Suits

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Chapter XVI — Prevention of Oppression and Mismanagement

The doctrine of majority rule (Foss v. Harbottle, 1843) — that the majority of members, in a company, has the power to decide the affairs of the company — while sound in theory, can become oppressive in practice. The minority shareholders, having limited voice, may find themselves at the mercy of a dominant faction. Chapter XVI of the Companies Act, 2013 (Sections 241 to 246) provides statutory machinery to protect the minority and to rectify corporate management that is 'oppressive' or 'prejudicial' in character. This is the equitable counter-weight to the corporate democracy principle.

The jurisdiction under this Chapter vests in the National Company Law Tribunal, and the Chapter also codifies class action suits under Section 245 — a device unavailable under the Companies Act, 1956.

Historical Background — Foss v. Harbottle and its Exceptions

The rule in Foss v. Harbottle (1843) 2 Hare 461 states that where a wrong is done to a company, the proper plaintiff to sue is the company itself and not an individual shareholder. The rationale is threefold: (a) legal personality of the company; (b) majority rule in corporate democracy; and (c) avoidance of multiple suits over the same grievance. However, the rule admits of well-known exceptions: (i) acts ultra vires the company; (ii) acts requiring a special majority but effected by ordinary majority; (iii) violation of personal membership rights; (iv) fraud on the minority; and, critically, (v) statutory remedies — which is where Chapter XVI of the 2013 Act operates. Sections 241 to 246 are thus the legislative response to the shortcomings of the common law position.

Section 241 — Application to Tribunal for Relief in Cases of Oppression, etc.

(1) Who May Apply

Any member of a company who complains that —

• The affairs of the company have been or are being conducted in a manner prejudicial to public interest or in a manner prejudicial or oppressive to him or any other member or members or in a manner prejudicial to the interests of the company; or
• The material change, not being a change brought about by, or in the interests of, any creditors, including debenture-holders or any class of shareholders of the company, has taken place in the management or control of the company, whether by an alteration in the Board of Directors, or manager, or in the ownership of the company's shares, or if it has no share capital, in its membership, or in any other manner whatsoever, and that by 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 members or any class of members,

May apply to the Tribunal, provided such member has a right to apply under section 244, for an order under this Chapter.

(2) Application by Central Government

The Central Government, if it is of the opinion that the affairs of the company are being conducted in a manner prejudicial to public interest, it may itself apply to the Tribunal for an order under this Chapter. The Central Government has the additional authority under sub-section (3) to proceed directly against specific managerial personnel or directors whom it considers are involved in the fraudulent or oppressive conduct.

Meaning of 'Oppression'

The word 'oppression' was interpreted by Lord Cooper in Elder v. Elder and Watson Ltd. (1952 SC 49) and by Lord Keith in Scottish Co-operative Wholesale Society v. Meyer (1959 AC 324) as denoting conduct which is 'burdensome, harsh and wrongful'. It must 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 is entitled to rely.

Section 242 — Powers of Tribunal

(1) Tribunal's Power to Grant Relief

If, on any application made under section 241, the Tribunal is of the opinion —

• That the company's affairs have been or are being conducted in a manner prejudicial or oppressive to any member or members or prejudicial to public interest or in a manner prejudicial to the interests of the company; and
• That to wind up the company would unfairly prejudice such member or members, but that otherwise the facts would justify the making of a winding-up order on the ground that it was just and equitable that the company should be wound up,

The Tribunal may, with a view to bringing to an end the matters complained of, make such order as it thinks fit.

(2) Types of Orders Tribunal May Make

Without prejudice to the generality of the powers under sub-section (1), an order under that sub-section may provide for —

1. The regulation of conduct of affairs of the company in future;The purchase of shares or interests of any members of the company by other members thereof or by the company;In the case of a purchase of its shares by the company as aforesaid, the consequent reduction of its share capital;Restrictions on the transfer or allotment of the shares of the company;The termination, setting aside, or modification, of any agreement, howsoever arrived at, between the company and the managing director, any other director or manager, upon such terms and conditions as may, in the opinion of the Tribunal, be just and equitable in the circumstances of the case;The termination, setting aside, or modification of any agreement between the company and any person other than those referred to in clause (e), provided that no such agreement shall be terminated, set aside, or modified except after due notice and after obtaining the consent of the party concerned;The setting aside of any transfer, delivery of goods, payment, execution, or other act relating to property made or done by or against the company within three months before the date of the application under section 241, which would, if made or done by or against an individual, be deemed in his insolvency to be a fraudulent preference;Removal of the managing director, manager, or any of the directors of the company;Recovery of undue gains made by any managing director, manager, or director during the period of his appointment as such and the manner of utilisation of the recovery including transfer to Investor Education and Protection Fund or repayment to identifiable victims;The manner in which the managing director or manager of the company may be appointed subsequent to an order removing the existing managing director or manager of the company made under clause (h);Appointment of such number of persons as directors, who may be required by the Tribunal to report to the Tribunal on such matters as the Tribunal may direct;Imposition of costs as may be deemed fit by the Tribunal;Any other matter for which, in the opinion of the Tribunal, it is just and equitable that provision should be made.

(3) Consequential Alteration

A certified copy of every order altering, or giving leave to alter, a company's memorandum or articles, shall within thirty days after the making thereof, be filed by the company with the Registrar who shall register the same. The company's memorandum and articles shall, from the date of such registration, be deemed to have been altered accordingly, and shall not be further altered by the company without leave of the Tribunal.

(4) Interim Orders

The Tribunal may, on the application of any party to the proceeding, make any interim order which it thinks fit for regulating the conduct of the company's affairs upon such terms and conditions as appear to it to be just and equitable.

Section 243 — Consequence of Termination or Modification of Certain Agreements

Where an order made under section 242 terminates, sets aside, or modifies an agreement such as is referred to in sub-section (2) of that section —

• Such order shall not give rise to any claims whatever against the company by any person for damages or for compensation for loss of office or in any other respect either in pursuance of the agreement or otherwise;
• No managing director or other director or manager whose agreement is so terminated or set aside shall, for a period of five years from the date of the order terminating or setting aside the agreement, without the leave of the Tribunal, be appointed, or act, as the managing director or other director or manager of the company.

Any person who knowingly acts as managing director or other director or manager of a company in contravention of this section, and every other director of the company who is knowingly a party to such contravention, shall be punishable with imprisonment for a term which may extend to six months or with fine which may extend to ₹5,00,000 or with both.

Section 244 — Right to Apply Under Section 241

(1) Qualifying Thresholds

The following members of a company shall have the right to apply under section 241, namely: —

Waiver of Threshold

Proviso to sub-section (1): The Tribunal may, on an application made to it in this behalf, waive all or any of the requirements specified in clause (a) or clause (b) so as to enable the members to apply under section 241. This is a significant flexibility — the Tribunal can grant standing to a smaller group of aggrieved minority members if the circumstances warrant.

(2) Consent by Some Members

Where any members of a company are entitled to make an application under sub-section (1), any one or more of them having obtained the consent in writing of the rest, may make the application on behalf and for the benefit of all of them.

Section 245 — Class Action Suits

(1) Who May File a Class Action

Such number of member or members, depositor or depositors or any class of them, as the case may be, as are indicated in sub-section (2) may, if they are of the opinion that the management or conduct of the affairs of the company are being conducted in a manner prejudicial to the interests of the company or its members or depositors, file an application before the Tribunal on behalf of the members or depositors for seeking all or any of the following orders, namely: —

1. To restrain the company from committing an act which is ultra vires the articles or memorandum of the company;To restrain the company from committing breach of any provision of the company's memorandum or articles;To declare a resolution altering the memorandum or articles of the company as void if the resolution was passed by suppression of material facts or obtained by misstatement to the members or depositors;To restrain the company and its directors from acting on such resolution;To restrain the company from doing an act which is contrary to the provisions of this Act or any other law for the time being in force;To restrain the company from taking action contrary to any resolution passed by the members;To claim damages or compensation or demand any other suitable action from or against — (i) the company or its directors for any fraudulent, unlawful, or wrongful act or omission or conduct or any likely act or omission or conduct on its or their part; (ii) the auditor including audit firm of the company for any improper or misleading statement of particulars made in his audit report or for any fraudulent, unlawful, or wrongful act or conduct; or (iii) any expert or advisor or consultant or any other person for any incorrect or misleading statement made to the company or for any fraudulent, unlawful, or wrongful act or conduct or any likely act or conduct on his part;To seek any other remedy as the Tribunal may deem fit.

(3) Qualifying Numbers for Class Action

Effect of Class Action

• Any order passed by the Tribunal in an application filed under sub-section (1) shall be binding on the company and all its members, depositors, auditors — including audit firm — experts, consultants, and advisors, as well as any other person associated with the company.
• Any company which fails to comply with an order passed by the Tribunal under this section shall be punishable with fine which shall not be less than ₹5 lakh but which may extend to ₹25 lakh, and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to three years and with fine which shall not be less than ₹25,000 but which may extend to ₹1 lakh.
• Satyam Computers-style frauds: Section 245 has been specifically framed to empower shareholders and depositors who have suffered losses due to fraud or wrongful conduct to seek collective redressal, thus addressing the gap in the 1956 Act.

Section 246 — Application of Certain Provisions to Proceedings Under Section 241 or Section 245

The provisions of sections 337 to 341 shall apply mutatis mutandis, in relation to an application made to the Tribunal under section 241 or section 245. Sections 337 to 341 deal with delinquent officers and members and impose penalties for their acts. The linkage is important — in an oppression or class action proceeding, if the Tribunal finds that any officer of the company has been guilty of an offence, such officer may be prosecuted even though the primary application is civil in character.

Distinguishing Oppression, Mismanagement and Class Action