Prevention of Oppression and Mismanagement

PREVENTION OF OPPRESSION AND MISMANAGEMENT

The modern Companies Act contains special provisions for prevention of oppression and mismanagement. The aim of such provisions which is not contained in Chapter XVI of Companies Act 2013 is to safeguard the interest of investors in companies and also to protect the public interest. The right conferred on shareholders by this chapter also known as qualified minority rights. This chapter provides for judicial as well as administrative remedies.

PREVENTION OF OPPRESSION:

The clear meaning of prevention of oppression is not stated in the act but in general term oppression means exercising powers.
Section 241 of the act lays down the meaning of the word oppression which states that the affairs of the company are being conducted in a manner prejudicial or oppressive to a member of some members or in a manner which is prejudicial to the public interest or in a manner be judicial to the interest of the company.

In Kilpest Pvt Ltd v. Shekhar Mehra the court pointed out that the petition cannot be converted into one for winding up. The Punjab High Court has gone a little further in Jagdish Chandra Mehra v. New India Embroidery Mills (1964) by helding that even if the petitioning member disposes of the share the petition remains competent.

WHO CAN APPLY?

Section 244 Lays down the condition of who can apply for prevention of oppression.

● The first remedy in the hands of an oppressed minorities is to move to the Tribunal.
● Whenever the affairs of a company are being conducted in a manner oppressive to any member or members or prejudicial to public interest an application can be made to the company law Tribunal under section 241.
● The requisite number of members who must sign the application is given in section 244.
● When the company is with the share capital the application must be signed by at least hundred members of the company or by one tenth of total number of its members whichever is less or by any member or members holding one-tenth of the issued share capital of the company.
● If the company is without share capital the application has to to be signed by one-fifth of the total number of its members and joint holders are considered as one member.

In the case of TNK Govindaraju Chetty v. Co v Kadri Mills(1998) the court held that the percentage is to be taken on the basis of the position before the increase of capital which has been questioned and which has reduced the percentage of the petitioner.

In the case of S Palaniappan v. Tirupur Cotton Spg & Wvg Mills Ltd (2005) the court held that a person holding less than 10% cannot apply.

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CONDITIONS OF THE RELIEF(section 241):

There are certain preliminary conditions which must be satisfied to entitle a shareholder to some relief under this section. The conditions on which an application can be made under section 241 are:

● that the affairs of the company are being conducted in a manner prejudicial or oppressive to a member of some members or in a manner which is prejudicial to the public interest or in a manner be judicial to the interest of the company.
● A material change 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 share of its membership or in any other manner whatsoever and that by reason of such change it is likely to that the affairs of the company will be conducted in a manner pre judicial to its interest or its members or any class of
members.

In the case of Scottish corporation wholesale society v. Meyers relief was allowed by the house of Lords the society created a subsidiary company to enable it to enter the rayon industry subsequently when the need for the subsidiary ceased to exist the society adopted
a policy of running down is business which depressed the value of its shares the two petitioners who are managing directors and minority shareholders in the subsidiary successfully pleaded “oppression “. The court ordered the society to purchase the minority shares at the value at which they stood before the operative policy started.

PREVENTION OF MISMANAGEMENT

Section 241(b) provides for relief in cases of mismanagement for a petition under this section to succeed it must be established that the affairs of the company are being conducted in a manner prejudicial to the interest of the company or Public Interest or that by reason of any change in the management or control of the company it is likely that the affairs of a company will be conducted in that manner if the Tribunal is so convinced it may with a view to bringing to an end or preventing the matter complained of or apprehended make such offer as it thinks fit.

In the case of Rajahmundry Electric Supply Corporation v. A Nageshwara Rao

A petition was brought against a company by certain shareholders on the ground of mismanagement by directors the court found that the vice-chairman grossly mismanage the affairs of the company and had drawn considerable amounts for his personal purposes that large amounts were going to the government for charges for supply of electricity that machinery was in a state of disrepair that the directorate had become greatly attenuated and a powerful local janta was ruling the roost and that the shareholders outside the group of chairman were powerless to set the matters right this was held to be sufficient evidence of mismanagement the coach accordingly appointed two  administrators for the management of the company for a period of six months vesting in them all the powers of the directorate.

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Interim reliefs [section 242(4)] : This sub- section says that the Tribunal may on the application of any party to the preceding make any interim order which thinks fit for regulating the conduct of the company’s affairs upon such term and conditions as appear to be just and equitable Alliance such relief in a case before it.

Compromise: the parties can enter into compromise and consent orders can be passed on the basis the compromise was held to be binding on the parties when the pink the dispute again overvaluation of the shares they were not permitted to question the validity of the  compromise by saying that the petition was not maintainable at this initial stage.

Date of evaluation: section 243 state that the court has discretion to fix the date of valuation which may not necessarily correspond with the order under the section it may correspond with the date of the petition. The managerial personnel whose contract is set aside shall not be entitled to damages or compensation not capable of serving the company in any managerial capacity for a period of 5 years except with the leave of the tribunal.

CLASS SECTION :

Section 245 states that the member of members or or depositors who can apply to the Tribunal under the right of class action is given in sub section 3 of the section the grounds of action as specified in subsection 1 if they are of opinion that the management of conduct of affairs of the company are being carried on in a man of the judicial to the interests of the company or its members or depositors the can file an  application before the Tribunal on behalf of all of them for any of the following orders:

● To restrain the company from committing an act which is ultra virus in the articles of memorandum.
● To restrain the company from committing breach of any provision of the companies Memorandum of articles.
● To declare a resolution altering the memorandum for articles as void if the resolution was passed in separation of the material facts are obtained by misstatement to 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 the act or any other law for the time being in force
● To claim damages on compensation on demand any other suitable action from or against .

FACTORS TO BE CONSIDEREDBY TRIBUNAL: [section 245(4)]

In considering the application for relief under the section the Tribunal has to take into account the following factors in particular:
● Whether the member or depositor is acting in good faith in making the application.
● Any evidence before it as to the involvement of any person other than directors or officers to the company or any of the matters provided in the section 245(1).
● Whether the cause of action is is one which the member or depositor could pursue in his own right rather than through an order under the section.
● Any evidence before the Tribunal as to views of the members or depositors of the company who have no personal interest direct or indirect in the matter before the Tribunal.
● Where the cause of action is an act or omission that has already occurred and whether it could be or likely to be ratified by the company.

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POWERS OF THE TRIBUNAL:

Powers the Tribunal under section 241 and 242 are fairly wide. The Tribunal has the power to do justice to the parties and can pass an order for the smooth conducting of a business even in absence of finding of oppression and mismanagement.

Some of the powers of tribunal are

1. The regulation of the conduct of the company’s affair in future. In the case of Richardson and Gurdas Ltd V. Haridas Mundra the court appointed special officer within advisory board to the total exclusion of the shareholders of a company to function subject to the terms and conditions laid down in the order.

2. The purchase of the shares or interest of any members of the company by other members or by the company. This kind of relief was provided in Mohan lal Chandumall v. Punjab Co. Ltd .
3. In the case of a purchase by the company of its shares the consequent reduction of share capital.
4. Restriction and allotment or transfer of shares of the company.
5. The termination setting aside or modification of an agreement between the company and any managerial personnel upon such terms and conditions are the terminal be considered just and equitable.
6. Removal of the managing director manager or any of the directors of the company.
7. 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.
8. Appointment of such member of persons as directors who may be required to the Tribunal to reports to it on such matters as a Tribunal may direct.
9. Imposition of costs as may be deemed Fit by the Tribunal.
10. Any other matter for which in the opinion of the Tribunal it is just and equitable that provision should be made.

Author: sarthak udaipuria,
ICFAI LAW SCHOOL HYDERABAD, 4TH YEAR

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