Prevention of Oppression and Mismanagement in a Company

This artice is authored by Sujata Porwal, third year BA LLB (Hons.) student at Symbiosis Law School, Pune. The article actively attempts to analyze the issue of oppression and mismanagement in a company and suggest viable solutions for the same.

INTRODUCTION

As per the ‘Cardinal Rule’ of Company Law, if a member acquires shares of a particular class, he/she is eligible for an equal right to vote. A company is said to function through the decisions of the Board of Directors, which highly depend upon the majority view of the members. Therefore, it is clear that the decisions of a company are controlled and affected by a multitude of members who are entitled to exercise their powers.

The majority decision is binding on the shareholders, provided that it fuses with the legal framework and the articles of the company. However, the working of a company, guided by the majority rule, might often result in the oppression of the minority groups existing within the company. Moreover, the ‘correctness’ of a decision cannot be paralleled with the number of people who stand in favor of it.

The Companies Act, 2013 (hereafter referred to as ‘the Act’) doesn’t render such minorities deserted. The Act guarantees relief in form of remedy to file a case in the tribunal to curb oppression and mismanagement within the company. The regulations and provisions lay a mechanism for statutory protection of the investors against misuse of powers and rights by others.

Comprehending Oppression

The term oppression finds no place in the Act. While the Act suffers from the deficit of an explicit definition of the term, the common dictionary meaning portrays it as exercise of an act in an unruly, harsh or wrongful manner. Lord Cooper explains it as ‘the essence of the matter seems to be that the conduct complained of should at the lowest 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’. The essence of the statement is that it must be established that the oppression is caused to a person in his capacity as a member only and that no other form of oppression shall be entertained under this head.

Moreover, merely filing a case with the tribunal doesn’t declare the majority, guilty of oppression and/or mismanagement. The court, in the case of Shanti Prasad v. Kalinga Tubes Ltd., laid down certain essentials that need to be established as a proof;

Inequitable conduct
Lack of fair deal or probity
Prejudice against the member, preventing him from exercising legal and other rights bestowed on him in the capacity of a shareholder

Over a period of time, the Indian judiciary has laid down a diverse ground for adjudging whether a situation accounts for as being oppressive or not. Certain examples of oppressive situations include:

Barring a shareholder from receiving his due share of dividend as well as his right to vote
Forceful introduction of risky objects on a reluctant minority
Ruling out minority from profit participation

Similarly, certain examples portraying non-oppressive conduct are:

Declaration of a moderate rate of interest even when the profits of the company provide scope for a higher rate of dividend
Withdrawal of salary by the director in a state where the company is suffering losses
Inability to declare dividend

Comprehending Mismanagement

Mismanagement can be understood as a state of gross misconduct and deviation from the original course of action of a company amounting to substantial failures and loss to the public and the company.

In other words, mismanagement can be summarized as:

Conduction of company’s affairs in a manner that is detrimental to the interests of the company
Occurrence of substantial change in management of control of a company
Alteration in ownership of shares of the company or Board of Directors
In situations where alteration mentioned above causes occurrence of prejudicial behavior

Certain examples of mismanagement, portrayed by the Indian judiciary, are:

Causing hinderances in the way of a director or barring him from performing his duty
Selling assets at lower prices thereby failing to comply with the Act
Disobeying the provisions of memorandum and articles of the company

Certain examples where courts adjudicated that the conduct cannot be termed as mismanagement are:

Change in management of the company that does not qualify as an ultra vires act towards the company
A bona fide decision to withhold the dividends and accumulate profits into reserves, by the directors
Arrangement of directors of a company and the creditors to shift the creditors to the position of shareholder in order to recover the company from losses.

Provisions for Prevention of Oppression and Mismanagement under Companies Act, 2013

Sections 241-245 of the Companies Act, 2013 deal with prevention of oppression and mismanagement within a company. The sections are described in brief below:

Section 241: Application to the Tribunal for relief
Section 242: Powers of Tribunal
Section 243: Consequences of termination or modification of certain agreements
Section 244: Right of members to apply for Tribunal
Section 245: Class Action

The provisions lay down rules for filing complaint against oppression and mismanagement in the company. However, the rules are structured in such a technique that they protect the rights of the minorities without being biased against the majority.

It wouldn’t be wrong to conclude that the Act, along with the courts, tries to balance the Right of Majority while providing protection to the minority.

An application to the tribunal can be made by individuals as well as groups of people who are of the opinion that oppression or mismanagement has taken place in the internal or external matters of a company. Moreover, the government itself can make an application to the tribunal if it believes that a company’s actions are prejudicial to the interest of general public. The tribunals are bestowed with great responsibility and power to handle such matters.

After critical analysis, it can be ascertained that the Companies Act, 2013 strives to protect minority rights in a comprehensive and inclusive way.

However, it must be ensured that such principles are implemented in an appropriate method to address the contemporary gaps in the implementation of the legislation. Methods to inculcate confidence among minority shareholder shall also be devised in order to obtain the desired results.

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