Prevention of Oppression and Mismanagement

By | June 8, 2018
Oppression and Mismanagement under company Law

In the Companies Act, 2013 Chapter XVI deals with the topic of “Prevention of oppression and mismanagement”. Oppression is the exercising of authority or power in a burdensome, merciless, or unjust manner. Whereas the term “Mismanagement” means a situation in which something such as a company or an economy is organized or controlled badly.

Introduction

The word Company is abridged as a legal entity made up of an association of people, be they natural, legal or a mixture of both, for carrying on a commercial or industrial enterprise. The term “Company” means a company incorporated under the Companies Act, 2013 or under any previous company law. The term company can be basically broken down into two simple words. “Com” which means collection while “Pain” means food. For the proper functioning and better management, we have Companies Act 1956 which has been modified as Companies Act 2013.

Whenever there is a group of people it becomes very difficult to manage them properly. Each and every person has their own view, thinking and idiosyncrasies. To ensure proper rules and regulation to be maintained in the company we have Companies Act.

Democracy gives each and every individual right to speak and express their views openly. Not hampering others religious sentiments and dignity being a restriction on Article 19. At the same time, democracy supports the majority view while neglects the minority view. Majority wins is like a trademark of democracy. This is a criticism of having a democracy.

The same kind of problem is faced by the company members the above principle even applies to corporate democracy. Company democracy is extra vulnerable to it due to the fact it is figured with the number of stocks and not with a number of individuals involved. The guideline of the majority has been made applicable to the management of the affairs of the business enterprise. The members bypass decision on various subjects either by way of the simple or 3-fourth majority. As soon as a decision is handed with the aid of majority it is binding on all members. As a resultant corollary, the court will not mostly intrude to defend the minority hobby stricken by resolution. But there are exceptions to this rule- Prevention of Oppression and mismanagement being one such floor.

With a view to check abuse of majority power, the agencies Act incorporates special provisions for Prevention of Oppression and Mismanagement.

Chapter XVI of the Companies Act, 2013

In the latest Companies Act, 2013 Chapter XVI deals with the topic of “Prevention of oppression and mismanagement”.

Chapter VI of the Companies Act, 1956

While the Companies Act, 1956 deals with this topic in Chapter VI. In the Companies Act, 1956 this provision is discussed in two parts.

Part A                         Powers of company law board

397 Application to Company Law Board for relief in cases of oppression
398 Application to Company Law Board for relief in cases of mismanagement
399 Right to apply under sections 397 and 398
400 Notice to be given to Central Government of applications under sections 397 and 398
401 Right of Central Government to apply under sections 397 and 398
402 Powers of Company Law Board on application under section 397 or 398
403 Interim order by Company Law Board
404 Effect of alteration of memorandum or articles of company by order under section 397 or 398
405 Addition of respondents to application under section 397 or 398
406 Application of sections 539 to 544 to proceedings under sections 397 and 398
407 Consequences of termination or modification of certain agreements

 Part B

 Powers of Central Government
408 Powers of Government to prevent oppression or mismanagement
409 Power of Company Law Board to prevent a change in Board of directors likely to affect company prejudicial

 

Prevention of Mismanagement
Meaning

The term “Mismanagement” means a situation in which something such as a company or an economy is organized or controlled badly. We all believe and practice in our day to day life. “Prevention” is better than “cure”. In the same context, it is equally applied to the corporate democracy. A relevant Sec is there in the Companies Act where the process of prevention of “mismanagement” is discussed.

Sec 398 of Chapter VI of the Companies Act, 1956 deals with the provision of “Prevention of Mismanagement”.

Sec 241 of Chapter XVI of the Companies Act, 2013 deals with the “Prevention of Mismanagement”.

Who can apply and who can’t

According to Companies Act, 1956 Sec 399 deals with the right who can apply for the prevention of Mismanagement.

The following members of a company shall have the right to apply

(a) in the case of a company having a share capital, not less than one hundred members of the company or not less than one-tenth of the total number of its members, whichever is less, or any member or members holding not less than one-tenth of the issued share capital of the company, provided that the applicant or applicants have paid all calls and other sums due on their shares;

(b) In the case of a company not having a share capital, not less than one-fifth of the total number of its members.

Companies Act, 2013

The following members of a company shall have the right to apply under section 244, namely:—

(a).     In the case of a company having a share capital, not less than one hundred members of the company or not less than one-tenth of the total number of its members, whichever is less, or any member or members holding not less than one-tenth of the issued share capital of the company, subject to the condition that the applicant or applicants have or have paid all calls and other sums due on his or their shares;

(b).    In the case of a company not having a share capital, not less than one-fifth of the total number of its members:

Prevention of Oppression
Meaning

Oppression is the exercising of authority or power in a burdensome, merciless, or unjust manner. It may also be described as an act or example of oppressing, the kingdom of being oppressed, and the feeling of being heavily confused, mentally or bodily, with the aid of problems, unfavourable situations, and anxiety.

Daleant Carrington funding (P) Ltd. v. P.k. Prathapan[1], held that boom of percentage capital of an employer for the only reason of gaining manage of the company, in which most people shareholder is decreased to minority, would quantity to oppression. The director holds a fiduciary position and couldn’t on his very own trouble shares to himself. In such cases, the oppressor might not accept an opportunity to buy placed the oppressed

In the Companies Act, 1956 Sec 397 deals with the provision of “Prevention of Oppression”

Any member of a company who complain that the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members (including any one or more of themselves) may apply to the Company Law Board for an order under this section, provided such members have a right so to apply in virtue of section 399.

In the Companies Act, 2013 Sec 241 deals with the provision of “Prevention of oppression

Who can apply who cannot

Same as the above Sec 399 of the Companies Act, 1956 deals with the provision, who can apply and who cannot.

In the same manner Sec 244 of the Companies Act, 2013 deals with the provision, who can apply and who cannot.

Oppression of majority rule

The management of a company is based on the majority rule. This principle states that the will of the majority should prevail and bind the minority is known as the principle of majority rule. It was established in the case of FOSS vs. HARBOTTLE[1].

Richard Foss and Edward Starkie Turton were two minority shareholders in the “Victoria Park Company”. Subsequently, an Act of Parliament incorporated the company.[1] The claimants alleged that property of the company had been misapplied and wasted and various mortgages were given improperly over the company’s property. They asked that the guilty parties be held accountable to the company and that a receiver is appointed. The defendants were the five company directors.

Held- The court dismissed the claim

Reason 1: The “proper plaintiff rule” is that a wrong done to the company may be vindicated by the company alone. – Corporation has a separate legal entity 

Reason 2: The “majority rule principle“ – states that if the alleged wrong can be confirmed or ratified by a simple majority of members in a general meeting, then the court will not interfere.

Exception

  • Ultra vires and illegality
  • Actions requiring a special majority
  • Invasion of individual rights
  • Frauds on the minority

Unfair Prejudice

Sec 397 of the Companies Act, 1956 deals with the term unfair prejudice. It has been incorporated from the Sec 210 of the English Companies Act, 1948.

Winding up the company could unfairly prejudice such member or participants, but that otherwise, the data would justify the making of a winding-up order on the ground that it was simply and equitable that the company must be wound up; the corporation law Board might also make such order because if it thinks suit.”

The phase prescribes standards for maintainability of utility for alleviation in instances of oppression. The impugned act have to be prejudicial to the interest of the business enterprise or oppressive upon a member or organization of participants, or the act can be prejudicial to general “public interest”. it’s also the burden of the applicant to satisfy before the Board that winding up the company would “unfairly prejudice” him or the magnificence he is representing; however in any other case, the records prima facie might justify that the organization is wound up on simply and equitable grounds.

Powers of Tribunal

Companies Act, 2013 Sec 242. Powers of Tribunal

When application filled under Sec 241

(a)    That the company’s affairs have been or are being conducted in a manner prejudicial or oppressive to any member or members.

(b)    That to wind up the company would unfairly prejudice such member or members. The Tribunal may, with a view to bringing to an end the matters complained of, make such order as it thinks fit.

Without prejudice to the generality of the powers under sub-section (1)

(a)     The regulation of the conduct of affairs of the company in future;

(b)    The purchase of shares or interests of any members of the company by other members thereof or by the company;

(c)    In the case of a purchase of its shares by the company as aforesaid, the consequent reduction of its share capital;

(d)    Restrictions on the transfer or allotment of the shares of the company;

(e)    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;

(f)    The termination, setting aside or modification of any agreement between the company and any person other than those referred to in clause (e):

Interim Reliefs

Preventive and corrective measures

Sec 397 and 398 of the Companies Act, 1956 give wide powers to the CLB to make any order with a view to bringing to an end the matters complained of or to prevent the matter complained of or apprehended. Section 402 provides for specific kinds of orders that can be passed. Few of them are as follows:

  • Regulation of conduct of affairs
  • Purchase of shares of members by other members/ company
  • Consequential reduction on capital
  • Termination or modification of contract with managing director, manager or director
  • Termination of contract/ arrangement with other parties.

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:—

Penalty Provision in the Companies Act, 2013

Sec 229. The Penalty for furnishing a false statement, mutilation, destruction of documents.

Where a person who is required to provide an explanation or make a statement during the course of inspection, inquiry or investigation, or an officer or another employee of a company or other body corporate which is also under investigation,

(a)     Destroys, mutilates or falsifies, or conceals or tampers or unauthorized removes, or is a party to the destruction, mutilation or falsification or concealment or tampering or unauthorized removal of, documents relating to the property, assets or affairs of the company or the body corporate;

(b)    Makes, or is a party to the making of, a false entry in any document concerning the company or body corporate; or

(c)     Provides an explanation which is false or which he knows to be false, he shall be punishable for fraud in the manner as provided in section 447.

Article by- Shubhendu Shekhar

National Law University, Jodhpur


Cases

[1] Daleant Carrington funding (P) Ltd. vs.. P.k. Prathapan 2004 122 CompCas 161 SC.

[2] Foss vs. Harbotte ‎(1843) 67 ER 189, (1843) 2 Hare 4.

Sources
  • Law and practice relating to prevention of oppression and mismanagement in companies Unknown Binding – 1982 by L. C Goyle.
  • indialawjournal.org
  • lawteacher.net
  • academike

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