Safeguarding Minority Shareholders: Understanding Oppression and Mismanagement under the Companies Act, 2013



The cardinal rule of company law asserts the supremacy of the majority. However, this principle has been found to be misused on several occasions by majority members, resulting in oppression against minority shareholders. This post explores issues of oppression and mismanagement within the Companies Act of 2013 in India.


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Understanding Oppression

Meaning of Oppression

Oppression, in its literal sense, denotes any act exercised in a burdensome, harsh, and wrongful manner. When applied to companies, it implies unjust dealings in the company's affairs, actions that are harsh, burdensome, or prejudicial to any member of the company.

Essential Features

1.       Unjust or Harsh Conduct: Oppression involves actions that are unjust, unfair, or burdensome to minority shareholders.

2.       Prejudice to Minority Interests: Oppressive conduct must prejudice the interests of minority shareholders, either financially or otherwise.

3.       Violation of Fair Play: The act or conduct violates the condition of fair play.

4.       Past or Continuing Conduct: Oppression can be either a past act or a continuing course of conduct.

5.       Motive: The motive behind oppression is irrelevant; it can be financial gain or any other unfair advantage.

6.       Complaint by Member Only: A member can complain of oppression only in their capacity as a member, not as a director or creditor.


What Amounts to Oppression

Various acts can be deemed oppressive, including:

1.       Imposing new and riskier objectives on the unwilling minority.

2.       Depriving a member of their ordinary membership rights, Mohan Lal Chandumall v. Punjab Company Ltd…

3.       Unreasonably refusing to accept the transfer or transmission of shares with an ulterior motive, Kumar Exporters P. Ltd. And Ors. vs Naini Oxygen And Acetylene Gas.

4.       Violating the provisions of the company's act or memorandum of association: In cases like Akbar Alri v. Konkan Chemicals Pvt. Ltd., Narayan Das v. British Grills Pvt. Ltd., and Ram Nath Gupta v. Phoel Industries Ltd., the courts held that acts in violation of the company's act or memorandum are deemed to be oppressive.

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What Does Not Amount to Oppression

Certain actions, while seemingly detrimental, do not constitute oppression:

1.       Inefficient or careless conduct of a director, Needle Industries (India) Pvt. Ltd. v. Needle Industries Newey (India) Holding Ltd..

2.       Non-declaration of dividend by a company with no or inadequate profit, Chandra Krishna v. Panna Lal Girdhari Lal Pvt. Ltd.

3.       Non-holding of meetings of the board of directors.


Remedies for Oppression

The Companies Act, 2013, provides four main remedies for oppression:

1.       Rectification of Oppressive Conduct: The NCLT can direct the company to rectify the oppressive conduct.

2.       Restriction or Prohibition of Activities: The NCLT can restrict or prohibit the company from engaging in certain activities.

3.       Compensation to Aggrieved Shareholders: The NCLT can order the company to compensate aggrieved shareholders for any losses incurred.

4.       Removal of Directors or Officers: The NCLT can remove directors or other officers responsible for the oppression.

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Understanding Mismanagement

Meaning of Mismanagement

Mismanagement refers to the inefficient, negligent, or dishonest management of a company's affairs. It encompasses actions that jeopardize the company's viability and the interests of its shareholders.


Essential Features:

1.       Making imprudent business decisions that result in significant losses or jeopardize the company's long-term sustainability.

2.       Failing to maintain proper financial records or neglecting compliance with regulatory requirements, putting the company at risk of legal and financial penalties.

3.       Engaging in activities that conflict with the company's objectives or violate its legal obligations, potentially damaging its reputation and value.


What Amounts to Mismanagement

Several actions have been deemed mismanagement under company law, including:

1.       Allotting shares for the consideration of objects favored by directors, based on their likings and disliking.

2.       Misuse or misapplication of company funds by a majority of directors.

3.       Diversion of funds to a loss-making company.

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What Does Not Amount to Mismanagement

Certain actions, while seemingly detrimental, do not constitute mismanagement:

1.       Incurring losses due to unforeseen circumstances or market fluctuations.

2.       Building reserves out of profit without declaring a dividend, provided it is done in the company's best interests.


Remedies for Mismanagement

The Companies Act, 2013, provides remedies for mismanagement similar to those for oppression, including rectification of mismanagement, restriction of activities, compensation to aggrieved shareholders, and removal of directors or officers.


Persons Entitled to Apply to the Tribunal for Oppression or Mismanagement

The following individuals or entities are entitled to apply to the tribunal:

1.                   Member or members of the company, under Section 244.

2.                   Central government, under Section 241(1).

3.                   Legal representative: The legal representative of a deceased member is entitled to apply to the tribunal. Such a representative may present a petition even before the registration of those shares.

4.                   Trustee: Trustees of a shareholder/member may also apply to the tribunal.


Grounds for Filing an Application to the Tribunal

1.       If the affairs of the company have been or are being conducted in a manner prejudicial to public interest, against any of its members, or the overall interest of the company.

2.       If a material change has occurred in the management or control of the company, leading to a likelihood that the affairs of the company will be conducted in a manner prejudicial to its own interest or the interests of its members.


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