Introduction
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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Declaration In India”: What, How, and When, (Case Laws Included)
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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