Before delving into the concept of oppression and mismanagement, it is necessary to begin with the judicial origin that shaped and laid down its foundational principles by emphasizing the significance of a company’s separate legal identity and the proper plaintiff rule. It provided a simple yet powerful principle of majority and minority shareholders’ right.
It is the case of Foss Vs. Harbottle[1] (popularly knowns as Rule of Majority), the concept of Oppression and mismanagement finds its roots. This English caselaw established two important rules first- the “Proper plaintiff Rule” meaning that if the wrong done to the company, it is only the company that can sue as company is separate legal entity and second- the “Majority Principal Rule” meaning that once any resolution passed by a majority of the company’s members in accordance with the bylaws, it becomes legally binding on every member and court have no say in such situations.
And this is the reason it popularly known as Rule of Majority meaning minority has no remedy if decision or wrong-doer are majority itself. However, the court soon realised that rigid application of this case will allow those in power to misuse their power for their personal gain by harming the company and minority. Thus, the rule established in said case has limited application to the Indian context, although minority members’ rights are protected by the law.
The exception to this Rule of Majority makes way for litigation by minority shareholders where oppression and mismanagement exist.
Thus, to protect the rights of minorities, the remedies against the oppression and mismanagement were introduced through Indian Companies (Amendment) Act 1951 which were followed in former Companies Act, 1956 under chapter VI and subsequently, the Companies Act, 2013 (hereinafter referred to as “the Act”) deals with entire chapter XVI encompassing from section 241 to 246 that provide provisions relating to Oppression and Mismanagement.
WHAT DO THEY MEAN?
You will not find any rigid or clear-cut definition of oppression and mismanagement in the Act but it has been understood as an unjust act or omission on the part of management.
- Oppression
It can simply mean behaviour of majorities in company that is unfair, harsh or prejudicial to minorities in a company. Like for an example it can be a situation where majority shareholders decide to sell a major asset of the company to another company they own at very low price for their personal gain and this will affect minority share’s value since the decision was not made fairly or in a transparent way.
- Mismanagement
Mismanagement comes in picture when the company’s affairs are being run in a careless, dishonest and incompetent ways that result in harming the company and its stakeholders. The mismanagement remedy applies when two conditions are fulfilled.
a. First, there must be a material change in the management or control of the company, (the cause).
b. Second, such change must be the reason that the company conducts its affairs in a manner that is prejudicial to the interests of the company or its shareholders (the effect).
IMPORTANT THRESHOLDS A PETITIONER MUST CLEAR:
a. The complaint must be in the capacity of a member (not merely a director, creditor or employee).
b. The conduct should show a pattern or course of unfairness, not a single quarrel.
c. If facts might otherwise justify winding up on “just and equitable” grounds, the petitioner should show that winding up would unfairly prejudice them so that the Tribunal can fashion an alternative remedy.
PROCESS: 3Ws –
1. WHO CAN APPLY?
2. WHERE TO APPLY?
3. WHAT REMEDIES ARE AVAILABLE?
1. WHO CAN APPLY?
The above makes it clear that it is the members who have the right to apply if he can show that company’s affairs carried out in way that is prejudicial or oppressive to the company. Further, section 244 of the Act outlines the prerequisites for members to apply to the Adjudicating Authority under section 241 of the Act.
Further, the Central Government, if it is of the opinion that the affairs of the company are being conducted in a manner prejudicial to public interest, it may also itself apply for an order under this Chapter.
2. WHERE TO APPLY?
An Application for relief in case of Oppression and Mismanagement shall be made to the Adjudicating Authority i.e., National Company Law Tribunal (NCLT) under section 241 of the Act.
3. WHAT REMEDIES ARE AVAILABLE?
If, on any application made under section 241 of the Act, the Tribunal is of the opinion that the company’s affairs have been or are being conducted in a manner prejudicial or oppressive and it was just and equitable that the company should be wound up, the Tribunal may under section 242 of the Act, with a view to bringing to an end the matters complained of, make such interim or final order as it thinks fit for example it may regulate the company’s affairs, remove the existing management, declare the any transaction void, direct the recovery of undue benefit gained or even as a last resort pass wind up order if found just & fair management of company is not possible.
Further, provision for collective or class remedy are also laid down under section 245 of the Act, where group of aggrieved members can initiate proceedings and seek relief under the Act. Furthermore, section 246 of the Act extends personal liability beyond winding up meaning that individuals involved in such act (oppression and mismanagement) can be held personally accountable.
CONCLUSION
The provisions relating to oppression and mismanagement under Sections 241–242 offer shareholders an effective means of addressing misuse of corporate power particularly when those in control fail to act fairly or responsibly, the law allows affected shareholders to seek the Tribunal’s intervention. These remedies ensure that corporate control is exercised with accountability and that companies are managed in a manner consistent with fairness and good governance or else the courts can step in.
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