Provisions for Oppression and Mismanagement Mentioned in the Companies Act 2013

Priyanka Bajpayee

10 Dec, 2019

The concept of Oppression and mismanagement helps corporate democracy find its roots. The term ‘oppression’ is not clearly defined by the Companies Act,2013. In the rule of Foss v Harbottle, The principle of majority originates which provide that the minority shareholders have no cause of action in law for any wrongdoing by the company and the action brought about in respect of such losses shall be brought either by the company itself or through a derivative action.

While majority rule, often overshadows minority rights. The objective is to maintain a balance between the interest of the small shareholders and the effective control of the company. To safeguard minority rights, the Indian Companies Act, 2013 has put in place sections 241 to 246 of the Companies, Act 2013.

Defining Oppression and Mismanagement

Oppression and Mismanagement are not defined in the Companies Act. The meaning of these words, the purpose of Company law should be used in a broad sense and not in any strictly literal sense. However, Mismanagement refers to gross negligence. Mere misconduct of business cannot be considered as Mismanagement. Oppression must be a continuous process and refers to an act of the majority, which is harsh and burdensome on the minority.

 Any member of the company having a complains that the affairs of the company are being conducted in a manner which is oppressive in nature or any material change has taken place which is not in the virtue of its members then he has a right to apply to the tribunal, Such an application can also be made by the Central Government to the tribunal.

Further, If the tribunal is of the view that the company’s affairs are being conducted in a manner prejudicial to the interest of the public, members or company then the tribunal shall make such orders as he may deem fit on whether the company should be wound up or not.

What are the Rights of the Shareholders Against the Oppression and Mismanagement?

• The concept of shareholders’ democracy in the present-day corporate world denotes the shareholders’ supremacy in the governance of the business and the affairs of the company either directly or through their elected representatives. The concept is termed as “Majority Powers and Minority Rights”.

• Majority Powers-The majority of members are entitled to exercise the powers of the company and are used generally to control the affairs of the company. The resolution passed through majority at a duly convened general meeting upon any agenda with which the company is legally competent to deal, is incumbent upon the minority shareholders and as well as on the Company.

• The Rule in Foss V. Harbottle-Usually, the competent court will not intervene at the instance of the shareholders in the matters of internal affairs and will not interfere with the management of a company by its directors as long as they are acting within the powers confided on them under the articles of the Company.

Facts of the Foss V. Harbottle-

• 2 shareholders instituted a suit against the directors.
• The Allegation by the shareholders that the directors had affected various fraudulent practices and illegal transactions acting on behalf of the company. Additionally, the directors had misapplied and wasted the property of the Company.

• Recognition of Majority Rule.
• Avoiding Multiplicity of cases and unproductive litigations.

Difference Between Oppression and Mismanagement-

Oppression-Oppression refers to exercising power in a burdensome, unjust and inequitable manner.

What acts held as Oppressive?

The below-mentioned acts amount to Oppression and are summarized as under-

• By not conducting a general meeting and keeping shareholders uninformed.
• Lack of maintenance of statutory records and not regulating the affairs of the company in accordance with the Companies Act.
• Divesting a member of the right to a dividend.
• By not registering the transmission under will.
• Benefiting a section of shareholders, by issuing further shares.
• Failure in distributing the amount of compensation received on nationalization of business of company among members, where it was obligatory to distribute.

Acts which are not covered as Oppression-

• Impudent, incompetent or careless conduct of director.
• Not conducting the meeting of the directors.
• When a company is making losses, Non-declaration of dividends.
• Refusal by the company to inspect the Books of Accounts to the shareholder.
• Absence of proper details in the notice of a meeting.
• Non-maintenance and filing of records.
• Manipulation by increasing the voting rights of the shares held by the management.

Mismanagement-Mismanagement refers to the situation where the affairs of the company have been conducted in such a way detrimental to the interests of the company.

Acts held as Mismanagement-

• Where there is serious infighting between directors.
• Where the illegality of the Board of Directors is being continued.
• Access of bank account(s) by the unauthorized person.
• No serious action has been taken by the directors to recover amounts misused.
• Even after the expiry of the term of directors, the director continued the office.
• Sale of assets without compliance with the Act at a low price.
• Contravention of Memorandum.
• Infringement of statutory provisions and those of Articles.
• Company reprobates to trade unprofitably.

Acts which are not covered as Mismanagement

• Building up of reserves or non-declaration of dividends, especially when it does not result in the devaluation of shares.
• Mismanagement can’t be suspect, merely because the company incurs a loss,
• Framing-up with the creditors in the company’s beneficial interest.
• Removal of the director.

Eligibility file the Application to the Tribunal for Relief in Case of Oppression and Mismanagement-

Application to the tribunal-In case of Oppression and Mismanagement, the first remedy available to a minority is to apply to the Tribunal when the members of the company apply that the affairs of a company are being conducted in a manner detrimental to the public interest or such a manner oppressive to any member or members.

Who is Eligible to Apply?

When the members of a company complain that the affairs of the company are being conducted in a manner oppressive to any member or members may apply to the Court for an order, provided such members have a right to apply. The provisions come into existence when the aggrieved member can exhibits that he suffered an inequity in his capacity as a shareholder and not in any other capacity.

Other than members following other people can also apply for an application to the tribunal-

• Central Government or any person authorized by the Central Government has a right to file a petition and any person authorized by the Central Government
• In the case of Deceased member its legal representative, on whom title to the share’s delegates by operation of law.

Who Cannot File the Application-

• A shareholder whose calls or other amounts due on their shares have not been paid.
• A holder of a letter of allotment of a partly paid share.
• Share warrant holder.
• In case of transfer of shares, A transferee of shares who has not lodged the shares to the company.

The Signing of the Application–

The requisite number of members must sign the application. The requirement differs from the fact as to whether the company has a share capital or not.

Conclusion-The Act was taken into consideration to strike a balance between the Right of Minority and the protection of the interest of Minority shareholders by preventing the Oppression and Mismanagement. Solitary Acts of Oppression or mismanagement will not give rise to an action.