PREVENTION OF OPPRESSION AND MISMANAGEMENT IN COMPANIES-AN OVERVIEW

Nov 11

2024

Posted by: CS Shilpi Thapar

A company is an association of individuals working with a common aim to achieve the purpose of the formation of the company and to earn maximum profit. There are difference of interests and opinions among individuals which results in forming of majority and minority group. These groups requires proper balancing under strict judicial securitization so that position of any of the group is not misused or abused. In today’s scenario , this topic has become a significant part of the companies law and practice.

How do companies run?, Who runs them?, Whether majority shareholders or directors run them? How majority oppress the minority? These questions needs to be answered for understanding the concept of Oppression and Mismanagement.

Oppression:

The Oppression of small/minority shareholders take place by majority shareholders who controls the company. It is understood as an act or omission on the part of management which implies majority, who holds or controls the management. The law, however, has not defined what is oppression but certain prominent case laws has defined the term “Oppression.”

Mismanagement:

Similarly , mismanagement is not uncommon in companies. It means mismanagement of resources by following means:

Absence of basic records of the company
Drawing considerable expenses for personal purposes by directors/management of the company.
Not filing documents with The Registrar of Companies relating to compliances under The Companies Act,1956
Misuse of companies finances/funds
Sale of assets at very low prices
Violation of provisions of law and memorandum or article of association of the company.
Making Secret Profits
Diverting company funds for personal use of directors
Continuation in office by director beyond the specified term and not holding any qualification shares.

The acts of mismanagement may not necessarily be of majority but can be by any person in the day to day management of the company.

Indian Position:

An analysis of the 50 Top Economic Times ranked companies reveals that in India nearly 50% are still family owned and if public sector undertakings are excluded , the percentage is approx.63%.To name a few are Wipro, Reliance Industries, Satyam Computer Services, Ranbaxy Laboratories, HCL Technologies, Dr. Reddy’s Laboratories, Hero Honda Motors, Zee Telefilms, Bajaj Auto, TATA Motors, Grasim, Nirma, Dabur, Gujarat Ambuja Cements, Sun Pharmaceuticals Laboratories.

The percentage of family owned business is increased in India as entrepreneurship in early years was highly personalized and did not get corporatised. The family owned concerns are almost dominating the business scene and professional management rarely exists.

Oppression and Mismanagement is less seen in professionally managed companies where manager work for “Shareholders” and not for particular group of members.

This concept is more common in family owned concerns where family members owned and developed entire business over time. These concerns are not professionally managed and system of functioning is very personal. The controlling member of the family curbs the whole family holdings by means of issuing new shares or transfers in his favor or reconstitute the board in such a manner so that other family member are alienate resulting to oppression of other family members and mismanagement of the company.

Legal Aspects:

Oppression and Mismanagement is governed by section 397/398 of The Companies Act,1956. It plays a crucial role in prevention and remedying the oppression and mismanagement. The small and medium sized companies especially family owned are most affected as the father wants his son to takeover certain business irrespective of the other family members which leads to oppression in some form or other and most of these disputed lands for remedy before courts/company law board.

To protect the interest of minority shareholders, the companies act,1956 defines certain rights as enumerated below:

The Rights of Minority Shareholders:

Section 17:	Special resolution is required for changing the registered office from one state to another and for changing the objects of the company.
Section 21 & 22	Changes of name of company require a special resolution.
Section 31	Alteration of articles can be done through a special resolution.
Section 39	Members are entitled on payments of a fee to copies of memorandum and articles of association and agreement and resolution referred to in section 192.
Section 79	Issue of shares at discount should be authorized by the resolution of the general meeting.
Section79 A	Issue of sweat equity shares should be authorized by special resolution in general meeting.
Section 81	When further shares are offered to persons other than the existing shareholders a special resolution should be passed to that effect.
Section 87	An equity shareholder has a right to vote on every resolution placed before the company and his voting right on a poll is in proportion to his share of the paid up equity capital.
Section 94	Alteration of share capital requires consent of shareholders in general meeting.
Section 100	Reduction of share capital requires passing of a special resolution.
Section 106	The rights attached to one class of shareholders can be varied with the consent in writing of holders of not less than three-fourths of such holders.
Section 107	The shareholders who are against the reduction of share capital and who did not vote in favor of the resolution under section 100 can apply to the court for cancellation of reduction (not less than ten per cent shareholders).
Section 113	Share allotment letters and share certificates should be delivered to the shareholders within three months of allotment and within two months of the registration of transfers.
Section 118	Copies of trust deeds for securing debentures should be forwarded to any member (apart from the debentures-holders).
Section 144	Copies of instruments creating charges and register of charges kept at the company can be inspected by any member.
Section 149	A public company formed after the 1956 Act should not commence other objects referred to under section 13(1) (d) ( i ) unless a special resolution is passed.
Section 163	The register of member, index of registers, certificates, documents, etc. can be kept away from the registered office within the same city etc. if it is so approved by the special resolution. The index, registers, returns, etc. should be open to the inspection of any member or debenture holder or any other person and extracts can be taken there from.
Section 165	Members of public companies are entitled to statutory reports and to the right of approval thereof at the statutory meeting.
Section 166	The annual general meeting should be held in each year and the gap between two such meetings should not exceed fifteen months.
Section 172	Members are entitled to notice of every meeting of the company.
Section 179	Members can demand a poll in accordance with this section.
Section 183	A member need not use all his votes in the same way.
Section 188	A member holding at least 1/20 total voting power or not less than hundred members can direct the company to circulate resolutions.
Section 196	A member can inspect the minutes of proceedings of general meeting and he is entitled to be furnished within a week with a copy of minutes on payment of a fee.
Section 210	The balance sheet and profit and loss account should be laid before the annual general meeting.
Section 217	Board’s report should be attached to every balance sheet laid before the annual general meeting.
Section 219	A copy of every balance sheet and profit and loss account, auditor’s report, board’s report should not less than 21 days before the annual general meeting be sent to every member.
Section 224	Auditor’s (other than first and casual auditors) should be elected by members at annual general meetings.
Section 225	Special notice is required of a resolution at an annual general meeting appointing as auditor a person other than the retiring auditor.
Section 235	Members holding not less than one tenth of total voting power or not less than 200 members may appeal to the Company Law Board for investigation of the affairs of the company.
Section 255	Not less than two thirds of the total number of directors of a public company should be appointed at general meetings.
Section 258	The board of directors can be increased or reduced by an ordinary resolution.
Section 284	Special notice shall be required of any resolution to remove a director.
Section 293	The board of directors cannot, except with the consent of the general meeting:1. Sell, lease or otherwise dispose of the whole or substantially the whole of the undertaking of the company. 2. Remit or give time for the repayment of any debt due by a director. 3. Invest the amount of compensation received in respect of compulsory acquisition. 4. Borrow moneys in excess of the aggregated capital and free reserves. 5. Contribute to charitable or any other funds in excess of 50000 rupees or five per cent of the average net profits during the immediately preceding three financial years, whichever is higher.
Section 294	Appointment of sole selling agents is subject to the consent of the general meeting held after the appointment.
Section 301	The register of contracts can be inspected by members extracts taken and a copy thereof required by them on payment of a fee.
Section 302	Members are entitled to details of terms of contracts or variation in regard to the appointment of managing director/manager.
Section 304	The register of directors can be inspected by any member.
Section 307	The register of directors’ shareholding should be open to inspection of any member during business hours.
Section 309	The remuneration payable to directors including the managing and wholetime directors by public companies is subject to the approval of members.
Section 314	The appointment of a relative or partner to office of profit is subject to approval of members by way of special resolution.
Section 323	The memorandum can be altered so as to render unlimited liability of directors’ if so authorized by special resolution.

The leading cases quoted by Indian Laws where minority shareholders rights was protected successfully are:

a) Meyer v. Scottish Cooperative Wholesale Society Ltd. (1954) SC 381.

b) Elder v. Elder and Watson (1952) SC 49.

c) In Re H R Harmer Ltd. (1959) IWLR 62.

d) Five Minute Car Wash Services Ltd. (1966) IWLR 715 Ch D.

e) In Re Jermyn Street Turkish Baths Ltd. (1971) WILL 1042 (CA).

f) Yenidge Tobacco Co. Ltd. (1971) I WLR 1042 (CA)

g) Loch V. John Blackwood Ltd. (1924) AC 783.

h) Clemens v. Clemens (1976).

i) Daniels v. Daniels (1978).

j) Ebrahimi v. Westbourne Galleries Ltd. (1973) AC 360.

Legal Remedies:

Section 397, 398 and 399 of the Companies Act 1956 covers the remedies for preventing Oppression and Mismanagement:

Section 397:

Application to Company Law Board for relief in cases of oppression:

1. Any members 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.

2. If, on any application under sub-section (1) the Company Law Board is of opinion (a) That the company’s affairs are being conducted in a manner prejudicial top public interest or in a manner oppressive to any member or members: and

(b) That to wind up the company would unfairly prejudice such member or members, but that otherwise the facts would justify the making of a winding-up order on the ground that it was just and equitable that the company should be wound up;

the Company Law Board may with a view to bringing to an end the matters complained of make such order as it thinks fit.

Section 398:

Application to Company Law Board for relief in cases of mismanagement:

1.Any members of company who complain-

(a) That the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner prejudicial to the interests of the company, or

(b) That a material change (not being a change brought about by, or in the interests of, any creditors including debenture holders, or any class of shareholders, of the company) has taken place in the management of control of the company whether by an alteration in its Board of Directors, or managers or in the ownership of the company’s shares or if it has no share capital in its membership, or in any other manner whatsoever and that by reason of such change, it is likely that the affairs of the company will be conducted in a manner prejudicial to public interest or in a manner prejudicial to the interest of the company.

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.

2.If, on any application under sub-section (1) the Company Law Board is of opinion that the affairs of the company are being conducted as aforesaid or that by reason of any material change as aforesaid in the management or control of the company, it is likely that the affairs of the company will be conducted as aforesaid, the Company Law Board may, with a view to bringing to an end or preventing the matters complained of or apprehended, make such order as it thinks fit

Section 399

Right to apply under sections 397 and 398 –

(1)The following members of a company shall have the right to apply under section 397 or 398: –

(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.

(2) For the purposes of sub-section (1), where any share or shares are held by two or more persons jointly, they shall be counted only as one member.

(3) Where any members of a company are entitled to make an application in virtue of sub-section (1), any one or more of them having obtained the consent in writing of the rest, may make the application on behalf and for the benefit of all of them.

(4) The Central Government may, if in its opinion circumstances exist which make it just and equitable so to do, authorize any member or members of the company to apply to the Company Law Board under section 397 or 398, notwithstanding that the requirements of clause (a) or clause (b), as the case may be, of sub-section (1) are not fulfilled.

(5) The Central Government may, before authorizing any member or members as aforesaid, require such member or members to give security for such amount as the Central Government may deem reasonable, for the payment of any costs which the Company Law Board dealing with the application may order such member or members to pay to any other person or persons who are parties to the application.

Closing note:

The true test of corporate governance is the manner in which the majority addresses minority interests. The corporate democracy is reckoned with the no. of shares one has, and not with the no. of individuals involved. Due to lack of shareholder activism in India especially of minority shareholders, oppression and mismanagement is increasing day by day reducing the importance of good corporate governance in the system. Today, a very large number of cases dealt at Company Law Board are pertaining to oppression and mismanagement. The Law must balance the need for effective decision making on corporate matters on basis of consensus without permitting persons in control of company.

To conclude with a famous quote of George Washington “ It is better to be alone than in bad company.”

PREVENTION OF OPPRESSION AND MISMANAGEMENT IN COMPANIES-AN OVERVIEW

PREVENTION OF OPPRESSION AND MISMANAGEMENT IN COMPANIES-AN OVERVIEW

Posted by: CS Shilpi Thapar

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