Oppression and mismanagement in a company

Section 241-246 of the Companies Act, 2013 lays down the provisions to effectively deal with oppressing and mismanagement in a company.

Corporate democracy finds its roots in the concept of majority rule. The principle of majority originated in the rule of Foss v Harbottle which provided that the individual shareholders have no cause of action in law for any wrongdoing by the corporation and the action brought about in respect of such losses shall be brought either by the corporation itself or through a derivative action.

While majority rule is the common norm, it often overshadows minority rights. The objective is to strike a balance between the interest of the small/individual shareholders and the effective control of the company. Therefore, the Indian company law, 2013 has put in place section 241 to 246 to safeguard minority rights.

Defining Oppression and Mismanagement

The term ‘oppression’ is not clearly defined by Company Law 2013, the court of law defines is conduct that involves a visible departure from the standards of fair dealing and a violation of conditions that require fair – especially with regard to the right of shareholders.

The term mismanagement does not find a clear meaning in the act but can be described as conducting company affairs in a prejudicial, dishonest or inept manner. Section No 241 to 246 provides for remedies to the members when they face oppression and the company is being mismanaged:

Any member of the company who has a complains that the affairs of the company are being conducted in an oppressive manner or any material change has taken place which is not in the interest 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. If the tribunal is of the opinion 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.

• The specific orders may provide for
• Regulation of the conduct of the affairs of the company.
• Purchase of shares/interest of the members by other members.
• Purchase of shares by the company and consequent reduction in capital.
• Restriction on transfer/allotment of shares.
• Termination or setting aside of agreements between company and MD, any other director or manager, as the tribunal may think fit.
• Termination of any other agreements between the company and any other person other than those referred to above. The agreement shall be terminated only after due notice and after obtaining the consent of the concerned party.
• Setting aside of transfer/delivery/payment/execution or any act related to property made either by or against the company within 3 months before the date of the application under this section which if done by or against the individual be deemed to be a fraudulent preference.

–Removal of MD/Director/Manager of the company and the manner of appointment subsequent to the order.

–Recovery of undue gain from the MD/Director/Manager and utilisation of the funds by transferring to investor education and protection fund or repayment to the victims who can be identified.

–Appointment of directors who are required to report to the tribunal. The imposition of cost and such other order which in the opinion is just and equitable.

• A certified copy of the order shall be filed with the registrar by the company within 30 days of the order of the tribunal
• The tribunal may impose interim orders as may be necessary.
• If the order of the tribunal results in an alteration of the MOA or AOA, then such alteration shall be in accordance with the order of the tribunal.
• The certified copy of the altered order shall be filed with the registrar.
• Where the order of the tribunal setting aside an agreement is made, such order shall not give rise to any claim against the company and no
• MD/Director/Manager shall act as the MD/Director/Manager for a period of
• 5 years from the date of the order without the permission of the tribunal.
• Such permission shall be granted only after the notice of intention to apply for leave is served on the Central Government and the Government was given an opportunity of being heard.

1. The tribunal has the power to waive off the requirements provided above.
2. Joint holders of shares shall be counted as one member.
3. One member can make an application on behalf of the other members.

Class Action Law Suits

Class action laws can be filed by a large group of people against a defendant who has caused common harm to the entire group.

Filing to the Tribunal

Who can apply?

Circumstances of filing

If any member/depositor/any class of them as mentioned above is of the opinion that the management of the company is being conducted in a manner that is prejudicial to the interest of the company, then an application shall be filed with the tribunal

Seeking of orders from the tribunal

• Restrain the company from
  • Committing an act which is ultra vires the AOA/MOA of the company
  • Committing breach  of any provision of the AOA/MOA of the company
  • Acting on a resolution declared as void which had the effect of altering the MOA/AOA of the company by suppression of facts/misstatement to the members/depositors. The restraint is also imposed on the directors.
  • Performing any act which is in contravention of this Act/any other law for the time being in force.
• or for any misleading /incorrect statement made by
  • The company/director 
  • The auditor(including audit firm and the firm as well as all partners)
  • Any expert/advisor/consultant
• To seek any other remedy as the Tribunal thinks fit.

Important Aspects

The Tribunal shall look into the following matters before considering the application

• The application should be made in good faith and the tribunal shall consider whether the application is made by some other persons other than the directors or officers of the company.
• Whether the matter could be taken up in member/depositor’s own right.
• Any evidence of the views of the members who have no direct or indirect personal interest in the matters.
• Where the cause of action is yet to occur and if it is capable of being authorised/ratified by the company before it occurs and where the cause of action has already occurred if it is capable of being ratified.

After the application is admitted the following aspects are worthy of note:

• The members/depositors of the class have to be served with a public notice
• All applications which are similar shall be taken as one and the lead applicant shall be selected by the class members/depositors. If no decision is reached regarding the appointment of the lead applicant the Tribunal shall appoint the same.
• The same cause of action cannot have more than one application.
• The cost shall be borne by the company or the person responsible for the oppressive act.
• All orders passed by the tribunal shall be binding.
• This section pertaining to a class action is not applicable to Banking Companies.