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Prevention of oppression and Mismanagement: Powers of NCLT and Central Government

The word oppression has not been defined anywhere in the Companies Act, 2013. The meaning of this word is construed in a general sense, which means causing harm or injury by the exercise of power/discretionary authority with malice intention. In the context of the corporate world, it may mean depriving of one or more shareholders of their legitimate expectations or other unfair treatment by the controlling shareholder(s).[1]

In Elder v. Elder & Watson Ltd[2], Lord Cooper explained the meaning of term oppression and the same is also approved by the hon'ble supreme court of India in the case of Shanti Prasad Jain v. Kalinga tubes.[3] In this case, the court defined oppression as the essence of the matter seems to be that the conduct complained of should, at lowest, involve a visible departure from the standards of their dealings, and a violation of the conditions of fair play on which every shareholder who entrusts his money with the company is entitled to rely upon it.

Sec 241 (1) (a) of companies act says that any member has a right to apply to the NCLT if the affair of the company have been or being conducted in a wrong manner or of the oppressive in nature hence from this we may conclude that oppression may be of past or continuing in nature.

Provisions dealing with the prevention of oppression and mismanagement under companies Act, 2013

A separate chapter is dedicated to the measures of prevention of oppression and mismanagement under the Companies Act, 2013. Chapter 16 of the Act deals with it, and it spans from section 241 to 246. Sec. 241 talks about the application to tribunals in case of oppression and sec. 242 deals with the power of tribunals. Sec. 243 deals with the Consequence of termination or modification of certain agreements, while sec 244 talks about the right to apply under Sec. 241. Class action and application of certain provisions to proceedings under sec 241 or 245 is dealt in Sec. 245 and 246 respectively.

Comparative analysis with the provisions dealing with the prevention of oppression and mismanagement under Companies Act, 1956 and Companies Act, 2013

Chapter 6 of the Companies Act, 1956 dealt with the prevention of oppression and mismanagement, and it spans from sec 397 to sec 409 while for Companies Act, 2013 chapter 16 dealt with the prevention of oppression and mismanagement and it spans from Sec. 241 to 246. Prima facie it appears that the new Act has shortened the provisions, but the new act has enlarged the concepts and also made certain new arrangements as well.

Sec 241 of the Companies Act, 2013 corresponds to the Sec. 397, 398, 401, 402, 403 and 404 of the Companies Act, 1956. Under the Companies Act, 1956 the Company Law Board was authorized to grant relief against any complaint of oppression and mismanagement but the Companies Act, 2013 has transferred these powers and functions to National Company Law Tribunal & National Company Law Appellate Tribunal.

The Act of 1956 does not deal with the act of past oppression and it covers only the oppression that have happened in the past and the same are still continuing till the date of a complaint made to company law board. The Companies Act, 2013 has covered the activities of past oppression as well and Section 241 (1) (a) of the Companies Act, 2013 deals with the same issue and provides for the procedure to deals with it.

Under the Companies Act, 2013 any members can seek relief against the conduct of affairs in a manner against/oppressive to him or any members or it may be prejudicial to the interests of the company even though it may not amount to oppression. Earlier this was covered under the Sec. 397 and 398 of the Companies Act, 1956.

Section 242 of the Companies Act, 2013 talks about the power of NCLT/NCLAT earlier there were no provisions in the old Companies law of 1956 dealing with the NCLT/NCLAT. In Company Act, 1956 it was Company law board whose power was dealt under the Sec. 402 of the Companies Act, 1956. Here the thing is to be noted that list of reliefs which may be granted by NCLT/NCLAT is enshrined under Sec. 242 of the Companies Act, 2013, and this have been enlarged with the comparison to Sec 402 of the Companies Act, 1956.

The Sec. 244 of the new company legislation that is Companies Act, 2013 is corresponding to section 399 of the Companies Act of 1956 and which is basically right to apply. Under Companies Act, 2013 it is Sec 244 which deals with the right to apply under sec 241 while in case of companies Act, 1956 it was Sec. 399 which deals with the right to apply under Sec. 397 & 398.

Sec. 399 of the Companies Act, 1956 says that the Central Govt. may waive off the requirements set up in sec 399 to apply, however, under the Companies Act, 2013 power to waive off the condition is with the National Company Law Tribunal (NCLT) and Central govt. do not have any such power. Hereby by this new Act, more power is given to NCLT, but earlier this was not the case.

Sec. 245 of the Companies Act, 2013 deals with the Class action, and this is the new provision. The class action was not present in the old Companies Act of 1956. The class action is a new provision. This provision permits class action by members or depositors against company, its directors and auditors, expert or advisor or consultant or any other person for damages and compensation or any fraudulent, unlawful or wrongful act or conduct. It should be noted that all application for Class action should be filed before the National company law tribunal.

Applications to National Company Law Tribunal (NCLT) for relief in case of Oppression and Mismanagement.

The very first remedy that any oppressed minority/member under Companies Act, 2013 can have is to move to the NCLT (hereinafter referred to as a tribunal). Whenever the affairs of the company are conducted or have been conducted in a manner oppressive to certain minority/members then they can made an application to the tribunal under sec 241 (1) (a) or an application can also be made under the 241 (1) (b) on the ground that any material change has been taken place in the management/ control of the company which is not in the best interests of the shareholders, creditors, debenture holders or any specific class of shareholders.

Section 241 (2) of the 2013 Act says that an application may be made to the NCLT to request order by the Central Govt. if the tribunal believes that the affairs of the company are being conducted or conducted in the past, in a manner prejudicial to the general interest of the public.

It is worthwhile to note that an application under Sec. 241 (1) of the Companies Act, 2013 can be made to grant relief for the past as well as present act of the company.

Powers of National Company Law Tribunals (NCLT)
The power of the tribunal is enshrined under the section 242 (1). Under the said section tribunal is empowered to make any order as it may think deem fit and with a view to end any matters complained in section 241 of the Companies Act, 2013.

There are certain things which tribunals need to satisfy before passing any order. They are as follows:

  1. The companies affair have been/being subjected to a manner prejudicial/ oppressive to any member(s) or the interest of the company
  2. To wind up the company would affect the member(s) but that otherwise the fact would justify the winding-up order on the ground that it was fair and equitable that the company should be wound up.


Oppression of majority
It is worthwhile to note that honorable Calcutta high court in the case of Sindhri Iron Foundry (P) Ltd. Re (1964) 34 comp. Cas. 510 (Cal.) has observed that Sec 397 and 398 (corresponding to sec 241 of the new company Act) nowhere prescribe that application under them can be made only by minority group nor they say anything of this sort that majority group cannot come under the court for redressal of their issues. If the tribunal is satisfied that the act of the minority has done oppression/mismanagement, then relief can be granted to the majority also.

National Company Law Tribunal (NCLT)/ National Company law Appellate Tribunal (NCLAT) Constitution and Company Law Board (CLB) dissolution- Critical issues in the transition of matters related to oppression and mismanagement.
On 1st June, 2016, the National Company Law Tribunal (NCLT) and National The Central finally constituted company Law Appellate Tribunal (NCLAT) Government. These constitutions of National Company Law Tribunal (NCLT) and National Company law Appellate tribunal (NCLAT) were results of the power conferred under sec 408 and sec 410 of the Companies Act, 2013 respectively.. NCLT and NCLAT are quasi-judicial body formed by the central government, and they hear the matter/dispute related to companies in India.

Before NCLT/NCLAT we have the Company Law Board (CLB). The Company Law Board was an independent quasi-judicial body in India which has powers to deal with the Company matters. It was formed on May 31, 1991, under Section 10E of the Companies Act, 1956. The Company Law Board has framed Company Law Board Regulations 1991, wherein all the procedure for filing the applications/petitions before the Company Law Board has been prescribed.[4]

By the establishment of NCLT/ NCLAT the powers of the following has been consolidated:

  1. The appellate powers related to industrial and financial reconstruction including those pending under the Sick Industrial Companies (Special Provisions) Act, 1985.
  2. Powers and jurisdiction related with winding up, restructuring, reduction of share capital and other such provisions, vested in the High Courts.
  3. The power of the board of industrial and financial reconstruction has also been taken away
  4. Company Law Board (CLB): By the constitution of NCLT/NCLAT company law Board (CLB) stands dissolves. The provisions which were dealing with the CLB will be regulated by national Company Law Tribunal and all the appeal from NCLT will go to NCLAT instead of High Court as this was the case with Company Law Board (CLB).


Transfer of matters to NCLT/NCLAT from CLB and other authorities:
Central Government has fixed the different dates for the transfer of matters to NCLT. They are as follows:

  1. Matters pending cases before Court and other authorities including CLB are transferred with the effect from 1 June 2016 to the NCLT and now it is up to the tribunal to dispose of such matters, proceeding as per the provision of the Companies Act, 2013.
  2. All proceeding under the old Act including compromise, arrangement and reconstructions, and arbitrations and winding up of companies, pending immediately before such date before any Court shall stand transferred to the NCLT with the effect from 28 Feb 2017.
  3. Any appeal or matter pending before the Board of Industrial and Financial reconstruction or any proceedings of whatever nature is transferred to NCLT with the effect from 1 June 2016.


Consequences of termination/ modifications of certain agreements:

Section 243 of the Companies Act, 2013 deals with the same and it says that where an order made under sec 242 of the Act terminates/modifies certain agreements such order will not give rise to any claims against the organization i.e., company by any individual or person for any harms or for compensation for loss of office or in any other respect either in pursuance of the agreement/contract or otherwise.

It likewise states that not any managing director or other director or manager whose agreement is so ended or set aside shall, for a period of five years from the date of the order terminating or setting aside the agreement, without the leave of the Tribunal, be appointed, or act, as the managing director or other director or manager of the company given that the Tribunal shall not grant leave under this proviso except if notice of the intention to apply for leave has been served on the Central Government and that Government has been given a reasonable opportunity of being heard in the matter connected to it.[5]

Right to apply under Section 241

Section 244 of the Companies Act, 2013, talks about the right to apply under Sec. 241. Section 244 lists down all the conditions and members who shall have the right to apply under section 241.

Who can apply?
The requirements depend upon the facts as to whether the company has a share capital or not and it is discussed in the section 244 itself. In cases where a company having a share capital the application needs to be signed by at least 100 members or one by tenth of the total number of the members of company whichever is less. Any member holding 1/10 of the issued share capital can also move the application. Another point is to be noted that joint holder of the shares will be counted as one member.

While in cases where company is not having a share capital an application need to be signed by at least one fifth (1/5) of the total number of members of the company. One point is worth noting that tribunal has the right to waive off any or all of the conditions under new Companies Act while in case of old Act this power was vested with the central government. A single member who is entitled to make an application under Sec. 244 (1) can file application on behalf of others if he does have a written consent of all others.

Who cannot apply?
The following cannot apply for relief under Sec, 241 of the Companies Act, 2013:
  1. A holder of share certificate to bearer
  2. Any members whose calls are in arrears
  3. Any holder of a letter of allotment of partly paid share
  4. Any shareholder warrant
  5. Any transferee of shares who has not lodged the shares for transfer to the company.


Class Action
Sec. 245 of the Companies Act, 2013 gives an alternative remedy to the members/depositors of the company by way of class action before the National Company law tribunal. Class actions means when one or several person joins together in a lawsuit and sue the accused person/company on behalf of all the person who have joined and have given their consent to do so. In most of the cases where large body of people is affected then they approach for Class action and this is the efficient way to deal with the matters it is more like Public interest litigation where one person sues and other takes the profit of same. It is worthy to note that class action is not available in case of banking companies.

Who may file an application?
An application may be filed in the case of company having a share capital if the application is signed by at least 100 members or one by tenth of the total number of the members of company or whichever is less. Any member holding 1/10 of the issued share capital can also move the application. Only those members have cleared their all arrears can join the class legislation. In case of company not having any share capital an application for class action may be filed by the signature of not less than the total of 1/5 of the members of the company.

Against whom an application may be filed?
A class action can be filed against the company, auditors, directors, any expert, advisors or consultants or any other person who has made any incorrect or misleading statement. A class action may be filed for the unlawful or wrongful conduct of the companies. An application to the tribunal is need to be made for filing a class action against a company.

Reliefs under class action:
Following reliefs can be claimed under the concept of class action:

  1. To stop the companies from committing the breach of any provisions of MOA.
  2. To stop the company from doing an act which ultra vires the Article of Association or Memorandum of Association of the company.
  3. To declare a resolution altering MOA as invalid if the resolution was passed by suppressing any material facts or fraudulent consent of the members.
  4. To stop a company from doing something which is against the law in force or the provision of the Companies Act, 2013.
  5. To stop a company from taking any action contrary to the resolution passed in board meetings.


Difference between applications made u/s 24/.244 and Sec 245 (Class action)

Following are the differences between the applications made u/s 241/244 and Sec. 245. Kindly see the table below:

Application u/s 241/244 Application under sec. 245
Who can apply Members of the company; Central Government Members and depositors of the company
Against whom Company and its management (Managing director, manager or any of the directors) Company, directors, Auditors, experts or advisors or consultants or any other person as mentioned
Public Notice Not required Required in the prescribed manner
Matters for relief which may be requested Oppression, mismanagement, pre-judicial to any member(s) or interest of the company or pre-judicial to the public interest, both past and continuing Acts involving violation of law, ultra vires the articles or memorandum. Fraudulent, unlawful or wrongful act or omission or improper or misleading statements cover past, present and future activities as well.[6]

The application of certain provisions to proceedings under Sec. 241 and Sec. 245



Section 246 deals with it and this is a very short section of the company Act, 2013 it simply says that provisions of Companies Act, 2013 from sec. 337 to 341( Including both) will apply mutatis mutandis, in relation to all application made to the national company law tribunal under sec. 241 or 245.

mutatis mutandis, is a Latin phrase which means the necessary changes having been made.[7]

Landmark judgments and principles evolved on oppression and mismanagement

There are various principles evolved over the years by judgments given by supreme courts and other tribunals on the principles of oppression and mismanagements. Let us look some of them one by one:
  1. Shanti Prasad Jain v. Kalinga Tubes Limited:[8] The main dispute in the case is that Shanti Prasad Jain alleged that the affairs of the company are conducted in wrong manner and it is oppressive to them. In this case court held that act of oppression must be continuing in nature till the date of filing petition. However we should note that now we can also approach the tribunals for past act of oppression as well due to new Companies Act, 2013 because it provides same in sec. 241. Other important aspect of this case is that court held that mere lack of confidence between shareholders cannot be treated as oppression by the majority there must be something to suggest that they have been treated unfairly then only court will look into the matter.
     
  2. Chatterjee Petrochem (I) (P.) Ltd. v. Haldia Petrochemical Ltd.[9] In this case main dispute was that the company was in immediate need of money and chatterhjee petrochem had failed to keep its promise of providing immediate fund so Haldia has to obtain a loan by raising the debt equity ratio of the company. Here in this case court held that relief against oppression can be invoked only in the case of when shareholder feels that his/her rights as shareholders are violated and it cannot be raised in any other case.
     
  3. Suresh Kumar Sanghvi v. Supreme motors Ltd[10]: In this case court held that if there is serious infighting is going on between the directors which results in a serious pre-judice caused to the company then it will be treated as the mismanagement.
     
  4. Ajay Nagrath v. Rishi Ganga Power Corporation Ltd[11]: In this case erstwhile company law board has ruled that opening many bank accounts without proof of any misappropriation of fund will not be treated as an act of oppression or mismanagement. However CLB authorized the petitioners to look into the receipt and payment of money to ensure that there is no misappropriation of fund was there.
     
  5. Modern Furnisher (Interior designers) P. Ltd[12]: In this case court held that mere termination of a service of a work manager who held only 10 shares will not be counted as an act of mismanagement or oppression.


Conclusion:
From all of the above discussion, it is clear that present Company legislation is equipped with all the weapons to prevent the oppression and mismanagement of the company and it is in more concise form as compared to the previous legislation. Tribunal, courts and other authorities have contributed extensively to the development of principles in prevention of oppression and mismanagement of the company. In old Company law Act Central Govt. has more discretion over some of the areas but in new company Act it is the NCLT who have more discretion so we can say that interferences from central government is now minimal.

End-Notes:

  1. http://www.businessdictionary.com/definition/oppression.html
  2. 1952 SC 49 Scotland
  3. AIR 1965 SC 1535
  4. https://www.biswajitsarkar.com/before-the-company-law-board.php
  5. Sec 243 (1) (b) of the Companies Act, 2013
  6. Kapoor, Dhamija, 21st edition taxmannís university edition.
  7. https://www.merriam-webster.com/dictionary/mutatis%20mutandis
  8. (1965) 1 CLJ 193
  9. Civil Appeal Nos.5420, 5437-5440 OF 2008
  10. (1988) 54 Comp. Cas. 235 (Delhi)
  11. (2014) 44 taxmann.com 468 (CLB-New Delhi)
  12. In re (1985) 58 Comp. Cas. 858 (Cal.)

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