A company successfully runs when all its branches are working in a
collaborative manner to achieve the main goal. An effective functioning of a
company will also ensure protection of interests of all its stakeholders, but
the greed of control, power, and authority by the top officials in any company
may disrupt its functioning.
The tactics used by the majority shareholders to exploit and oppress the
minority shareholders to gain more shares and power in the company causes
mismanagement in the company. This mismanagement caused often results in
distrust among the shareholders, which eventually affects the growth and
goodwill of a company.
The Companies Act 2013 led to the formation of the National Company Law Tribunal
(NCLT). Prior to the Formation of this Tribunal, Company Law Board (CLB) was
formed under which majority of the cases were of Section 397-398 which deals
with oppression and mismanagement in a company.
Similarly, in the new Act, section 241-242 deals with oppression and
mismanagement, and majority of cases have been filed before the NCLT. The scope
of remedies has also been expanded in the new Act, wherein the concept of
caused to any member as an objectionable conduct have been
introduced which is different from oppressive
behaviour of any member.
Therefore, this paper aims to analyse what is oppression, prejudice, and
mismanagement in the affairs of a company, and what are the remedies available
with the shareholders in such a case to protect the interest of all
A company is a group of individuals or entities operating with a common
objective of achieving the aim of the company's creation and gaining maximum
benefit. There are variations in individual preferences and beliefs that
contribute to the creation of a majority and a minority party in a company.
Under strict judicial securitization, these groups need careful balance such
that the status of any of the groups is not misused or abused.
The Corporate Governance Committee Report of the Securities and Exchange Board
of India, popularly known as Uday Kotak Committee Report points out two
different styles of running a company in India i.e., Raja
(Trusteeship) model. The Monarch
at advancing the interest of the promoters of the company even at the expense of
stakeholders by utilizing the energies of the management, promoters, and the
In this model, it is observed very clearly that the board and the management
personnel depend upon the promoters or majority shareholders of a company due to
the existence of power with them. Whereas, in the Custodian
company aims to act in the interest of all stakeholders including investors,
employees, customers, shareholders, etc. In India, most of the companies are
seen to follow the Monarch
Therefore, it can be said that similar to sovereign democracy, corporate
democracy also worked according to the rule of the majority. It is more
vulnerable to corporate democracy because it is accounted for by the number of
shares and not by the number of people involved. The majority rule has been made
applicable to the administration of the company's affairs. On different topics,
the representatives pass resolutions either by a simple or three-fourth vote.
When the resolution is adopted by a majority, all members are bound by it. As a
consequence, the court would not necessarily interfere to protect the rights of
the minority affected by the resolution. Then, how to avoid oppression by a
majority dictatorship that steamrolls minority shareholders remains a big issue.
Company law intervenes here to moderate the actions of dominant shareholders to
ensure that the interests of the minority are not adversely affected.
There are various sections of Companies Act 2013 which talks about 3 major
techniques to prevent oppression of minority shareholder:
- Making it mandatory for some core decisions to be taken by
super-majority i.e., ¾ votes to reduce oppression and unfairness against the
- Improving standards of corporate governance by providing safeguards and
disclosures of party transactions, the composition and independence of
the board of directors, independence of companies' auditors, and
improving the quality of audit of its financial statements;
- The decisions of the majority shareholders of the company to be reviewed
by the Tribunals if they are oppressive to the interests of minority
shareholders in the company.
It puts out various remedies under Section 241-242 to restore the balance of
power in the company for its smooth functioning which will benefit all the
stakeholders. A conspectus of sections 241 and 242 of the 2013 Act leads us to
their analysis through the lens of two principal questions, as the NCLAT
outlined in Tata Sons:
- Whether the company’s affairs have been or are being conducted in a
manner ‘prejudicial’ or oppressive to any member or members or prejudicial
to the public interest or in a manner prejudicial to the interests of the
- If that be so, whether 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.
If the shareholders have to claim and obtain remedies under the Companies Act
2013 including oppression, prejudice, and mismanagement, it must satisfy both
the provisions specified above.
In this background, the main aim of this paper is to analyze the remedies
available of oppression, prejudice, and mismanagement for shareholders in a
company under the Companies Act 2013 for saving their interest as well as
protecting the public interest. The paper also talks about how the evolution of
the law took place and how does the Indian judiciary look at the remedies
available to the shareholders.
It also analyses the increased scope of the new
Companies Act 2013 by introducing the word prejudice
caused to a member
due to the oppressive
behavior in the company, but the act has lowered the standard
of conduct that needs to be satisfied by the shareholder to invoke a remedy.
This paper also suggests the changes that could be done to the Companies Act
2013 after comparing the similar section of remedies available to shareholders
under the U.K. Companies Act.
Application for Remedies under the Companies Act 2013
In 1951, a major amendment was made in the UK Companies Act,1913, where remedies
against mismanagement and oppression were introduced in India. These changes
were bought to India after the recommendation of the Cohen Committee which
suggested changes in the UK Companies Act, 1948. The major challenge before the
committee was to protect the interest of minority shareholders of a company that
was constantly threatened by the majority shareholders, and the only remedy
available was to wind-up the company.
Winding up of a company has seen a trend
that the majority of shareholders took over the company without paying any penny
to the minority shareholders. This challenge was also highlighted in the Bhabha Committee Report. The issues that were presented before the committee
was restrictions on transferability of shares provided under the Article of
Associations (AOA), and domination of directors who were mostly the majority
shareholders, to use profits in such a way that only a few proportions is left
for the stakeholders.
Therefore, section 241(1) of Companies Act, 2013,
deals with the application of reliefs in cases where oppression, prejudice, and
mismanagement in a company took place states that:
241. Application to Tribunal for relief in cases of oppression, etc
- Any member of a company who complains that:
- the affairs of the company have been or are being conducted in a manner
prejudicial to the public interest or in a manner prejudicial or oppressive to
him or any other member or members or in a manner prejudicial to the interests
of the company; or
- the 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 or control of
the company, whether by an alteration in the Board of Directors, or manager,
or in the ownership of the company’s shares, or if it has no share capital,
in its membership, or any other manner whatsoever, and that because of such
change, it is likely that the affairs of the company will be conducted in a
manner prejudicial to its interests or its members or any class of members,
may apply to the Tribunal, provided such member has a right to apply under
section 244, for an order under this Chapter.
Section 241 of the Companies Act, 2013, is in pari-materia to erstwhile section
397 of the Companies Act, 1956. The offending conduct of any shareholder can be
viewed broadly under three categories (Oppression, Prejudice, and
Mismanagement), out of which only one has to be successful to establish
Remedies available under the Companies Act 2013
As we look into the statute, we find that there is no exact definition that
defines oppression in a company. Therefore, the courts have to read and expound
the principles, based on facts and circumstances on a case to case
basis. The initial definition of this principle came to form the case
of Elder v. Elder & Watson, where the court believed that loss of confidence or
deadlock doesn’t come under the scope of oppression. Whereas in the case
of Scottish Co-operative Wholesale Society Ltd. v. Meyer, the court stuck to
the literal meaning of oppression i.e. harsh and wrongful acts, given in the
The Supreme Court of India in the case of Rajahmundary Electric Company v.
Nageshwara Rao defined the meaning of oppression stating lack of probity and
fair dealing in the affairs of the company to the prejudice of some portion of
its members. The Indian courts have to deal with issues relating to
oppression claims due to a lack of proper definition. First, whether the act
of any offending shareholder be considered as oppression if it is illegal?
Gujarat High Court was of the view that if any action by the majority
shareholder is illegal and goes against any prevailing act but is in the best
interest of the company, then such acts can’t be considered as oppressive.
Whereas, if any act within the limits of the prevailing act may be oppressive if
it is against the shareholders and prejudicial interest of the
company. Second, whether the time and frequency of offending act by
shareholders be considered oppressive?
The Supreme Court and the Company Law
Board agreed that offending acts on part of majority shareholders should be
continuous, especially up to the date when the petition is submitted in the
court. The National Company Law Appellate Tribunal (NCLAT) in the case
of Power Finance Corporation Limited v. Shree Maheshwar Hydel Power Corporation
Limited took a narrow approach and ruled that only offending acts which are
continuous be brought before the court and not the acts which already came to an
end before filing the petition.
Third, whether the oppression is available
only to the petitioner who owns shares of a company, or to any other person of
the company? In the case of re H.R. Harmer Ltd., the court was of the view that
only members can claim oppressive acts but not directors.
The Supreme Court after looking into various judgments, set up some principles
that define the scope of oppression in the case of V.S. Krishnan v. Westfort
Hi-tech Hospital ltd. The following points would make out under oppression:
- Where the act is wrong, harsh, or burdensome
- Where the act benefits some shareholders and even in the interest of the
company, but the conduct is mala fide.
- The act is against good conduct.
- If an act is found to be oppressive, the remedy to put an end to it is
Therefore, it can be said that the definition and of oppression have evolved
over the years and the court has set a very high level of the bar for an act to
be called oppressive. This leads to our next element i.e., prejudice, which has
uncertainty in interpretation as it is a new concept that has been introduced in
the Companies Act, 2013. Therefore, it imposes less burden on the petitioning
shareholders to some extent, as compared to other elements.
The new Companies Act of 2013 added a remedy that any company whose affairs are
being conducted in a manner prejudicial to its shareholders or company itself,
then, in that case, legal action can be initiated. This remedy was missing in
the earlier act of 1956. This remedy was also put forward by the Jenkins
Committee in 1963, where he wrote about the inefficiencies of oppression and
recommended a new unfair prejudice remedy.
This was suggested for changes in
the English law, but then the word unfair was dropped in India after the case
of Re Saul D Harrison & Sons plc stated that The conduct must be both
prejudicial (in the sense of causing prejudice or harm to the relevant interest)
and also unfairly so; conduct may be unfair without being prejudicial or
prejudicial without being unfair, and it is not sufficient if the conduct
satisfies only one of these tests …
As it is a new concept which is also
undefined, then it becomes important to understand the scope of this remedy. The
Black’s Law Dictionary defines the word prejudice as damage or detriment to
one’s legal rights or claims and defines prejudicial as unfairly
disadvantageous; inequitably detrimental. Therefore, Black Dictionary
interprets it and tells that it is not restricted to unfairness to the victim
but also like the conduct of the alleged offender.
Therefore, the Indian Courts
have a much wider scope while interpreting with a minimum of three
methods. First, adopting a literal meaning and interpretation of it by looking
at the effect of the conduct on shareholders only. Second, the courts may
consider both i.e. the nature of the conduct and its impact on shareholders to
determine whether an act falls within its purview.
Third, courts could interpret
the term by applying the rule of constructing of noscitur a sociis. This
Latin term means that the court should consider some related words or synonyms
of any unclear or undefined word. Despite the fact on which method the court
adopts, the decision has to be given on a case to case basis. The lack of
guidance and novelty behind this remedy, a person has to wait till the
rationalization of this principle by the judiciary.
This remedy was first introduced in the Companies Act, 1956, after the Bhabha
Report who believed that the scope of oppression provision has to be enlarged
because the current scope only covered oppression of minority shareholders, but
not the gross mismanagement of the affairs of a company which can’t be put
within the scope of oppression. So, the mismanagement remedy was put in the
Companies Act, 2013 in section 241.
Two conditions are to be fulfilled for
mismanagement remedy to apply. First, there should be a change in control of
the company, through alteration or addition of members, managers, etc of the
company. Second, such changes should be reflected in the affairs that are
prejudicial to the interests of the company. Therefore, mismanagement is
considered as an extended remedy of oppression with a much wider scope.
companies act has included a change that expands the mismanagement effect which
is prejudicial to the company or its shareholders. The new act also subjected a
conditional remedy to the earlier alone remedy by including the establishment of
just and equitable grounds for winding up of a company.
The Companies Act, 2013 has established a special tribunal called the National
Company Law Tribunal (NCLT) to deal with the matters of company disputes
especially relating to section 241-242 of Companies Act, 2013. Therefore, it
bars the jurisdiction of civil courts to entertain such suits, and if any matter
has been taken up, then such matter to be referred to NCLT.
The majority of
cases in the NCLT are on the issue of oppression and mismanagement of the
companies. Section 242 (1) of Companies Act, 2013, which deals with the power of
Tribunal to prevent and provide remedies in case of oppression and mismanagement
was introduced to protect the interest of minority shareholders as well:
242. Powers of Tribunal:
- If, on any application made under section 241, the Tribunal believes:
- that the company’s affairs have been or are being conducted in a manner
prejudicial or oppressive to any member or members or prejudicial to the
public interest or in a manner prejudicial to the interests of the company;
- 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 Tribunal may, intending to bring to an end the matters complained of, make
such order as it thinks fit.
Section 242 of the Companies Act, 2013, is in pari-materia with the erstwhile
section 398 of the Companies Act, 1956. Section 242 empowers the Tribunal to
pass any order as they think is necessary while considering the interest of the
company and its shareholders, mainly under two broad grounds, namely,
Establishment of oppression and mismanagement in the affairs of the company, and
Just and Equitable grounds for winding up.
Comparison of Indian and U.K. Companies Act on Remedies
- Establishment of Oppression and Mismanagement claims under section
241 of Companies Act, 2013
The Tribunal has enormous powers to grant relief after the question of
oppression and mismanagement has been answered. The Companies Act, 2013 allows
the tribunal to resolve a dispute and pass an order to end it on the terms of
The Justice Bhagwati in the case of Mohanlal Ganpatram observed
The language of sections 397 and 398 leaves no doubt as to the true intendment
of the legislature and it is transparent that the remedy provided by these
sections is preventive to bring to end oppression or mismanagement on the part
of the controlling shareholders and not to allow its continuance to the
detriment of the aggrieved shareholders of the company. The remedy is not
intended to enable the aggrieved shareholders to set at naught what has already
been done by the controlling shareholders in the management of the affairs of
Therefore, the order and relief must be such that it breaks the stalemate and
stops it from perpetuating. In the case of Scottish Co-operative Wholesale
Society Ltd. v. Meyer, the House of Lord's order that the oppressor should
buy the shares of the oppressed shareholders at the price when no oppression
existed. Therefore, this will enable the company to run and will also give
monetary compensation for the injury suffered by the oppressed shareholders.
Such a solution is a wonderful answer to the problem of deadlock in a company
when there is a loss of trust among the shareholders. In the same cases, the
Tribunal also ordered that the minority shareholder should buy out the majority
and run the company. Therefore, it can be said that the judiciary needs to
decide the merits of the facts and pass an order on a case-to-case basis.
- Just and Equitable Grounds for Winding-Up
In the early times, the only remedy that was available to shareholders for any
offending act was to wind-up the company on just on equitable grounds. This
was also considered a nuclear option. Justice P.N. Bhagwati noted that:
That remedy was however totally inadequate for it meant killing the company to
put an end to the oppression and mismanagement. But killing the company would be
a singularly clumsy method of ending oppression and mismanagement and such a
course might well turn out to be against the interests of the minority
This remedy was added as a conditional limb and it has to be
satisfied if oppression is being claimed by the petitioning shareholders. A
committee headed by Justice Rajinder Sachar stated that We are also of the
opinion that [the conditional limb] impose[s] as an essential condition of
intervention by the Court a state of facts often difficult to establish. We see
no sufficient reason for making out a case of oppression that the facts should
also justify the making of a winding-up order.
The Supreme Court in the
case of Hind Overseas Pvt. Ltd. v. Raghunath Prasad Jhunjhunwalla, relied
upon the just and equitable test highlighted in the case of Ebrahimi v.
Westbourne Galleries Limited.
The Lords noted that whenever a company was
acting under the principles of commercial law but were in breach of the
agreement between shareholders, then the order of winding up is justified. There
are three major instances for passing an older or winding-up of a company on
just and equitable grounds.
First, When the main objective of the company
fails and it becomes impossible for the company to achieve it. Second, when a
deadlock situation occurs in the company due to the dispute among its
Third, when there is a complete loss of confidence among the
shareholders. This usually happens, when principles of the statute are
disregarded and conflict arises among the majority and minority shareholders.
Therefore, in such instances, the Tribunal can pass an order on Just and
The Origin of Indian Companies act was initially from the U.K. in 1913 when
India was ruled by the Britishers. After independence, India adopted many old
laws as they were and also amended some old laws that were on the same line with
that of the U.K. The U.K. introduced a new company act in 1948, whereas India
introduced it on similar terms in 1956. With the changing time, the need for
change arose and the U.K. changed its act in 2006, whereas India changed its act
Therefore, there is no much difference when it comes to remedies available to
oppressed shareholders between the U.K. and India due to the same origin. But in
the new law, two major differences have been noticed between both countries.
First, the word unfair prejudice
has been included in the U.K.
Companies Act whereas only the word prejudice
has been included in the Indian
Companies Act. This shows the narrow approach in the U.K. and a very high burden
on the petitioning shareholders to prove that the conduct was unfair too.
Whereas in India, this scope is widened and less burden has been imposed to
prove that conduct was prejudice to the interest of the company or its
shareholders. Second, the English Companies Act eliminated the conditional limb,
i.e., just and fair to wind-up a company, making the oppression remedy an
independent remedy than an alternative one. Whereas, the Indian law was in
opposite directions to it, where a conditional limb had to be satisfied for the
petitioning shareholder. Therefore, the standards to prove oppression have been
raised by the Indian law and therefore this remedy could not stand as an
The reliance of petitioning shareholders on the remedies given under section 241
and 242 of Companies Act, 2013, constitutes a majority. Thus, reliance on other
remedies like class actions or derivative actions is much ignored. The
legislation took a long way to shape and make proper law relating to oppression
and mismanagement in India, but still, several concerns remain.
The U.K. has
reformed the difficulties in its remedies by including prejudice and making the
conditional limb an independent remedy. Whereas, the Indian legislation tries to
widen the scope of remedy and makes it much easier for the petitioning
shareholder to claim the remedy but still it lacks behind the U.K law in some
key areas. It is very evident from the paper that India has a complex scenario
to provide relief in case of oppression and mismanagement.
Several steps need to
be satisfied for a claim to be successful against the offending shareholder. The
legislation still is very unclear at various stages which increases the work of
Tribunals to interpret the provisions and think of a worthy solution. This
ultimately utilizes a lot of time of the Tribunals, and the motive to provide a
speed justice is left behind. It has been observed that many courts hesitate to
refer a dispute for arbitration or mediation, but doing so will not only benefit
the parties but will also make courts effective.
Sometimes, mediation and
arbitration are observed to be fruitful to end the dispute between the
shareholders which merely arose due to lack of confidence. This creative
solution also ensures to be in the best interest of the company and its
shareholders, after properly analyzing everything which courts might not look
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