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A Mere Dissatisfaction Of The Minority Does Not Constitute Oppression: Critical Appraisal

The working of a company when it pertains to decision making always follows the Majority Rule. Any decisions to be taken are voted upon by members in meetings and depending upon the subject matter, the decision is taken by a simple or special majority. The rule emanates from the case of Foss v. Harbottle, and was applied to the Indian case of Bhajekar v. Shinkar.

It was held that on becoming a member of the company, s/he agrees to submit to the will of the majority of the members expressed in a general meeting and in accordance with law and Memorandum and articles.

One of the exceptions to the Majority Rule is Oppression and Mismanagement that can occur if the majority abuses its power. To remedy such a situation if it comes up, the Company's Act has built in some protective mechanisms by way of provisions under chapter XVI of the Act titles Prevention of Oppression and Mismanagement.

Under section 241 of the Act, members of a company may apply to the NCLT for relief on grounds that the company's affairs have been conducted in the past or continued to be conducted in a manner prejudicial to the company's and public's interest or oppressing certain members thereby amounting to oppression. The Indian courts adjudicating whether an act is oppressive or not initially applied the definition of oppression as given in the British case of Elder v. Elder and Watson Ltd.

This case described oppression to mean a visible departure from the standards of their dealing and violation of the conditions of fair play on which every shareholder who entrusts his money to the company is entitled to rely on.

Sections 397 to 409 of the Companies Act, 1956 lay down specific provisions whereby both the Company Law Board and the Central Government are empowered to interfere in the affairs of the company for preventing "oppression and mismanagement". These provisions are summarized below: According to Sections 397 and 398 the specified minimum number of members of a company, may make an application to the Company Law Board for appropriate relief, on any of the following grounds:
  1. Oppression:
    Where the affairs of the company are being conducted in a manner 'oppressive' to a member or some members or in a manner prejudicial to public interest.
     
  2. Mismanagement:
    1. Where the affairs of the company arc being conducted in a manner prejudicial to the interests of the company or to public interest, or
    2. where a material change has taken place in the management or control of a company, whether by an alteration in its Board of Directors or manager, or in the ownership of company's shares, or if it has no share capital, in its membership, and 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 to the interests of the company.

Meaning of Oppression:

Oppression implies tyrannical and cruel treatment to any member or members. It does not include mere domestic disputes between directors and members in matters of policy or administration, or private animosity between members and directors, or mere lack of confidence between the majority shareholders and minority shareholders.

Explaining the meaning of the word "oppression" for the purposes of the Company Law, Wanchoo J. (afterwards C.J.) of the Supreme Court in the case of Shanti Prasad Jain vs. Kalinga Tubes Ltd. [(1965), 35 Comp. Cas. 351]1 , observed:
"The essence of the matter seems to be that the conduct complained of should at the lowest involve a visible departure from the standards of fair dealing, and a violation of the conditions of fair play on which every shareholder who entrusts his money to the company is entitled to rely."

Prevention of Oppression:

For alleging mismanagement as contemplated by the Act in Section 398, there must be an unfair abuse of power and the persons in charge of management of the company must be guilty of fraud, misappropriation or misfeasance. It may be emphasized that these Sections also empower the Company Law Board/ Central Government to interfere in cases where the oppression or mismanagement complained of is prejudicial to the public interest, that is, the national interest and the general welfare of the community.

For, a company today is not considered to be mere device of profiteering but- is considered to be a viable socio-economic entity to cater to the needs of the society by supplying goods and services the society requires at a price the consumer is willing and able to pay.

Mr.Justice Douglas of American Supreme Court observes:
"Today it is generally recognized that all corporations possess an element of public interest. A corporation director must think not only of the stock-holder but also of the labourer, the supplier, the purchaser and the ultimate consumer." The Act, therefore, aims to ensure that the affairs of a company shall not be conducted in a manner detrimental to public interest.

Protection of Minority:
From the rule in Foss vs. Harbottle it becomes clear that the majority decisions are binding upon the company and a minority, even as great as 49%, has no voice in the control and management of the company's affairs. Obviously there are dangers in such a situation. Suppose the majority are rogues and are not acting bona fide for benefit of the company as a whole, on a strict application of the rule in Foss vs. Harbottle the minority could be exploited by the majority against which the former could take no action; it would be a shocking thing indeed. Certain exceptions have therefore been admitted in the interests of justice to the rule of supremacy of the majority of share-holders.

Exceptions to The Rule in Foss v. Harbottle:
In the following circumstances the will of the majority shall not prevail and individual shareholder or minority shareholders may bring an action against the company to protect their interest:
  1. Where the act done is ultra vires the company or illegal. As pointed out earlier the basis of the rule in Foss vs. Harbottle is that it is pointless to have legal actions based on matters which can be ratified by a general meeting. It follows, therefore, that the rule does not apply to acts which are ultra vires the company or which are illegal because no majority of shareholders can ratify such acts. As such every shareholder has a right of preventing the company from doing such acts by filing a suit of injunction [Bharat Insurance Company Ltd. vs. Kanhaya Lal (1956), A.I.R. S.C. 213].
     
  2. Where the act done is supported by a resolution passed by an insufficient majority. Certain resolutions, e.g., to alter the objects clause in the memorandum, require a three quarters majority. If any such resolution has been passed by the simple majority, any shareholder may institute an action to restrain the company from acting on the resolution (Nagappa Chettiar vs. Madras Race Club (1949), 1 M.L.J. 662.).
     
  3. Where the act complained of constitutes a fraud on the minority and those responsible for it are in control of the company. This exception to the general principle of majority rule covers the passing of a resolution from some ulterior motive, so that the minority is improperly deprived of some benefit to which they are entitled.

    Majority stands in a fiduciary position and therefore, they must exercise their powers bonafide in the best interests of the company as a whole and not for the benefit of some section of the company. If the majority exercises their powers for their own benefit at the cost of the minority, there is a 'fraud on the minority' and any shareholder may bring an action to stop the company from acting on such resolution.

    For instance, the Court will certainly intervene if the majority pass a resolution sanctioning a sale of the company's property to themselves at an under value. Thus, in all such cases where the majority uses their powers to defraud or oppress the minority, the rule in Foss vs. Harbottle will not hold good.


Conclusion:
Sections 397 to 409 of the Companies Act, 1956 lay down specific provisions whereby both the Company Law Board and the Central Government are empowered to interfere in the affairs of the company for preventing "oppression and mismanagement". According to Sections 397 and 398 the specified minimum number of members of a company, may make an application to the Company Law Board for appropriate relief, on any of the following grounds:
  1. Where the affairs of the company are being conducted in a manner 'oppressive' to a member or some members or in a manner prejudicial to public interest.
  2. Where the affairs of the company arc being conducted in a manner prejudicial to the interests of the company or to public interest, or (b) where a material change has taken place in the management or control of a company. The rule of supremacy of the majority was judicially recognized as early as 1843 in the leading case of Foss vs. Harbottle. The judgment in Foss vs. Harbottle case established that on a suit filed by the minority, the Court will not interfere with the internal management of companies acting within their powers even though negligence and inefficiency on the part of the management is proved.
In the following circumstances the will of the majority shall not prevail and individual shareholder or minority shareholders may bring an action against the company to protect their interest:
  1. Where the act done is ultra vires the company or illegal.
  2. Where the act done is supported by a resolution passed by an insufficient majority.
  3. Where the act complained of constitutes a fraud on the minority and those responsible for it are in control of the company.
  4. Where the personal membership rights of an individual shareholder have been infringed.
  5. Where the provisions of Sections 397 to 409 of the Companies Act 1956, apply.

Oppression implies tyrannical and cruel treatment to any member or members. It does not include mere domestic disputes between directors and members in matters of policy or administration, or private animosity between members and directors, or mere lack of confidence between the majority shareholders and minority shareholders.

For alleging mismanagement as contemplated by the Act in Section 398, there must be an unfair abuse of power and the persons in charge of management of the company must be guilty of fraud, misappropriation or misfeasance.

For alleging mismanagement as contemplated by the Act in Section 398, there must be an unfair abuse of power and the persons in charge of management of the company must be guilty of fraud, misappropriation or misfeasance. Section 399 and 401 specify the persons who may apply to the Company Law Board for relief in cases of oppression and mismanagement.

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