Author Name:   Anar Parikh

A comparative analysis as to what changes have been adopted in the Companies Bill, 2011 for the minority rights on Oppression and Mismanagement.

Comparative Analysis on Minority Rights on Oppression and Mismanagement Under Companies Act, 1956 And Companies Bill, 2011

Minority Protection- Prevention of Oppression and Mismanagement under Companies Act, 1956

The Rule of Minority:
The principle of rule by majority has been applicable to the management of the affairs of the companies. The members pass resolutions on various subjects either by simple majority or by special majority. Once a resolution is passed by the requisite majority then it is binding on all the members of the company. On becoming a member, each person impliedly gives consent to the will of the majority. Thus, if the wrong is done to the company, it is the company which is the legal entity having its own personality and that can only institute a suit against the wrongdoer, and the shareholders individually do not have a right to do so.

Palmer has laid down two propositions after the case of Foss v/s Harbottle are as follows:
1. The first proposition, which is that the court will not ordinarily intervene in the case of an internal irregularity if the matter is one which the company can ratify or condone by its own internal procedure.

2. The second is that where it is alleged that a wrong has been done to a company, prima facie, the only proper plaintiff is the company itself.

The Advantages to the ‘the rule in Foss v/s Harbottle:
1. Recognition of the separate legal personality of the company
2. Need to preserve right of majority to decide
3. Multiplicity of futile suits avoided
4. Litigation at suit of a minority futile if majority does not wish to

The exceptions to ‘the rule in Foss v/s Harbottle’:

The following cases the rule in Foss v/s Harbottle does not apply i.e. the minority shareholders may bring an action to protect their interest:
1. Ultra vires and illegal acts

2. Breach of Fiduciary duties

3. Fraud or oppression against minority

4. Inadequate notice of a resolution passed at a meeting of members

5. Qualified majority

6. Where the personal rights of an individual member have been infringed

7. Statutory exceptions:
Ø Variation of class rights [Section 106]
Ø Scheme of reconstruction and amalgamation [Section 394]
Ø Oppression and mismanagement [Section 397 and 398]
Ø Rights of dissentient shareholders under take-over bids [Section 395]

The term of Oppression under Companies Act, 1956:
Oppression is the exercise of authority or power in a burdensome, cruel, or unjust manner. It can also be defined as an act or instance of oppressing, the state of being oppressed, and the feeling of being heavily burdened, mentally or physically, by troubles, adverse conditions, and anxiety.

The term oppression explained in the case Scottish case of Elder v/s. Elder & Watson Ltd. which was cited in the case of Shanti Prasad Jain v/s. Kalinga Tubes by the Supreme Court-

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 their 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.

The most important element of oppression is that it should be a continuous act, which means that the act must be continued by the majority shareholder till date the petition is filed with the Tribunal.

Section 397 of the Companies Act, 1956 says that when any affair of the company is being conducted to any member or members by the way of prejudice to public interest or oppressive then any one or more than one member have right to apply to the Tribunal by the virtue of Section 399 of the Companies Act, 1956.

The requisite number of members who must sign the application is given under Section 399 of the Companies Act, 1956.
1. In case of a company, having a share capital an application signed by at least one hundred members or by at least 1/10th of the total number of its members, whichever is less
OR
A valid application may be made by any member/ members holding not less than 1/10th of the issued share capital of the company

2. In case of a company, having not a share capital an application signed by at least 1/5th of the total number of members of the company.

If the calculation of requisite members as per (1) mentioned above, joint holders of the shares shall be counted as one member only.

Acts held as Oppression
The following are the few acts which are said to be as oppression through various judgments
1. Not calling a general meeting and keeping shareholders in dark.
2. Non-maintenance of statutory records and not conducting affairs of the company in accordance with the Companies Act.
3. Depriving a member of the right to dividend.
4. Refusal to register transmission under will.
5. Issue of further shares benefiting a section of shareholders.
6. Failure to distribute the amount of compensation received on nationalisation of business of company among members, where required to be so distributed.

Acts not held as Oppressive
The following are the few acts which are said not to be as oppression through various judgments
1. An unwise, inefficient or careless conduct of director.
2. Non-holding of the meeting of the directors.
3. Not declaring dividends when company is making losses
4. Denial of inspection of books to a shareholder.
5. Lack of details in notice of a meeting.
6. Non-maintenance/Non-filing of records.
7. Increasing the voting rights of the shares held by the management.

The term of Mismanagement under Companies Act, 1956:
Mismanagement simply means inefficient or careless management of a company’s affairs or properties. Mismanagement of a company may be carried out by the majority shareholders, who work towards their personal interests rather than the interests of the company as a whole.

Section 398 of the Companies Act 1956 provides the circumstances the relief can be made available to the requisite number of members as laid down under Section 399 in case of mismanagement.

The relief is granted if:
1. the affairs of the company are prejudice to the public interest or prejudice to the interests of the company

2. The change in the management and the control of the company by alteration in its board of directors, managers or in the ownership of the company’s shares and if not having share capital then `in its membership or in any other manner. It does not include change brought in the interests of any creditor including debenture holders or any other class of shareholders of the company.

The requisite number of members who must sign the application is given under Section 399 of the Companies Act, 1956.

1. In case of a company, having a share capital an application signed by at least one hundred members or by at least 1/10th of the total number of its members, whichever is less
OR
A valid application may be made by any member/ members holding not less than 1/10th of the issued share capital of the company

2. In case of a company, having not a share capital an application signed by at least 1/5th of the total number of members of the company.

If the calculation of requisite members as per (1) mentioned above, joint holders of the shares shall be counted as one member only.

Acts held as Mismanagement
The following are the few acts which are said to be as mismanagement through various judgments
1. Where there is serious infighting between directors.
2. Where the Board of Directors is not legal and the illegal is being continued.
3. Diversion of funds of the company for the benefit of majority group.
4. Where bank account was operated by unauthorized persons.
5. Where the directors take no serious action to recover amounts embezzled.
6. Where the managing directors of the company continued in office even after their term was expired and no meeting was held to reappoint them.
7. Violation of Memorandum.
8. Company doomed to trade unprofitably.
9. Violation of statutory provisions and its Articles.
10. Sale of assets at low price and non compliance of the Act.

Acts not held as Mismanagement
The following are the few acts which are said not to be as mismanagement through various judgments
1. Building of reserves and not declaring dividends.
2. Company incurring losses
3. Arrangement with creditors in company’s bona fide interest.
4. Removal of directors and termination of woks manager services.

Comparative study on Minority Right under Companies Act, 1956 and Companies Bill, 2011

The Comparison among the provisions of the oppression and mismanagement under Companies Act, 1956 and proposed Companies Bill, 2011 can be seen under Section 397 and 398 of Companies Act, 1956 with the Clause 241 and Clause 245 of the proposed Companies Bill, 2011.

1. Combined Provisions for relief related to oppression and mismanagement:
Section 397 and 398 of the companies act talks about oppression and mismanagement respectively. The circumstances for granting relief has been specified only for mismanagement and not for oppression under companies act, 1956.

It does not clearly specify as to which circumstances are to be included under the term oppression. The Section only mentions about the act of the company prejudice to public interest or oppressive to one or more than one member of the company.

But the Clause 241 of the Companies Bill, 2011 combines both the provisions of oppression and mismanagement as one. So the circumstances for granting relief to mismanagement will also be now applicable to oppression as both have come under the same provision.

2. New Clause 245 has been added to the Companies Bill, 2011:
The Clause 245 of the Companies Bill, 2011, says that not only member/s but also depositor/s or any class of them as the case may be can file an application before the Tribunal if the affairs of the company are being conducted prejudice to the interests of the company, its members or depositors.

The members or depositors can seek following orders:
1. to restrain the company from committing an act which is ultra vires the articles or memorandum of the company;

2. to restrain the company from committing breach of any provision of the company’s memorandum or articles;

3. to declare a resolution altering the memorandum or articles of the company as void if the resolution was passed by suppression of material facts or obtained by mis-statement to the members or depositors;

4. to restrain the company and its directors from acting on such resolution;

5. to restrain the company from doing an act which is contrary to the provisions of this Act or any other law for the time being in force;

6. to restrain the company from taking action contrary to any resolution passed by the members;

7. to claim damages or compensation or demand any other suitable action from or against—

a. the company or its directors for any fraudulent, unlawful or wrongful act or omission or conduct or any likely act or omission or conduct on its or their part;

b. the auditor including audit firm of the company for any improper or misleading statement of particulars made in his audit report or for any fraudulent, unlawful or wrongful act or conduct; or

c. any expert or advisor or consultant or any other person for any incorrect or misleading statement made to the company or for any fraudulent, unlawful or wrongful act or conduct or any likely act or conduct on his part;

8. to seek any other remedy as the Tribunal may deem fit.
The application for the same has to be signed by the requisite number of members as specified under Section 399 of the Companies Act, 1956.

The application for the same has to signed by the requisite number of depositors shall be
1. at least one hundred depositors or not less than such percentage of the total number of depositors as may be prescribed, whichever is less.
OR
2. Any depositor or depositors to whom the company owes such percentage of total deposits of the company as may be prescribed.

While considering an application under sub-section (1), the Tribunal shall take into account, in particular—
1. whether the member or depositor is acting in good faith in making the application for seeking an order;

2. any evidence before it as to the involvement of any person other than directors or officers of the company on any of the matters provided in clauses (a) to (f) of subsection (1);

3. whether the cause of action is one which the member or depositor could pursue in his own right rather than through an order under this section;

4. any evidence before it as to the views of the members or depositors of the company who have no personal interest, direct or indirect, in the matter being proceeded under this section;

5. where the cause of action is an act or omission that is yet to occur, whether the act or omission could be, and in the circumstances would be likely to be—
a. authorized by the company before it occurs; or
b. ratified by the company after it occurs;

6. Where the cause of action is an act or omission that has already occurred, whether the act or omission could be, and in the circumstances would be likely to be, ratified by the company.

This Clause 245 is not applicable to Banking Companies. Thus, the Clause 245 provides for the various orders which the members or the depositories can seek, the requisite number required for filing an application and also about the particulars the Tribunal take into account while considering an application. Hence, the new added clause has expanded the scope for making an application as well as provides a concrete base on which an application can be considered and also as to what orders can be passed.

Conclusion
That there will be drastic change in the Minority Rights after the enactment of Companies Bill 2011. There has been major change in the proposed Companies Bill, 2011. The Clause 241 of the Bill also includes ‘Oppression’ for granting the relief to the minority. The Section 397 of the Companies Act, 1956 does not define the scope of oppression but the same is defined under the Bill.

The second major change brought in the Bill is that of Clause 245 which is newly added. This clause clearly states that not only members but depositors can file an application in the Tribunal. It also further states what orders the members or the depositors can seek from the Tribunal and also what orders the Tribunal can give to the relief seeker. Thus, there have been major changes proposed in the Companies Bill, 2011 in the Rights of Minorities.

Companies Act, 1956 defines few of the rights given to the minorities. One of them is Oppression and Mismanagement defined under Section 397 and 398 of the Companies Act, 1956. But the scope for seeking the relief is not defined in the case of oppression. The orders on which the applicants can seek relief and the orders which the Tribunal can give are also not mentioned. It does not give clear picture as to what relief can be taken by the applicant in the case of oppression and mismanagement.

On the other hand, Companies Bill, 2011 clarifies all such various doubts as to the scope for seeking the relief under oppression under Clause 241 and providing the idea about orders i.e. what applicants can seek and what tribunal has to provide under newly added Clause of 245. Thus, gives clear idea to the minorities if they want to seek relief under Oppression and Mismanagement.

Thus, after comparing both Companies Act, 1956 and Companies Bill, 2011 on Oppression and Mismanagement, it can be concluded that the proposed changes are very much useful to the minorities as it gives clear picture for the same.
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Bibliography
Website:
# The Companies Bill, 2012- Arrangement of Clauses, Dec 19 2012, http://www.mca.gov.in/Ministry/pdf/The_Companies_Bill_2012.pdf
# Sujay Dixit, Prevention of oppression and mismanagement, legal services of India, Dec 8 2010, http://legalservicesindia.com/article/article/prevention-of-oppression-&-mismanagement-482-1.html
# The Corporate Professional Group, Companies Bill 2011- Major Highlights, Taxguru, Dec 15 2011, http://taxguru.in/company-law/companies-bill-2011-major-highlights.html
# Shri M. Veerappa Moily- Minister of Corporate Affairs, The Companies Bill, 2011- Arrangement of Clauses, Minstry of Corporate Affairs, Dec 2 2011, http://www.mca.gov.in/Ministry/pdf/The_Companies_Bill_2011.pdf

Books:
A.K. Majumdar and Dr. G.K. Kapoor, Company Law, Taxmann Publication (P.) Ltd., 15th Edition.
Company Law, The Institute of Company Secretaries of India, 2011 Series

The  author can be reached at: anarparikh7@legalserviceindia.com

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