Author- VARSHA SHARMA
INTRODUCTION
In this article ‘oppression and mismanagement which is a remedy to provide relief to minority shareholders has been analysed. The article focuses on the tests required to be proved by the contemporary judgments, which require a similar threshold to be proved as required in the cases of winding-up. A suggestion has been made to reduce such threshold and shift the focus towards providing alternative remedies in the cases of oppression and mismanagement. This would result in a reduced burden on the minority shareholders in order to make a claim for oppression and mismanagement. Moving on, an amendment should be made under section 242 of the Companies Act as well so as to remove the requirement of proving tests similar to winding-up are not required in order to make a claim for oppression and mismanagement.
THE CONCEPT OF CORPORATE DEMOCRACY AND OPPRESSION AND MISMANAGEMENT
The principle of corporate democracy implies that in the company the rule of the majority is sacrosanct as it is the majority voting in a company which is determinative of the decisions in the company. Further, the courts should generally not intervene with the day-to-day functioning of a company’s decisions, and should also not restrict themselves to the powers of the Board of Directors.
In these circumstances there might be a situation where law’s intervention is required where the actions of the majority shareholders are not dealing with an action of fair dealing, and the company’s affairs are conducted in a manner which is oppressive to the members of the company or is contrary to public interest.
Under these situations, the law’s intervention might be required. The Companies Act, 1956 provides for such a remedy under section 397 and 398 of the Act. The Companies Act, 2013 provides for the remedy of oppression and mismanagement under section 241 and section 242 of the Act.
ANALYSING LEGISLATIVE HISTORY:
In the Cohen Committee Report, 1978 it was recommended that the, “the court should have the power to impose upon the parties to the dispute whatever settlement the court considers just and equitable.” On the basis of the Cohen Committee Report, section 210 was introduced in the English Companies Act, 1948, followed by the introduction of section 153 C in the Indian Companies Act, 1913. The scope was further expanded by the Bhabha Committee, 1952, which widened the scope of the area. The remedy was further expanded not just to the minority oppression but also to the cases of mismanagement of the companies affairs in a prejudicial manner.
INTERPRETING SECTION 242 OF THE COMPANIES’ ACT AND THE COURT’S CONSTRUCTION OF THE SAME
Section 241 of the Companies’ Act provides for the remedy of oppression and mismanagement. Section 242 gives power to the Tribunal with respect to the application made under section 241.
The word ‘oppression and mismanagement’ have not been defined in the Act. Therefore, understanding its construction through various case laws would be helpful.
The case of Palghat Exports(P) Ltd. vs Chandran, was against the judgment of the company judge. The court in its analysis said that winding up is a drastic procedure, which has often not even helped the oppressed and the prejudiced members. The court further relied upon the precedents to define what constitute oppression and mismanagement as the same has not been defined in the Act. The court relying on the English case of Scottish Cooperative Wholesale Society Ltd vs Meyer and others had held that as a preliminary inquiry to section 397 it must be shown that there existed ‘just and equitable clause’ for the winding up of the company. After that it must be shown that the majority shareholders’ conduct was oppressive to the minority shareholders and this requires that oppressive events should continue as a part of the consecutive story up till the date of petition, and the conduct should be harsh, burdensome and wrongful, and should not result from a mere lack of confidence between the majority and the minority shareholders, unless the lack of confidence results from majority’s oppression of the minority and involves an element of lack of fair dealing or probity. The same stance has also been taken in other cases such as SP Jain vs Kalinga Tubes Ltd, wherein it was clarified by the Supreme Court that it not just and enough for the petitioner to show that there exists a just and equitable clause for the purpose of but it, it is further required to be proved that the events should be considered in isolation but not as a part of the consecutive story.
In Hanuman Prasad Bagri v. Bagress Cereals (P) Ltd, the court held that in order to wind up a company under just and equitable ground, a case for the same must be made.
In Suryakant Gupta v. Rajaram Corn Products (Punjab) Ltd. , an appeal was filed for winding up of the company on ground of mismanagement. The case was remitted to CLB and it was held that if neither any third party and nor the shareholders are willing to buy the shares of the company at the valuation made, then orders for winding up the company should be made.
In the case of Rajahmundry Electric Supply Ltd. vs Nageswara Rao, it was held by the Court that where the directors have only misappropriated the company’s funds and nothing else, an order of winding up would not be enough as the same would operate harshly on the shareholders’ rights.
Therefore, according to the construction of section 242 and the court’s interpretation of the same, a heavy burden is placed on the petitioning shareholders at present, which requires proving of two conditions in order to make a claim for oppression and mismanagement: (i)that the affairs of the company were conducted in a manner which was prejudicial and oppressive to the company’s members. Moving on under section 242(1)(b) where the facts justify for the making of a claim of winding up, however, the same would be prejudicial to some members of the company, the courts could grant alternative remedies.
The first requirement is a substantial requirement, which is required to be proved under the Act and the second requirement is a conditional requirement which is required to be proved as well.
As is visible in the judgments cited the section for oppression and mismanagement has drawn upon from the notions of “just and equitable cause” under winding up, and therefore it is difficult to obtain alternative remedies as well under the law because the threshold equivalent to winding up needs to be proved, and that the winding up would be prejudicial, so alternative remedies should be provided.
A classic example of the problem created by such a construction of the section is visible in the case of Tata Consutancy Services Ltd vs Cyrus Investments Ltd, wherein it was reiterated by the court that a person’s removal from the post of executive chairman, would not constitute as prejudicial/ oppressive, as a case of functional deadlock had not been pleaded.
Now, the requirement to prove deadlock is actually a requirement in the cases of winding up, however importing the same to the oppression and mismanagement, has made it difficult for the minority shareholders to get a relief.
Rather than this the focus should be more on alternative remedies and the requirement to prove prejudice. A similar stance has been taken by the law in various countries. For instance, in the case of Sim Yong Kim vs Evenstar Investments Pvt Ltd., it was observed by the courts in Singapore that the winding up order in a case of “just and equitable ground” should be reduced to a buy-out order.
In Australian jurisdiction as well, it has been held by the court, that the practice of winding-up is withheld so as to encourage the parties to reach an alternative solution, and an order of winding-up can be made only when it could be proved that no such other remedy is available.
Now, even though it had been accepted that winding-up is a remedy which should be adopted as a last resort, which lead to the introduction of section 241 under the Act, and under section 241 of the English Companies Act., 1948. However, oppression and mismanagement should be accepted as a unique remedy in itself, wherein it is not considered essential to first prove that the situation is grave enough to claim a winding-up, but however since the same would cause injustice to certain members, the Tribunal should exercise powers to grant alternative remedies.
Further, applying the tests of winding up, such as ‘just and equitable clause’ and winding up and ‘functional deadlock’ has made it difficult to even claim alternative remedies in cases of oppression and mismanagement as was visible in the case of Cyrus Mystry.
Hence, section 242(1)(b) shall be remedied and it should be amended and should not include the phrase, “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.”
CONCLUSION
At present the law operates in a manner that the remedy of oppression and mismanagement exists as an alternative to winding-up. More emphasis should be laid on the alternative remedies in oppression and mismanagement under section 242 of the Act. Further, the threshold for claiming alternative remedies should not be the same as the ones required for proving a case of winding-up.
Such an approach has been in England as well, wherein upon the recommendations of the Jenkins Committee, the remedy of oppression was reduced to the ‘unfair prejudice’ remedy. However, in India the law is still is the same and even for proving oppression and mismanagement there is a requirement to prove just and equitable ground for winding up of the company.
Therefore, an approach which focuses more on alternative remedies in cases of oppression and mismanagement, without the requirement of proving the essentials of winding-up should be adopted.
