Oppression & Mismanagement of Companies Act 2013 – | Section 241-246 |

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Oppression & Mismanagement of Companies Act 2013

The principle of majority rule is at the heart of corporate democracy. The principle of majority originated with the rule of Foss v Harbottle, in which individual shareholders have no legal recourse for any wrongdoing by the corporation and that any action brought in respect of such losses must be brought either by the corporation itself or through a derivative action. While majority rule is the norm, minority rights are frequently overlooked. The goal is to establish a balance between the interests of small/individual shareholders and effective firm control. As a result, sections 241 to 246 of the  Companies Act, 2013, have been enacted to protect minority rights. Let us discuss the Oppression & Mismanagement under Companies Act in detail.

Before we jump into the main topic let us understand the concept of Oppression & Mismanagement of the Companies Act, 2013.

Table of Content

Concept of Oppression 

Although Companies Act, 2013 does not define ‘oppression,’ a court of law defines it as behaviour that constitutes a noticeable divergence from the rules of fair dealing and a breach of circumstances that demand fair – particularly with regard to shareholder rights. Further, we can also define it as the action of the power in an unfair manner against the party who granted his assent is referred to as oppression. As per the Dictionary of Black Law, ‘Oppression’ is “the act or instance of unfairly wielding authority.” We can also define oppression as conduct that entails a breach or contravention of fair conditions, particularly those pertaining to shareholder rights.

Concept of Mismanagement 

The statute do not define mismanagement, however, we can define it as administering corporate affairs in a prejudiced, dishonest, or inefficient manner. Sections 241 to 246 allow for remedies for members who are suffering due to mismanagement of the firm.

In other words, we can also define it as controlling the company’s business in an unfair and dishonest manner.

Who can file the complaint for Oppression & Mismanagement?

Any member of the company who has a complaint that the company’s operations are running in an oppressive manner or that any major change has occurred that is not in the best interests of its members has the right to apply to the Tribunal.

The Central Government may also make such an application to the Tribunal. If the Tribunal believes that the company’s affairs are as per the manner is detrimental to the public, members, or the firm, the Tribunal may issue such orders as he deems appropriate on whether the business can be wind up or not.

Filing Circumstances

If any of the above-mentioned members/depositors/any class of them believes that the company’s management is being handled in a manner that is detrimental to the company’s interests, an application must be submitted with the Tribunal.

Section 244 of the Companies Act of 2013 governs who can submit a claim for oppression and mismanagement. It establishes a person’s right to register a complaint against tyranny and mismanagement. The firm enjoys the right exclusively and to one of its members, who will make an application on behalf of the other member. The right for the corporation is further split and depends on whether companies have share capital and which do not have share capital. If the firm has share capital, it will determine it up on the number of shares held by the member.

So, the number of share capital implies it must be 100 or one-tenth of the total number of members, and when the calculation is based on the value of the share capital, the value must be one-tenth of the share capital. If the corporation lacks share capital, 1/5th of the members can file a complaint against tyranny and mismanagement. If just one person has the authority to file an application, that person must get the written approval of all other members.

SECTION 241 – Application to Tribunal for Relief in Cases of Oppression

Section 241 of the Companies Act, 2013 deals with applications for relief from oppression and mismanagement. It specifies the provisions for filing such an application. Before the Companies Act of 2013, there exists the Companies Act of 1956, which had Section 397, which deals with the provision of application against oppression and mismanagement. Chapter XVI of the Companies Act, 2013, deals with applications against oppression and mismanagement. It also specifies who can make an application against oppression and mismanagement.

Provisions of Companies Act, 2013

Provisions Penalties
Section 242- Alteration of the MOA/AOA in violation of the Tribunal’s order. Company fine—minimum of Rs 1 lakh, maximum of Rs 25 lakh Officer in default fine—minimum of Rs 25,000, maximum of Rs 1 lakh Imprisonment—maximum of 6 months Or Both
Sec. 243- Any individual who intentionally serves as a Director/Manager/Managing Director before the expiration of 5 years has their agreement cancelled. Imprisonment Maximum: 6 months,  Maximum fine: Rs 5 lakh or both
Section 245- The company fails to comply with the Tribunal’s order Section 245-An application filed with the Tribunal is frivolous. Officer in default Fine-Min: Rs 25,000 Max: Rs 1 Lakh Company Fine-Min: Rs 5 Lakh Max: Rs 25 Lakh Maximum term of incarceration: three years The petitioner paid Rs 1 lakh to the opposing party.

Points to keep note of

Before examining the application, the Tribunal shall investigate the following issues:

  • The applicant must file the application in good faith. Further, the Tribunal will assess whether it is the act by someone other than the company’s directors or officers.
  •  Whether the case may be took up in the name of the member/depositor. Any evidence of the members’ opinions who have no direct or indirect personal interest in the issues.
  •  If the cause of action has still to arise and can be authorized/ratified by the firm before it occurs, and if the cause of action has already occurred and can be ratified.

Points to Ponder

  • A public notice must be served on the class’s members/depositors.
  •  All comparable applications will act as one, and the class members/depositors will select the lead applicant. If no resolution is there on the nomination of the lead applicant, the Tribunal will do so.
  •  A single cause of action cannot have several applications. The expense will be borne by the firm or the individual who committed the abusive behaviour.
  •  The Tribunal’s decisions are final and binding.
  • This clause on class actions does not apply to banking companies.

Takeaway

Although the Tribunal has broad powers under Section 242 to put a stop to the complaints. It has the capacity to do so by virtue of Sections 241, 242, and 244. To obtain orders under Section 242, the applicant must first pass the numerical requirement under Section 244. Then satisfy the Tribunal on the criteria of Sections 241 and 242 – namely; oppressive or detrimental behaviour, and a just and equitable cause for winding up of company.

These standards have rather high thresholds because the numerical requirement may only be cut-off in rare situations. Further, in a simple loss of confidence between members and directors will not constitute just and equitable grounds for dissolution. We can interpret these restrictions against oppression and mismanagement as striking a balance between the interests of a company’s majority and minority shareholders. They give a method for getting the house in order.

Feel free to connect to our experts to gain some more information about Oppression & Mismanagement of Companies Act, 2013.

CS Urvashi Jain is an associate member of the Institute of Company Secretaries of India. Her expertise, inter-alia, is in regulatory approvals, licenses, registrations for any organization set up in India. She posse’s good exposure to compliance management system, legal due diligence, drafting and vetting of various legal agreements. She has good command in drafting manuals, blogs, guides, interpretations and providing opinions on the different core areas of companies act, intellectual properties and taxation.

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