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  • Writer's pictureBrain Booster Articles
    • Jun 30, 2022
    • 6 min read

PREVENTION OF OPPRESSION AND MISMANAGEMENT UNDER THE COMPANIES ACT, 2013

Author: Amber Gupta, V year of B.A.,LL.B.(Hons.) from G.D. Goenka University, Gurugram, School of Law.


Oppression

The exercise of authority or control in an unfair manner without the consent of the other party is referred to as oppression. The word ‘oppression' is described in the Black Law Dictionary as ‘the act or instance of unjustly exercising power.' It may also be interpreted as an act or instance of injustice, as well as the sensation of being heavily burdened, psychologically or physically, by difficulties, adverse circumstances, and anxiety.In the case of Dale and Carrington Investment Pvt Ltd. v P. K. Prathapan[[i]], it was determined that raising a company's resources for the sole purpose of acquiring power may be considered oppression.


Application against oppression and mismanagement

The aggrieved shareholder can file a complaint with the National Company Law Tribunal, which is established under the Company statutes.


Previously, Section 397 of the Companies Act of 1956 dealt with applications for relief from oppression and mismanagement. Section 241 of the Companies Act of 2013 provides for the filing of an appeal against oppression. The Company Act's Chapter XVI specifically outlines who can file a complaint and in what conditions a complaint of oppression and mismanagement can be filed. Consider a case in which a member of the company makes a complaint about the company's affairs when the affair seems shady, harming the interests of the public at large or the company, or when the company's affairs are coercive in nature and against the member making the complaint or any other member of the company. The member can also file a complaint about a material change in the company's management or control that appears to be detrimental to the company.The Central Government may file an oppression and mismanagement application before the tribunal on its behalf against a company if it believes that the company's affairs are prejudicial in nature.


Who can apply to Oppression and Mismanagement

Section 244 of the Companies Act is also essential since it specifies who has the authority to file such an application. The right is split broadly between the corporation and the right of one member to file on behalf of the other members. In a company, the right can be further divided depending on whether the company has a share capital or does not have a share capital. The share capital of the complaining member can be determined based on the amount or value of the share capital. When it comes to the amount, it should be 100 or one-tenth of the total number of shareholders, and when it comes to the value, it should be one-tenth of the share capital value. Returning to the right of one party to file on behalf of the other members, there is only one condition: the individual doing so must have the written consent of the others.


Power of Tribunal: Section 242 of the Companies Act, 2013

The tribunal is a separate adjudicatory body established to deal with issues relating to the Companies Act to obtain effective and urgent relief. Section 242 deals with the tribunal's powers, which have been reviewed and clarified for your consideration.


  • The first authority delegated to it by the statute is the right to issue an order. Such an order can be issued if the court believes that the company's activities have been or are being handled in a prejudicial manner. It has been stated that the company's dissolution will not be ordered rashly, but that the oppression and mismanagement will be halted.


  • The same clause also gives the tribunal authority over three matters involving

1. shareholders

2. The company, and

3. others


  • In the case of shareholders, a tribunal may require that shares of members be purchased by other members or by the corporation.


  • A tribunal can even order a reduction in the share capital or even impose restrictions on the sale of shares where the root cause of oppression and mismanagement is the coagulation of shares in the hands of a single or a few members.


  • In the case of the company's management, which is a critical part of the company, a tribunal may terminate or change agreements made between the company and management or agreements made between the company and any other individual.


  • In the case of the company's management, the tribunal can also expel the Managing Director, Manager, and Director, recover unfair gains made by such official and select another MD, manager, and director.


  • In such cases, the tribunal may appoint an individual to report to the tribunal on the practices of oppression and mismanagement by the management to prevent further oppression.


  • Finally, the tribunal has certain other powers, such as regulating the conduct of the company's affairs, restraining the transfer of any company property, and imposing costs. The tribunal must submit a copy of its order to the registrar, and if the order has not been finalized, it may issue an interim order to the registrar. Changes to the MOA (Memorandum of Association) and AOA (Article of Association) must be recorded and sent to the registrar. The penalty for breaking the law is set at 1 Lakh to 25 Lakh for a company and 25000 to 1 Lakh for an officer in default, with the latter also facing a 6-month prison sentence.


Oppression of the Minority

The management of a company is based on majority rule, but the interests of the minority cannot be fully ignored. When we speak about majority and minority, we don't mean numerical majority or minority, but rather majority or minority voting power. This distinction is made because a small number of shareholders may hold the largest shareholding, while the majority of shareholders may hold a very small percentage of share capital. If they gain control, the majority can do whatever they want with the company with almost no control or regulation, and even though they are challenged in the general meeting, they still come out on top due to their superior voting power. As a result, the new Companies Acts have a variety of provisions for the defense of minorities' rights in corporations.


Class action

Section 245 of the Company Act defines the term "class action." A class action is a case in which a group of plaintiffs who have a shared grievance against the defendant will bring a lawsuit against the company. Claimants may pool their money, such as attorney fees, to significantly reduce their litigation costs. Individuals with minimal resources see the financial scale applied to the class action suit as a saving grace.


A class-action suit is typically funded by the Investor Education and Protection Fund. This funding is contingent on the viability of reimbursement from the IEPF, which is typically regarded as a litmus test under the Company Act, 2013. The application is typically made when the conduct of the company's affairs is prejudicial to the interests of the company, its members, and its depositors. A class-action lawsuit may also be brought against the company's executives or auditors for deceiving the members by providing false reports. Under the Security Class Action, a group of people affected by modifications to the MOA/AOA must file a class action suit instead of filing a class action application.


Numbers of members/depositors eligible to file a class-action lawsuit

  • In the case of a company with a share capital, no less than 100 members of the company, or no less than 10% of the total number of members, whichever is less, can bring a class action suit, or any investor individually or jointly holding 10% of the share may bring a class action suit, provided that all such shareholder members have fully paid all share dues.

  • If the company does not have a share capital, a class action may be brought by at least one-fifth of the members.

  • A class action suit can be brought by not less than 100 depositors of the company or by a minimum of 10% of the total depositors, whichever is less, or a class action suit may be brought by any depositor separately or depositors collectively who hold 10% of the company's remaining deposit.


Conclusion

The ongoing financial collapse of big companies and corporations has caused those organizations to closely consider their conduct about the company's affairs. The weapon of class action suits, which are brought against management staff for injustice and mismanagement, has enhanced accountability. Under the law concerning oppression and mismanagement, individual shareholders and minority shareholders have been given the power to take action against the unjustified abuse of power and authority by managerial personnel. A person can apply with the tribunal informing it of oppression and mismanagement performed by any key personnel against him or any other shareholder of the company.

[i] (2005) 1 SCC 212

References

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