Minority Rights Against Oppression & Mismanagement Under Companies Act
Introduction
The provisions of the Companies Act 2013, read in correspondence with the rules of Corporate Governance along with SEBI LODR rules, provides for the protection of the Minority Interest. The rule of majority is the essential premise that governs the operation of shareholders’ democracy. However, it is also vital to guarantee that the majority’s authority is kept within appropriate limitations and does not lead to minority tyranny or firm mismanagement. As a result, minorities’ interests must be given a voice at the decision-making levels. Looking into the consideration of importance of the minority’s rights the provisions with respect to Oppression and Mismanagement came into the picture.
As per the Companies act the principle of rule by majority has been applicable to the management of the affairs of the companies. The members had the right 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.
It was provided under Section 397 of the Companies Act, 1956 which stated 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.
It is important to note that in the corporate world, all democratic decisions and management of a company are made with the majority rule which is deemed to be fair and justified. The majority rule of decision making, quite often than not overlooks the views of minority shareholders. A minority shareholder is a person in a company who does not enjoy much power in the management of the company and their interests are disregarded. Despite the provisions placed under Companies Act, 1956 of protection of the interest of minority shareholders, the minority shareholders found themselves incapable of exercising their rights due to lack of the resource or of time.
Therefore, this resulted in the majority domination and suppression of minority shareholders rights in the decision making and management of the company and to overcome this problem faced by the minority, the Companies Act, 2013 came up with the solution to tackle the problems which are usually faced by the minority shareholders.
CURRENT SITUATION AND APPLICABLE PROVISIONS
Section 241-246 of the Companies Act, 2013 lays down the provisions to effectively deal with oppression and mismanagement in a company
The principle of majority originated in the rule of Foss v Harbottle which provided that the individual shareholders have no cause of action in law for any wrongdoing by the corporation and the action brought about in respect of such losses shall be brought either by the corporation itself or through a derivative action. The Company Rule further protects the interests of the small shareholder director and ensures that the small shareholder director will not retire by the rotation and shall enjoy tenure of three years. However, the small shareholder director will not be further eligible for reappointment.
Ways to Protect the interest of minority Shareholders:
Provisions of Companies Act, 2013 deals with the situations where minority shareholders rights have been protected and the same can be divided into various major heads. Following are the ways to protect the rights of minority shareholders:
- Use of winding up action to protect minority shareholders: A minority shareholder can file a petition before the court to wind up the company if it is “just and equitable” to do this.
- Protecting minority shareholders under crowdfunding: This measure involves drafting new articles (AOA and MOA) and shareholders’ agreement (SHA) for a business with the motive to attract a number of small minority investors via crowdfunding.
- Resolving dispute over payment of dividends to minority shareholders: Where the majority shareholder thought they could force the minority shareholders to sell their shares by not paying a dividend. Minority shareholders in such cases can complain about the lack of dividends and if the company has sufficient distributable reserves to pay a dividend.
- Protection against dilution of shares of a minority shareholder: Unless the articles of association of a company have dis-applied a shareholder’s right of first refusal (also known as a pre-emption right), any new shares that are being issued must first be offered to the existing shareholders in such proportions as to preserve their percentage shareholding in a company.
JUDICIAL INTERVENTIONS
The tribunal is the special adjudicatory body set up under the Companies Act and Companies Rules, read in correspondence with the NCLT rules brought in order to deal with the matters pertaining to the Companies Act in order to get efficient and immediate relief. Section 242 deals with the powers of the tribunal in correspondence to the cases of oppression and mismanagement and protection of the minority. The Award pronounced by the National Company Law Tribunal can be appealed before the National Company Law Appellate Tribunal (“NCLAT”) The procedure and provision granting such right to appeal is provided under Section 421 of the Companies Act.
Landmark Cases
Tata Consultancy Services Limited v. Cyrus Investments Pvt. Ltd. & Ors., the Supreme Court (“SC”) made the following important observations:
- Removal from the position of directorship is not sufficient to make out a case of oppression and mismanagement, and the NCLT can dismiss such complaints.
- Winding up of a company upon finding of oppression/mismanagement can only take place when there is a justifiable lack of confidence in the conduct and management of the company’s affairs. A mere lack of confidence between majority and minority shareholders will not be sufficient.
- Sections 241 and 242 do not give the Tribunal powers of reinstatement.
- Court while deciding a case under Section 241 can only look at past conduct or conduct which is going on. An apprehension of future misconduct arising out of the Articles of the company cannot be looked into by the Tribunal under a Section 241 complaint.
Union of India v. Delhi Gymkhana Club, the petition for oppression and mismanagement was filed by the Government of India under Section 241(2). The NCLAT discussed the scope of Section 241(2) and made the following observations:
- When the Central Government files a complaint under Section 241(2), it is required to record its opinion as regards affairs of the company being conducted in a manner prejudicial to public interest, and recording of such opinion is a sine qua non for applying to the Tribunal under Section 241(2).
- The Tribunal cannot review sufficiency or otherwise of material based on which the government has formed its opinion, more so when no mala fide is attributed to the Central Government.
- The phrase ‘public interest’ cannot be stretched so far as to include all Indian citizens. It would suffice if the rights, security, economic welfare, health and safety of even a section of the society -like the candidates seeking membership from the category of common citizen- are affected notwithstanding the fact that they are only a few individuals.
CONCLUSION
Therefore, it can be concluded that the concept of independent directors provides an objective scrutiny of management, operations and decision making, the Boards of the companies could also incorporate the concept of representation of specific minority shareholders groups. The Company Law provides an option to companies to adopt proportional representation for the appointment of directors. It is essential to note that the reasons why there have been judicial prevention measures that have been taken in accordance with this mandate is due to the fact that management of the company is of the core importance when it comes to the working of the company.
Furthermore, it is essential to ensure that no member of the company is subjected to oppression. It has been noticed in the past that often the cases of Oppression and Mismanagement amounts to Corporate Scam, which cause a huge loss to not only the investors, but also shake the public in large, thereby the company law legislatures have made rules for the protection of minority in the cases of Oppression and Mismanagement.
Bibliography and References
https://www.mca.gov.in/MinistryV2/minority+interests.html
https://cleartax.in/s/opression-mismanagement
https://taxguru.in/corporate-law/minority-victim-protected-prevention-oppression-mis-management.html
https://blog.ipleaders.in/prevention-of-oppression-and-mismanagement/
https://www.indiafilings.com/learn/company-law-majority-rule-and-minority-rights/
https://legex.in/blog/minority-shareholder-protection-in-the-context-of-oppression-and-mismanagement
https://lawcorner.in/minority-shareholders-remedies-against-oppression-and-mismanagement/
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Written by- Aashi Narayan