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PREVENTION OF OPPRESSION AND MISMANAGEMENT /
PROTECTION OF MINORITY RIGHTS
QUESTION BANK
1.
2.
3.
Write about minority right and oppression and mismanagement.
Define protection of minority rights.
Explain the term mismanagement. Who can apply? Powers of the
company, Court and of the Central Government.
4.
5.
Write in detail about prevention of oppression and mismanagement.
What remedies are available to the minority shareholders of company against
oppression and mismanagement?
6.
7.
The will of majority must prevent is the principle of company management.
Are there any exceptions to these rules?
Explain the doctrine of supremacy of majority with relevant case law and
exceptions to it.
8. “The will of the majority must prevail” is the principle of company management
are there any exceptions to this rule?
9.
Discuss the Majority Rule and Minority Rights critically in the case of
Oppression and Mismanagement.
SHORT NOTES
1.
2.
Foss V/ Horbottle
Protection of minority rights
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SYNOPSIS
I. General Rule / Principles laid down in Foss vs. Harbottle /Supremacy of majority-
Exceptions to the Rule of Supremacy of majority / Rule in Foss V/s
Harbottle
(1) Acts Ultra Vires
(2) Fraud on minority
(3) Acts requiring Special Majority
(4) Wrong Doers in Control/Oppression and Mismanagement
(5) Individual Membership Rights
II. Oppression and Mismanagement (Ss. 241 to 246)
(A)
Meaning of Oppression and mismanagement
(i)
Meaning of Oppression (S. 241 (1) (a))
(ii)
Meaning of Mismanagement (S. 141 (1) (b)
B] Who can apply for oppression and mismanagement (S. 244)?
C] Powers of Tribunal regarding the case of oppression (S. 242)
Class Action (S. 245)
A] Meaning of ‘Class action’
Who can file class action (S. 245 (1), (3))-?
B] Circumstances in which Class Action Suit can be filed?
C] Facts to be considered by the Tribunal on filing an application (S. 245 (4))
D] Procedure after admission of an application-
E] Effect of Order
F] Difference between application under S. 241 and class action udder S. 245
1) Who can file an application?
2) Against whom application can be filed?
3) Acts against which an application can be filed?
Generally, shareholders are the true owners of the company. The shareholders
of the company can exercise control over the affairs of the company through its general
meeting. In a meeting, the decision of the majority prevails. Shareholders, in a general
meeting, may bring an action against the directors for the wrong committed by them
against the company; however, they do not have any such right outside the meeting. In
such a case, the majority of the shareholders may decide the company's action in the
general meeting.
However, for a company to function smoothly, a proper balance between the
rights of the majority and the protection of the minority is essential.
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I] General Rule / Principles laid down in Foss V/s Harbottle
majority):-
(Supremacy of
The general rule is that individual shareholders do not have any right to bring
an action for the wrongful act of the company.
Members of the company have deemed to have agreed to submit to the will of
the majority, provided that the will is expressed in accordance with the law and the
articles.
In short, the Court does not, at the instance of the shareholders, interfere in the
Facts: The minority shareholders of Victoria Park Company alleged that the
company had a claim in damages against some of the directors because of the
fraudulent act of those directors. However, at the general meeting, the majority
resolved that no action should be taken against them. Foss and Harbottle, two of the
minority shareholders, took legal proceedings against directors to compel them to
make good losses to the company. The Court dismissed the action on the ground that,
as the acts of the directors were capable of confirmation by the majority of members,
the Court should not interfere.
The reasons for the rules were
(i)
Litigation in the suit of a minority of the members is futile if the majority
does not wish it.
(ii)
to avoid the suit being multiplied.
Thus, the Court held that:-
(i)
that for any wrong done to the company either by directors or by the outsider,
the proper plaintiff is the company itself, and
(ii)
where the alleged wrong is a transaction which the majority can affirm, it is
no use having litigation about it if the ultimate end of it is going to be
the wish of the majority.
The principle of Foss vs. Harbottle has been applied in various subsequent cases.
The same rule was also applied in Burland v/s Earle. In this case, the Court held that
if the directors invest the profit in certain ways instead of paying a dividend to the
shareholders, individual shareholders can't approach the Court for redress, and only
the company can bring an action.
The same principle is applied in a number of decisions in India.
1 (1843) 2 Hare 461
2 (1934) AIR Bom. 243
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Facts—Some of the company's directors brought a suit for a declaration that a
resolution passed by the Board of Directors appointing certain persons as the managing
agents was invalid on the ground of irregularities. It appeared that the majority of the
shareholders had twice approved the resolution with full knowledge of all the material
facts and alleged irregularities.
The court refused to declare the resolution invalid since the company could ratify it
even if it was irregular.
Exceptions to
the Rule of Supremacy of Majority / The rule in Foss V/s
Harbottle:-
There are, however, certain exceptions to the rule of the supremacy of majority;
in these cases, shareholders can sue to enforce obligations against the company, viz.
(1)
Acts Ultra Vires:-
Every shareholder can restrain the company from acting ultra vires. Where a
company's act is ultra vires, the supremacy of majority rule does not apply. The ultra
vires rule is a rule of capacity, and when "wrongdoers are in control" of the company,
they may be restrained at the behest of any shareholder.
For example, a shareholder can sue to recover the company's assets from any person
they are given in an ultra vires transaction and the directors responsible for the
transaction.
(2)
Fraud on minority:-
When the act done is a fraud on the minority, any shareholders can bring an
action against the same.
Held -The majority shareholders were not permitted to sacrifice their rights of one
company in favour of another company at the cost of the minority.
(3)
Acts requiring Special Majority:-
Where the Company's Act or articles require a special majority for the passing
of any resolution, the supremacy of majority rule does not apply.
The court held that a shareholder can restrain the company from acting on a
special resolution for which insufficient notice was given.
(4)
Wrong Doers in Control/Oppression and Mismanagement:-
Sometimes, an obvious wrong may be done to the company, but the controlling
shareholders would not permit an action to be brought against the wrongdoers because
3 (1874)
4 (1915) Ch. 503 (C.A)
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they, themselves, being the wrongdoers, would not enforce the company's rights. In
such a case, action would lay at the instance of the minority shareholders.
For example, where the majority shareholders have converted the company's
assets to their own use, the action by a minority in Court is valid.
(5)
Individual Membership Rights:-
The supremacy of the majority rule does not apply to individual membership
rights. The Company's Act and the articles of the company have conferred upon the
shareholder a number of rights, such as the right to vote, the right to have his vote
recorded, the right to stand as a director of the company at an election, the right to
petition for a compulsory winding-up, etc.; a majority's resolution cannot take out such
rights.
II]
Oppression and Mismanagement (Ss. 241 to 246):-
The rule of the majority's supremacy is not applicable in cases of oppression of
the minority and mismanagement.
(A)
(i)
Meaning of Oppression and mismanagement:-
Meaning of Oppression (S. 241 (1) (a)):-
we may define Oppression as-
(i) When the affairs of the company,
(ii) have been or are being conducted,
(iii) in a manner prejudicial or oppressive to the-
(a) member or members, or
(b) company.
Generally, ‘Oppression’ means “the company has exercised its authority in a
manner burdensome harsh and wrongful”.
Lord Cooper has defined the term “oppression” in the Scottish case of Elder V/s
the conduct complained of should, at the lowest, involve a visible departure from the
standard of fair dealing and a violation of the conditions of fair play, on principles of
which every shareholder who entrusts his money to the company is entitled to rely on”.
In other words, the conduct of the majority or minority shareholders may be
treated as ‘Oppression’ if it involves a visible departure from the standards of fair
dealing and a violation of the conduct of fair play, on principles of which every
shareholder entrusts his money.
5 (1952) S.C. 49 (Scotland)
6 A.I.R. 1965 S.C. 1535
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Facts—The defendant company was doing business in forwarding contracts
and altered its articles to deprive non-trading members of their right to vote, call a
meeting, elect directors, elect auditors, and receive the dividend.
H.C. of Punjab Held that- depriving members of their ordinary membership
rights is the worst form of Oppression.
(ii)
Meaning of Mismanagement (S. 142 (1) (b)):-
The Companies Act does not provide a definition of the expression
‘mismanagement’. Generally, when the affairs of the company are being conducted in
a manner prejudicial to the interests of the company or its members or against the
public interest, it amounts to mismanagement.
From (S. 142 (1) (b)) of the Companies Act, we may define “Mismanagement”
as follows-
(i)
When the material change (not being a change brought about by, or in the
interests of any creditors, including debenture holders or any class of
shareholders of the company).
(ii)
has taken place
(iii) in the management or control of the company,
(a) whether by an alteration in the Board of Directors, manager, or
in the ownership of the company’s shares or
(b) if it has no share capital in its membership or in any other manner
whatsoever, and that
(iv)
(v)
by reason of such change,
the affairs of the company will likely be conducted in a manner
prejudicial to the company’s interest or the interest of its members or any
class of members.
Facts- Two directors made a huge allotment of shares for a consideration other
than cash. It was found that a considerable amount was used for their personal use.
S.C. held that- It amounts to mismanagement of company affairs.
B]
Who can apply for oppression and mismanagement (S. 244)?
The following members of a company shall have the right to apply for
oppression and mismanagement-
a) In the case of a company having a share capital,-
7 (A.I.R. 1961 Punj. 485)
8 (AIR 1956, SC 213)
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(i)
not less than one hundred members of the company, or
not less than one-tenth of the total number of its members, whichever
is less, or
(ii)
(iii) any member or member holding not less than one-tenth of the
company's issued share capital (provided that the applying members
should have paid all calls and other sums due on his or their share).
b) In the case of a company not having a share capital, not less than one-fifth of the
total number of its members.
Provided that the Tribunal may, on an application made to it on this behalf,
waive all or any of the requirements specified above to enable the members to apply
for oppression and mismanagement.
It is explained that for the purpose of the application, where any share or shares
are held by two or more persons jointly, they shall be counted only as one member.
It is further explained that where any company member is entitled to apply under
S. 141, any one or more of them, having obtained the written consent of the rest, may
make the application on behalf and for the benefit of all of them.
c) The Central Government, if it is of the opinion that the company's affairs are being
conducted in a manner prejudicial to the public interest, may apply to the Tribunal.
d)
Class action (S. 245):- Class action can be taken if the requisite number of
members are of the opinion that the management or conduct of the affairs of the
company is being conducted in a manner prejudicial to the interest of the company or
its members or depositors. (discussed in the note below).
C]
If on any application made to it under S. 241, the Tribunal is of the opinion-
(i) that the company’s affairs have been or are being conducted in a manner prejudicial
or oppressive to any member or members or prejudicial to the public interest or in
a manner prejudicial to the interest of the company; and
(ii) 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 on the
ground that it was just and equitable that the company should be wound up,
-the Tribunal may, with a view to bringing 6to an end the matters complained
of, make such order as it thinks fit.
Thus, the Tribunal has all those powers it thinks fit to end the matter complained
about.
9 According to S. 2 (90) of the Companies Act 2013 “Tribunal” means the National Company Law Tribunal
constituted under S. 408.
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Without prejudice to the above general powers, the Tribunal may make
the following orders also-
(a) the regulation of the conduct of affairs of the company in future.
(b) The purchase of shares or interests of any member of the company by other
members thereof or by the company.
(c) In the case of a purchase of its shares by the company as aforesaid, the
consequent reeducation of its share capital
.
(d) Restrictions on the transfer or allotment of shares of the company.
(e) The termination, setting aside, or modification of any agreement
,
howsoever arrived at, between the company and the managing director, any
other director or manager, upon such terms and conditions as may, in the opinion
of the Tribunal, be just and equitable in the circumstances of the case.
(f) The termination setting aside, or modification of any agreement between the
company and any person other than those referred to in clause (e),
(g) the setting aside of any transfer, delivery of goods, payment, execution or
other act relating to property made or done by or against the company within
three months before the date of the application under this section, which would,
if made or done by or against an individual, be deemed in his insolvency to be
a fraudulent preference.
(h) removal of the managing director, manager or any of the directors of the
company
Provided that no such agreement shall be terminated, set aside or modified
except after due notice and after obtaining the consent of the party concerned.
(i) Recovery of undue gains made by any managing director, manager or director
during the period of his appointment as such and the manner of utilisation of the
recovery, including transfer to Investor Education and Protection Fund or
repayment to identifiable victims.
(j) The manner in which the managing director or manager of the company
may be appointed subsequent to an order removing the existing managing
director or manager of the company made under clause (h).
(k) appointment of such number of persons as directors, who may be required
by the Tribunal to report to the Tribunal on such matters as the Tribunal may
direct.
(l) Imposition of costs as may be deemed fit by the Tribunal.
(m) any other matter for which, in the opinion of the Tribunal, it is just and
equitable that provision should be made.
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D] Consequences of termination or modification of certain agreements(S.243):-
Where an order terminates, sets aside or modifies an agreement as above-
a) No claim against the company- such order shall not give rise to any claims
whatever ageist the company, by any person, for damages or compensation, for
loss of office or in any other respect either in pursuance of the agreement or
otherwise.
b) No reappointment without Tribunal leave—no managing director or other
director or manager whose agreement is so terminated or set aside shall, for a
period of five years from the date of the order terminating or setting aside the
agreement, without the leave of the Tribunal, be reappointed or act as the
managing director or other director or manager of the company.
Punishment- Any person acting as a manager, director, etc., in contravention of the
Tribunal’s order, shall be punishable with a fine which may extend to five lakh rupees.
The provisions of S. 337 to 341 also apply to this topic.
Class Action (S. 245).
Class action under S. 245 is a new concept introduced for the first time under
the present Companies Act, 2013. The importance of the concept of a ‘class action suit
was realised after the Satyam Computer Services scam in 2006. The investors in India
could not succeed in the matter because there was no provision for a ‘Class action suit';
however, U.S. investors were fortunate enough to recover the investment.
A]
Meaning of ‘Class action’:-
A ‘Class action suit’ refers to a lawsuit that allows a large number of people
with a common interest in a matter to sue or be sued as a group. Thus, it is a procedural
device enabling one or more plaintiffs to file and prosecute litigation on behalf of a
larger group or class, wherein such class has common rights and grievances.
Who can file class action:-
The following can bring class action-
1. Member or members or any class of them-
a) in the case of the company having a share capital-
i.
not less than 100 members of the company, or
not less than 10% of the total number of its members, whichever is
less, or
ii.
iii.
any member or members singly or jointly not holding less than 10%
of the company's issued share capital.
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However, the applicant or applicants should have paid all calls and
other sums due on his or their share.
b) in the case of a company not having a share capital, not less than one-fifth
of the total number of its members.
2. Depositors or depositors or any class of them,
a) not less than one hundred depositors of the company, or
b) not less than 10 % of the total number of its depositors, whichever is less.
Such action or application must be brought or filed before the National
Company Law Tribunal.
3. Person, Persons or any association of persons representing the persons affected
by any act or omission (subject to the compliance of this section) (S. 245 (10)).
B]
Circumstances in which Class Action Suit can be filed?
Members, depositors or any class of them (as discussed above) may file a class
action suit if they are of the opinion that the management or conduct of the affairs of
the company are being conducted in a manner prejudicial to the interests of the
company or its members or depositors, seeking all or any of the following orders,-
a) to restrain the company from committing an act that ultra vires the articles
or
memorandum of the company.
(b) to restrain the company from committing a
breach of any provision of the
company’s memorandum or articles;
(c) 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 misstatement to the members or depositors;
(d) to restrain the company and its directors from acting on such a resolution
;
(e) 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;
(f) to restrain the company from taking action contrary to any resolution passed
by the members;
(g) to claim damages or compensation or demand any other suitable action from
or against-
(i) 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;
(ii) the auditor , including the 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
(iii) any expert or advisor or consultant or any other person for any incorrect or
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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;
(h) to seek any other remedy as the Tribunal may deem fit.
Thus, the class action suit can lie against the company, director, Auditor, Audit
firm, expert, advisor, consultant, or any other person. However, no class action suit
shall lie against the Banking company (S. 245 (9)).
C]
Facts to be considered by the Tribunal on filing an application (S. 245 (4))
In considering an application, the Tribunal shall take into account the following
facts-
a) whether the member or depositor is acting in good faith in making the
application for seeking an order,
b) 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)
above.
c) 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.
d) 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.
e) 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
(i) authorised by the company before it occurs, or
(ii) ratified by the company after it occurs;
f) 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.
On confirmation of the above facts, the Tribunal gets the application admitted.
Procedure after admission of application:-
D]
If an application is admitted, the Tribunal shall consider the following-
a) issue a public notice to all the members or depositors of the class as may be
prescribed.
b) Consolidation of applications-
All similar applications prevalent in any jurisdiction should be
consolidated into a single application, and the class members or depositors
should be allowed to choose the lead applicant; in the event, the members or
depositors of the class are unable to come to a consensus, the Tribunal shall
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have the power to appoint a lead applicant, who shall be in charge of the
proceedings from the applicant’s side;
c) Two class action applications for the same cause of action shall not be allowed.
d) The person responsible for bearing the cost of litigation.
The company or any other person responsible for an oppressive act shall defray the
cost or expenses connected with the application for a class action.
Effect of Order:-
E]
Any order of the Tribunal affects as follows-
a) Any order passed by the Tribunal shall be binding on the company and all its
members, depositors, and auditors, including audit firm experts, consultants,
advisors, or any other person associated with the company.
b) Penalty- (i) Any company which fails to comply with an order passed by the
Tribunal under this section shall be punishable with a fine which shall not be
less than five lakh rupees but which may extend to twenty-five lakh rupees and
(ii) every officer of the company who is in default shall be punishable with
imprisonment for a term which may extend to three years and with fine which
shall not be less than twenty-five thousand rupees but which may extend to one
lakh rupees.
c) Frivolous applications:-
Where any application filed before the Tribunal is found to be frivolous or
vexatious, it shall, for reasons to be recorded in writing, reject the application
and make an order that the applicant shall pay the opposite party such cost, not
exceeding one lakh rupees, as may be specified in the order.
F]
Difference between an application under (S. 241) and class action under
(S. 245):-
There are the following points of difference between these two, viz.
1)
Who can file an application?
Members of the company file applications under S. 241. Whereas a class
action suit under S. 245 can be filed by the members as well as by the depositors.
2)
Against whom can the application be filed?
An application under S. 241 is to be filed against the company. Whereas a
class action suit can be filed against the company, directors, auditor or audit firm,
expert or advisor, consultant or any other person.
3)
Acts against which an application can be filed?
An applicant under S. 241 can be filed against any current or past activity or to
prevent the recurrence of the act. Meanwhile, class action under S. 245 can be taken
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against past, current or future acts.
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