Introduction:
If we talk about the definition of the company in a broad sense then it is a group of persons who have come together or who have invested money for some common purpose and have incorporated themselves into a distinct legal entity. Company is the combination of two distinct words- “com” and “pain”, the former meaning with or together and the latter meaning “bread”. The whole scheme of the Companies Act, 1956 is to ensure proper conduct of the affairs of the company in public interest and preservation of the image of the country in the public interest.
In the eye of the law, a company which is a legal institution comprising of individual running a business together is maintained by appropriate management and ownership. But as it is an institution run by individuals and humans are not infallible, errors are bound to be committed. It may happen that the interests of some members of the company are being overlooked and compromised by the action of directors or any authority which may lead to oppression and mismanagement.
The word oppression in common parlance refers to a situation or an act or instance of oppressing or subjecting to cruel or unjust impositions or restraints. As per Lord Keith,” Oppression means, lack of morality and fair dealings in the affairs of the company which may be prejudicial to some members of the company. The term mismanagement refers to the process or practice of managing ineptly, incompetently, or dishonestly.
Therefore to maintain a balance between the interests of various individuals involved in managing a company, Chapter XVI of Companies Act, 2013 deals with the prevention of oppression and management. Earlier in the Companies Act, there were well defined different sections of possible oppression and mismanagement in the company but now they have been combined in chapter XVI with sections 241-246 of the Act dealing with the same.[1]
Prevention of Oppression
Oppression refers to subjecting someone (generally a minority) to maltreatment and abuse and burdening them with troubles. It is the exercise of authority or power in a burdensome, cruel, or unjust manner.[2]
It was observed in Rao (V.M) v. Rajeswari Ramakrishnan[3] That the oppression complained off must affect a person in his capacity or character as a member of the company; harsh or unfair treatment in other capacities, e.g., as a director or a creditor is outside the purview of the section.
There must be ongoing acts constituting oppression up to the date of the petition. The events have to be considered not in isolation but as a part of a continuous story. It must be shown as a preliminary to the application of section 397 that there is just and equitable ground for winding up the company. The conduct complained of can be said to be “oppression” only when it could be said that it is burdensome harsh and wrongful; oppression involves at least an element of lack of probity and fair dealing to a member in matters of his proprietary right as a shareholder.
Acts which amount to Oppression
Attempt to force new and more risky objects upon an unwilling minority may in circumstances amount to oppression. This can be best illustrated with the case of Hindustan Coop Insurance Society Ltd, Re. Here, the life insurance business of a company was acquired by Life Insurance Corporation in1956 on payment of compensation. Directors, who had majority voting powers, refused to distribute this amount to shareholders. Rather, they passed a special resolution changing the objects of the company and use compensation money for new objects. This was held to be oppression. Here the majority forced the minority shareholders to invest money in different kinds of business against their will.
In an attempt to deprive a member of his ordinary membership rights is “oppression”, as in the case of Mohan Lal Chandumall v. Punjab Co. Ltd[4]. In the instant case, a public company doing forward contract business amended its articles of association under statutory directions, so as to deprive its non-trading members their right to vote, to call meetings, to elect directors and receive dividends. Court held that “the company is doing so trampled upon valuable rights of such members by the unjust exercise of its authority and power, and this amounted to oppression within Section 377. Suppressing notices of meetings to some of the members amounts to oppression. Casual omission may not be oppression, but systematic elimination of notices to some of the members is a serious deprivation of their most important right.
Prevention of Mismanagement (S. 398)
Section 398 provides for relief in cases of mismanagement. All the provisions are common with Section 397 except[5] The burden of satisfying Tribunal that the Company shall be wound up is not in Sec 398. The word “likely” is used in Sec398 (1) (b). So this section can be invoked not only when there is mismanagement but also when it is likely that affairs of the company will be conducted prejudicial to public interest or interest of Company on account of a material change in management or control of Company. So, Sec 397 is only curative, whereas Sec 398 is both curative and also preventive. Under Sec400, Tribunal shall give notice of every application made to it under Sec397 & 398 to Central Government and shall take into consideration the representations if any made by Government, before passing a final order.
Sec 398(1) (a) will not only take into account acts or conduct of company leading to mismanagement but also non- conduct of the affairs of the company which leads to prejudice caused to the company.[6]
Instances of Mismanagement
A very clear illustration of mismanagement under Section 398 appears in Rajahmundary Electric Corporation v. Nageshwara Rao.[7]Here, a petition was brought against a company by certain shareholders on the ground of mismanagement by directors. Court found that vice-chairman grossly mismanaged the affairs of the company and had drawn considerable amounts for his personal purposes, the shareholders outside the group of chairman were powerless to set matters right. This was held to be sufficient evidence of mismanagement. The court accordingly appointed two administrators for management of the company for a period of six months vesting in them all the powers of the directorate.
Where the managing directors of the Company continued in office after the expiry of their terms, without a meeting being held to re-appoint them prior to making a fresh application to Central Government under Sec 269, the continuation of office under these conditions was held to be mismanagement.- Sishu Ranjan v. Bholanath Paper House.[8]
Where bank account was operated by an unauthorized person. Kuldip Singh Dhillon v. Paragon Utility Financers Ltd. In this case, a certified copy of a resolution had been sent to the bank authorizing certain persons to operate the account. No such resolution was found recorded in the minutes book; rather the resolutions passed on the particular date and recorded in the minutes book; rather the resolutions passed on the particular date and recorded in the minutes book were different.
Sale of assets at low price and without compliance with the Act- One of the estates of a tea and rubber plantation company was sold by the direction at a low price to another tea plantation company without complying with the requirements of sec 293(1) which demands approval by shareholders and without giving adequate under Sec 173 and relevant information, giving delivery of possession before general body meeting and accepting consideration in installment. It was held that all these acts constituted mismanagement of affairs and sale was set aside. The Board of directors and the purchasers were held liable for the company’s losses and were required to submit an account of the income of the estate from the date of delivery of possession to the date of its actual return to the company- Malayalam Plantations Ltd., Re
Violation of statutory provisions and those of articles- Transferring shares without first offering them to the existing members in accordance with their rights under the articles, holding meetings without sending a notice to members; the issue of shares for consideration other than cash not represented by corresponding assets and burdening the company with an additional rental by shifting the company’s office- Akbarali Kalveri v. Konkan Chemicals Ltd.[9]
Other instances include Gross neglect of interest of the company by the sale of its only assets and total inattention thereafter to the affairs of the company; Violation of conditions of the company’s memorandum etc.
The famous Satyam fiasco is a very good example of mismanagement of funds of the company and fraudulent accounting, where the Chairman of Satyam Computer Services- Ramalinga Raju in his letter to the Board of Directors confessed to India’s biggest corporate fraud worth Rs 7,000 crore on the company.
Relief Available
Sec 397 and 398 give wide powers to the CLB to make any order with a view to bringing to an end the matters complained of or to prevent the matter complained of or apprehended. Section 402 provides for specific kinds of orders that can be passed. Few of them are as follows:
- Regulation of conduct of affairs
- Purchase of shares of members by other members/ company
- Consequential reduction on capital
- Termination or modification of contract with managing director, manager or director
- Termination of contract/ arrangement with other parties.
Punitive Measures
Sec 406 provides that provisions of sections 539 to 544 of the Act, as modified vide Schedule XI, are applicable to the proceedings under sections 397/398. These are the provisions providing for penalties and liabilities for falsification of books, frauds, and damages, etc. but these provisions are rarely invoked
Section 542 deals with fraudulent trading. In the winding up of proceedings, if it appears that certain persons have carried on the business of the company with the intent to defraud creditors of the company or any other persons, or for any fraudulent purpose, shall be personally responsible without any limitation of liability, for all or any of the debts or other liabilities of the company as Tribunal may direct. Application under 542 applies for application made under Sec 397 and 398.
References:
[1] S. P. Jain vs. Kalinga Tubes Ltd[1965], AIR 1535, 1965 SCR (2) 720
[2] Available at https://www.merriam-webster.com/dictionary/oppression, (last visited on 24 January, 2020)
[3] Rao (V.M) v. Rajeswari Ramakrishnan 1987 61 CompCas 20 Mad
[4] Mohan Lal Chandumall v. Punjab Co. Ltd 23 SCC 363
[5] Foss v. Harbottle(1843) , 67 ER 18
[6] Shanti Prasad Vs. Kalinga Tubes Ltd[1965], AIR 1535, 1965 SCR (2) 720
[7]Rajahmundary Electric Corporation v. Nageshwara Rao. 1956 AIR 213, 1955 SCR (2)1066
[8] Sishu Ranjan v. Bholanath Paper House 1983 53 CompCas 883 Cal
[9] Akbarali Kalveri v. Konkan Chemicals Ltd. 1997 88 CompCas 245 CLB
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