Oppression
& mismanagement: ambit of civil Court AND NCLT
The
oppression and mismanagement of minority shareholder has often been a cause of
concern and in the Companies Act 1956 the relevant sections were section
397-399, and the new Companies Act 2013 the relevant Sections are Sections
241-246.
What may constitute “oppression and
mismanagement” in conducting affairs of the company cannot be put to a straight
jacket formula and only for illustrative purposes some issues could fall under
that bracket:
(i)
The act to cause detriment-whether
omission or commission;
(ii)
Usurping the office of Directors
(iii)
Relegating interest of minority
shareholder to lurch
(iv)
The acts which may be illegal, but
carried out in a mala fide pursuit to cause detriment on minority shareholder
(v)
The judgment which may belie commercial
wisdom, though, may not be actuated with malice;
(vi)
Siphoning of funds of the company
(vii)
Efforts of change in shareholding
composition, numbers and percentage of shareholders
(viii)
Secret investments to elicit wrongful
gains
(ix)
Undisclosed loan to Directors
(x)
Ousting from management;
(xi)
Issuing right offer with a view to
cause hardship on minority shareholders
(xii)
Refusal of transfer of shares
(xiii)
Breach of shareholders agreement
(xiv)
Excessive payment of salaries to
directors
The Companies Act 2013 has
replaced the Companies Act 1956. The old Act did not provide the
constitution of the Company Law Tribunal, and thus, all disputes under
the old Act were subject to the jurisdiction of the Civil Court.
However, the Act of 1956 was amended to constitute a Company Law Tribunal to
try the disputes enumerated in the notification. The amendment did not provide
for exclusive jurisdiction of the Company Law Tribunal. Hence,
the jurisdiction of the Civil Court was not ousted in the absence of a
specific provision to that effect. However, the Section 430 of Companies Act
2013 came into force only on 1 June 2016, whereby the National Company Law
Tribunal came to be constituted. The section 430 of the new Act specifically
bars the Civil Court's jurisdiction to entertain any suit or proceedings
concerning any matter which the Tribunal or Appellate Tribunal is empowered to
decide by or under said Act. In view of such a specific ouster, the Civil Court's
jurisdiction to decide issues raised in the suit is barred.
Section 430 of the Companies Act 2013 is reproduced as under:
430.
Civil Court not to have jurisdiction.
“No civil
court shall have jurisdiction to entertain any suit or proceeding in respect of
any matter which the Tribunal or the Appellate Tribunal is empowered to
determine by or under this Act or any other law for the time being in force and
no injunction shall be granted by any court or other authority in respect of
any action taken or to be taken in pursuance of any power conferred by or under
this Act or any other law for the time being in force, by the Tribunal or the
Appellate Tribunal”.
Whether the expression
'member' occurring in Sections 241 and 242 shall have wider meaning to include
any person who alleges mismanagement or oppression. A shareholder or a member
as defined under Section 2 (55) of the Act.
"2(55).
"member", in relation to a company, means--
(i) the subscriber to the
memorandum of the Company who shall be deemed to have agreed to become member
of the Company, and on its registration, shall be entered as member in its
register of members;
(ii) every other person who
agrees in writing to become a member of the Company and whose name is entered
in the register of members of the Company;
(iii) every person holding
shares of the Company and whose name is entered as a beneficial owner in the
records of a depository;
The recitation of Sections 241-242 of the Companies Act 2013 may
also be perused before going further:
241. Application
to Tribunal for relief in cases of oppression, etc.
(1) Any member of a company who complains
that--
(a) the affairs of the Company have been or are being conducted in
a manner prejudicial to public interest or in a manner prejudicial or oppressive
to him or any other member or members or in a manner prejudicial to the
interests of the Company; or
(b) 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, has taken place in the management or control of
the Company, whether by an alteration in the Board of Directors, or manager, or
in the ownership of the Company's shares, or if it has no share capital, in its
membership, or in any other manner whatsoever, and that by reason of such
change, it is likely that the affairs of the Company will be conducted in a
manner prejudicial to its interests or its members or any class of members, may
apply to the Tribunal, provided such member has a right to apply under Section
244 for an order under this Chapter.
(2) The Central Government, if it is of the opinion that the
affairs of the Company are being conducted in a manner prejudicial to public
interest, it may itself apply to the Tribunal for an order under this Chapter.
Provided that the
applicants under this sub-section, in respect of such Company or class of
companies, as may be prescribed, shall be made before the Principal Bench of
the Tribunal which shall be dealt with by such Bench.
(3) Where in the opinion of the Central Government there exist
circumstances suggesting that--
(a) any person concerned in the conduct and management of the
affairs of a company is or has been in connection therewith guilty of fraud,
misfeasance, persistent CRA141-2022-J.F.doc negligence or default in
carrying out his obligations and functions under the law or of breach of trust;
(b) the business of a company is not or has not been conducted and
managed by such person in accordance with sound business principle or prudent
commercial practices;
(c) a company is or has been conducted and managed by such person
in a manner which likely to cause, or has caused, serious injury or damage to
the interest of the trade, industry or business to which such Company pertains;
or
(d) the business of a company is or has been conducted and managed
by such person with intent to default its creditors, members or any other
person or otherwise for a fraudulent or unlawful purpose or in a manner
prejudicial to public interest, the Central Government may initiate a case
against such person and refer the same to the Tribunal with a request that the
Tribunal may inquire into the case and record a decision as to whether or not
such person is a fit and proper person to hold the officer of director or any
other office connected with the conduct and management of any company.
(4) The person against whom a case is referred to the Tribunal
under sub-section (3), shall be jointed as a respondent to the application.
(5) Every application under
sub-section (3)--
(a) shall contain a concise statement of such circumstances and
materials as the Central Government may consider necessary for the purpose of
the inquiry; and
(b) shall be signed and verified in the manner laid down in the
Code of Civil Procedure, for the signature and verification of a plaint in a
suit by the Central Government
FEATURES of 2013 Act
In Tata Consultancy Services Ltd vs Cyrus Investments
Pvt Ltd & Ors- Civil Appeal No. 440-441/2020 The Supreme Court has
illustrated the broad features in the 2013 Act has brought about a lot of drastic changes and some of the
salient features of the 2013 Act in para no. 19.14. The
same are:
(i)
Every company is required to have at least one Director who has stayed in India for a total period of not
less than 182 days in the previous calendar year.
(ii) Every listed Public Company is required to have at
least one third of the total number of
Directors as independent Directors. (iii) Some Public Companies
are required to have at least two independent Directors.
(iv) Every
independent Director should give a declaration at the first Board meeting that he meets the
criteria of independence.
(v) Certain types of Public Companies are required to
appoint at least one woman Director.
(vi)
Every listed company may appoint a small shareholders’ Director,
to be elected by the small
shareholders. (vii) The report of the Board of Directors should include
a Directors’ Responsibility Statement,
covering certain aspects relating to accounting standards, accounting
policies and maintenance of accounting records. (viii)
Directors of a company are obliged to
perform certain duties, such as duty to act in good faith, duty to
exercise reasonable care, skill, diligence and independent judgments etc.
(ix) A
detailed Code of conduct for independent Directors’ is stipulated
in Schedule IV. This includes
guidelines for professional conduct, roles and functions
and duties. (x) The resignation or removal of independent Directors
should be in accordance with the procedure prescribed.
(xi) Independent Directors are required to hold at least
one meeting in a year without the attendance of non independent Directors and members
of management and they are entitled in this meeting to review the
performance of non independent Directors and the Board
as a whole. They can even review the performance of the
Chairperson of the Company and assess the quality, quantity and timelines of flow of information between
the management and the Board.
(xii) The
Board of Directors of certain companies are
required to have certain Committees such as (1) Audit
Committee, (2) Nomination and Remuneration Committee and (3)
Stakeholders Relationship Committee.
(xiii) A separate section on Corporate Governance is to be
included in the Annual reports of certain companies, with a detailed
compliance report on Corporate Governance.
(xiv) After the advent of the Companies Act, 2013, SEBI
Regulations were also Regulations were also amended, inserting Clause 49
in the listing Agreement, to enforce compliance with
Corporate Governance standards.
The following table may also simplify the issue:
|
Section of
the Companies Act, 1956 |
Section of
the Companies Act, 2013 |
Remark |
|
|
Section 397,
398 and 401 to 404 |
Section 241 |
Application before tribunal (Now NCLT) for oppression &
mismanagement |
|
|
Section 399 |
Section 244 |
|
|
|
Section 402 |
Section 242 |
|
|
|
Section 404 |
Section 243 |
|
|
|
Section 406 |
Section 247 |
|
Law
The
Bombay High Court in a matter captioned as Sardesai Engineering Private
Limited vs Mahadeo Appasaheb Jagtap And Ors CIVIL REVISION
APPLICATION NO.141 OF 2022 (decided on 22 January, 2024 has held as
under:
“26. The
Division Bench of this Court in Killick
Nixon was considering whether a member of a company who had transferred his
shareholding to another person but whose name continues to be on the register
of members of the Company can maintain a petition under Section 397 and
398. In the said context, the Division Bench held that Section 397, in
plain language, states that a petition can be filed by any member or member/s
of the Company. They can file such petitions if the affairs of the Company are
being conducted in a manner prejudicial to the public interest or in a manner
that may be oppressive to any member. Such persons who are being oppressed may
or may not include petitioning members. A member of the Company can file a
petition under Section 398. The Division Bench held that the Companies Act does
not contemplate a member with no share in the Company. It is also held that the
Company recognises only the person who is a member as a shareholder. In other
words, the rights that may exist between the Company and its members or
shareholders can be exercised only by members. Similarly, the Company can only
look to its members to discharge their obligations to the Company as its
shareholders”.
It also emerge thus if a plaintiff
files a suit seeking a declaration praying that the one of the defendant had
ceased to be a director of the company and for declaration that meeting held
were illegal and non-est. The Civil Court may return the plaint. As has happened
in some cases. In similar situation, in Sardesai
Engineering (Supra), on a reference made by the Single Judge of the Bombay
High Court, Division Bench of the said Court held that Companies Act 1956 has
not prescribed the forum where reliefs in relation to irregularities in holding
meeting or cessation of office of director can be decided. In the absence of
such prescription, ordinary Civil Courts were held to be competent to deal with
directorial disputes.
It may appear that under
the provisions of the Companies Act 1956, the words 'member' and
'shareholder' can be read as synonymous Act of 1956 does not contemplate a
member who has no share in the Company; The directorial disputes with reference
to the Companies Act 1913 need to be decided by ordinary Civil
Courts. Under Indian Companies Act 1913 the words 'member,
'shareholder' and 'holder of a share' have been used interchangeably. The
expression 'shareholder' or 'holder of a share' in the Act of 1913
denotes no other person except a 'member'.
In Sardesai Engineering (Supra) it is held as under:
41. An individual
membership right is a right to maintain himself in full membership with all the
rights and privileges appurtenant to that status. This right implies that
individual shareholders can insist on strict adherence to legal Rules. It is
the membership right that confers a particular right to issue in respect of
wrong done to him individually by the Company. It is a member entitled to
enforce his individual rights against the Company conferred under the
provisions of the Companies Act Prima facie, therefore, it appears that if
a person other than a member of a company is CRA141-2022-J.F.doc conferred
with the right to approach the National Company Law Tribunal or National
Company Law Appellate Tribunal alleging mismanagement, it would render part
(any member) of Section 241 of Act of 2013 as otiose. The expression
"any member" cannot be interpreted to mean any person.
42. Applying the analogy adopted
in Seven Trent Water Purification Vs Chloro Controls (India) Pvt Ltd (2008) 4 SCC 380 as
regards Section 241, the provision starts with the specific expression
"any member". Such words cannot be interpreted to mean a person other
than a member. The provision of a statute conferring a right in favour of
member as a 'person' defined in a statute cannot be expanded beyond such
specific expression unless the case of "context otherwise requires"
is made out. The context justifying departure from the definition needs to be
specifically made out by a person urging the Court to adopt such an approach”.
43. The interpretation of
the provision to Section 244 authorises the Tribunal to waive all or
any of the requirements specified in clauses (a) and (b), but such exercise of
waiver is to enable "members" to apply under Section 241.
Therefore, even the proviso to Section 244 does not create a right
for anyone other than the 'member' to apply under Section 241. Moreover,
clauses (a) and (b) of Section 241 do not include the expression
"any member" of a company who complains "under sub-section (1)
of Section 241 ". Therefore, the mandate of Section 241 requires
a person to be the 'member' for invoking the power of a Tribunal.
The question was therefore
framed by the ld single judge in Sardesai Engineering (Supra)for
reference to the larger bench. The question of reference are as under:
"Whether an application under Section 241 at the
instance of a person other than a member of a company alleging mismanagement
and oppression is maintainable before the National Company Law Tribunal or
National Company Law Appellate Tribunal for reliefs under Section 242 of
the Companies Act 2013?"
In Cyrus Investments Pvt. Ltd. & Anr Vs Tata Sons Ltd- NCLAT against
order passed by NCLT has held that the removal and other actions taken
against appellant was declared illegal and hence was set aside and the other
respondent and nominee of Tata Trust was restrained from taking decision in
advance that may presuppose majority decision of the Board of Directors or in
the Annual General Meeting. Cyrus Mistry was restored as Chairman of Tata Sons
Ltd. Moreover, majority shareholders were directed to consult minority
shareholders for appointments of Chairman /Executive Directors. However,
Supreme Court had reversed the decision of NCLAT as illustrated above.
Therefore, the issue as to whether a Director for its removal may approach
NCLT or a civil court remains a grey area, though, the basic gravamen in this regard
is that directorial issue could be dealt with by a civil court and any member/shareholder
if raises the issue of oppression and mismanagement in the affairs of the
company and if minority shareholders are treated despicably and detriment is
caused and likely to be caused to such minority shareholder, then, the jurisdiction
of civil court shall be barred and only the national Company Law Tribunal Shall
be empowered to deal with such issue, as the same squarely falls within its
ambit under section 241-244 of the Companies Act 2013.
--------
Anil K Khaware
Founder & Senior Associate
Societylawandjustice.com
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