Posted by: CS Shilpi Thapar
A company is an association of individuals working with a common aim to achieve the purpose of the formation of the company and to earn maximum profit. There are difference of interests and opinions among individuals which results in forming of majority and minority group. These groups requires proper balancing under strict judicial securitization so that position of any of the group is not misused or abused. In today’s scenario , this topic has become a significant part of the companies law and practice.
How do companies run?, Who runs them?, Whether majority shareholders or directors run them? How majority oppress the minority? These questions needs to be answered for understanding the concept of Oppression and Mismanagement.
The Oppression of small/minority shareholders take place by majority shareholders who controls the company. It is understood as an act or omission on the part of management which implies majority, who holds or controls the management. The law, however, has not defined what is oppression but certain prominent case laws has defined the term “Oppression.”
Similarly , mismanagement is not uncommon in companies. It means mismanagement of resources by following means:
- Absence of basic records of the company
- Drawing considerable expenses for personal purposes by directors/management of the company.
- Not filing documents with The Registrar of Companies relating to compliances under The Companies Act,1956
- Misuse of companies finances/funds
- Sale of assets at very low prices
- Violation of provisions of law and memorandum or article of association of the company.
- Making Secret Profits
- Diverting company funds for personal use of directors
- Continuation in office by director beyond the specified term and not holding any qualification shares.
The acts of mismanagement may not necessarily be of majority but can be by any person in the day to day management of the company.
An analysis of the 50 Top Economic Times ranked companies reveals that in India nearly 50% are still family owned and if public sector undertakings are excluded , the percentage is approx.63%.To name a few are Wipro, Reliance Industries, Satyam Computer Services, Ranbaxy Laboratories, HCL Technologies, Dr. Reddy’s Laboratories, Hero Honda Motors, Zee Telefilms, Bajaj Auto, TATA Motors, Grasim, Nirma, Dabur, Gujarat Ambuja Cements, Sun Pharmaceuticals Laboratories.
The percentage of family owned business is increased in India as entrepreneurship in early years was highly personalized and did not get corporatised. The family owned concerns are almost dominating the business scene and professional management rarely exists.
Oppression and Mismanagement is less seen in professionally managed companies where manager work for “Shareholders” and not for particular group of members.
This concept is more common in family owned concerns where family members owned and developed entire business over time. These concerns are not professionally managed and system of functioning is very personal. The controlling member of the family curbs the whole family holdings by means of issuing new shares or transfers in his favor or reconstitute the board in such a manner so that other family member are alienate resulting to oppression of other family members and mismanagement of the company.
Oppression and Mismanagement is governed by section 397/398 of The Companies Act,1956. It plays a crucial role in prevention and remedying the oppression and mismanagement. The small and medium sized companies especially family owned are most affected as the father wants his son to takeover certain business irrespective of the other family members which leads to oppression in some form or other and most of these disputed lands for remedy before courts/company law board.
To protect the interest of minority shareholders, the companies act,1956 defines certain rights as enumerated below:
|The Rights of Minority Shareholders:|
| The leading cases quoted by Indian Laws where minority shareholders rights was protected successfully are:
a) Meyer v. Scottish Cooperative Wholesale Society Ltd. (1954) SC 381.
b) Elder v. Elder and Watson (1952) SC 49.
c) In Re H R Harmer Ltd. (1959) IWLR 62.
d) Five Minute Car Wash Services Ltd. (1966) IWLR 715 Ch D.
e) In Re Jermyn Street Turkish Baths Ltd. (1971) WILL 1042 (CA).
f) Yenidge Tobacco Co. Ltd. (1971) I WLR 1042 (CA)
g) Loch V. John Blackwood Ltd. (1924) AC 783.
h) Clemens v. Clemens (1976).
i) Daniels v. Daniels (1978).
j) Ebrahimi v. Westbourne Galleries Ltd. (1973) AC 360.
Section 397, 398 and 399 of the Companies Act 1956 covers the remedies for preventing Oppression and Mismanagement:
Application to Company Law Board for relief in cases of oppression:
1. Any members of a company who complain that the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members (including any one or more of themselves) may apply to the Company Law Board for an order under this section, provided such members have a right so to apply in virtue of section 399.
2. If, on any application under sub-section (1) the Company Law Board is of opinion (a) That the company’s affairs are being conducted in a manner prejudicial top public interest or in a manner oppressive to any member or members: and
(b) 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 Company Law Board may with a view to bringing to an end the matters complained of make such order as it thinks fit.
Application to Company Law Board for relief in cases of mismanagement:
1.Any members of company who complain-
(a) That the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner prejudicial to the interests of the company, or
(b) That a 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 of control of the company whether by an alteration in its Board of Directors, or managers 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 public interest or in a manner prejudicial to the interest of the company.
may apply to the Company Law Board for an order under this section, provided such members have a right so to apply in virtue of section 399.
2.If, on any application under sub-section (1) the Company Law Board is of opinion that the affairs of the company are being conducted as aforesaid or that by reason of any material change as aforesaid in the management or control of the company, it is likely that the affairs of the company will be conducted as aforesaid, the Company Law Board may, with a view to bringing to an end or preventing the matters complained of or apprehended, make such order as it thinks fit
Right to apply under sections 397 and 398 –
(1)The following members of a company shall have the right to apply under section 397 or 398: –
(a) in the case of a company having a share capital, 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 any member or members holding not less than one-tenth of the issued share capital of the company, provided that the applicant or applicants have paid all calls and other sums due on their shares;
(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) For the purposes of sub-section (1), where any share or shares are held by two or more persons jointly, they shall be counted only as one member.
(3) Where any members of a company are entitled to make an application in virtue of sub-section (1), any one or more of them having obtained the consent in writing of the rest, may make the application on behalf and for the benefit of all of them.
(4) The Central Government may, if in its opinion circumstances exist which make it just and equitable so to do, authorize any member or members of the company to apply to the Company Law Board under section 397 or 398, notwithstanding that the requirements of clause (a) or clause (b), as the case may be, of sub-section (1) are not fulfilled.
(5) The Central Government may, before authorizing any member or members as aforesaid, require such member or members to give security for such amount as the Central Government may deem reasonable, for the payment of any costs which the Company Law Board dealing with the application may order such member or members to pay to any other person or persons who are parties to the application.
The true test of corporate governance is the manner in which the majority addresses minority interests. The corporate democracy is reckoned with the no. of shares one has, and not with the no. of individuals involved. Due to lack of shareholder activism in India especially of minority shareholders, oppression and mismanagement is increasing day by day reducing the importance of good corporate governance in the system. Today, a very large number of cases dealt at Company Law Board are pertaining to oppression and mismanagement. The Law must balance the need for effective decision making on corporate matters on basis of consensus without permitting persons in control of company.
To conclude with a famous quote of George Washington “ It is better to be alone than in bad company.”