PREVENTION OF OPPRESSION & MISMANAGEMENT

Foss v. Harbottle (Majority rule)

Directors wrongly diverged funds of a project. Act ratified by majority SH in AGM. Foss, a
minority shareholder approached court. It was held that if ratified by majority, even wrong
acts are allowed.
Limited application of ‘majority rule’ in India.

RELEVANT LEGAL PROVISIONS

1. S.241- Right for prevention of oppression and mismanagement.
2. S.242- Powers of tribunal
3. S.244- Who may exercise that right?
4. S.245- Class action.

MAINTAINABILITY OF PETITION
Cyrus Investment pvt ltd v. Tata Sons case. CA Sundaram v. Dr Singhvi
Mistry removed from board in October 2016. To ratify this removal, EGM was convened. He
went to NCLT. Now he also asked for injunction. That time NCLT did not have power.
Whether his petition u/s 241 is maintainable as per S.244?
S.244 – in case company having share capital, minimum 100 members or 10% of total
members whichever is less, or any member (or members jointly) holding 1/10th of issued
share capital. In case company does not have share capital, minimum 1/5th of total members.
In this case, Mistry said he holds 18.37% of shares in Tata sons, and therefore is eligible to
file. Tata contended that this does not come within ‘issued capital’. Mistry said that issued
share capital is not a different category, it includes ‘relevant share capital’.
NCLAT held in favour of Tata that issued means issued to public for raising funds, and
therefore means equity. So cannot be maintainable.
S.244 provides that NCLT may waive these conditions in extra-ordinary circumstances.
On waiver, it was argued by Mistry that market capitalisation of company is 6 lakh and
Market value of shares is 1 lakh crore. He had significant interest in company and was
removed without following proper procedure. NCLAT allowed the waiver, and is now
hearing the matter for oppression mismanagement.
Bhagwati Sponge pvt ltd. In Re Kol CLB
Petitioner did not have 10% equity. Held not maintainable. Question of waiver not even
raised.
S. Ahamed meeran v. Ronny George, 2019 NCLAT
Petitioner explained that out of 10 members, 8 hold more than 1/10th share. Only 2 members
hold less than 1/10th share so waiver. NCLT gave. NCLAT overruled- not extraordinary
circumstance.
Nasik Dicesan Trust Association & ors v. Uday Daniel Khare & ors, 2018 NCLAT
Respondent is S.8 company limited by guarantee. Object was charitable activities for
Christians. In NCLT, petitioner claimed that 12 directors were removed in one AGM, which
is fake. Within one month, new ones are appointed in another fake AGM. Company
contended that the petition has never been a member so not eligible. Petitioner shows minutes
of 2014 AGM that shows sign of him in minutes. NCLT denied to give waiver, not
extraordinary. NCLAT held that this is sceptical. How did number of members reduce from
49 to 8 in a year! This is an extra-ordinary situation- grant waiver.
Amalgamation ltd. v. Sankarsundaram, 2012 Mad CLB
Petitioner was member in holding company, filed for O&M in subsidiary company for
serious fraud. CLB held that you are not member in subsidiary so can’t file.
Arjandas Khatri v. Pure Dharma ltd, 2018 NCLT Ahmedabad
A director was removed arbitrarily and he filed for O&M. He had just 2% equity. He had
consent letter of 4 shareholders having 11% stake, that go file for O&M. NCLT took into
consideration that there was no signature of shareholders or any affidavit. So, consent letter
cannot be taken into account and petition not maintainable. Waiver was not argued.

WHAT IS OPPRESSION & MISMANAGEMENT

S.241 explains what is oppression and mismanagement.
Oppression: The affairs of the company have been conducted in a manner prejudicial to
public interest or in a manner oppressive to petitioner, or other members or prejudicial to the
interests of the company.
Mismanagement: Material change in the company, not in interest of shareholders, creditors
etc. which takes place in management or control of the company, whether by alteration or
ownership of shares. In case there is no share capital, then any change in membership
prejudicial to other members.
In many cases, oppression happens as a result of mismanagement.
Pinakin Kharwar v. Nagina Processors
The petitioner was removed as a director despite holding many shares. Tribunal found that he
was removed because one project involving him had to be transferred to another entity,
because of losses. So it was in interest of company, so no oppression. However for
petitioner’s relief, it asked company to buy his shares at market value.
Pender v. Lushington
Chairman of a company refused to take shares of certain shareholders into account in General
meeting. Held, in the eyes of company law it was offensive and prejudicial to their interest.
This is oppression.
Wood v. Odessa Waterworks co.
Company declared to pay dividend by bonds instead of cash. Held, right to dividend as
important as right to vote and hence the act is prejudicial. Therefore, oppressive.
In Amalgamation ltd case, another point was that you, as a member of holding company
cannot be oppressed by activities in subsidiary company.
N Thirumurthy v. Sri Pavithra Steels
A director guessed that he is going to be removed so filed for apprehension of oppression.
Tribunal held that to file this, oppressive act must have occurred.
Imcable Net (Andhra) ltd v. AP Aksh Broadband ltd., 2010 SC
JV agreement between 3 companies involving AP government. 2 companies were SH in 3 rd.
Contract work was given to second company who could not finish. The joint company called
for unpaid amount on shares. First company filed O&M case alleging collusion between 2
and how they have mismanaged. SC commented that they filed only when unpaid amount
was called. Under these circumstances, it cannot be claimed to be O&M.
Chatterjee Petrochemicals pvt ltd v. Haldia Petrochemicals ltd, 2011 SC
JV was created by WB, Chatterjee and Tata, whereby decided to take equity in 3:3:1 of 700
crores. A share purchase agreement was signed between WB and Chatterjee under which
former will transfer its shares. WB then called EGM to transfer 150 crores to IOC, in which it
was resolved. Chatterjee filed for PO&M. CLB held that this was O&M and hence
invalidated the resolution. It further asked WB to transfer shares to Chatterjee. In SC the
question was raised wrt breach of contractual obligation leading to O&M. Held, this was
breach of contract but not O&M. Further, CLB doesn’t have power under Specific Relief Act.
N Shankar Rao v. Mancherial Cement Co pvt ltd, 2017 CLB
A private company needed funds. It offered one issue to existing members. Not completely
subscribed. So, another round of issue- now offered to outsider who purchased and then
removed a director. He filed for O&M. CLB held that this was O&M because violation of CA
and AOA so cancel the allotment and refund their money. (This was done despite it was
private arrangement in nature of contract).
Dr Bhagwati Prasad v. Span Biotonics pvt ltd, 2018 NCLT
This guy owned 5% and other guy owned 95%. Other guy sold to 3 rd party his whole stake
without serving notice to petitioner for the agenda in AGM. NCLT held that this was
prejudicial to his right to vote. Petitioner told that he didn’t want to be associated with them
anymore. NCLT ordered them to buy him out at market value.

Some examples of O&M

Oppression
1. Allotment of shares without complying with the law- prejudicial to members & co.
2. Increase/Decrease of capital without legal compliance- eg without resolution.
3. Any scheme of arrangement w/o “ “ “.
4. Abuse of power by BOD.
5. Illegal appointment and removal of Director.
Mismanagement
6. Commercial mismanagement.
7. Secret Profit.
S.242 Powers of Tribunal
 If convinced of extreme circumstances like deadlock, financially incapable etc. then it
can order winding up.
 Order for regulation of conduct of the company.
 Order for purchase of share, interest or subsequent reduction.
 Order for restriction on transfer of shares.
 Termination/Modification of contract between company and director/member, but
contractual matters not allowed  go to civil court.
 Setting aside any transfer.
 Removal of directors.
 Recovery of undue gains from directors,
 Procedure for appointment of MD/Director.
 Any other order on justice and equity.
S.245 Class Action
No provision under 1956 Act. US shareholders got a writ for ADRs issued by Satyam, but
Indian SH failed. JJ Irani committee constituted. On their recommendation, sec 245 was
included.
To claim compensation, 2 categories- members and depositors. They can claim compensation
if affairs are prejudicial to their or company’s interest.
Reliefs
 Compensation
 To restrain company from doing an ultra-vires act, or in breach of CA, AOA or MOA.
 To declare alteration of AOA/MOA invalid, if there is suppression of facts.
 Any other remedy.
Against whom:
 Company or directors.
 Auditor for misleading statement.
 Any expert giving misleading statement.
Who may file?
 In case of company with share capital, 100 members or 1/10 th of total members,
lower.
 If w/o capital, then 1/5th of total members.
 100 depositors, 1/10th of depositors or depositors with 1/10th of deposits.
S.245 r/w NCLT rules:
 NCLT will issue public notice.
Now it will examine:
 Filed in good faith? (check vested interest)
 Evidence produced.
 Scrap the petition if personal interest (not the case in O&M).