CENTRE FOR ACADEMIC LEGAL RESEARCH | JOURNAL OF APPLICABLE LAW

&JURISPRUDENCE

Volume 2

“Shareholders Democracy In The Light Of Oppression And Mismanagement”

By: Sriparna Pal (Jogesh Chandra Chaudhuri Law College)

The following research/scholar work is under Centre for Study of Contemporary Legal Issues. The
copyright over thismaterial is held by CALR as per the CALR Policy 2020.
ABSTRACT:

Shareholders Democracy is an important role for governing company law administration. It is

also an integral part of “Corporate Governance.” The Satyam Scandal brought many changes
or reforms in the company law administration. The concept came into force to provide rights
to shareholders, so that they are informed about how their money are utilised in the company.
It is the ability by which the shareholders manage the affairs of the company, either by
themselves or through their elected representatives, i.e., the Board of Directors. From practical
point of view, shareholders democracy emphasises on total control of the majority
shareholders. Shareholders Democracy mainly depends on the voting right of the shareholder,
availability of members in general meetings. When there are huge powers given to majority
shareholders, they may tend to abuse their powers, which in turn affects the rights of minority
shareholders in the form of oppression and mismanagement. There are certain criteria by which
the minority shareholders apply to the Tribunal for relief in cases of oppression and
mismanagement. But the term “oppression” and “mismanagement” has also been defined in
the Companies Act, 2013. There are certain loopholes in this concept, but if these anomalies
are removed and amended accordingly, then shareholders democracy can be run in an efficient
way in the Company.

KEYWORDS: Shareholder, Democracy, Oppression, Mismanagement, Company Law,

Corporate Governance.
 SHAREHOLDERS DEMOCRACY IN THE LIGHT OF OPPRESSION
AND MISMANAGEMENT

I. INTRODUCTION:

“Shareholder’s democracy” concept is an integral part of corporate governance. The idea of

‘oppression’ and ‘mismanagement’ in companies plays an important role in corporate
governance to ensure that no shareholder or member of the company faces undue bias or
prejudice.

The term “Corporate Governance” is an abstract term and can be understood through several
other interpretations. A “Corporation” is an organisation of group of people, stockholders or
shareholders, to operate for profit. The term “governance” is derived from a Greek verb
kubernaein [kubernáo] which means to steer, the metaphorical sense of which was first attested
in Plato. Governance encompasses the system by which an organisation is controlled, operated
and the mechanism by which it and its people are held into account. Ethics, risk management,
compliance and administration are all elements of governance. Thus, Corporate Governance is
the collection of mechanisms, processes and relations by which corporations are controlled and
operated.1

The first documented use of the word “corporate governance” is by Richard Eells to denote
“the structure and functioning of the corporate polity” 2. It is not a new concept and has stressed
its path since the early days of civilisation. Both eastern and western civilisation recognised
and preached the principle of good governance.

According to the Cadbury report of 1992, “corporate governance is the system by which
companies are directed and controlled.” 3
Just like any other institutional framework or a
system of governance in the corporation, a system of democracy also exists in the corporation,
which follows the same principles but with less vigour.4

Good corporate governance is a key factor in maintaining the integrity and efficiency of a
company. Poor corporate governance can weaken a company's potential and can lead to
financial difficulties and in some cases can cause long term damage to a company's reputation.

1
DR. S.R. MYNENI, LAW OF CORPORATE GOVERNANCE 15 (New Era Law Publication 2021).
2
Marco Becht, “Corporate Governance and Control”, National Bureau of Economic Research (December 2002)
Available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=359308 (last visited on November 8, 2022)
3
ARINDAM DAS, CORPORATE GOVERNANCE IN INDIA 05 (Routledge Francis and Taylor Group 2020).
4
Shareholders Democracy, available at: https://www.iilsindia.com/studymaterial/960169_1635709536.pdf (last
visited on November 8, 2022)
A company which supplies the core principles of good corporate governance like fairness,
accountability, responsibility and transparency will usually outperform other companies and
will be able to attract more investors whose support can help to finance further growth.5

India is a growing economy and it is quite important to safeguard the interests of the investors
and also to ensure the responsibility of management. The Satyam Scandal (2009) also known
as India’s own Enron scandal was one of the reason that corporate governance in India has
taken the centre stage. Corporate Governance safeguards not only the management but also the
interests of the shareholders as well as foster the economic progress of India in the roaring
economies of the world. Several Indian companies such as PepsiCo, Infosys, Tata, WIPRO,
TCS and Reliance are some of the global giants which have their flag of success flying high in
the sky due to their good corporate governance.6

II. AN INTRODUCTION TO SHAREHOLDERS DEMOCRACY

The concept of “shareholder’s democracy” in the present-day corporate scenario denotes the
supremacy of a shareholder in the affairs of the corporate sector either directly or through their
elected representatives. It is through corporate governance only, that transparency of the
company is well maintained, otherwise the company may indulge in malpractices like black
marketing, maintaining false accounts which are kept hidden from the shareholders, etc. For
this purpose, shareholders take part in corporate governance so that they can get full disclosure
of the company and information can flow smoothly to them. 7

The term “democracy” means rule of the people, by the people and for the people. In that
context, the “shareholders democracy” can also be described as the rule of shareholders, by the
shareholders, and for the shareholders in the corporate enterprise, to which the shareholders
belong. 8 Precisely, it is the ability of the shareholders to manage the affairs of the company
directly or indirectly, by electing Board of Directors, who are responsible for managing the
day-to-day affairs of the Company.

5
Myneni, supra note 1, Page – 23
6
Myneni, supra note 1, Page – 30
7
Keshav Jindal, “Shareholders Democracy and Corporate Governance” 1 DE JURE NEXUS LAW JOURNAL
(2021). Available at: https://dejurenexus.com/wp-content/uploads/2021/08/Shareholder-Democracy-and-
Corporate-Governance-By-Keshav-Jindal.pdf (last visited on November 10. 2022)
8
Shareholders’ Democracy and Corporate Dispute, available at: https://cscartindia.com/wp-
content/uploads/2019/10/rcd.pdf (last visited on November 8, 2022)
The concept of “shareholders democracy” means that the company is under the control of its
shareholders.9 Shareholder’s act as agents and trustees for the company in a fiduciary capacity.
So, meaningful participation of the shareholders in company meetings is a necessary
requirement.10

It is the responsibility of the company to provide all the necessary information and also to
encourage shareholders participation in the affairs of the company. 11 Shareholders constitute
the very essence of public company. They can exercise control over the company in several
ways, which are as follows –

i. exert control over the decision-making process by exercising their right, which they
hold by virtue of shareholding.

ii. the shareholders can express their choices by way of selling or buying shares. 12

 Indian Scenario:

The J.J. Irani Committee constituted in 2004, replaced the Companies Act,1956 with a lean
and straight forward version.13 The Committee recommended various effective measures to be
initiated for protecting the interests of the shareholders and investors, which also includes small
investors through legal basis for sound corporate governance practices. 14 This recommendation
laid stress on the concept of shareholders democracy. But in actual practice, shareholders
democracy means total control by the majority shareholders. Hence, a mandatory “checks and
balances” are needed to ensure that unscrupulous promoters do not misuse the system. 15

Shareholder’s democracy focuses more on the secondary rights of a shareholder. The rights of
the shareholders are managed from two sources –

a) Articles of Association (these are regulations for the management of a registered

company. They form the company’s constitution along with relevant resolutions or
agreements, and also regulate internal affairs of the company.),

9
Sakshi Sharma, Shareholders Democracy, SUPREMO AMICUS, Volume – 17. Available at:
https://supremoamicus.org/wp-content/uploads/2020/05/A47.v17.pdf (last visited on November 10. 2022)
10
https://www.iilsindia.com/study-material/960169_1635709536.pdf (last visited on November 10, 2022).
11
Sharma, supra note 9.
12
Sharma, supra note 9.
13
Ibid.
14
Myneni, supra note 1, Page – 23
15
Sharma, supra note 9.
 b) Shareholder Agreement (It is a contract amongst the shareholders of a company that
lays down guidelines for operation of the company and addresses the rights and
obligations of a shareholder.)

 Rights under the Indian law:

The fundamental concept of investors rights has remained same since the Companies Act,
1956, but new dimensions have been added by law to the rights of the shareholders depending
on the type of shares they held, with the main theme of protection of investors. Shareholders
Democracy depends upon the voting strength of shareholders and availability of the members
in General Meetings, either by themselves or through their proxy. But this concept has still not
received a statutory recognition in the Companies Act, 2013. Other rights include right to
appoint directors, company auditors, call for general meetings, inspect register and books,
winding up of the company, etc.

Rights of shareholders –

There are two kinds of share capital –

i. equity share capital, and

ii. preference share capital

Equity share capital further gets divided into –16

a) equity shares with voting rights, and

b) equity shares with differential rights as to dividend voting or otherwise. (according to

Section 43 of the Companies Act, 2013)

i. Equity share capital –

a) Rights of equity shareholders with voting rights –

The term ‘voting rights’ is defined in Section 2 (93) of the Companies Act, 2013 as the right
of a member of a company to vote in any meeting of the company or by means of postal ballot.
Section 47(1) of the Act confers voting rights on every member of a company limited by shares
and holding equity share capital. 17[subject to the provisions of Section 43(2) of Section 50 and

16
DR. N.V. PARANJAPE, COMPANY LAW 198 (Central Law Agency 2022).
17
Substituted for “provision of Section 43 and sub-section (2) of Section 50 by the Companies (Amendment)
Act, 2017.
Section 188(1)]. His voting right on a poll shall be in proportion to his share in the paid-up
equity share capital. Provided that where the dividend in respect of a class of preference shares
has not been paid for a period of 2 years or more, such class of class of preference shareholders
18
shall have the right to vote on every resolution placed before the company.

b) Right of Equity shareholders with differential rights –

Equity shares with differential rights are those shares that give the holder of the shares the
differential rights related to voting, which means, either more voting rights or less voting rights
compared to the ordinary shareholders of the Company. 19 The other rights may include rights
of participation in management, rights available to equity shareholders in the event, the
company issues bonus shares, rights shares, rights when the company enters into a scheme of
arrangement or amalgamation, etc. Shares with differential rights are issued when it is specified
in the articles of association and an ordinary resolution to issue the same has been passed at a
general meeting of shareholders.

ii. Preference share capital –

Preference shares are called so, because they are given preference over equity shares.
Preference share is one which fulfils the two conditions:

a) with regard to dividend, it carries a preferential right to be paid a fixed amount or an

amount calculated at a fixed rate, which may either be free or subject to income-tax,
and

b) with regard to capital, it carries on a winding-up, repayment of capital, preferential right

to be paid the amount of paid-up capital. 20

In Re Isle of Thanet Electricity Supply Co., 21 it was held that where no such rights are conferred
by the provisions defining the rights, the onus lies on the preference shareholder to show that
the specified rights were not exhaustive and on winding up of the company, he is entitled to
share in the surplus assets after ordinary capital has been repaid.

Voting by show of hands –

18
Paranjape, supra note 16, page - 219
19
Differential Voting Rights For Start-ups, available at: https://cleartax.in/s/differential-voting-rights-startups
(last visited on November 21, 2022).
20
Paranjape, supra note 16, Page – 199.
21
(1950) Ch 161 (168)
According to section 107 of the Companies Act, 2013 at any general meeting, a resolution put
to the vote of the meeting shall, unless a poll is demanded under section 109 or the voting is
carried out electronically, be decided on a show of hands, indicating their opinion on the
resolution. A person by show of hands can record both the number and value of his own due
and show those as well as of persons whom he represents or whose proxies he gives for this
purpose (Rivers Steam Navigation Co. Ltd. v. Owners 22) This method is quicker and also tends
to avoid unnecessary formalities and costs.

Electronic voting –

Shareholders are also entitled to vote electronically in a general meeting. Electronic voting is
a common internet infrastructure that enables the investors to vote through digital means on
resolutions. 23 This enables the shareholders, who resides in far-flung areas, to take part in the
decision-making process of the company without being physically present at the meeting. This
24
step encourages to promote good corporate governance by modern means.

Voting by poll –

Shareholders who have shares of worth minimum Rs. 5 lacs or 10% of the voting power of the
company can have the option to demand for voting by poll. This demand is made to the
Chairman of the meeting before or on the declaration of the result of voting on any resolution
by show of hands. (as per the provisions of Section 109 (1)(a) of the Companies Act, 2013). 25

Proxy voting –

Section 105 of the Companies Act 2013 provides that any member of a company entitled to
attend and vote at a meeting of the company shall be entitled to appoint another person as its
proxy to attend and vote on his behalf provided that a proxy appointed shall not have the right
to speak in the meeting and cannot vote except poll.26 This instrument of proxy encourages the

22
A.I.R. 1939 Cal 513.
23
Section 108 of the Companies Act, 2013 read with Rule 20 of Companies (Management and Administration)
Rules, 2014. Available at: http://www.mca.gov.in/Ministry/pdf/Chapter7_Rules_19032015.pdf. (last visited on
November 10, 2022).
24
E-Voting Ready Reckoner, The Institute of Company Secretaries of India, Web Module, August, 2014.
Available at: https://www.icsi.edu/webmodules/CompaniesAct2013/E-VOTING%2018-08-14.pdf. (last visited
on November 10, 2022)
25
Analysis on Shareholders’ Democracy, available at:
https://jlmpgofficial.files.wordpress.com/2019/01/analysis-on-shareholder-democracy-.pdf (last visited on
November 10, 2022)
26
Ibid.
participation of a member indirectly and also strengthens the democratic pattern of the modern
corporations.27

III. PREVENTION OF OPPRESSION AND MISMANAGEMENT IN CONTEXT

TO SHAREHOLDERS DEMOCRACY

As discussed before, supremacy of the majority is the fundamental rule governing the company
law administration. But in few cases, majority shareholders may tend to abuse their powers and
affect the minority shareholders. Therefore, it is necessary to maintain a proper balance
between the rights of majority and minority shareholders for smooth functioning of the
company. 28 The ultimate authority of the company’s management vests with the general
meeting which can decide certain issues by an ordinary resolution and some other issues by
special resolution. The acts done with the consent of the majority in its general meetings are
deemed to be valid. 29 The principle of “rule of majority” (that is, decision-making power
belongs to the group that has the most members) was established in the case of Foss v.
Harbottle.30 It has also been stated by the Calcutta High Court in Kanika Mukherji v.
Rameshwar Dayal Dubey,31 that the principle that is embodied in Sections 397 (oppression)
and 398 (mismanagement) of the Companies Act, 1956 is an exception to the rule of majority.32
In order to extend protection to minority interest, a positive check has been provided in Section
163 of the Companies Act, 2013 which deals with the provision regarding proportional
representation for appointment of Directors so that minority interests also get proper
representation in the Board of Directors. But this provision is not sufficient, so, additional
safeguards are provided under the Companies Act, 2013 (Section 241-246) which provide relief
in case of oppression and mismanagement in the affairs of the company. The aim of these
provisions is to protect the interests of investors and public in general. 33

 Background:

27
https://www.iilsindia.com/study-material/960169_1635709536.pdf (last visited on November 10, 2022)
28
Paranjape, supra note 16, page – 530.
29
Ibid.
30
(1843 67 ER 189)
31
(1966) 1 Comp LJ 65 Cal.
32
https://www.gklawcollege.com/wpcontent/themes/gklawtheme/downloads/library/studymaterials/3company-
law.pdf (last visited on November 12, 2022)
33
Paranjape, supra note 16, page – 530.
While Indian Company law has incorporated versions of shareholder remedies since mid-20th
Century, the remedies currently find a place in Section 241 and 242 of the Companies Act,
2013. Prior to the Companies Act, 1956, there was no statutory provision to combat oppression
and mismanagement in the companies. During this period the only judicial remedy that was
available, “just and equitable clause”.34 Both in the UK and India, the ‘oppression’ remedy
emerged as a response to the shortcomings of the sole remedy of winding-up to the minority
members.

Later, ‘mismanagement’ was introduced as a separate, lower-threshold remedy alongside

‘oppression’ in the Companies Act, 1956. The Bhabha Report provided that the scope of
‘oppression’ remedy may be extended to cover not only the cases of oppression against a
minority shareholder but also of gross mismanagement of the affairs of a company.35

The Companies Act, 1956 provides for the provision of “oppression” in Section 397 and
“mismanagement” in Section 398. These sections were incorporated to provide remedies
through application to be made to the Company Law Board. But under the Companies Act,
2013, instead of providing with different sections like that the Act of 1956 for oppression and
mismanagement, a mixed provision under Section 241 to 246 has been provided in Chapter
XVI titled “Prevention of Oppression and Mismanagement”.36

 Prevention of Oppression:

In general sense, oppression means an unjust or cruel exercise of authority or power.37 The
term “oppression” and “mismanagement” is not defined anywhere in the Companies Act, 2013.
However, according to Halsbury’s Laws of England, ‘oppression’ means a burdensome, harsh
and wrongful conduct. It does not include a conduct which is merely inefficient or negligent,
nor does it include an isolated incident. There must be a continuing course of oppressive
conduct. 38

34
Anamika Singh, “Scope of Term “Unfairly Prejudice” in the Oppression and Mismanagement” 4
INTERNATIONAL JOURNAL OF LAW MANAGEMENT AND HUMANITIES 2256 (2021). Available at:
https://www.ijlmh.com/paper/scope-of-term-unfairly-prejudice-in-the-oppression-and-mismanagement/ (last
visited on November 11, 2022).
35
Ibid.
36
Provisions regarding Prevention of Oppression and Mismanagement and Class Action Suits in India, available
at: https://icsi.edu/media/filer_public/ec/4b/ec4b2455-5bdf-4d45-af53-
3e2949676f71/msop_project_report_team_c.pdf (last visited on November 11, 2022)
37
https://www.merriam-webster.com/dictionary/oppression (last visited on November 11, 2022)
38
Paranjape, supra note 16, page – 533.
“Oppression” is explained by Lord Cooper in the Scottish case of Elder v. Elder and Western
Ltd., 39 as the conduct complained of should at the lowest, involve a visible departure from the
standards of fair dealing, and a violation of the conditions of fair play on which every
shareholder who entrusts his money to the company is entitled to rely upon. 40

“Oppression” under the Companies Act, 1956 –

Section 397(1) of Companies Act 1956 has defined ‘oppression’ as when affairs of the
company are being conducted in a manner prejudiced to public interest or in a manner
41
prejudicial to public interest or in a manner oppressive to any member or members.

Under Section 397(2), if, on any application under section 397(1), the Court is of opinion –

(a) that the company's affairs are being conducted in a manner oppressive to any member or
members; and

(b) 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 then the company should be wound up;

the Court may, with a view to bring an end to the matters complained of, make such order as it
thinks fit. 42

 Application to Tribunal for Relief in Cases of Oppression, etc (Sec 241):

1. any member of the company may apply to the Tribunal, provided that such member has a
right to apply under section 244, if he 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

39
(1952) Scottish Cases 49
40
Oppression and Mismanagement, available at: http://www.legalservicesindia.com/article/125/Oppression-&
Mismanagement.html#:~:text=Whenever%20the%20affairs%20of%20a,Tribunal)%20u%2Fs%20397.
(last visited on November 11, 2022)
41
Supra note 35.
42
Oppression and Mismanagement, available at: http://www.legalservicesindia.com/article/125/Oppression-&-
Mismanagement.html#:~:text=Whenever%20the%20affairs%20of%20a,Tribunal)%20u%2Fs%20397.
(last visited on November 11, 2022)
b) the material change, has taken place in the management or control of the company, and 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.

2. the Central Government, if it is of the opinion that the affairs of the company are being
43
conducted in a manner prejudicial to public interest, it may itself apply to the Tribunal.

 Right of members to apply (Section 244):

The members who have the right to apply under Section 241 are –

a) in the case of a company having a share capital, not less than 100 members of the
company or not less than 1/10th of the total number of its members, whichever is less,
or any member or members holding not less than 1/10th of the issued share capital of
the company, subject to the condition that the applicant or applicants has or have paid
sums due on his or their shares;
b) in the case of a company not having a share capital, not less than 1/5th of the total
number of its members: Provided that the Tribunal may, on an application made to it in
this behalf, waive all or any of the specified requirements so as to enable the members
to apply u/s 241.44

 Acts constituting oppression:

By considering various judicial pronouncements, the acts which amounts to oppression are as
follows –

a) Not keeping a general meeting and keeping shareholders in dark

b) Not maintaining the statutory records, books of accounts and not abiding by the
Companies Act
c) Depriving the right to dividend of a member
d) Issuing of shares only benefiting a few shareholders, etc. 45

43
Shareholders’ Democracy and Corporate Dispute, available at: https://cscartindia.com/wp-
content/uploads/2019/10/rcd.pdf (last visited on November 12, 2022)
44
Some recent trends in Oppression and Mismanagement Cases under the Companies Act, 2013, available at:
https://www.mondaq.com/india/shareholders/1077784/some-recent-trends-in-oppression-mismanagement-
cases-under-the-companies-act-2013#_ftn1 (last visited on November 12, 2022).
45
Ashutosh Misra, “An analysis of mismanagement and oppression under the Companies Act, 2013” 4 Journal
of Legal Studies and Research 21 (2018). Available at: https://thelawbrigade.com/wp-
content/uploads/2019/05/Ashutosh-Misra.pdf (Last visited on November 12, 2022).
  Acts not constituting oppression:

The acts that are held to be non-oppressive are as follows –

a) An unwise, inefficient or careless conduct of a director.

b) Non-holding of the meeting of the directors.
c) Not declaring dividends when the company is making losses.
d) Denial of inspection of books to a shareholder.
e) Lack of details in the notice of a meeting.
f) Non-maintenance or non-filing of records.
g) Increasing the voting rights of the shares held by the management.
h) Drawing of remuneration by a director to which he is not legally entitled. 46

Events of oppression have to be part of consecutive story and not in isolation to constitute
“oppressive” conduct of the majority as held in Shanti Prasad Jain v. Kalinga Tubes Ltd. 47 It
has been held that isolated acts of indiscipline or indifference or even deprivation would not
by themselves be taken to be of oppressive nature. There must be some continuity of acts of
which it could be said that the affairs are being conducted in that manner. 48

 Mismanagement:

The term “mismanagement” is also not defined in the Companies Act, 2013. Section 241(1)
(b) of the Companies Act, 2013 provides for relief in cases of mismanagement. If the acts of
the company are conducted in a manner which is prejudicial to the interest of the company or
public interest, or any alteration or addition in the board of directors could amount to
mismanagement, depending upon the facts and evidence of the case.49 Where directors have
preferred objects of their liking and made a huge allotment of shares for a consideration other
than cash, this was held to be a mismanagement of affairs. 50

46
Supra note 35.
47
Ibid.
48
Ibid.
49
Oppression and Mismanagement under Companies Act, 2013, available at: https://taxguru.in/company-
law/oppression-mismanagement-companies-act-2013.html?amp (last visited November 12, 2022).
50
Akbarali A Kaveri v. Konkan Chemicals (P) Ltd, (1997) 88 CLB 245.
Mismanagement under Companies Act, 1956 –

Section 398 of the Act states that mismanagement is said to be done if:

i. the affairs of the company are being conducted in a manner prejudicial to the
interests of the company; or
ii. 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
iii. if its managing agent or secretaries and treasurers, or in the constitution or control
of the firm or body corporate acting as its managing agent or secretaries and
treasurers, or in the ownership of the company's shares, or
iv. 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 the interests of the company. 51

 Acts constituting mismanagement:

a. Serious fighting between directors

b. Violations of the Memorandum of Association and Articles of Association of the company

c. Sale of assets at low price without complying with the Act

d. Directors continuing in office after expiry of the term. 52

After the coming up of the Companies Act, 2013, Company Law Board (CLB) was abolished
and Tribunals were created, National Company Law Tribunal (NCLT) and National Company
Law Appellate Tribunal (NCLAT). If the party is not satisfied with the decision of the Tribunal,
then an appeal can be made to NCLAT.53

 Acts not constituting mismanagement:

a) Merely because company incurs loss, mismanagement can’t be alleged.

b) Arrangement with creditors in company’s bonafide interest.

51
Supra note 35.
52
Misra, supra note 44, page - 22
53
Ibid.
 c) Removal of director and termination of works manager’s services.
d) Building up of reserves or non-declaration of dividend especially when it does not
result in devaluation of shares. 54

 Jurisdiction of Courts:

The first remedy in the hands of an oppressed minority is to move to the Tribunal. Whenever
the affairs of the company are being conducted in a manner which is oppressive to any other
member or members or prejudicial to public interest, an application can be made to the NCLT
under Section 241 of the Companies Act, 2013. Under the Act, NCLT has been empowered for
trying of suits for mismanagement and oppression. No civil court has jurisdiction to entertain
any proceeding or suit with regard to matters which the NCLT or Appellate Tribunal have been
given the power to entertain.55

 Powers of Tribunal (Section 242):

After the application has been made under section 241 of the Companies Act, 2013, if the
Tribunal is of opinion that –

- Company’s affairs have been or are being conducted in such a manner that they are
prejudicially or oppressive towards any member, public company or public interest,
- And in winding up, the company would unfairly prejudice such member or members,

An order may be provided by the Tribunal in relation to regulation of the conduct of affairs of
the company in future, the purchase of shares, restriction on the transfer of the share,
termination, setting aside or modification of any agreement, setting aside of any transfer,
delivery of goods, payment, execution or other act relating to property, removal of managing
director, manager, or any of the directors of the company, recovery of undue gains made by
any managing director, manager or director during the period of his appointment as such,
imposition of costs as it may deem fit.

A certified copy of the order shall be filed with the Registrar within 30 days of the order by the
tribunal. Any contravention of the provisions of this chapter shall lead company towards the
imposing of fine which shall not be less than 1 lakh rupees and which may extend to 25 lakh
rupees and every officer of the company who is in default shall be punished with an

54
Supra note 35.
55
Misra, supra note 44, page – 24.
imprisonment of six months and with fine which shall not be less than twenty-five thousand
rupees but which may extend to one lakh rupees, or with both.56

Section 243 of the Act provides for the consequences of Section 242. It also lays down penalty
provisions for any act done in contravention with section 242 of the Act.

Section 245 of the Act introduces the concept of “class action suit”. After the Satyam Scam
(2009), a necessity was felt to introduce this concept. This was already existing in other
countries. So, in Companies Act, 2013, this idea was incorporated. A ‘class action suit’ can be
understood as in which a large group of people collectively bring a claim with similar interest
to Court and/or a group of defendants. Such group is collectively called “class”. 57 It can be
filed against the Company, Directors, Auditor and Experts.

IV. JUDICIAL OBSERVATIONS

1) In Vikram Bakshi v. Connaught Plaza Restaurants Limited,58 (McDonald’s case),
Vikram Bakshi approached the National Company Law Tribunal ('NCLT') on the
grounds of oppression by McDonald's. He alleged that the act of not re-electing him
as the Managing Director ('MD') of Connaught Plaza Restaurants ('the company')
amounted to oppression under section 397 of the Companies Act, 1956 ('the Act').
The NCLT decided in Vikram Bakshi's favour holding the action in question as
oppressive and restored his position as the MD. 59
2) In Rajahmundry Electric Supply Corporation v Nageswara Rao, 60 the consent to be
given by a shareholder is reckoned at the beginning of the proceedings. The
withdrawal of consent by any shareholder during the course of proceedings shall not
affect the maintainability of the petition. Also, it was observed that where the vice-
chairman grossly mismanaged affairs of the company and had drawn considerable
amounts for his personal purposes, that large amounts were owing to the Government
towards charge for supply of electricity, that the machinery was in a state of disrepair,
these are sufficient evidences of mismanagement.

56
Supra note 35.
57
https://www.cnbctv18.com/why-india-urgently-needs-to-have-class-action-suits-10991422.htm (last visited
on November 20, 2022).
58
[2017] 143 SCL 37.
59
The Redefined boundaries of Section 397 after the McDonald’s Case, available at:
https://www.mondaq.com/india/shareholders/1087120/the-redefined-boundaries-of-section-397-after-the-
mcdonald-case#_ftn1 (last visited on November 12, 2022)
60
AIR 1956 SC 213
 3) In Needle Industries (India) Ltd. v. Needle Industries (Newey) India,61 it was held
that the person complaining of oppression must show that they have been constrained
to submit to a conduct which lacks in probity, conduct which is unfair to him and
which causes prejudice to him in the exercise of his legal and proprietary rights as a
shareholder. Additionally, the Supreme Court held that even if the company petition
fails to succeed in making a case of oppression, the court could still proceed to act to
bring justice between the parties and that the act of oppression should be continuous
and continue till the date of filing of the petition.
4) In Chatterjee Petrochem(I) Pvt. Ltd vs Haldia Petrochemicals Ltd.& Ors. 62, a
shareholder has certain rights conferred by the Companies Act, which are statutory
rights and certain rights are conferred by the Articles. In both these cases, if the
shareholders rights are affected, they can allege oppression.
5) In Tata Consultancy Services Ltd. v. Cyrus Investment Pvt. Ltd. & Ors.,63 NCLT,
initially dismissed the petition under Sec. 241-242 of the Companies Act, 2013, stated
it was non-maintainable and cited that no cause of action was established in any of
the allegations raised by the Petitioners because they didn’t meet the criteria of 10%
ownership in a company for filing the case of Oppression and mismanagement under
the Companies Act, 2013 and also dismissed the petition of waiver. 64 After NCLT
rejected the petition, the two companies appealed to NCLAT and it ruled in favour
of Cyrus Mistry. It reversed orders passed by NCLT and ruled that Mr. Cyrus Mistry
shall be reinstated at his original designation Executive Chairman of ‘Tata Sons
Limited’ and consequently as Director of the ‘Tata Companies’ for rest of the tenure
in final order dated 18.12.2019. However, on March 26, 2021, Supreme Court
reversed the NCLAT order and ruled in favour of Tata Sons citing that removal from
the directorship cannot be called as acts oppressive to minority shareholders. The
Court said that it was “valid and justifiable reasons” and could not be termed as
“oppressive or prejudicial in law”. It was held that minority shareholders or their
representatives are not automatically entitled to a seat on the private company’s board
like a small shareholder’s representative. 65

61
1981 AIR 1298
62
CIVIL APPEAL NOS.5416-5419 OF 2008
63
2021 SCC OnLine SC 272
64
https://www.mangalamjobs.com/wp-content/uploads/2021/05/TATA-v-CYRUS-MISTRY.pdf (last visited on
November 24, 2022)
65
Ibid.
 6) In Cyrus Investment (P) Ltd. v. Tata Sons Ltd.,66 the Hon’ble National Company Law
Tribunal, while deciding the issue of waiver under the proviso of Section 244 of the
Companies Act, 2013, allowed the appeal, and held that the following factors are
required to be noticed namely –
a) Whether the appellants are member of the Company?
b) Whether the application under section 241 pertains to “Oppression &
Mismanagement”?
c) Whether the similar allegation of oppression & mismanagement was earlier made
and decided?
d) Whether there is an exceptional circumstance made out to grant waiver?

The Appellate Tribunal held that the NCLT is not required to decide the merit
of application at this stage but required to record grounds to suggest that the application has
made out some exceptional case for waiver of all or any of the requirements specified in clauses
(a) and (b) of sub-section (1) of Section 244 and such opinion required to be formed on the
basis of application and to form an opinion whether application pertains to oppression and
mismanagement.67

V. SUGGESTIONS AND CONCLUSION:

The concept of shareholder democracy sometimes becomes a curse, when the views and
interests of the majority shareholders are overlooked and are given less importance. Due to
excessive centralisation of control in the hands of the majority shareholders, the minority
shareholders suffer, in terms of oppression and mismanagement or “squeezed out” or “freezed
out”. 68 A major flaw in the Companies Act, 2013 is the numerical threshold that is mentioned
under Section 244 of the Act. Though the power of waiver is given to the NCLT, there is no
clarity on when the Tribunal can exercise that right and what is the criteria for the same.

The introduction of class action suit is one step in the right direction. Efforts must be taken to
create awareness regarding the same, so that the affected parties use this mechanism and get
justice. This will also lead to reduction in the number of lawsuits since it has allowed a group

66
(2020) 154 CLA 47
67
Available at: https://www.icsi.edu/media/portals/29/Oppression%20&%20Mis-
management_by%20CS%20Nesar%20Ahmed.pdf (Last visited on November 12, 2022)
68
Dr. Sandeep Ojha, “Overcoming the Tyranny of Non-Interference: A Critique view with reference to Various
Cases” 6 Journal of Positive School Psychology 8697 (2022). Available at:
https://journalppw.com/index.php/jpsp/article/view/9557 (last visited on November 12, 2022).
of people to file the case against one defendant on common grounds. 69 Since, section 241 deals
with only term ‘prejudice’ and left out the term ‘unfairly’, so, there exists a grey area. 70

The protection of the independent directors and the minority shareholders goes hand-in-hand
and thereby, it is necessary for their protection and for the existence of corporate governance.
The independence of the independent directors is like a baton of power lying with the
promoters, directors and the company purely acting as rubber stamps. It is a post created by the
Companies Act so as to ensure that the companies function efficiently and no case of
mismanagement and oppression takes place and if any case of such is found out, then it has to
be reported. Unfortunately, these directors are removed by the Board for their vigilant acts. A
stringent legislation for the protection of the independent directors is necessary and the voices
of them should be taken seriously. 71

Special Fraud Investigation Office (SFIO) is the post created by the Central Government for
the investigation of serious fraud by the companies involving a public interest. It should be
made an independent agency (without government’s interference) which can take Suo-moto
action against the companies and not work on the aid and advice of the Central government. 72

In India, the jurisprudence behind corporate governance has been developed by various
committees like Mr Kumar Mangalam Birla committee, Mr Narayan Murthy committee, Mr
73
Naresh Chandra committee and the latest being Mr Uday Kotak committee. It has been
proved that companies which have a sound corporate governance mechanism have been able
to generate significantly higher number of profits than the companies that have not exhibited
or have exhibited poor corporate governance. 74

The attitude of Indian shareholders is very passive, majority of them is only desired to get
financial benefits, and some members are only active in understanding company’s policies. So,
a strict outlook is required in this context. The laws should be firm both on papers and in

69
S. Sadhana, “A Study on the Oppression of the Minority Shareholders in India with Reference to the Majority
Rule” 119 International Journal of Pure and Applied Mathematics 889 (2018). Available at:
https://acadpubl.eu/hub/2018-119-17/1/79.pdf (last visited on November 12, 2022).
70
Singh, supra note 33.
71
Misra, supra note 44, page – 22
72
Misra, supra note 44, page - 23.
73
Keshav Kaushik, “Corporate Governance Vis-À-Vis Oppression and Mismanagement: A Case Study of Mr.
Ratan Tata and Mr. Cyrus Mistry Dispute” 1 Indraprastha Law Review 3 (2020). Available at:
https://indraprasthalawreview.in/wp-content/uploads/2020/10/Paper-5-converted.pdf (Last visited on November
14, 2022).
74
Maria Maher And Thomas Andersson, Corporate Governance: Effects On Firm Performance And Economic
Growth, OECD. Available at: https://www.oecd.org/Sti/Ind/2090569.pdf. (Last visited on November 14, 2022)
practicality for their enforcement and for the achievement of the desired goals as set out in the
Act. The legislature should be vigilant in the legal developments globally to which India is in
business relations with for the better functioning of the company and adapting to the global
changes. 75

75
Misra, supra note 44, page - 24