COMPANY LAW END TERM SUMMATIVE ASSESSMENT

JUDICIAL INTERPRETATION OF OPERATIONAL

MISMANAGEMENT IN INDIA

Submitted To: Assistant Professor Yash Pandey

Submitted By: Husain Bohra

Enrolment No.- 20200401038
Section: A
Batch: 2020-25

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TABLE OF CONTENTS

SUBMITTED TO: ASSISTANT PROFESSOR YASH PANDEY.......................................1

ABSTRACT................................................................................................................................3
RESEARCH METHOLODY....................................................................................................4
CONCEPTUAL FRAMEWORK.............................................................................................5
JUDICIAL INTERPRETATION..............................................................................................7
CONLUSION............................................................................................................................10
BIBLIOGRAPHY.....................................................................................................................11

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ABSTRACT
Oppression and mismanagement pose serious risks to minority shareholders and the general
health of the firm in the Indian corporate environment. In order to examine how courts
understand these problems, this research explores historic decisions, legislative measures, and
academic viewpoints. We acquire a thorough grasp of the corporate governance environment
by looking at legislative purpose from statutes, how standards are changed from one case law
to another, and key cases' legal standards. The main goal is to provide a detailed
understanding of the judicial interpretation of oppression and mismanagement by exposing
the aspects that courts take into account. This investigation contributes to scholarly
knowledge as well as useful insights for stakeholders managing the complexity of corporate
governance. In the end, the study aims to assess the consequences for policy and suggest
changes to strengthen the legal framework against oppression and mismanagement, so
advancing better corporate governance standards in India.

INTRODUCTION
The Companies Act does not define "mismanagement" or "oppression"1 specifically. The
Elder v. Elder & Watson2 case served as the impetus for the fundamental understanding of
these concepts. In Rajahmundry Electric Company v. Nageshwara Rao3, the Supreme Court
of India defined "oppression" as a lack of integrity and fair dealing in a business's operations
that negatively affects a portion of its members. Oppression" is not limited to pursuing
financial gain; it can take many other forms. It might result from a desire for dominance,
power, or even retaliation, as the case, H.R. Harmer Ltd. clarifies. One important point to
note is that, according to A.M. Varkey v. J.R. Motishaw,4 a resolution that has a negative
impact on the

1
Mohan, Landmark judgements in Oppression & Mismanagement, (Dec. 20, 2022),
https://www.icsi.edu/media/filer_public/58/1d/581de8e5-8fc4-40a4-acdc-
6ac1907826ef/oppression mismanagement_-_final.pdf.

2
Elder v. Elder, 7 (Scotland Ct. session 1951).
3
Rajahmundry electric company v. Nageshwara rao, 1066 India supreme Ct. (India supreme Ct. 1955).
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4
A.M Varkey v. J.R.Motishaw, 114 Kerala high Ct. (Kerala high Ct. 1961).

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corporation or its shareholders as a whole is considered oppressive. Because there isn't a clear
description in the statute, one must have a contextual understanding based on court rulings
and significant instances. These judicial precedents collectively underscore that operational
mismanagement is a comprehensive and inclusive concept. It includes a wide variety of
behaviours, from outright mismanagement to infringements on the rights of shareholders and
activities that compromise the honesty and equity of the business's operations. Sections 241
to
246 of companies act, 20135 contain measures pertaining towards mismanagement and
oppression. These parts offer a framework for dealing with cases of mismanagement and
oppression, guaranteeing that minority shareholder interests are safeguarded, and doing
business in an equitable and open way. Although they must be implemented in accordance
with the specific provisions of the Companies Act of 2013, the guidelines set forth in earlier
rulings remain relevant.

It is crucial to keep in mind that the Companies Act, 2013 has replaced the previous act of
1956, which provided the legal basis for these decisions. Because of this, any discussion of
operational mismanagement needs to be understood in light of the new Act's requirements as
well as any court interpretations that have followed. Under company law, operational
mismanagement is a broad term that includes a variety of behaviours that are harmful to the
firm's and its stakeholders' interests. Important insights into the interpretation of operational
mismanagement have come from judicial decisions, such as those in H.M. Patel Group v.
Ambika Food Products Pvt Ltd6 and Shanti Parsad Jain v. Kalinga tubes limited7. However,
it is imperative to take these decisions into consideration within the context of the current
Companies Act, 2013.

RESEARCH METHOLODY

The study for this paper, which is doctrinal in nature, was conducted by the author using
secondary sources from newspapers, journals, articles, statues, and internet legal databases
like Manupatra and SCC.

5
Companies act, 18 I.S.C. § 241 (ministry of company affairs 2013).
6
H.M Patel Group v. Ambika Food Products Pvt Ltd, 8194 Indian Supreme Ct. (Indian Supreme Ct. 2018).
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7
Shanti Parsad Jain v. Kalinga Tubes Limited, 202 Orissa high Ct. (Orissa high Ct. 1962).

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CONCEPTUAL FRAMEWORK

In the context of Indian law, oppression and mismanagement relate to instances in which
minority shareholders' rights and interests are infringed and there is a breakdown in the
company's appropriate administration and governance.

Oppression happens when dominating or majority owners abuse their position of power or
influence to take actions that are harmful to the interests of minority shareholders. This
includes things like unfairly reducing minority shareholders' ownership stakes, hiding
important information, or denying them the ability to participate in decision-making. The
crucial component is that the actions of the majority cause the rights of minority shareholders
to be denied or violated.

On the other hand, mismanagement refers to situations where a corporation lacks efficient
management, governance, or administration. This includes situations like carelessness,
directors' or officers' breaches of their fiduciary obligations, abnormalities in the company's
finances, or any other activities that cause the company or its stakeholders significant injury
or detriment.`

Section 241 of the companies Act, 20138, in India, handles concerns of oppression and
mismanagement inside firms, with the National Company Law Tribunal (NCLT) serving as
the regulatory authority. The influence that majority owners exercise, how they treat minority
shareholders, the effect of resolutions made by the majority, and the overall impact on the
business's operations are all taken into consideration by courts when determining cases of
oppression and mismanagement. Court interpretations place a strong emphasis on corporate
democracy, equity, and minority rights protection.9.

In important decisions that shaped Indian jurisprudence, the concepts of oppression and
mismanagement emerged. The early seminal case of Shanti Prasad Jain v. Kalinga Tubes
Ltd.

8
supra
9
Action Against Oppression and Mismanagement – An Effective Tool, SCC Blog (June 7, 2022),
https://www.scconline.com/blog/post/2022/06/07/action-against-oppression-and-mismanagement/.

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is one example. In this instance, the Supreme Court made clear the parameters of Section But
the only goal of this section is to act in the minority owners' best interest and make sure that
the management of the business operates in a way that is impartial and fair to all
shareholders.

Over the period, the Supreme Court of India issued several critical decisions that helped in
clarifying the meaning of “oppression” and “mismanagement.” Several rulings on the scope
and interpretation of Companies Act 1956’s rules are known to have made such matters
clearer while guiding the best way to prevent or stop exploitative management practices.

Sangramsinh P. Gaekwad & Ors. V. Shantadevi P. Gaekwad10. This case revolves around more
shares and a breach of the duty of directors. The extent of sections 397 & 402 of the
Companies Act 1956 plus guidelines for court jurisdiction on some

Dale and Carrington Invt. (P) Ltd. v. P.K. Prathapan and Ors11. This case deals with the
issue that arises when there are more shares allocated and what should be done in such
situations. According to the Supreme Court, the allocation should have been reasonable,
should have benefited the corporation, and should have followed the proper procedure.

These cases led to some changes in the Companies Act of 2013 where different sections, for
example, about mismanagement or oppression were addressed. Some of these amendments
broadened the number of available clauses and further protected against mistreatment
because it could happen due to company officials’ decisions.

In the latest case, Hasmukhlal Madhavlal Patel and Anr v. Ambika Food Products Pvt. Ltd.
and ors12. the court ordered the Board of Directors to look into certain financial matters.
However, it concluded that there was no evidence of any particular cases of misgovernance
and oppression. Furthermore, the court noted that the issuance of shares and the capitalization
did not violate the interests of shareholders. The legal challenge against the forced
withdrawal of the appellants only re-emphasized the conflict among the three shareholder
groups and their incapability to effectively co-manage the firm.

10
Sangramsinh P. Gaekwad & Ors v. Shantadevi P. Gaekwad, 6359 Indian Supreme Ct. (Indian supreme Ct.
2005).
11
dale and carrington Invt. (P) Ltd v. P.K. Prathapan and Ors, 5915 Indian Supreme Ct. (Indian Supreme Ct.
2004).
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The notion of oppression and misappropriation has taken new meaning based on the views of
the Indian Supreme Court and relevant revision of the laws. This idea has since been refined
so that the corporation would be run justly to protect the shareholders

JUDICIAL INTERPRETATION

A sequence of milestone decisions on oppression and mismanagement within the Indian

Corporate Legality illuminate this evolution. For instance, in a case known as Shanti Prasad
Jain vs. The dispute was on oppression by majority shares of Kalinga Tubes Limited. The
court pointed out that such acts should be systematic, and there should be no fair dealing with
minority shareholders even if they do not show any confidence in the company.

Sangramsinh P. Gaekwad & Ors. v. Shantadevi P. Gaekwad raised issues of further share
issuance and the director’s duty of care. In this regard, the court pointed out to broad meaning
in sections 397 & and 402 noting that the relief granted must be based on the exigencies of a
particular case and a court cannot limit itself to sections 402. It was said that the jurisdictional
power of granting relief is very wide under section 397.

Chatterjee Petrochem Ltd. v. Halida petrochemicals Ltd.13 The debt-equity ratio was cited as
a cause for oppression by Haldia Petrochemicals LTD., which needed capital and participated
in a transaction with another company. The court however reiterated that oppression relief is
applicable where the rights of the shareholders are violated since section 397 is limited only
to enforcement of shareholders’ contract.

Dale and Carrington Invt. Prasads Cements Ltd v. P. K. Prathapan & ors. went to the court
where the case was reversed, allowing him to acquire the shares. According to the principle
that a wrongdoer should not profit from his/her actions, the court decided with a remedy in
favor of the appellant and set aside the award of shares to her for purposes of malafide
reason.

MSDC Radharamanan v. M S D Chandrasekara Raja14 court addressed allegations of

oppression under Sections 397 and 398. The court acknowledged the existence of a deadlock

13
Chatterjee petrochem Ltd v. Halida petrochemicals Ltd, 10392 Indian Supreme Ct. (Indian Supreme Ct. 2013).
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14
MSDC Radharamanan v. MSD Chandrasekara, 2006 Indian Supreme Ct. (Indian Supreme Ct. 2008).

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in the company's affairs and directed the appellant to purchase shares, with powers under
Section 402 invoked for the smooth running of the company.

In Girdhar Gopal Gupta And Ors. V. Aar Gee Board Mills Pvt. Ltd. And Ors 15., the court
refrained from interference under Article 136, upholding the decision of CLB on valid
allotment. The resolution of factual controversies and the conduct of parties determined the
basic issue.

In Cyrus Investments Pvt. Ltd. v. Tata Sons Ltd., the NCLT's role in deciding the merit at the
waiver stage was highlighted. Factors such as membership status, the nature of the
application, previous allegations, and exceptional circumstances for waiver were considered,
emphasizing the need for a reasoned opinion by the NCLT on waiver. These cases
collectively underscore the nuanced considerations in addressing oppression and
mismanagement in corporate settings, reflecting the evolution of legal principles in
safeguarding shareholder rights.

In recent judgement Hasmukhlal madhavlal patel and anr. v. Ambika food products pvt. ltd.
and ors. the court the case deals with the exemption of private limited corporations from the
copanies Act, 195616, Section 81, and it revolves around the allocation of disproportionate
rights shares. The court still closely examined the directors' conduct in spite of this exception.
The court concluded that there was no legal infraction when it allowed stockholders to apply
for shares in excess of the 1:1 ratio. Because the appellants filed more applications, their
shareholding was skewed in favor of them. The court emphasized that equitable distribution
would occur if all shareholders' entitlements were surpassed. It further stated that choices
made by directors that are advantageous to the company's interests are not void.

To determine whether there is mismanagement or oppression in a company's operations,

courts have developed a complex methodology. It is understood that the idea includes
behavior that is considered oppressive, severe, and unjust, but that it can take many different
forms and is not always motivated only by financial gain. The courts also stress the
importance of fair dealing and a lack of probity in the company's operations, emphasizing
that coercive behavior should harm some of its members. Furthermore, resolutions that have a
negative impact on the company's or its shareholders' interests collectively are considered
oppressive. Notably, the focus has shifted from legality to the actual impact of their activities
as the courts have stressed

15
Gridhar Gopal Gupta and ors v. Aar gee board mills pvt ltd and ors, 601 Indian Supreme Ct. (Indian Supreme
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Ct. 2009).
16
Companies act, 1 § 81 (ministry of company affairs 1956).

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that even actions taken within the legal rights of majority owners might be considered
oppressive. Secret loans to Directors, the usurpation of the role of the Director, and the
diversion of business cash are important indicators of tyranny or mismanagement. Courts
evaluate a wide range of elements in their judgment, including the activities of directors of
the firm, the behavior of the dominant shareholder, and the wider effects of decisions on the
company and its shareholder community.

Ultimately, the goal of the courts' rulings in these instances is to guarantee that businesses are
managed in an equitable, open, and just way. The courts have worked to safeguard the rights
of all shareholders and stop directors or majority shareholders from abusing their positions of
authority.

COMPARTIVE ANANYSIS

Section 241 of the Companies Act of 2013 corresponds to Sections 397, 398, 401, 402, 403,
and 404 of the Companies Act of 1956. The 2013 Act transferred the responsibility of hearing
cases involving oppression and mismanagement from the Company Law Board (CLB) under
previous legislation to the National Company Law Tribunal (NCLT) and the National
Company Law Appellate Tribunal (NCLAT).

By addressing previous instances of persecution, the new statute expands the grounds for
seeking remedy, thereby significantly expanding its scope. Formerly covered by Sections 397
and 398 of the 1956 Act, Section 241 enables members to pursue remedies for actions that
harm the interests of the company, oppress any member, or harm the public interest—even
when those actions don't directly qualify as oppression.

Comparing Section 402 of the 1956 Act to Section 242 of the 2013 Act, the latter shows a
wider array of reliefs available to the Tribunal. In the meantime, Section 399 of the 1956 Act,
which describes the eligibility to apply under Section 241, is matched by Section 244 of the
2013 Act. Notably, the NCLT now has the jurisdiction to waive compliance with Section 244
requirements in the 2013 Act, which is a change from the prior provision that gave the
Central Government this authority

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Furthermore, a new provision under Section 245 of the Companies Act of 2013 allows
members or depositors to file a class action lawsuit for damages and compensation against a
company, its directors, auditors, experts, advisors, consultants, or any other individual for acts
or conduct that was fraudulent, illegal, or wrong. This innovative feature gives rise to a
mechanism for class action lawsuits, which can be filed with the NCLT.17 All of these
modifications represent a development in the legal system, with the goal of addressing a
wider range of problems associated with oppression, poor management, and corporate
misconduct in a way that is more thorough and up to date.

CONLUSION

To sum up, this study explores the complex and dynamic terrain of mismanagement and
oppression in the Indian corporate sector, tracing its historical origins, legislative changes,
and judicial interpretations. For a complete understanding, it is necessary to examine historic
judgments and statutory modifications because the Companies Act does not define
"mismanagement" or "oppression" explicitly.

The Companies Act of 2013 represents a paradigm shift in the evolution of the Companies
Act of 1956, redefining jurisdiction, remedies, and petition filing thresholds. Authority is
now vested in the National Company Law Tribunal (NCLT), and a wider range of
stakeholders can now file at this threshold. A temporal component is added to the legal
system with the implementation of a three-year petition filing deadline.

The conceptual framework emphasises the need of context-specific judicial judgements in

understanding the complexities of oppression and mismanagement. These words' definitions
are derived from court judgements, emphasising their wide and encompassing character.
Sections 241–246 of the Companies Act of 2013, in particular, offer the legal basis for
resolving these concerns, emphasising the preservation of minority shareholder interests and
the ideals of corporate democracy.

The study follows the growth of oppression and mismanagement from Shanti Prasad Jain to
more current instances like Hasmukhlal Madhavlal Patel v. Ambika Food Products Pvt. Ltd.

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supra

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These judgements demonstrate the judiciary's flexible approach to responding to the changing
business world, emphasising justice, equity, and shareholder rights protection.

In summary, our research adds to scholarly understanding while simultaneously providing

practical insights for stakeholders navigating the complexities of corporate governance. The
conclusion mirrors the primary purpose of the research: to examine the policy implications
and advocate measures that enhance the legal framework against oppression and
mismanagement, ultimately achieving stronger corporate governance standards in India.

BIBLIOGRAPHY

1. Mohan, Landmark judgements in Oppression & Mismanagement, (Dec. 20, 2022),

https://www.icsi.edu/media/filer_public/58/1d/581de8e5-8fc4-40a4-acdc-
6ac1907826ef/oppression mismanagement_-_final.pdf.
2. Action Against Oppression and Mismanagement – An Effective Tool, SCC Blog (June 7, 2022),
https://www.scconline.com/blog/post/2022/06/07/action-against-oppression-and-mismanagement/.
3. Sanskar Mishra, Corporate Mismanagement And Oppression, (Apr. 7, 2023),
https://www.livelaw.in/lawschoolcolumn/corporate-mismanagement-and-oppression-company-law-
225767.
4. https://www.mca.gov.in/Ministry/pdf/CompaniesAct2013.pdf.
5. Parina Katyal, Companies Act - Decision To Allot Additional Shares Cannot Be Set Aside Merely
Because Promoters Have Also Benefited: Supreme Court, Decision To Allot Additional Shares Cannot Be
Set (June 23, 2023), https://www.livelaw.in/supreme-court/supreme-court-upholds-disproportionate-
share- allotment-private-limited-company-companiees-act-231165.
6. Microsoft Word - GA871j.doc, (Aug. 12, 2020),
https://www.livelaw.in/pdf_upload/pdf_upload-379944.pdf.
7. (June 15, 2023), https://www.livelaw.in/pdf_upload/2156420186150244710judgement15-

jun-2023-477984.pdf.
8. Guest, Coverage of Future Misconduct under Oppression and Mismanagement, IndiaCorpLaw

(Aug. 22, 2021), https://indiacorplaw.in/2021/08/coverage-of-future-misconduct-under-

oppression-and-mismanagement.html.

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