VIth Semester

Company Law
Unit 3
Majority Rule, Prevention of Oppression
and Mismanagement, CSR, Directors-
Legal Position

-Akhila Rani
Assitant Professor, RCL
Majority Rule ( Rule in Foss v. Harbottle)
• According to Palmer, a proper balance of the rights of
Majority and Minority Shareholders is essential for the
smooth functioning of the Company.
• The general rule is that the court will not interfere in the
matters relating to the company’s management by the
directors as long as they are acting within their powers
enshrined under the Articles of the company.
• This rule was laid down in the case, Foss v. Harbottle.
Foss vs Harbottle [1843] 67 ER 189
Facts
• In the case of Foss v Harbottle [1843], the two
shareholders commenced an action against the
defendants, promoters and directors of the company. The
plaintiff shareholders claimed that the defendants had sold
their own property to the company at an exorbitant price
and then improperly mortgaged it.
Issue
• Whether the plaintiff shareholders were allowed to bring
an action against the defendants on behalf of the
company?
Judgement
• The court found that the shareholders were not the
proper plaintiffs and could not, therefore, bring an
action.
• The court held that the company is a proper claimant.
• company is a legal person separate from its members.
• A member cannot bring an action to redress a wrong
done to the company.
• Thus, the majority supremacy rule was established
Rules established in Foss vs Harbottle [1843] 67 ER 189

• Proper Plaintiff Rule: -In any action in which a wrong is

alleged to have been done to a company, the proper
claimant is the company itself.
• Majority Rule :-The court will not interfere in the
matters relating to the company’s management by the
directors as long as they are acting within their powers
enshrined under the Articles of the company
• The decision of the majority prevails, and they decide
on how the company is to carry out its affairs. The rights
of the majority will be protected
Exceptions of the Majority Principle
Although the majority rule prevails, there are certain
circumstances in which the rule is kept in check:
a) Company acting beyond its power – Ultra vires
• If the company is acting beyond its prescribed power in
the memorandum, a shareholder can bring an action
upon such breach.
• It can be brought against the company or its officers
• Prudential Assurance Co Ltd v Newman (1982)
• Bharat Insurance Company Ltd v. Kanhaiya Lal, AIR
1935 Lah 742 case
b) Fraud on minority
• In this scenario, an action can be brought by the minority
shareholders if fraud or oppression has caused an
unreasonable use of power by the majority against the
minority.
• This should have resulted in gross unfairness to the
minority.
• Further, it also includes scenarios where the majority
shareholders appropriated the money, property and so on
belonging to the company
• Burland v Earle (1902)
• Menier v. Hooper's Telegraph Works, (1874) L.R. 9 Ch
c) Control in the hands of a wrongdoer
• Sometimes, the control is in the hands of a wrongdoer,
and he would not permit an action to be brought against
them.
• To protect the company’s interest, a suit can be brought
by the minority shareholders.
• To protect the rights of a single shareholder if infringed.
• Glass v. Atkin, (1967) 65 DLR 501
d) Against oppression and mismanagement
• The Companies Act provides the provisions concerning
oppression and mismanagement in companies and the
prevention of the same.
• This is to ensure remedy in the cases of oppression and
mismanagement against the minority and combat the
same.
• This acts as an exception to the majority rule as well
e) Special Resolution
• Where the matter in issue requires the sanction of a
special majority and there has been non-compliance
with a special procedure
• Edwards v Halliwell (1950)
f) Infringement of Individual Rights
• Where a member’s personal rights have been infringed.
• Pender v Lushington (1877)
PREVENTION OF OPPRESSION AND MISMANAGEMENT
• Oppression refers to unjust treatment committed by
majority shareholders upon the minority shareholders
by misusing the authority.

• Mismanagement refers to practices of managing the

company incompetently and dishonestly.
• Prevention of oppression and mismanagement is an
exception to the Majority Rule
Application to the Tribunal (Sec.241)
• Affairs of the company conducted in Prejudicial to
Public interest
• Oppressive to any member
• Prejudicial to the interests of the Company

Central Govt itself can apply to tribunal if the affairs

of the Company is conducted Prejudicial to Public
interest
Right to apply under section 241 (Section 244 )
• When a company having share capital the following
members can apply under section 241:
• Not less than 100 Members 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
• When a company does not have a share capital at least
1/5th of the total number of its members shall apply
under section 241.
• On application, Tribunal may waive the above
requirements
Powers of Tribunal (Sec.242)
The Tribunal is empowered to pass an order as it deem fit
• Regulation of company’s conduct in future
• Purchase of shares or interests of any members by other
members of the company
• The consequent reduction of share capital if a company’s
shares are purchased by the company itself
• Limitation on transfer and allotment of shares
• Termination, setting aside, or modification of an
agreement between the company and managing directors
or another person
• Removal of managing director or other directors
• The agreement may be terminated, set aside, or modified
only after giving due notice and obtaining the consent of
the concerned person
• Recovery of undue gains made by managing director,
manager, director during his employment;
• Recovered funds must be utilized by transferring to investor
education and protection fund or
• Repayment to identified victims
• Manner as to the appointment of a new managing director
• Appointment of members who may report to the tribunal
on matters directed by it
• Imposition of costs
• Under section 242(3) the company is required to file a
certified copy of the order of Tribunal before the Registrar
within 30 days of passing the order.
• Under section 242(4) the Tribunal may pass an interim
order fit for regulating the company’s conduct.
• Under section 242(4A) the Tribunal must record its decision
specifying whether the respondent is a fit and proper
person to manage the company affairs or not.
• Under section 242(8) if a company contravenes the
Tribunal’s order it shall be liable to pay a fine of 1 lakh
rupees which may extend to 25 lakh rupees.
• Every defaulting officer shall be liable to pay a fine of 25
thousand rupees which may extend up to one lakh rupees.
Appeal against order of the tribunal
• Aggrieved party can file an appeal within 45 days of
the date of receipt by him of the copy of the order or
decision before the appellate tribunal.
• Appeal from the appellate tribunal to the supreme
court.
• Difference between the Winding up & proceedings for
oppression and mismanagement- relief under section
241 is an alternative to the winding up
Conclusion
• Section 241 provides the procedure for oppressed
shareholders to file an application to the Tribunal for
relief in cases of oppression and mismanagement.
• Section 244 provides the members who may apply under
section 241.
• Section 242 deals with the powers of the Tribunal.
• Oppression and mismanagement can be checked by the
Tribunal and relief may be granted
CORPORATE SOCIAL RESPONSIBILITY (CSR) (Sec.135)
• CSR can be defined as a Company’s sense of responsibility
towards the community and environment (both ecological
and social) in which it operates.
• Companies can fulfill this responsibility through waste and
pollution reduction processes, by contributing educational
and social programs, by being environmentally friendly and
by undertaking activities of similar nature.
• Corporate entities visibly contribute to the social good.
• CSR is said to increase reputation of a company’s brand
among its customers and society.
• The Companies Act, 2013 has formulated Section 135,
Companies (Corporate Social Responsibility) Rules, 2014
and Schedule VII prescribes mandatory provisions for
Companies to fulfill their CSR
Applicability of CSR Provisions:
• Net worth of Rs. 500 Crore or more, or
• Turnover of Rs. 1000 crore or more, or
• Net Profit of Rs. 5 crore or more
• during the immediately preceding financial year

• A foreign company having its branch office or project office

in India, which fulfills the criteria
CSR Committee:
• Every Company on which CSR is applicable is required to
constitute a CSR Committee of the Board:
• Listed Company- 3 or more Directors (One shall be
Independent Director)
• Private companies- 2 or more directors. No independent
director is required
• Foreign Company- 2 persons of which one person shall be
its authorised person resident in India and another
nominated by the foreign company
Functions of CSR Committee
• (i) formulate and recommend the CSR policy to the Board;
• (ii) recommend the amount of expenditure to be incurred
on CSR activities;
• (iii) monitor the CSR policy of the company from time to
time; and
• (iv) formulate and recommend to the Board, an annual
action plan in pursuance of its CSR policy, which shall
include the items as mentioned in rule 5(2) of
the Companies (CSR Policy) Rules, 2014.
Responsibilities of the Board of a CSR-eligible company
• (i) approve the CSR policy;
• (ii) disclose contents of such policy in its report and also
place it on the company's website, if any;
• (iii) ensure that the activities included in the CSR policy
are undertaken by the company;
• (iv) ensure that the company spends, in every financial
year, at least two per cent of the average net profits of
the company made during the three immediately
preceding financial years;
• (v) satisfy itself regarding the utilisation of the disbursed
CSR funds; and
(vi) if the company fails to spend at least two per cent of
the average net profits of the company, the Board shall,
in its report specify the reasons for not spending
the amount and transfer the unspent CSR amount to a
separate account specifically made for ‘unspent CSR
amount’
CSR Policy
The CSR Policy of the company shall, inter-alia, include
the following namely :-
• A list of CSR projects or programs which a company
plans to undertake specifying modalities of execution of
such project or programs and implementation schedules
for the same
• Monitoring process of such projects or programs
• A clause specifying that the surplus arising out of the
CSR projects or programs or activities shall not form part
of the business profit of the company.
• Display of CSR Activities on its Website
• The BOD shall disclose contents of CSR policy in its report
and the same shall be displayed on the company’s website,
if any.
• Schedule 7
• Activities which may be included by companies in their
Corporate Social Responsibility Policies relating to:
• Eradicating hunger, poverty and malnutrition,promoting
health care including preventive health care and sanitation
including contribution to the Swach Bharat Kosh set-up by
the Central Government for the promotion of sanitation and
making available safe drinking water.
• Promoting education, including special education and
employment enhancing vocation skills especially among
children, women, elderly and the differently abled and
livelihood enhancement projects.
• Promoting gender equality, empowering women, setting
up homes and hostels for women and orphans; setting up
old age homes, day care centres and such other facilities
for senior citizens and measures for reducing inequalities
faced by socially and economically backward groups.
• Ensuring environmental sustainability, ecological balance,
protection of flora and fauna, animal welfare,
agroforestry, conservation of natural resources and
maintaining quality of soil, air and water including
• Ganga Fund set-up by the Central Government for
rejuvenation of river Ganga.
• Protection of national heritage, art and culture including
restoration of buildings and sites of historical importance
and works of art; setting up public libraries; promotion
and development of traditional art and handicrafts;
• Measures for the benefit of armed forces veterans, war
widows and their dependents;
• Training to promote rural sports, nationally recognised
sports, paralympic sports and olympic sports
• Contribution to the Prime Minister’s national relief
fund or any other fund set up by the central govt. for
socio economic development and relief and welfare of
the schedule caste, tribes, other backward classes,
minorities and women;
• Contributions or funds provided to technology
incubators located within academic institutions which
are approved by the central govt.
• Rural development projects Slum area development
Directors
• Director means a director appointed to the board of
directors of the Company- sec. 2(34) of Companies Act,
2013.
• Only an individual can be appointed as a director (Sec.149)
• No body corporate, association or firm can be appointed as
the Director of a Company
 Number of Directors (Section 149)
Public Company
• Minimum 3 Directors
• Maximum number of directors – 15 (fifteen)
• Also, at least 1/3rd (one-third) must be independent
Private Limited Company
• Minimum 2 Directors
• Maximum number of directors – 15 (fifteen)
One Person Company
• Minimum 1 Director
• Maximum number of directors – 15 (fifteen)
Number of Directorships
• Maximum number of Directorships can be held by a
person is 20 companies at the same time
• Maximum number of Directorships can be held by a
person in Public Companies is 10 at the same time
• For reckoning the limit of Public Companies in which he
can be appointed as a director, directorship in Private
company that are either holding or subsidiary company
of a Public Company also shall be included
Appointment of directors
• Who may be appointed as a director?
• An individual can be appointed as director (Sec 149)
• No body corporate, association or firm can be appointed
• Such individual must have obtained DIN (sec 153)
Qualification for directors
• No academic or professional or share qualification for
directors has been prescribed under the Act
• AOA may prescribe for a minimum share qualification
 Disqualification of a director (sec164)
• unsound mind
• Insolvent
• convicted by court of any offence involving moral turpitude
• court/tribunal has disqualified the director
• non payment of calls
• convicted for offence dealing with Related Party
Transactions (Sec.188)during the last preceding five years
• no DIN
• He is already appointed as a director in 10 public companies
or in total 20 companies
• Defaulted to file the financial statements or annual
returns for any continuous period of 3 financial years
• Failed to repay the deposits/ pay interest or redeem
debentures or pay dividend for a continuous period of
one year
Legal position of director
• Directors are the persons duly appointed by the
Company to lead and manage its affairs and their legal
position.
At times they have to act as:-
• Agents
• Managing partner
• Trustees
• Employee etc
• “Directors are described sometimes as agents,
shareholders, as trustees and sometimes as managing
partners. But each of these expressions is used not as
exhaustive of their powers and responsibility but as
indicating useful points of view from which they may for the
moment and for the particulars purpose to be considered.” –
Browen, L. J.
1)Directors as Agents
• A company as an artificial person and cannot act itself.
• It can act through directors who are the elected
representatives
• They execute decision made for the benefit of shareholders.
• Hence the relationship between the company & Director is
that of the principal and agent
2) Directors as trustees
• Directors are trustees of the company’s money and property
and they have to safeguard them and use them for the sake
of the company and on behalf of the company.
3)Directors as employees
• Directors are professionals who manage the company
for the benefit of themselves and for the benefit of the
shareholders.
• However, if a director accepts employment in the same
company under a separate contract of service, then, in
addition to the directorship, he is also treated as an
employee or servant of the company.
4)Directors as Managing partners
• Directors have been described as the managing partners
because, on the one hand, they are entrusted with
management and control of the affairs of the company,
and on the other hand, they are the important
shareholders of the company.