Prevention of Oppression
and Mismanagement
Contents
Oppression
Acts held as Oppressive
Acts held as not Oppressive
Mismanagement
Acts held as Mismanagement
Acts held as not Mismanagement
Prevention of Oppression and Mismanagement
Relief against Oppression and Mismanagement
Difference between Petition under section 397 & 398 and
Petition for winding up under section 433(f)
Conclusion
References
Oppression
The word ‘oppression’ is not defined in the companies act.
According to the dictionary meaning oppression is any act
exercised in a manner burdensome, harsh and wrongful.
It means that the complaining shareholder is under an
unbearable burden due to unjust, harsh treatment of the
majority shareholders.
The term ‘oppression’ has been explained by Lord Cooper in
Elder v. Elder & Watson Ltd. as,
“The essence of the matter seems to be that 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.”
Acts held as Oppressive
Looking to the various judicial pronouncements, some of
the acts amounting to oppression may be summarized as
under:-
Not calling a general meeting and keeping shareholders in
dark.
Non-maintenance of statutory records and not conducting
affairs of the company in accordance with the Companies Act.
Issue of further shares benefiting a section of shareholders
Failure to distribute the amount of compensation received on
nationalization of business of company among members,
where required to be so distributed.
An attempt to deprive a member of his ordinary membership
right is an oppression i.e. Depriving a member of the right to
dividend
An unreasonable refusal to accept a transfer or transmission of
shares has been held to be oppressive.
An attempt to force new and more risky objects upon an
unwilling minority may amount to oppression.
Where a majority controller persistently flouted the decision
of the board and made it impossible for the company to
function , was held to be an oppression.
Example
The life insurance business of a company was taken over by
the life insurance corporation of India in 1956 and
compensation thereof was paid to the company. The directors,
who had the majority voting power, refused to distribute the
amount of compensation and went ahead with a special
resolution to undertake new and , more risky objects. This was
held to be an ‘oppression’ as the minority had invested their
money in a life insurance business with all its safeguards and
statutory protections but they were being forced to invest
where there should be no such protections or safeguards. ( Re
Hindustan Co-operative Insurance Society Ltd. AIR Cal.44)
Acts held as not Oppressive
The following acts have been held as not oppressive:-
Non-holding of the meeting of the directors
Not declaring dividends when company is making losses
Denial of inspection of books to a shareholder.
Increasing the voting rights of the shares held by the
management
An unwise, inefficient or careless conduct of director
Non-maintenance/Non-filing of records
Lack of details in notice of a meeting.
The drawing of salary by the directors does not amount to
oppression merely because the company is suffering losses.
The fresh issue of shares to outsiders by passing a resolution
even if it does not suit the interest of minority.
Refusal to declare more than moderate rate of dividend even
though the profits earned could justify a higher rate of
dividend may not amount to oppression.
Mismanagement
U/s 398, Mismanagement is said to be done if
the affairs of the company are being conducted in a manner
prejudicial to the interests of the company
or
a material change has taken place in the management of control
of the company it is likely that the affairs of the company will be
conducted in a manner prejudicial to the interests of the
company.
Example
The managing directors of a company continued in office after
their terms had expired , without a meeting being held to
reappoint them prior to making a fresh application to the
central government under section 269. It was held that
continuation in office under these conditions was
mismanagement within the purview of sections 397 and 398.
(Shishu Ranjan Dutta v. Bhola Nath Paper House Ltd.1983)
Acts held as Mismanagement
The following acts have been held as amounting to
mismanagement:-
Where there is serious infighting between directors.
Where Board of Directors is not legal and the illegality is being
continued.
Where bank account(s) was/were operated by unauthorized
person(s).
Where directors take no serious action to recover amounts
embezzled.
Continuation in office after expiry of term of directors.
Violation of the conditions of the company’s Memorandum by
those who are in charge of company’s management.
Violation of statutory provisions and those of Articles.
Diversion of the funds of the company for the benefit of
majority group.
Where shares are being transferred without first being offering
them to the existing members
Holding meetings without sending notice to members
Issue of shares for a consideration other than cash not
represented by corresponding assets.
Acts held as not Mismanagement
Bonafide decisions of the directors which are consistent with
the company's memorandum and articles are not to be equated
with mismanagement even if they turn out to be wrong or they
cause temporary losses.
Where the directors of a company in financial difficulties
arrange with the company’s creditors that they may become
shareholders and director instead of remaining creditors, was
held not be an act of mismanagement rather done bonafide in
the best interests of a company.
Termination of the services of a works manager who held only
20 shares was not in itself an act of mismanagement
The mere keeping of the money of the company in a term
deposit is not a bad business practice so as constitute
mismanagement.
Directors bonafide decision not to declare dividend and plough
back profit i.e. to create reserves is not mismanagement.
Slight delay in the payment of full value of shares can in no
case be taken to be so prejudicial to the interest of the
company as to call for any action u/s 398 of the act.
Prevention of Oppression and
mismanagement
(i) Application to Tribunal (section 397 and 398)
The first remedy available to oppressed minority or in case of
mismanagement to move to the Tribunal. Whenever the affairs
of a company are being conducted in a manner pre-judicial to
public interest or in a manner oppressive to any member or
members, an application can be made to the Tribunal.
(ii) Who can apply
Any members of a company who complain that the affairs of the
company are being conducted in a manner oppressive to any
member or members (including any one or more of themselves)
may apply to the Court for an order under this section, provided
such members have a right so to apply in virtue of section
399.The section comes into force only when the aggrieved
member is able to show that he suffered an injustice in his
capacity as a shareholder and not in any other capacity.
The requisite number of members who must sign the
application is given in Section 399. The requirement varies
with the fact as to whether the company has a share capital or
not and is discussed below:-
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.
In the case of a company not having a share capital, not less
than one-fifth of the total number of its members.
Any Lesser number of members, if so authorized by the
Central Government. The Central Government will give its
consent if in its opinion circumstances exist which make it
just and equitable so to do.
Besides members, the following may also apply for relief u/s
397 and 398:-
U/s 401, the Central Government or any person authorized by
the Central Government has a right to file a petition.
U/s 243, any person authorized by the Central Government
under the circumstances mentioned in that section can also file
a petition.
A legal representative of a deceased member, on whom title to
the shares devolves by operation of law.
iii) Who cannot apply
The following can’t apply for relief u/s 397 and 398 :-
A member whose calls or other sums due on their shares have
not been paid.
A holder of a letter of allotment of a partly paid share.
A holder of a share warrant.
A transferee of shares who has not lodged the shares for
transfer to the company.
(iv) Notice to the Central Government (u/s 397 and 398):-
Section 400 requires the Tribunal to give notice of every
application made to it u/s 397 and 398 to the Central
Government.
Relief against Oppression and
Mismanagement
Powers
Powers
of Central
of Tribunal
Government
Powers of Tribunal
Whereas Sections 397 and 398 confer general powers on the
Tribunal to pass necessary orders including an interim order,
where appropriate, to end oppression and mismanagement, Sec
402 empowers it to grant certain specific reliefs. The reliefs
contemplated u/s 402 are:-
(a) the regulation of the conduct of the company's affairs in
future u/s sec 402(a)
(b) The Tribunal may order for the purchase of the shares or
interests of any members of the company by other members
thereof or by the company u/s sec 402(b)
(c) The Tribunal may order for the reduction of the share capital
of the company , provided the company has purchased its own
shares under the orders of the tribunal as aforesaid u/s sec402(c)
(d) The Tribunal may order for the termination, setting aside or
modification of any agreement, howsoever arrived at, between
the company on the one hand, and any of the following persons,
on the other namely:—
(i) the managing director,
(ii) any other director,
(iii) the managing agent,
(iv) the secretaries and treasurers, and
(v) the manager,
upon such terms and conditions as may, in the opinion of the
Court, be just and equitable in all the circumstances of the case
(e) The tribunal may order for the termination, setting aside or
modification of any agreement between the company and any
person not referred to in clause (d), provided that no such
agreement shall be terminated, set aside or modified except
after due notice to the party concerned and provided further
that no such agreement shall be modified except after
obtaining the consent of the party concerned.
Penalty:- Imprisonment of 1 year or fine of Rs 50,000 or both
(f) The Tribunal may also make provision for any other matter
which appears to the tribunal to be just and equitable under the
circumstances of a particular case, even if it amounts to
interference in internal management.
(g) The Tribunal may also set aside of any transfer, delivery of
goods, payment, execution or other act relating to property
made or done by or against the company within three months
before the date of the application under section 397 or 398,
which would, if made or done by or against an individual, be
deemed in his insolvency to be a fraudulent preference
Powers of central government
The central government has been empowered to appoint
directors on an order passed by the tribunal to effectively
safeguard the interests of the company or its shareholders or
the public interest to prevent mismanagement or oppression.
The power is in the nature of the preventive action and can be
exercised by the tribunal either on a reference made by the
central government or an application made by the-
(a) At least 100 members
(b) Members holding at least 10% voting powers.
The central government may appoint any number of directors in a
company as it may deem fit , for a period not exceeding 3 years at
a time u/s sec 408 (1)
If the Tribunal recommends to the central government for the
appointment of directors u/s 408, it may, if it thinks fit, direct that
until new directors are appointed in pursuance of the order passed
by it u/s 408(1), such number of persons as the Tribunal may, by
order, specify as being necessary to effectively safeguard the
interests of the company, or its shareholders or the public interest,
shall hold office as additional directors of the company and on
such directions, the Central Government shall appoint such
additional directors u/s sec 408(2)
For the purposes of reckoning two-thirds or any other
proportion of the total number of directors of the company,
any director or directors appointed by the Central Government
under sub-section (1) or (2) shall not be taken into account u/s
sec 408(3)
The directors or the additional directors appointed by the
central government shall not be required to hold any
qualification shares u/s sec 408(4)
No change in the Board of directors made after a person is
appointed or directed to hold office as a director or additional
director under this section shall, so long as such director or
additional director holds office, have effect unless confirmed
by the Tribunal u/s sec 408 (5)
The Central Government may issue such directions to the
company as it may consider necessary or appropriate in regard
to its affairs and such directions may include directions to
remove an auditor already appointed and to appoint another
auditor in his place or to alter the articles of the company u/s
sec 408(6)
The Central Government may require the persons appointed as
directors or additional directors in pursuance of sub-section
(1) or sub-section (2) to report to the Central Government
from time to time with regard to the affairs of the company u/s
sec 408 (7)
Power of Tribunal to Prevent change in
Board of Directors.(sec 409)
Where a complaint is made to the Tribunal by the managing
director or any other director or the manager, of a company
that as a result of a change which has taken place or is likely to
take place in the ownership of any shares held in the company,
a change in the Board of directors is likely to take place which
(if allowed) would affect prejudicially the affairs of the
company, the Tribunal may, if satisfied, after such inquiry as it
thinks fit to make.
Any such order shall have effect notwithstanding anything to
the contrary contained in any other provision of this Act or in
the Memorandum or Articles of the company, or in any
agreement or any resolution passed in general meeting by, or
by the Board of directors of, the company u/s sec 409(1)
The Tribunal shall have power when any such complaint is
received by it, to make an interim order, until the completion
of enquiry u/s sec 409(2)
The provisions of section 409 do not apply to a private
company, unless it is a subsidiary of a public company u/s sec
409(3)
Petition under section 397 and 398 Petition for winding up under section 433 (f)
Petition under sections 397 & 398 is to be Petition for winding up is to be made to be
made to the Tribunal. made to the court.
Notice to central government is necessary No such notice is necessary
under section 400.
Share qualification is required for an No minimum share qualification is required.
application vide section 399 unless otherwise
allowed by the central government
Under section 401 , the central government The central government cannot apply but the
may itself apply or it can cause the application registrar of companies can apply under section
to be made by a person authorized by it. 439(5) or company itself can apply.
Nature of relief is much wider, vide section 402 Nature of relief is narrower, vide section 433
Remedy is of preventive nature and thus helps Winding up results in civil death of a company.
the continuity of company.
Source :- Majumdar.A.K, & Kapoor.G.K.(2004).Company Law and Practice.New Delhi:Taxmann,s
Conclusion
The Act and the Courts try to strike a fine balance between the
Right of Majority to rule (i.e. the Rule laid down in Foss v.
Harbottle) and the protection of interests of the minority
shareholders through the prevention of Oppression and
Mismanagement
References
Garg.K.C,Gupta.V,Gupta.P,&Chawla.R.C.(2003).Company
Law.New Delhi:Kalyani
Majumdar.A.K, & Kapoor.G.K.(2004).Company Law and
Practice.New Delhi:Taxmann,s
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f
http://www.financedoctors.net/Notes/206.pdf
http://dsaca.co.in/publications/Oppression%20&
%20Mismanagement.pdf
http://www.articlesbase.com/regulatory-compliance-
articles/petition-under-section-397398-maintainability-a-case-
study-indian-company-law-2211998.htmlcase
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