OPPRESSION & MISMANAGEMENT UNDER COMPANIES ACT 2013

UPDATE: on 30^th August 2013: Companies Bill 2012 became the Companies Act, 2013 (Act 18 of 2013).

Class Action is one of the youngest additions to Indian jurisprudence particularly, in Indian Corporate Jurisprudence. Class Action aims to prevent Oppression and Mismanagement in Companies. The Provisions relating to Oppression and Mismanagement are in Chapter XVI of the Companies Bill, 2012.

In this post, I will cover Section 241 – 244 which deals with normal provisions.

In next post, I will discuss Section 245 dealing with Class Action and after that Section 246 read with Section 373 to 341.

APPLICATION IN CASE OF OPPRESSION & MISMANAGEMENT (SECTION 241):

Any member, who has right to apply under Section 244, may apply to the Tribunal under this Section 241.

An application may be filed for a complaint that:

(a)  The affairs of the company have been or are being conducted

1.  in a manner prejudicial to the public interest, or
2. In an manner prejudicial or oppressive to him or any other member or members, or
3. In a manner prejudicial to the interests of the company; or

(b) The material change has taken place in the management or control of the company, whether by;

1. An alteration in the Board of Directors, or
2. Manager, or
3. In the ownership of the company’s share, or
4. If it has no share capital, in its membership, or
5. 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 its interests or its members or any class of members. These changes should not be a change brought about by, or in the interests of, any creditors, including debenture holders or any class of shareholders of the company.

The Central Government, if it is of the opinion that the affairs of the company are being conducted in a manner prejudicial to public interest, it may itself apply to the Tribunal for an order under this Chapter.

RIGHT TO APPLY UNDER SECTION 241 (SECTION 244):

In case of company having sharing share capital:

(a)  Not less than one hundred members of the company, or

(b) Not less than one – tenth of the total numbers of its members,

Whichever is less shall have right to apply under Section 241.

However, any member or members holding not less than one – tenth of the issued share capital of the company, subject to the condition that the applicant or applicants has or have paid all calls and other sums due on his or their shares, shall also have right to apply under Section 241.

In case of a company not having a share capital, not less than one – fifth of the total number of its members shall have right to apply under Section 241.

Tribunal may, on an application made to it in this behalf, waive all or any of the requirements specified, so as to enable the members to apply under section 241.

Where any members of a company are entitled to make an application, any one or more of them having obtained the consent in writing of the rest, may make the application on behalf and for the benefit of all of them.

POWER OF TRIBUNAL (SECTION 242, SUB – SECTION 1, 3):

On any application made under Section 241, the Tribunal shall frame its opinion on two points:

(a)  that the company’s affairs have been or are being conducted in a manner prejudicial or oppressive to any member or members or prejudicial to public interest or in a manner prejudicial to the interests of the company; and

(b) that 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 that the company should be wound up,

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

A certified copy of the order of the Tribunal under sub-section (1) shall be filed by the company with the Registrar within thirty days of the order of the Tribunal.

This means the Tribunal has unlimited power under this Section. However, this Section asks the Tribunal to give particular details in its order.

Details in Order Passed by Tribunal (Section 242, Sub – Section 2):

The Order shall provide for:

(a)  the regulation of conduct of affairs of the company in future;

(b)  the purchase of shares or interests of any members of the company by other members thereof or by the company;

(c)  in the case of a purchase of its shares by the company as aforesaid, the consequent reduction of its share capital;

(d)  restrictions on the transfer or allotment of the shares of the company;

(e)  the termination, setting aside or modification, of any agreement, howsoever arrived at, between the company and the managing director, any other director or manager, upon such terms and conditions as may, in the opinion of the Tribunal, be just and equitable in the circumstances of the case;

(f)   the termination, setting aside or modification of any agreement between the company and any person other than those referred to in clause (e)but no such agreement shall be terminated, set aside or modified except after due notice and after obtaining the consent of the party concerned;

(g)  the setting 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 this section, which would, if made or done by or against an individual, be deemed in his insolvency to be a fraudulent preference;

(h)  removal of the managing director, manager or any of the directors of the company;

(i)    recovery of undue gains made by any managing director, manager or director during the period of his appointment as such and the manner of utilisation of the recovery including transfer to Investor Education and Protection Fund or repayment to identifiable victims;

(j)   the manner in which the managing director or manager of the company may be appointed subsequent to an order removing the existing managing director or manager of the company made under clause (h);

(k)  appointment of such number of persons as directors, who may be required by the Tribunal to report to the Tribunal on such matters as the Tribunal may direct;

(l)    imposition of costs as may be deemed fit by the Tribunal;

(m) any other matter for which, in the opinion of the Tribunal, it is just and equitable that provision should be made.

Interim Order (Section 242, Sub – Section 4):

The Tribunal may, on the application of any party to the proceeding, make any interim order which it thinks fit for regulating the conduct of the company’s affairs upon such terms and conditions as appear to it to be just and equitable.

Alteration in Memorandum or Articles (Section 242, Sub – Section 5, 6, 7):

Where an order of the Tribunal makes any alteration in the memorandum or articles of a company, then, the company shall not have power, except to the extent, if any, permitted in the order, to make, without the leave of the Tribunal, any alteration whatsoever which is inconsistent with the order, either in the memorandum or in the articles.

The alterations made by the order in the memorandum or articles of a company shall, in all respects, have the same effect as if they had been duly made by the company in accordance with the provisions of this Act and the said provisions shall apply accordingly to the memorandum or articles so altered.

A certified copy of every order altering, or giving leave to alter, a company’s memorandum or articles, shall within thirty days after the making thereof, be filed by the company with the Registrar who shall register the same.

CONSEQUENCE OF TERMINATION OR MODIFICATION OF AGREEMENTS (SECTION 243):

Where an order made under section 242 terminates, sets aside or modifies an agreement—

(a)  such order shall not give rise to any claims whatever against the company by any person for damages or for compensation for loss of office or in any other respect either in pursuance of the agreement or otherwise;

(b) no managing director or other director or manager whose agreement is so terminated or set aside shall, for a period of five years from the date of the order terminating or setting aside the agreement, without the leave of the Tribunal, be appointed, or act, as the managing director or other director or manager of the company. Tribunal shall not grant leave under this clause unless notice of the intention to apply for leave has been served on the Central Government and that Government has been given a reasonable opportunity of being heard in the matter.

Here, I observed that tribunal may grant leave to after hearing Central Government. Why any such opportunity of hearing not be given to members, who originally filed the application?

Please note: this blog post is not a professional advice but general information about the subject covered here. I appreciate if readers share this post on social media with friends and colleagues.