Different Prevention of Oppression & Mismanagement Under Corporate Law

PRINCIPLE OF MAJORITY RULE

Generally, the management of a company is based on the thumb of majority rule. The will of majority should prevail and bind the minority is known as principle of majority rule.

 

Foss V. Harbottle (1843)

Directors bought their own land for company’s use and had payed prices greater than its value to themselves, hence, it generated a loss to the company. Minority shareholder decided to take action against directors. BOD by majority stated that those directors are not responsible for loss.

The court dismissed the suit on the ground that directors are capable of confirmation by majority of members and held that company has done wrong to itself.

Rules laid down in this case:-

1. If company suffers financial loss, it is the company and not the minority shareholder who can sue.
2. If every member were given right to decide there would be endless litigation.
3. There is a need to preserve right of minority to decide.

• For the smooth functioning of the company, harmony has to be maintained between the majority and minority shareholders as the principle of majority rule has been abused many times.
• To examine the existence of oppression their must be the successive act of such oppression(unfairly prejudicial, wrong, burdensome and harsh).

 

Section 241: Application to Tribunal for relief just in case of oppression,etc

1. Any member of the company may make a complaint that the activities of the company are prejudicial to public interest or to himself or to any other member of the company or to the company.
2. Any material change conducted in a manner prejudicial to its interest, or its members or any class of members.               – If the central government thinks that the affairs of the company are conducted in prejudice manner then, the central government may itself apply to the tribunal for an order.

Section 242: Powers of Tribunal

1. If the tribunal found that the affairs of the company are being conducted in a manner prejudicial to the interest of the company/ it’s members/ to public interest and if wind up is unfairly prejudice to such members and the facts would justify that it is just and equitable to wind up the company, the tribunal may make such order as it thinks fit.
2. Other than general powers specified, an order may provide for,

• Regulation of conduct of affairs of the corporate in future.
• Purchase of shares/ interest of any members of company by other members.
• If any shares purchased its consequent reduction of share capital.
• Restriction on transfer/ allotment of shares.
• Termination, setting aside or modification of any agreement between the company and its managing director, any other director or manager.
• Termination, setting aside or modification of any agreement between the company and any other person.
• Setting aside of:  -Any transfer, delivery of goods, Payment, execution, or Other act relating to property Made/done by/against the company within 3 months before the date of application which would if made/done by/against an individual, be deemed in  his solvency to be fraudulent preference.
• Recovery of undue gain made by any managing director, manager or director and the manner of utilization of recovery.
• Manner of appointment of managing director or manager of the company may subsequent to an order removing.
• Appointment of such number of persons or directors.
• Imposition of costs as may be deemed fit by the tribunal.
• Any other matters which the tribunal thinks it be just and equitable.

3. A certified copy of the order of the tribunal to be filed with ROC within 30 days of order of tribunal.
4. Tribunal has the power to make interim order.
5. Alteration in MOA/AOA through the order of tribunal.
6. Altered provisions shall apply.
7. Certified copy of the altered order shall be filed with the registrar.
8. If the tribunal orders for the alteration in MOA/ AOA and if it is contravened then, the company shall be punishable with fine which shall not be less than one lakh rupees but which may extend to twenty five lakh rupees, also every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to six months or with fine which shall not be less than twenty five thousand rupees and may extend to one lakh rupees, or both.

Section 243: Consequence of termination or modification of certain agreements

• If an order made under section 242 is terminated, modified or set aside then that order shall not give rise to any claim or agreement against any person or company.
• If the agreement of any managing director or manager or other director is terminated, then from the date of termination till five years, shall not be appointed or act as the managing director or manager or other director, without the leave of the tribunal.

(The tribunal shall not grant leave unless notice of the intention to apply for leave has been served to central government and also the government has been given a reasonable opportunity of being heard in the matter.)

Any contravention of clause (b), shall be punishable with imprisonment for a term which may extend to 6 months or with fine which may extend to five lakh rupees or, both.

Section 244: Right to apply

• If a company has share Capital

– Not less than 100 members or not less than 1/10^th of total number of its members(whichever is less)

– Any member/members holding not less than 1/10^th of the issued share capital

(Applicants have paid all calls and other sums due on their shares)

• If a company has no share capital

– Not less than 1/5^th of the total number of members.

{On an application, the tribunal may waive off, all or any of the requirements mentioned above so as to enable the members for a right to apply under section 241.}

 Section 245: Class-action

If the corporate affairs aren’t being conducted properly then, this section gives right to different categories of members or depositors as a category to proceed against a corporation.

1. If the members or depositors or any class feels that a corporation is conducted in a manner which isn’t in favour of the interest of the company or its members or depositors, then, file an application before tribunal seeking the subsequent order.

Purpose of Application:-

1. To restrain the corporate from committing any ulta vires
2. To restrain the corporate from committing breach of any provision.
3. To declare a resolution of altering the memorandum or article as void.
4. To restrain the corporate and directors from working on such resolution.
5. Restraining the corporate from doing any act which is contrary to the provisions of this act.
6. To restrain the corporate from taking action contrary to any resolution passed by members.
7. To claim damages or compensation from or against:

-Company or directors for act or omission

-Auditor including audit firm of the corporate for misleading statement.

-Any expert or advisor or consultant for any fraudulent or unlawful act.

8. To seek the other remedy as tribunal thinks fit.

 

Action against audit firm if taken;

Then, it’s the liability of the firm as well as of each partner who was involved in making any improper or misleading statement of particulars within the audit report or who acted in a fraudulent, unlawful or wrongful manner.

 

Requisite number of members for class action;

Co. having share capital   ————

Not less than 100 members or such % of it’s total number of members of company whichever is less

OR

Any member/ members holding not less than such % of issued share capital of company.

 

Co. having no share capital   ———–

Not less than 1/5^th of the total number of it’s members.

 

Requisite number of depositors for class action;

# Shall not be less than 100 depositors/ such % of total number of depositors whichever is less

OR

#Any depositor(s) to whom such company owes such % of total deposits of company.

 

Acceptance of application by Tribunal;

– Issue public notice to all the members/depositors of case.

-Consolidate altogether the similar application prevalent in all jurisdiction and appoint the lead applicant.

-Two class action suit application for an equivalent explanation for action shall not be allowed.

-Cost of expenses shall be borne by the defrayed company/person liable for an oppressive act.

-Any other order passed by tribunal shall be binding.

 

Penalty/Contravention of section 245;

Company    —————

Fine not less than five lakh rupees which may extend to twenty five lakh rupees

 

Every officer in default  ————-

Punishable with imprisonment up to 3 years and a fine of Twenty Five thousand rupees which may extend to one lakh rupees.

 

If any application    ————–

-Reasons to be recorded in writing filed with tribunal is

– Reject the application found to be frivolous

– Make an order that the applicant shall pay or vexatious the other party such cost, not exceeding One lakh rupees.

Author: AKANKSHA CHHABRA,
Ideal Institute of Management & Technology, IV Year/ Student