Section 241-246 of the Companies Act, 2013 lays down the provisions to effectively deal with oppressing and mismanagement in a company.
Corporate democracy finds its roots in the concept of majority rule. The principle of majority originated in the rule of Foss v Harbottle which provided that the individual shareholders have no cause of action in law for any wrongdoing by the corporation and the action brought about in respect of such losses shall be brought either by the corporation itself or through a derivative action.
While majority rule is the common norm, it often overshadows minority rights. The objective is to strike a balance between the interest of the small/individual shareholders and the effective control of the company. Therefore, the Indian company law, 2013 has put in place section 241 to 246 to safeguard minority rights.
Defining Oppression and Mismanagement
The term ‘oppression’ is not clearly defined by Company Law 2013, the court of law defines is conduct that involves a visible departure from the standards of fair dealing and a violation of conditions that require fair – especially with regard to the right of shareholders.
The term mismanagement does not find a clear meaning in the act but can be described as conducting company affairs in a prejudicial, dishonest or inept manner. Section No 241 to 246 provides for remedies to the members when they face oppression and the company is being mismanaged:
Any member of the company who has a complains that the affairs of the company are being conducted in an oppressive manner or any material change has taken place which is not in the interest of its members then he has a right to apply to the tribunal.
Such an application can also be made by the Central Government to the tribunal. If the tribunal is of the opinion that the company’s affairs are being conducted in a manner prejudicial to the interest of the public, members or company then the tribunal shall make such orders as he may deem fit on whether the company should be wound up or not.
- The specific orders may provide for
- Regulation of the conduct of the affairs of the company.
- Purchase of shares/interest of the members by other members.
- Purchase of shares by the company and consequent reduction in capital.
- Restriction on transfer/allotment of shares.
- Termination or setting aside of agreements between company and MD, any other director or manager, as the tribunal may think fit.
- Termination of any other agreements between the company and any other person other than those referred to above. The agreement shall be terminated only after due notice and after obtaining the consent of the concerned party.
- Setting aside of transfer/delivery/payment/execution or any act related to property made either by or against the company within 3 months before the date of the application under this section which if done by or against the individual be deemed to be a fraudulent preference.
–Removal of MD/Director/Manager of the company and the manner of appointment subsequent to the order.
–Recovery of undue gain from the MD/Director/Manager and utilisation of the funds by transferring to investor education and protection fund or repayment to the victims who can be identified.
–Appointment of directors who are required to report to the tribunal. The imposition of cost and such other order which in the opinion is just and equitable.
- A certified copy of the order shall be filed with the registrar by the company within 30 days of the order of the tribunal
- The tribunal may impose interim orders as may be necessary.
- If the order of the tribunal results in an alteration of the MOA or AOA, then such alteration shall be in accordance with the order of the tribunal.
- The certified copy of the altered order shall be filed with the registrar.
- Where the order of the tribunal setting aside an agreement is made, such order shall not give rise to any claim against the company and no
- MD/Director/Manager shall act as the MD/Director/Manager for a period of
- 5 years from the date of the order without the permission of the tribunal.
- Such permission shall be granted only after the notice of intention to apply for leave is served on the Central Government and the Government was given an opportunity of being heard.
| Class of company | No. of members to apply |
|---|---|
| Company with a share capital | –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 of the company Note: The applicant should have paid all the calls and other sums due on his/her shares |
| Company with no share capital | Not less than 1/5th of the total number of its members |
- The tribunal has the power to waive off the requirements provided above.
- Joint holders of shares shall be counted as one member.
- One member can make an application on behalf of the other members.
Who can file the complaint for Oppression & Mismanagement?
Any member of the company who has a complaint that the company’s operations are running in an oppressive manner or that any major change has occurred that is not in the best interests of its members has the right to apply to the Tribunal.
The Central Government may also make such an application to the Tribunal. If the Tribunal believes that the company’s affairs are as per the manner is detrimental to the public, members, or the firm, the Tribunal may issue such orders as he deems appropriate on whether the business can be wind up or not.
Filing Circumstances
Right to Apply Pursuant to Section 241 of the Companies Act, 2013
Section 244 of the Companies Act of 2013 governs who can submit a claim for oppression and mismanagement. It establishes a person’s right to register a complaint against tyranny and mismanagement. The firm enjoys the right exclusively and to one of its members, who will make an application on behalf of the other member. The right for the corporation is further split and depends on whether companies have share capital and which do not have share capital. If the firm has share capital, it will determine it up on the number of shares held by the member.
So, the number of share capital implies it must be 100 or one-tenth of the total number of members, and when the calculation is based on the value of the share capital, the value must be one-tenth of the share capital. If the corporation lacks share capital, 1/5th of the members can file a complaint against tyranny and mismanagement. If just one person has the authority to file an application, that person must get the written approval of all other members.
SECTION 241 – Application to Tribunal for Relief in Cases of Oppression
Section 241 of the Companies Act, 2013 deals with applications for relief from oppression and mismanagement. It specifies the provisions for filing such an application. Before the Companies Act of 2013, there exists the Companies Act of 1956, which had Section 397, which deals with the provision of application against oppression and mismanagement. Chapter XVI of the Companies Act, 2013, deals with applications against oppression and mismanagement. It also specifies who can make an application against oppression and mismanagement.
Provisions of Companies Act, 2013
| Provisions | Penalties |
| Section 242- Alteration of the MOA/AOA in violation of the Tribunal’s order. | Company fine—minimum of Rs 1 lakh, maximum of Rs 25 lakh Officer in default fine—minimum of Rs 25,000, maximum of Rs 1 lakh Imprisonment—maximum of 6 months Or Both |
| Sec. 243- Any individual who intentionally serves as a Director/Manager/Managing Director before the expiration of 5 years has their agreement cancelled. | Imprisonment Maximum: 6 months, Maximum fine: Rs 5 lakh or both |
| Section 245- The company fails to comply with the Tribunal’s order Section 245-An application filed with the Tribunal is frivolous. | Officer in default Fine-Min: Rs 25,000 Max: Rs 1 Lakh Company Fine-Min: Rs 5 Lakh Max: Rs 25 Lakh Maximum term of incarceration: three years The petitioner paid Rs 1 lakh to the opposing party. |
Seeking of orders from the tribunal
- Restrain the company from
- Committing an act which is ultra vires the AOA/MOA of the company
- Committing breach of any provision of the AOA/MOA of the company
- Acting on a resolution declared as void which had the effect of altering the MOA/AOA of the company by suppression of facts/misstatement to the members/depositors. The restraint is also imposed on the directors.
- Performing any act which is in contravention of this Act/any other law for the time being in force.
- or for any misleading /incorrect statement made by
- The company/director
- The auditor(including audit firm and the firm as well as all partners)
- Any expert/advisor/consultant
- To seek any other remedy as the Tribunal thinks fit.
Important Aspects
The Tribunal shall look into the following matters before considering the application
- The application should be made in good faith and the tribunal shall consider whether the application is made by some other persons other than the directors or officers of the company.
- Whether the matter could be taken up in member/depositor’s own right.
- Any evidence of the views of the members who have no direct or indirect personal interest in the matters.
- Where the cause of action is yet to occur and if it is capable of being authorised/ratified by the company before it occurs and where the cause of action has already occurred if it is capable of being ratified.
After the application is admitted the following aspects are worthy of note:
- The members/depositors of the class have to be served with a public notice
- All applications which are similar shall be taken as one and the lead applicant shall be selected by the class members/depositors. If no decision is reached regarding the appointment of the lead applicant the Tribunal shall appoint the same.
- The same cause of action cannot have more than one application.
- The cost shall be borne by the company or the person responsible for the oppressive act.
- All orders passed by the tribunal shall be binding.
- This section pertaining to a class action is not applicable to Banking Companies.
| Section No and Description | Penalty |
|---|---|
| Sec 242- Alteration of the MOA/AOA in contravention of the order of the tribunal | Company Fine-Min: Rs 1 Lakh Max: Rs 25 Lakh Officer in default Fine-Min: Rs 25,000 Max: Rs 1 Lakh Imprisonment-Max:6 months Or Both |
| Sec 243- Any person who knowingly acts as a Director/Manager/managing director before the expiry of 5 years, whose agreement is terminated | Imprisonment Max: 6 months Fine-Max: Rs 5 Lakh Or Both |
| Sec 245- Company fails to comply with the order of the tribunal Sec 245-Application filed before the tribunal is frivolous | Company Fine-Min: Rs 5 Lakh Max: Rs 25 Lakh Officer in default Fine-Min: Rs 25,000 Max: Rs 1 Lakh Imprisonment-Max:3 years Rs 1 Lakh paid by the applicant to the opposite party |
FAQs
Q: What is oppression and mismanagement under the Companies Act, 2013?
- Oppression refers to the unfair treatment of minority shareholders or the disregard of their interests.
- Mismanagement involves the inefficient or wrongful conduct of a company’s affairs.
Q: How can a shareholder claim oppression or mismanagement?
Shareholders can file a petition with the National Company Law Tribunal (NCLT) seeking relief under Sections 241 and 242 of the Companies Act, 2013.
Q: Who can file a petition for oppression and mismanagement?
Any shareholder or group of shareholders holding at least 10% of the share capital can file a petition. Additionally, the Central Government or any person authorized by it can also file a petition.
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