The Oppression & Mismanagement Clause: Exploring The Need For Revision Under The Indian Law

[By Rishi Raj & Mehek Wadhwani

The authors are students at MNLU, Aurangabad. 

Introduction

The ideal of corporate democracy envisages that a company governs its affairs based on majority voting, with the shareholders voting to decide on the course of action. Under these circumstances, the intervention of law may be required to address the possibility of the majority decision departing from the standards of fair dealing or conducting the company’s affairs in a manner contrary to the public interest or oppressive to any of its members. The Indian law acknowledges this possibility. Consequently, the minority shareholders have the statutory right to bring any action against the majority shareholders to prevent the majority from oppressing and mismanaging the company. As an integral part of corporate governance, these special provisions are contained in Part XVI of the Companies Act, 2013 (hereinafter referred to as the Act).

In particular, Section 241 of the Act contains the provision for the prevention of oppression and mismanagement, whereas Section 242 of the Act grants tribunals the power to make an order for the smooth management of the company, and this power can be exercised if the oppressed member (shareholders) fulfils certain conditions.

We seek to analyse how the construct of the clause under Section 242 of the Act places an undue burden through the just and equitable standard to substantiate the issue raised in the Tata Consultancy Service Ltd. v. Cyrus Investments Pvt. Ltd. and Ors. Further, we propose certain changes that may be considered while reforming the law.

Invoking the oppression & mismanagement remedy: An undue burden on the shareholder

The inefficiencies and perils of winding up a company have long been recognized under the company law jurisprudence, leading to the introduction of remedies such as the oppression and mismanagement clause under Section 241 of the Act. The prudent realization that such winding-up would not help the aggrieved minority shareholders led to the inclusion of this clause under the English Companies Act, 1948. Thereafter, the common law countries, including India, adopted the remedy with certain changes.

2.1. Oppression, Prejudice, and Mismanagement (Substantive elements) 

Oppression’ is said to be caused when the company’s conduct is opposed to the public interest as well as the principles of fair dealing, including the imposition of new and risky objects by the majority shareholders in an autocratic way. Further, the oppressed shareholder is under a persistent burden to prove the oppressive act, which makes redressal under Section 241  wrongful, harsh, and burdensome.

The scope of ‘oppression’ was outlined in  V.S. Krishnan v. Westfort Hi-tech Hospital Ltd., and adopted verbatim in several judgments that followed under the Act. Accordingly, ‘oppression’ entails the absence of probity, good conduct, or an act that is mala fide or for a collateral purpose.  Further, while making winding-up orders, the court may follow rational principles to decide if the conduct is unjust, inequitable or unfair.  Ultimately, this is a question of fact, and accordingly, we have seen several unique positions taken by the courts. Adding to the jurisprudence on the scope of ‘oppression’, in a very recent judgment of Tata Consultancy (Supra) wherein the Apex Court held that the mere removal of a person from the post of Executive Chairman cannot be termed as oppressive and cannot trigger the provisions of Section 242 of the Act. Any single act of oppression cannot enable a Company Law Board (CLB) to intervene; rather,  “the oppression must be the commutative results of continuous acts,” and there must be no scope of debate in the facts of the case.

We believe that the existence of undue burden on the aggrieved shareholder owing to their obligation to establish the substantive elements discussed above, along with the conditional limb discussed below, severely restricts the remedy that the law seeks to provide. In the next section, we reflect on this aspect to substantiate our argument that lawmakers must reform the clause in a well-balanced manner to avoid deadlocks.

2.2. Just & Equitable Clause (Conditional Limb)

The remedy that the shareholder seeks, requires more than establishing the substantive elements. Section 242 of the Act, which is the conditional limb of this remedy, places a heavy burden on the oppressed members to satisfy the following two conditions: firstly, the affairs of the company must have been conducted in a manner that is prejudicial or oppressive to the members of the company, or prejudicial to the public interests; secondly, even if the winding-up order would unfairly prejudice some members, it would be fair to wind up the company if it is justifiable under the ‘just and equitable clause.

In Ebrahimi v. Westbourne Galleries Ltd., the Court ordered the winding up of a company, as the majority was guilty of abuse of power. However, the House of Lords, while reversing the decision, applied the test of (i) bona fide use of power in the interest of the company and (ii) whether a reasonable man could think that the removal was done in the interest of the company. Further, under the “just and equitable” clause, the winding-up order may be made if there is an entire “functional deadlock” or an irretrievable breakdown of “trust and confidence”  raised in the management of the company.

For a better understanding of the term ‘just and equitable clause, the Scottish Court of Session in Baird v. Lee observed that the shareholders invest their money on certain conditions which are mentioned in the Memorandum of Association of the company, including that the business shall be conducted in accordance with the principles of commercial administration that assures commercial probity and efficiency. It is noteworthy that only if these conditions are intentionally violated that it would be justifiable to wind up the company. Further, as opined by the Apex court while considering whether to admit an application, the interests of the company’s shareholders as a whole have to be kept in mind. This, however, means that the tribunal can make an order to bring an end to the oppression or prejudice complained of,  only if the complaining shareholders can establish that, even though the facts show the existence of just and equitable grounds, the winding-up would nevertheless ‘unfairly prejudice’ them or other shareholders. It is this ‘undue burden’ that has been repeatedly criticized on the basis that it makes the remedy under the Indian Law restrictive.

Existence of alternative remedy

In most cases, the existence of an alternate remedy is not a bar to pursue the prime remedy, but it may act as a bar under the Act. The Act provides the remedy of winding up as a remedy of last resort if no other equally and effective remedy is available. However, there are a plethora of judgments wherein the tribunal has refused to make an order of winding up if it is of the opinion that there is some other remedy available to the petitioner and he is acting unreasonably in seeking to have the company wound up, instead of pursuing that other remedy.

Instead of winding up orders, the other alternative remedy is buying the minority’s share by the majority or selling the majority’s shares to the minority. Recently, Singapore legislation removed the winding up of a company as the last remedy under the ‘just and equitable’ clause. It provided an alternative remedy of ‘Buy-out of minority shareholders’  that might protect the harmony of the company and help it to survive in the long term.

In Sim Yong Kim v Evenstar Investments Pte Limited, the Singapore Court observed that the winding-up order on the “just and equitable” clause could be reduced to a buy-out order, making it an effective remedy. Further, the practice of holding back the winding-up order of a company to allow the parties to reach an alternative settlement is a well-established principle in the Australian jurisdiction. It is noteworthy that a winding-up order can only be made when no other remedy is available to the shareholders.

We believe that the Indian lawmakers must reflect upon such developments in contemporary jurisdictions. This may be inculcated in the provisions of the Indian law. The same would fulfil the existing objectives of protecting the interests of the shareholders and the overall harmony of the company without affecting the remedies available to the shareholders.

Concluding Remaks  

The prohibitions against oppression and mismanagement, as well as judicial precedents, can be regarded as striking a balance between the interests of the majority and minority shareholders in a corporation. We found that the rationale behind such a construct of the provision is that the oppression and management remedies operate as an alternative to winding up, which is meant to protect the interest of all the shareholders, not only the aggrieved. However, we believe that prescribing alternative forms of relief than winding up the company would aid in the implementation of the remedy of oppression and mismanagement. In India, the doctrine of Alternative remedy is nowhere expressly mentioned in the Act, like in other jurisdictions, but a plain reading of Section 242 of the Act gives tribunal an extraordinary power to make any order for regulating the conduct of the company smoothly, upon any terms and conditions which it may deem necessary, even in the absence of findings of oppression and mismanagement clause. While the recent judgment has contributed significantly to the jurisprudence of this remedy, the lawmakers must thoroughly introspect to avoid making the law too restrictive.

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