Ushering Substantive Democracy into the Corporate Sphere: Expanding Shareholders’ Rights

[By Ankit Rao]

The author is an Associate at Archer Jurists LLP.

 

INTRODUCTION

Democracy is more than mere procedures that follow the will of the majority. Substantive democracy entails governing in the interest of all stakeholders. The concept of a holistic democracy such as this has become relevant in all spheres of life, public and private both. Thus, the corporate sector should not be exempt from democratic functioning. In a corporate democratic setup, the rule of the majority is endorsed and the will of the majority necessarily prevails. However, in the pursuit of substantive democracy, the need to balance and preserve the right of minority shareholders has been recognised and accordingly materialised by incorporating a proviso in the form of Section 241 of the Companies Act, 2013 (“Act”).

As per Section 241(1)(a) of the Act, if affairs of the company are being administered in such a form so as to be deemed prejudicious to the interest of the public/company or detrimental to an individual member or all other members, it entitles the relevant member(s) to move an application before the National Company Law Tribunal (“NCLT”) seeking relief against oppression and mismanagement. In a parallel construct, under Section 241(1)(b) of the Act, relevant member(s) are also authorized to move an application before NCLT seeking relief if a material change is brought about in the company’s administration/control, which does not qualify to be in the preservation of interest of the Company, its members, creditors or any class of shareholders, and might potentially result in the affairs of the company being conducted in such a manner so as to be detrimental to the interest of company/its members.

The position of being a member in a Company carries and provides for an inherent right to file an application against oppression and mismanagement and seek relief if the member duly fulfills certain statutory eligibility criteria laid down under Section 244(1) of the Act. A minimum of 100 members or 1/10th of the aggregate number of members of a company, whichever is lower, is a prerequisite to filing an application to the NCLT in case of a company having a share capital, and in case of a company not having a share capital, a minimum of 1/5th of the total number of the members is the required threshold to be entitled to move such an application.

This article primarily argues for dispensing with technicalities in the pursuit of justice because rigid adherence would not be in the best interest of the company or the stakeholders. Rather, striking a balance between the procedural and substantive aspects of the law is optimal for creating an equitable environment for all stakeholders, members, and non-members both.

To that end, the article will first analyse the mandatory nature of minimum shareholding criteria to move an application of oppression & mismanagement and in doing so it explores whether the right to move an application can be struck down on the basis of technical non-compliances, second it determines as to whether this right is confined to the members or it extends to potential members, third, it elaborates on the findings of Supreme Court in World Wide Agencies Pvt. Ltd. & Ors. V. Margarat T. Desor & Ors. (“World Wide Agencies”) where the Court extended the rights of deceased members to their legal representatives, even though in the register of members, the deceased member’s name exists.

MANDATORY NATURE OF THE MINIMUM SHAREHOLDING ELIGIBILITY

The pivotal question which arises is how rigid is the eligibility criteria for holding shares to the extent of the 10% threshold as stipulated under Section 244 of the Act. If the said threshold is not met, does it strike at the very root and viability of the application under Section 244? It does not seem inescapable and mandatory in nature, since the NCLT is empowered to waive all the requirements as specified in Section 244(1)(a) & (b) of the Act. The concerned proviso empowering the NCLT to grant waivers on Section 244 did not specify the circumstances wherein such authority can be exercised and it also does not indicate any reasoning which must be taken into account by the NCLT while granting such exemptions. To discern the obligatory nature of the minimum shareholding requirement, the object and reasoning behind prescribing a qualifying percentage of shares to entertain a petition under Section 244 need to be examined. The Supreme Court of India in J.P. Srivastava & Sons Pvt. Ltd. & Ors. V. M/s. Gwalior Sugar Co. Ltd. & Ors. [AIR 2005 SC 83] dwelled upon the said issue and held that the object of prescribing a qualifying percentage of shares to entertain petitions under Section 397 & 398 of Companies Act, 1956 which is pari materia to Section 241 & 244 of the Companies Act, 2013, was to ensure that frivolous litigation is not indulged in by persons who have no legal stake in the company. The Hon’ble Supreme Court stipulated that the guiding principle in such matters is a broad common sense approach and that there exists certain non-compliance which can be condoned or dispensed with. The Supreme Court further observed that if a Court is satisfied that the petitioner moving an application of oppression & mismanagement represents a body of Shareholders holding the requisite percentage, it can assume that involvement of the company in litigation is not lightly done and it should entertain the matter on its merit, and not reject it on a technical requirement.

RIGHT TO MOVE AN APPLICATION CONFINED TO MEMBERS?

Now, the material question which needs to be delved into is whether this right, specifically reserved for the members, can be enlarged and extended to include anyone who may be entitled to become a member or even just a potential member.

The definition of a member as provided under Section 2(55)(a) & (b) of the Act needs to be borne in mind before probing this material question. As per Section 2(55)(a) of the Act, ‘members’ encompasses, within its domain, subscribers of a memorandum of a Company who are deemed to have agreed to become members of the company, and upon the company’s incorporation, such member’s name shall be recorded in the register of members and Section 2(55)(b) provides every other person who agrees in writing to become a member of the company and whose name is recorded in the register of members of the company shall fall in the category of members.

In subclauses (a) & (b) of Section 2(55) of the Act, the common variable is that members’ names should be recorded in the register of members of the company. So does this lead to an inference that individuals who do not find the presence of their name in the register of members are not empowered to move an application of oppression and mismanagement, and are such statutory rights to be strictly construed in terms of the statute?

The Hon’ble Madras High Court in the matter of Chiranjeevi Rathnam V. Ramesh [2017 (6) CTC 568], held that the word ‘member’ employed in Section 241 of the Act should not be read in isolation or be assigned a restricted interpretation. It was noted, that in case of doubt, it is imperative to call in aid and take into account the doctrine of reading down to construe the words in a Statute, according to which, the words, phrases or sentences should be interpreted according to the intent of the legislature that passed the Act. It was observed that Section 241 should be read together with Section 242 and that phrase ‘member of the company’ in Section 241 encompasses a person who is not only a member of the company in the strict sense but also anyone who ‘bears the character of a member’ or ‘has a substantial interest in the internal affairs of the company’.

The locus standi of non-members or potential members to move an application of oppression and mismanagement remained res integra until the Hon’ble Supreme Court dealt with the said issue in World Wide Agencies. In the said matter, M/s. World Wide Agencies Pvt. Ltd. contended that if potential members are authorised to move an application of oppression and mismanagement, it would result in a catastrophe, as then, even the individuals having in their possession a blank transfer form signed by members, could argue that they possess the authority to file such an application. The said contention of M/s. World Wide Agencies Pvt. Ltd. was fallacious and the Hon’ble Court observed that it cannot come to terms with the reasoning that legal representatives shall be entitled to present a petition for winding up the company which is a nuclear option, but would decline the substitute and lesser redress of seeking relief against oppression and mismanagement. The Court further explained that it will be incongruous to hold that the case for winding up, on just and equitable grounds, can be made out by the legal representatives under Section 439(4)(b) of the erstwhile Companies Act, 1956, but not the other. Accordingly, the Supreme Court in the said matter upheld the view rendered by the Hon’ble Delhi High Court that legal representatives of deceased members whose name is still reflected on the register of members are qualified to move an application of oppression and mismanagement.

CONCLUSION

The object of prescribing a qualifying percentage of shares to institute a petition of oppression & mismanagement was to avoid frivolous litigation, however, it is not in the spirit of the law to avoid entertainment of such applications on the basis of mere technicalities. Therefore, the Hon’ble Supreme Court rightly held that certain non-compliances can be condoned. The requirements as provided under clauses (a) & (b) of Section 244 are not mandatory in nature since the NCLT is empowered with the discretion to waive off all the requirements.

The Hon’ble Supreme Court rightly extended the right of deceased members to their legal representatives in cases where the deceased member’s name is still reflected on the register of members. Placing such an equitable and just construction furthers the purpose intended to be fulfilled by petitions under Sections 241 & 244 of the Act, since it facilitates aid in the case of oppression being inflicted upon the minority members, when the member is deceased and the said member’s legal heirs/representatives are yet to be substituted. When a member dies, the dominion over the deceased’s estate stands entrusted in the hands of a legal representative. Thereafter, when the said estate is unlawfully or unjustly interfered with, the legal representatives stand in the shoe of a deceased member so as to be empowered to preserve the said estate by way of moving an application. The right to move an application cannot be kept in abeyance till the time a legal representative’s name is recorded in the Register of Members, as in the meanwhile coercive actions might be taken against the estate which might deteriorate the value of such holding, or make the very act of moving an application infructuous.

While standard procedures are essential in maintaining the formal structures that uphold institutions, they cannot be a tool for oppressing minority stakeholders. By eliminating unnecessary formalities, the courts have created an environment conducive to pursuing justice in a true sense, and given a voice to minority stakeholders, who may have otherwise not been able to exercise their rights.

Comments

Leave a Reply

Your email address will not be published. Required fields are marked *

Contact Us

Kerwa Dam Road., 
National Law Institute University, Bhopal
Madhya Pradesh, India. 462044​.

write to us at – cbcl@nliu.ac.in