6 mismanagement sec-241 to 246 prevention of … · that rule of majority shall prevail. (foss vs...

PREVENTION OF OPPRESSION AND MISMANAGEMENT SEC-241 TO 2466

CHAPTER XVI OF COMPANIES ACT, 2013

Resolution passed by majority of members binding on Company. It is an accepted principle that rule of majority shall prevail. (Foss Vs Harbottle). But law also affords protection to minority shareholders.

Rule of majority shall not be applicable if the act in question is illegal. (Case Law: North West Transportation co. Vs Beatty).

Oppression

The term “oppression” has not been dened under the

Companies Act.

The conduct is generally said to be oppression only when it is

burdenful, harsh and wrongful.

Do following situations involve oppression or not?

PREVENTION OF OPPRESSION AND MISMANAGEMENT 01CA SANIDHYA SARAF www.apnamentor.com [email protected]

Any bonade exercise of powers under any law.

Any illegal allotment of shares where majority are reduced to minority.

The termination of distributorship agreement where any member may be interested.

Non-sending of any notice of meeting.

Any improper or unwise transaction done by any of the Directors.

Any case of non-declaration of dividend.

Increase in the capital of the company.

Any case of shorter notice of meeting.

A situation involving non-convening of any general meeting & not informing or updating the members.

Non-maintenance of 'statutory records' & not conducting affairs of the company in accordance with Companies Act.

A continuous refusal by any company to effect regn. of shares with a malade motive of retaining control over affairs of the company.

NO

YES

NO

YES

NO

NO

NO

NO

YES

YES

YES


Refusal to register transmission under will YES

Lack of details in notice of a meeting NO

Payment of remuneration to a director to which he is not legally entitled

NO

Do following situations involve mismanagement or not?Any case of non-declaration of dividend NO

The termination of distributorship agreement where any member may be interested.

The violation of conditions of the memorandum by any person in charge of the company .

Selling or disposing the assets of Company without fullling Sec. 180 on Co's Act 2013.

Cases of major disputes among directors, thereby adversely affecting overall interests of company.

Diversion of funds of company.

Advancing of any loans without any interest, without legal documents, which is not repaid.

If the dominant or controlling group in a company takes away the prime/signicant business by incorporating another company without the knowledge of the other group of the company.

YES

YES

YES

YES

YES

YES

YES

SECTION-241

APPLICATION FOR TRIBUNAL TO RELIEF IN CASES OF OPPRESSION, ETC.

Any member of a company who complains that—1

the affairs of the company have been or are being conducted in a manner:

¨ prejudicial to public interest; or

¨ prejudicial to the interests of the company; or¨ prejudicial or oppressive to him or any other member or members; or

a

the material change, not being a change brought about by, or in the interests of:

¨ any creditors, including debenture holders; or

¨ any class of shareholders of the company,

b


has taken place in the management or control of the company, whether by an alteration in the Board of Directors, or manager, or in the ownership of the company's shares, or if it has no share capital, in its membership, or 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,may apply to the Tribunal, provided such member has a right to apply under section 244, for an order under this Chapter XVI.

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 XVI.

2

As per Rule 82 of NCLT Rules , 2016 application shall not be withdrawn without the leave of the tribunal.

NOTE

SECTION-244

RIGHT OF MEMBERS TO APPLY UNDER SECTION 241

The following members of a company shall have the right to apply under section 241, namely: —

1

¦ not less than 100 members of the company; or

th ¦ any member or members holding not less 1/10 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.

th ¦ not less than 1/10 of the total number of its members, whichever is less, or

in the case of a company having a share capital:a

in the case of a company not having a share capital, not less than 1/5 the th of

total number of its members.b

Provided that the Tribunal may, on an application made to it in this behalf, waive all or any of the requirements specied in clause ( ) or clause ( ) so as to enable the members a bto apply under section 241.

Explanation. —For the purposes of this sub-section, where any share or shares are held by two or more persons jointly, they shall be counted only as one member.

Where any members of a company are entitled to make an application under sub-section (1), any one or more of them having obtained the consent in writing of the rest, may make the application on behalf and for the benet of all of them.

2


SECTION-242

POWER OF TRIBUNAL

If, on any application made under section 241, the Tribunal is of the opinion—

1

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¨ prejudicial to the interests of the

company; and

a

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 t.

b

Without prejudice to the generality of the powers under sub-section (1), an order under that sub-section may provide for—

2

t he regu la t ion o f conduct of affairs of the company in future.

athe purchase of shares or interests of any members of the company by other members thereof or by the company.

b

in the case of a purchase of its shares by the company as aforesaid, the consequent reduction of its share capital.

crestrict ions on the transfer or allotment of the shares of the company.

d

the termination, setting aside or modication, 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;

e

Provided that no such agreement shall be terminated, set aside or modied except after due notice and after obtaining the consent of the party concerned;

the termination, setting aside or modication of any agreement between the company and any person other than those referred to in clause ( )e :

c

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;

c

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

c

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 identiable victims;

c

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

c

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;

c

imposition of costs as may be deemed t by the Tribunal;c

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

c


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

NOTE

OTHER POWER OF TRIBUNAL

To pass interim order. To alter MOA and AOA. Company cannot make future without leave of Tribunal.

SECTION-243

CONSEQUENCES OF TERMINATION OR MODIFICATION OF CERTAIN AGREEMENTS:

Where an order made under section 242 terminates, sets aside or modies an agreement such as is referred to in sub-section (2) of that section, —

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

no managing director or other director or manager whose agreement is so terminated or set aside shall, for a period of ve 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.

a b

Provided that the 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.

SECTION-245

CLASS ACCTION


Application for class action shall be given

01. in the case of a company having a share capital:

not less than 100 members of the company, or

not less than such percentage of the total number of its members as may be prescribed, whichever is less, or

any member or members holding not less than such percentage of the issued share capital of the company as may be prescribed, subject to the condition that the applicant or applicants has or have paid all calls and other sums due on his or their shares


th 02. in the case of a company not having a share capital, not less than 1/5 of the total number of its members.

OR03. in case of depositors:

not be less than one hundred depositors, or

not less than such percentage of the total number of depositors as may be prescribed, whichever is less, or

any depositor or depositors to whom the company owes such percentage of total deposits of the company as may be prescribed.

An application shall be led before the Tribunal on behalf of the members or depositors for seeking all or any of the following orders, namely: —

to restrain the company from committing an act which is ultra vires the articles or memorandum of the company.

to restrain the company from committing breach of any provision of the company's memorandum or articles.

to declare a resolution altering the memorandum or articles of the company as void if the resolution was passed by suppression of material facts or obtained by misstatement to the members or depositors.

a

b

c

to restrain the company and its directors from acting on such resolution.

dto restrain the company from doing an act which is contrary to the provisions of this Act or any other law for the time being in force.

e

to restrain the company from taking action contrary to any resolution passed by the members.

f

to claim damages or compensation or demand any other suitable action from or against—

g

the company or its directors for any fraudulent, unlawful or wrongful act or omission or conduct or any likely act or omission or conduct on its or their part.

the auditor including audit rm of the company fo r any i m p r o p e r o r m i s l e a d i n g statement of particulars made in his audit report or for any f r a u d u l e n t , u n l a w f u l o r wrongful act or conduct; or

any expert or advisor or consultant or any other person for any incorrect or misleading statement made to the company or fo r a ny f r a u d u l e n t , unlawful or wrongful act or conduct or any likely act or conduct on his part.


to seek any other remedy as the Tribunal may deem t.h

CASE LAWJagdish Chandra Mehra

Vs New India Embroidery Mills

The applicants must hold the requisite number of shares on the date of making the application. Subsequent transfers will not affect the validity of the original application.

Rajahmundri Electric Supply Corporation Vs

Nageshwara Rao

The consent to be given by Shareholder is reckoned at the beginning of the proceedings. The withdrawal of consent by a Shareholder during the course of proceedings does not affect the maintainability of the application. (Delhi HC)

CASE LAWS ON OPPRESSIONSindhri Iron

Foundary(P)Ltd 34CC 777

A single act of oppression which has its continuous impact could also constitute oppression. Therefore, “affairs are being conducted” has been judicially interpreted to include past &concluded acts which has a continuous impact.

Seth Mohanlal Ganpatram Vs Sayaji Jubilee Cotton & Jute

Mills Co.ltd

Illegal, Invalid & Irregular acts by themselves, unless they are oppressive to any Shareholders or prejudicial to the interest of the Company, be cannot set aside in a petition u/s 397/398.

Rashmi Seth Vs Chemin(India)Pvt.Ltd

Illegal Issue/Allotment of Shares- Majority reduced to MinorityOne of the ways a group of Shareholders oppress other groups is to issue & allot shares to themselves in an illegal manner. Such actions are oppressive in nature. These allotments have been set aside & status quo ante restored by Courts/Tribunal. Thus Sec. 397 could be used even by Majority shareholders on oppression against them by Minority Shareholders.


Re.Sindhri Iron Foundry (P) Ltd

Majority can also claim relief u/s 397/398: Oppressed majority may also le relief under Section 397.

Mohta Bros(P)Ltd vs Calcutta Landing &

Shipping Co.Ltd. & Ors 2 Comp.

Acquisition of Shares in open market cannot constitute oppression to Minorities.

Allianz Securities Ltd Vs Regal Industries ltd Not sending Notices to Shareholdrs/Directors &

passing resolutions thereat, is held “ oppressive” to Members and constitute mismanagement of Companies.

Omission to give notice of meeting is oppression

Shantidevi Gaikwad Vs Sangramsingh P. Gaikwad 1 Comp Provisions of the act regarding length of notice are

directory and not mandatory. Giving a shorter notice will not invalidate the meeting or cause oppression.

Giving short notice of meetings is not oppression

Thomas Veddon V.J vs Kuttanad Rubber Co.Ltd

Failure to declare dividends or payment of low dividends does not amount to oppression.

Ashok Betelnut Co.Ltd vs M.K. Chandrakanth

Continuous losses by itself cannot be regarded as oppression.

Re.Tamilnad Transporters

When both groups are equally strong, there may be a situation of deadlock but oppression cannot take place.

Push yourself because no one else is going to

do it for you

6 mismanagement sec-241 to 246 prevention of … · that rule of majority shall prevail. (foss vs...

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