Summary: While oppression remedies are traditionally viewed as minority protection provisions, Indian law does not restrict majority shareholders from also filing such petitions if they meet statutory thresholds and can demonstrate they are powerless against the oppressing minority due to special circumstances. This article discusses scenarios where majority shareholders can seek relief against oppressive conduct by minority shareholders, with an analysis of judicial pronouncements on the topic.
Introduction
Minority protection is one of the fundamental tenets of corporate law. The provisions of Chapter XVI of the Companies Act, 2013 (“2013 Act”), which provide for remedies against oppression and mismanagement, are generally seen as minority protection provisions.
Section 241 of the 2013 Act provides that any member of a company, subject to meeting thresholds provided in Section 244 of the 2013 Act, has a right to seek relief from National Company Law Tribunal (“NCLT”) in certain situations. These include (A) where the affairs of the company have been or are being conducted in a manner prejudicial to (i) such member or any other member(s) of the company; (ii) public interest; or (iii) interest of the company or (B) on occurrence of a material change in the management or control of the company (not being a change brought about by, or in the interests of, creditors or any class of shareholders) is likely to result in conduct that is prejudicial to the interests of the company, its members, or any class of members.
A member must meet the following thresholds provided in Section 244 of the 2013 Act for the right to apply to the NCLT to claim oppression or mismanagement:
- In the case of a company with a share capital, at least 100 of its members or at least one-tenth of the total number of its members, whichever is less, or any member (s) holding at least one-tenth of the issued share capital of the company, provided all calls and other sums due on shares have been paid;
- In the case of a company without a share capital, at least one-fifth of the total number of its members.
It is generally believed that the majority may act in a manner prejudicial to interests of the minority, and thus the remedy to seek relief from NCLT in such circumstances is available to minority shareholders of the company. However, Sections 241 and 244 of the 2013 Act do not specify that only a minority shareholder can claim oppression or mismanagement. In fact, from a bare reading of Section 244 of the 2013 Act, it appears that a member can file an application with NCLT under Section 241 of the 2013 Act upon meeting the thresholds specified, irrespective of being a majority shareholder.
Following is a discussion on the circumstances in which a majority shareholder can file a petition alleging oppression under the 2013 Act.
Validity of petition filed by majority alleging oppression by minority
In Dr. V. Sebastian v. City Hospital P. Ltd.,[1] the Kerala High Court observed, “It is true that Sections 397 (Oppression) and 398 (Mismanagement) [of the Companies Act, 1956] are intended primarily to protect the minority interests. In ordinary cases, the majority will be able to protect itself by controlling the directors at general body meetings. But, where the majority is prevented from doing so, despite the clear indication in the articles that majority rule based on the right to demand poll should operate as a correcting influence, the majority becomes an artificial minority entitled to claim protection under Sections 397 and 398. When the directors with the majority backing, oppress the minority and misconduct the affairs of a company, occasion arises for interference by the courts. But, when the directors, with only minority support, seek to stifle the majority by taking advantage of some defect or error, I think such a situation can also be remedied in a like manner.”
Similarly, in Ramashankar Prosad and Ors. vs. Sindri Iron Foundry (P) Ltd. and Ors.,[2] the Calcutta High Court observed, “It is impossible to say that only a minority can apply under Section 397 and that a majority cannot.”
Sections 397 and 398 of the Companies Act, 1956 (“1956 Act”), correspond to Section 241 of the 2013 Act, and the aforementioned judgments will also be relevant under the 2013 Act.[3]
NCLT Kochi, in a case under the 2013 Act, has also observed, “From a reading of [Section 241 of the 2013 Act], it appears there is no expressed statutory bar of a majority shareholder to initiate an action based on an allegation of oppression by minority shareholders.”[4]
Therefore, it is clear that, subject to meeting the thresholds provided in Section 244 of the 2013 Act, member(s) holding the majority of shares are also eligible to apply to the NCLT for claiming relief for oppression or mismanagement under Section 241 of the 2013 Act.[5]
Criteria for determining Reverse Oppression
The Supreme Court in V.S. Krishnan and Ors. vs. Westfort Hi-tech Hospital Ltd. and Ors.,[6] has laid down the following criteria for determining oppression or mismanagement under Sections 397 and 398 of the 1956 Act:
- The conduct is harsh, burdensome, and wrong.
- The conduct is mala fide and is for a collateral purpose, where although the ultimate objective may be in the interest of the company, the immediate purpose would result in an advantage for some shareholders vis-à-vis the others.
- The action is against probity and good conduct.
- The oppressive act complained of may be fully permissible under law but may yet be oppressive. Therefore, the test on an action’s oppressiveness is not based on its legal permissibility, since even if legally permissible, if the action is otherwise against probity, good conduct or is burdensome, harsh, or wrong or is mala fide or for a collateral purpose, it would amount to oppression under Sections 397 and 398.
- Once the conduct is found to be oppressive under Sections 397 and 398, the discretionary power given to the Company Law Board under Section 402 to set right, remedy, or put an end to such oppression is very wide.
- Which facts would give rise to or constitute oppression is a question of fact and, therefore, whether an act is oppressive or not is a question of fact.
While the aforementioned criteria are useful for determining oppressive acts by minority shareholders, NCLT Kochi, in Sulaiman Assanar Kunju and Ors. vs. Lamcy Enterprises P. Ltd. and Ors.[7] was of the view that majority shareholders should exercise their voting powers to self-remedy, before relying on any statutory provisions such as Section 241 of the 2013 Act to protect themselves from oppression by the minorities. NCLT Kochi noted the following circumstances in which the statutory relief for oppression would be available to majority shareholders:
- When majority shareholders are not in control of the management of the company and who, for any given reason, are unable to control the board or when majority shareholders are unable to rectify the oppression themselves; and
- There exist some special circumstances rendering majority shareholding of a shareholder powerless, against the oppressor.
Therefore, for a petition of reverse oppression to be maintainable, a majority shareholder may have to impress upon the NCLT that (i) they are unable to control the board or management of the company; (ii) there exist circumstances that render such a shareholder powerless against the oppressing shareholder; (iii) the only recourse left for claiming relief by such a majority shareholder is the filing of a petition alleging oppression before the NCLT; and (iv) the impugned conduct is an act that may be considered as oppression.
Conclusion
Provisions pertaining to claiming relief against oppression or mismanagement under the 2013 Act were included in the 2013 Act with a view to primarily safeguard the interests of the minority shareholders in the company.[8] However, as discussed, it would be incorrect to assume that a petition of oppression before the NCLT can be only filed by a minority shareholder of a company. A majority shareholder may also claim oppression against a minority shareholder, in the above-mentioned circumstances.
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Megha Bharghava, Cyril Amarchand Mangaldas
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[1] [1985] 57 Comp Cas 453 (Ker). In this case, the petitioners formed part of the majority shareholder group, and were aggrieved by actions of the respondent directors, who did not enjoy their confidence. Due to an error in the company’s articles of association, the petitioners were unable to exercise their voting rights to remove the respondent directors. The court allowed the petition to the extent of correcting the error in the company’s articles of association.
[2] AIR 1966 Cal 512.
[3] It may be noted that the following differences exist between Section 397 and 398 of the 1956 Act and Section 241 of the 2013 Act:
- Under the 1956 Act the application complaining oppression has to be made to Company Law Board whereas in the Act the application has to be made to NCLT.
- Under the 1956 Act power to grant relief is when the company’s affair is being conducted in oppressive manner whereas, the Act uses the words “have been or are being conducted”. Thus, an application can also be made for past acts of oppression which are not continuing under the 2013 Act.
[4] Sulaiman Assanar Kunju and Ors. Vs. Lamcy Enterprises P. Ltd. and Ors, 2021 SCC OnLine NCLT 38874.
[5] Other cases in which courts have held that oppression or mismanagement may be caused in a scenario in which a minority shareholder is in a position to manage affairs of the company, include Capricorn Oils Limited and Ors. Vs. Ratan Mohan Sarda and Ors. [(2012) 2 Comp LJ 227 (Cal)] where the majority was turned into minority, by minority shareholders taking advantage of their managerial position and allotting shares to its own people without calling a meeting or offering corresponding shares to promoter’s group or other shareholders, such an act was held as an act of oppression.
[6] (2008) 2 Comp LJ 1 (SC).
[7] 2021 SCC OnLine NCLT 38874.
[8] Report of the Expert Committee on Company Law (2005) available at https://www.mca.gov.in/content/mca/global/en/data-and-reports/reports/other-reports/report-company-law/minority-interest.html.
