In a corporate democracy, the rule of majority prevails, period! Hence, in most jurisdictions, shareholders’ resolutions may be passed by a simple majority, or, where the decision may be critical to the operations or the future of a company, by a super/ special majority of at least, three-fourths. In this way, the decision of the majority binds all members/ shareholders.
This is all well and good when interests of the company, majority, and minority shareholders, are aligned. But a boardroom and shareholder standoff can occur, when a strong promoter or management group considers (or is alleged to consider) only its own advantage, to the detriment of the company and/or the minority shareholder(s). What redress is the minority entitled to from majority oppression in such a scenario? What is the redress when the majority in management, mismanage the company – harming both the company and its minority shareholders?
Shareholder protection was one of the key drivers of the Companies Act, 2013, which finessed measures to ensure that the supremacy of the majority is not abused through oppression of the minority and mismanagement of the company. These measures ensure that the balance of power remains intact and minority interests are protected.
Historical Background:
The first Companies Act of 1913 also gave protection to minority shareholders against acts of oppression and mismanagement by the majority, mandating that if found just and equitable to do so, the company concerned could be wound up. The redress was really using a cannon to kill a mosquito, as it destroyed the company itself even if it was otherwise solvent; albeit putting an end to the oppression/ mismanagement. Such a dissolution also harmed minority shareholders, whom the remedy was meant to protect.
The Indian Companies (Amendment) Act, 1951, however, provided an alternative remedy by empowering courts, if satisfied that a winding up order would not do justice, to “make such order in relation thereto as it thinks fit”[1] with a view to bring an end to the oppression of the minority.
The subsequent Companies Act, 1956, (“1956 Act”), then bifurcated oppression and mismanagement remedies into separate sections,[2] and gave extensive powers to the erstwhile Company Law Board (“CLB”) to grant wide ranging reliefs to protect minority shareholders and provide them redress.
India’s corporate law regime was virtually overhauled by the Companies Act, 2013 (“2013 Act”), which, inter alia, once again combined the provisions relating to oppression and mismanagement, as also the power of the Central Government to apply for redressal in public interest,[3] retaining the test for it being otherwise just and equitable to wind up the company concerned.
The 2013 Act also consolidated all corporate jurisdiction into one forum with dissolution of CLB and constitution of the National Company Law Tribunal[4] (“NCLT”) and National Company Law Appellate Tribunal[5] (“NCLAT”). Established in order to centralise, streamline and aid speedy disposal of corporate matters, the NCLT/ NCLAT have exclusive jurisdiction in relation thereto. Jurisdiction of civil courts are thus barred,[6] as is arbitration thereof, as a consequence rendering issues relating to oppression, mismanagement and unfair prejudice claims being not arbitrable in India (although it is arbitrable in other jurisdictions such as Singapore, England and Wales).
Remedies against Oppression, Mismanagement and Prejudice
Sections 241-246 of the 2013 Act provide relief and protection to members of a company, (subject to meeting a minimum numerical threshold), against acts of oppression, mismanagement, as also acts of the majority/ management of a company that are prejudicial to the interests of the company or public interest.
If the NCLT, on an application made to it, is satisfied that facts justify the winding-up of the company on just and equitable grounds, but that such an order would not do complete justice, it may make such orders as it thinks fit, to bring an end to the matters complained of.[7] The powers of the NCLT are wide-ranging in this regard.
Oppression:
Conducting the company’s affairs in a manner prejudicial to public interest or interests of the company or in a manner oppressive to any member or members amounts to oppression.[8] Oppression of a person in a capacity other than as member – such as a director (unless it is in relation to a shareholder nominee/ appointed director and so relatable to the shareholder himself), would not be redressable under this provision.
The bedrock of principles that govern acts of oppression were laid down more than fifty years ago in S.P. Jain v. Kalinga Tubes Ltd.[9], where the Supreme Court expounded the principles determining the concept of oppression, i.e. that the conduct must be burdensome, harsh and wrongful, involving lack of probity or fair dealing to a member in the matter of his proprietary rights as a shareholder. Further, a mere lack of confidence between the majority and minority shareholders would not be enough, unless the lack of confidence springs from oppression of a minority by a majority in the management of the company’s affairs.
These principles were applied and amplified in other cases. In Needle Industries India Ltd. v. Needle Industries Newey (India) Holdings Ltd.[10], the Supreme Court held that an illegal act will not in and of itself be treated as oppressive, unless it is accompanied by a mala fide intention or if otherwise such an act was harsh, burdensome and wrongful. However, where there has been a series of illegal acts directed against a person, it would be justifiable to conclude that they are a part of the same object of committing oppression. In V.S. Krishnan v. Westfort Hi-Tech Hospital Ltd.,[11] the Supreme Court relied on the Needle Industries case,and ruled that the test to gauge whether an action is oppressive – is not whether it is illegal, but rather, whether the act of oppression entailed the absence of probity, good conduct, or an act that was mala fide, harsh burdensome and wrong or for a collateral purpose. Going further, it observed that although the ultimate objective of such an action may be in the interest of the company, the immediate purpose would result in an advantage for some shareholders vis-à-vis others.
These cases make it clear that just one act may not be sufficient to meet the test of oppression. In general, several/ continuous acts on the part of majority shareholders, continuing up to the date of the petition, would establish that the affairs of the company were being conducted in an oppressive manner.[12] However, this is not a rule of law but only a rule of prudence, which has been evolved by courts to prevent frivolous litigation so that a dissatisfied group of shareholders do not obstruct the regular working of the company by complaining of any trivial or one-off act of oppression.[13] That said, even one single and egregious act of oppression may nevertheless qualify – particularly if the effects are of a continuing nature, and the members concerned are deprived entirely of any important right(s)/ privilege(s).[14] For instance, the single act of issuing additional shares at a meeting without complying with legal requirements and made to a single member without a simultaneous offer to others on a pro rata basis – was considered to be an act of oppression.[15]
Using the same example, illegality of the oppressive act complained of, while it may be more extreme, is not a sine qua non for being entitled to protection. The remedy can be invoked even where the act is lawful.[16] For instance, an allotment of shares, where such allotment reduced the petitioners to frail minority, would be treated as being oppressive – despite such conduct being perfectly legal.[17] Similarly, a rights issue made for the sole purpose of diluting minority shareholding, or a preferential allotment to one section of the shareholders at a steep discount etc., are examples of conduct that are legally kosher, but could nevertheless be interdicted on the grounds of being oppressive. However, where the allotment or issuance of shares was bona fide and in the interest of the company, it will not amount to oppression even if it incidentally leads to majority shareholders losing control over the company, or becoming a minority.[18]
Some instances of oppression include breach of shareholders’ agreement on terms relating to the management of the company, such as, failure to vote in favour of the appointment of managing director, contrary to the agreement.[19]
Mismanagement:
The term ‘mismanagement’ generally refers to gross mismanagement of a company’s affairs and acts that are prejudicial to its interest.[20] The 2013 Act extended the scope to also include a change that is prejudicial to the shareholders or any class thereof. It may include (a) diversion of public money for unknown/ unwanted purposes, affecting grossly the financial state of the company[21], (b) gross negligence in managing the affairs, and (c) inaction.[22]
An act of mismanagement may be alleged if a material change takes place in the management or control of the company, either by alteration of the board of directors, manager and ownership of the company’s shares or alteration to the company’s membership or in any other manner whatsoever. This change is then the reason there is actual mismanagement in the company’s affairs or it is likely that the affairs of the company will be conducted in a manner prejudicial to public interest, or in a manner prejudicial to the interests of the company or its shareholders or any class thereof.[23]
Relief will only be granted if it can be proved that such change will lead to the affairs of the company being conducted in a manner prejudicial to public interest or interests of the company.[24]
Some instances of mismanagement include sale of the assets of the company at a low price without compliance with law, resulting in loss of the substratum or business of the company.[25] However, mere unwise or loss making business decisions, etc., cannot in and of themselves, amount to mismanagement.
Prejudicial Acts:
Newly introduced in the 2013 Act, members also have recourse against affairs of a company being conducted in a manner prejudicial to their interest.
The term ‘prejudicial to the interest of its members or any class of members’ being a novel concept has not yet been interpreted by Indian Courts in the corporate context. Black’s Law Dictionary defines the term “prejudice” as “tending to harm, injure or impair; damaging or hurtful” and “prejudicial” as “unfairly disadvantageous; inequitably detrimental”.[26] A prejudicial act refers to an act that adversely affects the interests of petitioning shareholders. For instance, the single act of issuing additional shares for the sole purpose of altering the shareholding pattern in certain shareholders’ favour and subsequent changes to the board of directors, was held to prejudicially affect the interests of the petitioning shareholders by the Andhra Pradesh High Court in the case of R.N. Jalan v Deccan Enterprises Pvt. Ltd.[27]. In this case, noting that the company was profitable (and so it would be inappropriate to order it to be wound up), the Court appointed an interim administrator/ special officer to take charge and conduct the affairs of the company in supersession of the Board of Directors, in order to remedy the prejudice caused.
Just and equitable grounds for winding up a company:
To be entitled to relief for acts of oppression, mismanagement and/ or other prejudicial acts, the applicants are required to establish that it would be just and equitable to wind up the company concerned as a result of such acts, but that the passing of such order will cause unfair prejudice to them.[28]
Loss of substratum of the company’s business, functional deadlock, complete loss of confidence in the conduct and management of the company’s affairs, (not a mere lack of confidence between majority and minority shareholders) are regarded as grounds for winding up on just and equitable grounds.[29]
In Tata Consultancy Services Ltd. v. Cyrus Investments (P) Ltd.,[30]Mr. Cyrus Mistry was removed from the position of Executive Chairman of Tata Sons Limited, and also removed from directorship in various companies of the Tata Group, by resolutions passed at various board and shareholder meetings. Considering the removal and the manner thereof as being oppressive to minority shareholders, viz. Cyrus Investments Pvt. Ltd. and Sterling Investment Corporation Pvt. Ltd. (shareholders of Tata Group of Companies and in which Mr. Mistry had a controlling stake), this minority group filed a complaint alleging prejudice, oppression and mismanagement before the NCLT. The NCLT ruled against the minority group. The NCLAT ruled in favour of the minority group and held that the removal of Mr. Mistry was oppressive/ prejudicial, and hence it ordered the reinstatement of Mr. Mistry as the Executive Chairman of Tata Sons and as the Director of the various companies. Tata Sons, challenged the NCLAT order before the Supreme Court, which finally held that the act of Mr. Mistry’s removal as Executive Chairman of Tata Sons was not in fact, prejudicial and/ or oppressive to the interests of the minority group. Further, it noted that in the factual matrix of the case, the requisite standard to justify the winding up of the company was not met, ruling that the “just and equitable clause” is triggered only in certain situations, for instance: (a) where there was a functional deadlock – the inability of members to co-operate paralyses the company from functioning and (b) where there is a justifiable lack of confidence on the conduct of the directors. A mere lack of confidence of minority shareholders in relation to the majority in management would not be sufficient. Further and specifically in the context that the majority shareholding of Tata Sons (Private) Limited was held by philanthropic Trusts and not individuals or corporate entities, the NCLAT’s decision that it was just and equitable to wind up Tata Sons was flawed as it would only result in those charitable Trusts starving to death.
Numerical threshold:
The minimum numerical threshold for maintainability of an action for oppression/ mismanagement/ prejudicial acts before the NCLT, is either, (a) members holding at least 10% of the “issued share capital of the company”, or 1/10th of its total number of members, whichever is less; or, where the company does not have a share capital, not less than 1/5th of the total number of its members.[31] This is to protect the majority from vexatious suits by miniscule minorities.
The numerical threshold can however be waived if required, and was waived by the NCLAT in the Tata Sons case, where the NCLAT ruled that the minority group could maintain the action, notwithstanding that the number of members fell short of the 10% threshold.[32] The NCLAT held that if exceptional circumstances were made out (which it ruled, were made out in that case), it could grant a ‘waiver’, and proceed with the application. For instance, if, (a) the applicant(s) have substantial interest in the company, (b) there is fragmented shareholding of cluster of multiple minorities, and (c) the act of oppression, for which waiver is sought, has led to dilution of members below the 10% requirement, the waiver will be granted, despite the applicant falling short of the 10% threshold.
Accordingly, while maintaining this threshold to discourage the filing of frivolous proceedings, in the interest of justice, wherever required, the NCLT is empowered to nevertheless entertain a proceeding through a smaller but prejudicially affected minority shareholder group.
Grant of relief:
The NCLT/ NCLAT has been given wide-ranging power to grant relief to protect minority interests, by passing orders to “bring an end to the matters complained of”, and to that end, the NCLT is empowered, for the benefit of minority shareholders/ the company, to interfere with the management of the company, including by supplanting its management and regulating its affairs. On a temporary, or even on a permanent basis, the NCLT may appoint administrator(s), or a special officer or committee of advisors to take charge of the company,[33] or be appointed to the board of directors. However, as explained in the Cyrus Mistry case,[34]the Supreme Court clarified that this sweeping power is not absolute or unlimited and certainly does not include power to order the reinstatement of a director or an officer. On this basis, the Court set aside the NCLAT’s order reinstating Mr. Mistry as the Executive Chairman of Tata Sons, holding that it had no foundation in pleadings and without any basis in law.
Conclusion:
To conclude, the rights of minority shareholders in Indian companies have been protected under the 2013 Act, by the bouquet of reliefs that can be granted by the NCLT to redress oppression, mismanagement and prejudice claims and redress minority interests. While the conditional aspect of establishing that there is just and equitable case for winding up of the company concerned, may seem difficult to meet, it balances the interests of the minority with the majority and the company’s interests, so that true justice may be done.
For further infomation, please contact:
Shaneen Parikh, Cyril Amarchand Mangaldas
shaneen.parikh@cyrilshroff.com
[1] Section 153C was inserted in Indian Companies Act, 1913 by the Indian Companies (Amendment) Act, 1951
[2] Section 397 and Section 398 of the Companies Act, 1956
[3] Section 241 of the Companies Act 2013 (Application to the Tribunal for relief in cases of oppression, etc.)
[4] Section 408 of the Companies Act 2013 (Constitution of National Company Law Tribunal)
[5] Section 410 of the Companies Act 2013 (Constitution of Appellate Tribunal)
[6] Section 430 of the Companies Act 2013 (Civil Court not to have jurisdiction)
[7] S.P. Jain v. Kalinga Tubes Ltd. AIR 1965 SC 1535
[8] Section 241(1)(a) of the Companies Act, 2013
[9] AIR 1965 SC 1535
[10] 1981 3 SCC 333
[11] 2008 3 SCC 363
[12] Sangramsinh P. Gaekwad v. Shantadevi P. Gaekwad (2005) 11 SCC 314
[13] K. Muthusamy v. S. Balasubramanian 2011 SCC OnLine Mad 256
[14] Tea Brokers Pvt. Ltd. v. Hemendra Prosad Barooah, [1998] 5 Comp LJ 463
[15] Bhagirath Aagarwala v. Tara Properties P Ltd. (2002) 111 Comp Cas 597
[16] Needle Industries India Ltd. v. Needle Industries Newey India Holdings Ltd. 1981 3 SCC 333
[17] Rajendra Kumar Tekriwal v. Unique Construction Pvt Ltd. (2009) 147 Comp Cas 737 (CLB)
[18] Needle Industries India Ltd. v. Needle Industries Newey India Holdings Ltd. 1981 3 SCC 333
[19] Vikram Bakshi v. Connaught Plaza Restaurant Ltd. 2017 SCC Online NCLT 560
[20] Section 241(1)(a) of the Companies Act, 2013
[21] K.R.S. Mani & Ors. v. Anugraha Jewellers Limited & Ors., (2000) 100 Comp Cas 665 (CLB)
[22] Chander Krishan Gupta v. Pannalal Girdhari Lal Private Ltd., 1981 SCC OnLine Del 327
[23] Surinder Singh Bindra v Hindustan Fasteners Pvt Ltd. 1990 69 Comp Cases 718 , 726 Del
[24] Jodh Raj Laddha v. Birla Corporation Ltd. C.P. 57 of 2004 CLB (unreported)
[25] Malyalam Plantation India Ltd Re 1991 5 Corpt LA 361 Ker; AIR Asia Ltd. Re 1994 3 Comp LJ 294 (CLB)
[26] Bryan A. Garner (editor in chief), Black’s Law Dictionary (11th edn., 2019).
[27] R.N. Jalan v Deccan Enterprises Pvt. Ltd, (1992) 75 Comp Cas 417, paragraph 26
[28] S.P. Jain v. Kalinga Tubes Ltd. AIR 1965 SC 1535
[29] Hind Overseas P Ltd. v. Raghunath Prasad Jhunjhunwalla 1976 3 SCC 259
[30] Tata Consultancy Services Ltd. v. Cyrus Investments (P) Ltd., 2021 SCC OnLine SC 272
[31] Section 244 of the Companies Act, 2013
[32] Cyrus Investments Pvt. Ltd. v. Tata Sons Ltd. SCC OnLine NCLAT 261
[33] Bennet Coleman & Co v. Union of India and Ors. 1977 47 Com Cases 92
[34] Tata Consultancy Services Ltd. v. Cyrus Investments (P) Ltd., 2021 SCC OnLine SC 272
