COMPANY LAW

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Equity Research Report

What is the meaning of Oppression

Oppression is the exercise of authority or power in a burdensome, cruel, or unjust manner. An act or instance of oppressing, the state of being oppressed, and the feeling of being heavily burdened, mentally or physically, by troubles, adverse conditions, and anxiety. Daleant Carrington Investment (P) Ltd. v. P.K. Prathapan case.

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SECTION 397,398

Majority rules over company Possibility that majority may adopt measures which are not favorable to others. Thus there is oppression. Examples

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Relief From Oppression and Mismanagement

In case of oppression of members & mismanagement of company by majority, a requisite no. of shareholder can apply for appropriate relief to: The tribunal for winding up The National Company Law Tribunal (NCLT) The Central Govt.

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Application to NCLT (Sec. 397)

This first remedy in the hand of oppressed members A requisite no of shareholder can apply for appropriate relief to NCLT

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Relief From NCLT

Section 397 of Company law indicates that the NCLT may grant relief to an applicant on following grounds: The company affairs are being carried out in a way that is harmful to public interest or oppressive to an associate or associates. If the NCLT feels that it is justified and fair to wind up the company. If it feels that winding up the organization will cause injustice to the complainants.
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WHO CAN APPLY FOR RELIEF

Requisite number of members should sign on the application. a) Company having share capital: i. Not less than 100 members or 1/10 of the total number of its members, whichever is less, or ii. By any member(s) holding not less than 1/10 of the issued share capital.
Example : The case of Tarlok Chand Khanna And Another vs. Raj Kumar Kapoor And Others, 1983, Delhi High Court regarding maintanence of bank accounts by shareholders in the company.
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Who can apply for Relief contd.

(b) In the case of a company not having a share capitalnot less than 1/5 of the total number of members [Section 399(1)(b)]. (c) Besides Members: Central Govt. or any person authorized by the Central Govt. Trustees of a shareholder/member A legal representative of a deceased member (d) The Central GovernmentThe Central Government can also apply or authorise a member or members to make an application under Section 397 or 398, though the [B]requisite conditions under [a] and are not satisfied [Section 399(4)]. CASE of Satyam
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How to apply

An application under Section 399(4) must contain the names and addresses of the applicants, the total numbers of applicants, etc., it must be verified by an affidavit. The Central Government may require the applicant to produce documentary evidence in support of the complaint [Section 399(4)]. It may also require the members to give security for costs [Section 399(5)] The notice of every application made to the NCLT under sec. 397/398 for oppression or mismanagement must be given by NCLT to Central Govt.
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Act Held As Oppressive (By Court / NCLT)

Not calling a gen. meeting & keeping the shareholder in dark Non maintenance of statutory records & not conducting affairs of the co. in accordance with the Cos Act Depriving a member of the right to dividend Transfer of share held by Company to some shareholders otherwise than by making an offer to all

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Contd..

Allotment of share by directors in a manner by which majority of share-holders is reduced to a minority Failure to distribute the amount of compensation received on nationalization of business of Co. among the members, where required to be so distributed Countermanding decision of board of directors who controls majority voting power, & not allowing board to perform its functions

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Contd..

If sale of asset is made by a Co. to some of its directors & simultaneously giving them loan to purchase the same Issue of further shares benefiting a section of the share holders

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Acts Not Held As Oppressive

An unwise, inefficient careless conduct of a director Not declaring dividend when Co. is making loss Non-holding of the meeting of the director Failure to maintain proper records of the Co.

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Acts Not Held As Oppressive

Denial of inspection of books to a shareholder Lack of details in notice of a meeting Increasing the voting rights of the shares held by the management

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Majority?
Relief can be granted if the application is made by majority share holder who have been rendered completely ineffective by the questionable acts of a minority group.

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Prevention of Mismanagement

Sec. 398 of 1956 Company Act provides for relief in case of mismanagement by majority Requisite no. of members may apply to CLB for appropriate relief Inefficient management also amounts to mismanagement and comes under the section Mismanagement must have existed and continued at the time of application

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Rajahmundry Electric Supply Corp. vs A.Nageshwara Rao

Petition filed by certain shareholders on grounds of mismanagement by directors Thorough enquiry by the court Considerable amounts drawn by the VC for personal use Machinery lying in state of despair Shareholders outside the VCs circle did not have enough powers Court appointed two administrators for a period of six months

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Acts Held as Mismanagement

Serious in fight between the directors Illegal constitution of the board of directors

Continuation of managing director in office after the expiry of his term

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Acts Held as Mismanagement

Absence of records and losses Operation of bank A/C by an unauthorized person Company doomed to trade unprofitably

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Contd..

Sale of assets at low price & with out compliance with the Act Violation of statutory provisions & those of articles

Violation of the condition of the Cos memorandum

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Acts not held as Mismanagement

Building up of reserves Merely because company incurs loss, it can not be that it is mismanaged Removal of secretary by majority decision of the board of directors unless it is shown that the removal has prejudicially affected the interest of the Co. or the public interest

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Acts not held as Mismanagement(contd)

Removal of director and termination of works managers services. Arrangement with creditors in companys bonafide interest.

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Powers of the NCLT: Prevent change in Board of Director

When, a complaint is made to the Company Law Board by the managing director or any other director or the manager of a company regarding; Change in ownership Change in shares held in the company, Which, May lead to a change in the Board of directors place which (if allowed) would affect prejudicially the affairs of the company, Then, After inquiry if it thinks fit to make that it is just and proper to do so, by order direct that no resolution passed or that may be passed or no action taken or may be taken to effect a change in the Board of directors after the date of the complaint shall have effect unless confirmed by the Company Law Board.
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Powers of the NCLT

Sections 397 and 398 confer general powers on the Company Law Board (now Tribunal) to end oppression and mismanagement. Section 402 empowers it to grant certain specific reliefs. The reliefs contemplated under section 402 are:the regulation of the conduct of the company's affairs in future; the purchase of the shares or interests of any members of the company by other members thereof or by the company;

a)

b)

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Powers of the NCLT

(c) in the case of a purchase of its shares by the company as aforesaid, the consequent reduction of its share capital;
(d)

the termination, setting aside or modification of any agreement, howsoever arrived at, between the company on the one hand, and any of the following persons, on the other namely: (i) the managing director, (ii) any other director, (iii) the managing agent, (iv) the secretaries and treasurers, and (v) the manager, upon such terms and conditions as may, in the opinion of the Court, be just and equitable in all the circumstances of the case;

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Powers of the NCLT

(e) the termination, setting aside or modification of any agreement between the company and any person not referred to in clause (d), provided that no such agreement shall be terminated, set aside or modified except after due notice to the party concerned and provided further that no such agreement shall be modified except after obtaining the consent of the party concerned;
(f)

(g)

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 section 397 or 398, which would, if made or done by or against an individual, be deemed in his insolvency to be a fraudulent preference; any other matter for which in the opinion of the Court it is just and equitable that provision should be made. PREVENTION OF OPPRESSION & MISMANAGEMENT
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POWER OF THE CENTRAL GOVT.

Power to prevent oppression or mismanagement (Sec. 408)

On the application of 100 members or members holding 10 % or more of the total voting, central govt. may appoint such number of persons as additional directors.
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Power to remove managerial personnel

When concerned person is guilty When business being conducted by person of unsound principles When business is run by person in manner of causing injury and damage to interest of trade When business is managed by person with intent to defraud
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