The management of a Company is based on the majority rule, but at the same time the interests of the minority can’t be completely overlooked. While talking of majority and minority, we are not talking of numerical majority or minority but of majority or minority voting strength. The reason for this distinction is that a small group of shareholders may hold the majority shareholding whereas the majority of shareholders may, among them, hold a very small percentage of share capital. Once they acquire control, the majority can, for all practical purposes, do whatever they want with the Company with practically no control or supervision, because even if they are questioned on their acts in the general meeting, they always come out winners because of their greater voting strength. So, the modern Companies Acts contain a large number of provisions for the protection of the interests of minorities in companies.
FOSS v. HARBOTTLE ((1843) 67 ER 189):
The principle of oppression and mismanagement was developed in the case of Foss v. Harbottle, where action was brought by two shareholders in a company against the directors charging them with concerting and effecting various fraudulent and illegal transactions whereby the property of the company was misapplied and wasted, and praying that the defendants might be decreed to make good to the company the losses. The action was rejected in respect of those transactions which a majority of the shareholders had the power to confirm.
The Indian case illustrating the rule in Foss v. Harbottle is Bhajekar v. Shinkar [(1934) 4 Comp Cas 434], wherein The Board of Directors of a Company passed a resolution appointing certain persons as managing agents (now abolished). The resolution was confirmed by the company in general meeting with full knowledge of all the material facts. Some of the directors brought a suit for a declaration that the resolution was invalid on the grounds of certain irregularities. Held, it was open to the company to ratify the resolution even if it was irregular and the plaintiffs were not, under these circumstances, entitled to maintain the suit and ask the court to interfere.
CONTEXUAL MEANING OF OPPRESSION:
The term ‘oppression’ has been explained by Lord Cooper in Elder v. Elder & Watson Ltd. [1952 SC 49 (Scotland)] as, “The essence of the matter seems to be that the conduct complained of should at the lowest involve a visible departure from the standards of fair dealing, and a violation of the conditions of fair play on which every shareholder who entrusts his money to the company is entitled to rely.”
Acts held as Oppressive:
Looking to the various judicial pronouncements, some of the acts amounting to oppression may be summarised as under:
· Not calling a general meeting and keeping shareholders in dark.
· Non-maintenance of statutory records and not conducting affairs of the company in accordance with the Companies Act.
· Depriving a member of the right to dividend.
· Refusal to register transmission under will.
· Issue of further shares benefiting a section of shareholders.
· Failure to distribute the amount of compensation received on nationalisation of business of company among members, where required to be so distributed.
CONTEXUAL MEANING OF MISMANAGEMENT:
U/s 398 of the Companies Act, 2013, mismanagement is said to be done if:
· The affairs of the company are being conducted in a manner prejudicial to the interests of the company; or
· A 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) has taken place in the management of control of the company, whether by an alteration in its Board of directors, or if its managing agent or secretaries and treasurers, or in the constitution or control of the firm or body corporate acting as its managing agent or secretaries and treasurers, 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 the interests of the company.
Acts held as Mismanagement:
The following acts have been held as amounting to mismanagement:-
· Where there is serious infighting between directors.
· Where Board of Directors is not legal and the illegality is being continued.
· Where bank account(s) was/were operated by unauthorised person(s).
· Where directors take no serious action to recover amounts embezzled.
· Continuation in office after expiry of term of directors.
· Sale of assets at low price and without compliance with the Act.
· Violation of Memorandum.
· Violation of statutory provisions and those of Articles.
· Company doomed to trade unprofitably.
The word oppression in common parlance refers to a situation or an act or instance of oppressing or subjecting to cruel or unjust impositions or restraints. According to Lord Keith, Oppression means, lack of morality and fair dealings in the affairs of the company which may be prejudicial to some members of the company.The term mismanagement refers to the process or practise of managing ineptly, incompetently, or dishonestly. However it is to be noted that the terms are not defined under the companies act and is left to the discretion of the court to decide on the facts of the case whether there is oppression or mismanagement of minority or not. The new Companies Act of 2013 in many ways ensures that the rights of the minority shareholders are protected in every possible manner. The stake held by them in a company is not in any manner subservient to the majority and it is the duty of the law to protect their interests from any odious activity of the latter. The Act and the Courts try to strike a fine balance between the rights of the majority to rule and the protection of interests of the minority shareholders through the prevention of oppression and mismanagement.
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