OPPRESSION AND MISMANAGEMENT UNDER COMPANY LAW

By V.V.S.N. Raju and Nivedita Jha

The concepts of oppression and mismanagement plays a crucial role in maintaining corporate governance and protecting the interests of shareholders, particularly minority shareholders, in a company. The Companies Act, 2013, provides mechanisms to address issues arising from actions that are oppressive or amount to mismanagement of the company’s affairs. This article explores the legal framework surrounding these concepts, focusing on key judicial decisions that have shaped the interpretation and application of the law.

Oppression in company law refers to conduct that is burdensome, harsh, and wrongful to shareholders. As defined in Black’s Law Dictionary, it is “the act or an instance of unjustly exercising authority or power; unfair treatment of minority shareholders (especially in a close corporation) by the directors or those in control of the corporation.”

The legal framework for addressing oppression is primarily found in Section 241 (formerly Section 397 of the Companies Act, 1956) of the Companies Act, 2013. This section gives members of a company the right to apply to the Company Law Board (CLB) for relief if the company’s affairs are being conducted in a manner oppressive to any member or members.

Hon’ble Supreme Court of India in the case of Needle Industries (I) Limited v. Needle Industries Newey (I) Holding Limited (1981 AIR 1298) held that the acts which are Burdensome, harsh and wrongful indicates that it is synonymous with the term oppressive manner. A separate act may be against the law, but it cannot be said to be oppressive if it does not have mala fide intention cloaking it or if the act was harsh, burdensome and wrongful.

If there are multiple illegal acts, it automatically means that all the acts were a part of one action with the motive to oppress the persons against whom the acts have been done. The person claiming oppression against another party has the duty to prove in which way the act of oppression led him to compromise on his decision and submit to an act lacking integrity, an act which is prima facie unfair and further on how it has affected his proprietary rights.

The Supreme Court, in the landmark case of Shanti Prasad Jain v. Kalinga Tubes Limited (AIR 1965 SC 1535), established that for conduct to be considered oppressive:

1. It must be burdensome, harsh, and wrongful.
2. Mere lack of confidence between majority and minority shareholders is not enough.
3. The lack of confidence must spring from oppression of a minority by a majority in the management of the company’s affairs.
4. It must involve at least an element of lack of probity or fair dealing concerning a member’s proprietary rights as a shareholder.

This principle has been consistently applied and refined in subsequent cases. For instance, in Elder & Watson Limited Lord Cooper (1952 SC 49 (Scotland)) emphasized that oppressive conduct should “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 a company is entitled to rely.”

 Continuous Nature of Oppressive Acts

“It’s important to note that oppression must be a continuous process, not isolated events. This principle was reinforced in the case of Cyrus Investments Private Limited and others. v. Tata Sons Limited (2021 SCC OnLine SC 272).  In the case of Sangramsinh P. Gaekwad and others v. Shantadevi P. Gaekwad (Dead) (through legal representatives) and others (2005) 11 SCC 314), which emphasized that for invoking provisions related to oppression and mismanagement, there must be a continuous act on the part of the majority shareholders, continuing up to the date of the petition. Isolated incidents spread over a period of time may not be sufficient to establish oppression or mismanagement.

Examples of Oppressive Conduct

Oppression can manifest in various forms, including:

1. Excluding minority shareholders from the company’s affairs;
2. Issuing shares to dilute minority shareholding;
3. Misuse of company funds for personal benefit; and
4. Denying access to company information.

However, it’s crucial to note that not all unfavourable decisions constitute oppression. In Venus Petrochemicals (Bombay) Private Limited v. Niranjan Kumar Agarwal (2015) 3 SCC 726), the court clarified that appointing or not appointing directors alone doesn’t constitute oppression, and non-declaration of dividends isn’t automatically oppressive. This ruling reinforces the principle that business decisions, if made in good faith, are not inherently oppressive.

Mismanagement Definition and Scope

Mismanagement refers to conduct that results in:

• Material change in the management or control of the company;
• Substantial impairment of the company’s financial position; and
• A change in the board of directors prejudicial to the company’s interests.

The Ram Parshotam Mittal and Others v. Hotel Queen Road Private Limited and Others (2019) SCC OnLine NCLAT 447.) The case illustrated that mismanagement can take various forms, including failure to notify directors of board meetings, directors participating in decisions affecting their own interests, and illegal share transactions.

Distinguishing Mismanagement from Oppression

While oppression focuses on unfair treatment of shareholders, mismanagement relates to improper conduct in managing the company’s affairs, which may or may not directly oppress shareholders. However, both concepts are often interlinked in practice.

The Concept of “Unfair Prejudice”

The Companies Act, 2013, introduced “unfair prejudice” as a separate ground for relief, distinct from oppression. Section 241(1)(a) uses the expression “prejudicial or oppressive” disjunctively, empowering shareholders to bring action not only for oppressive acts but also for those that are unfairly prejudicial.

The Vikram Bakshi case (2019 SCC OnLine NCLAT 754) aligns with the principle mentioned in the Sangramsinh P. Gaekwad case, which emphasizes that oppression must be a continuous act up to the date of the petition.

Types of Prejudice

1. Public Prejudice: Actions against public interest in general; and
2. Commercial Prejudice: Actions affecting the legitimate expectations of shareholders.

The V.S. Krishnan v. Westfort Hi-tech Hospital Limited (2008) 3 SCC 363 case provided some guidance on this concept, stating that “even conduct that is legally permissible may be oppressive if it is against probity, good conduct or is burdensome, harsh or wrong or is mala fide or for a collateral purpose.”

Remedies and Powers of the Tribunal

The National Company Law Tribunal (NCLT) has wide-ranging powers under Section 242 (formerly Section 402) to provide remedies in cases of oppression and mismanagement. These powers include:

1. Regulating the conduct of the company’s affairs in the future
2. Making changes to the company’s memorandum and articles
3. Appointing directors or removing existing ones
4. Setting aside or modifying agreements made by the company

The NCLT can provide these remedies as an alternative to winding up the company when:

• The company is a going concern;
• Shareholders have invested substantial amounts, and
• Winding up would result in unfair prejudice

In considering whether to order winding up, the Tribunal must balance the interests of the applicant shareholders with those of the remaining shareholders. As noted in the Sangramsinh P. Gaekwad case, “The interest of the applicant alone is not of predominant consideration. The interests of the shareholders of the company as a whole, apart from those of other interests, have to be kept in mind at the time of consideration as to whether the application should be admitted.”

Venus Petrochemicals (Bombay) Private Limited Case: A Landmark in Oppression and Mismanagement Jurisprudence

1. Background of the Case

Venus Petrochemicals (Bombay) Private Limited was a family-owned business incorporated in 1995. The company’s shares were equally divided between two families led by brothers Sunil M. Thakkar and Atul M. Thakkar. The dispute arose in 2015 when Atul M. Thakkar attempted to change the equal representation on the Board of Directors by appointing his son while denying similar appointments to Sunil M. Thakkar’s family members.

2. Appointment of Directors

The court clarified that the mere act of appointing or not appointing directors doesn’t automatically constitute oppression. This ruling demonstrates that:

The act of “oppression and mismanagement should be prejudicial to a member of the company and not against the director of the BoD. Technically and legally speaking, the appointment and removal of directors cannot be treated as an act of “oppression and mismanagement.

3. Financial Decisions and Dividend Distribution

The court held that the non-declaration of dividends, being a financial decision, is not automatically considered oppressive. This ruling:

Aligns with the concept that oppression must involve a lack of probity or fair dealing in relation to shareholders’ rights.

4. Continuous Nature of Oppressive Acts

The court’s examination supports the principle that oppression must be a continuous act:

Isolated incidents are generally insufficient to establish oppression.

There must be a pattern of behavior that consistently prejudices minority shareholders.

5. Quasi-Partnership in Family-Owned Businesses

The court considered whether the company operated as a quasi-partnership, clarifying that:

Being family-controlled doesn’t automatically make a company a quasi- partnership. The intentions and understanding between parties are crucial in determining the nature of the business relationship.

6. Misuse of Casting Vote

The court’s examination aligns with the principle that even legally permissible actions can be oppressive if against probity and good conduct.  The manner in which power is exercised, even if technically legal, can be scrutinized for fairness. The Adjudicating Authority took a decision to remove the casting vote in these extraordinary circumstances, which created a company imbalance by one set of 50% shareholders taking all decisions for their own benefits and denying any right to the other 50% shareholders.

7. Unfair Prejudice

While primarily about oppression, the case indirectly touches on the concept of “unfair prejudice”: Actions can be prejudicial to the interests of some members even if they don’t rise to the level of oppression.

8. Implications and Significance

The case emphasizes the need to balance the rights of majority shareholders to manage the company with the protection of minority shareholders from unfair treatment. It underscores the need for a holistic, continuous assessment of company affairs rather than focusing on isolated incidents when determining oppression. The case contributes to an expanded understanding of oppression and mismanagement, moving beyond just illegal actions to consider the fairness and probity of technically legal actions.

The Venus Petrochemicals case serves as a significant benchmark in the evolving jurisprudence of oppression and mismanagement under Indian company law. It reinforces the idea that determining oppression requires a careful examination of conduct, its continuity, and its impact on shareholders’ rights, aligning with and expanding upon the foundational principles established in earlier landmark decisions.

Conclusion

The Venus Petrochemicals case serves as a significant benchmark in the evolving legal landscape of oppression and mismanagement under Indian company law. It reinforces the idea that determining oppression requires a careful examination of conduct, its continuity, and its impact on shareholders’ rights, aligning with and expanding upon the foundational principles established in earlier landmark cases.

Recent cases like Venus Petrochemicals and Cyrus Investments demonstrate that courts are moving towards a more nuanced understanding of oppression and mismanagement. This approach considers not just the legality of actions, but also their fairness and impact on shareholders’ rights.

In conclusion, while the law provides robust protections against oppression and mismanagement, each case must be analysed on its own merits, considering the specific circumstances, the nature of the alleged oppressive acts, and their impact on the shareholders and the company as a whole. As corporate structures and practices continue to evolve, so will the interpretation and application of these vital legal principles.