JURISDICTION OF THE NCLT TO GRANT RELIEF IN A CASE OF OPPRESSION AND MISMANAGEMENT: AN ANALYSIS

[Bhawna Lakhina is a third year student at National Law Institute University, Bhopal]


Section 241 of the Companies Act, 2013 (Companies Act) provides the right to a member of a company to seek relief for oppression and/or mismanagement of the company. It provides that any member can approach the National Company Law Tribunal (NCLT) alleging that the affairs of the company are being conducted in a way oppressive to any member(s), or prejudicial to the interests of the public or the company. In this post, the author analyses the position of law on the maintainability of such complaints as well as on the jurisdiction of the NCLT to grant relief in the cases concerning oppression and mismanagement.

Who can file a complaint under Section 241?

Any member of a company can file a complaint alleging oppression and mismanagement as provided under Section 241 of the Companies Act. It is pertinent to note that the provision itself does not, as a pre-requisite, stipulate that it can be invoked only by minority shareholders. The only qualification to file a complaint is that provided under Section 244. In other words, a complaint under Section 241 will be rendered maintainable only when the thresholds under Section 244 are satisfied. Accordingly, an application must be filed by one hundred members or over one-tenth of the total members, or any member(s) holding over one tenth of the issued share capital of the company, provided that all dues have been paid by the member(s) making the complaint. Alternatively, if the company does not have an issued share capital, the complaint must be made by at least one-fifth of the total members.

However, the thresholds exist only as a procedural requirement and do not negate the substantial prospects of the law. Accordingly, even if a party falling below this threshold comes before the Tribunal pressing significant issues, the NCLT has the power to waive these thresholds and look into the matter if it affects the interests of the company. A similar reasoning was contemplated in the case of Maharashtra power Development Corp v. Dabhol Power Co., wherein the substantive aspects of the company law were held to supersede any procedural irregularity. In any case, it is well established principle of law that procedural law is always subservient to a substantive law, as held in Saiyad Mohammad Bakar El-Edroos v. Abdulhabib Hasan Arab. Thus, Section 244 sets out the minimum shareholding that is required for any member to make a complaint under Section 241. This is to ensure that the NCLT is not approached for frivolous complaints.

Are majority shareholders covered within its ambit?

A perusal of this provision shows that there is only a minimum threshold provided under Section 244, not a maximum one. Therefore, there is no bar on either the majority or the minority to file an application alleging oppression and mismanagement under Section 241. This was also iterated in the case of P.S. Nanawati v. Jaipur Metals & Electricals.

However, the traditional interpretation of Section 241 has been that only a minority can allege oppression/ mismanagement by the majority qua the shareholding capacity. The reasoning behind such an understanding is that the minority is usually not in a position to cause oppression and mismanagement in the company. Alternatively, the majority shareholders have internal mechanisms through which they can take action against any oppression and mismanagement by the minority shareholders, including removal of the latter from the company Board.[i] However, such means are not available to the minority shareholders and thus, legal remedies are a means for protection of their interests against any prejudicial act of the majority.

As against this understanding, there is a need to consider the practicalities of the functioning of a company. There can be circumstances wherein the minority assumes a position wherein it controls some significant functions, including but not limited to finance, operations and sales, etc. This gives them the requisite power to act in furtherance of their self interests while harming the functioning of the company.

Furthermore, there are procedures to be followed in a company before any resolution is passed. These generally include the condition of special majority and sometimes even that of unanimous voting for certain significant decisions pertaining to the company. In such a situation, the minority possesses the power to veto any significant decisions which can have adverse implications on the interests of the company. This shows that a minority also has the power to conduct the affairs of the company prejudicial to the interests of the public or company itself.

Such a situation also enables the minority shareholders to prevent the majority to resort to any internal mechanism for curing the oppression and mismanagement caused due to the conduct of the former.[ii] Thus, the majority also needs a legal mechanism for protection against such acts of the minority. This is the reason why there has been a change in interpretation of Section 241 which recognises such situations wherein the conduct of the minority can also lead to oppression and mismanagement, irrespective of their shareholding capacity.

Exclusive Jurisdiction of the NCLT

Section 242 provides wide powers to the NCLT to issue any remedy to cure the oppression and mismanagement being alleged. However, the Tribunal must be satisfied that the alleged oppression and mismanagement has actually taken place and the company’s affairs are being conducted in a prejudicial manner which affects the interests of the public or company such that the company should be winded up on “just and equitable” grounds. However, winding up of the company would adversely affect the interests of the member(s) of the company who have filed the complaint and thus, some other relief needs to be granted by the Tribunal.

With regard to such powers to grant relief, the Companies Act, 2013 went a step ahead from the 1956 legislation as the former confers an exclusive jurisdiction upon the Tribunal. According to Section 430 of the 2013 Act, the civil courts are not to have jurisdiction in such matters. Accordingly, the legislative intent is that such disputes including allegations of acts prejudicial to the interest of the shareholders, or company, must be looked into by the Tribunal only. Such jurisdiction cannot be protested. The same has also been iterated in the case of Tata Consultancy Services v. Cyrus Mistry wherein it was held that the Tribunal possesses wide powers to issue any relief if the interest of the company is involved. In other words, the wellbeing of the company is of paramount consideration while granting relief.

In such context, the law has now been developed to the extent that the jurisdiction to grant relief can be exercised even in cases where the acts of oppression or mismanagement cannot be made out. In the case of MSDC Radharamanam v. MSD Chandrasekara Raja, it was held that relief can be granted even when the acts of the parties involved do not qualify as oppression or mismanagement; however, situations exist where “just and equitable” grounds exist for winding up of the company.

Such a situation arises when there is lack of probity between the parties such that there is an irretrievable breakdown in the company wherein the disputing parties cannot be made to work together. If such parties are made to work together, it would be prejudicial to the interest of the company. This is because each party would keep their own interest above that of the company while dealing with each other. In such a situation, the interest of the company would be defeated if relief is not granted. Thus, the NCLT has a wide ranging jurisdiction to grant relief even when the allegations of oppression and mismanagement are not proved.

Conclusion

The position of law in India has evolved to a great extent with regard to cases pertaining to oppression and mismanagement. The law poses no restriction on either the majority or the minority to file a complaint invoking the jurisdiction of the NCLT. In this way, the Indian law has been drafted to take care of all practical realities that may exist in the functioning of the company. Furthermore, the prerequisites for warranting relief have been diluted in a way that the NCLT can grant relief even in situations where the interests of the company would be adversely affected if relief is not granted owing to lack of faith and confidence among the parties to the dispute. This is in furtherance of the larger objective wherein the wellbeing of the company is paramount and supersedes the individual interests of either party.



_____________________________________________________________________________ [i] RR Drury, “The Relative Nature of a Shareholder's Right to Enforce the Company Contract” 223 Cambridge Law Journal Vol. 45 No. 2 (1986). [ii] Sturgess v. Dunphy, [2014] NZCA 266

39 views0 comments