CORPORATE

GOVERNANCE
ASSIGNMENT
CONDUCT CONCERNING TRADE & BUSINESS:
PREVENTION AND OPPRESSION OF
MISMANAGEMENT

SUBMITEED BY –
SHUBHRAJIT SAHA; &
NASIF MUSTAHID
[BA LLB (H) – 9th semester]
A company in a broad sense is a group of persons who have come together or who have
contributed money for some common purpose and have incorporated themselves into distinct
legal entity. Company is the amalgamation of two distinct words- “com” and “pain”, the
former meaning with/together and the later meaning “bread”. The whole scheme of the
Companies Act, 1956 is to ensure proper conduct of the affairs of the company in public
interest and preservation of image of country in public interest.

Majority rule is hallmark of democracy. It equally applies to corporate democracy and is not
free from pitfalls and abuse. Corporate democracy is more vulnerable to it because it is
reckoned with the number of shares and not with number of individuals involved. The rule of
majority has been made applicable to the management of the affairs of the company. The
members pass resolution on various subjects either by simple or three-fourth majority. Once
resolution is passed by majority it is binding on all members. As a resultant corollary, court
will not ordinarily intervene to protect the minority interest affected by resolution. However,
there are exceptions to this rule- Prevention of Oppression and mismanagement being one
such ground.

With a view to check abuse of majority power, the Companies Act contains special
provisions for Prevention of Oppression and Mismanagement. Chapter VI of the Companies
Act deals with this. The chapter is in two parts- Part ‘A’ deals with Powers of Company Law
Board (Sec 397-407) and Part ‘B’ deals with Powers of Central Government (Sec 408-409).
By 1988 Amendment power under Sec409 are transferred to CLB. Further powers of Central
Government are exercisable only if directed by the CLB. There can also be a composite
petition under Sec 397/398 and under Sec 433(f) [winding up of company for just and
equitable reasons] for relief against oppression and mismanagement. This was valid when the
jurisdiction for both was exercisable by court. Presently, jurisdiction under section 397/398
the CLB can order winding up. With the amendment of 2002, powers of the CLB and of
court are transferred to Tribunal. Tribunal is yet to be established. Upon its establishment, it
may hold good to say that powers under sec 397/398 and under sec 433(f) are exercisable by
the Tribunal.

The requisite number of members to make an application before the Tribunal is :

 1. In case of Company having share capital: 100 members or 1/10th of total number of
its members, whichever is less or member/s holding not less that 1/10th issued capital.
The applicants should have paid all calls and other sum due on their shares.

2. In case of Company not having a share capital: not less than 1/5th of total number of
the members. In case of joint shareholding they will be counted as only one member.

PREVENTION OF OPPRESSION

The meaning of the term “oppression” as explained by Lord Cooper in the Scottish case of
Elder v. Elder & Watson Ltd.1, was cited with approval by Wanchoo J. of the Supreme Court
of India in Shanti Prasad Jain v. Kalinga Tubes2 . He said that the conduct complained of
should, at least, involve a visible departure from the standards of their dealing, and violations
of conditions of fair play on which every shareholder who entrusts his money to Company is
entitled to rely. The complaining member must show that he is suffering from oppression in
his capacity as a member and not in any other capacity.

To constitute oppression, persons concerned with the management of the company’s affairs
must in connection therewith be guilty of fraud, misfeasance or misconduct towards the
members. It does not include mere domestic disputes between directors and members or lack
of confidence between one set of members and others.

It was observed in Rao (V.M) v. Rajeswari Ramakrishnan3 :

 That the oppression complained off must affect a person in his capacity or character
as a member of the company; harsh or unfair treatment in other capacity, e.g., as a
director or a creditor is outside the purview of the section.
 There must be continuous acts constituting oppression up to the date of the petition.
 The events have to be considered not in isolation but as a part of a continuous story.
 It must be shown as a preliminary to the application of section 397 that there is just
and equitable ground for winding up the company.

1
1952
2
1965 AIR 1535
3
1987 61 Comp Cas 20 Mad
  The conduct complained of can be said to be “oppression” only when it could be said
that it is burdensome harsh and wrongful; oppression involves at least an element of
lack of probity and fair dealing to a member in matters of his proprietary right as a
shareholder.

There are preliminary conditions which must be satisfied to entitle a shareholder to relief
under S397:

 The company’s affairs are being conducted in a manner

 Prejudicial to public interest or oppressive to any member/s
 Which would make it just and equitable to wind up the company, but,
 Winding up would unfairly prejudice such member/s

It is not necessary to establish any personal prejudice for any relief under the section.
Tribunal has been given the powers to impose upon the parties whatever solution the Tribunal
considers just and equitable.

Who can apply

Section 397 of the Companies Act states the members of a company shall have the right to
apply under Section 397 or 398 of the Companies Act. According to Section 399 where the
company is with the share capital, the application must be signed by at least 100 members of
the company or by one tenth of the total number of its members, whichever is less, or by any
member, or members holding one-tenth of the issued share capital of the company. Where the
company is without share capital, the application has to be signed by one-fifth of the total
number of its members. A single member cannot present a petition under section 397 of the
Companies Act. The legal representative of a deceased member whose name is again on the
register of members is entitled to petition under Section 397 and 398 of the Companies Act.

Under Section 399(4) of the Companies Act, the Central Government if the circumstances
exist authorizes any member or members of the company to apply to the tribunal and the
requirement cited above, may be waived. The consent of the requisite no. of members is
required at the time of filing the application and if some of the members withdraw their
consent, it would in no way make any effect in the application. The other members can very
well continue with the proceedings.

CIRCUMSTANCES WHICH AMOUNT TO OPPRESSION

Looking at the judicial pronouncements a few acts which amount to oppression are listed
below:

1. Attempt to force new and more risky objects upon an unwilling minority may in
circumstances amount to oppression. This can be best illustrated with the case of
Hindustan Coop Insurance Society Ltd, Re 4. Here, a life insurance business of a
company was acquired by Life Insurance Corporation in 1956 on payment of
compensation. Directors, who had majority voting powers, refused to distribute this
amount among share holders. Rather, they passed a special resolution changing the
objects of the company and use compensation money for new objects. This was held
to be an oppression. Here the majority forced the minority shareholders to invest
money in different kind of business against their will.
2. An attempt to deprive a member of his ordinary membership rights is “oppression”, as
in the case of Mohan Lal Chandumall v. Punjab Co. Ltd. 5 In the instant case, a public
company doing forward contract business amended its articles of association under
statutory directions, so as to deprive its non-trading members their right to vote, to
call meetings, to elect directors and receive dividends. Court held that “the company
in doing so trampled upon valuable rights of such members by unjust exercise of its
authority and power, and this amounted to oppression within Section 377.
3. Suppressing notices of meetings to some of the members amounts to oppression.
Casual omission may not be oppression, but systematic elimination of notices to some
of the members is serious deprivation of their most important right.
4. Continuous refusal by company to register shares with an ulterior motive of retaining
control over the affairs of the company. Though the refusal once by the company may
not be oppressive, but a continuous refusal by the company to register the shares with
an ulterior motive of retaining the control over the affairs of the company where CLB

4
AIR 1961 Cal 443
5
1962 32 Comp Cas 937 P H
 will have to grant relief under Sec 397.- Kumar Exporters (P) Ltd v. Naini Oxygen
and Acetylene Gas Ltd.
5. Failure to distribute the amount of compensation received on nationalization of
business of company among members, where requires to be distributed. Hindustan
Co-op Insurance Society Ltd, In re – Here, the insurance business of the company was
nationalized and compensation was received. The directors did not call any AGM.
After three years the board resolved to call a GM and pass a resolution to continue the
company and carry on other businesses authorized by memorandum with
compensation money received. Sec 39 of the Life Insurance Act envisaged
distribution of compensation to shareholders and dissolution of the company. The
court held that the resolution and persistent conduct of the respondent in the affairs of
the company shows that they never intended to distribute the compensation money
amongst the shareholders, who were entitled thereto. This conduct was held to be
oppressive to the company and the applicant’s minority shareholding company.

Other instances of oppression may include- issue of further shares benefiting a section of the
shareholders; registration of transfers in violation of articles; irregularity in allotment and
transfer of shares; denial of inspection of books to shareholder etc.

There is nothing to limit equity shareholdings only. Applicants may be partly or wholly
preference share holders too. Any member or members having obtained the consent in
writing of requisite number of members may apply. Right to apply is not confined to
oppressed minority alone even oppressed majority can apply.

PREVENTION OF MISMANAGEMENT [S 398]

Section 398 provides for relief in cases of mismanagement. All the provisions are common
with Section 397 except :

The burden of satisfying Tribunal that Company shall be wound up is not in Sec 398.

The word “likely” is used in Sec398 (1) (b). So this section can be invoked not only when
there is mis-management but also when it is likely that affairs of company will be conducted
prejudicial to public interest or interest of Company on account of material change in
management or control of Company.

So, sec 397 is only curative, whereas Sec 398 is both curative and also preventive. Under
Sec400, Tribunal shall give notice of every application made to it under Sec397 & 398 to
Central Government and shall take into consideration the representations if any made by
Government, before passing a final order.

Sec 398(1) (a) will not only take into account acts or conduct of company leading to
mismanagement but also non- conduct of the affairs of the company which leads to prejudice
caused to the company.

INSTANCES OF MISMANAGEMENT

A very clear illustration of mismanagement under Section 398 appears in Rajahmundary

Electric Corporation v. Nageshwara Rao 6. Here, a petition was brought against a company
by certain shareholders on the ground of mismanagement by directors. Court found that vice-
chairman grossly mismanaged the affairs of the company and had drawn considerable
amounts for his personal purposes, the shareholders outside the group of chairman were
powerless to set matters right. This was held to be sufficient evidence of mismanagement.
The court accordingly appointed two administrators for management of company for period
of 6 months vesting in them all the powers of the directorate.

Where the managing directors of the Company continued in office after expiry of their terms,
without a meeting being held to re-appoint them prior to making fresh application to Central
Government under Sec 269, the continuation of office under these conditions was held to be
mismanagement.- Sishu Ranjan v. Bholanath Paper House7.

Where bank account was operated by unauthorized person. Kuldip Singh Dhillon v. Paragon
Utility Financers Ltd8. In this case, a certified copy of a resolution had been sent to the bank
authorizing certain persons to operate the account. No such resolution was found recorded in
the minutes book; rather the resolutions passed on the particular date and recorded in the
minutes book; rather the resolutions passed on the particular date and recorded in the minutes
book were different.
6
1956 AIR 213
7
1983 53 CompCas 883 Cal
8
1986 60 CompCas 1075 P H
Sale of assets at low price and without compliance with the Act- One of the estates of a tea
and rubber plantation company was sold by the direction at a low price to another tea
plantation company without complying with the requirements of sec 293(1) which demands
approval by shareholders and without giving adequate under Sec 173 and relevant
information, giving delivery of possession before general body meeting and accepting
consideration in instalment. It was held that all these acts constituted mismanagement of
affairs and sale was set aside. The Board of directors and the purchasers were held liable for
the company’s losses and were required to submit an account of the income of the estate from
the date of delivery of possession to the date of its actual return to the company- Malayalam
Plantations Ltd., Re 9

Violation of statutory provisions and those of articles - Transferring shares without first
offering them to the existing members in accordance with their rights under the articles,
holding meetings without sending notice to members; issue of shares for consideration other
than cash not represented by corresponding assets and burdening the company with additional
rental by shifting the company’s office- Akbarali Kalveri v. Konkan Chemicals Ltd.

Other instances include Gross neglect of interest of the company by sale of its only assets and
total inattention thereafter to the affairs of the company ; Violation of conditions of
company’s memorandum etc.

The famous Satyam fiasco is a very good example of mismanagement of funds of the
company and fraudulent accounting, where the Chairman of Satyam Computer Services-
Ramalinga Raju in his letter to the Board of Directors confessed to India’s biggest corporate
fraud worth Rs 7,000 crore on the company.

Effect of Arbitration Clause – Provisions in the Articles of Association of a company for

reference of disputes between Company and director, or between directors or between
members cannot oust the jurisdiction of the Court to try petition by member for winding up or
petition against oppression and mismanagement.

Partnership- The Supreme Court has laid down that a relief cannot be granted under S 397
and 398 on the analogy of principles applicable partnership and the application of this has to
be confined to rare cases for invoking the jurisdiction under S.433 for ordering winding up of
small private company.

9
1965 AIR 161, 1964 SCR (7) 391
Banking- A banking company can be wound up only under Part III of Banking Regulation
Act and not under the just and equitable clause in Sec 433(f). Consequently no application is
maintainable under sec 397 in respect of banking company.

RELIEFS AVAILABLE

The reliefs available to the oppressed and the share holders can be divided into Preventive
and punitive as follows:

Preventive and corrective measures

Sec 397 and 398 give wide powers to the CLB to make any order with a view to bring to an
end the matters complained of or to prevent the matter complained of or apprehended.
Section 402 provides for specific kinds of orders that can be passed. Few of them are as
follows:

 Regulation of conduct of affairs

 Purchase of shares of members by other members/ company
 Consequential reduction on capital
 Termination or modification of contract with managing director, manager or director
 Termination of contract/ arrangement with other parties.

Therefore it can be seen that buyback of shares and consequent reduction in capital can take
place without recourse to any other provisions of the Act. Emphasis under the above sections
is on preventing or curing the ills and not punishing the misdeeds. The powers can be
exercised without limitations of other provisions of the Act, Memorandum or Articles of
Association. In the case of Needle Industries (India) v. Needle Industries Newey Holding
Ltd10., the SC passed an order to make complete justice even after holding that there was no
oppression and minority was required to buy majority shares.

10
1981 AIR 1298
Under Sec 408, the Central Government can appoint additional directors/ directors on board
of the company if so directed by CLB. The Central government also has powers to issue
directions to directors appointed by it and call for the report from them about the affairs of
the company. It is more or less a takeover of the management. Under proviso to section 408
(1) the CLB has exclusive power to direct the amendment of articles providing for
proportionate representation for appointment of directors.

Under Sec 409, CLB has power to direct that no resolution or action having effect of change
in board of directors shall be given effect unless confirmed by CLB.

Punitive Measures

Sec 406 provides that provisions of sections 539 to 544 of the Act, as modified vide Schedule
XI, are applicable to the proceedings under sections 397/398. These are the provisions
providing for penalties and liabilities for falsification of books, frauds and damages etc. but
these provisions are rarely invoked.

Section 542 deals with Fraudulent trading. In the winding up of proceedings, if it appears that
certain persons have carried on business of company with intent to defraud creditors of the
company or any other persons, or for any fraudulent purpose, shall be personally responsible
without any limitation of liability, for all or any of the debts or other liabilities of company as
Tribunal may direct. Application under 542 applies for application made under Sec 397 and
398.

Sec 397-402, 408-409 are discussed above. Sec 403 provides for interim orders by CLB, sec
404 provides for effect of alteration of memorandum and articles of association by order of
CLB and Sec 405 provides for addition of respondents.
CONCLUSION

Oppression and mismanagement are part and parcel of business. During the course of
business, oppression of small/minority shareholders takes place by the majority shareholders
who are in control of the company. Similarly, mismanagement of business is not uncommon.
When we talk of mismanagement we mean mismanagement of resources. Mismanagement
could mean siphoning of funds, causing losses due to rash decision, not maintaining proper
records, not calling requisite meetings. Finer version of mismanagement could arise where
the management does not act/react to a business situation leading to downfall of business.

The concept of oppression and mismanagement is more relevant or common to family owned
concerns. The reasons are very obvious. Family owned concerns are owned by family
members who over time develop vested interest in business vested interest in their own heirs
being the most common - thereby leading to oppression of other family members. Here
typically, the controlling member of the family appropriates the family holdings by means of
either a fresh issue or fraudulent transfers in his favor or reconstitutes the board in such a
manner as to alienate the other family members. The result is the other family members get
oppressed.

Secondly, the family owned concerns are not professional managed and their system of
functioning is usually personal. They lack probity and fair play. They generally do business
in a manner where they begin to benefit personally to the exclusion of other members. This
leads to oppression of other family members/mismanagement of companies.

In order to check all these discrepancies the need was felt to have any measure to prevent the
Oppression and mismanagement and thus under Chapter 6th of Part 6th of Companies Act ,
1956 provides for the judicial as well as administrative remedies to check Oppression and
mismanagement. It is a powerful tool which provides such power that even a singer member
can approach Company Law Board if any of his right has been infringed or in order to
prevent the Oppression and mismanagement in the company.
BIBLIOGRAPHY

1. Singh Avtar .Company Law(Lucknow:Eastern Book Company) 2008.

2. Kapoor N.D. Elements of Mercantile Law(New Delhi:Sultan Chand and Sons) 2009.

3. Tripathi S.C. Modern Company Law (Allahabad:Central Law Publications) 2006.

4. Saharay H.K. Company Law (New Delhi:Universal Law Publishing Company Pvt. Ltd)
2008.