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Published : May 01, 2010 | Author : suryabhansingh
Category : Company Law | Total Views : 14383 | Unrated

  
suryabhansingh
Surya Bhan Singh Billawria, Advocate (B.S.L.-LL.B.) College Attended: D.E.S. Law College, Pune. University of Pune. Other Articles by same Author: 1. Euthanasia 2. Constitutional Position of Jammu & Kashmir.
 

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.

Rule in Foss v. Harbottle
2.(a) The Rule in Foss v. Harbottle
This rule was laid down in 19th century in the case of Foss v. Harbottle [(1843) 67 ER 189], 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. Briefly, the opinion of the court was:

“The conduct with which the defendants are charged is an injury not to the plaintiffs exclusively, it is an injury to the whole corporation. In such cases the rule is that the corporation should sue in its own name and in its corporate character. It is not a matter of course for any individual members of a corporation thus to assume to themselves the right of suing in the name of the corporation. In law, the corporation and the aggregate of members of the corporation are not same thing for purposes like this.”

This rule was restated in simpler terms in Edwards v. Halliwell [(1950) 2 All ER 1064] as “The rule in Foss v. Harbottle comes to no more than this. First, the proper plaintiff in respect of a wrong alleged to be done to a company is prima facie the company itself. Secondly, where the alleged wrong is a transaction which might be made binding on the company by a simple majority of members, no individual member of the company is allowed to maintain an action in respect of that matter for the simple reason that, if a mere majority of the members of the company is in favour of what has been done, then cadet quaestio.”

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.

2.(b) Advantages of the Rule in Foss v. Harbottle
The following are the advantages of the rule in Foss v. Harbottle:-
(i) Recognition of the separate legal personality of the Company
(ii) Preservation of the Right of Majority to decide
(iii) Multiplicity of futile suits avoided

2.(c) Exceptions to the Rule in Foss v. Harbottle
For protecting the rights of minority, certain exceptions to the above rule are recognized and applied. These exceptions are as follows:-
(i) Ultra vires acts
(ii) Fraud on the minority
(iii) Act requiring special majority
(iv) Wrongdoers in control
(v) Individual membership rights
(vi) Oppression and Mismanagement
In this article, we will be dealing with the last exception in detail.

OPPRESSION
3.(a) Meaning
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.”

3.(b) 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.

3.(c) Acts held as not Oppressive
The following acts have been held as not oppressive:-
· An unwise, inefficient or careless conduct of director.
· Non-holding of the meeting of the directors.
· Not declaring dividends when company is making losses
· Denial of inspection of books to a shareholder.
· Lack of details in notice of a meeting.
· Non-maintenance/Non-filing of records.
· Increasing the voting rights of the shares held by the management.

3.(d) Prevention of Oppression
3.(d)(i) Application to Company Law Board (now Tribunal)
The first remedy available to oppressed minority is to move the Company Law Board (now Tribunal). Whenever the affairs of a company are being conducted in a manner pre-judicial to public interest or in a manner oppressive to any member or members, an application can be made to the Company Law Board (now Tribunal) u/s 397.

3.(d)(ii) Who can apply

Any members of a company who complain that the affairs of the company are being conducted in a manner oppressive to any member or members (including any one or more of themselves) may apply to the Court for an order under this section, provided such members have a right so to apply in virtue of section 399.The section comes into force only when the aggrieved member is able to show that he suffered an injustice in his capacity as a shareholder and not in any other capacity.

The requisite number of members who must sign the application is given in Section 399. The requirement varies with the fact as to whether the company has a share capital or not and is discussed below:-

· In the case of a company having a share capital, not less than one hundred members of the company or not less than one tenth of the total number of its members, whichever is less, or any member or members holding not less than one-tenth of the issued share capital of the company, provided that the applicant or applicants have paid all calls and other sums due on their shares.
· In the case of a company not having a share capital, not less than one-fifth of the total number of its members.
· The Central Government may, if in its opinion circumstances exist which make it just and equitable so to do, authorise any member or members of the company to apply to the court under section 397, notwithstanding that the two abovementioned requirements are not fulfilled.

Besides members, the following may also apply for relief u/s 397:-
· U/s 401, the Central Government or any person authorised by the Central Government has a right to file a petition.
· U/s 243, any person authorised by the Central Government under the circumstances mentioned in that section can also file a petition.
· A legal representative of a deceased member, on whom title to the shares devolves by operation of law.

3.(d)(iii) Who cannot apply
The following can’t apply for relief u/s 397:-
· A member whose calls or other sums due on their shares have not been paid.
· A holder of a letter of allotment of a partly paid share.
· A holder of a share warrant.
· A transferee of shares who has not lodged the shares for transfer to the company.

3.(d)(iv) Notice to the Central Government

S. 400 requires the Company Law Board (now Tribunal) to give notice of every application made to it u/s 397 to the Central Government.

3.(e) Relief against Oppression
U/s 397(2), If, on any application u/s 397(1), the Court is of opinion—

(a) that the company's affairs are being conducted in a manner oppressive to any member or members; and

(b) that to wind up the company would unfairly prejudice such member or members, but that otherwise the facts would justify the making of a winding-up order on the ground that it was just and equitable that the company should be would up;

the Court may, with a view to bringing to an end the matters complained of, make such order as it thinks fit..

MISMANAGEMENT
4.(a) Meaning
U/s 398, 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.

4.(b) 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.

4.(c) Acts held as not Mismanagement
The following acts have been held to not to amount to Mismanagement:-
· Building up of reserves or non-declaration of dividend especially when it does not result in devaluation of shares.
· Merely because company incurs loss, mismanagement can’t be alleged.
· Arrangement with creditors in company’s bonafide interest.
· Removal of director and termination of works manager’s services.

4.(d) Prevention of Mismanagement

4.(d)(i) Application to Company Law Board (now Tribunal)

The first remedy available to oppressed minority is to move the Company Law Board (now Tribunal).

4.(d)(ii) Who can apply
U/s 398(1), Any members of a company who complain—

(a) that the affairs of the company are being conducted in a manner prejudicial to the interests of the company; or

(b) that 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;

may apply to the court for an order under this section, provided such members have a right so to apply in virtue of section 399.

The requisite number of members who must sign the application is given in Section 399. The requirement varies with the fact as to whether the company has a share capital or not and is discussed below:-

· In the case of a company having a share capital, not less than one hundred members of the company or not less than one tenth of the total number of its members, whichever is less, or any member or members holding not less than one-tenth of the issued share capital of the company, provided that the applicant or applicants have paid all calls and other sums due on their shares.

· In the case of a company not having a share capital, not less than one-fifth of the total number of its members.

· The Central Government may, if in its opinion circumstances exist which make it just and equitable so to do, authorise any member or members of the company to apply to the court under section 398, notwithstanding that the two abovementioned requirements are not fulfilled.

Besides members, the following may also apply for relief u/s 398:-
· U/s 401, the Central Government or any person authorised by the Central Government has a right to file a petition.
· U/s 243, any person authorised by the Central Government under the circumstances mentioned in that section can also file a petition.
· A legal representative of a deceased member, on whom title to the shares devolves by operation of law.

4.(d)(iii) Who cannot apply
The following can’t apply for relief u/s 398:-
· A member whose calls or other sums due on their shares have not been paid.
· A holder of a letter of allotment of a partly paid share.
· A holder of a share warrant.
· A transferee of shares who has not lodged the shares for transfer to the company.

4.(d)(iv) Notice to the Central Government
S. 400 requires the Company Law Board (now Tribunal) to give notice of every application made to it u/s 398 to the Central Government.

4.(e) Relief against Mismanagement
U/s 398(2), If, on any application u/s 398(1), the Court is of opinion that the affairs of the company are being conducted as aforesaid or that by reason of any material change as aforesaid in the management or control of the company, it is likely that the affairs of the company will be conducted as aforesaid, the court may, with a view to bringing to an end or preventing the matters complained of or apprehended, make such order as it thinks fit.

Powers of the Company Law Board (now Tribunal)
Whereas Sections 397 and 398 confer general powers on the Company Law Board (now Tribunal) to pass necessary orders including an interim order, where appropriate, to end oppression and mismanagement, S. 402 empowers it to grant certain specific reliefs. The reliefs contemplated u/s 402 are:-

(a) the regulation of the conduct of the company's affairs in future;

(b) the purchase of the shares or interests of any members of the company by other members thereof or by the company;

(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;

(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) 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;

(g) any other matter for which in the opinion of the Court it is just and equitable that provision should be made.

Conclusion
The Act and the Courts try to strike a fine balance between the Right of Majority to rule (i.e. the Rule laid down in Foss v. Harbottle) and the protection of interests of the minority shareholders through the prevention of Oppression and Mismanagement.

Authors contact info - articles The  author can be reached at: suryabhansingh@legalserviceindia.com




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