Oppression, mismanagement and NCLT petitions under the Companies Act, 2013

Section 241(1) gives a member two complaints to make. The first is that the affairs of the company have been or are being conducted in a manner prejudicial to public interest, or in a manner prejudicial or oppressive to the applicant or any other member or members, or in a manner prejudicial to the interests of the company. The second is that a material change, not being a change brought about by or in the interests of creditors including debenture holders or any class of shareholders, has taken place in the management or control of the company, whether by an alteration in the board of directors or manager, or in the ownership of the company's shares, or, where the company has no share capital, in its membership, and that by reason of such change it is likely that the affairs of the company will be conducted in a manner prejudicial to its interests or its members or any class of members.

The application is made under section 241 for an order under that Chapter, and only a member who has the right to apply under section 244 may make it. Section 242(1) then sets the threshold for relief. The Tribunal must be satisfied that the company's affairs have been or are being conducted in a manner prejudicial or oppressive to any member or members or prejudicial to public interest or in a manner prejudicial to the interests of the company, and 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 wound up. Where that second condition is not met, the Tribunal does not order a buy-out.

The conduct complained of has to be a course of conduct rather than a single act, and the petitioner must plead the facts that show it. Sangramsinh P. Gaekwad v. Shantadevi P. Gaekwad (2005) 11 SCC 314 collects the principles: the conduct complained of must relate to the manner of management of the affairs of the company, the behaviour and conduct complained of must be held to be harsh and wrongful, the court has to look at the business realities of the situation and not confine itself to a narrow legalistic view, and the burden of proving oppression or mismanagement is on the applicant.

One caution on the older cases. The oppression and mismanagement sections were carried into the 2013 Act from sections 397 to 400 of the Companies Act, 1956. A judgment that construes the older text has to be read with that substitution in mind, and the page says which text a decision was decided under. The mapping between the two sets of sections was taken from the corpus record of the judgments themselves rather than from memory.

Section 244(1)(a) gives the right to apply to three classes of applicant in a company with 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. The second limb carries a condition, and it is a condition on the applicant rather than on the size of the holding: the applicant or applicants must have paid all calls and other sums due on his or their shares. A company that has no share capital needs not less than one-fifth of the total number of its members under section 244(1)(b).

Two provisions in section 244 decide whether a small holder can get in at all. The proviso to section 244(1) lets the Tribunal, on an application made to it in that behalf, waive all or any of the requirements specified in clause (a) or clause (b) so as to enable the members to apply. The Explanation to section 244(1) counts shares held jointly by two or more persons as one member, which matters in a family holding where the members hold in joint names. Section 244(2) allows any one or more of the qualifying members, having obtained the consent in writing of the rest, to make the application on behalf of and for the benefit of all of them.

Aruna Oswal v. Pankaj Oswal & Ors. [2020] 7 S.C.R. 476 shows the threshold applied to a single holder at the other end of the scale. The Supreme Court set aside the orders of the Tribunal and the Appellate Tribunal and held that the proceedings under sections 241 and 242 should not be entertained because of the pending civil dispute and the minuscule extent of the holding of the applicant, which had been acquired after the civil suit was filed. The point for a shareholder with a small stake is that the number in section 244 is the start of the enquiry rather than the end of it, and that the court will look at how the holding came about.

Costs are available against an applicant. The Tribunal may impose costs under section 242(2)(l), and a class action that is frivolous or vexatious must be rejected under section 245(8), with reasons recorded in writing and an order that the applicant pay to the opposite party such cost, not exceeding one lakh rupees, as may be specified.

Section 242(2) lists the orders. They include the regulation of the conduct of the affairs of the company in future; the purchase of shares or interests of members by other members or by the company, with the consequent reduction of the share capital where the company buys its own shares; restrictions on the transfer or allotment of the shares; the termination, setting aside or modification of an agreement between the company and a managing director or another director or manager, and of an agreement between the company and any other person, in the latter case only after due notice and after obtaining the consent of the party concerned; 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, which would, if made or done by or against an individual, be deemed in his insolvency to be a fraudulent preference; the removal of the managing director, manager or any of the directors of the company; recovery of undue gains made by a managing director, manager or director during the period of his appointment; the appointment of persons as directors who may be required to report to the Tribunal; and the imposition of costs.

Section 243 governs the consequence of setting an agreement aside. Where an order under section 242 terminates, sets aside or modifies an agreement, the order does not give rise to any claims whatever against the company by any person for damages or for compensation for loss of office or in any other respect. The managing director or other director or manager whose agreement is terminated or set aside cannot, for a period of five years from the date of the order, without the leave of the Tribunal, be appointed or act as the managing director or other director or manager of the company.

Where the order is a buy-out, the valuation is made by a registered valuer under section 247, appointed by the audit committee or, in its absence, by the board of directors of the company. The valuer has to make an impartial, true and fair valuation, exercise due diligence, follow the prescribed rules, and not undertake a valuation of assets in which he has a direct or indirect interest or become so interested during a period of three years before the appointment or three years after the valuation. A valuer who contravenes section 247 is punishable with fine which shall not be less than twenty-five thousand rupees and may extend to one lakh rupees.

Vinod Krishan Khanna v. Amritsar Swadeshi Woollen Mills Private Limited [2021] 1 S.C.R. 708 shows what the appellate courts do with the interest in a buy-out order. The Company Law Board had directed the exit of the petitioners, the Tribunal fixed the consideration and directed payment with simple interest at nine per cent per annum, and the Appellate Tribunal reduced the interest to six per cent on a point it took up on its own motion. The Supreme Court set aside the reduction, restored the order of the Tribunal and directed that the respondents pay the consideration with simple interest at nine per cent per annum within four months.

A family company that has stopped being a company in law and become a partnership in practice is the hardest case to bring and the easiest to understand. The pattern is a company run on an understanding between the members: no dividend is declared, the profits are shared by way of salary, one member is left out of the management, and the ownership on paper does not reflect the working arrangement. The complainant has to plead that understanding. A company that merely pays salaries badly is not a quasi-partnership.

Chatterjee Petrochem (I) Pvt. Ltd. v. Haldia Petrochemicals Ltd. [2011] 15 S.C.R. 135 puts the test in the respondent's own words. When the company was in substance, though not in law, a partnership, there had to be utmost good faith between the members, and the behaviour and conduct complained of must be held to be harsh and wrongful. In arriving at that finding the court has to look at the business realities of the situation and not confine itself to a narrow legalistic view, and technical pleas should not be allowed to defeat the beneficial provision. The Supreme Court dismissed the appeals and set aside the order of the Company Law Board directing the transfer of shares to the complainant group.

The evidence that builds the case is the sort a company already keeps. Board minutes, the absence of any dividend resolution over the years, the salary structure, the payment of expenses personally, and the excluded member's exclusion from information about the business. The pleading has to tie those facts to the understanding alleged, because the Tribunal decides the petition on what has been pleaded and proved, and a petition that pleads only the constitutional position of the members will not carry the argument.

Section 245 is the class action route. Such number of members or depositors, or any class of them, as are indicated in section 245(2) may, if they are of the opinion that the management or conduct of the affairs of the company are being conducted in a manner prejudicial to the interests of the company or its members or depositors, file an application before the Tribunal on behalf of the members or depositors. The orders the Tribunal may make are listed in section 245(1): to restrain the company from committing an act which is ultra vires its articles or memorandum; to restrain the company from committing a breach of any provision of the memorandum or articles; to declare a resolution altering the memorandum or articles void where the resolution was passed by suppression of material facts or obtained by mis-statement to the members or depositors; to restrain the company and its directors from acting on such a resolution; to restrain the company from doing an act contrary to the Act or any other law in force; to restrain the company from taking action contrary to a resolution passed by the members; to claim damages or compensation or demand any other suitable action from or against the company or its directors for a fraudulent, unlawful or wrongful act or omission, from or against the auditor including an audit firm for an improper or misleading statement of particulars in the audit report, and from or against any expert, advisor or consultant; and any other remedy the Tribunal deems fit.

The thresholds are set by section 245(3). For a company with share capital the number is not less than one hundred members or not less than such percentage of the total number of its members as may be prescribed, whichever is less, or any member or members holding not less than such percentage of the issued share capital of the company as may be prescribed. The percentages are left to notification, so the current figures have to be read from the notification and not from the section. For depositors, the number is not less than one hundred depositors or not less than such percentage of the total number of depositors as may be prescribed, whichever is less, or any depositor or depositors to whom the company owes such percentage of total deposits of the company as may be prescribed.

Once the application is admitted, section 245(5) requires public notice to be served on admission to all the members or depositors of the class in such manner as may be prescribed, the consolidation of similar applications into a single application with a lead applicant chosen by the class or appointed by the Tribunal, and the cost or expenses connected with the application to be defrayed by the company or any other person responsible for the oppressive act. An order of the Tribunal binds the company and all its members, depositors, auditor including audit firm, expert, consultant and advisor. Rule 87 of the National Company Law Tribunal Rules, 2016 prescribes the public notice, and it tells a member of the class that the outcome of the application binds them unless they opt out by submitting the relevant form.

Section 246 applies certain provisions to a proceeding under section 241 or section 245. A class action is the heavier instrument. It binds members who did not join, and it carries the risk of a costs order, because section 245(8) requires the Tribunal to reject an application that is frivolous or vexatious, for reasons recorded in writing, and to order the applicant to pay to the opposite party such cost, not exceeding one lakh rupees, as may be specified in the order. Section 245(9) also puts a banking company outside the section.

A shareholder dispute often starts with a refusal to put a name on the register. Section 56(1) requires a proper instrument of transfer, in such form as may be prescribed, duly stamped, dated and executed by or on behalf of the transferor and the transferee and specifying the name, address and occupation of the transferee, to be delivered to the company by the transferor or the transferee within a period of sixty days from the date of execution, along with the certificate relating to the securities or, where no such certificate is in existence, the letter of allotment.

A private company limited by shares that refuses, whether in pursuance of any power of the company under its articles or otherwise, to register the transfer or the transmission by operation of law of the right to any securities or interest of a member, has to send notice of the refusal, giving reasons for it, to the transferor and the transferee or to the person giving intimation of the transmission, within a period of thirty days from the date on which the instrument of transfer or the intimation was delivered to the company. The transferee may then appeal to the Tribunal against the refusal within a period of thirty days. Securities of a public company are freely transferable under section 58(2), subject to the proviso that a contract or arrangement between two or more persons in respect of the transfer of securities remains enforceable as a contract.

Section 59 deals with the register itself. Where a name has been entered in the register of members without sufficient cause, or after having been entered has been omitted without sufficient cause, or where a default is made or unnecessary delay takes place in entering a person in the register or recording the fact of a person having become or ceased to be a member, the person aggrieved, any member of the company or the company may appeal to the Tribunal for rectification of the register. The Tribunal may dismiss the appeal or direct that the transfer or transmission be registered by the company within a period of ten days of the receipt of its order, or direct rectification of the depository records or the register.

A two-member company has a quorum problem by design. Section 174(1) fixes the quorum for a meeting of the board at one-third of its total strength or two directors, whichever is higher, and participation by video conferencing or by other audio visual means counts towards the quorum. With two directors on the board, both have to attend, so a disagreement between them stops the board from acting. Section 174(2) allows the continuing directors to act notwithstanding a vacancy, but if their number is reduced below the quorum fixed by the Act they may act only for the purpose of increasing the number of directors to that fixed for the quorum, or of summoning a general meeting of the company, and for no other purpose.

Two routes out of the board are open without going to the Tribunal. Section 175(1) allows a resolution to be passed by circulation, if the draft and the necessary papers are circulated to all the directors and the resolution is approved by a majority of those entitled to vote, but where not less than one-third of the total number of directors require that a resolution under circulation must be decided at a meeting, the chairperson must put the resolution to a meeting of the board. With two directors, one of them can require a meeting and the other can decline to attend. Section 169 allows a company to remove a director, not being a director appointed by the Tribunal under section 242, by ordinary resolution before the expiry of his office after giving him a reasonable opportunity of being heard, and section 169(2) requires a special notice of the resolution. Section 115 sets the threshold for that notice: such number of members holding not less than one per cent of the total voting power, or holding shares on which the prescribed aggregate sum not exceeding five lakh rupees has been paid up.

Where the deadlock is at the level of the members rather than the board, section 98 lets the Tribunal, either of its own motion or on the application of any director or member of the company who would be entitled to vote at the meeting, order a meeting of the company to be called, held and conducted in such manner as the Tribunal thinks fit, with such ancillary or consequential directions as it thinks expedient. Section 97 lets the Tribunal call or direct the calling of an annual general meeting where the company has defaulted in holding one under section 96, and the Tribunal may direct that one member present in person or by proxy be deemed to constitute the meeting.

None of those routes gives a shareholder a valuation of the holding. A buy-out order under section 242(2)(b), with the valuation under section 247, is the exit that converts a frozen stake into money, and in a two-member company it is the order most often sought. Tata Consultancy Services Ltd. v. Cyrus Investments Pvt. Ltd. (2021) 9 SCC 449 is the reminder that the Tribunal's powers are exercised on the conduct complained of, and that an order which goes beyond the pleadings and beyond the powers in section 242(2) will not survive the appeal.

The petition is made under section 241 and is heard by the National Company Law Tribunal, which has a bench at Chennai. The verification of the petition has to declare that the matter falls within the jurisdiction of the Tribunal, that the application is within the limitation prescribed in the provision of the section relied on read with section 433 of the Act, and that the matter is not pending with any other Tribunal. Section 433 provides that the provisions of the Limitation Act, 1963 apply, as far as may be, to proceedings or appeals before the Tribunal or the Appellate Tribunal.

Section 424(1) keeps the Tribunal out of the civil procedure. It is not bound by the procedure laid down in the Code of Civil Procedure, 1908, but is guided by the principles of natural justice and may regulate its own procedure, subject to the Act and the rules made under it. Section 424(2) gives it the same powers as a civil court trying a suit in respect of the matters listed there, including summoning and enforcing the attendance of a person and examining him on oath, requiring the discovery and production of documents, receiving evidence on affidavits, requisitioning a public record or document, issuing commissions for the examination of witnesses or documents, dismissing a representation for default or deciding it ex parte, and setting aside an order of dismissal of a representation for default.

Interim relief is available under section 242(4), which lets the Tribunal, on the application of any party to the proceeding, make any interim order which it thinks fit for regulating the conduct of the company's affairs upon such terms and conditions as appear to it to be just and equitable. Section 420(2) allows the Tribunal, at any time within two years from the date of the order, to amend an order passed by it with a view to rectifying any mistake apparent from the record, and bars an amendment where an appeal has been preferred. After the order, section 242(3) requires the company to file a certified copy with the Registrar within thirty days, and section 242(7) requires the same for an order altering the memorandum or articles of the company.

The appeal route has three stages and three periods. Section 421(1) allows any person aggrieved by an order of the Tribunal to prefer an appeal to the Appellate Tribunal, section 421(3) requires the appeal to be filed within a period of forty-five days from the date on which a copy of the order of the Tribunal is made available to the person aggrieved, with condonation for a further period not exceeding forty-five days, and section 421(2) bars an appeal from an order made by the Tribunal with the consent of the parties. Section 422 requires the Tribunal and the Appellate Tribunal to deal with every application, petition and appeal expeditiously and to endeavour to dispose of it within three months from the date of its presentation or filing, with the President or the Chairperson able to extend that period, after considering the reasons recorded, by not more than ninety days. Section 423 carries a further appeal to the Supreme Court on any question of law within sixty days from the date of receipt of the order, with condonation for a further period not exceeding sixty days. Section 252 is the appeal against the dissolution of a company under section 248 and is not the route for an order made on a section 241 petition.