Oppression and Mismanagement under Indian Companies Act, 2013: Debunking the Threshold for Waivers

– Animesh Bordoloi and Hitoishi Sarkar†

Just as in a democratic country like India, the rights of every individual against oppressive majoritarian actions can be guaranteed by virtue of the Constitution, within corporate democracy, it is the provisions of Oppression and Mismanagement under Chapter XVI of the Companies Act, 2013 which provides protection to the minorities against any actions by the majority shareholders which could create prejudice or oppress their interests unreasonably. Such protection against oppressive actions was first introduced under Section 210 of the English Companies Act, 1948, which later inspired many other common law countries including India. However, the Indian law simultaneously introduced a unique position that provided for any application by minority shareholders calling out such practices to be supported by at least 10 percent of the issued share capital and 20 percent of its total members in case of companies not having a share capital. While the initial idea of such a threshold was to protect the majority shareholders vexatious suits, this aspect under the Companies Act, 2013 has dominated the Indian corporate law landscape primarily owing to its uniqueness and exceptions created through judicial pronouncements.

When the Indian Supreme Court recently pronounced its ruling in Tata Consultancy Services Limited v. Cyrus Investments Pvt. Ltd, corporate law scholars have already spilled much ink on it. Around the same timeline, another interesting matter in the sphere of oppression and mismanagement which could have widespread ramifications was being adjudicated upon by the NCLT Principal Bench. However, there is a dearth of literature concerning the judgment.

On 18 May 2020, the Ministry of Corporate Affairs (MCA) approached the Principal Bench of the NCLT to file a petition against the Delhi Gymkhana Club (DGC) under Section 241 of the Companies Act, 2013. In doing so, the MCA invoked Section 241(2) of the Companies Act, 2013 which empowers the Indian state to file an oppression and mismanagement petition if “it is of the opinion that the affairs of a company are being conducted in a manner prejudicial to the public interest.” The relief prayed for by the MCA was that the incumbent DGC administration be replaced with 15 directors nominated by the Central government. Interestingly, the NCLT Bench found merit in the MCA’s arguments and allowed the Central Government to nominate two individuals to the DGC’s administration while also curtailing all significant powers of the incumbent administration.

The aforementioned matter is worthy of a detailed analysis for multiple reasons. Firstly, if we are to imagine a hypothetical situation where the petition would have been filed by a member of the DGC pursuant to Section 241(1), multiple issues would have to be answered upon by the Court. For instance, since the DGC is representative of a corporate entity with an extensively fragmented membership, the issue of waiver of requirements under Section 244(b) arises. Secondly, many of the acts of oppression and mismanagement that may be complained of by the petitioner in such cases may predate his/her membership of the company. Thus, it becomes necessary to examine the position of law in that regard.

This post seeks to highlight the underlying concerns with the use of a numerical threshold under Section 244 and the absence of any clear determinant factors for granting of a waiver. It will also study the scope of a minority shareholder to petition for acts that predate their membership, especially in a setting akin to the Delhi Gymkhana Club.

Fragmented Shareholding

Section 241(b) mandates that multiple minority shareholders of a company must come together and collectively form the ten per cent issued share capital requirement. However, in Cyrus Investments, the NCLAT accepted a waiver to this requirement, viewing it to be a compelling and exceptional circumstance. As forty-nine minority shareholder’s shareholdings had less than 2% individually, the Tribunal held that they could not form the required ten per cent unless they approached in groups of six or more. In such a scenario the rights of the minority shareholders would be dependent on other members. The Tribunal admitting to the absurdity of the circumstances granted a waiver observing that the members cannot always be expected to approach in groups where the minority shareholding was fragmented to an extent that multiple shareholders would be at the prerogative of others to fulfil the ten per cent requirement. It is pertinent to note that the NCLAT order has been subsequently set aside by the Supreme Court. However, the Supreme Court hasn’t delved into the merits of the pre-decided waiver argument in its judgement. It is pertinent to note here that Indian corporate entities usually don’t have a very fragmented shareholding pattern. For instance, the recent OECD report the proportion of companies where promoters hold more than 50% has increased from 56% in 2001 to 66% in 2018. However, the same may not be true in the near future with increased involvement of institutional investors and others new stakeholders in the Indian capital market.

In this context, the Delhi Gymkhana Club case creates an interesting scenario. DGC is a company limited by guarantee, where each Permanent Member shares equal rights, liabilities and has equal voting rights. Given that the structure of membership represents a company with a fragmented shareholding, a corresponding question that would arise is whether it would be feasible for the court to grant a similar waiver from Section 244 (b) that mandates not less than 1/5th (one – fifth) of the total members must come together.  If the reasoning of Section 244 as discussed above was to be applied to DGC, any aggrieved person would require not less than 1120 members out of the 5600 Permanent Members to make an application to the Tribunal collective. This situation would create a similar scenario of absurdity as was experienced in the Cyrus – Tata dispute, where members would be dependent on one another.  However, the question of whether to grant or not suffers from the lack of clarity of jurisprudence as was the case in the Cyrus – Tata dispute.

Other Jurisdictions

In an attempt to understand the cross-jurisdictional jurisprudence of Oppression and Mismanagement some of other common law jurisdictions can be examined. It can be argued that neither Singapore nor the UK Companies Act or any other recognised common law jurisdictions have such measures to tackle vexatious applications from minority shareholders. This brings forth an interesting conundrum as the immediate question that arises is the need for such a specific filter under the Indian law and its effectiveness since introduction. Interestingly, introduced first in the Bhabha Committee Report in 1952, this threshold was a deviation from Old English Company Law, which otherwise formed a significant influence on the Indian Company law development discourse. 

Further, two subsequent arguments can also be framed against using creating such a safety valve – Firstly, even though the NCLAT in Cyrus-Tata dispute had categorically stated that waiver application cannot be decided by reading into the merits and had also enlisted broad factors that needs to be considered while entertaining such applications, its approach is both unclear and inconsistent. Unclear because it leaves the door open to judicial interpretation in extremes by allowing them to consider all ‘non – merit’ related factors. Inconsistent because, the factors highlighted (para 151) not only do not add anything substantially new to be considered but also at this stage allows the Tribunal to pursue and form an opinion on whether the matter in question involves oppression and mismanagement. The issue with lack of clarity becomes evident in a scenario similar to the DGC as the questions might arise if the element of ‘public interest’ can be considered as a factor significant enough to allow a waiver.

Secondly, while used widely, the interpretation of which ‘extraordinary circumstances’ will lead to a grant of waiver is undefined and unclear. This coupled with judicial discretion in such cases not only gives the court unfettered power but also leaves the parties uncertain while approaching courts or tribunals. Moreover, in creating a numerical threshold based on the factor of issue share capital, the statute has created a paradoxical situation as the laws under Section 241 are intended to be in the interest of ‘minority’ shareholders, in situations of oppression or mismanagement, regardless of how small the number of such shareholders would be. The intent should be to protect when in trouble and not to create hurdles for the minority shareholders.  In cases similar to the DGC where the company is limited by guarantee, this numerical threshold could have been further exposed.

Oppressive acts that predate the petitioner’s membership

A pertinent question that arises for the reader’s consideration is if a petitioner can complain of acts of oppression which predate his membership of the company. For instance, in the DGC case, some of the acts of oppression and mismanagement could have been given effect before the applicant gained membership of the DGC. Thus, there is a need to determine if such absence of membership of the company on the date that the oppressive acts had been committed creates a legal hurdle for applicants. While the Indian legal discourse on this point is unclear, an examination of common law jurisprudence reveals interesting trends in this regard. The Singapore High Court in Lim Seng Wah v. Han Meng Siew was called upon to adjudicate on whether an applicant could complain of oppressive acts which predated his membership of the company.[1] The Court ruled that there was no disability which prevented an applicant from seeking relief with regard to prior acts. Interestingly, the court rooted its reasoning in the phraseology of Section 216(1)(b) of the Singaporean Companies Act which provides that an applicant can also apply for reliefs with regard to acts “acts that have been done” and “resolutions that have been passed.” Likewise, the UK High Court of Chancery in Lloyd v Casey endorsed a similar approach and ruled that an applicant under section 459 of the Companies Act 1985 (UK) could rely on conduct which took place before he became a registered shareholder. The court reasoned that the words used in section 459 were “the company’s affairs are being or have been conducted in a manner which is unfairly prejudicial.”[2] The position of law has been reiterated by a New Zealand court in Tyrion Holdings Ltd v Claydon.[3]

A closer look at the phraseology of Section 241(1)(a) of the Indian Companies Act, 2013 would reveal that the Indian statutory framework uses a same approach in this regard as it allows petitioners to complain of both oppressive affairs that “have been or are being conducted in a manner prejudicial to public interest or members of the company.” Thus, if we place reliance on the ruling in Lim Seng Wah, Indian petitioners should have the ability to seek remedies with regard to oppressive acts that have been committed prior to their membership in the company.

Conclusion

The idea of oppression and mismanagement provisions is to undoubtedly protect the interest of minority shareholders within the company. However, considering the volume of corporate litigation, the idea of filtering out vexatious petitions also cannot be denounced. The intent of such filters should be to strike a balance between protection and misuse of the law. While the idea of a filter is not wrong per se, the nature of its classification must change.

Further, given the significance of oppression and mismanagement jurisprudence from an Indian business perspective, it is only logical that clarity is brought upon the position of complaints that predate a shareholder’s membership of the company. India’s peculiar position remains at a divergence with most jurisdictions in both the aspects highlighted above. While there has been substantial judicial action with regard to oppression and mismanagement, the lack of a clear legislative position or a view from the Supreme Court which can bind all other Courts and Tribunals to a uniform standard is the need of the hour. Furthermore, as has been pointed out there is an urgent need to rethink the 10% threshold which exists in the present regime. Professor Umakanth Varottil makes an interesting observation in this regard by advocating for the need to tackle vexatious suits by depending on the type of shareholder action rather than numerical thresholds and through greater guidance on the adjudicating authorities while determining such issues on a case to case. The aforementioned suggestion if considered would go a long way in making India a more investor friendly jurisdiction and in filling the gaps. Moreover, the idea for Courts and Tribunals must be to see if the minority shareholders can prima facie prove the claims in the suit rather than focusing on the numerical threshold. Or else, it would it be paradoxical to punish the minority shareholder for filing such a suit merely because they are minorities within the corporate setup particularly when the intent behind such provisions were to protect the interest and role of the minorities in the first place.

† Animesh Bordoloi is an Assistant Lecturer at the O.P. Jindal Global University, and Hitoishi Sarkar, is a member of the GNLU Centre for Corporate and Insolvency Law.

[1] [2016] SGHC 177

[2] [2001] 12 WLUK 711

[3] [2015] NZAR 698