The liberalisation of the Indian economy attracted foreign investors
interested in the market's potential. Since the Indian market was uncharted and
had its own practises and difficulties, the majority of Western investors
partnered with Indian business houses. Foreign investors contributed capital,
technology, knowledge, and a global perspective, while their Indian counterparts
ran daily operations with a local presence and experience. In the previous 2 to
3 decades, it has been common for numerous domestic companies to collaborate on
Although these connections are normally beneficial, one party may be excluded
from corporate management. In other circumstances, despite contractual
safeguards, investors discover a partner's diversion/misuse of firm
assets/funds. Typically, this occurs when a single entity controls the company's
operations and "grounds" employees.
The Companies Act, 2013 permits the aggrieved shareholder to initiate the
contractual dispute resolution process or to seek recourse from the National
Company Law Tribunal ("NCLT") from sections 241-242.
Mismanagement And Anti-Oppression
Sections 241-246 of the Act limit corporate oppression and mismanagement.
The phrases "oppression" and "mismanagement" are not defined by the Act. All
those shareholders who feel aggrieved may apply to NCLT through Section 241 if
it considers that the company's affairs are detrimental to the company/public or
prejudicial/oppressive to it or the other member (s). Likewise, a shareholder
may invoke such an action if they believe that there is a major change in the
company on the aspect of management or control which is not to the mutual
benefit of any creditors or different shareholders and could lead to the
company's affairs being managed in a manner that is adverse to the company/its
members. The Board, management, and ownership of shares have all changed.
The 1956 Companies Act only permitted such an action to be taken against present
acts, However, in the Companies Act, of 2013 such an action can also be brought
against past activity. Section 241 of the act permits it.
Remedies Given In The Act
Section 241, "Any member of a firm who complains," restricted Section 242
remedies to just stockholders, and only for submitting complaints of abuse of
proprietary rights as a member, not as a director. In Tata Consultancy Services
Limited v. Cyrus Investments Private Limited and Others, the Supreme Court
clarified that even the firing of a director cannot be oppressive or
The Act does not prohibit major owners from suing minor shareholders. Section
244 stipulates that the applicant must own at least one-tenth of the company's
issued share capital (all calls/sums due on held shares must be paid) or 100
members, or one-tenth of the overall membership, whichever is fewer. Applicants
must account for one-fifth of the company's membership if it has no share
The NCLT is authorised to waive this filing requirement.
When Does The Role Of NCLT Begin?
The NCLT may intervene under Section 242.
Section 242 says:
- the company's affairs have been/are being conducted in a manner
prejudicial to any member(s) or public/interest; company's, and
- winding up the company would unfairly prejudice such member(s), even if
the facts justify winding up the company on just and equitable grounds.
Even though unethical, loose behaviour may not constitute
oppression/mismanagement, nor would commercial blunders/poor investment
judgments, unless such decisions lack fairness/probability. Actions that are
repetitive, burdensome, harsh, and illegal must be denounced.
Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd
Supreme Court declared that "an imprudent, incompetent, or negligent Director in
the discharge of his duties cannot give rise to a claim for relief under that
Article." The complaint must demonstrate that the conduct is unjust, unethical,
and violates the shareholder's legal and property rights.
Similar to a lack of confidence among shareholders, the NCLT will not intervene
unless a minority in corporate management is oppressed by the majority. In SP
Jain v. Kalinga Tubes, the Supreme Court declared that oppression requires a
disregard for the privacy rights of a shareholder
Even though the act is legal, the NCLT can interfere if it becomes oppressive.
In V.S. Krishnan and Others vs. Westfort Hi-tech Hospital Ltd. and Others
Supreme Court decided that an act is oppressive if it is against "probity, good
conduct, or is burdensome, harsh, erroneous, mala fide, or for a collateral
Section 242 of the Act grants the NCLT the authority to issue any orders it
deems necessary to stop the alleged misconduct and provides a list of examples.
Examples include orders controlling future business acts, the removal of the
managing director, manager/director(s), etc.
The NCLT possesses the extensive authority to grant remedies. In appropriate
circumstances, NCLT directives can be comprehensive. The NCLT applied insolvency
principles to ILFS and its subsidiaries after the Insolvency and Bankruptcy Code
of 2016 did not apply to NBFCs. The NCLT further ordered the sale of the
companies' assets and the freezing of the bank accounts of directors and others.
To preserve the company's interests throughout the proceedings, section 242 (4)
authorises the NCLT to impose interim orders managing the company's business on
terms and conditions deemed "just and equitable." This is a simple approach for
preventing the loss of assets or their diversion.
Arbitration And Nclt Relationship
Arbitrators are bound by the arbitration agreement and the pending disputes. The
Act grants the NCLT the authority to give just and equitable relief. There are
no barriers to participation in the proceedings. The NCLT's relief is not
limited to individuals but can also apply to real property.
A shareholder may approach the NCLT regardless of an arbitration agreement if it
can demonstrate that its concerns are not merely contractual and stem from a
breach of a commercial understanding. Instead, the allegations contain Act
violations that harm the firm and its shareholders. Equally applicable to the
In such cases, the NCLT may refer the matter to arbitration if it is convinced
The petition is frivolous, vexatious, and disguised as an action under Section
241-242 to oust an arbitration clause
A private arbitral tribunal may consider and resolve the reliefs sought., and
Third parties have been charged solely to avoid arbitration and are not required
to participate in the proceedings.
Sections 241-242 provide an adequate remedy for an investor who was misled.
Although effective, this action is not time-bound. During such proceedings, the
aggrieved party may seek interim relief from the NCLT, but both interim and
final relief is appealable.