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Oppression And Mismanagement In India: Effects And Analysis

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 expansive projects.

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 detrimental.

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 capital.

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:

  1. the company's affairs have been/are being conducted in a manner prejudicial to any member(s) or public/interest; company's, and
  2. 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.

In Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd, the 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, the 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 purpose."

The Aid

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 arbitration agreement.

In such cases, the NCLT may refer the matter to arbitration if it is convinced that

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.

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