“A minority is powerless while it conforms to the majority.”
-Henry David Thoreau
A company sustains based on a balance created among the majority and the minority. Whenever the majority takes the upper hand in the company’s affairs, the whole system upon which the company was built breaks down. There should be a proper balance when it comes to the rights of both majority and minority shareholders.
The general law holds that the majority shareholders can exercise control over the affairs of the company. This is the majority rule, rule of supremacy of the majority or majority supremacy rule.
This article deals with the development of company law and its provisions to prevent oppression and mismanagement in companies.
Development of the Concept of Majority Rule
The Rule in Foss vs Harbottle
The general rule is that the court will not interfere in the matters relating to the company’s management by the directors as long as they are acting within their powers enshrined under the Articles of the company. A shareholder is restricted to take any action concerning the internal disputes between the shareholders. This rule evolved as a result of the case, Foss vs Harbottle.
The facts of Foss vs Harbottle are as follows:
Two shareholders of the company brought an action against the directors of the company, claiming that they had been carrying fraudulent transactions due to which the property of the company was wasted in such transaction. The prayer was to force the defendants to make good the loss sustained by the company. The court, in this case, held that the fraudulent act of the defendants is not an injury to the individual but the whole corporation. The act is done by the persons in whose hand the corporation entrusted its powers for carrying out the functions smoothly. Further, it was held that an individual shareholder has no right to sue in this matter but the whole corporation on its own by exercising the corporate nature of the company.
Thus, the majority supremacy rule was established. The same principle was applied in several judgements that followed. The majority rule proved to be worthy in various scenarios:
- It strengthened the separate legal entity concept of the company.
- The wish of the majority prevails, and they decide on how the company is to carry out its affairs. The right of the majority is protected.
- The application of this principle can prevent many unnecessary futile suits.
Exceptions of the Majority Principle
Although the majority rule prevails, there are certain circumstances in which the rule is kept in check:
- Company acting beyond its power – Ultra vires: If the company is acting beyond its prescribed power in the memorandum, a shareholder can bring a personal or derivative action upon such breach. It can be brought against the company or its officers.
- Fraud on minority: In this scenario, an action can be brought by the minority shareholders if fraud or oppression has caused an unreasonable use of power by the majority against the minority. This should have resulted in gross unfairness to the minority. Further, it also includes scenarios where the majority shareholders appropriated the money, property and so on belonging to the company.
- Control in the hands of a wrongdoer: Sometimes, the control is in the hands of a wrongdoer, and he would not permit an action to be brought against them. To protect the company’s interest, a suit can be brought by the minority shareholders.
- To protect the rights of a single shareholder if infringed.
- Against oppression and mismanagement: The Companies Act provides the provisions concerning oppression and mismanagement in companies and the prevention of the same. This is to ensure remedy in the cases of oppression and mismanagement against the minority and combat the same. This acts as an exception to the majority rule as well.
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Prevention of Oppression
Oppression refers to the deviation from fair play in relation to the conditions set out concerning the rights of the shareholders. Oppression refers to the abuse of power in a company. Let’s see some remedies for this:
Remedy Against Oppression
The provisions of the Companies Act provides for remedial action against the oppression of the majority against the minority. These provisions are included with an intention. It is to protect the shareholders and safeguard the public interest. The right so conferred to the minority shareholders through these provisions is known as “qualified minority rights”.
Sections 397 and 398 of the Companies Act provided for the remedy. Whereas, in the Companies Act of 2013, sections 241 and 242 hold for the relief:
- The first remedy available to the affected minority is to apply to the tribunal. Under section 241(1) of the Act, it is explained that if any members are disappointed that the company’s matters are being carried out in a prejudicial, oppressive or in a manner that is against the public interest, such persons may apply to the tribunal for relief.
- Further, it holds that any member who complains that a material change has been brought about without protecting the interests of the shareholders, debenture holders and so on, for which the material change is prejudicial, oppressive or is in a manner that is against the public interest, the members may apply to the tribunal as in the manner prescribed in section 244 of the Companies Act.
Instances of Oppression
These are instances for which various judgements are passed against the oppressing majority:
- The majority shareholders force the minority with risky objects without their willingness.
- If a member is prohibited or deprived of his ordinary membership rights.
- When the majority is putting the minority shareholders under a heavy burden which is unjust, unfair, harsh and inhuman.
- If the company’s affairs are being carried out in a matter that is not in compliance with the provisions of the Companies Act.
Prevention of Mismanagement
If the company affairs are being carried out in a prejudicial manner against public or company’s interest, or if any material change is brought about management and control of the company, then relief can be availed as per section 241(1)(b) of the Companies Act, 2013.
Material change here refers to any change brought or alteration made in the Board of Directors, company shares ownership and so on. If there is proof that the affairs are being carried out in a prejudicial manner, that will be sufficient for the relief.
Tribunal and Its Powers
The tribunals have a wide power when it comes to the question of oppression and mismanagement in the companies. The powers of the tribunals are provided under sections 241 and 242 of the Companies Act. The tribunal may make any order as it finds necessary to regulate the conduct of the company’s affairs:
- Winding up order: The tribunal may pass a winding-up order if it believes that the affairs of the company are being conducted in an oppressive or prejudicial manner. Moreover, it affects the interests and rights of the members as well as the public. Further, if the tribunal holds that it is just and equitable to wind up the company, it may do so by taking into consideration all the aspects of the same. But the tribunals avoid the same because it will lead to a worse situation, and eventually, the company’s business will be dealt with by the majority.
- Other orders dealing with the regulation of the conduct of the company’s affairs, purchase of shares, termination, setting aside or modification of any agreement and so on as per section 242(2) of the Companies Act, 2013.
- Interim relief as per section 242(4) of the Companies Act, 2013: Any party to the proceeding can make an application for interim relief. This is to ensure proper regulation relating to the conduct of affairs of the company.
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Case Laws Related to Oppression and Mismanagement in Companies
Rajahmundry Electric Supply Corporation vs A Nageshwara Rao (1956)
In this case, the court observed whether mismanagement is sufficient to pass a winding-up order. The contention was that the mere misconduct on the part of the director would not amount to mismanagement, and a winding-up order cannot be passed as it is an affair of ‘internal management. Hence, it was contended that no courts can interfere.
The court here ruled that, if circumstances exist, apart from that misconduct, which renders it necessary to protect the interest of the shareholders for which they want nothing but winding up, then the court may look into the same.
In this case, the Vice-Chairman of the company mismanaged the affairs of the company and drew huge amounts from the company to satisfy his personal affairs. Here, there was sufficient evidence of mismanagement.
Mohan Lal Chandumall vs Punjab Co. Ltd (1961)
In this case, the court held that depriving a member of his ordinary membership rights amounts to oppression. Here, a public company had to amend its Articles due to compulsion under statutory direction. The non-trading members were deprived of their right to vote, to call meetings and so on.
The court held that there was oppression and directed the company to buy shares of the members who complained and to allow them to walk out with the money they invested therein.
Analysis and Conclusion
Oppression is an unjust act whereby the voice of the minority is suppressed. It is the act of exercising power to suppress the powerless. Mismanagement, on the other hand, refers to a situation whereby the affairs of the company are being carried out in an unwarranted manner. For a very long time, the iron curtain was made strong and wide with the help of majority rule evolved through Foss vs Harbottle.
With the advent of provisions as to relief against these unjust and unwanted practices, the Company Law holds for the protection of the minority against the savage acts of the majority. If we were to look into the current way as to how the tribunals arrive at a decision, we might find that the tribunals are doing a balancing act with the majority rule and the rules that protect minorities from oppression and mismanagement. The need of the hour is to uphold just and equitable practices in the companies and bring about proper management as to the affairs of the same.