Prevention of Oppression and Mismanagement

may apply to the Tribunal, provided he has a right to apply under section 244, for an order under this Chapter.

Clause (a) covers three distinct wrongs, and an answer should separate them: conduct prejudicial to public interest; conduct prejudicial or oppressive to a member; and conduct prejudicial to the interests of the company. The first and third are what is usually called mismanagement; the second is oppression.

Clause (b) is different in kind, because it looks forward. It does not require any wrong yet done. It requires a material change in management or control, and a likelihood that the affairs will be conducted prejudicially by reason of that change. So a takeover by persons whose past conduct makes prejudicial management likely can be attacked before the harm occurs.

And notice the carve-out in clause (b). A change brought about by or in the interests of creditors, debenture holders or any class of shareholders is outside it, because such a change is the exercise of rights those persons already hold.

The Central Government's applications: section 241(2) to (5)

Section 241(2). The Central Government, if of opinion that the affairs of the company are being conducted in a manner prejudicial to public interest, may itself apply to the Tribunal.

The proviso, inserted later, requires applications under this sub-section, in respect of prescribed companies or classes, to be made before the Principal Bench of the Tribunal, which shall deal with them.

Section 241(3): the fit and proper reference. Where in the Central Government's opinion circumstances exist suggesting that:

• (a) any person concerned in the conduct and management of a company is or has been guilty of fraud, misfeasance, persistent negligence or default in carrying out his obligations and functions under the law, or of breach of trust;
• (b) the business has not been conducted and managed by such person in accordance with sound business principles or prudent commercial practices;
• (c) the company is or has been conducted and managed by such person in a manner likely to cause, or which has caused, serious injury or damage to the interest of the trade, industry or business to which the company pertains; or
• (d) the business is or has been conducted and managed by such person with intent to defraud its creditors, members or any other person, or otherwise for a fraudulent or unlawful purpose, or in a manner prejudicial to public interest,

the Central Government may initiate a case against such person and refer it to the Tribunal, with a request that the Tribunal inquire into the case and record a decision whether or not he is a fit and proper person to hold the office of director or any other office connected with the conduct and management of any company.

Section 241(4). The person against whom the case is referred shall be joined as a respondent.

Section 241(5). Every application under sub-section (3) shall contain a concise statement of the circumstances and materials the Central Government considers necessary for the inquiry, and shall be signed and verified in the manner laid down in the Code of Civil Procedure, 1908 for a plaint in a suit by the Central Government.

Note what this machinery is for. It is not about relieving a minority; it is about disqualifying a person from managing any company, which is why the order under section 243(1A) runs for five years across all companies.

The Tribunal's jurisdiction: section 242(1)

If, on any application under section 241, the Tribunal is of opinion:

• (a) 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 prejudicial to the interests of the company; and
• (b) 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,

the Tribunal may, with a view to bringing to an end the matters complained of, make such order as it thinks fit.

Both conditions must be satisfied, and the conjunction is "and". This is the point most often missed in an answer. It is not enough to prove oppression; the applicant must also bring his case within clause (b), which is a double test: a winding up would be unfairly prejudicial to him, and yet the facts would justify one on the just and equitable ground.

The purpose clause matters too. The order is to be made "with a view to bringing to an end the matters complained of", so the Tribunal's function is remedial and forward-looking, not punitive.

What the Tribunal may order: section 242(2)

Without prejudice to the generality of sub-section (1), an order may provide for:

• (a) the regulation of the conduct of the affairs of the company in future;
• (b) the purchase of the shares or interests of any members by other members or by the company;
• (c) in the case of a purchase by the company, the consequent reduction of its share capital;
• (d) restrictions on the transfer or allotment of the shares;
• (e) the termination, setting aside or modification of any agreement between the company and the managing director, any other director or the manager, on such terms as the Tribunal thinks just and equitable;
• (f) the termination, setting aside or modification of any agreement between the company and any other person, provided that no such agreement shall be so dealt with except after due notice to, and after obtaining the consent of, the party concerned;
• (g) 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 by or against an individual, be deemed in his insolvency to be a fraudulent preference;
• (h) removal of the managing director, manager or any of the directors;
• (i) recovery of undue gains made by any managing director, manager or director during the period of his appointment, and the manner of utilisation of the recovery, including transfer to the Investor Education and Protection Fund or repayment to identifiable victims;
• (j) the manner in which a managing director or manager may be appointed after an order of removal under clause (h);
• (k) appointment of such number of persons as directors as the Tribunal may require to report to it on such matters as it directs;
• (l) imposition of costs; and
• (m) any other matter for which, in the Tribunal's opinion, it is just and equitable that provision should be made.

Three of these deserve a sentence each in an answer.

Clause (b), the buy-out, is the commonest order in practice, because it separates people who cannot work together while keeping the company alive. Note that the purchase may be by other members or by the company, and if by the company, clause (c) authorises the consequent reduction of capital without the usual procedure.

Clause (f) is conditional, and the condition is the difference between it and clause (e). An agreement with an outsider may be interfered with only after due notice and with his consent; an agreement with the managing director or a director or the manager may be terminated without it.

Clause (i) is restitutionary. Undue gains are recovered and may be sent to the Investor Education and Protection Fund or repaid to identifiable victims, so the money does not simply return to a company still controlled by the wrongdoers.

The rest of section 242

Section 242(3). A certified copy of the order shall be filed by the company with the Registrar within thirty days.

Section 242(4). The Tribunal may, on the application of any party, make any interim order for regulating the company's affairs on such terms as appear just and equitable.

Section 242(4A). At the conclusion of the hearing of a case referred under section 241(3), the Tribunal shall record its decision stating specifically whether or not the respondent is a fit and proper person to hold the office of director or any other office connected with the conduct and management of any company.

Section 242(5) and (6): alterations to the constitution. Where the order alters the memorandum or articles, the company shall not, without the leave of the Tribunal, make any alteration inconsistent with the order, except so far as the order permits; and the alterations made by the order have the same effect as if duly made by the company under the Act.

Section 242(7). A certified copy of every order altering, or giving leave to alter, the memorandum or articles shall be filed with the Registrar within thirty days, and he shall register it.

Section 242(8): the punishment for breach of sub-section (5). The company is punishable with fine of not less than one lakh rupees extending to twenty-five lakh rupees, and every officer in default with fine of not less than twenty-five thousand rupees extending to one lakh rupees.

Consequences of terminating an agreement: section 243

Section 243(1)(a): no claim against the company. Where an order under section 242 terminates, sets aside or modifies an agreement, that order shall not give rise to any claim whatever against the company by any person for damages or for compensation for loss of office, or in any other respect, whether under the agreement or otherwise.

That is a complete answer to the removed managing director's suit. His contract may have had years to run; the order extinguishes the claim.

Section 243(1)(b): a five year bar. No managing director, other director or manager whose agreement is so terminated or set aside shall, for five years from the date of the order, without the leave of the Tribunal, be appointed, or act, as managing director, director or manager of the company.

The proviso: the Tribunal shall not grant leave unless notice of the intention to apply for leave has been served on the Central Government and that Government has been given a reasonable opportunity of being heard.

Section 243(1A): the fit and proper bar, and note how much wider it is. A person found not fit and proper under section 242(4A) shall not hold the office of a director or any other office connected with the conduct and management of the affairs of any company for five years from the date of that decision. Proviso: the Central Government may, with the leave of the Tribunal, permit him to hold such office before the expiry of the five years.

Compare the two bars. Clause (b) keeps a man out of that company; sub-section (1A) keeps him out of any company. And the leave works the other way round: under clause (b) the Tribunal grants leave after hearing the Central Government; under sub-section (1A) the Central Government permits it with the leave of the Tribunal.

Section 243(1B): no compensation. Notwithstanding anything in this Act, any other law, any contract, memorandum or articles, a person removed from the office of a director or any other office connected with the conduct and management of the affairs of the company shall not be entitled to, or be paid, any compensation for the loss or termination of office.

Section 243(2): the offence. Any person who knowingly acts as managing director, other director or manager in contravention of clause (b) of sub-section (1) or of sub-section (1A), and every other director who is knowingly a party to the contravention, is punishable with fine which may extend to five lakh rupees.

Who may apply: section 244

Dealt with in [Majority Rule, Minority Rights and the Principle of Non-interference] and repeated here in short. In a company having a share capital, one hundred members or one-tenth of the total number of members, whichever is less, or members holding one-tenth of the issued share capital, all calls being paid; in a company without share capital, one-fifth of the total number of members. The Tribunal may waive all or any of these. Joint holders count as one member. And under section 244(2) one or more of the qualified members, with the written consent of the rest, may apply on behalf and for the benefit of all.

Procedure borrowed from winding up: section 246

The provisions of sections 337 to 341, both inclusive, apply mutatis mutandis to an application under section 241 or section 245. Those sections deal with the penalty for frauds by officers, the liability where proper accounts are not kept, the liability for fraudulent conduct of business, the power to assess damages against delinquent directors, and the liability of the officers under them. Their extension here means the Tribunal hearing an oppression petition has the same machinery for fixing personal liability as a Tribunal winding a company up.

A worked example

Vasind Rubber Limited has six hundred members. The Deshmukh group holds fifty-five per cent and controls the Board; the Nadkarni group holds thirty per cent, and the rest is widely held.

The conduct complained of. Over two years the Deshmukh group has excluded the Nadkarni nominee from Board meetings by giving him no notice, stopped dividends while paying itself large managerial remuneration, allotted new shares to itself at par to reduce the Nadkarni holding, and diverted the company's export orders to a firm the Deshmukhs own.

Standing. The Nadkarni group holds thirty per cent of the issued share capital, well over the one-tenth required by section 244(1)(a), so it qualifies without needing one hundred members or one-tenth of six hundred, and without a waiver.

The ground. The affairs are being conducted in a manner oppressive to a member and prejudicial to the interests of the company: section 241(1)(a). The allotment to entrench control and the diversion of orders are the classic instances.

The jurisdictional test. The Tribunal must be satisfied not only of that conduct, but that winding up would unfairly prejudice the Nadkarni group, while the facts would otherwise justify a winding-up order on the just and equitable ground: section 242(1)(b). The company is profitable and the applicants' shares would fetch far more as a going concern than in liquidation, so winding up would unfairly prejudice them; and the loss of mutual confidence and the exclusion from management would justify a just and equitable winding up. Both limbs are answered.

The orders. The Tribunal may regulate the conduct of the affairs in future (clause (a)); set aside the allotment and impose restrictions on further transfer or allotment of shares (clause (d)); terminate the managing director's agreement (clause (e)); remove him (clause (h)); direct recovery of the undue gains he made, to be repaid to identifiable victims or transferred to the Investor Education and Protection Fund (clause (i)); prescribe the manner of appointing his successor (clause (j)); appoint two directors to report to the Tribunal (clause (k)); and, most usefully, order the purchase of the Nadkarni group's shares by the Deshmukh group or by the company, with the consequent reduction of capital if the company buys them (clauses (b) and (c)).

A payment made shortly before the petition. Two months before the application the company paid one crore rupees to a Deshmukh family concern in respect of an old and doubtful debt. Since it was made within three months before the date of the application and would, in an individual's insolvency, be a fraudulent preference, the Tribunal may set it aside under clause (g).

A contract with an outsider. The company has a long supply agreement with an unconnected transporter on unfavourable terms. The Tribunal may modify it under clause (f), but only after due notice to the transporter and with his consent, which is not required for the managing director's agreement under clause (e).

The removed managing director's claim. He sues the company for damages for wrongful termination and compensation for loss of office. Section 243(1)(a) bars it: the order gives rise to no claim whatever against the company. He is also barred by section 243(1)(b) from acting as managing director, director or manager of that company for five years without the leave of the Tribunal, and the Tribunal cannot grant leave unless notice has been served on the Central Government and it has been heard. And under section 243(1B) he is not entitled to any compensation for the loss or termination of office, notwithstanding his contract or the articles.

If he takes office anyway. He, and every other director knowingly a party, is punishable with fine up to five lakh rupees: section 243(2).

Meanwhile. On an application by either party the Tribunal may make an interim order regulating the company's affairs: section 242(4). And a certified copy of the final order must be filed with the Registrar within thirty days: section 242(3).

An alteration of the articles. If the order alters the articles, the company may not, without the leave of the Tribunal, make any alteration inconsistent with the order; the altered articles take effect as if the company had altered them; a certified copy goes to the Registrar within thirty days for registration; and breach exposes the company to a fine of one lakh to twenty-five lakh rupees and every officer in default to twenty-five thousand to one lakh rupees.

A different route. Independently, the Central Government, if of opinion that the affairs are being conducted prejudicially to public interest, may itself apply under section 241(2); and if it considers that the managing director has been guilty of fraud, persistent negligence or breach of trust, or has managed the business contrary to sound business principles or with intent to defraud creditors, it may refer a case under section 241(3) asking the Tribunal to decide whether he is a fit and proper person. If the Tribunal records under section 242(4A) that he is not, he is barred from holding office in any company for five years under section 243(1A), and only the Central Government, with the leave of the Tribunal, can shorten that.

Distinctions that carry marks

What this does NOT mean

It does not mean proof of oppression is enough. Section 242(1) requires both that the affairs are being conducted oppressively or prejudicially and that winding up would unfairly prejudice the applicants although the facts would justify a just and equitable winding up.

It does not mean any member may petition. The thresholds in section 244 apply, subject to the Tribunal's waiver.

It does not mean a single act of unfairness founds the petition. Section 241 speaks of the affairs being conducted in a manner prejudicial or oppressive, which points to a course of conduct, though clause (b) allows a forward-looking complaint on a material change in management or control.

It does not mean an outsider's contract can be torn up. Clause (f) of section 242(2) requires due notice to and the consent of the party concerned; only agreements with the managing director, other directors or the manager fall under clause (e).

It does not mean a removed managing director keeps his contractual claim. Section 243(1)(a) bars any claim against the company for damages or compensation, and section 243(1B) denies compensation notwithstanding any contract, memorandum or articles.

It does not mean the fit and proper machinery is old law. Sections 241(3) to (5), 242(4A) and 243(1A) and (1B) came in with the Companies (Amendment) Act, 2019 with effect from 21 December 2020.

Quick revision

• 241(1)(a): a member may apply where the affairs have been or are being conducted in a manner prejudicial to public interest, prejudicial or oppressive to him or any other member, or prejudicial to the interests of the company.
• 241(1)(b): or where a material change has taken place in the management or control, by alteration of the Board, the manager, the ownership of shares or the membership, or in any other manner, not being a change brought about by or in the interests of creditors, debenture holders or a class of shareholders, and by reason of it prejudicial conduct is likely.
• 241(2) to (5): the Central Government may apply where the affairs are prejudicial to public interest, prescribed applications going to the Principal Bench; and it may refer a fit and proper case where a person managing the company is guilty of fraud, misfeasance, persistent negligence, default or breach of trust, has not managed by sound business principles or prudent commercial practices, has caused serious injury to the trade or industry, or has managed with intent to defraud or for a fraudulent or unlawful purpose; he is joined as respondent, and the application carries a concise statement, signed and verified as a plaint by the Central Government under the Code of Civil Procedure, 1908.
• 242(1): the Tribunal must be satisfied both that the affairs are conducted oppressively or prejudicially, and that winding up would unfairly prejudice the members but the facts would justify a just and equitable winding up; then it may make such order as it thinks fit to bring the matters complained of to an end.
• 242(2), thirteen heads: regulate future conduct; purchase of shares by members or the company; consequent reduction of capital; restrictions on transfer or allotment; termination, setting aside or modification of agreements with the managing director, directors or manager; the same for other agreements, only after notice and with consent; setting aside a fraudulent preference within three months before the application; removal of the managing director, manager or directors; recovery of undue gains, to the Investor Education and Protection Fund or identifiable victims; the manner of appointing a successor; appointment of directors to report to the Tribunal; costs; and any other just and equitable matter.
• 242(3) to (8): certified copy to the Registrar in thirty days; interim orders; a fit and proper decision recorded under (4A); alterations to the memorandum or articles binding, no inconsistent alteration without the Tribunal's leave, certified copy within thirty days for registration; breach punished by fine of one lakh to twenty-five lakh rupees on the company and twenty-five thousand to one lakh rupees on every officer in default.
• 243: an order terminating an agreement gives rise to no claim against the company for damages or compensation; the person concerned may not be appointed or act in that company for five years without the Tribunal's leave, granted only after notice to and hearing of the Central Government; a person found not fit and proper is barred from any company for five years, relaxable only by the Central Government with the Tribunal's leave; no compensation is payable on removal, notwithstanding any contract or the articles; and knowingly acting in contravention is punishable with fine up to five lakh rupees, as is every director knowingly a party.
• 244: one hundred members or one-tenth of the members, whichever is less, or one-tenth of the issued share capital, all calls paid; one-fifth of the members where there is no share capital; waiver by the Tribunal; joint holders count as one; and one or more may apply with the written consent of the rest, on behalf of all.
• 246: sections 337 to 341 apply mutatis mutandis to applications under section 241 or section 245.

Test yourself

1. On what grounds may a member apply under section 241? That the affairs of the company have been or are being conducted in a manner prejudicial to public interest, or prejudicial or oppressive to him or any other member, or prejudicial to the interests of the company; or that a material change has taken place in the management or control of the company, not brought about by or in the interests of creditors, debenture holders or any class of shareholders, and that by reason of that change it is likely that the affairs will be conducted in a manner prejudicial to the company's interests or to its members or any class of members.

2. What must the Tribunal be satisfied of before it can make an order under section 242? Both that the affairs have been or are being conducted in a manner prejudicial or oppressive to any member, or prejudicial to public interest or 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 a winding-up order on the just and equitable ground.

3. Name six orders the Tribunal may make. Any six of: regulation of the conduct of the affairs in future; purchase of the shares of any members by other members or by the company, with the consequent reduction of capital; restrictions on the transfer or allotment of shares; termination, setting aside or modification of agreements with the managing director, directors or manager, or with others after notice and consent; setting aside a fraudulent preference made within three months before the application; removal of the managing director, manager or directors; recovery of undue gains; the manner of appointing a successor; appointment of directors to report to the Tribunal; costs; and any other just and equitable provision: section 242(2).

4. Can a director removed by such an order sue for damages? No. Section 243(1)(a) provides that the order shall not give rise to any claim whatever against the company for damages or compensation for loss of office or in any other respect; and section 243(1B) denies him compensation notwithstanding any contract, memorandum or articles.

5. What is the effect of a finding that a person is not fit and proper? He shall not hold the office of a director or any other office connected with the conduct and management of the affairs of any company for five years from the date of the decision, though the Central Government may, with the leave of the Tribunal, permit him to hold such office earlier: section 243(1A). Knowingly acting in contravention is punishable with fine up to five lakh rupees: section 243(2).

6. Which transactions before the petition can be set aside? 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: section 242(2)(g).