Rule of Majority and its Limitations

The fundamental principle of company law is the Rule of Majority Supremacy, which means that the decisions of the company are taken by a majority vote of its members. The courts will generally not interfere in the internal management of a company as long as the majority acts within the powers conferred on it by the company's Memorandum and Articles. This principle was famously established in the English case of Foss v. Harbottle (1843).

The rationale behind this rule is that:

• It is democratic and practical for the will of the majority to prevail.
• It prevents endless litigation by disgruntled minorities over every business decision.
• If a wrong is done to the company, the company itself is the proper person to sue, not an individual shareholder.

However, this rule of majority is not absolute. Unchecked majority power could lead to the oppression of minority shareholders. Therefore, the law has carved out significant exceptions to this rule and provided several statutory and common law protections to safeguard the interests of the minority.

Oppression and Mismanagement (Section 241)

The most powerful statutory remedy available to minority shareholders is the right to file a petition before the National Company Law Tribunal (NCLT) for relief against oppression and mismanagement, as provided under Section 241 of the Companies Act, 2013.

Meaning of Oppression

Oppression refers to conduct that is burdensome, harsh, and wrongful. It involves a lack of probity and fair dealing in the affairs of the company to the prejudice of some of its members. It is not about mere disagreement with the majority's business policy but about conduct that is unjust and infringes on the members' rights. Examples of oppression include:

• Illegally depriving a member of their right to vote or receive dividends.
• Allotting new shares in a way that converts a majority into a minority.
• Denying members access to the company's records.
• Siphoning off company funds for personal use by the majority.

Meaning of Mismanagement

Mismanagement occurs when the affairs of the company are being conducted in a manner that is prejudicial to the public interest or to the interests of the company itself. This involves serious mismanagement that could lead to the company suffering heavy losses or being unable to pay its debts. Examples include:

• Gross negligence by the directors leading to substantial financial losses.
• The company's property being sold at a very low price.
• A deadlock in the management of the company.

Who can Apply?

Not every single shareholder can file a petition. The right to apply is given to a specified number of members to prevent frivolous applications:

• For a company with share capital: Not less than 100 members OR not less than one-tenth of the total number of its members, whichever is less; OR any member or members holding not less than one-tenth of the issued share capital.
• For a company without share capital: Not less than one-fifth of the total number of its members.

Powers of the Tribunal (Section 242)

If the NCLT is of the opinion that the company's affairs have been conducted in an oppressive manner or are being mismanaged, it has been given very wide and extensive powers under Section 242 to pass any order it thinks fit with a view to bringing to an end the matters complained of. The NCLT is not bound to make a winding-up order; its primary objective is to remedy the situation and allow the company to continue to function properly.

The orders that the NCLT can pass include, but are not limited to:

• The regulation of the conduct of the company's affairs in the future.
• The purchase of the shares of any members of the company by other members or by the company itself (and the consequent reduction of share capital).
• Restrictions on the transfer or allotment of shares.
• The termination, setting aside, or modification of any agreement between the company and its MD, director, or manager.
• The removal and replacement of the directors or KMPs of the company.
• The setting aside of any transfer or delivery of goods, payment, or other act done which would amount to a fraudulent preference in case of insolvency.
• Imposing costs as it may deem fit.

These powers are discretionary and are exercised by the NCLT based on the facts and circumstances of each case to provide a fair and equitable solution.

Class Action Suits (Section 245)

A Class Action Suit is another powerful remedy introduced by the Companies Act, 2013, which allows a large group of people with a common grievance to come together and file a single lawsuit. This is particularly useful in cases where the individual loss to each person is small, but the collective loss is large.

Under Section 245, a specified number of members or depositors can file an application before the NCLT on behalf of all affected members or depositors if they are of the opinion that the management or conduct of the affairs of the company is being conducted in a manner prejudicial to the interests of the company or its members or depositors.

Grounds for Class Action

A class action suit can be filed to seek an order to:

• Restrain the company from committing an act which is ultra vires the MOA or AOA.
• Restrain the company from committing a breach of any provision of the company’s MOA or AOA.
• Declare a resolution altering the MOA or AOA as void if it was passed by suppression of material facts or by a mis-statement.
• Restrain the company from acting on such a resolution.
• Restrain the company from doing an act which is contrary to the provisions of the Act or any other law.
• Claim damages or compensation from the company, its directors, auditors, or experts for any fraudulent, unlawful, or wrongful act or omission.

Who Can File?

The eligibility criteria for filing a class action suit are similar to those for an oppression and mismanagement petition:

• For a company with share capital: Not less than 100 members or 5% of the total number of members (whichever is less), or members holding at least 5% of the issued share capital.
• For depositors: Not less than 100 depositors or 5% of the total number of depositors (whichever is less), or depositors to whom the company owes 5% of its total deposits.

This provision empowers a smaller group of stakeholders to seek collective justice against corporate wrongdoing, enhancing the overall framework for minority protection.

Meaning of Oppression and Mismanagement

The provisions relating to the prevention of oppression and mismanagement, contained in Sections 241 to 244 of the Companies Act, 2013, are a crucial safeguard for minority shareholders. They act as a significant exception to the established common law principle of majority rule, as laid down in Foss v. Harbottle. These sections empower minority shareholders and, in certain cases, the Central Government, to approach the National Company Law Tribunal (NCLT) for relief when the company's affairs are being conducted in a manner that is unjust or detrimental.

Oppression: Unfairly Prejudicial to Members

Oppression, in the context of company law, is not merely about the majority outvoting the minority on business decisions. It refers to conduct by the majority that is burdensome, harsh, and wrongful. It is a visible departure from the standards of fair dealing and a violation of the conditions of fair play on which a shareholder invests in a company. The conduct must be ongoing and must be unfairly prejudicial to the interests of some part of the members.

The key elements of oppression are:

• Lack of Probity: The actions of the majority lack fairness, honesty, and integrity.
• Prejudicial Conduct: The conduct is harmful to the interests of some members, often the minority.
• Continuing Act: Oppression usually involves a series of wrongful acts over a period, not just a single isolated incident.

Mismanagement: Prejudicial to the Interests of the Company

Mismanagement refers to a situation where the affairs of the company are being conducted in a manner that is prejudicial to the public interest or prejudicial to the interests of the company itself. Unlike oppression, which focuses on harm to the members, mismanagement focuses on harm to the company as a whole or to the public.

This covers situations of gross negligence, incompetence, or recklessness by the management, even if it is not intended to be oppressive to any particular group of members. The primary concern is the potential damage to the company's financial health, its assets, and its ability to function as a viable business entity.

Who can apply to the Tribunal?

Not every disgruntled member can file a petition for oppression and mismanagement. To prevent frivolous litigation, Section 244 of the Companies Act, 2013, prescribes a minimum threshold of shareholding or membership that an applicant must meet to have the standing (locus standi) to approach the NCLT.

Members Holding Prescribed Minimum Shares

The application to the NCLT can be made by the members of a company who meet the following numerical criteria:

For a company having a share capital:

The application must be made by:

• Not less than one hundred members of the company; OR
• Not less than one-tenth of the total number of its members,

whichever is less, OR

• Any member or members holding not less than one-tenth of the issued share capital of the company (on which all calls have been paid).

For a company not having a share capital:

The application must be made by not less than one-fifth of the total number of its members.

Waiver by Tribunal: The NCLT has the discretion to waive all or any of these requirements to enable the members to apply, if it believes it is justified in the circumstances of the case.

Application by the Central Government

The power to initiate proceedings is not limited to members. Section 241(2) empowers the Central Government itself to file a petition with the NCLT if it is of the opinion that the affairs of the company are being conducted in a manner prejudicial to the public interest. This allows the government to intervene directly to protect the broader public good in cases of serious corporate mismanagement.

Powers of the Tribunal

Once the NCLT is satisfied that a case of oppression or mismanagement has been made out, Section 242 grants it extremely wide and flexible powers to pass any order it thinks fit to bring the complained-of matters to an end. The objective is remedial, not penal—to cure the disease, not to kill the patient.

Regulation of Company's Affairs

The NCLT can pass an order for the regulation of the conduct of the company's affairs in the future. This can include giving specific directions on how the management should operate or even amending the company's Memorandum or Articles of Association. Once so altered by the NCLT's order, the company cannot further alter these documents without the prior permission of the NCLT.

Purchase of Shares of Oppressed Members

This is one of the most common and effective remedies. The NCLT can order the purchase of the shares or interests of any members of the company (typically the oppressed minority) by other members (typically the oppressive majority) or by the company itself. This provides a fair exit route for the oppressed members, allowing them to leave the company with the fair value of their investment.

Termination of Oppressive Agreements

The NCLT has the power to terminate, set aside, or modify any agreement between the company and its Managing Director, any other director, or manager. This is a powerful tool to nullify agreements that are the source of oppression or are prejudicial to the company's interests.

Other Wide-Ranging Powers

The powers listed in the Act are inclusive and not exhaustive. The NCLT can also:

• Impose restrictions on the future transfer or allotment of the shares of the company.
• Remove the managing director, manager, or any of the directors of the company and appoint new ones.
• Order the recovery of any undue gains made by any director or manager and the manner of its utilisation.
• Appoint an administrator to run the affairs of the company.

Winding up the Company

While winding up is a possible outcome, it is a power of last resort. Section 242 states that if the NCLT is of the opinion that there are grounds that would justify the making of a winding-up order on just and equitable grounds, but that to wind up the company would unfairly prejudice the members who are applying, it may pass any other remedial order instead. This clearly indicates the NCLT's preference to find a solution that allows the company to continue as a going concern.