OPPRESSION AND MISMANAGEMENT UNDER SECTION 241 AND 242 OF COMPANIES ACT, 2013

INTRODUCTION

Sections 241 and 242 of the Companies Act 2013 address corporate oppression and mismanagement. They allow members of a company to apply to the National Company Law Tribunal (NCLT) for relief. Essentially provide a legal mechanism for a company member to seek relief from the NCLT, if they believe the company's affairs are being conducted in a manner that is oppressive or prejudicial to their interests, allowing the tribunal to take actions like regulating company management, restricting share transfers, or even ordering a company winding up to address such issues; essentially safeguarding minority shareholder rights against majority shareholder misconduct. 

Section 241 chapter XVI of companies Act, 2013, deals with Application to Tribunal for relief in cases of oppression, its states that-

1)     Any member of a company who complains that—

a.  the affairs of the company have been or are being conducted in a manner prejudicial to public interest or in a manner prejudicial or oppressive to him or any other member or members or in a manner prejudicial to the interests of the company; or

b.   the material change, not being a change brought about by, or in the interests of, any creditors, including debenture holders or any class of shareholders of the company, has taken place in the management or control of the company, whether by an alteration in the Board of Directors, or manager, or in the ownership of the company‘s shares, or if it has no share capital, in its membership, or in any other manner whatsoever, and that by reason of such change, it is likely that the affairs of the company will be conducted in a manner prejudicial to its interests or its members or any class of members, may apply to the Tribunal, provided such member has a right to apply under section 244, for an order under this Chapter. 151

2)     The Central Government, if it is of the opinion that the affairs of the company are being conducted in a manner prejudicial to public interest, it may itself apply to the Tribunal for an order under this Chapter.

It means that  it essentially allows a company member to apply to the Tribunal for relief if they believe the company's affairs are being conducted in a manner that is oppressive to them or other members, prejudicial to the company's interests, or if there has been a significant change in the company's management or control, enabling minority shareholders to seek redress against potential mismanagement or unfair practices by the majority shareholders; essentially providing a mechanism to address "oppression and mismanagement" within a company.

Section 242 chapter XVI of companies Act, 2013, deals with Powers of Tribunal.

1)     If, on any application made under section 241, the Tribunal is of the opinion -

• 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 in a manner prejudicial 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 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.

2)     prejudice to the generality of the powers under sub-section (1), an order under that subsection may provide for-

a)     the regulation of conduct of affairs of the company in future;

b)     the purchase of shares or interests of any members of the company by other members thereof or by the company;

c)    in the case of a purchase of its shares by the company as aforesaid, the consequent reduction of its share capital;

d)      restrictions on the transfer or allotment of the shares of the company;

e)     the termination, setting aside or modification, of any agreement, howsoever arrived at, between the company and the managing director, any other director or manager, upon such terms and conditions as may, in the opinion of the Tribunal, be just and equitable in the circumstances of the case;

f)      the termination, setting aside or modification of any agreement between the company and any person other than those referred to in clause(e)

Provided that no such agreement shall be terminated, set aside or modified except after due notice 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 under this section, which would, if made or done 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 of the company;

i)     recovery of undue gains made by any managing director, manager or director during the period of his appointment as such and the manner of utilisation of the recovery including transfer to Investor Education and Protection Fund or repayment to identifiable victims;

j)     the manner in which the managing director or manager of the company may be appointed subsequent to an order removing the existing managing director or manager of the company made under clause (h);

k)    appointment of such number of persons as directors, who may be required by the Tribunal to report to the Tribunal on such matters as the Tribunal may direct;

l)       imposition of costs as may be deemed fit by the Tribunal;

m)    any other matter for which, in the opinion of the Tribunal, it is just and equitable that provision should be made. 152

3)    A certified copy of the order of the Tribunal under sub-section (1) shall be filed by the company with the Registrar within thirty days of the order of the Tribunal.

4)    The Tribunal may, on the application of any party to the proceeding, make any interim order which it thinks fit for regulating the conduct of the company’s affairs upon such terms and conditions as appear to it to be just and equitable.

5)     Where an order of the Tribunal under sub-section n (1) makes any alteration in the memorandum or articles of a company, then, notwithstanding any other provision of this Act, the company shall not have power, except to the extent, if any, permitted in the order, to make, without the leave of the Tribunal, any alteration whatsoever which is inconsistent with the order, either in the memorandum or in the articles.

6)     Subject to the provisions of sub-section (1), the alterations made by the order in the memorandum or articles of a company shall, in all respects, have the same effect as if they had been duly made by the company in accordance with the provisions of this Act and the said provisions shall apply accordingly to the memorandum or articles so altered.

7)     A certified copy of every order altering, or giving leave to alter, a company ‘s memorandum or articles, shall within thirty days after the making thereof, be filed by the company with the Registrar who shall register the same.

8)     If a company contravenes the provisions of sub-section (5), the company shall be punishable with fine which shall not be less than one lakh rupees but which may extend to twenty-five lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to six months or with fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupees, or with both.

ADVANTAGES OF SECTIONS 241 AND 242:

1) Right to File a Petition (Section 241): Section 241 of the Companies Act, 2013, allows minority shareholders (holding at least 10% of the share capital or representing 1/10th of the total number of minority shareholders) to file a petition with the National Company Law Tribunal (NCLT) for relief in case of oppression and mismanagement.

2) Grounds for Oppression and Mismanagement (Section 241): The petition can be filed on grounds of oppression or mismanagement. “Oppression” refers to the conduct that is prejudicial to the interests of the company or its members, and “mismanagement” refers to the improper or inefficient conduct of the affairs of the company.

3) Power of the Tribunal (Section 242): Section 242 empowers the NCLT to make various orders to regulate the conduct of the company’s affairs, including the appointment of a new managing director or director, changes in the company’s articles, or even the winding up of the company.

4) Transparency and Accountability: The process under these sections encourages transparency in corporate operations as the NCLT can scrutinize the company's affairs and hold the management accountable for their actions. 

5)Promoting Good Governance: By providing a mechanism to address minority shareholder grievances, these sections contribute to better corporate governance practices within companies.

Conclusion

Section 241, which deals with shareholder protection in India, has come a long way since its colonial roots. It has also expanded its scope by introducing the concept of "prejudice" alongside traditional oppression, demonstrating a commitment to addressing various unfair practices. The ongoing discussions in courts about what constitutes "oppression" highlight the importance of finding a balanced interpretation that considers both literal meanings and the broader principles of fairness. What makes Section 241 particularly powerful is its inclusion of the idea of mismanagement, a concept specific to India. This uniquely Indian concept significantly amplifies the statute's efficacy, extending protection beyond instances of oppression to shield shareholders from deleterious shifts in corporate control. This addition broadens the scope of protection, ensuring shareholders are safeguarded not just from oppression but also from harmful changes in corporate control.