Oppression and Mismanagement – Does the law need a revamp?

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Sudden ouster of Mr. Cyrus Mistry late last year as the Chairman of Tata Group and the subsequent oppression and mismanagement petition filed by the Mistry group against the Tatas before NCLT has brought into foray, the intense debate and interpretative approach towards provisions dealing with oppression and mismanagement under the statute, i.e. Sections 241, 242 and 244 of the Companies Act, 2013 (‘Act’). The Mumbai bench of National Company Law Tribunal (“NCLT”) had dismissed the petition and also the Mistry Group’s request for a waiver of the shareholding requirement to bring in the suit of oppression and mismanagement against Tata Sons. Further, on appeal by Mistry Group before National Company Law Appellate Tribunal (“NCLAT”), NCLAT ruled that Mistry Group’s petition did not meet the requirements of maintainability under section 244 of the Act, however, it exercised its discretionary power to grant a waiver on certain “exceptional circumstances”, and allowed the action to proceed on its merits before the NCLT.

The surrounding legal provisions of the Act on this aspect suggest that any member of a company can make an application for seeking relief to the NCLT in case of oppression and mismanagement, subject to certain prescribed eligibility criteria. Law prescribes that in case of a company having a share capital, at least one hundred members or members constituting one-tenth of total number of its members, whichever is less, or members holding at least 10% of issued share capital of the company, can file an application with NCLT alleging oppression and mismanagement. NCLT is also empowered to grant waiver in case any of the above criteria are not met by the applicant. Moreover, the term ‘share capital’ under the Act includes both equity and preference share capital.

Just to recap, in Tata-Mistry tussle, the Mistry group held 2.17% of the total issued share capital of Tata Sons Limited, which was equivalent to 18.37% of the equity share capital of the company. Moreover, the Mistry Group comprised two members out of a total of 51 members in the company. The crux of the issue was whether the 10% requirement stipulated in the Act ought to have been satisfied by taking into account the entire issued share capital of the company (comprising of both equity and preference) in which case the Mistry Group falls below the threshold, or whether it should take into account only the equity share capital of the company (in which case the Mistry Group satisfies the requirement).

On this issue, both NCLT and NCLAT provided a literal and narrow interpretation to the eligibility criteria, and held that the scope of expression “issued share capital of the company” ought to take into account both equity and preference shares. However, on the issue of grant of waiver, NCLAT exercised its judicial discretion liberally since the Act was silent on this aspect; it gave due importance to the fact that in the concerned case, only two shareholders strictly met the shareholding qualifications and the Mistry Group’s interests in Tata Sons was enormous in monetary terms, and hence, such petition should not be rendered as frivolous. NCLAT observed that it would be unfair and inequitable to rule Mistry Group’s petition non- maintainable on the shareholding linked eligibility criteria, and thereby it qualifies to be “exceptional circumstances”.

On analysing the orders passed by both NCLT and NCLAT, an argument may be made that the existing legal provisions surrounding oppression and mismanagement warrants a serious revisit. While certain numerical threshold may be required to prevent frivolous lawsuits that may be brought by resentful shareholders, thereby hindering the day to day operations of a company, however, an intelligible differentiation should be created considering the nature and class of shareholders as opposed to treating all members on the same footing. Such demarcation is also essential to mitigate the scope of judicial discretion by tribunals on grant of waiver, thereby making the position of law more exhaustive and less ambiguous in future.

In this context, reference may be made to Indian Accounting Standard (IndAS) 32, which construes preference shares as debt, unless they are compulsorily convertible. The rationale behind such specification is that as long as such shares are not converted or convertible into equity shares, the holders of such shares stand in the same footing as that of other creditors since a fixed or assured return shall be distributed to such holder without him taking any equity risks in the company. This position is substantially different from that of equity shareholders who infuse funds in a company with no assured or fixed return and also carries equity risk. Hence, corporate governance matters and conduct of affairs of a company so as to allege any oppression or mismanagement are much more relevant and critical from an equity holder’s perspective as opposed to holder of redeemable preference shares. Since the provisions in relation to oppression and mismanagement are provided to protect minority shareholders’ interests against the brute force of majority, the law should be interpreted in a more beneficial manner against a strict literal, technical and narrow approach. Though it is a disquieting drift from the jurisprudential position vis-à-vis interpretation of a statute of this nature, the same may be warranted to curb abuse by majority shareholders and to provide a mechanism to minority shareholders to assert their rights against majority.

Thus, while prescribing the numerical threshold for maintainability of such petition, the redeemable preference shares should be kept out of the equation and should not be construed as share capital, since they do not have an intrinsic interest in day to day affairs of the company. Otherwise, the very purpose of protecting minority in the company will become redundant. Having such a literal interpretation may lead to a conflicting or absurd situation sometime, when an equity holder holding 26% of equity shares can block special shareholder resolutions (those requiring consent of more than 75% of equity holders) wherein such resolutions are significant vis-à-vis constitution/restructuring of a company and crucial corporate governance matters, he cannot seek relief for oppression and mismanagement in case affairs of a company are conducted prejudicial to its interests.

Moreover, there is a conscious departure in the legislative intent of Companies Act, 1956 which only addressed public interest or interest of the company while assessing a claim of oppression and mismanagement; however, the Companies Act, 2013 expands the scope of such assessment to any class of shareholders, debenture holders and creditors and so the threshold of 10 % should also be looked at from this aspect.

Though the law seeks to obtain an appropriate balance between minority protection and the avoidance of frivolous or vexatious litigation, the construct of numerical shareholding threshold in case of oppression and mismanagement should be revisited in order to protect the genuine interests of minority shareholders against the tyranny of majority. Till the time the legislature brings such reforms in the present laws, the tribunals shall have the onus to direct the jurisprudence towards a more balanced approach.

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