Corporate Disputes: Legal Remedy Against Oppression and Mismanagement
Rohit Parasrampuria
Rohit Parasrampuria is a seasoned lawyer with 8+ years of experience in litigation and dispute resolution. A first-class commerce graduate from St. Xavier’s College, Kolkata, and a law graduate, he also holds dual memberships with ICAI and ICSI, along with a certification in Forensic Accounting and Fraud Detection. Rohit specializes in tax disputes, IBC matters, and resolving both family and corporate conflicts. His strong blend of legal and financial expertise makes him a trusted advisor and effective litigator.
Corporate Disputes: Legal Remedy Against Oppression and Mismanagement
Corporate governance in India has evolved significantly with the Companies Act, of 2013, particularly in addressing power imbalances between majority and minority shareholders. Sections 241-246 of the Act provide robust mechanisms to combat oppression and mismanagement, offering crucial safeguards for minority shareholders who might otherwise find themselves at the mercy of controlling interests. These provisions represent a significant advancement from their predecessors in the Companies Act 1956, with expanded scope and more nuanced approaches to shareholder protection. The introduction of the term ‘prejudicial’ alongside ‘oppressive’ has substantially broadened the circumstances under which relief can be sought, creating a more comprehensive framework for addressing corporate misconduct.
Historical Background and Evolution of the Remedy
Indian company law has a long history of protecting against oppressive shareholder behavior, dating back to the Company Act of 1913, which was inspired by English law. Over the years, this remedy has been greatly improved, and for more than 50 years, Section 397 of the Companies Act 1956 has been a crucial component of shareholder remedies in India. Drawing on the principles of its English counterpart, Section 210, Indian courts established jurisprudence on this subject, resulting in a substantial body of case law that continues to shape contemporary interpretations. The way these remedies are conceived and applied in the Indian corporate environment has significantly changed since the 1956 Act was replaced by the 2013 Act.
Transition to the Current Framework
The National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT) now have the authority to provide remedies against oppression and mismanagement, which was formerly granted by the Company Law Board (CLB) under the 1956 Act. This institutional reform demonstrates a more specialized approach to resolving corporate conflicts by establishing dedicated tribunals, thereby going beyond a mere change in adjudicating bodies.
Another notable change is that while the 1956 Act did not cover past aspects of oppression unless they continued until the filing date, the 2013 Act in Section 241 has expanded the scope to include actions that have already concluded. This temporal expansion significantly increases the protective reach of the provisions by allowing redress for past wrongs.
Object and Purpose of the Statutory Remedy
- Preserving the Rights of Minorities in Corporate Democracy
According to the ruling in Foss v. Harbottle, which established that individual shareholders typically do not have standing to hold corporations accountable for misconduct, corporate democracy is based on majority rule. Although necessary for administration, if abused by powerful interests, this could endanger the rights of minorities. In order to prevent majority tyranny, maintain shareholder equity, and uphold corporate justice, Sections 241–246 seek to strike a balance between the rights of individual shareholders and effective control.
- Making Corporate Governance Accountable
Beyond standard business decisions, statutory remedies against tyranny and poor management establish an accountability framework. When corporate procedures fail to safeguard the rights of lawful shareholders or turn into instruments of tyranny, they make it possible for the courts to step in. According to Chapter XVI of the Companies Act 2013, both individual actions by aggrieved shareholders and derivative actions on behalf of the company may be brought before the NCLT for redress.
Conditions for invoking the remedy under Section 241
Under Section 241(1) any member of any company who is eligible to apply under Section 244 of any company may apply to the National Company Law Tribunal, complaining that:
(1) the affairs of the company have been, or are being, conducted, in a manner:
- prejudicial to the public interest, or
- prejudicial to the petitioner (member) or any other member or members of the company, or
- oppressive to the petitioner (member) or any other member or members of the company,
- prejudicial to the interests of the company.
(2) a 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-
- by alteration in the Board of Directors, or manager, or
- in the ownership of the company’s shares, or
- in the company’s membership (if there is no share capital), or
- in any other manner whatsoever,
and such change is likely to result in the affairs of the company being conducted in a manner prejudicial to
- the company’s interests, or
- the members of the company, or
- any class of members of the company.
Under Section 241(2), the Central Government can itself apply to the Tribunal if it is of the opinion that the affairs of the company are being conducted in a manner prejudicial to the public interest.
The petitioner(s) must allege, in the petition under Section 241, one or more of the above-mentioned matters so that the petition is admitted by the Tribunal. The Tribunal may then pass an appropriate order under Section 242 to address the grievances raised in the petition.
Therefore, under Section 241, any person who is eligible to apply under section 244, can apply to the NCLT that the affairs of the company are being conducted in a manner prejudicial to the public interest or a manner prejudicial or oppressive to any member or members and that winding up the company would unfairly prejudice such member(s), even though the facts might otherwise justify a winding-up order on the ground of just and equitable circumstances that the company should be wound up and to bring an end to the matter complained of, the NCLT, if satisfied, may pass such orders as it may deem fit and proper.
The Significance of “Prejudicial” in the 2013 Act
Under the Companies Act, 2013, the term “prejudicial” has been introduced before the word “oppression” in Section 241, a change not present in the earlier Section 397 of the Companies Act, 1956. As a result, both “prejudice” and “oppression” can now serve as grounds for filing a complaint under Section 241 of the 2013 Act. The petitioner member(s) can allege either prejudice or oppression or both and the NCLT can pass an order to bring an end to the matter complained of. The conduct of affairs of the company must be, inter alia, prejudicial or oppressive to the petitioner member(s) or other member(s).
The ordinary meaning of the word “prejudice” encompasses damage, detriment, harm, loss, injury, hurt, and impairment. The term “prejudice” carries a broader scope compared to “oppression.” It refers to any harm or injury caused by the actions of another that disregards one’s rights, particularly detriment to one’s legal rights or claims.
Also, including “prejudicial” alongside “oppressive” lowers the threshold for Tribunal intervention. Oppression requires burdensome, harsh, and wrongful conduct, while prejudicial conduct only needs to disadvantage or potentially harm certain interests. This makes the remedy more accessible and effective in addressing issues before they escalate into severe oppression. It reflects a preventative approach, enabling earlier intervention when warning signs appear.
In Conclusion
In conclusion, the statutory remedy against oppression and mismanagement under Sections 241–246 of the Companies Act, 2013, signifies a progressive and robust legal framework aimed at preserving corporate democracy and protecting minority shareholders from abuse of power by majority stakeholders. The transition from the 1956 Act to the 2013 Act has introduced several key reforms, including the establishment of specialized tribunals (NCLT and NCLAT) and the expansion of relief to cover not only ongoing but also past misconduct. Most notably, the inclusion of the term “prejudicial” alongside “oppressive” has broadened the scope of redressal by allowing action against conduct that may harm shareholder interests even if it does not meet the higher threshold of oppression. This shift reflects a more preventative, inclusive, and responsive approach to corporate governance, ensuring protection for minority voices and reinforcing corporate accountability.
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