SECTION 241& 242, of the Companies Act, 2013, has provided the gateway through which a person facing oppression and mismanagement in a company can knock on the door of the court for justice after fulfilling certain criteria as per section 244 of the Companies Act, 2013.
The Companies Act, 2013 travels all the way from the year 1850 to the 21st century, was sculptured by the legislatures to regulate joint-stock companies, Protect shareholders’ interests, and Promote business growth across the boundaries of the Nation. Keeping its spirit high on the values of its incorporation with the amendments from time to time like a steam engine train now changed to bullet train as per the time and technological advancements. The act provides a statute with regard to the incorporation till the winding up of a company. The act stands as a company’s fundamental rights and duties in the manner a company is supposed to perform as a legal person, enjoying rights and liabilities similar to the natural person in a country.
The Company is run by a Board of Directors holding the majority in the ownership of the company. Protecting the rights of minorities in a company was a need and to tackle the arisen problem, Sections 241 & 242 were introduced in The Companies Act, 1956 to deal with the oppression of minority shareholders and mismanagement of the company. Specifically Section 241 deals with the procedure of making application to the Tribunal for relief in case of oppression and mismanagement whereas Section 242 deals with powers of Tribunals in the matter of said matter. Under section 241, the act has provided the gateway through which a person facing oppression and mismanagement in a company can knock on the door of a special tribunal created for dealing with the matters belonging to the companies in the country for the justice which he/she deserves to be served and for the said purpose, the three-tier justice system is there, two tribunals envisaged under section 408 as National Company Law Tribunal (NCLT) and Appealing Court above is carved under section 410 as National Company Law Appellate Tribunal (NCLAT), and last stair of justice Supreme Court of India, where the final verdict can be gained upon the satisfaction based on the proven law and the procedure established by law, Article 136 of the Constitution of India grants Supreme Court appellate jurisdiction over any judgment or order of any court or tribunal.
When we talk about procedure established by law, then we should remember the procedure that is the qualification for filing a petition in NCLT. There are a few conditions which should be fulfilled,Who can apply? The answer is hidden in section 244 which states the condition which should be fulfilled then only a person/member can move to tribunal u/s 241. The conditions which should be fulfilled are
- 10% of total shareholders or
- 100 shareholders or
- Shareholders holding 10% of total paid-up share capital
Based on the above conditions only the cases against oppression and mismanagement are entertained. There are many cases where NCLT, NCLAT & the Hon’ble Supreme Court of India upheld maintainability based on fulfilling the conditions given under section 244.
However, the Indian judiciary is flexible, and discretionary power rests with the Judges who decide the maintainability given under section 244 , but in a few instances, while dealing with the cases, Courts follow a flexible approach in deciding the maintainability based on merit, following the principle of Audi Alteram Partem. to ensure the best interest of the company and the rule of law is being established. The core eligibility is holding 10% shares in a company, but Tribunals have surpassed the eligibility to ensure the justice provided to Minority in the company based on established law.
In the case of Cyrus Mistry v. Tata Sons Ltd, Cyrus was holding share capital of less than 10% as stated in the statute, but NCLAT upheld the maintainability to ensure justice served and based on prima facie showing that oppression and mismanagement are held in the top-notch pyramid of the company, removal of Cyrus from the post of Chairman. Following another case filed in NCLAT was Brookefield Tech Pvt.Ltd v. Shylaja Iyer & Ors. where Shylaja Iyer alleged that her 45% shares were reduced to 9% by virtue of Rights Issue, NCLT accepted the maintainability but the petitioner i.e. Brookefield Tech Pvt. Ltd. Questioned the maintainability of the petition filed under section 241, 242 &244. At NCLT, but NCLAT dismissed the appeal filed by Brookefield stating that the NCLT decided the virtue of maintainability considering all prima facie factors and ensuring the interest of minority members of the company. The case of Ashneer Grover, where NCLT is satisfied and listed the case against Resilient Innovations Pvt. Ltd filed under section 241 of the Companies Act, 2013, holding 8.3% shares which is below the norms of section 244 based on prima facie facts present in front of the court which showcase the oppression or mismanagement is being carried out in the company. The above cases showcase how the judiciary mechanism in our country works to ensure that the justice is served, the principle of natural justice is followed by the rule of law to ensure everyone is heard and the merit of the case is decided based on that.
Sections 241 and 242 of the Companies Act, 2013, aimed at protecting minority shareholders from oppression and mismanagement, face several challenges. One major issue is the stringent eligibility criteria outlined in Section 244, which may limit access to justice for minority shareholders. Additionally, the Tribunal’s discretionary power to waive eligibility criteria can lead to inconsistent decisions. The lengthy proceedings in these cases can also delay resolution, while ambiguity in defining “oppression” and “mismanagement” can result in conflicting interpretations. Furthermore, enforcing Tribunal orders, particularly against large corporations, poses significant difficulties. To address these challenges, it is essential to clarify the eligibility criteria and standardize the waiver process. Streamlining proceedings through efficient case management systems and enhancing Tribunal members’ expertise through training and capacity building are also crucial.
In the short term, clarifying eligibility criteria and standardizing the waiver process will help alleviate some of the challenges. Implementing efficient case management systems and providing ongoing training for Tribunal members will also improve the efficacy of these sections. In the long term, reforming the Tribunal structure to establish specialized Tribunals for company law cases and enhancing enforcement mechanisms will strengthen the protection afforded to minority shareholders. Promoting alternative dispute resolution mechanisms, such as mediation and arbitration, will also help reduce the burden on Tribunals. Collaborating with foreign regulatory bodies to address cross-border issues will further enhance the effectiveness of these provisions.
Potential amendments to Sections 241 and 242 include relaxing eligibility criteria for minority shareholders, introducing time limits for Tribunal decisions, enhancing penalties for non-compliance, and providing clearer guidelines for waiver of eligibility criteria. By addressing these challenges and implementing reforms, these provisions can effectively safeguard minority shareholders’ interests and promote a healthier corporate ecosystem.
In the nutshell, the rights of the minority shareholders under Indian corporate regime have been protected under CA, 2013 by the plethora of reliefs that can be granted by NCLT to redress the oppression and mismanagement being faced by the minority members. Even though the stake held by the minority members is not subservient to the majority members, however, the CA, 2013 has clearly regarded the duty to protect their interest from the oppressive conduct and mismanagement that is being carried on by the latter.
This article has been authored by Ali Hyder.
