Oppression and mismanagement (ss.241–242): when a minority shareholder can go to the NCLT

A co-founder who holds fifteen per cent watches the majority divert contracts to a family firm, stop declaring dividends, and remove him from the board. Sections 241 and 242 of the Companies Act 2013 are the remedy the statute provides for this kind of position: a member's application to the Tribunal (the NCLT, the National Company Law Tribunal) complaining that the company's affairs are being run oppressively or prejudicially, with powers ranging from regulating future conduct to removing directors and ordering the purchase of a member's shares.

Legal basis: Companies Act 2013, ss.241–242 (standing s.244; class action s.245) — Effective: ongoing.

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The two complaints s.241 recognises

Section 241(1) gives "any member" who complains about either of two things the route to the Tribunal, provided that member has a right to apply under section 244. The first complaint, in clause (a), is that "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". Note the three distinct subjects the clause protects: the public interest, the complaining member (or other members), and the company itself. Conduct that enriches the majority while starving the company can fall under the third limb even when no single member is singled out.

The second complaint, in clause (b), looks forward. It covers 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", that "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", where "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". A change of board control that has not yet caused any loss can therefore be raised here: the member must show the change makes prejudicial conduct likely, not that the damage has already been done. Changes brought about by or in the interests of creditors (including debenture holders) or a class of shareholders are carved out of the clause by its own words.

The Central Government has its own route. Under s.241(2), "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". The text of s.241(2) does not make that application depend on a shareholding.

Standing: the s.244 arithmetic every petitioner must clear first

Section 244(1) sets numerical gates. For a company with share capital, the applicants must be "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", subject to the condition that the applicant or applicants "has or have paid all calls and other sums due on his or their shares". For a company without share capital, the requirement is "not less than one-fifth of the total number of its members".

Two features soften the arithmetic. The proviso lets "the Tribunal, on an application made to it in this behalf, waive all or any of the requirements specified in clause (a) or clause (b) so as to enable the members to apply under section 241", so a member who falls short of the numbers can ask for a waiver. And the Explanation counts joint holders "only as one member". Section 244(2) adds a practical mechanism: where members are entitled to apply, "any one or more of them having obtained the consent in writing of the rest, may make the application on behalf and for the benefit of all of them". One applicant can front the case with written consents behind it.

What the Tribunal can order under s.242

Before it makes an order, the Tribunal must be of the opinion under s.242(1), first, 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 second, "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". Both limbs are joined by "and". If it is of that opinion, the Tribunal "may, with a view to bringing to an end the matters complained of, make such order as it thinks fit".

Section 242(2) then lists, "without prejudice to the generality" of that power, what an order "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", with (c) the consequent reduction of share capital where the company itself buys;
• (d) restrictions on the transfer or allotment of the shares of the company;
• (e) the termination, setting aside or modification of any agreement 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";
• (f) the same for agreements with any other person, but "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 a transfer, delivery of goods, payment, execution or other act relating to property made within three months before the date of the application which would, if made 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;
• (i) "recovery of undue gains made by any managing director, manager or director during the period of his appointment as such", including 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 a managing director or manager may be appointed after a removal order under clause (h);
• (k) appointment of persons as directors who may be required to report to the Tribunal on matters it directs;
• (l) costs; and
• (m) "any other matter for which, in the opinion of the Tribunal, it is just and equitable that provision should be made".

Further sub-sections shape what follows. Under s.242(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". Under s.242(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", which gives protection while the application is heard.

Three further points are easy to miss. Section 242(4A), inserted by Act 22 of 2019 (w.e.f. 15-8-2019), applies where the Central Government has referred a case under s.241(3): at the conclusion of that hearing the Tribunal must record whether or not the respondent is a fit and proper person to hold the office of director or any other office connected with the conduct and management of any company. Section 242(5) provides that where an order alters the memorandum or articles, the company has no power, except as the order permits, to make "without the leave of the Tribunal, any alteration whatsoever which is inconsistent with the order". And s.242(8) provides that a company that contravenes s.242(5) is punishable with fine of not less than one lakh rupees but which may extend to twenty-five lakh rupees, with a fine of not less than twenty-five thousand rupees but up to one lakh rupees for every officer in default.

The class-action neighbour: s.245

Section 245 opens a separate route for groups. Such number of members, depositors or any class of them "as are indicated" in the section may, if they are of the opinion that the management or conduct of the company's affairs is prejudicial to the interests of the company or its members or depositors, apply to the Tribunal "on behalf of the members or depositors". The orders sought can begin with restraining the company "from committing an act which is ultra vires the articles or memorandum of the company" (that is, beyond the powers the company's charter documents give it) or "from committing breach of any provision of the company's memorandum or articles", and extend to damages or compensation against the company, its directors, an auditor or an advisor. The numerical thresholds for a class action sit in s.245(3), and for a company with share capital they are expressed partly as percentages "as may be prescribed". Anyone weighing this route should read s.245 and the prescribed percentages together, rather than assume the s.244 figures apply. An oppression application is made by a member about how the company's affairs are conducted; a class action is made on behalf of members or depositors and can reach auditors and advisors as well.

A worked scenario: the frozen-out co-founder

Two founders hold 60:40. The majority stops board meetings, routes the company's new contracts through a proprietorship, and proposes a rights issue priced to dilute the minority. The 40% holder holds "not less than one-tenth of the issued share capital" and, if her calls are paid, has the s.244(1)(a) right to apply alone. Her s.241(1)(a) complaint covers the contract diversion (prejudicial to the company and oppressive to her); a change in board control may support a s.241(1)(b) complaint. She asks for an interim order under s.242(4) to regulate the company's affairs while the case runs, and in the final order she can ask for relief of the kinds listed in s.242(2): regulation of future conduct, setting aside of the diverted-contract arrangements under clauses (e) or (f), recovery of undue gains under clause (i), and, if the relationship has broken down, purchase of her shares under clause (b). Whether any of this is granted is for the Tribunal, which must first be of the opinion described in s.242(1). If an order is made, the company must file a certified copy with the Registrar within thirty days under s.242(3).

How the application file should read

A s.241 application can be organised in five parts: the s.244 standing position (member count or shareholding percentage, calls paid, written consents under s.244(2), or a request for waiver under the proviso); the clause (a) conduct narrative with dates and documents; the clause (b) material-change account if control has shifted; the s.242(1) test, which asks why winding up would unfairly prejudice the applicant although the facts would otherwise justify a just-and-equitable winding-up order; and the specific s.242(2) reliefs sought, with any interim relief under s.242(4).

What to do now

• Next step: work out whether you have a right to apply. For a company with share capital, count against the s.244(1)(a) tests (one hundred members, one-tenth of the members, or one-tenth of the issued share capital), confirm all calls and sums due on your shares are paid, and if you fall short consider the waiver proviso. Source: s.244(1) and proviso, Companies Act 2013.
• Why it matters: s.241(1) lets a member apply "provided such member has a right to apply under section 244".
• Deadline on the text: sections 241 and 244 as read state no filing period for the member's application. The clock the Act does set is on the company: a certified copy of any s.242(1) order is to be filed with the Registrar within thirty days of the order.
• Consequence of non-compliance: a company that makes an alteration to its memorandum or articles inconsistent with a Tribunal order without leave is punishable under s.242(8) with fine of one lakh to twenty-five lakh rupees, and each officer in default with fine of twenty-five thousand to one lakh rupees.

Have a CA review your facts before you act or file.

Frequently asked questions

Can a single small shareholder file an oppression application?
Only if that shareholder meets the s.244(1)(a) numbers (for example, one-tenth of the issued share capital, with calls and sums due paid) or the Tribunal waives the requirements. The proviso lets the Tribunal "waive all or any of the requirements ... so as to enable the members to apply under section 241". A member who holds less than the threshold would apply for waiver.

Does the applicant need fully paid-up shares?
The capital route is subject to the condition that the applicant or applicants "has or have paid all calls and other sums due on his or their shares" (s.244(1)(a)).

Can joint shareholders each count toward the 100-member threshold?
No. The s.244 Explanation counts shares held by two or more persons jointly "only as one member".

Can one member file for a group?
Yes. Under s.244(2), "any one or more of them having obtained the consent in writing of the rest, may make the application on behalf and for the benefit of all of them".

Can the Tribunal protect the applicant before the final order?
Section 242(4) lets the Tribunal "make any interim order which it thinks fit for regulating the conduct of the company's affairs" on the application of any party.

What must the company do after a Tribunal order?
A certified copy of the order under s.242(1) "shall be filed by the company with the Registrar within thirty days of the order of the Tribunal" (s.242(3)).

Can the government apply without holding shares?
Under s.241(2), the Central Government may apply to the Tribunal if it is of the opinion that the affairs of the company are being conducted in a manner prejudicial to public interest.

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See Also

• Allotting Shares After a Public Offer? Minimum Subscription, Listing Permission and Refunds Under Sections 39–40
• Debentures Under Section 71: Conversion, DRR, Trustees and Holder Remedies
• Buying back your own shares (s.68): the 25% ceiling, the board-vs-members route, and the solvency paper trail