Disputes between two sets of people coming from diverse backgrounds although pursuing a common objective are inevitable at times due to various reasons ranging from ego, misunderstanding, personal objectives taking priority over common objective, ill motives, wrong advice or believing in self-developed notions. The parties knocking the door of the judicial forums are often entangled into cumbersome and costly litigation expecting that result would be in their favour. However, over a period of time, the scenario becomes clear which may not be a favourable outcome, as expected. We are hereunder attempting a series of issues handled by experts in the shareholders disputes like Ab Initio for a better understanding of the reader as to whether it is worthwhile to fight the legal battle or not.
CASE STUDY-2
(Oppression Of A Minority By The Majority In The Management Of The Company’s Affairs)
*This Case Study is a part of series of Articles dealing with disputes between Shareholders/Founders/Partners/Family Members resulting into various allegations and litigation before relevant forums.
Factual Matrix
- In this matter, Party-1 was being oppressed by the acts of Party-2, who held majority stake in the company, for their ulterior motives and also disrupting the smooth functioning of the company, which was against the interests and welfare of the company, its members and general public.
- Since the inception, Party-1 had worked with complete dedication and hard work for the company to become a famous name and had been instrumental in the company’s growth.
- Party-1, who held 25% stake in the company, was continuously being oppressed by the acts of Party-2, who not only embezzled the funds of the company but also damaged the image of the company by illegally creating a franchise model and misusing the registered trademark without the approval of the Board of Directors of the company.
- Party-1 even offered to give up the shares held by him but Party-2 wanted to illegally take complete control of the management of the company by removing Party-1 from the company without paying him proper and due compensation.
Problem Statement
In case of such divergence between the minority and majority shareholder, how can the concerns of the minority shareholder be addressed effectively by giving due credence to the protection of his interests within the realms of the modern corporate governance regime?
Analysis
- The provisions relating to oppression and mismanagement in companies are an integral part of corporate governance. Section 241 to 246 of the Companies Act , 2013 encompasses provisions relating to ‘oppression’ and ‘mismanagement.’ Interestingly, the words ‘oppression’ and ‘mismanagement’ are not defined under the Companies Act. These terms are to be interpreted by the tribunal depending upon the facts of each case. Therefore, the general meaning of both the terms needs to be considered which can create a lot of ambiguity.
- Overtime, the Tribunal has interpreted the meaning of these terms to be such that if the affairs of a company are being conducted in a manner which is prejudicial to the public interest or the company’s interest or oppressive to a particular member or other members of the company, then it has the power to pass such an order as it deems fit. The numerical requirement under Section 244 of the Act to apply for an action in this regard is somewhat high and it can waived only in exceptional circumstances, and a mere lack of confidence between members will not amount to just and equitable grounds for winding up.
- In such situations, a deadlock like situation in the working of a company arises, as all the acts of Party-2 were contrary to the articles of the company and the articles failed to embody an effective dispute resolution mechanism. Even the winding up proceedings of a company cannot be initiated in such cases of oppression and mismanagement. To resolve such disputes, the aggrieved party is compelled to divulge into the tedious process of legal proceedings which takes years to yield any favorable outcome, not to mention the exorbitant legal costs that come with it.
Conclusion
Party-1, in this matter, was constrained to file a petition under Section 241 and 242 of the Companies Act, on account of various acts of oppression and mismanagement by Party-2 which were detrimental to the interests of the company. Considering the fact that the law in this regard is open-ended, the burden on Party-1 to prove the deliberate attempt on part of the opponents to oust him from the management and control of the company becomes even more strenuous. The matter is still on-going as Party-1 is striving hard to make out his case.
It can be concluded that the Articles of Association of a company, which are the charter documents of a company, must explicitly devise a mechanism for resolution of disputes in case of a deadlock like situation, as in the instant matter. This would spearhead the dispute resolution process in an effective and efficient manner.
*Disclaimer: This article is not a legal advice and is published to understand the nuances of resolution process in case of oppression of a minority by the majority in the management of the company’s affairs.
