Paper on Shareholder Remedies: Oppression, Prejudice and Mismanagement

Under company law, shareholders (particularly the minority) can resort to various remedies prescribed thereunder, such as oppression, prejudice and mismanagement. While Indian company law has incorporated versions of shareholder remedies since the mid-20th century, the design of the remedies as they currently operate finds place in sections 241 and 242 of the Companies Act, 2013 (the “2013 Act”).

No sooner than these provisions took effect on 1 June 2016, they faced a litmus test in one of India’s fiercest corporate battles in recent times. On 24 October 2016, the board of Tata Sons Limited, the holding company of the Tata group of companies, ousted its executive chairman, Mr. Cyrus Mistry, from the position. The Shapoorji Pallonji group, of which Mr. Mistry is a part, is a minority shareholder in Tata Sons. The group promptly initiated action under sections 241 and 242 of the 2013 Act against Tata Sons and its controlling shareholders, being two Tata trusts. In Cyrus Investments Pvt. Ltd. v. Tata Sons Ltd. (12 July 2018), the Mumbai Bench of the National Company Law Tribunal (“NCLT”) issued a 368-page ruling declining to grant any relief to the minority shareholders. However, the National Company Law Appellate Tribunal (“NCLAT”) on 18 December 2019 overturned the NCLT’s ruling and granted several forms of relief to the minority shareholders. Aggrieved by this, Tata Sons preferred an appeal to the Supreme Court, which stayed the operation of the NCLAT ruling. The matter is presently pending before the Supreme Court.

The Tata Sons dispute is noteworthy, as it is the first significant dispute under sections 241 and 242 of the 2013 Act to receive attention of the higher judiciary. In testing the mettle of these provisions, it presents an opportunity for the Supreme Court to elucidate the scope of the oppression, prejudice and mismanagement provisions in India, especially under the 2013 Act.

In this context, sections 241 and 242 of the 2013 Act lead us to their analysis through the lens of two principal questions, as the NCLAT outlined in Tata Sons (in paragraph 105):

(i)      Whether 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

(ii)       If that be so, whether 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.

For ease of reference, this post refers to the first paragraph above as the “substantive limb” and the second as the “conditional limb”. In order for a shareholder to obtain remedies under the previously mentioned statutory provisions, it must demonstrate the satisfaction of both the limbs cumulatively. If so, the petitioning shareholder is entitled to relief from the court “with a view to bringing to an end the matters complained of”.

In this background, the goal of my new working paper “Unpacking the Scope of Oppression, Prejudice and Mismanagement under Company Law in India” is to explore the shareholder remedies of oppression, prejudice and mismanagement under the 2013 Act. While this legislation substantially tracks its predecessor in the form of sections 397 and 398 of the Companies Act, 1956 (the “1956 Act”), it has also deviated, and that too in material fashion, on some counts. The 2013 Act has the effect of both expanding as well as contracting the shareholder remedies. The upshot of my paper is that section 241 of the 2013 Act considerably expands the scope of the substantive limb, thereby ensnaring within it conduct that was previously excluded. By introducing the concept of “prejudice” caused to a member as objectionable conduct apart from “oppressive” behaviour, Parliament has arguably lowered the standard of conduct that a petitioning shareholder must satisfy before it can revoke the remedy. However, by remaining steadfast in its insistence that petitioners must satisfy the conditional limb no matter what the nature of the conduct of the offending shareholders, the 2013 Act retains a considerable burden on petitioning shareholders. Moreover, while conduct involving mismanagement was not subject to the conditional limb under the 1956 Act, the 2013 Act alters the position and introduces the cumulative nature of the two limbs even for mismanagement, thereby narrowing the scope of the remedies. The 2013 Act, therefore, offers a mixed bag.

Part II of the paper focuses on the substantive limb enshrined in section 241 of the 2013 Act, and Part III on the conditional limb enshrined in section 242(1). Both Parts track evolution of the law, how the Indian courts have interpreted the two limbs, including with reference to English law, and identify areas that call for courts to fill the interpretative gaps. Part IV analyses the remedies that adjudicatory bodies can award in such cases, whether or not the petitioning shareholder can discharge the burden of establishing the substantive and conditional limbs. Part V concludes. While this post as well as the introduction to the paper are set in the background of the Tata Sons rulings merely to provide a context, they confine themselves to an analysis of the legal issues. Given that the matter is presently sub judice,it is clearly the intention to avoid any application to the specific dispute at hand therein.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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