[Devika Bansal and Naina Bora are third-year law students at Gujarat National Law University, Gandhinagar]
Spanning over a four-year period, the dispute in Tata Consultancy Services Limited v. Cyrus Investments Pvt. Ltd. recently came to an end with the Indian Supreme Court (“SC”) dismissing allegations of oppression and mismanagement. This SC judgement has highlighted how the oppression remedies provided under sections 241 and 242 of the Companies Act, 2013 (“CA, 2013”) leave much to be desired. Section 242 of CA, 2013 makes it mandatory for the petitioner to prove that it is “just and equitable” to wind up a company as a result of oppression and mismanagement. This is in stark contrast to other jurisdictions where dissolution of companies is considered to be an alternative remedy to oppression.
This post critiques this conditional provision under section 242 CA, 2013. Further, it compares such an oppression remedy with that of other similar jurisdictions and concludes by addressing the need for change.
The Oppression Remedy: The Law
According to CA, 2013, an oppressed member may file an application under section 241 to complain about the affairs of the company being prejudicial to such members, whereas section 242 allows the tribunal to pass an order on application under section 241 only if certain requirements are met.
Section 242 of the CA, 2013 places a heavier burden on the petitioning shareholders as they must prove two conditions. The first is that the affairs of the company are oppressive and prejudicial to any member or the interests of the company (the substantive limb). The second is that winding up the company would unfairly prejudice such member or members, but that otherwise it would be “just and equitable” to wind up the company (the conditional limb). This second precondition greatly narrows the scope of such an oppression remedy as it is tied to winding up of the company.
The Indian SC in Tata Consultancy Services held that Mistry’s removal from the position of a director was not prejudicial and oppressive to the interest of minorities. Further, it came to the conclusion that the present scenario did not meet the requisite standard to justify the winding up of the company. It also criticised the National Company Law Appellate Tribunal for not finding out whether such winding up would starve the charitable trusts which hold a majority of the shareholding in the company.
The SC relied on Loch v. John Blackwood, which held that there must be a lack of confidence in the conduct and management of the affairs of the company to justify winding it up. However, this lack of confidence must not arise only out of the dissatisfaction of being out voted from the affairs of the business or from the domestic policy of the company.
To navigate the “just and equitable” ground, the SC relied on the test laid down in Baird v. Lees, where it was held that a shareholder invests in a company based on certain conditions, including that the business it invests in shall be limited to a specific purpose and will be conducted in accordance with the principles of probity and efficiency. Further, it was stated that it will be “just and equitable” to wind up the company only when these conditions are deliberately and consistently violated.
The CA, 2013 maintains a significant burden by insisting upon the conditional limb regardless of the nature of the offending shareholder’s behaviour. Not only does this remedy present an excessively high standard for oppression and prejudice, but it is more often not in the minority shareholder’s best interests for the firm to be wound up. This is due to various reasons including the complete erosion of asset value that would result in response to this radical measure as there is a sale of company assets at break-up value without consideration for goodwill; the long-term company debts would become due immediately; the winding-up process is inordinately lengthy; and the liquidator’s expenses are costly.
A Comparative Study
India has the inordinate requirement for warranting a just and equitable winding up as an oppression remedy. However, in other comparable jurisdictions like the United Kingdom, Canada, Australia, Singapore and United States, the termination of the existence of a corporation has always been seen as a drastic measure. As a result, the courts have been hesitant to grant this remedy.
In the United Kingdom, from where India derives its conditional oppressional remedy, the conditionality of the remedy was observed to result in very few applications being successful under this remedy. Legislative change was brought about in 1980 after recognising the ineffectiveness of this statutory oppression remedy. In accordance with the recommendations of the Jenkins Report, the Companies Act 1980 considerably broadened the potential application of the remedy. It allowed the facts of the case to not require the justification for a winding up. This significant change reverberated its influence onto other Commonwealth jurisdictions as well.
While recognising the conventional relationship of equity with legal rights when considering the practice of winding up a company on “just and equitable grounds”, Lord Wilberforce observed that the conditional limb:
“enable(s) the court to subject the exercise of legal rights to equitable considerations; considerations, that is, of a personal character arising between one individual and another, which may make it unjust, or inequitable, to insist on legal rights, or to exercise them in a particular way.”
A Report in India by a committee headed by Justice Rajinder Sachar recognized that the conditional limb was difficult to establish and hence did not see any “sufficient reason” to retain such a condition. Yet this did not have any receptive impact on the current law.
In cases where the substantive limb has been established but the judicial dissolution of a company was deemed too harsh, courts in other countries began to order alternative forms of relief. This increased willingness to grant alternative reliefs has aided the development and implementation of the oppression ground. Since courts were not limited to ordering the severe solution of winding up if oppression was established (the conditional limb), they were more likely to find oppression.
In this regard, until recently, Singapore had the winding up of the company as the only remedy for circumstances where the “just and equitable” circumstances apply. However by providing an alternate relief such as a buy-out, there have been even fewer cases where companies are wound up. In Sim Yong Kim v. Evenstar Investment Pte Ltd., the Singapore Court of Appeal observed that even in winding-up cases on the just and equitable ground, the winding up order could be tailored to mirror a buy-out order. It further applied the practice of staying a winding-up order to allow the parties to work out an alternative arrangement.
In Lim Swee Khiang v. Borden Co. (Pte) Ltd, the Singapore Court of Appeal has observed that the winding up of the company shall only be considered when “no other remedy is available.” Despite noting the position in Re Kong Thai Sawmill (Miri) Sdn Bhd, [1978] 2 MLJ 227, that the option of winding up “ranks equally with others,” the Singapore Court of Appeal has time and again reiterated the position of approaching the winding up remedy as a last resort.
Concluding Remarks
While it is relatively easier to prove that the affairs of the company are prejudicial to certain members, proving it is “just and equitable” to wind up the company limits the scope of the remedy. The conditional nature of section 242 of CA, 2013 is a significant obstacle for shareholders seeking relief. Further, compared to other jurisdictions that have developed their laws over time, India’s oppression remedies have remained restrictive. The recent judgement in Tata Consultancy Services serves as a reminder that there is a need for the remedy to be broadened by the Parliament.
– Devika Bansal & Naina Bora
Very well written. Thank you