Coverage of Future Misconduct under Oppression and Mismanagement

[Priya Garg is an Assistant Lecturer, OP Jindal Global University, Guest Faculty at NALSAR and Founding Trustee at The Corporate House and Saloni Kumari is a student research fellow at The Corporate House and law student at National Law University, Delhi]

Recent corporate governance episodes have resulted in a greater invocation of the provisions under the Companies Act, 2013 (‘2013 Act’) relating to oppression and mismanagement (‘O&M’). For instance, recently, Valli Arunachalam, the eldest daughter of the former Murugappa group executive chairman M V Murugappan, and her family have moved the National Company Law Tribunal (‘NCLT’), Chennai alleging oppression and mismanagement. Likewise, in the recent past, the Supreme Court delivered its verdict in the well-known Tata-Mistry case (Tata Consultancy Services Ltd. v Cyrus Investments Pvt. Ltd).

Given that O&M provisions are gaining more traction, we wish to consider whether a mere apprehension of future misconduct is remediable under the O&M provisions. This issue was partly discussed in the Tata Mistry verdict and the Supreme Court held that oppression under section 241(1)(a) of the 2013 Act does not cover future acts. We argue that while this observation may be correct, it is incomplete in terms of the revised scheme of O&M post-2013.

To establish this argument, we would explain the unexplored inter-relationship between sections 241(1)(a) and 241(1)(b). But before that, a discussion regarding the origin and journey of the concepts of O&M is important.

Discussion Regarding Section 241

Overview of the provisions

Section 241(1) of the 2013 Act is the substantive provision that delineates the scope of O&M. Under section 241(1)(a), a member can approach the NCLT if the affairs of the company have been or are being conducted in a manner ‘oppressive to any member’ or ‘prejudicial to any member’, or ‘prejudicial to the public interest’, or ‘prejudicial to the company’s interest’. The wordings ‘have been conducted’ and ‘are being conducted’ imply that section 241(1)(a) covers only those oppressive or prejudicial acts that continue in the present even though they might have roots in the past, as discussed in the Power Finance Corporation Ltd. v. Shree Maheshwar Hydel Power Corporation Ltd. Clearly, section 241(1)(a) does not cover future misconducts, as the Supreme Court also reasoned in the Tata-Mistry verdict that ‘Section 241 is not intended to discipline a Management in respect of a possible future conduct’ (para 18.7).

The above observation might be true for section 241(1)(a), but it is not so for the entirety of section 241. This is because, under section 241(1)(b), a member can approach the NCLT when, due to a material change in the control or management of the company in the ‘present’, there is a likelihood that ‘future’ affairs of the company may be conducted in a manner ‘prejudicial to the company’s interests’ or ‘prejudicial to the members’. Therefore, before analysing O&M further, prima facie it can be seen that future misconducts are remediable under O&M.

Tracing the history: ‘oppression’ v. ‘mismanagement’

Both in the UK and India, the ‘oppression’ remedy emerged as a response to the shortcomings of the sole remedy of winding-up to the minority members. On the recommendation of the Cohen Report, section 210 was introduced in the UK’s Companies Act 1948, under which the courts could grant an ‘alternative remedy’ to winding-up in case of ‘oppression’ of members. A similar recommendation was proposed by the Bhabha Report in relation to Indian law. Consequently, section 153C was added to the Companies Act, 1913 to provide an alternative remedy to winding-up when: (a) the affairs of the company are being conducted in a manner ‘oppressive’ to members, and (b) facts otherwise justify winding-up (‘winding-up condition’). This was later adopted in section 397 of the Companies Act 1956 (‘1956 Act’).

Until this point, only conduct that was ‘oppressive to members’ was remediable. It was a high-threshold remedy as, in addition to proving the somewhat onerous threshold of ‘oppression’ (that the UK law had interpreted as ‘harsh, burdensome and wrongful’), the members also had to satisfy the winding-up condition. 

Hence, later, ‘mismanagement’ was introduced as a separate, lower-threshold remedy alongside ‘oppression’ in the 1956 Act. The Bhabha Report had noted that the scope of ‘oppression’ remedy ‘may be appropriately enlarged to cover not only the cases of oppression to a minority shareholder but also of gross mismanagement of the affairs of a company…’. Therefore, section 398 in the 1956 Act provided for a remedy even in those situations where ‘in present’, there is a change in control or management due to which ‘in future’ the affairs of the company are likely to be conducted in a manner ‘prejudicial to the company’s interests’ (‘future misconducts’). Interestingly, neither the winding-up condition nor the actual prejudicial act was required for mismanagement. Therefore, its rationale and wordings, both made it a lower-threshold remedy.

Changes Post-2013 and their Implications on the O&M Relationship

Later, on the recommendations of the Parliamentary Standing Committee on Finance (2009-10), sections 397 and 398 of the 1956 Act were recast as sections 241 and 242 in the 2013 Act, with some material changes.

Merger of O&M

The post-2013 changes have altered not just the contents, but also the spirit, of these provisions such that they can no longer be called two distinct remedies. A key difference between oppression and mismanagement was that in oppression, the wordings used, i.e., ‘oppressive to members’ suggested that the impugned acts had a direct oppressive effect on the members. However, in mismanagement, the wording was ‘prejudicial to the company’, suggesting that the direct effect was on the company’s interests, that may ultimately affect the members. 

Pertinently, the Bhabha Committee had recognised the need to have a separate remedy for ‘gross mismanagement’ in addition to ‘oppression’. Accordingly, O&M under the 1956 Act reflected this difference. But, with the 2013 Act, this difference has been eliminated. This is because, now, ‘prejudicial to members’ (new ground), and ‘prejudicial to company’s interest’, both have been included in both sub-sections (a) and (b) of section 241(1) even though they both refer to two different things. ‘Prejudicial to members’, like ‘oppressive to members’ is more about direct effects of the acts on members, but ‘prejudicial to company’s interests’ is about direct effect on the company. By juxtaposing them in both the provisions, O&M have been brought mutually closer. Furthermore, earlier, only ‘oppression’ contained the winding-up condition, but now, the winding-up condition exists even for mismanagement. This, further blurs the line between O&M.

Section 241(1)(a) and (b) now differently delineated

However, despite the merger of O&M, they still bear some differences. However, we argue that these differences no longer matter in relation to ‘oppression’ and ‘mismanagement’, conventionally so understood. Following the merger, even though the grounds of ‘prejudicial to members’ and ‘prejudicial to company’s interest’ are present in both the provisions, the difference is this: earlier, mismanagement provided remedies for both present and future acts of prejudice to the company’s interests (in sections 398(a) and 398(b) of the 1956 Act). However, now the first part of section 398, i.e., ‘present acts prejudicial to the company’s interests’, has been merged to section 241(1)(a) of the 2013 Act, while leaving future acts only in Section 241(1)(b). Therefore, section 241(1)(a) now deals only with present misconduct, while section 241(1)(b) deals with future misconducts. Resultantly, to that extent, the current law does provide a remedy for future misconducts as well under section 241(1) and not just for present misconducts. However, e must also simultaneously note that the grounds of ‘oppressive to members’ and ‘prejudicial to public interests’ are there only in section 241(1)(a) and not in section 241(1)(b). Therefore, for a remedy against these conducts, the oppressive or prejudicial act must occur at present and not in future in terms of section 241(1)(a)).

However, one may pay attention to two riders vis-à-vis the future misconducts: (a) the future act must be consequent to a ‘present’ change in control or management, and (b) the future act must satisfy the threshold of it being ‘prejudicial’ to members or the company. Only upon the satisfaction of these two conditions is a future misconduct remediable. Here, another issue arises: is this position of law adequate to remedy all possible future misconducts that should be remedied at present, i.e., if the range of acts done in the present covered by section 241(1)(a) is similar to the range of acts as to the future covered by section 241(1)(b)? 

Adequacy of the Present Law to Remedy Future Misconducts

We argue that section 241(1)(b) in its current form is adequate to address those future misconducts that are parallelly covered by section 241(1)(a) as to the present acts that comprise of O&M. Under section 241(1)(b), we need a material change in control or management of the company. This change can take place whether by changing the board, manager, ownership of shares or membership, or in any manner whatsoever. The phrase ‘in any manner whatsoever’ reflects that the intention is to cover even those changes in control or management that do not take place through a change in board or ownership of shares, but through any other means. For instance, if in a company, the behaviour, attributes of the management change without a formal change in the managerial personnel (example: change in policy orientation of management due to change in their personal and familial circumstances in case of family businesses), this may qualify as the change under section 241(1)(b). Therefore, a wide interpretation of ‘change in control/management’ is warranted, thereby expanding the scope of the range of situations in which the future misconduct is included under this sub-clause. 

Furthermore, within section 241(1)(b), the term ‘control’ is also to be interpreted widely according to section 2(27) of the 2013 Act, which visualizes the exercise of control through myriad means. Likewise, the Supreme Court has given a wide interpretation to the word ‘control’ and has said that ‘control’ can be de jure or de facto. De jure control includes, among others, the right to appoint a majority of directors on the board. But de facto control extends to the power to influence the management (i.e., day-to-day decisions) or policy decisions (i.e., long-term decisions) in any manner whatsoever. The above interpretation already expands the scope of section 241(1)(b) to cover future misconduct to a large extent. 

However, simultaneously, it must be remembered that the bracket of remediable future misconducts is restricted only to those that can be linked to some material change at present. But, since the bracket of ‘material change at present’ itself is quite wide, that would cover much of those future misconducts whose apprehension at present is real. Too remote and artificial future misconducts would not thus be covered under section 241(1)(b). Therefore, it adequately covers those future misconducts that the court should intervene into due to the wide ambit of section 241(1)(b).

Conclusion

Based on the aforesaid discussion, we arrive at the inference that sections 241(1)(a) and (b) do not merely represent oppression and mismanagement respectively of the pre-2013 Act and that there is a relationship between the scope and ambit of clauses (a) and (b) which has not been discussed in as much detail as yet. Our contribution herein is to explore the possible relationship in this regard. Hopefully, this analysis would be incorporated as more cases come up and are decided in relation to section 241. 

Priya Garg & Saloni Kumari

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