Power of Winding Up at the Suit of Minority Shareholders

In India, the protection of interests of minority shareholders has held a place of central importance. Company matters are governed by democratic norms. This is a well-established principle of law. As a corporate governance rule, it was established in Foss v. Harbottle¹. In a majority of the cases, shareholder resolutions are required to be passed by a simple majority or in case of decisions important to the future of a company or certain other specified cases, a special majority of three-fourth, following which the decision is binding on all members. When the interests of the majority and minority are aligned, this raises no issues. However, in case of a standoff, a minority shareholder is entitled to certain remedies. However, running a company by consensus or majority agreement cannot mean completely sidelining the minority shareholders of the company. In order to avoid their voice being suppressed, certain protections are given to minority shareholders. The suppression of the dissent of minority shareholders is legally termed “oppression” and more often than not they relate to allegations of the company’s “mismanagement”. Remedies for “oppression and mismanagement” are given under the Companies Act.

Under the Companies Act, 1956² (1956 Act), under Section 397(2)³ the Tribunal had the power to make “such order as it thinks fit” if the Tribunal was of the opinion that—

(a) the company’s affairs were being conducted in a manner “prejudicial to public interest or in a manner oppressive to any member or members”; and

(b) winding up the company would unfairly prejudice the 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”.

This essentially means that the section was meant to be an alternative to winding up, although winding up would be justified. Section 398⁴ under the 1956 Act mandated that the Tribunal could pass an order with an objective of “bringing to an end or preventing the matters complained of or apprehended, make such order as it thinks fit”.

The equivalent sections in the Companies Act, 2013 (2013 Act)⁵ are Sections 241⁶ and 242⁷. Section 241(a) read with Sections 242(1)(a) and (b) give the understanding that the National Company Law Tribunal (NCLT) can only grant relief for oppression and mismanagement if it is convinced that affairs of the company have been or are being conducted in a manner—

(a) prejudicial to any member or members;

(b) prejudicial to public interest;

(c) prejudicial to the interests of the company; and

(d) oppressive to any member or members.

And that although winding up would be justified, such winding up would “unfairly prejudice such member or members” based on “just and equitable clause”. Therefore, here also, the aim seems to be an attempt to not wind up though winding up may be justified. Though the definitions of oppression and mismanagement are not given separately, their meaning can be inferred from the requirements laid down in the section.

Therefore, it becomes clear that the discretion given to the courts is very high. Though there have been attempts to put a framework in place, the ultimate decision of whether conduct is an example of oppression and/or mismanagement depends on the facts of the case. Given that, the courts will necessarily have room for decision-making.

In S.P. Jain v. Kalinga Tubes Ltd.⁸, Justice Wanchoo laid down the framework for determining oppression while quoting the Scottish case of Elder v. Elder and Watson Ltd.⁹ based on pari materia legislative wording as follows—

(a) Must be related to manner of conduct of affairs of the company and the conduct must be to oppress the minority.

(b) Must be against conduct of majority.

(c) Evaluation of unfair prejudice to minority members while assessing “just and equitable” rules.

(d) Treatment of company and its affairs “‘as if they were their own property’ to the prejudice of the minority shareholders”.

This is a landmark case and examined the issue of oppression and mismanagement.

In Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holdings Ltd.¹⁰, the Supreme Court held that an illegal act “in and of itself” will not be oppressive unless accompanied by a “harsh, burdensome, wrongful act” or “mala fide intention”. But a number of illegal acts against a person would justify the conclusion that they have the same objective of committing oppression. Since there is no definition of oppression under the Companies Act, the Court has come to the conclusion that it must be able to come to the conclusion that the company affairs have been going on in a manner that is oppressive to minority shareholders.

The following points have emerged over time on the point of oppression.

(a) The acts of the majority have to be “continuous” in a manner as “oppressive” to the minority and such conduct must be “burdensome, harsh and wrongful”.¹¹

One deviation was noted in Deepak C. Shriram v. General Sales Ltd.¹² In this case, it was held that if the oppressive act has an effect that is permanent and “continuously harsh or oppressive to any member”, even a single or isolated act can constitute an act of oppression. In the given case, respondents had issued shares with an intention to gain absolute control of the company in a fraudulent manner. In Sindhri Iron Foundary (P) Ltd., In re¹³ the Court investigated what would constitute a continuous act of oppression. The Court noted that:

“33. … if the Court is satisfied that the conduct arising from a single wrongful act is such, that its effect will be a continuous course of oppression and there is no prospect of remedying the situation by the voluntary act of the party responsible for the wrongful act, this Court is entitled to interfere by appropriate order under Section 397 of the Act.

(b) The “oppression” as under the Act is only pertaining to the oppression of members of the company and not of a director or employee of the company.”

In V.M. Rao v. Rajeswari Ramakrishnan¹⁴, the Madras High Court laid down a 6-point test that identified a framework to determine if an act was oppressive, which is:

(1) The alleged oppressive conduct must have an effect on the person in their capacity as members of the company.

(2) “Continuous” acts must have constituted the oppression.

(3) The event must be considered as part of a “continuous story”.

(4) “Just and equitable” grounds for winding up the company must be shown as preliminary to the Section 397 application.

(5) Conduct has to be “burdensome, harsh and wrongful”.

(6) At the very least, there must be “an element of lack of probity or fair dealing to a member in matters of his proprietary right as shareholder and not any harsh or unfair treatment in any other capacity”.

In Suresh Kumar Sanghi v. Supreme Motors Ltd.¹⁵, the Court held that a Section 397 application could only be filed in case of oppression against the minority shareholders by the majority shareholders. However, there is nothing in the section to back this. In fact, Baltic Real Estate Ltd., In re¹⁶ the UK Court dealt with the question of whether a majority shareholder can complain of unfair prejudice. It was held that when the Board of Directors and minority shareholders of the company join forces, the majority can file an application for oppression. In the Indian context, this would be the equivalent of filing a Section 397 application, with court having powers to make appropriate orders under the Companies Act, 1956. Under the Companies Act, 2013, Sections 241 and 242 read together give the understanding that the NCLT can only grant relief for oppression and mismanagement if it is convinced that affairs of the company have been or are being conducted in a manner as listed and that although winding up would be justified, such winding up would unfairly prejudice such member or members.

The term “mismanagement” has not been defined separately in the Act but comes from inference from the section and has developed judicially. In Subhash Chand Agarwal v. Associated Limestone Ltd.¹⁷, the Court held that under a Section 397 application, if winding up is not justified, allegations of oppression cannot be considered but those of mismanagement can still be considered. This shows that the two are severable and separable and can potentially be considered independent of each other. In All India Shaw Wallace Employees Federation v. Shaw Wallace and Co. Ltd.¹⁸, the Court held that if the conduct of the directors or company had “brought affairs of company to a stage wherein its existence was under threat due to financial difficulties”, it would be “prejudicial to interests of the company and its members, satisfying parameters of Sections 408¹⁹ and 398”. In Union of India v. Pentamedia Graphics Ltd.²⁰, the Court held that a “gross violation of statutory provisions and irregularities in relation to sale of assets is mismanagement”. In Five Minute Car Wash Service Ltd., In re²¹, the Court emphasised that mere allegations would mean nothing. In the case, the allegations levelled against the Managing Director (MD) were that he was “unwise, inefficient and careless in performance of his duties”. However, there was nothing to back these claims and so did not provide substance to the allegations of mismanagement.

The case of Tata Consultancy Services Ltd. v. Cyrus Investments (P) Ltd.²² has been a landmark case on the question of oppression and mismanagement in corporate India. The Court examined the legislative shift of the relevant provisions in detail. It found that “mere removal” of a Director or Executive Chairman cannot be grounds for winding up the company. It, then, logically follows that since the grounds did not justify winding up of the company, there lay no remedy for oppression and mismanagement. Further, the remedy could not be granted even if removal was not as per law, the requirement was to show that such removal was “oppressive or prejudicial to the shareholders”. Moreover, Mistry had not been representing shareholders and so his dismissal could not be “an act that is prejudicial or oppressive to minority shareholders”. This case also consolidated and reaffirmed the “just and equitable” test. Applying the established tests, the case at hand did “not fall anywhere near the just and equitable standard, for the simple reason that it was the very same complaining minority whose representative was not merely given a berth on the Board but was also projected as the successor to the office of Chairman”. Further, on the question of alternate remedy, the Court held that it would not adjudicate on the matter and leave it as an internal matter between the appellant and respondent in accordance with Article 75 of the Articles of Association of the company, which provided for an exit option, including by way of fair compensation.

In Anupam Mittal v. People Interactive (India) (P) Ltd.²³, the Singapore Court of Appeal (SGCA) passed an anti-suit injunction against Anupam Mittal restraining him from continuing oppression and mismanagement proceedings before the NCLT against Westbridge Investment Holdings. Oppression and mismanagement is not an arbitrable dispute in India. Subsequently, Bombay High Court passed an anti-enforcement injunction restraining the enforcement of the anti-suit injunction. Then, NCLT passed an anti-arbitration injunction, restraining ongoing proceedings in the SGCA. This was given on the grounds that Mittal would have no remedy if the Arbitral Tribunal gave a decision on the non-arbitrable disputes. Thus, the remedy for oppression and mismanagement was held to be an essential right, the possibility of grant of which must be protected. The disputes arose from disagreements pertaining to the shareholders’ agreement and Westbridge’s desire to exit its investment in the company. Whether the disagreements are merely contractual disputes or oppression or mismanagement is something that is yet to be seen.

A recent case after the case of Cyrus Mistry has been Shankar Sundaram v. Amalgamations Ltd.²⁴ In this case, the Tribunal held that there were disagreements and differences but nothing to suggest a “deadlock situation”. Due to this, there was no case of oppression or mismanagement as under Sections 241 and 242. Further, the appellant could not prove compelling enough reasons for the Tribunal to direct the purchase of shares of the appellant or for any buyout. Further, in spite of the wide powers available, the Tribunal noted that the “overall objective of these sections must be kept strictly in view and the marginal note of the said section of this Act shows that the purpose of the order of the Court in this section is to give relief ‘in case of oppression’ ”. Since that could not be proved, the Tribunal must avoid overreach. It is further established that the company is solvent and nothing on record could substantiate the claim of “complete lack of confidence against the majority shareholders”. A low dividend is merely dissatisfaction and does not amount to oppression. Therefore, it concluded “that ‘the just and equitable proposition’ cannot be made applicable in this case, where there is no irretrievable breakdown in trust and confidence, leading to a ‘functional deadlock’ ”. The Tribunal concluded that that there were no grounds for oppression or mismanagement.

Conclusion

Winding up a company is a drastic step requiring careful consideration, and this is accounted for in the Companies Act. There lies a high degree of responsibility in deciding to wind up a company. In making this decision, there is an important task of balancing the rights of the shareholders, including and even especially the minority shareholders, with the benefits arising out of having a company. A company by virtue of its scale of operations generates employment and contributes to the growth of an economy. In this context, the New Jersey law is helpful to the extent that it provides for winding up as a remedy in case of corporations where the shareholders are not more than 25 in number i.e. “closely held corporations”. At the same time, this provides a very limited form of the remedy, available to select a few.

At the same time, it must be acknowledged that in a setup where majority shareholders’ decisions prevail, by virtue of corporate democracy, it is important to protect minority shareholders’ rights. In India, the threshold for seeking remedies for oppression is too high. The burden is to prove that it would be justified to wind up the company but due to equitable considerations, it is not being wound up and some other remedy will be granted as the court finds fit. The problem with this is the thin likelihood and few number of cases falling in this category. There may very well be a situation of oppression where winding up the company is not justified but some remedy ought to be granted.

In Cyrus Mistry²⁵ itself, keeping aside the contentions by Mr Mistry and evaluating only the burden of proof reveals an interesting observation. Tata Consultancy Services (TCS) was founded in 1968. It has some major achievements to its credit, some of which include delivering an electronic repository for a Swiss company as long ago as in 1975 and automation of the Johannesburg Stock Exchange. It was also among the first to create and develop software tools for automated conversion in light of the Y2K bug and the launch of euro as a unified currency. Soon after getting publicly listed in 2004, it was the first Indian IT services company to enter and disrupt the bioinformatics market. In 2020, TCS became the world’s most valuable IT company at a market capitalisation of about $145 billion, currently employing over 6 lakh people with more than 1.25 lakh employees having stayed for over 10 years. The point is that under any circumstances, it will be extremely difficult to justify the winding up of TCS. This is compounded by the fact that the Tata Group has built its brand on the value of trust and having multiple companies from the Tata Group filing suits against an individual — which is what happened at the Supreme Court (SC) level — did not help Mr Mistry with the optics.

In my opinion, the standard of proving oppression should be brought down and must be much lower. Oppression in common parlance means “a situation in which people are governed in an unfair and cruel way and prevented from having opportunities and freedom”.²⁶ While this definition cannot be adopted as is because of business and financial constraints and considerations, it must be closer to this.

By virtue of the wording of the statute, the Court can order the winding up of a company if it deems such an action fit. However, it is also a reality that a great deal of capital and resources go into setting up and running a business. The positive effect of running a business is also undeniable. Yet, these benefits should not, in good conscience, come at a detrimental cost and adverse effect to minorities. Further, the Tribunal now has the power to waive off minimum requirement by percentage to file a petition for oppression and mismanagement. Moreover, the courts have wide powers of discretion because each case has unique facts, and present distinct opportunities of application of the law. The facts of each case separately will determine what constitutes oppression and what does not.

In the interest of protecting all, including minority shareholders, the law must remain committed to providing sufficient and appropriate protections. One way to do so may be by way of amendment, to lower the standard of burden of proof from proving that it would be otherwise just to wind up the company. Instead, the standard could possibly be closer to the dictionary meaning of the word — to be in a situation where the minority is bulldozed, reasoned orders are not given, it becomes difficult or impossible for the minority to present their honest and genuine opinion and so on. While the ultimate power lies with the courts to decide on what constitutes oppression, having a legislative framework will be helpful. This will also result in the same powers being available to the court i.e. pass an order as it deems fit to remedy the wrong but the burden of proving the oppression will be lower. This will also be helpful for business because there will be a certain degree of certainty.

Overall, oppression and mismanagement is a serious issue in India. We must take lessons from comparable jurisdictions in order to stay competitive. Introducing certain changes will go a long way in establishing and strengthening India’s credibility as a business hub, more so in the post-pandemic era to develop as a manufacturing powerhouse.