Legal Capsule by Economic Laws Practice

  

Minority protection against Oppression and Mismanagement
Authors: Amit Manubarwala, Ananthram Ganesh, Karan Narvekar

INTRODUCTION

Chapter XVI of the Companies Act, 2013 (Act) provides for minority protection against oppression and mismanagement.  Ordinarily, the board of directors of a company is empowered to take decisions binding the company, and outsiders including courts are not permitted to interfere in its affairs. However, when the management of a company purports to conduct its business in a manner prejudicial to the interests of the company, its shareholders, or a minority group of shareholders, its shareholders are empowered under Chapter XVI to approach the court to redress the wrong.24

APPLICATION FOR RELIEF AGAINST OPPRESSION AND MISMANAGEMENT

Section 241(1) of the Act provides that shareholders of a company can apply to the National Company Law Tribunal (NCLT) for relief against oppression and mismanagement if:

• Its affairs are carried out in a manner prejudicial or oppressive to certain members of the company, to the company’s interests, or to public interest; or
• There occurs a change of management, control, ownership of shares, membership, or other change, that is likely to result in the affairs of the company being conducted in a manner prejudicial to its own interests, or the interests of its members or a certain class thereof (unless such change is brought about by its creditors, debenture holders, or a class of its shareholders, or in their interest).

ELIGIBILITY TO APPLY FOR RELIEF AGAINST OPPRESSION AND MISMANAGEMENT
Section 244 of the Act provides that an application for relief under Section 241 should be made by at least 100 members, or one tenth of the members of the company, whichever is less, or members holding at least one tenth of the total issued share capital of the company.  Applicants should have paid all calls on capital, and other sums due in respect of the shares held by them. 

The NCLT, however, has been empowered to waive the above eligibility requirements at its discretion.  As a quasi-judicial body, a waiver by the NCLT is required to be made on merits and with a reasoned order, rather than capriciously or arbitrarily. 

The corresponding provision in the Companies Act, 1956 was Section 399, which also contained similar eligibility requirements. The power to waive the requirements, was vested with the Central Government, and was thus an administrative power rather than an investigatory/judicial power.

ITC v. LEELA AND OTHERS INTERVENTION

ITC Limited (ITC) filed a petition on April 23, 2019, against Hotel Leela Venture Limited (Leela) with the National Company Law Tribunal (NCLT), Mumbai, alleging “oppression and mismanagement”.  Since ITC holds only 8.27% of the share capital of Leela, it has also applied for an exemption of the requirements under Section 244.  

In the petition, ITC has sought injunctions restraining Leela, its promoters, directors and JM Financial ARC (JM) from the sale and transfer of the assets of four hotels and one property to BSREP III India Ballet Pte. Ltd. (Brookfield). ITC has alleged that the transaction is skewed in favor of the promoters and JM and opposed to the interests of minority shareholders, including itself.

ITC further alleges that the proposed transaction would have the effect of transferring a substantial part of Leela's assets in favor of Brookfield, resulting in diversion of Leela’s revenue stream to Brookfield and leaving Leela with no real business prospects, while it retained large liabilities, which it would be unable to service.  According to ITC, the interests of Leela, and its minority shareholders would be prejudiced by the transaction.  The decision of the NCLT is yet awaited.

Given the route that ITC has taken, it appears that the company currently does not enjoy any contractual protection of its rights as a shareholder of Leela. Accordingly, if on the basis of the facts, the NCLT does not grant ITC a waiver, ITC may either choose to

• Appeal against the order of the NCLT, or 
• Form a cohort with other shareholders of Leela to collectively meet the 10% requirement and make a fresh application, or 
• Increase its shareholding in Leela to 10% in order to meet the requirement under Section 244 of the Act, and thereafter make a fresh application 

- however, in the given circumstances, it seems unlikely that ITC will choose to invest more of its funds in the Leela.

The NCLT ruling is expected to be synchronous with recent legislative thrust on transparency and objectivity in corporate governance.  The ruling on ITC’s waiver application will also serve as important guidance for measures to be put in place, and steps to be taken by corporate India to avoid judicial intervention in its management and affairs.