Regulation of Corporate Mismanagement - Protection Against Oppression - Protection Against Mismanagement Shareholders Derivative Action - Investigation Power - Role

of Central Government

Corporate Class Lectures 2014

The claimants, Foss and Turton, were shareholders in a company 'The Victoria Park Company' which was formed to buy land for use as pleasure park. The defendants were the five company directors (Thomas Harbottle, Joseph Adshead, Henry Byrom, John Westhead, Richard Bealey) and the solicitors and architect (Joseph Denison, Thomas Bunting and Richard Lane).

Corporate Class Lectures 2014

Minority shareholders in a company alleged that its directors were guilty of buying their own land for the company's use and paying themselves a price greater than its value. This act of directors resulted in a loss of the company. The minority shareholders decided to take action against the directors, but the majority shareholders in a meting resolved not to take any action against the directors alleging that they were not responsible for the loss which had occurred.

Corporate Class Lectures 2014

The court dismissed the suit on the ground that the acts of the directors were capable of confirmation by the majority members and held that the proper plaintiff for wrongs done to the company is the company itself and not the minority shareholders and the company can act only through majority shareholders. The rationale in that line of reasoning is that a company is a separate legal entity from the members who compose it and as such, if any right of the company is violated, it is the company which can bring an action through the majority.

Corporate Class Lectures 2014

If the thing complained is a thing which, in substance, the majority of the company are entitled to do, or something has been done irregularity which the majority of the company are entitled to do regularly or if something has been done illegally which majority of the company are entitled to do legally, there can be no use in laying litigation about it, the ultimate end of which is only that a meeting has to be called, and then ultimately the majority gets its wishes.

Corporate Class Lectures 2014

It is elementary principle of law relating to joint stock companies that the court will not interfere with the internal management of the company, acting within their powers and jurisdiction to do so. Again it is clear that in order to redress a wrong done to the company or to recover monies or damages due to the company the action should prima facie be brought by the company itself"

Corporate Class Lectures 2014

a.

b.

c.

d.

Recognition of separate legal personality of a company. If a company has suffered some injury, then it is not the individual members, rather it should be the company to seek redress. It preserves the right of the majority to decide how the affairs of the company shall be conducted. It is the wish of the majority to prevail. Multiplicity of futile suits can be avoided, that is, if every member were permitted to sue everyone who has injured the company through a breach of duty, there would be enormous waste of time and money. Litigation at the suit of a minority is futile if majority do not wish it.

Corporate Class Lectures 2014

Palmer rightly pointed out that, "a proper balance of rights of majority and minority shareholders is essential for the smooth functioning of the company". To curtail the power of the majority, the following exceptions have been admitted as follows:a. Acts which are ultra vires or illegal Foss vs. Harbottle will apply only when the act done by the majority is one which the company is authorized to do by its memorandum. b. Acts supported by insufficient majority
Corporate Class Lectures 2014 8

For certain acts, it might require th majority. The rule in Foss vs. Harbottle cannot be invoked by a simple majority if the act requires special majority. If the requirements of special majority are not fulfilled, any shareholder can restrain the company from acting on resolutions.

Corporate Class Lectures 2014

c. Where the act of majority constitutes a fraud on the

minority: A resolution would constitute a fraud on minority if it is not bona fide for the benefit of the company as a whole. d. Where it is alleged that the personal membership rights of the plaintiff shareholder has been infringed: Such individual rights include the right to attend meetings the right to receive dividends the right to insist in strict observance of the legal rules; statutory provisions in the memorandum and articles. If such a right is in question, a single shareholder can on principle, defy a majority consisting of all other shareholders.
Corporate Class Lectures 2014 10

e. Where there is breach of duty

A minority shareholder can bring a suit against the company where there is a breach of duty by the directors and majority shareholders to the detriment of the company. f. Oppression and Mismanagement: Where there is oppression of minority or mismanagement of the affairs of the company, Foss vs. Harbottle does not apply. Oppression refers to an act performed in a burdensome, harsh and wrongful manner. A shareholder can bring an action against the management of the company on the grounds of oppression and mismanagement.

Corporate Class Lectures 2014

11

It is the lack of probity and fair dealing in the affairs of a company to the prejudice of some portion of its members or to public interest. The term "oppression" as explained by Lord Cooper in the Scottish case Elder v. Elder & Watson Ltd was cited with approval by Wanchoo J. of the Supreme Court of India in Shanti Prasad Jain v. Kalinga Tubes opined that the conduct complained of should, at least, involve a visible departure from the standards of their dealing, and violations of conditions of fair play onwhich every shareholder who entrusts his money to Company is entitled to rely. The complaining member must show that he is suffering from oppression in his capacity as a member and not in any other capacity.

Corporate Class Lectures 2014

12

It was Observed in Rao (V.M) v. Rajeswari Ramakrishnan : That the oppression complained off must affect a person in his capacity or character as a member of the company; harsh or unfair treatment in other capacity, e.g., as a director or a creditor is outside the purview of the section. There must be continuous acts constituting oppression up to the date of the petition. The events have to be considered not in isolation but as a part of a continuous story. It must be shown as a preliminary to the application of section 397 that there is just and equitable ground for winding up the company.
Corporate Class Lectures 2014 13

Under section 397 the members of a company who comply with the conditions of Section 399 can make an application to the Court for relief under Section 402 of the Act if the affairs of a company are being conducted in a manner oppressive to any member or members including any one or more of those applying. The Court has power to make such orders under section 397 read with section 402 as it thinks fit, if it comes to the conclusion that 1) the company's affairs are being conducted in a manner prejudicial to public interest or in a manner oppressive of any member or members; and 2) 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, and 3) That to wind up the company would unfairly prejudice the petitioners

Corporate Class Lectures 2014

14

1)

2)

Where there are minor acts of mismanagement e.g. where passengers traveling without tickets on a company's buses were not checked or where the petrol consumption by a transport company was excessive. Negligence & inefficiency, even assuming that these are proved, do not amount to oppression or mismanagement as contemplated by the act.[Mohta Bros. Vs Calcutta Landing & Shipping Limited] Where a shareholder holding 30% of shares of a company is denied access to or inspection of books of accounts of the company. This is because this right is recognized by the Companies Act. [Lalita Rajya Laxmi Vs. India Motor Company]
Corporate Class Lectures 2014 15

A very clear illustration of mismanagement under Section 398 appears in Rajahmundary Electric Corporation v. Nageshwara Rao AIR 1956. Here, a petition was brought against a company by certain shareholders on the ground of mismanagement by directors. Court found that vice-chairman grossly mismanaged the affairs of the company and had drawn considerable amounts for his personal purposes, the shareholders outside the group of chairman were powerless to set matters right.

Corporate Class Lectures 2014

16

This was held to be sufficient evidence of mismanagement. The court accordingly appointed two administrators for management of company for period of 6 months vesting in them all the powers of the directorate. Where the managing directors of the Company continued in office after expiry of their terms, without a meeting being held to re-appoint them prior to making fresh application to Central Government under Sec 269, the continuation of office under these conditions was held to be mismanagement.Sishu Ranjan v. Bholanath Paper House
Corporate Class Lectures 2014 17

a.

b. c. d.

Sale of assets at low price and without compliance with the Act. Violation of statutory provisions and those of articles. Violation of conditions of company's memorandum Satyam fiasco is a very good example of mismanagement of funds of the company and fraudulent accounting, where the Chairman of Satyam Computer Services- Ramalinga Raju in his letter to the Board of Directors confessed to India's biggest corporate fraud worth Rs 7,000 crore on the company.

Corporate Class Lectures 2014

18

Preventive and Corrective Measures Sec 397 and 398 give wide powers to the CLB to make any order with a view to bring to an end the matters complained of or to prevent the matter complained of or apprehended. Section 402 provides for specific kinds of orders that can be passed. Few of them are as follows: Regulation of conduct of affairs Purchase of shares of members by other members/ company Consequential reduction on capital Termination or modification of contract with managing director, manager or director Termination of contract/ arrangement with other parties.
a.

Corporate Class Lectures 2014

19

Therefore it can be seen that buyback of shares and consequent reduction in capital can take place without recourse to any other provisions of the Act. Emphasis under the above sections is on preventing or curing the ills and not punishing the misdeeds. The powers can be exercised without limitations of other provisions of the Act, Memorandum or Articles of Association.

Corporate Class Lectures 2014

20

Sec 406 provides that provisions of sections 539 to 544 of the Act, as modified vide Schedule XI, are applicable to the proceedings under sections 397/398. These are the provisions providing for penalties and liabilities for falsification of books, frauds and damages etc. but these provisions are rarely invoked.

Corporate Class Lectures 2014

21

In the winding up of proceedings, if it appears that certain persons have carried on business of company with intent to defraud creditors of the company or any other persons, or for any fraudulent purpose, shall be personally responsible without any limitation of liability, for all or any of the debts or other liabilities of company as Tribunal may direct. Application under 542 applies for application made under Sec 397 and 398.

Corporate Class Lectures 2014

22

Persons Entitle to Apply: - [Section 399/ 244] a. In Co. with Share Capital; 100 Members,or 1/10th of Total Members In Co. with No Share Capital b. Application shall be made by atleast 1/5th of total number of members.

In Companies Act 1956 : The chapter is in two parts- Part 'A' deals with Powers of Company Law Board (Sec 397-407) and Part 'B' deals with Powers of Central Government (Sec 408-409).

Corporate Class Lectures 2014

23

Under corporate law, shareholder may bring principally two types of actions.
a.

Direct Action : Under S.397/S.398: the shareholder brings a suit against the company, its board, management or other shareholders for the breach of a duty owed to the shareholder. any recovery or benefit under a direct shareholder suit will accrue to the shareholder, and generally not to the company
Corporate Class Lectures 2014 24

Shareholders Derivative Action Claim/Suit. A suit, Where a shareholder may sue on behalf of the company in respect of a loss caused to the company. The classic instance where derivative action is an effective shareholder remedy is when the directors or officers of a company have breached their duties to their company, but the board decides not to initiate legal action against them. In such a case, the derivative action enables the shareholder to bring a suit on behalf of the company against the offending party.

Corporate Class Lectures 2014

25

A member of a company can commence an action against the defendants himself where he can demonstrate that the case at hand comes within one of two exceptions to the rule in Foss v Harbottle (1843) 2 Hare 461 (also known as the 'proper plaintiff' rule, which, briefly, states that no member can arrogate to himself the company's cause of action).

Corporate Class Lectures 2014

26

First, the Companies Act, 1956 does not statutorily recognize derivative actions. One has therefore to rely upon common law to initiate such an action by establishing that one of the exceptions to the rule in Foss v. Harbottle applies to the given case. The development of common law in this regard has been unclear, making the use of derivative actions cumbersome. For example, a shareholder bringing a derivative action must establish "fraud on the minority" and must also come with clean hands

Corporate Class Lectures 2014

27

Second, there were procedural difficulties as well. Derivative actions are considered to be representative actions under Order I, Rule 8, of the Civil Procedure Code, which requires shareholders to obtain permission of the court before the suit can proceed. Third, the costs of bringing a derivative action may be prohibitive, especially if it involves a recovery suit. This is due to the existence of court fees and stamp duties payable while initiating the suit, which varies from state to state.

Corporate Class Lectures 2014

28

Fourth, countries where shareholder actions have succeeded possess an active plaintiff bar, whereby plaintiff law firms initiate actions on behalf of shareholders. Such an active plaintiff bar is non-existent in India due to the prohibition against lawyers from charging contingency fees.

Corporate Class Lectures 2014

29

A. AS A SHAREHOLDER, YOU CAN MAKE A DIFFERENCE THROUGH DERIVATIVE ACTIONS

In a shareholder derivative action, an individual or institutional shareholder, serving as a representative plaintiff, takes legal action on behalf of the corporation. The shareholder derivative action is typically brought against insiders of the company, such as the executive officers, directors, and/or board members, who are suspected of misconduct or other acts that cause harm to the corporation. A shareholder derivative action allows shareholders to redress harm to the corporation caused by management where it is unlikely that management will redress the harm itself. By filing a shareholder derivative action, a single shareholder may be able to compel changes that otherwise might not happen at the company, such as pro-investor corporate governance reform, removal of officers or directors whose misconduct injured the corporation, and monetary payments in the form of damages and/or disgorgement (recovery) of ill-gotten gains.
Corporate Class Lectures 2014 30

B. A SHAREHOLDER LAWSUIT FOR VICTIMS OF CORPORATE MISCONDUCT Corporate misconduct harms not only shareholders, but also the financial markets by driving down stock prices, decreasing shareholder value, and creating mistrust among investors. Past revelations of corporate fraud, including Enron, WorldCom, Tyco, the options backdating scandals, and the recent misconduct that precipitated the U.S. economic crisis, have increased the need to enforce the legal duties of loyalty and good faith that corporate directors and officers owe to their shareholders. Shareholder derivative actions provide greater accountability for shareholders, inspire investor confidence in the financial markets, and protect companies and shareholders from further harm.

Corporate Class Lectures 2014

31

Breaches of fiduciary duty Fraud or other unlawful activity Self-dealing or greed by insiders Conflict of interest Waste of corporate assets Insider trading Options backdating Accounting scandals Inflated, false, or misleading financial statements Improprieties related to executive compensation Management or board decisions that expose the company to harm or risk (e.g., violations of consumer protection laws, environmental violations)

Corporate Class Lectures 2014

32

The Companies Act, 2013 introduces some important changes to the company law regime in India. One such feature is a Class Action. The provision governing Class Action is set out under Section 245 of the Companies Act, 2013. Section 245 of the Companies Act, 2013 falls under Chapter XVI Prevention of Oppression and Mismanagement'. However, class actions are evidently not the same as petitions against oppression/mismanagement, as commonly understood in India. Provisions governing applications in respect of oppression/mismanagement (echoing s. 397-398 of the 1956 Act) are set out under Sections 241-244 of the Companies Act, 2013 and Section 245 in contrast introduces a distinct regime of class actions.

Corporate Class Lectures 2014

33

The Satyam scam involved a fraudulent scheme wherein the revenues of Satyam Computers Services Ltd. (Satyam) were materially overstated based on falsified invoices for hundreds of millions of dollars in consumer products that did not actually exist. The primary charges that were made out in the scam are a) The defendants issued misleading financial information b) Due to falsification of accounts, the purchasers of Satyam ADS were injured through their purchase of stock at inflated prices. c) None of the statements made by the defendant had any qualifying cautionary statement

Corporate Class Lectures 2014

34

Since Satyam's American Depository Shares were listed on the New York Stock Exchange, several class actions were filed against Satyam and the managing director including other members of the errant management of Satyam on behalf of purchasers of Satyam's American Depository Receipts, in the U.S. In addition, the global audit firm PwC along with its international and India unit were charged with class action for having recklessly disregarded a multi-year massive fraud by the Satyam management.

Corporate Class Lectures 2014

35

In 2011 Satyam and its auditor PwC agreed to pay USD 125 million and USD 25.5 million to settle claims filed by shareholders by way of a class action in US. However, due to the absence of any statutory provision for class action under the (Indian) Companies Act,no similar proceedings could be initiated by the affected shareholders of Satyam in India. This lacuna has been sought to be addressed by the legislature while drafting of the Companies Act, 2013 and introducing the provision of class action by way of Section 245

Corporate Class Lectures 2014

36

The concept of a class action by shareholders was also recommended, prior in time, by the J.J. Irani Committee Report, 2005 which suggested that representative action may be initiated by one shareholder on behalf of one or more of the shareholders, on the premise that they would all have the same locus standi to initiate an action against an erring company.

Corporate Class Lectures 2014

37

A Class Action/Derivative Suit is a law suit in which a single person or a small group of peoples represents the interest of a larger group before the Court. It is a procedural device enabling one or more plaintiffs to file and prosecute a litigation on behalf of a larger group or class, wherein such class has common rights and grievances. The term 'Class Action' owes its origin in the US law which is used to describe a 'sui generis' area of litigation.

Corporate Class Lectures 2014

38

While Indian law recognizes the concept of a representative suit', it has not, as opposed to the law in US, used the term or phrase class actionn 'to describe a 'sui generis' area of litigation. In India, a representative suit may be instituted under the Indian Civil Procedure Code, 1908 for the benefit of, or on behalf of, the interested parties. A similar concept has also been evolved by the Courts in India in form of Public Interest Litigations and Social Interest Litigations.

Corporate Class Lectures 2014

39

Class Action is a well defined area of litigation in the U.S. The relevant provision for a class action is detailed under Rule 23 of the US Federal Rules of Civil Procedure. (Rule 23) Rule 23 (a) is extracted herein below: "(a) PREREQUISITES. One or more members of a class may sue or be sued as representative parties on behalf of all members only if: (1) the class is so numerous that joinder of all members is impracticable; (2) there are questions of law or fact common to the class; (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class; and

Corporate Class Lectures 2014

40

4) the representative parties will fairly and adequately protect

the interests of the class." U.S. class action litigation can broadly be categorised into two different groups: Securities Class Action - instituted by shareholders involving violation of securities, regulations, accounting, fraud, etc. Consumer Class Action or Employee Class Action instituted by a large number of consumers who suffer losses due to some illegal claims made by the companies, or those may claims against illegal debt collection practices, unfair credit reporting, product liability, etc.

1.

2.

Corporate Class Lectures 2014

41

The Development of Statutory Derivative Action Suit In India

Corporate Class Lectures 2014

42

The concept of Class Action Suits is among one of the many novelties introduced by the Companies Act, 2013. Thought the concept per se is not new but in Indian context it has found statutory recognition and enforceability now only by means of Companies Act 2013. The first time class action suit came to the spotlight in the context of securities market was when the Satyam scam broke out in 2009. At that time, the Indian investors in India couldn't take any legal recourse against the company while their counterparts in USA filed class action suit claiming damages from the company and the auditing firm. Credit to the Satyam scam, India has introduced class action suit in the new Companies Act, 2013 by means of Section 245 which is yet to be notified by the Ministry of Corporate Affairs.

Corporate Class Lectures 2014

43

Who can file Class Action Suits? As per Section 245 (1) read with Section 245 (3), a Class Action Suit may be filed by: 1. Member or members or any class of them, as described below in the case of a company having a share capital, any 100 or more members of the company, or members equal to or exceeding 10 percent of the total number of its members, whichever is less, or any member or members singly or jointly holding atleast 10 percent of the issued share capital of the company, subject to the condition that the applicant or applicants has or have paid all calls and other sums due on his or their shares in the case of a company not having a share capital, members equal to or exceeding 1/5th of the total number of its members.

Corporate Class Lectures 2014

44

2. Depositor or depositors or any class of them, as described below any 100 or more depositors of the company, or depositors equal to or exceeding 10 percent of the total number of its depositors, whichever is less, or any depositor or depositors singly or jointly holding atleast 10 percent of the total value of outstanding deposits of the company. 3. The Central Government, if it is of the opinion that the affairs of the company are being conducted in a manner prejudicial to public interest A depositor is not defined; but a "deposit" is defined as including "any receipt of money by way of deposit or loan or in any other form by a company, but does not include such categories of amount as may be prescribed in consultation with the Reserve Bank of India. Before which authority class action suit needs to be filed? Application for class action suit has to be filed before the National Company Law Board Tribunal (NCLT/Tribunal).

Corporate Class Lectures 2014

45

Members or depositors or any class of them, as indicated above, may file a class action suit if they are of the opinion that the management or conduct of the affairs of the company are being conducted in a manner prejudicial to the interests of the company or its members or depositors seeking all or any of the following orders, namely: - . (a) to restrain the company from committing an act which is ultra vires the articles or memorandum of the company; (b) to restrain the company from committing breach of any provision of the company's memorandum or articles; (c) to declare a resolution altering the memorandum or articles of the company as void if the resolution was passed by suppression of material facts or obtained by mis-statement to the members or depositors;

Corporate Class Lectures 2014

46

(d) to restrain the company and its directors from acting on such resolution; (e) to restrain the company from doing an act which is contrary to the provisions of this Act or any other law for the time being in force; (f) to restrain the company from taking action contrary to any resolution passed by the members; (g) to claim damages or compensation or demand any other suitable action from or against (i) the company or its directors for any fraudulent, unlawful or wrongful act or omission or conduct or any likely act or omission or conduct on its or their part;

Corporate Class Lectures 2014

47

(ii) the auditor including audit firm of the company for any improper or misleading statement of particulars made in his audit report or for any fraudulent, unlawful or wrongful act or conduct; or (iii) any expert or advisor or consultant or any other person for any incorrect or misleading statement made to the company or for any fraudulent, unlawful or wrongful act or conduct or any likely act or conduct on his part; (h) to seek any other remedy as the Tribunal may deem fit.

Corporate Class Lectures 2014

48

Class action suit can be filed against the Company, Any of its directors Auditor, including audit firm Expert or advisor or consultant or any other person In case of any claim against an audit firm, the liability shall be of the firm as well as of each partner who was involved in making any improper or misleading statement of particulars in the audit report or who acted in a fraudulent, unlawful or wrongful manner What action will be taken by NCLT on a class action suit application? On receipt of a class action suit application, the Tribunal will look into the following before admitting it: whether the member or depositor is acting in good faith in making the application for seeking an order;
Corporate Class Lectures 2014 49

 any evidence before it as to the involvement of any person other than directors or officers of the company on any of the matters on which an order can be passed; whether the cause of action is one which the member or depositor could pursue in his own right rather than through an order under this section; any evidence before it as to the views of the members or depositors of the company who have no personal interest, direct or indirect, in the matter being proceeded under this section; where the cause of action is an act or omission that is yet to occur, whether the act or omission could be, and in the circumstances would likely to be authorised by the company before it occurs; or ratified by the company after it occurs; where the cause of action is an act or omission that has already occurred, whether the act or omission could be, and in the circumstances would be likely to be, ratified by the company.

Corporate Class Lectures 2014

50

If the application is admitted, the Tribunal will Issue a public notice to all the members of the class by publishing the same within 7 days of admission of the application once in a vernacular newspaper in the principal vernacular language of the state in which the registered office of the company is situated and circulating in that state and at least once in English in an English newspaper circulating in that State. Require the company to place the public notice on the website of such company, if any, in addition to publication of such public notice in newspaper and such notice shall also be placed on the website of the Tribunal, if any, on the website of Ministry of Corporate Affairs, on the website, if any, of the concerned Registrar of Companies and in respect of a listed company on the website of the concerned stock exchange(s) where the company has any of its securities listed, until the application is disposed of by the Tribunal.
Corporate Class Lectures 2014 51

Consolidate all similar applications prevalent in any jurisdiction into a single application and the class members or depositors shall be allowed to choose the lead applicant and in the event the members or depositors of the class are unable to come to a consensus, the Tribunal shall have the power to appoint a lead applicant, who shall be in charge of the proceedings from the applicant's side Not allow two class action applications for the same cause of action. A copy of every application made under this section shall be served on the Regional Director and Registrar of Companies. The Tribunal shall give notice of every application made to it under this section to the Central Government and shall take into consideration the representations, if any, made to it by that Government before passing a final order under those sections.

Corporate Class Lectures 2014

52

Where any application filed before the Tribunal is found to be frivolous or vexatious, it shall, for reasons to be recorded in writing, reject the application and make an order that the applicant shall pay to the opposite party such cost, not exceeding Rs. 1 Lakh, as may be specified in the order. Penalty for non-compliance of order passed by Tribunal Any company which fails to comply with an order passed by the Tribunal under section 245 shall be punishable with fine which shall not be less than Rs. 5 Lakhs but which may extend to Rs. 25 Lakhs and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to 3 years and with fine which shall not be less than Rs. 25,000/- but which may extend to Rs. 1,00,000/-.

Corporate Class Lectures 2014

53

Under Section 425 of the Companies Act, 2013 the Tribunal has also been conferred the same jurisdiction, powers and authority in respect of contempt of its orders as conferred on High Court under the Contempt of Courts Act, 1971. Other points relating to Class Action Suits The cost or expenses connected with the publication of the public notice shall be borne by the applicant and shall be defrayed by the company or any other person responsible for any oppressive act. Any order passed by the Tribunal shall be binding on the company and all its members, depositors and auditor including audit firm or expert or consultant or advisor or any other person associated with the company. Provisions relating to class action suits do not apply to a banking company.

Corporate Class Lectures 2014

54

DIFFERENCE BETWEEN
APPLICATION FOR PREVENTION OF OPPRESSION AND MISMANAGEMENT U/S 241 TO 244 AND CLASS ACTION SUITS U/S 245

Corporate Class Lectures 2014

55

Prevention of oppression and Mismanagment 241 to 244 Who can File Members of the company Company and its statutory appointees

Class Action Suits 245

Members as well as deposit holders of the company Company, Any of its directors Auditor, including audit firm Expert or advisor or consultant or any other person

Against whom application can be filed?

Matters for which application can be filed

Any current or past activity or to prevent recurrence

Any current, past or future activity, including to desist from one or more particular action that have not been taken yet.
56

Corporate Class Lectures 2014

The requisite minimum number of members can apply to the central government for relief from oppression and mismanagement under Sec. 397 and 398. The minimum number shall be 100 or members not holding less than 1/10 th of the total voting power. The following are the reliefs can be provided: 1) The central government may appoint such number of persons as the CLB/NCLT specifies as being necessary to safeguard the interest of the company, or its shareholders or the public interest to hold the office as directors of the company to prevent oppression and mismanagement. The directors so appointed shall not hold office more than three years from the date of appointment. Government may appoint additional directors also. 2) Any person can appointed by the central government to hold office as director or additional director and the government may issue such directions to the company as it may consider necessary to be appropriate in regard to its affairs.

Corporate Class Lectures 2014

57

3)The central government may require the persons appointed as directors to report to the government from time to time with regards to affairs of the company. 4)The government may issue directions that may include: a)To remove an auditor already appointed and appoint another auditor in his place. b) To alter the articles of the company. 5)Section 388-B and 388-E empowers the central government to remove managerial personnel from office on recommendation of CLB/NCLT
Corporate Class Lectures 2014 58

Under section 397 and 398 the CLB/Tribunal has all the necessary powers to end oppression as well as prevent management of the company. Section 402 further lay down that an order under section 397 or 398 may provide for: 1) The regulation of the conduct of the company's affairs in future. [Richardson & Cruddas Ltd. Vs Hardas Mundra] The purchase of the shares of any member of the company by the 2) company. In the case of purchase of the shares by the company, consequent 3) reduction of its share capital. The termination, setting aside or modification of an agreement 4) between the company and managing director, or any other director, and manager. The termination, setting aside or modification of any agreement 5) with any person, provided due notice has been given to him and
Corporate Class Lectures 2014 59

his consent obtained

6) Any other matter for which, in the opinion of the CLB/ NCLT, it is just and equitable that provision should be made. 7) Not to change in the Board of Directors. If a change in the Board of directors is likely to take place which (if allowed) would affect prejudicially the affairs of the company, the CLB/Tribunal may, if satisfied, after such inquiry as it thinks fit to make that it is just and proper so to do by order, direct that no resolution passed or that may be passed or no action taken or that may be taken to effect a change in the Board of directors after the date of the complaint shall have effect unless confirmed by the CLB/Tribunal. [Section 409] 8) If CLB/NCLT orders any alteration in memorandum or articles, company can not introduce any provision inconsistent to the order. [Section 404(i)] 9) If order set asides or modifies any agreement causing any loss then any claim for the loss can not be made. [Section 407(i)(a)] 10) The managerial personnel set aside shall not be eligible to serve company for 5 years.[Section 407(i)(b)]
Corporate Class Lectures 2014 60