INDIAN COMPANY LAW MAKING WAY FOR UNFAIR PREJUDICE REMEDY?
This piece has been authored by Prateek Kumar Singh, a 5th year student of B.A.LL.B at New Law College, Bharati Vidyapeeth.
Corporate structures in India are quite peculiar and exhibit a feature of common owner and manager in most of the cases. This is because number of the corporate groups in India are privately held by business families exercising close control. Whereas, in the western companies, the managers and its owners are separate. Such unique corporate structures in India give rise to unique corporate governance issues. The most prominent one is the tussle between the majority shareholders and the minority shareholders of a corporate entity. Unlike western companies where central problem of governance revolves around conflict between owners and managers, in India, the core issue is that of constant disciplining of dominant shareholders and protecting minority shareholder’s interest. The rule of corporate democracy is that the “majority will rule” as was laid down in the case of Foss v. Harbottle[i]. This rule allows majority to impose and perpetuate its will on the minority. However, there are certain exceptions to this rule and the law against minority shareholders’ oppression and mismanagement of company is one such relief.
The relief for oppression and mismanagement finds its origin under section 210 of the United Kingdom’s (“UK”) Companies Act, 1948. The said provision was adopted in the Companies Act, 1956 of India under section 397. Presently section 241-244 of Companies Act, 2013 provides for relief against such oppression. However, the language under the new Act has undergone a little modification. The erstwhile legislation provided for cases when the affairs of the company are being conducted “prejudicial” to the public interest or “oppressive” to the member of the company. On the other hand, the new legislation of 2013 provides for cases where the affairs of the company are being conducted “prejudicial” to the public interest or “prejudicial” or “oppressive” to the member of the company, giving wider relief to the minority shareholders. A parallel can be drawn from the English company law jurisprudence where the language under section 210 of the 1948 Act underwent a similar change albeit not exactly like that of India. The erstwhile English Act provided relief against “oppressive” conduct which was interpreted widely and which ultimately led to its substitution by the word “unfair prejudice” to give even wider relief to the minority shareholders by giving enough room for court interference.
UNFAIR PREJUDICE IN THE TATA V. MISTRY CASE
The National company law tribunal (“NCLAT”) in the well-known recent case of Cyrus Investment Pvt Ltd. v. Tata Sons Ltd & Co.[ii] has dealt with the issue whether the Companies Act, 2013 provides for relief against unfair prejudice under section 241-242. The answer is in affirmative as per NCLAT. This is contrary to the earlier and prevalent view taken by NCLT, Mumbai bench in the same case that no legal act can be declared as oppressive on the mere ground its unfairness.
NCLAT, setting the premise of its judgment on the fact that a relationship of mutual trust and confidence existed between the Tata sons and Shapoorji Pallonji group (minority shareholders in the case) for more than four decades, held that structure of the company is in nature of quasi-partnership. The appellate tribunal took the view that the Indian law does not use the word unfair under section 241 and the real test is whether the alleged act is “prejudicial or oppressive” to the minority shareholder interest. In continuation of this view, the appellate court interpreted the word “oppressive” by relying on some landmark English cases namely; Elder v. Elder[iii], Scottish co-op wholesale society v. Meyer[iv] and In re HR Harmer Ltd. [v] NCLAT observed the ruling of these cases wherein it was held that “the word oppressive meant burdensome, harsh & wrongful”. “The circumstances must be such as to warrant the interference that there had been at least, an unfair absence of powers and an impairment of confidence in the probity with which the affairs of the company are being conducted, as distinguished from mere resentment on the part of minority being outvoted on some issue of domestic policy.” The word oppressive should suggest that the conduct complained of “involve a visible departure from standards of fair dealing, and a violation of conditions of fair play on which every shareholder who entrusts his money to a company is entitled to rely”. Furthermore, the appellate court referred to ruling in the Meyer’s case wherein it was ruled “effect of section 210 of the Companies Act, 1948 warrants the court in looking at the business realities of situation and does not confine to a narrow legalistic view.”
In the light of the aforementioned English rulings, the appellate tribunal interpreted the term “unfairness” as an outcome of word “oppressive” itself and held that affairs of Tata sons are both “prejudicial and Oppressive” to the minority shareholders. The judgment has read the words prejudicial and oppressive conjunctively and since unfairness flows out of oppressiveness as per English rulings, the judgment in effect provides an unfair prejudice remedy to the minority shareholders.
EVOLUTION OF THE PRINCIPLE OF UNFAIR PREJUDICE REMEDY
Initially UK’s Companies Act, 1948 stated that in order to succeed the applicant must show that the affairs of the companies are being conducted in a manner “oppressive” to the interest of some members (including himself). According to Meyer’s case, oppressive meant “burdensome, harsh & wrongful”. But the question that cropped in the case was that what should be the degree of wrongfulness? Does it prescribe for actual illegality or conduct which are not actually illegal but can be described as reprehensible. The outcome of Meyer’s case supported the broader view. The effect of this judgment and few other cases which follow similar principles was that section 210 should not be interpreted narrowly for oppressive conduct, but should involve that conduct also which has the effect of being “unfairly prejudicial”. This meant that though the act is legal, if it causes unfair prejudice to minorities, it will be termed as oppressive. To give better effect to section 210, the Jenkins committee[vi] suggested amendment of the section by substituting the word “oppressive” with “unfair prejudice”. This suggestion was tardily adopted in the Companies Act, 1985 and was later on retained under section 994 of English Companies Act, 2006. The word “unfair prejudice” has an elastic quality enabling the court to mould its concept to provide appropriate relief in given circumstances. [vii]
The Indian framework against majority oppression was adopted under section 397 of Companies Act, 1956 inspired by the English Act. The Supreme Court of India in cases like Kalinga tubes[viii]and Needle Industries[ix] approved the English rulings in respect of the interpretation of the word “oppressive”. The law in India was further tweaked in the year 2013, when under the new Companies Act, it allowed applicant to approach the tribunal when the affairs of the companies are being conducted in a manner “prejudicial” or “oppressive” to the minority shareholders. This modification for remedy under section 241 suggested a movement away from oppression based test to prejudice based test which led to widening of the scope of court intervention. With the judgment of NCLAT, the unfairness aspect has also been touched signifying another leap towards unfair prejudice regime that is prevalent in United Kingdom.
A wide interpretation of section 241 may have its own pros and cons from the aspect of corporate law jurisprudence. But even after all this, the only question that remains is that if Indian Parliament really wanted to envisage unfair prejudice remedy, then why have they incorporated the word “prejudicial” or “Oppressive” instead of “unfair prejudice” like in UK. The question will surely be answered by the Supreme Court, as an appeal has been filed against the NCLAT judgment and the matter is sub judice as of now. It’ll be interesting to see whether the apex court will follow the footsteps of UK or develop its own jurisprudence in this matter considering the Indian corporate structures.
[i] Foss v. Harbottle, 67 ER 189 (1843)
[ii]Cyrus Invetsements Pvt. Ltd. v. Tata Sons Ltd & Co., CA No. 254/2018 (NCLAT)
[iii] Elder v. Elder & Watson ltd., AC 49 (1952)
[iv] Scottish Co-op wholesale society v. Meyer, AC 324 (1959)
[v] In re HR Hammer, 1 WLR 6 (1959)