Difference Between Oppression And Mismanagement

Corporate governance is the backbone of a well-functioning company, ensuring that all stakeholders are treated fairly and resources are managed efficiently. However, challenges like oppression and mismanagement can disrupt this balance, leading to disputes among shareholders and affecting the company's stability. Understanding the difference between oppression and mismanagement is crucial for stakeholders, legal professionals, and students of corporate law.

Oppression refers to unfair, prejudicial, or wrongful actions by majority shareholders that harm minority shareholders, such as exclusion from decision-making or denial of dividends. On the other hand, mismanagement involves poor governance, such as financial negligence or misuse of company assets, which affects the company's overall functioning and stakeholders.

This blog explores the legal definitions, key elements, case laws, and remedies for oppression and mismanagement under the Companies Act, 2013.

What Is Oppression?

Oppression is the disrespectful, unfair, or discriminatory treatment of minority shareholders or any act that contravenes their legal, equitable, and/or contractual rights. The usual story involves the abuse of a majority power to suppress minority interests within the company.

Legal Definition

The term ‘Oppression’ is defined in Section 241(1)(a) of the Companies Act, 2013, as conduct by the majority that is burdensome, harsh, or wrongful to the minority shareholders.

Examples Of Oppression

• Prevent minority shareholders from taking part in the making of decisions.
• Refusal to register share transfers in the absence of justification.
• Dissolution of the company to dilute the minority's ownership.
• The denial of dividends without justification.

Key Elements Of Oppression

To understand the concept of oppression, you have to keep in mind some of its elements.

Intentionality: This kind of act is usually an attempt to disadvantage majority shareholders by intentionally oppressive means unfairly.

Harm inflicted: These actions have the direct and specific effect of harming currently the minority shareholder(s) equally to the extent that they could not participate in the company’s concerns nor to the extent to which they could be considered to receive their legitimate share of the company’s dividend.

Targeted behavior: It’s mostly directed at a special group of minority shareholders and not the company.

What Is Mismanagement?

Mismanagement is the lack of management over the affairs of a company that defeats the use of the resources of the company or a failure to observe proper governance, thus causing harm to the company and its stakeholders.

Legal Definition

Mismanagement in terms of Section 241(1)(b) of the Companies Act, 2013, is such a situation in which a company’s affairs are being managed with prejudice to the interest of a company or the public interest.

Examples Of Mismanagement:

• Failure to hold board meetings consistently.
• The company funds have been diverted in an unauthorized manner.
• Failure to care for and keep good financial records.
• The improper use of corporate assets to further the (person's) own interests.

Key Elements Of Mismanagement

To understand the concept of mismanagement, you have to keep in mind some of its elements.

Impact on the company: If we define actions as those that damage the company’s reputation or overall functioning, then these actions are etched in the head.

Public interest: Things sometimes get out of hand, so creditors or other employees are impacted.

Breach of fiduciary duty: Sometimes, one of the mistakes that Directors often make is mismanaging.

Also Read : Promoters Of Company : Definition, Legal Duties & Functions Explained

Difference Between Oppression And Mismanagement

Corporate law deals with oppression and mismanagement as critical concepts that have been specially referred to under the Companies Act, 2013 in India. They incorporate both terms to protect minority shareholders and prevent majority stakeholders or company management from treason.

Stakeholders, legal professionals, and students of corporate law need to understand the distinction between management and oppression.

Here is the table of comparison between oppression vs. mismanagement, which will help you to understand easily.

The Ministry recently released a 2023 report, which said over 1,000 cases of oppression and mismanagement were filed with NCLT in the last five years.

However, according to the Institute of Company Secretaries of India (ICSI), 60 percent of the complaints that had been lodged under oppression pertained to the denial of shareholder rights.

Companies Act 2013 Legal provisions

The court has made some legal provisions, and most of the cases are solved according to them.

Section 241: Application To tribunal

This section allows shareholders to file a complaint with the National Company Law Tribunal (NCLT) if:

• The company oppresses its affairs.
• Proof of mismanagement exists.

Section 242: Powers Of The tribunal

NCLT has the authority to:

• Cancel or change agreements.
• Appoint or remove directors.
• Regulate company management.
• Order shares to be bought from aggrieved shareholders.

Section 244: Eligibility To Apply

Shareholders must meet specific criteria to file a petition:

• At least 10% of the issued share capital should be held.
• At least 100 members, or 1/10th of the total.

Remedies For Oppression And Mismanagement

The law provides various remedies to protect stakeholders:

Remedies For Oppression

Buyout of shares: The aggrieved parties may also be directed to make majority shareholders purchase their shares.

Compensation: Amounts compensating for losses suffered.

Reinstatement of rights: Restoration of lost privileges such as the right to dividends or the right to vote.

Remedies for mismanagement

Appointment of administrators: A company may also pay for courts to appoint external administrators to oversee the company.

Restoration of assets: Funds or assets may be recovered from misuse.

Management restructuring: The removal or replacement of those directors responsible for mismanagement.

Importance Of Addressing Oppression And mismanagement

Let’s understand the importance of addressing oppression and mismanagement:

Protecting minority interests: Prevents small shareholders being exploited.

Maintaining corporate governance: It prevents financial losses, and also reputational damage.

Promoting transparency: Guides on how to operate in business in a more ethical manner.

Boosting investor confidence: It is to ensure that companies adhere to best practices.

Case laws On oppression And Mismanagement

Here are some real cases, and these cases will help you to understand this concept more beautifully.

Oppression

Shanti Prasad Jain vs. Kalinga Tubes Ltd

The minority Jain group accused the majority Patnaik and Loganathan groups of oppression and mismanagement. In 1954, that agreement was violated when 39,000 new shares were wrongly issued on board representation, without the minority. The court ordered board reconstitution and transfer of the disputed shares to protect minority interests in favour of the Jain group.

Haldia Petrochemicals vs Chatterjee Petrochem

Despite the mounting debt on the Chatterjee Group, the group did not deliver the promised funds. The court held that oppression claims require a breach of shareholder rights by directors or other managers, whether statutory or set out in the articles of association. Oppression laws do not include such simple enforcement of shareholder contracts if it interferes with the statutory powers of the company.

Mismanagement

Malayalam Plantations (India) Limited

A director developed and sold a company estate at an unfair price without the necessary shareholder approval and sharing proper information and paid in installments. For this mismanagement, the court refused to support, upholding the sale, but held both the director and the buyer liable for damages. For example, improper share transfers, inadequate meeting notices, and shares without share assets. Mismanagement also includes illegal offers.

Kuldip Singh Dhillon vs. Paragaon Utility Financiers

The company did not place any such resolution in the company records, and the resolution authorizing certain individuals to operate the company's accounts was given to the bank. The court decided that this also applies to a boss who misappropriated funds as mismanagement. But honest business decisions, firm belief that they will lead to losses, are not mismanagement unless they violate company documents.

Reference Links:

https://www.mca.gov.in/Ministry/reportonexpertcommitte/chapter6.html

https://nclat.nic.in/sites/default/files/migration/upload/13203582945c063d8c41440.pdf