Prevention of Oppression and Management
Section 241. Application to the Tribunal for relief in cases of oppression
241(1).
Any member can apply to the Tribunal if they believe that the company’s affairs are being conducted:
In a way harmful to public interest.
In an oppressive or prejudicial to any member or to the company itself.
If there has been a material change in management or control (like a change in the board, ownership, or membership) that is likely to harm the company or its members.
However, the member must have the right to apply as specified under Section 244.
241(2).
The Central Government may also file an application before the Tribunal if it believes that the company’s affairs are being carried out against public interest.
Certain cases may be directly heard by the Principal Bench of the Tribunal, as prescribed.
241(3).
If the Central Government finds evidence of wrongdoing by the people managing the company, it can take action.
Wrongdoing may include fraud, misfeasance, negligence, or breach of trust.
It also includes acting with fraudulent intent or any conduct harmful to the company.
In such cases, the Central Government can refer the matter to the Tribunal for further proceedings.
The Tribunal will then inquire into the conduct of such individuals.
The tribunal will then determine whether they are fit and proper persons to hold office as directors or in any managerial capacity.
241(4).
Any person against whom such a case is referred will be made a respondent in the application.
241(5).
The application by the Central Government must include a concise statement of facts and materials relevant to the inquiry.
The application must be signed and verified in the same manner as a legal plaint under the Code of Civil Procedure, 1908.
Section 242. Powers of Tribunal
242(1).
In order for the tribunal to exercise its powers and act:
An application must first be filed under Section 241.
The Tribunal must find that the company’s affairs are being conducted in a way that is oppressive, unfair, or harmful to the members, the company, or the public interest.
The Tribunal must also find that winding up the company, though justified, would unfairly hurt the members.
If both conditions are met, the Tribunal can pass any order necessary to stop the oppressive or harmful conduct.
242(2).
The Tribunal has broad discretion and may order one or more of the following remedies:
(a). Regulate the company’s future affairs to ensure fair and proper management.
(b). Order the purchase of shares of certain members by other members or by the company itself.
(c). If the company buys back its shares, the Tribunal may order a reduction of share capital accordingly.
(d). Restrict or prohibit transfer or allotment of shares in the company.
(e). Cancel, modify, or terminate agreements between the company and its managing director, other directors, or managers, if it considers it just and fair.
(f). Modify or cancel agreements between the company and third parties, but only after due notice and with the consent of those affected.
(g). Reverse transactions done within three months before the application that amount to fraudulent preference, similar to bankruptcy laws.
(h). Remove the managing director, manager, or any director of the company.
(i). Recover undue gains made by any director, manager, or managing director during their tenure, and direct how the recovered money should be used.
(j). Lay down the process for appointing a new managing director or manager after removal.
(k). Appoint new directors and require them to report to the Tribunal on specific matters.
(l). Impose costs or penalties as deemed appropriate.
(m). Pass any other order that is just and equitable in the circumstances.
242(3).
A certified copy of any order made by the Tribunal must be filed with the Registrar of Companies within 30 days of the order.
242(4).
While proceedings are ongoing, the Tribunal may pass interim orders to regulate the company’s affairs temporarily.
242(4A).
When the Central Government sends a case to the Tribunal under Section 241(3), the Tribunal must examine the allegations.
The Tribunal must then clearly state whether the accused person is a fit and proper person.
This applies to holding any position as a director or in the management of a company.
242(5).
If the Tribunal’s order alters the company’s memorandum or articles of association, the company cannot change them again without the Tribunal’s permission.
242(6).
Such alterations have the same legal effect as if they were made by the company through normal procedures.
242(7).
A certified copy of every such order (altering or allowing alteration of the memorandum or articles) must also be filed with the Registrar within 30 days, who will then register the same.
242(8).
If a company violates 242(5) then:
The company is liable to a fine between ₹1,00,000 and ₹25,00,000, and
Every officer in default will be fined between ₹25,000 and ₹1,00,000.
Section 243. Consequence of termination or modification of certain agreements
243(1).
If the Tribunal passes an order under Section 242(2) that cancels, modifies, or ends an agreement then:
(a) No Claim for Damages or Compensation:
The person whose contract is terminated or modified cannot claim any compensation or damages from the company.
This means the company cannot be sued or held liable for loss of office, salary, or any other financial loss arising from that termination.
The Tribunal’s decision is final, and the individual cannot demand payment “in pursuance of the agreement or otherwise.”
(b) Restriction on Future Appointments:
If such an agreement is terminated or set aside, the person (like a managing director or manager) cannot be reappointed or act as a director or manager for a period of five years, unless:
The person obtains special permission (leave) from the Tribunal.
Before granting this permission, the Tribunal must notify the Central Government and allow it a reasonable chance to express its views.
(1A) Disqualification of “Unfit and Improper” Persons:
If the Tribunal, under Section 242(4A), has declared that a person is not a fit and proper person to manage the affairs of a company, then:
That person cannot hold the office of a director or any managerial position in any company for five years from the date of that decision.
However, the Central Government, with the Tribunal’s permission, can allow such a person to hold such a position before the five-year period ends if it thinks fit.
(1B) No Right to Compensation After Removal:
Even if any other law, contract, or company document (like memorandum or articles) provides for compensation for termination, this section overrides it.
When a person is removed from office (as director, managing director, or officer), he or she cannot claim or receive any compensation for the loss of position or office.
243(2).
If a person despite being disqualified under the above provisions:
Knowingly acts as a managing director, director, or manager of a company, or
If other directors of that company knowingly allow such an illegal appointment.
Then both the individual and the complicit directors are liable to be punished with a fine up to ₹5,00,000.
Section 244. Right to apply under section 241
244(1).
There are two main categories of companies.
The companies with share capital and those without share capital and the eligibility criteria differ for each.
(a) Companies Having Share Capital
In a company that has a share capital, the following members can apply to the Tribunal under Section 241:
At least 100 members, or
At least one-tenth (10%) of the total number of members, whichever is less, or
Any member or group of members holding not less than 10% of the company’s issued share capital, provided that they have paid all the calls and other amounts due on their shares.
If a company has 2,000 shareholders, one-tenth means 200. But since the law says “whichever is less,” only 100 members can jointly apply.
Alternatively, even a single shareholder can apply if they hold 10% or more of the issued share capital and have cleared all dues on their shares.
(b) Companies Not Having Share Capital
In a company without share capital not less than one-fifth (20%) of the total members can apply to the Tribunal.
If the company has 50 members, at least 10 members (one-fifth of 50) must jointly make the application.
Power of the Tribunal to Waive Requirements
Even if the members do not meet these minimum numerical requirements, the Tribunal (NCLT) has the power to waive all or any of these conditions.
So , If fewer members have a genuine grievance but don’t meet the threshold, they can apply to the Tribunal for a waiver.
If the Tribunal finds the case justified, it can allow them to proceed under Section 241.
Explanation
If a share is held jointly by two or more persons, they will be counted as one single member for the purpose of meeting the minimum number.
If a share is held jointly by A and B, they count as one member, not two.
244(2).
When a group of members is eligible to apply in accordance with 244(1) , any one or more of them can file the application on behalf of all the others.
But this can only be done after obtaining written consent from the rest
If 100 members are eligible to apply, only 5 of them can file the application as long as they have the written consent of the remaining 95 members.
Section 245. Class action
A class action is a legal remedy that allows a group of members or depositors of a company to file a collective complaint before the National Company Law Tribunal (NCLT).
It lets many affected shareholders or depositors come together and take action as a group when the company’s affairs are being run in a way that is fraudulent, harmful, or prejudicial to them or to the company.
245(1).
A certain minimum number of members or depositors can file an application before the Tribunal.
They can do this if they feel the company’s affairs are being run in a way that is harmful to the company, its members, or its depositors.
In their application, they can request one or more specific orders from the Tribunal to address the wrongdoing or mismanagement.
The application can seek one ore more following orders including:
(a) To stop the company from doing anything beyond its powers (ultra vires) under its Memorandum or Articles of Association.
(b) To restrain the company from violating any provision of its Memorandum or Articles.
(c) To declare void any resolution that alters the Memorandum or Articles if it was passed through suppression of material facts or misstatement.
(d) To stop the company and its directors from acting on such void resolution.
(e) To restrain the company from doing anything contrary to this Act or any other law.
(f) To prevent the company from taking any action contrary to a resolution passed by the members.
(g) To claim damages, compensation, or suitable action against:
(i) The company or its directors for any fraudulent, unlawful, or wrongful act or likely conduct;
(ii) The auditor or audit firm for any improper, misleading, fraudulent, or wrongful act in their report;
(iii) Any expert, advisor, or consultant who gave incorrect, misleading, or fraudulent advice or opinion.
(h) To seek any other remedy as the Tribunal may consider just and appropriate.
245(2).
If damages or compensation are sought from an audit firm, the firm itself will be liable.
Each partner who was involved in making the wrongful or misleading statement will also be personally liable.
245(3).
The law specifies a minimum number of members or depositors required to bring a class action, to ensure that the action represents a genuine class and not an individual grievance.
(i) For Members
If the company has share capital:
Not less than 100 members, or
Such percentage of total members as may be prescribed (whichever is less), or
Any member(s) holding not less than the prescribed percentage of issued share capital, provided they have paid all dues on their shares.
If the company has no share capital:
Not less than one-fifth (20%) of its total members.
(ii) For Depositors
Not less than 100 depositors.
A certain minimum percentage of all depositors (as set by the rules) can file the application whichever lower requirement applies.
Any depositor or group of depositors to whom the company owes at least that prescribed percentage of total deposits can also file the application.
245(4).
Before admitting a class action, the Tribunal examines several factors to ensure the case is genuine and in good faith:
(a) Whether the applicant(s) are acting in good faith.
(b) Whether persons other than directors/officers are involved in the wrongdoing.
(c) Whether the applicant could have pursued the case individually instead of a class action.
(d) The views of other members or depositors who have no personal interest in the matter.
(e) If the act or omission is yet to occur, whether it can be authorised or ratified by the company.
(f) If the act or omission has already occurred, whether it could be ratified by the company.
245(5).
Once the Tribunal admits the class action application:
(a). A public notice must be issued to all members or depositors of that class.
(b). All similar applications (if any) will be consolidated into one case. The class must choose a lead applicant & if they fail to do so, NCLT will appoint one.
(c). Two separate class action applications for the same cause will not be allowed.
(d). All costs and expenses of the case shall be borne by the company or by the person responsible for the oppressive act.
245(6).
Any order passed by the Tribunal in a class action will be binding on:
The company.
All members and depositors.
The auditor or audit firm.
And any expert, consultant, or advisor associated with the company.
245(7).
If a company fails to comply with a Tribunal order under this section:
The company is punishable with a fine between ₹5 lakh and ₹25 lakh.
Every officer in default may face imprisonment up to 3 years and a fine between ₹25,000 and ₹1 lakh.
245(8).
If the Tribunal finds that the application is frivolous or malicious, it may:
Reject the application, and Order the applicant to pay costs up to ₹1 lakh to the opposite party.
245(9).
This section does not apply to banking companies, since they are governed by separate financial laws and regulations.
245(10).
Subject to compliance with this section, a person, group of persons, or any association representing the affected class (members or depositors) may also file or continue an action under this section.
Section 246. Application of certain provisions to proceedings under section 241 or section 245
Sections 337 to 341 of the Companies Act deal with issues like fraudulent conduct, fraudulent preference, extortionate credit transactions, and misfeasance.
These provisions will also apply mutatis mutandis to cases filed under Section 241 (oppression and mismanagement) and Section 245 (class action).
When the Tribunal is handling cases related to oppression, mismanagement, or class action, it can apply the same principles and legal consequences that are applicable in cases of fraudulent or wrongful conduct during the winding up of a company.
