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OPPRESSION AND MISMANAGEMENT FACED BY CREDITORS AND SHAREHOLDERS OF A COMPANY

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Last Updated on July 5, 2023 by Kanakkupillai

Introduction

The efficient functioning of a company relies on the smooth relationship between its creditors and shareholders. However, when creditors and shareholders face oppression and mismanagement, it can lead to detrimental consequences for the company. This article delves into the issues of oppression and mismanagement experienced by creditors and shareholders and explores the available remedies to address these challenges.

What is Oppression and Mismanagement?

Before understanding the process of oppression and mismanagement, it is crucial to grasp the concepts of minority rule and majority rule. While both minority and majority shareholders contribute capital to the company, important decisions are typically made by the majority shareholders. This can sometimes disregard the rights of minority shareholders, leading to oppression and mismanagement. In such situations, measures are taken to protect the rights of minority shareholders and prevent mismanagement and oppression within the company.

Understanding Shareholder Rights

Shareholders are entitled to various rights based on general law and contractual agreements. These rights are derived from the company’s contracts and shareholder agreements. Shareholders have the power to have their names registered in the company’s shareholder register, and this register cannot be altered without their consent. Furthermore, shareholders possess significant powers granted by general law that allow them to prevent certain actions by the company, which may not be explicitly mentioned in the Memorandum of Association.

Types of Actions

  1. Representative Action: This type of action can be initiated by a single person on behalf of the company. It aims to provide a remedy for any wrongdoing by adhering to the guidelines outlined in the company’s Memorandum of Association. Majority shareholder consent is not required for representative actions.
  2. Derivative Action: In derivative actions, members of the company take legal action against third parties on behalf of the company. The company itself does not directly file the lawsuit, but rather the members derive the right to sue the third party for the benefit of the company.

Statutory Exceptions

  1. Variation u/s 48: If the variation decision is mentioned in the Memorandum of Association and 75% of the majority shareholders support the variation, all preferential and equity shareholders’ opinions are considered. However, this process can be halted under section 48(2).
  2. Request for Investigation u/s 213: When 100 or more members possessing 1/10th of the total shares make a request, an order for investigation can be sought under section 213.
  3. Agreement for Compromise and Arrangement u/s 230: Members and creditors can carry out an agreement for compromise and arrangement according to the provisions of the scheme.
  4. Provision of Dissent Shareholders u/s 235: If an offeror intends to purchase 100 percent of the company’s shares and during the meeting, 90 percent accept while 10 percent refuse to sell their shares, the dissenting shareholders have the right to approach the tribunal to safeguard their 10 percent shares.
  5. Class Rights u/s 245: Certain members can approach the tribunal if they believe that certain activities in the company are affecting its growth and the rights of the members, including any illegal activities.

Conclusion

The concepts of oppression and mismanagement are crucial in protecting the rights of minority shareholders. Without adequate protection for minority shareholders, confusion and losses can arise within the organization. It is essential to address and resolve issues related to oppression and mismanagement to ensure the smooth functioning and growth of the company.

G.Durghasree B.A.B.L (Hons)

G Durghasree B.A.B.L (Hons) is a registered trademark attorney with extensive experience as an Advocate for a period of 8 years. She possesses expertise in trademark law, including trademark filing and trademark hearings. Additionally, she is skilled in contract drafting and reviewing, providing legal advice and opinions, particularly in the areas of Company Law, Insolvency and Bankruptcy Code (IBC), and Goods and Service Tax Law (GST). Her experience encompasses both litigation and non-litigation aspects of these laws.