March 15, 2018

The concept of oppression and mismanagement can be found in Section 241 of the Companies Act, 2013 (“2013 Act”). This provision was earlier Section 397(1) of the Companies Act, 1956.

Section 241 of the 2013 Act allows for any member with either 100 shares or controlling 1/10th of the shares of the company (whichever is less) to file a suit before the National Company Law Tribunal (“NCLT”) in case where the affairs of the company is being conducted in a way that is either prejudicial to public interest, in a manner that is prejudicial or oppressive to a particular party or prejudicial to the interest of the company.

Any change in the management of the company ( an alteration in the board of directors, ownership in the shareholding pattern etc) that is prejudicial or oppressive to any party or a class of shareholders has also been recognized under Section 241 of the 2013 Act.

The tribunal has been given a wide range of powers to address the issue of oppression and mismanagement by Section 241(2) of the 2013 Act. This power ranges from preventing the transfer of shares to reinstating members of the board. This has been considered as a positive step in order to address the issue of oppression and mismanagement.

Legal overview of oppression and mismanagement in India

The Supreme Court first defined the term oppression in the Needle Industries (India) v. Needle Industries Newey (India) case where it held that:

Oppression under s. 210 may take various forms. It suggests to my mind…a lack of probity and fair dealing in the affairs of the company to the prejudice of some portion of its members. The section confers a wider power on the Court to deal with such a situation in an equitable manner”.

The Supreme Court in the Shanti Prasad Jain v. Kalinga tubes looked at the requirements for a case of oppression and mismanagement. The court held that for a case of oppression and mismanagement, there needs to be a conduct amounting to misconduct by the majority towards the minority. The court further went on to state that this conduct cannot be in one isolated instance but rather, it needs to be a continuous act.

NCLT, in the case of Sidharth Gupta & Ors. Vs. M/s. Getit Infoservices Pvt. Ltd. & Ors further held that a mere violation of the articles of the company will not amount to oppression and mismanagement. It held that there needs to be a continuous action with a motive to prove the act of oppression and mismanagement. 

The NCLT has further expanded and elaborated the concept of oppression and mismanagement in the recent case of Vikram Bakshi v. McDonald’s. This case has gained a lot of attention in recent years and is the first major case involving ‘oppression and mismanagement’ that the NCLT has looked into. Considering the fact that the NCLT will be the first point of dispute for the coming years, it is important to study how the tribunal has interpreted the concept of oppression and mismanagement.

Facts of the Case

Vikram Bakshi and McDonalds India Private Limited entered into a joint venture agreement by which they each held 50% of equity stake in Connaught Plaza Restaurants Private Limited (“CPRPL”). CPRPL was appointed as the primary franchisee for McDonalds for a period of 25 years and was given the right to manage all of McDonald’s franchises in north India. The agreement specified that the board of directors would have four people of which each party got to nominate two members. The board was to appoint a managing director for a period of two years. The conditions to be fulfilled for the role as per clause 7(e) was.

  1. He had to be a resident of the national capital region; and
  2. He had to have at least 50% of the shares of the joint venture.

Clause 32 of the agreement further stated that if Mr. Bakshi was not the MD, then McDonalds would have the option to purchase his shares as per fair market value determined by the formula specified in the Joint Venture Agreement they had entered into. In 2007-08, McDonald’s offered to buy his shares at $5 million. However, on the basis of the fair market value, Mr. Bakshi demanded $100 million. This led to Mr. Bakshi’s termination (blocking of his re-appointment as Managing Director of CPRPL) in 2013 for allegations of diversion of funds and mismanagement.  Mr. Bakshi disputed the facts and the basis on which such allegations were made. He stated that the actions by the nominee directors of MIPL to oust him as Managing Director was oppressive and done with the malafide intention of purchasing his shares in the Company. Hence, Mr. Bakshi approached the company law tribunal which subsequently got transferred to the NCLT.

Mr. Bakshi’s main argument relied on the fact that there was a history of prejudice and oppression shown against him by the respondents. The respondent’s main argument was that the NCLT lacked jurisdiction in the present case as it is an issue of a private contract. The respondents also further argued on facts that MIPL (and its nominee directors) had the right to block such re-appointment as Mr. Bakshi had violated the provisions of the Joint Venture Agreement by acting against the interests of CPRPL and MPIL. They further mentioned that the private contract provides for arbitration as the means of dispute settlement.

NCLT’s Decision

After looking into the facts and issues of the case, the NCLT held the following in favour of Mr. Bakshi. In summary:–

  1. The NCLT held that it has jurisdiction in the present case as the joint venture agreement was incorporated into the AoA of the company. Therefore, it has jurisdiction.
  2. The NCLT rejected the arguments of the respondents completely. Looking at the financial statements, it held that there was no case of mismanagement of the company as it was financially healthy. It also found no case of diversion of funds.
  3. It also took cognizance of the fact that the respondents while sending emails to key management of McDonalds, continued to send emails to Mr. Bakshi post-2013 and acknowledged the sincere efforts that he had put in building the brand of McDonalds in India.
  4. The NCLT held that the acts by the nominee directors of MIPL to block the re-appointment of Mr. Bakshi as MD was an act of oppression and was done with the malafide and pre-meditated intention of availing the benefits of their right to purchase his shares upon his termination.
  5. The NCLT also relied on the fact that the actions of MIPL was detrimental to public interest as several employees of the franchise suffered die to the employment hanging in the balance owing to the decision to terminate the franchise agreement.
  6. The NCLT held that this is a continuing trend of the respondent’s prejudice and oppression towards Mr. Bakshi. Therefore, it held that this is a case of oppression and mismanagement.
  7. The NCLT reinstated him as Managing Director of CPRPL.

Analysis

This judgement has given clarity to the position of oppression and mismanagement in India. Although, the provisions in the case deal with the 1956 Act, it is still relevant as the 2013 Act has borrowed a lot of principles of oppression and mismanagement from the 1956 Act. The main implications of this judgment are as follows.

  1. The main issue was whether the NCLT will have jurisdiction in this matter. This question arose as the matter was regarding a dispute in the joint venture agreement which was argued to be a private contract by the respondents. As the provisions of the Agreement were incorporated within the Articles of Association of CPRPL, NCLT expanded the jurisdiction of the NCLT to conclude that such contracts that are incorporated in the AoA, will fall within the jurisdiction of NCLT.
  2. The NCLT also reaffirmed the position that it could pass any judgment on any matter if it dealt with the protection of any member or class of member from oppression and mismanagement.
  3. Another takeaway from this case is the non enforcement of the arbitration clause. The Delhi high court did not allow for its enforcement as the matter was being dealt with by the NCLT.
  4. This judgment has elucidated that what qualifies as ‘oppression’ must be dealt with on the facts of the case and a clear malafide intent must be established through such facts.

The above points show that the NCLT has taken a strong position on oppression and mismanagement in a company. Through this judgement, the tribunal expanded the rights of those shareholders who are victims of oppression and mismanagement in the company by remaining shareholders, which is an important decision towards protection of minority shareholder rights. However, by failing to enforce the arbitration clause in the agreement, the tribunal took a step backwards. This will have severe implications when foreign companies consider investing in India or when it comes to the ease of doing business in India. A majority of companies prefer arbitration over the domestic judicial process for dispute resolution.