JUDICIARY ON “OPPRESSION” U/S.397 OF THE COMPANIES ACT, 1956
By Sahil M Shah,
Fourth Year, Gujarat
National Law University, Gujarat.
Section 397 of the Companies Act gives a right to
members of a company who comply with the conditions of Section 399 to apply to
the Court for relief under Section 402 of the Act or such other reliefs as may
be suitable in the circumstances of the case, if the affairs of a company are
being conducted in a manner oppressive to any member or members including any
one or more of those applying. [1]
The Court then has power to make such orders under S. 397 read with S. 402 as
it thinks fit, if it comes to the conclusion that - (1) the company's affairs
are being conducted in a manner prejudicial to public interest or in a manner
oppressive of any member or members; and (2) the facts would justify the making
of a winding up order on the ground that it was just and equitable that the
company should be wound up, and (3) the winding up order would unfairly
prejudice the applicants.[2]
In Elder v. Elder & Watson Ltd.[3],
S.210 of the English Act, which is similar to S.397 of the Companies act, has
been very elaborately explained. In that case it was held that “(1) The
oppression of which a petitioner complains must relate to the manner in which
the affairs of the company concerned are being conducted; and the conduct
complained of must be such as to oppress a minority of the members (2) It
follows that the oppression complained of must be shown to be brought about by
a majority of members exercising as shareholders a predominant voting power in
the conduct of the company's affairs. (3) Although the facts relied on by the
petitioner may appear to furnish grounds for the making of a winding up order
under the 'just and equitable' rules, those facts must be relevant to disclose
also that the making of a winding up order would unfairly prejudice the
minority members (4) Although the word 'oppressive is not defined, it is
possible, by way of illustration, to figure a situation in which majority
shareholders, by an abuse of their predominant voting power, are' treating the
company and its affairs as if they were their own property' to the prejudice of
the minority share-holders.[4]
The law, however, has not defined what oppression
for purposes of this section is, and it is left to Courts to decide on the
facts of each case whether there “oppression” under S.497 has been committed or
not. Certain English cases can be
referred to understand the meaning of the term “oppression.” In Scottish Cooperative Wholesale Society Pvt.
Ltd. v. Mayor[5] the
dictionary meaning of the term “oppression” was used and it was held that the
conduct should be “burdensome, harsh and wrongful.” Whereas in Elder’s case the meaning of the term
“oppression” has been explained as
“…the conduct complained of should at the lowest involve a visible departure
from the standards of fair dealing, and a violation of the conditions of fair
play on which every shareholder who entrusts his money to the company is
entitled to rely.”[6] In Re. Jermin Street Turkish Bath Ltd[7]
it was held that “what is to be
considered is whether the affairs of the company are being conducted in a
manner oppressive to some part of members of the company. Oppression occurs
when shareholders having a dominant power in the company, either (1) exercise
that power to procure that something is done or not done in the conduct of the
company's affairs or (2) procure by an express or implicit threat exercising of
that power that something is not done in the conduct of the company affairs and
such acts are burdensome, harsh and wrongful and lacks the degree of probity
which they are entitle to expect in the conduct of company's affairs.”
Oppression has been very lucidly and elaborately
stated In the Halsbury's Laws of
England, [8]wherein it is stated that, "…'oppressive' means burdensome, harsh and
wrongful. It does not include conduct, which is merely inefficient or careless.
Nor does it include an isolated incident: there must be a continuing course of
oppressive conduct, which must be continuing at the date of the hearing of the
petition. Further, the conduct must be such as to be oppressive to the
petitioner in his capacity as a member: whatever remedies he may have in respect
of exclusion from the company's business by being dismissed as an employee or a
director, he will have none under the provisions relating to oppression. On the
other hand, these provisions are not confined merely to conduct designed to
secure pecuniary advantage to the oppressors; they cover the case of wrongful
usurpation of authority, even though the affairs of the company prosper in
consequence."
In Sangramsinh
P. Gaekwad v. Shantadevi P. Gaekwad[9]
the Apex Court held that 'Oppression'
complained of, thus, must relate to the manner in which the affairs of the
company are being conducted and the conduct complained of must be such as to
oppress the minority members. By reason of such acts of oppression, it must be
shown that the majority members obtained a predominant voting power in the
conduct of the company's affairs. The Court also held that the acts complained
of may either be designed to secure pecuniary advantage to the detriment of the
oppressors or wrongful usurpation of authority. In Binani Metals Ltd.
and Triton Trading Co. Pvt. Ltd. Vs. Gallant Holdings Ltd. and Ors.[10]
it was held that it is settled law that in a case of oppression, a member has
to specifically plead on five facts - (a) what is the alleged act of
oppression; (b) who committed the act of oppression; (c) how it is oppressive;
(d) whether it is in the affairs of the company; (e) and, whether the company
is a party to the commission of the act of oppression.
The Indian Supreme Court in Needle Industries
(India) Ltd. v. Needle Industries Newey (India) Holdings Ltd.[11]
has held that the person complaining of oppression must show that he has been
constrained to submit to a conduct which lacks in probity, conduct which is
unfair to him and which causes prejudice to him in the exercise of his legal
and proprietary rights as shareholder. In that case it was also held that
oppression should be a continuous act continuing till the date of filing of the
petition. In Chatterjee Petrochem (Mauritius) Company and Ors. Vs. Haldia
Petrochemicals Ltd. and Ors.[12]it
was held that “relief against oppression can be invoked only when a shareholder
feels aggrieved or oppressed that his rights as shareholder are being affected.
A shareholder has certain rights conferred by the Companies Act, which are
statutory rights…certain rights are conferred by the Articles….In both these
cases, if the shareholders rights are affected, they can allege oppression.” In
Shanti Prasad Jain case[13]
it was categorically held that the conduct complained of must relate to the
manner of management of the affairs of the company and must be such so as to
oppress a minority of the members including the petitioners qua shareholders.
The burden to prove oppression or mismanagement is upon the petitioner. The
Court, however, will have to consider the entire materials on records and may
not insist upon the petitioner to prove the acts of oppression.
In Chatterjee Petrochem
(Mauritius) Company & Ors. case[14]
it was held that provisions
of Section 397 seeking relief against oppression can be invoked only when a
shareholder feels aggrieved or oppressed that his rights as shareholder are
being affected. A shareholder has certain rights conferred by the Companies Act
which are statutory rights. Sometimes, certain rights are conferred by the
Articles also like preemption rights in case of transfer of shares, non
rotational directorship etc. In both these cases, if the shareholders rights
are affected, they can allege oppression. Sometimes, certain rights accrue to a
shareholder on the basis of agreements to which the company is a party and
there are cases wherein, even though the company is not a party, it has acted
upon the said agreement or has derived benefits out of the private agreements.
There could be instances, wherein without any written documents, certain rights
might have been enjoyed for a long time and when the same is subsequently
denied, the affected shareholders may allege oppression. In the last three
cases, whether the breach of the terms of the agreements or understandings
could be considered to be an act of oppression will depend on the facts of each
case.[15]
Hence, the meaning of the term oppression u/s.397 of
the Companies Act has been very clearly explained by the Courts and has filled
the gap of the lack of definition by the Legislature. However, what amounts to
oppression depends upon facts and circumstances of each case and a
straight-jacket formula has aptly not been laid down by the Courts.
[1] Shanti Prasad
Jain v. Kalinga Tubes Ltd AIR 1965 SC 1535 at para 14
[2] Hanuman Prasad Bagri
v. Bagress Cereals Pvt. Ltd. AIR 2001 SC 1416
[3] 1952 SC 49
[4] Referred to in
Shanti Prasad Jain v. Kalinga Tubes Ltd AIR 1965 SC 1535
[5] 1958 3 AER 66
[6] Sangramsinh P.
Gaekwad v. Shantadevi P. Gaekwad AIR 2005 SC 809
[7] 1971 AER 184
[8] 4th Edition,
Volume 7, para 1011 cited in Sangramsinh P. Gaekwad v. Shantadevi P.
Gaekwad AIR 2005 SC 809
[9] AIR 2005 SC 809
[11] AIR 1981 SC 1298
[13] Shanti Prasad
Jain v. Kalinga Tubes Ltd AIR 1965 SC 1535
[14]Chatterjee
Petrochem (Mauritius) Company and Ors. Vs. Haldia Petrochemicals Ltd. and Ors MANU/CL/0011/2007
[15] Chatterjee Petrochem (Mauritius) Company and Ors. Vs. Haldia Petrochemicals Ltd. and Ors MANU/CL/0011/2007