Unit 5
Majority Powers and Minority Rights
Majority and minority define who has the power to rule. The structure of democracy is as such, where the majority has the supremacy. In the corporate world, also the rule and decisions of the majority seem to be fair and justifiable. The power of the majority has greater importance in the company, and the court tries to avoid interfering with the affairs of the internal administration of the shareholders. With the superiority of the majority, there is always inferiority among the minority, which shows an unbalance in the company. The Companies Act, 2013 reduces the inferiority of the minority. This article details the rules of the majority and also the rights of the minority in a company.
Powers of Board of Directors
The Companies Act distributes the power between the board of directors and the shareholders. The board and the shareholders exercise their powers through meetings in a democratic way. The meetings include the meetings of the board of directors and the general meetings. The shareholders entrust certain powers on the board of directors, which is through the Memorandum of Association (MoA) and Articles of Association (AoA). The board of directors has all the powers and can to do all the things and acts just the same as the company exercises its powers. But the Act restricts the board of directors from the powers that only the shareholders can do in the general meetings.
Majority Powers
A company stands as an artificial entity. The directors run it but they act according to the wish of the majority. The directors accept the resolution passed by the majority of the members unless it is not within the powers of the company. The majority members have the power to rule and also have the supremacy in the company. But there is a limitation in their powers. The following are two limitations:
Limitations
- The powers of the majority of the members are subject to the MoA and AoA of the company. A company cannot authorise or ratify any act legally outside the memorandum. This will be regarded as the ultra vires of the company
- The resolution made by the majority should not be inconsistent relating to The Companies Act or any statutes. It should also not commit fraud on the minority by removing their rights.
Principle of Non-Interference
The general rule states that during a difference among the members, the majority decides the issue. If the majority crushes the rights of the minority shareholders, then the company law will protect it. However, if the majority exercises its powers in the matters of a company’s internal administration, then the courts will not interfere to protect the rights of the majority.
Foss Versus Harbottle
Foss v. Harbottle lays down the basics of the non-interference principle. The reasons for the rule is that, if there is a complaint on a certain thing which the majority has to do if there is something done irregularly which the majority has to do regularly or if there is something done illegally which the majority has to do legally, then there is no use to have a litigation over such thing. As in the end, there will be a meeting where the majority will fulfil their wishes and make decisions.
Benefit and Justification
The benefit and the justification of the decision of the case are:
- Recognises the country’s legal personality
- Emphasises the necessity of the majority making the decisions
- Avoid the multiplicity of suits
Exceptions to the Rule (Minority Rights)
The rule is not absolute for the majority; the minority also has certain protections. The Non-interference principle does not apply to the following:
Ultra Vires Act
An individual shareholder can take action if they find that the majority has done an illegal act or ultra vires act. The individual shareholder has the power to restrain the company. This is possible by the injunction or the order of the court.
Fraud on Minority
If the majority commits fraud on the minority, then the minority can take necessary action. If the definition of fraud on the minority is unclear, then the court will decide on the case according to the facts.
Wrongdoer in Control
If the company is in the hands of the wrongdoer, then the minority of the shareholder can take representation act for fraud. If the minority does not have the right to sue, then their complaint will not reach the court as the majority will prevent them from suing the company.
Resolution Requiring Special Majority
If the act requires a special majority, but it passes by a simple majority, then an individual shareholder can take action.
Personal Action
The majority of shareholders always oblige to the rights of the individual membership. The individual member has the right to insist on the majority on compliance with the statutory provisions and legal rules.
Breach of Duty
If there is a breach of duty by the majority of shareholders and directors, then the minority shareholder can take action.
Prevention of Oppression and Mismanagement
To prevent the majority of shareholders from oppression and mismanagement, the minority can take action against them.
Key Takeaways:
- The directors accept the resolution passed by the majority of the members unless it is not within the powers of the company.
- The rule is not absolute for the majority; the minority also has certain protections.
A. OPPRESSION
Lord Cooper explained the meaning of oppression in the case Elder v. Watson Ltd[1], “Oppression is a misdemeanour committed by majority shareholders who under colour of their majority power, wrongfully inflict upon the minority shareholder or minority shareholders any harm of injury” was also cited with approval by WANCHOO J (afterwards CJ) of the Supreme Court of India in Shanti Prasad Jain V. Kalinga Tubes Ltd[2],
The grounds on which an application can be made under section 241 are : (a) that the affair of the company are being conducted in a manner which prejudicial or oppressive to a member or some members or in a manner which is prejudicial to the public interest or in a manner prejudicial to the interests of the company; (b) a material change has taken place in the management or control of the company, whether by an alteration in the Board of directors, or manager, or in the ownership of the company’s shares or it’s membership, or in any other manner whatsoever, and that by reason of such change, it is likely that the affairs of the company will be conducted in a manner prejudicial to its interests or it’s members or any class of members.
B. MISMANAGEMENT
Mismanagement means the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner prejudicial to the interest of the company. It is also said to mismanagement where a material change has taken place in the ownership of the company’s share or if it has no share capital in its membership or in any other manner whatsoever and that by reason of that change it is likely that the affairs of the company will be conducted in a manner prejudicial to public interest or in a manner prejudicial to the interest of the company. Palmer explains that a proper balance of majority and minority rights is necessary to run a smooth functioning of the company.
PROVISIONS UNDER COMPANIES ACT, 2013
In providing the remedies to the minorities the tribunal plays an important role.
· Section 241 – empowers the minority shareholders to file an application to the tribunal for relief in case of oppression etc.
· Section 242 – narrates the powers about the tribunal
· Section 243 – states about the consequences of termination of modification of certain agreements.
· Section 244 – gives the right to apply under section 241.
· Section 245 – states about the Class Action.
· Section 246 -lays down the provisions of secty377- 341. Liability under 339 and 340 to extend to partners or directors in firms or companies. Shall apply Mutatis Mutandis in relation to an application made to the tribunal under section 241 or 245.
· Section 337- Penalty for frauds by officer.
· Section 338- Liability where proper accounts are not kept.
· Section 339- Liability for fraudulent conduct of business.
· Section 340- Power of tribunal to assess damages against delinquent directors etc.
· Section 341- Liability under section 339 and 340 to end to partners or directors in firms or company.
Key Takeaways:
- Oppression is a misdemeanour committed by majority shareholders who under colour of their majority power, wrongfully inflict upon the minority shareholder or minority shareholders any harm of injury.
- Mismanagement means the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner prejudicial to the interest of the company.
The main methods of winding up may be discussed under the following four heads, namely:-
1. Compulsory winding up by the court.
2. Voluntary winding up without the intervention of the court.
3. Voluntary winding up with the intervention of the court i.e., under the supervision of the court.
4. Winding up by Tribunal
Mode # 1. Compulsory Winding Up by the Court:
Winding up of a Company by an order of the court is called the compulsory winding up. Section 433 of the Companies Act lays down the circumstances under which a Company may be compulsorily wound up. They are:
(a) If the Company has by special resolution, resolved that the Company may be wound up by the court.
(b) If default is made in delivering the statutory report to the Registrar or in holding the statutory meeting.
(c) If the Company does not commence its business within a year from its incorporation or suspends it for a whole year.
(d) If the number of members is reduced, in the case of a public Company below seven, and in the case of a private company below two.
(e) If the Company is unable to pay its debts.
(f) If the court is of the opinion that it is just and equitable that the company should be wound up.
Persons Entitled to Apply for Liquidation:
The Petition for winding up of a Company may be presented by any of the following persons (Sec. 439):
(1) The Company.
(2) The creditors which include contingent creditors, prospective creditors, secured creditors, debenture holders, or a trustee for debenture holders.
(3) The contributories – comprise present and past shareholders of a Company (Secs. 426 and 428).
(4) The Registrar.
(5) Any person authorised by the Central Government on the-basis of report of inspectors.
Mode # 2. Voluntary Winding Up:
A voluntary winding up occurs without the intervention of the court. Here the Company and its creditors mutually settle their affairs without going to the court.
This mode of winding up takes place on:
(a) The expiry of the prefixed duration of the Company, or the occurrence of event whereby the Company is to be dissolved, and adoption by the Company in general meeting of an ordinary resolution to wind up voluntarily; or
(b) The passing of a special resolution by the Company to wind up voluntarily.
Mode # 3. Winding Up Subject to Supervision of the Court:
Windings up with the intervention of the court are ordered where the voluntary winding up has already commenced. As a matter of fact, it is the voluntary winding up but under the supervision of the court. A court may approve a resolution passed by the Company for voluntary winding up but the winding up should continue under the supervision of the court.
The court will issue such an order only under the following circumstances:
(a) If the resolution for winding up was obtained by fraud by the company; or
(b) If the rules pertaining to winding up are not being properly adhered to; or
The Court may exercise the same powers as it has in the case of compulsory winding up under the order of the court.
Mode # 4. Winding up by Tribunal
As per new Companies Act 2013, a company can be wound up by a tribunal in the below mentioned circumstances:
1. When the company is unable to pay its debts.
2. If the company has by special resolution resolved that the company be wound up by the tribunal.
3. If the company has acted against the interest of the integrity or morality of India, security of the state, or has spoiled any kind of friendly relations with foreign or neighboring countries.
4. If the company has not filled its financial statements or annual returns for preceding 5 consecutive financial years.
5. If the tribunal by any means finds that it is just & equitable that the company should be wound up.
6. If the company in any way is indulged in fraudulent activities or any other unlawful business, or any person or management connected with the formation of company is found guilty of fraud, or any kind of misconduct.
Filling up winding up petition: Section 272 provides that a winding up petition is to be filed in the prescribed form no 1, 2 or 3 whichever is applicable and it is to be submitted in 3 sets. The petition for compulsory winding up can be presented by the following persons:
a) The company
b) The creditors ; or
c) Any contributory or contributories
d) By the central or state govt.
e) By the registrar of any person authorized by central govt. for that purpose
Final Order and its Contents: The tribunal after hearing the petition has the power to dismiss it or to make an interim order as it think appropriate or it can appoint the provisional liquidator of the company till the passing of winding up order. An order for winding up is given in form 11.
Key Takeaways:
- Winding up of a Company by an order of the court is called the compulsory winding up.
- A voluntary winding up occurs without the intervention of the court. Here the Company and its creditors mutually settle their affairs without going to the court.
References:
- ‘Company Law’ by Brenda Hannigan
- ‘Elements of Company’ Law by N. D. Kapoor
