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COMPANY LAW-II

INTERNAL ASSIGNMENT III


"A Mere Dissatisfaction Of The Minority
Does Not Constitute Oppression"

-Akanksha Dutta
PRN: 12010123312
IIIrd Year Division D
B.A. LL.B.

The working of a company when it pertains to decision making always follows the Majority
Rule. Any decisions to be taken are voted upon by members in meetings and depending upon
the subject matter, the decision is taken by a simple or special majority. The rule emanates
from the case of Foss v. Harbottle1, and was applied to the Indian case of Bhajekar v.
Shinkar2 It was held that on becoming a member of the company, s/he agrees to submit to the
will of the majority of the members expressed in a general meeting and in accordance with
law and Memorandum and articles.
One of the exceptions to the Majority Rule is Oppression and Mismanagement that can occur
if the majority abuses its power. To remedy such a situation if it comes up, the Companys
Act has built in some protective mechanisms by way of provisions under chapter XVI of the
Act titles Prevention of Oppression and Mismanagement. Under section 241 of the Act,
members of a company may apply to the NCLT for relief on grounds that the companys
affairs have been conducted in the past or continued to be conducted in a manner prejudicial
to the companys and publics interest or oppressing certain members thereby amounting to
oppression.
The Indian courts adjudicating whether an act is oppressive or not initially applied the
definition of oppression as given in the British case of Elder v. Elder and Watson Ltd3. This
case described oppression to mean a visible departure from the standards of their dealing and
violation of the conditions of fair play on which every shareholder who entrusts his money to
the company is entitled to rely on.
The above definition was referred to by the Supreme Court in the landmark case of Shanti
Prasad Jain v. Kalinga Tubes.4 This was a case where a private company having 3 groups of
shareholders i.e. the petitioner and two respondents held equal proportions of shares with
equal representation on the Board. The same arrangement had been agreed to in writing but
had not been included in the Articles of Association. Later on the company went public in
order to obtain certain loan facilities and proposed to issue 39,000 more shares. According to
s. 81 of the 1956 Act, these shares were to be offered first to existing shareholders, but the
respondents, being majority members passed a resolution that allowed these shares to be sold
directly to outsiders. The petitioner had contended that these outsiders were all friends of the
respondents thus the resolution was a move to corner the petitioner by increasing their voting
strength and was mala fide.
Here, the Supreme Court, affirmed the Orissa High Courts decision, dismissed the petition
and held that just because the company had been continuing in the format of equal
1Foss v. Harbottle (1843) 67 ER 189
2Bhajekar v. Shinkar (1934) 36 BOMLR 483
3Elder v. Elder and Watson Ltd [1952] S.C. 49
4Shanti Prasad Jain v. Kalinga Tubes 1965 AIR 1535

proportions of shareholding, it did not mean that the same had to be followed after the
company became public. The resolution passed by the respondents was merely an exercise of
the right the majority had to direct free issue of shares. In fact this would be in interest of the
company as the existing shareholders might not be able to raise the capital that would be
required. The court noted that in proceedings related to oppression, the legality of the action
is not of consequence but the act should be oppressive. Hence the court held that actions of
the majority did not amount to oppression of the minority shareholders as it did not involve a
lack of probity or fair dealing with respect to proprietary rights of the shareholders.
Thus, oppression means not keeping the general standards of honesty and fairness and not
having regard of the interests of shareholders. It includes any act which harsh and
burdensome and it may be caused either by acting or not acting in a particular manner but
excludes unwise, inefficient and careless conduct of the director in the performance of his
duties.
The meaning of oppression was again discussed in the case of Needle Industries Ltd v.
Needle Industry Newey (India) Ltd.5 This was a case where the respondent was a wholly
owned subsidiary of an English Company. The company had a provision in its Articles where
the directors could decide to increase the capital of the company by the issue of new share,
the same would be offered to the existing shareholders proportionately. Failing this they
could be offered to outsiders in a manner beneficial to the company. Meanwhile the
government of India introduced a policy to reduce foreign holdings in Indian companies, thus
the respondents issued shares to employees and relatives effectively reducing the foreign
holding to 60%. As more than 25% of the company was still held by a body corporate, u/s
43A of the old Act, it became a public company, but chose to function as a private one in
most situations. The company had to further reduce foreign holdings to 40%, the English
company wanted this reduced 20% shares to be allotted to one of the Indian companies in
which it had substantial holdings, but the Board of Directors passed a resolution following
the policy of allotting it to existing members. Thus the English company would have no
means to control the reduced 20%. The resolution gave 16 days time to the members to take
their proportions, this letter of offering reached the holding company only 4 days before the
last date. And the letter for exercising the option reached them after expiry of the time, also
the notice of the meeting of directors completing the allotment was sent with such a short gap
that they received in England on the day of the meeting in India. Thus, they were neither able
to buy the block of rights shares they were entitled to, nor were able to attend an important
meeting, based on these events they applied to the court complaining of oppression.
Here the court held that there was no instance of oppression as the respondent company was
merely following the government policy, also by increasing the Indian holdings, rather than
buying out the foreign holdings, it provided more capital to the company therefore took
actions in the companys interest. While it was unjust that the English company didnt
receive the notice in time, even if it had, it wouldnt be able to subscribe to them or renounce
them to others as it wasnt permitted in the Articles. The court directed the Indian
5Needle Industries Ltd v. Needle Industry Newey (India) Ltd 1981 AIR 1298

shareholders to pay the holding company a fair premium on the shares which were part of the
rights issue in which the holding company could[ not participate as the notice did not reach
them on time. The court held that even if the complainant does not make out a case of
oppression, the court is not powerless to do substantial justice between the parties.
It has to be remembered that owing to recent judgements oppression can be complained by
even majority members. In the case of Sindhi Iron Foundry (P.) Ltd., Re6 it was stated that
nowhere in the Act was it mentioned that only minorities can complain against oppression.
Again, in Dr. V. Sebastian v. City Hospital (P.) Ltd.7 the Kerala High Court had stated that
while the Act intends to protect the minority members form oppression. But where it is
proven that the majority has been prevented from protecting itself through the process of
meetings despite the articles establishing the majority rule based on the right to demand a
vote; then the majority can claim to be an artificial minority and is entitled to the same
protection form oppression.
Thus whether oppression has occurred or not varies according to facts and circumstances that
need to be evaluates by the court. It is necessary to prevent acts that are unfair and prejudice
the propriety rights of shareholders and are not in the interest of the company and the 2013
Act has provided for a mechanism to do the same.

6Sindhi Iron Foundry (P.) Ltd., Re [1964] 34 Comp Cas 510 (Cal)
7Dr. V. Sebastian v. City Hospital (P.) Ltd 1985 57 Comp Cas 453 Ker

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