- Sarah Azad
THE NEED TO CALL FOR A CHANGE IN SECTIONS 241,242 UNDER THE COMPANIES ACT 2013
Updated: Dec 26, 2022
The case concerning "Tata Consultancy Services Limited v. Cyrus Investments Pvt. Ltd.", which lasted four years, lately came to a close with the Supreme Court of India ("SC") trying to dismiss accusations of persecution and poor management. The oppressive penalties offered within the few sections of the Companies Act, 2013 ("CA, 2013"), namely sections 241 and 242, lack a lot to be wanted, as this SC decision demonstrates. The petitioner must show that winding up a firm as a result of persecution and mismanagement is "fair and equitable" under Section 242 of the CA, 2013. Even though being fair is seen as similar to being equitable, the two terms are related yet different. Being Fair will be being impartial while being equitable would include equal distribution of resources and equal treatment. India, when straightaway ‘winding up’ business in light of persecution and oppression, is not abiding by these guiding ‘fair and equitable’ principle. When you are winding up a business, you are snatching away all the assets that come along with the business from all the stakeholders that had invested their time money, and efforts into setting up the business. This is in stark contradiction to other jurisdictions, wherein company separation is seen as a feasible alternative to persecution.
This piece examines the conditional provision found in Section 242 of the CA, 2013 in India and analyses the oppression remedy therein. It also contrasts such an oppression remedy to those in other similar jurisdictions, before concluding for a call for change.
A law: Remedy for Oppression
As per the CA, 2013, "an aggrieved person may make an action using section 241 to protest regarding the company's activities being harmful to such members, whereas section 242 permits the tribunal to only pass an order on an application under section 241 if specific conditions are met". Under CA, 2013, particularly section 242, the petitioning shareholders encounter a higher challenge since they must meet two prerequisites. The first is that the firm's practices are authoritarian and damaging to any of its members or its objectives. This is called the "substantive limb". The other justification says that the closure of the firm might unjustly harm such members or individuals, even though it would be "just and equitable" to do so otherwise. This is called the "conditional limb". The reach of establishing an oppressive redress is significantly restricted since the other element is tied to the firm's liquidation process. This is simply because, ‘oppression’ is a subjective term – what may be oppressive for one, may not be oppressive for the other. In order to prove oppression as a cause leading to mismanagement of the firm and its practices, a clear concise definition of the same is required – but in reality, the term harbors vagueness.
The Indian Supreme Court found in "Mistry v. Tata Consultancy Services" that dismissal of Mistry from the role as a board really wasn't biased or repressive of minorities' concerns. Moreover, the existing condition was considered to not meet the essential conditions to warrant the firm's liquidation. The "National Company Law Appellate Tribunal” was also reprimanded for neglecting to assess if a winding-up might deprive the charity foundations that possess the majority of the company's stock.
The Supreme Court used the Baird v. Lees test to navigate the "just and equitable" ground, holding that a shareholder puts money in a business headquartered on some circumstances, such as that the company it puts money in will be limited to a clear objective and will be carried out in compliance with probity and efficiency principles. Simply put, this means that it is a given expectation of each stakeholder that his money is going to be used ethically. There has to be a decent amount of transparency and accountability on part of the firm. Furthermore, it was declared that only when these standards are deliberately and regularly disregarded will it be "fair and equitable" to wind up the corporation.
The Companies Act, 2013 preserves a huge weight by relying on this conditional limb irrespective of the basis of the alleged stockholder's conduct. This would not just raise the standard for exploitation and bias unduly high, but it is sometimes not to the greatest advantage of small investors to wind up the corporation. This is due to a number of factors, such as the total damage of asset worth as a consequence of this drastic criterion, as assets of the company would've been traded at liquidation worth without respect for goodwill; long time corporation debt payments would have become due and payable; the winding-up procedure would be exceedingly long; as well as the liquidator's expenditures would've been extremely expensive. The company's financial assets will be locked, making it impossible for the firm to make any transactions out of them. Banks always undertake this practice to protect themselves in the event of a winding up notice being issued against the firm. The accounts of a corporation are normally blocked promptly after the petition is published, but it can happen at any point after the petition is presented. After the accounts are frozen, the firm may be unable to pay its employees and suppliers, forcing it to discontinue operations. The filing of a winding up application against a firm can be extremely damaging to the company's commercial standing. While the appeal is pending, the company may find it more challenging to acquire credit (for example, from contractors). Current creditors of the corporation may approach the company more aggressively for recovery of existing obligations than would be the case.
A Comparative Study
As an oppression remedy, India has a strong desire to ensure a just and equitable winding up. In various other countries that are similar, such as the, Singapore, United Kingdom, Australia, Canada and the United States, however, a corporation's demise has always been viewed as an extreme action. As a result, courts have been wary of awarding this relief.
The conditionality of the redress in the UK, from where India got its conditional oppressive redressal, has been noted to conclude in relatively lesser applications becoming successful within this remedy. Upon realizing that this legal oppressive redress is ineffectual, legislation was changed in 1980. The Companies Act of 1980, which was enacted in response to the Jenkins Report's recommendations, greatly expanded the scope of the remedy's potential application. It permitted the details and facts of the case to justify the winding-up process without the need for justification.
Regarding the conditional limb, When reviewing the practice of liquidation of a firm considering "just and equitable reasons," Lord Wilberforce noted that:
“It enable(s) the court to subject the exercise of legal rights to equitable considerations; considerations, that is, of a personal character arising between one individual and another, which may make it unjust, or inequitable, to insist on legal rights, or to exercise them in a particular way.”
Under the leadership of Justice Rajinder Sachar, a report from the commission acknowledged that the conditional limb was not easy for demonstration and therefore saw no "sufficient justification" to keep it. However, this had little effect on the current legislation. The just and equitable clause gives the judge broad discretionary powers. The courts must weigh the interests of the firm, its personnel, debtors, shareholders, and the public at large when declaring a corporation to be wound up under this provision. As a result, the courts have concluded that the words "fair and equitable" have the broadest meaning and do not confine the court 's competence to any case. It is a matter of fact, and each case must be judged on its own merits. There is no way to categorise the conditions in which the court can utilise the "fair and equitable provision."
Courts in other nations began to impose other types of remedies, however, this legal termination of a firm was said to be excessive. The establishment and execution of the oppression ground have been facilitated by this growing willingness to offer alternative reliefs. Courts were more likely to discover oppression since they were never constrained to impose the punitive remedy of incarceration if injustice was demonstrated (the conditional limb).
In this respect, until lately, the one and only recourse for conditions where "fair and equitable" circumstances applied in Singapore was the company's winding up. There have been fewer occurrences of corporations being wound up as a result of giving an alternative relief, such as a buy-out. The Singapore Court of Appeal ruled at the time of Sim Yong Kim v. Evenstar Investment Pte Ltd. saying that even in just as well as equitable winding-up proceedings, this "winding-up order" can be customised to resemble any "buy-out order". This also used the practise of maintaining the wind-up demand to give both the sides some time to come up with a new agreement.
While demonstrating that the company's affairs are harmful to specific representatives is fairly straightforward, demonstrating that liquidation of the firm is "just and equitable" reduces the extent of this redress. Again, the terms ‘just and equitable’ themselves pose a greater problem. The 'just and equitable clause' gives the courts enormous power. The courts have held that the absence of a reference to a statute will not prohibit the court from issuing a winding-up order28. The courts, on the other hand, have established certain limitations under which this power can be utilised. However, the court's primary concern is the company's efficient operation, which is in the best interests of the shareholders. There is nothing prohibiting the court from applying this section and ordering the company's winding up if the court believes the firm is solely a deception to the shareholders, or that the corporation's goal is to cheat the creditors, or that the company is not functioning as it should. Section 242 of CA 2013 says that the conditional character is a substantial hurdle for investors looking for redressal. Additionally, India's oppressive measures have stayed restricted in contrast to neighbouring nations that already have improved their legislation over centuries. The latest Tata Consultancy Services ruling acts as a warning that Parliament needs to widen the remedies. Given the current developments, it would be unwise to anticipate that the legislature will make significant changes to resolve outstanding issues, such as whether a trio of remedies – oppression, prejudice, and mismanagement – is required, which is likely to cause substantial crossover, or whether integration, like in England. Furthermore, for these cures, an existential dilemma is whether their evolution as an alternative to a single medicine still holds true today. Due to a lack of legislative attention, courts will be responsible for interpreting existing legislation to define conduct that is punishable, a function they have played for more than half a century. The key to doing so is to assess issues against a set of criteria. The key is to analyse matters against the criterion of striking a line between adhering to the principle of corporate democracy while also safeguarding susceptible shareholders from behaviour that warrants judicial intervention.