Corporate Disputes – CS Professional Study Material

Chapter 2 Corporate Disputes – Resolution of Corporate Disputes Non Compliances & Remedies Notes is designed strictly as per the latest syllabus and exam pattern.

Corporate Disputes – Resolution of Corporate Disputes Non Compliances & Remedies Study Material

Question 1.
Explain the following:
Mere lack of confidence between the majority shareholders and minority shareholders would not be enough to order for relief under Section 241 . (Dec 2013, 4 marks)
Answer:

  • The scope of Section 241 was very succinctly enunciated by the Supreme Court in Shanti Prasad Jain v. Kalinga Tubes Ltd. where it observed that “It is not enough to show that there is just and equitable cause for winding up of the company though that must be shown as a preliminary to the application under Section 241.
  • It must further be shown that the conduct of majority shareholders were oppressive to the minority as members and this requires that events have to be considered not in isolation but as a part of consecutive story.
  • There must be continuous acts on the part of the majority shareholders continuing to the date of petition, showing that the affairs of the company were being conducted in a mariner oppressive to some members^ the conduct must be burdensome, harsh and wrongful.
  • Mere lack of confidence between the majority shareholders and the minority shareholders would not be enough unless lack of. confidence springs from oppression of minority by the majority in the management of the company’s affairs and such oppression must involve at least an element of lack of probity or fair dealing to a member in the matter of his proprietary rights as a shareholder.”

Corporate Disputes - CS Professional Study Material

Question 2.
A petition signed by 100 members of a company has been moved to NCLT for prevention of mismanagement. Later on, half of the members (signatories) withdrew their consent after filing the petition. Examine whether the remaining applicants (petitioners/signatories) to the petition would be successful in their complaint to NCLT. (June 2015, 4 marks)
Answer:
1. Right to apply under section 241:
The following members of a company shall have the right to apply u/s 241, namely
(a) In the case of a company having a share capital: Not less than 100 members of the company or not less than one -tenth of the total number of members, whichever is less or any member or members holding not less than one tenth of the issued share capital of the company, subject to the condition that the applicant or applicants has or have paid all calls and other sums due on his or their shares;
(b) In the case of a company not having a share capital: Not less than one- fifth of the total number of members.

2. Rajahmundry Electric Supply Co. v. A. Nageshwara Rao, AIR 1956 SC 213:
However, the Tribunal may, on an application, waive all or any of the above requirements so as to enable the members to apply u/s 241.
Once the consent has been given by the requisite number of members by signing the application, the application may be made by one or more of them on behalf and for the benefit of all of them. It has been held by the Supreme Court in Rajahmundry Electric Supply Co. v. A. Nageshwara Rao, AIR 1956 SC 213, that if some of the consenting members have, subsequent to the presentation of the application, withdrawn their consent, it would not affect the right of the applicant to proceed with the application.
Obtaining of consent is a condition precedent to the making of the application and hence a consent obtained subsequent to the application is ineffective. Makhan Lai Jain Vs. The Amrit Banaspati Co. Ltd., I. L. R. (1954) 1 All. 131.

3. Chandramurthy V.K.L.Kapsi (2005)48 SCL 294 CLB:
In L. Chandramurthy V. K. L. Kapsi (2005) 48 SCL 294 CLB, a person who had disposed off his shares was not allowed to apply.
Therefore, in the above case, the withdrawal of consent by some of the members shall not affect the success of the remaining applicants.

Question 3.
The minority shareholders are empowered under the Companies Act, 2013 to bring action with a view to prevent the majority from oppression and mismanagement’. Justify the statement with rights available to minority shareholders under the Act. (June 2019, 4 marks)
Answer:
The various rights are available to the minority shareholders under the Companies Act, 2013 to bring action with a view to prevent oppression and mismanagement:
1. Right to appoint Small Shareholders’ Directors: The small shareholders or minority shareholders as often construed, of a listed company have a right to appoint a shareholder of their choice on the board and such shareholder may be called as a ‘Small Shareholders’ Director’ under section 151 of the Companies Act, 2013.

2. Right to apply to NCLT for Oppression and Mismanagement: The minority shareholders can approach the National Company Law Tribunal (NCLT) under the provisions of the Companies Act, 2013. Section 241, 242 and 244 of the Companies Act, 2013 under Chapter XIV lays down the remedies that minority shareholders can resort to in cases of oppression and mismanagement.

3. Right to file a Class Action Suit under section 245(1) of the Companies Act, 2013: It is another type of protection given to minority shareholders. A class action suit usually means a legal suit wherein a group of persons sharing a common interest can go to NCLT if they are Of the view that the affairs of the company are conducted in manner that is prejudicial to the interests of the company or members or depositors.

Corporate Disputes - CS Professional Study Material

Question 4.
‘The words “oppression” and “mismanagement” are not defined in the Act. The meaning of these words for the purpose of Company Law should be used in broad generic sense and not in any strict literal sense’ – Discuss citing suitable case law. (Dec 2020, 4 marks)
Answer:
The words “oppression” and “mismanagement” are not defined in Companies Act, 2013. The meaning of these words for the purpose of Company Law may be used in a brOad generic sense and not in any strict literal sense.
The meaning of the term “oppression as explained by Lord Cooper in the Scottish case of Elder v. Elder & Western Ltd., (1952) Scottish Cases 49, which has been cited with approval by Wanchoo, J (afterwards C.J.) of the Supreme Court in Shanti Prasad v. Kalinga Tubes, (1965) 1 Comp. L.J. 193 at 204 is as under:
“The essence of the matter seems to be that the conduct complained of should at the lowest, involve a visible departure from the standards of fair dealing, on which every shareholder who entrusts his money to the company is entitled to rely.”

A similar relief was allowed by the House of Lord in Scottish Co-operative Wholesale Society v. Mayer (1959) AC 324. In this case, the society created a subsidiary company to enable it to enter in the rayon industry.
Subsequently when the need for the subsidiary ceased to exist, the society adopted a policy of running down its business which depressed the value of its shares.
The two petitioners who were managing directors and minority shareholders in the company successfully pleaded “oppression”.
The court ordered the society to purchase the minority shares at the value at which they stood before the oppressive policy started.
This decision has also been followed in Re. H.R. Harmer Ltd., (1959) I WLR62).
Minor acts of mismanagement, however, are not to be regarded as oppression. As far as possible, shareholders should try to resolve their differences by mutual readjustment.
Moreover, the courts will not allow these special remedies to become a vexatious source of litigation.

Question 5.
During the course of Secretarial Audit, it was found that in one of the case of transmission of shares, the company took 4 months from the date of its lodgment. Discuss the provisions relating to the transmission of shares under the Companies Act, 2013.
Is there any change in the penal provision in the recent amendment made by the Companies (Amendment) Act, 2020? (Aug 2021, 4 marks)
Answer:
Under Section 56(4)(c) of the Companies Act, 2013, states that each company shall, unless prohibited by any provision of law or any order of court, tribunal or other authority, deliver the certificate of all securities transmitted, within a period of one month from the date of intimation of transmission.

According to penalty Companies (Amendment) Act, 2020 has made changes in the penal provisions contained in Section 56(6) in case of default, and the said amendment came into effect from 21st December, 2020.
The amended section 56(6) of the companies Act, 2013 provides that where any default is made in complying with the provisions of Sub-section (1) to (5) of section 56, the company and every officer of the company who is in default shall be liable to penalty of ₹ 50000/-.

Question 6.
In background of decided case laws, comment whether the following instances amount to oppression or mismanagement with brief reasoning:
(i) Filing of unaudited Balance Sheets
(ii) Non holding of the meetings of the Board. (Dec 2021, 4 marks)
Answer:
Disgorgement:
(i) Filing of Unaudited Balance Sheets:
In Chandra Krishan Gupta v. Pannalal Girdhari Lai Pvt. Ltd., supra, it was held that “Filing of the unaudited balance sheets show misconduct in the managing of the affairs of the company. If this act causes prejudice to the company’s interests, it may justify action under Section 398 of the erstwhile Companies Act, 1956 but this by itself cannot be regarded as an ingredient of oppression within the meaning of Sec. 397 of the erstwhile Companies Act, 1956.”
In the above case, it can be said that filling of unaudited balance sheet may amount to oppression or mismanagement.

(ii) Non-Hoiding of Meetings of the Board:
In Chandra Krishan Gupta v. Pannalal Girdhari Lai Pvt. Ltd., supra, it was held that ‘The non-holding of the meetings of the Board would not amount to oppression of minority shareholders.
The rights of the petitioner as a director might have been affected but his rights as a minority shareholder have not been affected thereby”.
In the given situation, it can be said that non holding of the Board meeting may not amount to oppression or mismanagement.

Corporate Disputes - CS Professional Study Material

Question 7.
In a case pertaining to oppression and mismanagement, the respondents pleaded that the legal heirs of a deceased member whose name is still on the register of members are not entitled to apply before Tribunal, as only member of the company can complain about oppression and mismanagement. Thus, legal heirs have no locus standi. Examine this argument in the light of decided cases. (Dec 2018, 3 marks)
Answer:
According to Section 241 of Companies Act, 2013 any member of the company may make an application to the Tribunal for relief in cases of oppression or mismanagement under given circumstance. In Worldwide Agencies (P) Ltd. v. Margaret T. Desor (1990), it was decided that the legal representatives of a deceased member whose name is still on the register of members are entitled to file a petition, for relief against oppression or mismanagement.
In the above case, the above mentioned case is applicable, where the member has died and his name still exists in the register of members, the legal heirs are entitled to maintain the petition.

Question 8.
A group of shareholders of ABC Developers Limited consisting of 24 members decided to file a petition before the Tribunal for relief against oppression and mismanagement by the Board of Directors. The company has a total of 250 members and the group of 24 members holds one-tenth of the total paid-up share capital accounting for one-fifteenth of the issued share capital. The main grievance of the group is that due to mismanagement by the Board of Directors, the company is incurring losses and they company has not declared any dividends even when profits were available in the past years for declaration of dividend. In the light of the provisions of the Companies Act, 2013, advise the group of shareholders regarding the chances of success for.
(i) getting the petition admitted
(ii) obtaining relief from the Tribunal. (June 2019, 4 marks)
Answer:
Section 244 of the Companies Act, 2013 provides the right to apply to the Tribunal for relief against oppression and mismanagement. This right is available only when the petitioners hold the prescribed limit of shares as indicated below:
(i) In the case of company having a share capital, not less than100 members of the Company or not less than one tenth of the total number of its members whichever is less or any member or members holding not less than one tenth of the issued share capital of the company, provided that the applicant(s) have paid all calls and other dues on the shares.
(ii) In the case of company not having share capital, not less than one-fifth of the total number of its members.
Since the group of shareholders do not number to 100 or hold 1/10m of the issued share capital or constitute 1/10th of the total number of members, they have no right to approach the Tribunal for relief.

However, pursuant to Section 244 of the Act, the Tribunal may, on an application made to it waive all or any of the requirements specified in (i) or (ii) so as to enable the members to apply under section 241.
As regards obtaining relief from Tribunal, continuous losses cannot, by itself, be regarded as oppression (Ashok Betelnut Co. P. Ltd. vs. M.K. Chandrakanth).
Similarly, failure to declare dividends or payment of low dividends also does not amount taoppression. (Thomas Veddon V.J. (v) Kuttanad Robber Co. Ltd). Thus, the shareholders may not succeed in getting any relief from Tribunal.

Question 9.
Mrs. P who holds 500 equity shares of Zeta Limited made an application through instrument of transfer to the Company for transfer of 300 equity shares in favour of Mrs. H. Zeta Limited refused to register the transfer of shares in favour of Mrs. H, stating that she has been declared as a wilful defaulter by the banks. What are the rights available to Mrs. H, under the Companies Act, 2013 for such refusal? (Dec 2019, 4 marks)
Answer:
As per section 58(4) of the Companies Act, 2013, if a public company without sufficient cause refuses to register the transfer of securities within a period of 30 days from the date on which the instrument of transfer or the intimation of transmission, as the case may be, is delivered to the company, the transferee may, within a period of 60 days of such refusal or where no intimajion has been received from the company, within 90 days of the delivery of the instrument of transfer or intimation of transmission, appeal to the Tribunal.
As per Section 58(5), the Tribunal, while dealing with such an appeal, may, after hearing the parties, either dismiss the appeal, or by order
(a) direct that the transfer or transmission shall be registered by the company and the company shall comply with such order within a period of 10 days of the receipt of the order; or
(b) direct rectification of the register and also direct the company to pay damages, if any, sustained by any party aggrieved.
Thus Mrs. H can file an appeal with the Tribunal as mentioned above.

Corporate Disputes - CS Professional Study Material

Question 10.
HDF Limited, a listed entity was into real-estate business. Over a period in an attempt to diversify its operations it borrowed heavily from banks and financial institutions. The Company appointed a Merchant Banking firm, to provide strategic inputs for its business operations. On the recommendation of the firm, the Company created complex group structures and business models. Due to financial mismanagement and lack of strategic operations, the Company started making losses and over a period was not able to repay the loans it had taken. The Company also failed to repay the deposits it had raised from public. Gradually, the market capitalization of the
Company eroded and now it has been reduced to a penny stock. The shareholders are evaluating the option of filing a case against the Company, the Merchant Banking firm and also the Rating Agency which were involved with the Company during such period.
Evaluate whether the shareholders and depositors be successful in filing a suit in these circumstances. (Dec 2019, 8 marks)
Answer:
As per the provisions of Section 245(1) of the Companies Act, 2013, the member or members, depositor or depositors or any class of them, as the case may be, as are indicated in sub-section 245(3) may, if they are of the opinion that the management or conduct of the affairs of the company are being conducted in a manner prejudicial to the interests of the company or its members or depositors, file an application before the Tribunal on behalf of the members or depositors to claim damages or compensation or demand any other suitable action from or against:

  • the Company or its directors for any fraudulent, unlawful or wrongful act or omission;
  • the auditor including audit firm of a Company for any improper or misleading statement of particulars made in the audit report or for any unlawful or fraudulent conduct;
  • any expert or advisor or consultant or an incorrect or misleading statement made to the Company.

However, Rule 84 of the National Company Law Tribunal Rules, 2016 provides that:
1. An application under sub-section (1) of section 245, read with sub-section (3) of section 245 of the Act, shall be filed in Form NCLT-9.

2. A copy of every application under sub-rule (1) shall be served on the company, other respondents and all such persons as the Tribunal may direct.

3. In case of a company having a share capital, the requisite number of member or members to file an application under sub-section (1) of section 245 shall be
(i) (a) at least five per cent, of the total number of members of the company; or
(b) one hundred members of the company, whichever is less; or
(ii) (a) member or members holding not less than five per cent, of the issued share capital of the company, in case of an unlisted company;
(b) member or members holding not less than two per cent, of the issued share capital of the company, in case of a listed company.

4. The requisite number of depositor or depositors to file an application under subsection (1) of section 245 shall be –
(i) (a) at least five per cent, of the total number of depositors of the company; or
(b) one hundred depositors of the company, whichever is less; or;
(ii) depositor or depositors to whom the company owes five per cent, of total deposits of the company.
Based on the aforementioned provisions, it can be concluded that shareholders of HDF Limited will be successful in filing Class Action Suit against the company, its directors and consultants including merchant banking firm/rating agencies.

Corporate Disputes - CS Professional Study Material

Question 11.
Rahul and Rachna are husband and wife. They incorporated a Private
Ltd. Company in the name of RR Industries Pvt. Ltd. The paid-up capital of the company was ?50 lakh, whieh they have contributed equally. The shares were held by them in their individual capacity. The Company’s Board of directors consists of 10 directors. Rachna was designated as Managing Director (MD) and Chief Executive Officer (CEO) of the company and other directors were her father, mother, two brothers. The Rahul’s father and mother were also occupying the position of director. Rest of the three directors were friends of Rachna. Rahul’s status was only as a shareholder of the company, since he was engaged in the employment, occupying a good position there. After some time, due to some domestic issues, Rahul and Rachna got judicially separated (divorced). After getting divorced from Rahul, Rachna expelled the father and mother of Rahul from occupying the position of directorship from the company and inducted her relatives as directors. Rachna now started playing with the funds of the company for her personal use.
Now Rahul want to file an application with the National Company Law Tribunal (NCLT) for relief against oppression and mis-management prevailing in the company.
Whether Rahul can do so? Quote the relevant provisions of the Companies Act, 2013. (Aug 2021, 5 marks)
Answer:
According Section 241(1)(a) of the Companies Act, 2013 provides that any member of a company who complains that-
(a) the affairs of the company have been or are being conducted in a manner prejudicial to public interest or in a manner prejudicial or oppressive to him or any other member or members or in a manner prejudicial to the interests of the company
Or
(b) the material change, not being a change brought about by, or in the interests of, any creditors, including debenture holders or any class of shareholders of the company, has taken place in the management or control of the company, whether by an alteration in the BOD, or manager, or in the ownership of the company’s shares, or if it has no share capital, in its 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 its members or any class of members, may apply to the National Company Law Tribunal, provided such member has a right to apply under section 244.

Section 244(1) of Companies Act, 2013 provides that the following members of a company shall have the right to apply under section 241, namely:
(a) in the case of a company having a share capital, not less than one hundred members of the company or not less than one-tenth of the total number of its members, whichever is less, or any member or members holding not less than one tenth of the issued share capital of the company, subject to the condition that the applicant or applicants has or have paid all calls and other sums due on his or their shares;

(b) in the above of a company not having a share capital, not less than one-fifth of the total number of its members:
In the above case, there are only two shareholders in the company holding the entire share capital in equal proportions and one shareholder
i.e., Rahul want to file an application with the NCLT.
Here, Rahul is having one half of share capital (i.e., more than one tenth of the issued share capital as mentioned in section 244(1).
Therefore, he can very well file the application under Sec 241 of the Act with NCLT for seeking relief against the oppression and mismanagement in the company.

Question 12.
Raji, was holding 1,10,000 equity shares in Mahanav Industries Ltd. After Raji’s death, her legal heir Raman applied for transmission of the shares in his name while the application for Succession Certificate was pending before the Civil Court. The Company allotted these shares to someone else. Raman contends that it is an act of mismanagement by the Company.
Evaluate in context of a judicial pronouncement. (Dec 2021, 4 marks)
Answer:
The fact given in the question is similar to the case in Rajkumar Devraj & Anr. v. Jai Mahal Hotels Pvt. Ltd.
In the above case, a shareholder dies and his heirs apply for transmission of shares while their application for succession certificate was pending before the Civil Court.
The legal heirs alleged illegal allotment of shares by respondent to themselves, reducing the legal heirs to minority.
It was held that the legal heirs are entitled to file a petition alleging oppression and mismanagement.
Conclusion: Yes, Raman will be entitled to file a petition against the illegal allotment of equity shares in accordance with the above mentioned case.
The Company cannot allot the shares to someone else as the succession certificate is pending in Civil Court.

Corporate Disputes - CS Professional Study Material

Question 13.
Sun, is the Company Secretary of S Ltd., a Company listed on Bombay Stock Exchange. During one of the Stakeholder Committees meetings, SKR, one of the Committee members raised a query on whether the Company can allow the transfer of partly paid up shares. There were quite some deliberations in the meeting around the transfer of shares. One such question which arose was whether Ek Private Ltd, one of the group companies, refuse the registration of any transfer or transmission of its securities, considering the fact that it is a private limited company. Explain briefly the provisions relating to transfer of partly paid up shares and the ‘refusal notice’ in connection with registration of transfer/transmission of Securities in a private limited company under the Companies Act, 2013. (June 2022, 4 marks)

Question 14.
Write short note on Transfer and Transmission of securities.
Answer.
Transfer and Transmission of Securities (Section 56)
1. A company shall not register a transfer of securities of the company, or the interest of a member in the company in the case of a company having no share capital, other than the transfer between persons both of whose names are entered as holders of beneficial interest in the records of a depository, unless a proper instrument of transfer, in such form as may be prescribed, duly stamped, dated and executed by or on behalf of the transferor and the transferee and specifying the name, address and occupation, if any, of the transferee has been delivered to the company by the transferor or the transferee within a period of sixty days from the date of execution, along with the certificate relating to the securities, or if no such certificate is in existence, along with the letter of allotment of securities: Provided that where the instrument of transfer has been lost or the instrument of transfer has not been delivered within the prescribed period, the company may register the transfer on such terms as to indemnity as the Board may think fit.

2. Nothing in sub-section (1) shall prejudice the power of the company to register, on receipt of an intimation of transmission of any right to securities by operation of law from any person to whom such right has been transmitted.

3. Where an application is made by the transferor alone and relates to partly paid shares, the transfer shall not be registered, unless the company gives the notice of the application, in such manner as may be prescribed, to the transferee and the transferee gives no objection to the transfer within two weeks from the receipt of notice.

4. Every’company shall, unless prohibited by any provision of law or any order of Court, Tribunal or other authority, deliver the certificates of all securities allotted, transferred or transmitted –
(a) within a period of two months from the date of incorporation, in the case of subscribers to the memorandum;
(b) within a period of two months from the date of allotment, in the case of any allotment of any of its shares;
(c) within a period of one month from the date of receipt by the company of the instrument of transfer under sub-section (1) or, as the case may be, of the intimation of transmission under sub-section (2), in the case of a transfer or transmission of securities;
(d) within a period of six months from the date of allotment in the case of any allotment of debenture:
Provided that where the securities are dealt with in a depository, the company shall intimate the details of allotment of securities to depository immediately on allotment of such securities.

5. The transfer of any security or other interest of a deceased person in a company made by his legal representative shall,, even if the legal representative is not a holder thereof, be valid as if he had been the holder at the time of the execution of the instrument of transfer.

6. As per Companies (Amendment) 2020 provides that where any default is made in complying with the provisions of sub-sections (4) to (5), the company and every officer of the company who is in default shall be liable to a penalty of ₹ 50,000.

7. Without prejudice to any liability under the Depositories Act, 1996 where any depository or depository participant, with an intention to defraud a person, has transferred shares, it shall be liable under Section 447.

Corporate Disputes - CS Professional Study Material

Question 15.
Discuss the Punishment for wrongful withholding of Property.
Answer:
Punishment for wrongful withholding of property (Section 452)
1. If any officer or employee of a company –
(a) wrongfully obtains possession of any property, including cash of the company; or
(b) having any such property including cash in his possession, wrongfully withholds it or knowingly applies it for the purposes other than those expressed or directed in the articles and authorised by this Act, he shall, on the complaint of the company or of any member or creditor or contributory thereof, be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees.

2. The Court trying an offence under sub-section (1) may also order such officer or employee to deliver up or refund, within a time to be fixed by it, any such property or cash wrongfully obtained or wrongfully withheld or knowingly misapplied, the benefits that have been derived from such property or cash or in default, to undergo imprisonment for a term which may extend to two years.
As per Companies (Amendment) Act, 2020
In Section 452(2) of the Companies Act, 2013, the following proviso has been inserted, namely:-
“Provided that the imprisonment of such officer or employee, as the case may be, shall not be ordered for wrongful possession or withholding of a dwelling unit, if the court is satisfied that the company has not paid to that officer or employee, as the case may be, any amount relating to
(a) provident fund, pension fund, gratuity fund or any other fund for the welfare of its officers or employees, maintained by the company;
(b) compensation or liability for compensation under the Workmen’s Compensation Act, 1923 in respect of death or disablement.”

Question 16.
Discuss the grounds of refusal of registration and appeal against refusal.
Answer:
Refusal of registration and appeal against refusal (Section 58)
1. If a private company limited by shares refuses, whether in pursuance of any power of the company under its articles or otherwise, to register the transfer of, or the transmission by operation of law of the right to, any securities or interest of a member in the company, it shall within a period of thirty days from the date on which the instrument of transfer, or the intimation of such transmission, as the case may be, was delivered to the company, send notice of the refusal to the transferor and the transferee or to the person giving intimation of such transmission, as the case may be, giving reasons for such refusal.

2. Without prejudice to sub-section (1), the securities or other interest of any member in a public company shall be freely transferable: Provided that any contract or arrangement between two or more persons in respect of transfer of securities shall be enforceable as a contract.

3. The transferee may appeal to the Tribunal against the refusal within a period of thirty days from the date of receipt of the notice or in case no notice has been sent by the company, within a period of sixty days from the date on which the instrument of transfer or the intimation of transmission, as the case may be, was delivered to the company.

4. If a public company without sufficient cause refuses to register the transfer of securities within a period of thirty days from the date on which the instrument of transfer or the intimation of transmission, as the case may be, is delivered to the company, the transferee may, within a period of sixty days of such refusal or where no intimation has been received from the company, within ninety days of the delivery of the instrument of transfer or intimation of transmission, appeal to the Tribunal.

5. The Tribunal, while dealing with an appeal made under sub-section (3) or sub-section (4), may, after hearing the parties, either dismiss the appeal, or by order
(a) direct that the transfer or transmission shall be registered by the company and the company shall comply with such order within a period of ten days of the receipt of the order; or
(b) direct rectification of the register and also direct the company to pay damages, if any, sustained by any party aggrieved.

6. If a person contravenes the order of the Tribunal under this section, he shall be punishable with imprisonment for a term which shall not be less than one year but which may extend to three years and with fine which shall not be less than one lakh rupees but which may extend five lakh rupees.

Corporate Disputes - CS Professional Study Material

Question 17.
What are the consequences of termination or modification of agreements?
Answer:
Consequence of termination or modification of certain agreements Section 243(1) states that where an order made under Section 242 terminates, sets aside or modifies an agreement such as is referred to in sub-section (2) of that section,
(a) such order shall not give rise to any claims whatever against the company by any person for damages or for compensation for loss of office or in any other respect either in pursuance of the agreement or otherwise;

(b) no managing director or other director or manager whose agreement is so terminated or set aside shall, for a period of five years from the date of the order terminating or setting aside the agreement, without the leave of the Tribunal, be appointed, or act, as the managing director or other director or manager of the company:
Provided that the Tribunal shall not grant leave under this clause unless notice of the intention to apply for leave has been served on the Central Government and that Government has been given a reasonable opportunity of being heard in the matter.
Further, Section 243(2) provides that any person who knowingly acts as a managing director or other director or manager of a company in contravention of clause (b) of sub-section (1), and every other director of the company who is knowingly a party to such contravention, shall be punishable with fine which may extend to five lakh rupees.
Note: As per Companies (Amendment) Act, 2020 Provides that Section 243(2) for the words “five lakh rupees, or with both”, the words “five lakh rupees” shall be substituted.

Corporate Disputes Notes

Meaning of Oppression:
The words “oppression” and “mismanagement” are not defined in the Act.
The meaning of these words for the purpose of Company Law should be used in a broad generic sense and not in any strict literal sense.

Right to apply:
The following members of a company shall have the right to apply u/s 241, namely:
(a) In the case of a company having a share capital.’ Not less than 100 members of the company or not less than one -tenth of the total number of members, whichever is less or any member or members holding not less than one tenth of the issued share capital of the company, subject to the condition that the applicant or applicants has or have paid all calls and other sums due on his or their shares;

(b) In the case of a company not having a share capital: Not less than one- fifth of the total number of members.
However, the Tribunal may, on an application, waive all or any of the above requirements so as to enable the members to apply u/s 241.

Exceptions to the Rule in Foss v. Harbottle or Protection of Minority Rights and share-holders remedies

  • Ultra Vires Act
  • Fraud on Minority
  • Wrongdoers in Control
  • Resolution requiring Special Majority but is passed by a simple majority
  • Personal Actions
  • Breach of Duty
  • Prevention of Oppression and Mismanagement

Under the Provision of Companies Act, 2013:
The first remedy in the hands of an oppressed minority is to move the NCLT. Section 241 provides that any member of a company who complain that the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member(s) (including any one or more of themselves) may make an application to the NCLT by way of petition for relief. Following requirements must be satisfied for seeking a relief under Section 241:
(i) That the affairs of the company are being conducted: (a) in a manner prejudicial to public interest; or (b) oppressive to any members.
(ii) That the fact justified the compulsory winding up order on the ground that it is just and equitable that the company should be wound up.
(iii) That to wind up the company would unfairly prejudice the petitioners
[Ramji Lai Baiswala v. Britain Cable Ltd., (1964) 14 Raj. 135].
On being satisfied about the above requirements, the NCLT may make the necessary orders for ending the matters complained of. The first requirement relates to public interest or oppression. First we analyse and discover the precise connotation of the word “oppression” with the help of judicial decisions.

Corporate Disputes - CS Professional Study Material

Transfer and Transmission of Securities (Section 56):
1. A company shall not register a transfer of securities of the company, or the interest of a member in the company in the case of a company
having no share capital, other than the transfer between persons both of whose names are entered as holders of beneficial interest in the records of a depository, unless a proper instrument of transfer, in such form as may be prescribed, duly stamped, dated and executed by or on behalf of the transferor and the transferee and specifying the name, address and occupation.

2. Nothing in sub-section (1) shall prejudice the power of the company to register, on receipt of an intimation of transmission of any right to securities by operation of law from any person to whom such right has been transmitted.

3. Where an application is made by the transferor alone and relates to partly paid shares, the transfer shall not be registered, unless the company gives the notice of the application, in such manner as may be prescribed, to the transferee and the transferee gives no objection to the transfer within two weeks from the receipt of notice.

4. The transfer of any security or other interest of a deceased person in a company made by his legal representative shall, even if the legal representative is not a holder thereof, be valid as if he had been the holder at the time of the execution of the instrument of transfer.

Punishment for Personation of Shareholder (Section 57):
If any person deceitfully personates as an owner of any security or interest in a company, or of any share warrant or coupon issued in pursuance of this Act, and thereby obtains or attempts to obtain any such security or interest or any such share warrant or coupon, or receives or attempts to receive any money due to any such owner, he shall be punishable with imprisonment for a term which shall not be less than one year but which may extend to three years and with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees.

Transfer in case of private company:
Section 58(1) provides that transfer or transmission of securities or interest of a member in respect of a private limited company is to be effected strictly as per its articles of association. In case the same is refused by the company, the company within thirty days to send the notice of refusal along with the reason for the same. This refusal notice is to be issued to the person (transferor or transferee) who has lodged the transfer/ transmission.

Free transferability of shares in case of public companies:
Sub-section (2) provides that securities or other interests shall be freely transferable in a public company. But in case of any contract or arrangement between two or more persons with respect of transfer of securities the same shall be enforceable as a contract.

Appeal to Tribunal:
Sub Section (3) provides that the transferee (not the transferor) may appeal to tribunal within 30 days of refusal notice by the company and in case company does respond in any manner then within 60 days of delivery of instrument of Transfer or intimation given to the company in case of transmission.

Time limit to approach Tribunal in case of public companies:
Sub-section (4) provides that in case of public companies, which refuses to register transfer without sufficient cause within a period of thirty days from the date on which the instrument of transfer or the intimation of transmission, as the case may be is delivered to the company, the transferee may within a period of sixty days of such refusal or where no intimation has been received from the company, within ninety days of the delivery of the instrument of transfer or intimation of transmission, appeal to the Tribunal.

Powers of Tribunal:
The tribunal after hearing the parties may decide the issue. In case it orders for registration of securities and order for rectification of register, in addition it may also order for damages. Once transfer/transmission is ordered the concerned company has to implement the order within 10 days of the receipt of the order.

Offence and compoundability:
In case orders of Tribunal are not complied with, the concerned person shall be liable for imprisonment of minimum one year and may extend to three years in addition to minimum fine of Rupees One lakh which may go upto Rupees Five Lakhs. Violation of sub-section (5) is not compoundable.

Corporate Disputes - CS Professional Study Material

Rectification of Register of Members (Section 59):
If the name of any person is, without sufficient cause, entered in the register of members of a company, or after having been entered in the register, is, without sufficient cause, omitted there from, or if a default is made, or unnecessary delay takes place in entering in the register, the fact of any person having become or ceased to be a member, the person aggrieved, or any member of the company, or the company may appeal in such form as may be prescribed, to the Tribunal, or to a competent court outside India, specified by the Central Government by notification, in respect of foreign members or debenture holders residing outside India, for rectification of the register.

Punishment for wrongful withholding of property (Section 452):
If any officer or employee of a company
(a) wrongfully obtains possession of any property, including cash of the company; or
(b) having any such property including cash in his possession, wrongfully withholds it or knowingly applies it for the purposes other than those expressed or directed in the articles and authorised by this Act, he shall, on the complaint of the company or of any member or creditor or contributory thereof, be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees.

As per Companies (Amendment) Act, 2020:
In Section 452(2) of the Companies Act, 2013, the following proviso has been inserted, namely:
“Provided that the imprisonment of such officer or employee, as the case may be, shall not be ordered for wrongful possession or withholding of a dwelling unit, if the court is satisfied that the company has not paid to that officer or employee, as the case may be, any amount relating to
(a) provident fund, pension fund, gratuity fund or any other fund for the welfare of its officers or employees, maintained by the company;
(b) compensation or liability for compensation under the Workmen’s Compensation Act, 1923 in respect of death or disablement.”

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