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10/5/09

Non-Compliance of provisions - Opression and Mismanagement - Company Law

Whether mere non-compliance of the provisions be construed as “Oppression” and “Mismanagement” under Company Law?

It is known that section 397/398 of the Companies Act, 1956 enables the members to question the “oppression” and “mismanagement” in the Company if any. The Company Law Board or the Tribunal entertains the applications very carefully in view of the consequences of an order against the Company and at times it is very very difficult to construe “oppression” and “mismanagement”.
But, the interesting questions is that as to whether mere non-compliance of the provisions of the Act or the rules be construed as “mismanagement” or “oppression” enabling the Board to pass orders against the Company or the majority as the case may be. After the MCA scheme, filing statutory documents etc. with the Registrar of Companies become very easy and earlier it was a risky procedure. Now, most of the big companies or even the closely held public companies scrupulously file all the necessary documents with the Registrar of Companies. Still, the private companies or the closely held private companies may not be filing the necessary documents with the Registrar of Companies as required under the Act and also the rules. Whether such a non-compliance be construed as “oppression” or “mismanagement”? is an interesting question to look into. Because, non-compliance of the provisions, may enable the petitioners under section 397/398 of the Act to substantiate their version.
It is true that many private companies may not be able to adhere to the good corporate governance. Many private companies and even the public companies may not be complying with the provisions of the Act in stricto senso. Even final accounts and annual reports are not filed by some companies as required by law. Some companies do not hold annual general body meeting as required. If mere irregularity or non-compliance of the provisions of the Act is construed as ‘oppression’ and ‘mismanagement’, then, most of the companies may not run the company smoothly as their actions tend to give rise to an application under section 397/398 of the Act. Again, there may be a question as to what happens if the Board or Tribunal passes preventive orders and in what way the company or the management is going to be prejudiced with the preventive order. It all may appear to be very simple, but, passing an order against the majority in the company or the company, amounts to interfering with the commercial wisdom of the company or the majority which goes against the basic principle of ‘majority rule’ and the principle of ‘indoor management’. Again, if we see the issue of construing the non-compliance of the provisions as ‘oppression’ and ‘mismanagement’, it is very difficult to put the issue straight. Normally, the ‘oppression’ and ‘mismanagement’ is construed based on the circumstantial evidence and led by presumptions. It is also true that, in many cases, there can not be any tangible evidence to support the ‘oppression’ and ‘mismanagement’, and, still, there can be “oppression” and “mismanagement”. As such, it can not be said that very non-compliance of the provisions of the Act is meant for “oppression” and “mismanagement”, but, certainly, the non-compliance of the provisions of the Act may be construed as “oppression” and “mismanagement” looking the same from evidentiary point of view.

The following points to be noted in this regard.

1. There can not be any rule like non-compliance of the provisions of the Act can be construed as “oppression” and “mismanagement”.
2. Certainly, where there is no proper justification justifying the issue of non-compliance as unrelated to oppression and mismanagement, certainly, the non-compliance of the provisions of the Act can be construed as ‘oppression’ and ‘mismanagement’.
3. Event the issue of non-compliance to be looked at the kind of the company, share holding pattern, managerial personnel, the statutory provisions, corporate governance, track record of the company, the practice adopted in the company and the probabilities, to be considered while dealing with the issue of construing as to whether the non-compliance of the provisions of the Act leads to ‘oppression’ and ‘mismanagement’.
Note: I have just expressed my views on the subject and I will be very happy to get enlightened with new things.

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