The Hindu Business Line : A hijack by the minority

LACK of time appears to have compelled the Irani Committee to avoid not merely statistical information to support its conclusions but also involvement in problems that are offbeat. Its treatment of `minority interests' provides an illustration. Chapter VII of the Companies Act, 1956 which has as many as 14 sections and deals with applications for relief from oppression and mismanagement from concerned members has undergone no significant amendment from 1956 except for the power conferred on the Central Government in sub-section (6) of Section 408 enabling removal of an auditor and appointment of another in his place in certain circumstances.

Are mismanagement and oppression actually confined to private limited companies or are listed companies also facing this problem? If the cases under Sections 397 and 398 that have been taken to the Company Law Board (CLB) or that have come up before the courts can be taken to reflect the true position, trouble arises mostly in private limited companies.

The CLB's prescription in such cases has been almost the same: the majority has been required to acquire the shares of the minority at a price determined by an independent valuer. But there is no mitigation in the malady, leading to the inference that the remedy is not effective. The law has mistaken the symptoms for the disease and done little to stop its spread. It is possible that the removal of the complainant from the scene strengthens the offender in effect. Is this equitable?

It is of the utmost importance that the objectives with which the company concept has been evolved should not be ignored in dealing with any of the special problems that its abuses may cause. There can hardly be any doubt that the concept of incorporation was expected to facilitate the pooling of financial and manpower resources on a scale which an individual enterprise could not ordinarily command or mobilise.

If the shareholders were large in number and did not participate in the day-to-day running of the business, they could not be saddled with the liability which the incompetence of those who were put in charge of the business might have led to, except to the extent of their own subscription to the capital of the corporation. The malpractices to which some of those in charge of a company resort do not appear to have been visualised when the medium was devised.

The Government cannot, therefore, disclaim its responsibility to prevent any adverse development detrimental to the public interest and the interest of the subscribers in minority who have no influence on the control and management of the corporation in which they are members in minority. To contribute to risk capital is one thing. To be victims of self-seekers who contravene the law, in order to feather their individual nests, is quite another.

One can appreciate the existence of a `partnership company', that is, a company which is formed by the partners of a `firm' converting themselves by incorporation into members of a company to take advantage of the limited liability benefit conferred by a company. It becomes a mockery when the `partner' is ousted by oppressive tactics and the company becomes a one man company, the shares being acquired by the aggressive partner from the person who has been ousted by him either in his own name or in the names of members of his family or friends or employees.

The new breed of one man (or one `group') owned companies emerging, as a consequence of the stereotyped solution built into the law, is that the law is no longer `neutral'. One who carries on a business with the mask of a company is being given an unfair advantage vis-à-vis one who conducts it transparently as his individual venture.

There is no element of punishment for wrongdoing, even where oppression and mismanagement are established by the victim as facts. Far from being penalised or punished in any manner, the aggressive `controller' of the company is rewarded for his misdeeds. The victim is asked to make his exit from the company, with the market or intrinsic value of the shares in which he has invested. No compensation or damages will be available to him for being pushed out for no fault of his.

The law is weighted in favour of the unscrupulous. `Might is right' may be a matter of expediency serving to save an industrial unit from a break-up. It can hardly be in public interest. There should be a provision in Chapter VII of the Companies Act, 1956 for levy of a penalty on those who flout the law with impunity, in addition to whatever settlement may be effected.

Sections 397 and 398 of the Act can be invoked only if the impugned mismanagement or oppression is continuous or has relevance to the existing situation. The law may or may not be of avail where misdeeds are sporadic and have no repercussion or effect on current rights and privileges. This may not be equitable particularly where there is no alternative remedy which is not prohibitively expensive and time consuming for undoing the wrong done.

It is incorrect to assume that it is only the shareholders in majority who oppress the minority. Cases in which management is hijacked and control seized by shareholders in minority through means which are not fair or reasonable are not as rare as one may imagine. Some of them have been reported in law journals and are well known. Significantly neither Section 397 nor Section 398 mentions minority shareholders or minority interests. It is the Irani Committee which highlights the interests of minority shareholders in this context.

(By arrangement with Corporate Law Adviser, New Delhi.)

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