9-10 Management of Co & Prevention of Oppresion and Mismanagement

8/8/2019 9-10 Management of Co & Prevention of Oppresion and Mismanagement .

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Company Management

DUTIES AND LIABILITIES OF

DIRECTORS


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General Duties of Directors

DUTY OF GOOD FAITH

DUTY OF REASONABLE CARE

DUTY TO ATTEND BOARD MEETINGS

DUTY NOT TO DELEGATES

DUTY TO DISCLOSE INTEREST


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DUTY TO GOOD FAITH

Directors must act honestlyand in the interest of thecompany andshareholders

Shouldnot exploit corporate opportunities to theirown use

shouldnot makesecret profits

If No obligation ordirection from company - no breach ofduty

- not liable to pay profits


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DUTY OF REASONABLE CARE

With duediligenceandcaution, Directorhas to attend the workassigned

to him, If fails, he is guilty ofnegligence

Not liable formere errors of judgement

Exclusion ofliability fornegligence clause- inarticles or inany

agreement is void- as Companies Act doesnot allow


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DUTY TO ATTEND BOARD MEETINGS

Directorexercise powersat the meeting of the Boardso:

heshouldattend them but

Not bound to attendall meetings

But if he, without obtaining permission of Board, fails:

to attend threeconsecutive meetings or

absents inall the meetings foraconsecutive period of three months

his officeshall bedeemed to have been vacated:

from thedate of first meeting from which thedirectorhasabsented

himself.


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DUTY NOT TO DELEGATES

Directorsareappointed because of theirskill,competence,and

integrityso

They shouldperform theirfunctionspersonallyandnot to delegate

them to otherpersons

Exceptions:

Candelegate to theextent - Companies Act orArticles of Co.

authorizes (Sec.292)

Can beleft to otherofficials- incase of exigencies of business-but in

propermanner


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DUTYTODISCLOSEINTEREST

To avoid theconflictbetween the personal interest of the Directorand

hisduties towards thecompany:

Directorsshoulddisclose his personal interest at the first meeting of

the Board held- after he becomes interested ina:

Contract orsomearrangements entered into oron behalf of the

company

Punishment fornon-disclosure- fine upto Rs.50 thousands


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Interesteddirectorcannot participate in thediscussion orarrangement

of his interest

Cannot vote on such matters- if votes,it shallnot be taken into account

Presence ofsuch directorshallnot becounted forthe purpose of

forming a quorum (Sec 287)

No ban on thecompany to enterinto acontract in which directoris

interested

Company must haveseparateregisterforentry ofsuch contracts in

which directorsare interested(301)


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Onlyrequirement - such interest must be fairlydisclosed

Non-disclosure- makes thecontract voidableat companys option

If whole body of thedirectors isalreadyaware of such interest -

formaldisclosure not necessary

Failure to disclose his interest liabilityto:

refund hisremuneration

cease to becomedirector&

Fine of Rs. 50 thousands


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Statutory Duties ofDirectors

Duties underCompanies Act - include theduty :

to filereturn ofallotments,

to disclose receipt ofcompensation from transferof propertyandshares

to convene annualand theextraordinary general meeting


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Liabilities of directorsLiability mayarise from due to :

breach of fiduciaryduty- trust andconfidence,

ultra vires acts,

negligence- lackofreasonablecareandskill, and

mala fide acts- willful misconduct / willfulnegligence

Can be heldliable to compensate company or members - forloss

occasioneddue to abovereasons

Directors may be personallyliable to third parties for untrue

statement in prospectus


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Directors may be heldliable-forAllotment ofshares incontravention

of Companies Act- Sec 69, Sec 70, Sec 73 etc.

Forexceeding authority conferred-underAct orArticles. - ulta vires

Mayalso incurcriminalliability under Companies Act and otherstatutes

ForEx: Offence of Cheating for issuing acheque knowing

inadequacy of fundsand with intention to cheat


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Directors maybe liable - If particulars ofa charge are not filed with

registrarwithin 30 days of its creation

Where annual return is not filed with the registrar within 60 days of

annual general meeting

Where dividends are not distributed within 42/30 ???days of itsdeclaration

Where register ofdirectors, managing directors and managers is not

maintained


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Minority Protectionand

Prevention of oppression

&

Mismanagement


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Supremacy of Majority and Protection of Minority

MAJORITYRULEORTHE RULEOFSUPREMACY.

Company is governedand managed by will of majority of

shareholders.

Wide powers may be misused by majorityshareholders to exploit the

minorityshareholders.

Need for balance for the smooth functioning of companyaffairs


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WHY PROTECTIONOFMINORITY?

A properbalance of therights isdone by -

allowing minority to exercise theirpowers

To regulate powers of majorityand

majority to observe principles ofnatural justiceand fairplay

Companies Act and Common Law provide protection to minority


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RULESOFSUPREMACYOFMAJORITY

RULE IN FOSS v. HARBOTTLE(1843)

The will of the majorityshareholders issupremeand it should prevail

overthe minority

Court should not interfere with the internal management ofcompaniesso long ascompanysactivitiesare within its powers

Ascompany isaseparatelegalentity independent from the members

who compose it.

So, ifa wrong isdone to Co., thecompany is the proper person to

bring anaction forthesame.


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Principle of the Rule ofSupremacy of Majority

Where thealleged wrong ina transaction is binding on the companyby a simple majority of members-

no individual memberof thecompany isallowed to maintainanaction

inrespect of that matter.

Limitations:

Power of the majority is subject to companys memorandum of

association.

Majoritys act must not be inconsistent with the provisions of the

Companies Act or any other law


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BASISOFTHERULEOFSUPREMACYOFMAJORITY

To honour the will of the majority shareholders

To avoid the multiplicity of suits

To Recongnise the separate legal entity of the company

To preserve the right of the majority to decide the matters :

The majority ofshareholders has theright to decide how the

companysaffairsshall beconducted.

Therule ofsupremacy of majorityseeks to preserve thisright of the

majority,as the minority isnot allowed to challenge thelawfulacts of

the majority.


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EXCEPTIONSTOTHERULEOFSUPREMACYOFMAJORITY

Certainactscannot beapproved orratifiedeven by the majority.

Evenasingleshareholdermay bring alegalaction: Ex:-

Ultra-vires actscase ofadvance moneyat interest without security- directorsacting ultra vires thecompany contrary to provisions of thecompanys memorandum

Fraud on the minoritycase ofcompromise between two competing Co. A Co.sdecision was in favourof B Co. Minorityshareholders of A Co. may question thecompromise

resolution if it amounts to fraud.


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Acts requiring special majority but passed by simple majority

Acts inconsistent with the articles of association- a company in need offurther capital- majority can not alter article to enable them to purchase minority shares

compulsorily.

Asaltering companysarticles is not beneficial to thecompanyasa

whole.

The majority powers must beexercised in good faith and forthe benefit

of thecompanyasa whole.

If powers exercisedamount to a fraud on minority- liable to bechallenged by the minority.


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Personal rights of individual members :

Right to vote, Right to have his voterecorded / counted

It isno ground forrejecting a members vote that he has votedagainst the interest ofthecompany.

Right to receivedividend,

Right to contest theelection foradirectorof the company

Wrongdoers in control of the companyAs wrongdoer themselves maynot permit anaction to be brought against themselvesAs wrongdoer themselves maynot permit anaction to be brought against themselves

,any membermay bring anaction in thename of thecompany.,any membermay bring anaction in thename of thecompany.--

Oppression and mismanagement

If there is oppression of minority, orthe mismanagement ofcompanysaffairs.Minority haveright to bring anaction underCompanies Act.


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PROTECTIONOFMINORITYUNDERTHE COMPANIESACT

Right to apply to the court for the cancellation of the variation of

class rights [S

ection 106, 107]

But if it leads to fraudulent variations of the rights to the prejudice of the

remaining one-fourth minority.

classrights may be varied with the writtenconsent of three-fourth majority of the

shareholders of that class [Section 106].

Right to apply to the Company Law Board/ National Company Law

Tribunal ( Now )for the investigation of companys affairs [Sections 235,

236]

The specified number of members (even if they constitute

minority) may apply to the Company Law Board for the

investigation of companys affairs. Co. with share capital- at least 100members or members having 1/10 of total voting powers/ No share capital- 1/5 of total

numbers


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Right to apply to the court if not satisfied with the scheme of

reconstruction and amalgamation [Section 391 to 395]

Inaschemeapproved by the majority ofshareholders- the minorityshareholders who

do not give theirconsent to thescheme- mayapply to thecourt to prevent the

compulsoryacquisition of theirshares.

Right to apply to the court for winding up of the company [Section 433 ]

Ifaffairs of the company are conducted in a manner which is oppressive to the

members, or are mismanaged.

Right to apply to the Company Law Board for prevention of oppression andmismanagement [Section 397 and 398]

The required number of members who may apply for the prevention of oppression and

mismanagement under 397 and 398 is mentioned in Section 399


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Prevention of Oppression and Mismanagement

Severalremediesareavailable to minority where majority indulges in

oppression ormismanagement

Anapplicationcan be made to theCLB underSec 397

&398

Complaining member must show that

he issuffering from oppression in hiscapacityas memberand

not inany othercapacityand

oppressions is ofcontinuing nature


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Acts held to be oppressive by the Courts/CLB

(i) not calling a general meeting andkeeping shareholders indark

(ii) non-maintenance ofstatutoryrecords

(iii) not conducting affairs ofcompany inaccordance with the

companies Act

(iii) depriving a memberof hisright to dividend

(iv) transferofshares to selectedshareholders rather than making an

offerto all


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(v) allotment of shares by directors in a manner by which an existing

majority of shareholders is reduced to a minority

(vi) continuousrefusal bycompany to registershares with an ulteriormotive ofretaining control overaffairs ofcompany

(viii) countermanding decision ofBoard - by a director who

controls majority voting powerandnot allowing Board to perform its

functions

(x) sale ofassets to directors simultaneously giving them loan to

purchase thesame

(xi) refusal to register transmission under will

(xii) issue of further shares benefiting a section of shareholders

(xiii) registration of transferofshares in violation ofarticles


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Sec 398 CLB is empowered to grant relief in cases of

mismanagement

When CLB is of the opinion that

affairs ofcompanyare being conducted/ likely to conducted

ina mannerprejudicial to the public interest orinterests of thecompany


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Courts/CLB held Actsamounting to mismanagement are :

serious infighting betweendirectors,

illegalconstitution of the Board ofdirectors,

grossneglect of interest ofcompany bysale of itsassets,

diversion of funds to benefit majority, operation of bankaccount by

an unauthorized person,

continuing in office of managing directorafterexpiry of theirterm


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To end oppression and mismanagementCLB has been empowered under Sec 402 to grant certainspecific

relief which include:

(i) regulation of conduct of companys affairs in future

(ii) order to purchase shares or interests of any member by other

members thereof or by company and permission to reduce its

share capital

(iii) termination or modification of any agreement between

company and MD /director/manager/ third person,

(iv) set aside any transfer, delivery of goods, payment, execution

and other act relating to property,

Central Govt. may nominate a BO Dirs to prevent oppression and

mismanagement

Documents

9-10 Management of Co & Prevention of Oppresion and Mismanagement