CONTENT

1. Introduction
1.1 Oppression and Mismanagement
1.2 Prevention of Oppression
1.2.1 Conditions for relief under section 242
1.3 Winding up on the basis of just and equitable clause in cases of Oppression
2. RAJAHMUNDRY ELECTRIC SUPPLY CORPORATION LTD V.
A.NAGESWARA RAO: FACTS
3. LEGAL ISSUE OF THE CASE
4. JUDGMENT OF APEX COURT
4.1Question of Maintainability-

4.2 Just and equitable clause not to be constructed ejusdem generis

4.3 Circumstance of Winding up on just and equitable ground exist
5. JUDGMENT ANALYSIS
6. SUGGESTIONS

1. INTRODUCTION
Democratic decisions are made in accordance with the majority decision and are deemed to
be fair and justified while overshadowing the minority concerns. The corporate world has
adopted this majority rule1 in decision making process and management of the companies.
Despite the fact provisions have been in place under the Companies Act, 1956 to protect the
interest of the minority shareholders, the minority has been incapable or unwilling due to lack
of time, recourse or capability- financial or otherwise. This has resulted in the minority to
either let the majority dominate and suppress them or squeeze them out of the decision
making process of the company and eventually the company. Companies Act, 2013 has
sought to invariably provide for protection of minority shareholders rights and can be
regarded as a game changer in the tussle between the majority and minority shareholders.
Various provisions have been introduced in CA 2013 to essentially bridge the gap towards
protection and welfare of the minority shareholders under CA 19562.

1.1 Oppression and Mismanagement

CA 1956 provides for protection of the minority shareholders from oppression and
mismanagement by the majority under Section 397 (Application to Company Law Board for
relief in cases of oppression) and 398 (Application to Company Law Board for relief in cases
of mismanagement). Oppression as per Section 397(1) of CA 1956 has been defined as 'when
affairs of the company are being conducted in a manner prejudicial to public interest or in a
manner oppressive to any member or members' while the term mismanagement has been
defined under Section 398 (1) as 'conducting the affairs of the company in a manner
prejudicial to public interest or in a manner prejudicial to the interests of the company or
there has been a material change in the management and control of the company, and by
reason of such change it is likely that affairs of the company will be conducted in a manner
prejudicial to public interest or interest of the company'. Right to apply to the Company Law
1 "Once a resolution is passed, then it is binding on all the members of the company and the court
will not intervene to protect minority against the resolution, as by becoming a member, the
shareholder agrees to submit to the will of the majority of the members."- Foss v. Harbottle.
2 Akshat Sulalit, Companies Act, 2013: Rise of the Minority Shareholder, Indian Law Journal, Vol 6,
Issue 2, 2007 available at http://indialawjournal.com/volume6/issue-2/article5.html accessed on
29.4.16.

Board in case of oppression and/or mismanagement is provided under Section 399 to the
minority shareholders meeting the ten percent shareholding or hundred members or one-fifth
members limit, as the case may be. However, the Central Government is also provided with
the discretionary power to allow any number of shareholders and/or members to apply for
relief under Section 397 and 398 in case the limit provided under Section 399 is not met.
On the other hand, CA 2013 provides for provisions relating to oppression and
mismanagement under Sections 241-246. Section 241 provides that an application for relief
can be made to the Tribunal in case of oppression and mismanagement. Section 244(1)
provides for the right to apply to Tribunal under Section 241, wherein the minority limit is
same as that mentioned in CA 1956. Under CA 2013, the Tribunal may also waive any or all
of the requirements of Section 244(1) and allow any number of shareholders and/or members
to apply for relief. This is a huge departure from the provisions of CA 1956 as the discretion
which was provided to the Central Government to allow any number of shareholders to be
considered as minority is, under the new CA 2013 been given to the Tribunal and therefore is
more likely to be exercised.
Presently, 'minority shareholders' are not defined under any law, however, by virtue of
Section 3993 (Right to apply for Oppression and Mismanagement) of CA 1956, minority
shareholders have been set out as ten percent (10%) of shares or minimum hundred (100)
shareholders, whichever is less, in companies with share capital; and one-fifth (1/5) of the
total number of its members, in case of companies without share capital. In general terms,
minority shareholding can be understood to mean holding such amount of shares which does
not confer control over the company or render the shareholder with having a non-controlling
interest in a company4.
1.2 Prevention of Oppression
Under Section 242(1) of Companies Act, 2013 the Tribunal is empowered to make any order
as it may think fit to with a view to end the matters complained off in Section 241. Before
passing an order the Tribunal needs to satisfy itself that(a) the company's affairs have been
or are being conducted in a manner prejudicial to public prejudicial or oppressive to any
3 Corresponding Section 244 (Right to apply under section 241) of The Companies Act, 2013.
4 Supra 2.

member or members or pre interest or in a manner prejudicial to the interests of the company;
and (b) to wind up the company would unfairly prejudice such member or members, but that
otherwise the facts would justify the making of a ding-up order on the ground that it was just
and equitable that the company should be wound up.

1.2.1 Conditions for relief under section 242

In K.P. Chackochan v. FederalBank5 it was observed that in order to grant relief under
section 397 [corresponding to Section 241], a petitioner must show three things:
1. The affairs of the company are being conducted in a manner oppressive to some
part of the members/shareholders including the petitioners. It is to be noted here that
the section does not require that the oppressed members should be the minority.
'Shareholders with a minority beneficial interest may, by having control over voting,
be able to oppress those with majority beneficial interest.'
2. The facts pleaded justify the making of a winding-up order on the 'just and
equitable' ground. In case, winding up of the company is not justified, the Supreme
Court in Kilpest (P.) Ltd. v. Shekhar Mehra 6 held that the petition for oppression and
mismanagement shall not be maintainable.
3. To wind up the company would unfairly prejudice the oppressed members.
1.3 Winding up on the basis of just and equitable clause in cases of Oppression
The rule in Fosss case was relaxed and fraud on minority was identified as one of the
exceptions to this rule, on the basis of which the minority shareholders could move a petition
for winding up of the company on the just and equitable ground.
However, the committee appointed in England, the Cohen Committee pointed out that the
remedy of winding up was quite often detrimental to the interests of the minority
shareholders and beneficial to the majoritys case. A similar committee that was formed in
India for the said purposes was the Bhabha Committee. Both the committees recommended
an alternative remedy to winding up. The Indian Companies Act, 2013 is S.241 which confers
a right on the minority shareholders to apply to the court for relief in cases of oppression. If
5 [1989] 66 Comp. Cas. 953 (Ker.),
6 [1996] 10 SCL 233

any member of a company complains that the affairs of the company are conducted in a
manner prejudicial to public interest or the shareholders interests or in manner oppressive to
them. It is just and equitable to wind up a company where the principal shareholders have
adopted an aggressive or oppressive or squeezing policy towards the minority 7. One such
instance is the case of Loch v. John Blackwood Ltd8 where the Privy Council ordered the
winding up of the company on the petition of minority shareholders when the directors, who
held the majority of the issued shares, had persistently refused to call annual general
meetings, or to submit accounts to the petitioners, or to have auditors appointed, or to give
the petitioners any information about the companys affairs, all this being part of the scheme
to coerce the petitioners into selling their shares to the directors at a price somewhat less than
quarter of their real worth.
2. RAJAHMUNDRY

ELECTRIC

SUPPLY

CORPORATION

LTD

V.

A.NAGESWARA RAO: FACTS

An application was filed by the first respondent under section 162, clauses (v) and (vi) 9, of
the Indian Companies Act, 1913 for an order that the Rajahmundry Electric Supply
Corporation Ltd., be wound up. The grounds on which the relief was claimed were that the
affairs of the Company were being grossly mismanaged, that large amounts were owing to
the Government for charges for electric energy supplied by them, that the directors had
misappropriated the funds of the Company, and that the directorate which had the majority in
voting strength was "riding roughshod" over the rights of the shareholders. In the alternative,
it was prayed that action might be taken under section 153-C and appropriate orders passed to
protect the rights of the shareholders. The only effective opposition to the application came
from the Chairman of the Company, Appanna Ranga Rao, who contested it on the ground that
7 Prevention of Oppression and mismanagement, Legal Service India available at
http://www.legalservicesindia.com/article/article/prevention-of-oppression-&-mismanagement-4821.html accessed on 29.4.16.
8 [1924] ALL ER Rep 200 PC.
9 SECTION 162: Circumstances in which company may be wound up by Court:A company may be wound up
by the Court--...................
(v) if the company is unable to pay its debts :
(vi) if the Court is of opinion that is it just and equitable that the company should be wound up.

it was the Vice-Chairman, Devata Ramamohanrao, who was responsible for the
maladministration of the Company, that he had been removed from the directorate, and steps
were being taken to call him to account, and that there was accordingly no ground either for
passing an order under section 162, or for taking action under section 153-C.
The Andhra Pradesh High Court before which the application came up for hearing, held that
the charges set out therein had been substantially proved, and that it was a fit case for an
order for winding up being made under section 162(vi). It was also held that under the
circumstances action could be taken under section 153-C, and accordingly two administrators
was appointed for the management of the company for a period of six months vesting in them
all the powers of the directorate and authorising them to take the necessary steps for
recovering the amounts due, paying the debts and for convening a meeting of the
shareholders for the purpose of ascertaining their wishes whether the administration should
continue, or whether a new Board of Directors should be constituted for the management of
the Company.
Against this order, the Company preferred appeal by special leave.
3. LEGAL ISSUE OF THE CASE
The first issue in this case was regarding maintainability of the suit, in this regard the
appellant contended that there was no proof to depict that the applicant(respondent) had
obtained the consent of the requisite number of shareholders as provided in sub-clause (3)(a)
(i) to section 153-C. That clause provides that a member is entitled to apply for relief only if
he has obtained the consent in writing of not less than one hundred in number of the members
of the company or not less than one-tenth in number of the members, whichever is less. The
first respondent stated in his application that he had obtained the consent of 80 shareholders,
which was more than one-tenth of the total number of members, and had thus satisfied the
condition laid down in section 153-C, sub-clause (3)(a)(i). To this, an objection was taken in
one of the written statements filed on behalf of the respondents that out of the 80 persons who
had consented to the institution of the application, 13 were not shareholders at all, and that
two members had signed twice. It was further alleged that 13 of the persons who had given
their consent to the filing of the application had subsequently withdrawn their consent. In the
result, excluding these 28 members, it was pleaded, the number of persons who had
consented would be reduced to 52, and therefore the condition laid down in section 153-C,
sub-clause (3)(a)(i), was not satisfied.

Thus the question of law before the apex court was to determine whether the requisite
requirement under section 153-C sub clause (3)(a)(i) was to be satisfied at the
commencement of suit or throughout the action.
Secondly it was alleged that the allegations in the application were not sufficient to support a
winding up order under section 162, and that therefore no action could be taken under section
153-C. As per the Act before taking action under section 153-C, the court must be satisfied
that circumstances exist on which an order for winding up could be made under section 162.
Where, therefore, the facts proved do not make out a case for winding up under section 162,
no order could be passed under section 153-C. The question therefore to be determined is
whether the facts found make out a case for passing a winding up order under section 162.
The respondent contended that the present action of directors constitutes sufficient ground for
winding up company under just and equitable clause. Thirdly, the court was left with question
of law that on the basis of facts established whether it was just and equitable to make an order
for winding up under section 162(vi).
4. JUDGMENT OF APEX COURT
Question of Maintainability- For an application under s.153-C the applicant

need to

obtained the consent of requisite number of shareholders as provided in sub-clause (3)(a)(i).

In the present case it was alleged that thirteen members who had given their consent to the
filing of the application had subsequently withdrawn their consent. In this regard court held
that the validity of a petition must be judged on the facts as they were at the time of its
presentation, and a petition which was valid when presented cannot, in the absence of a
provision to that effect in the statute,

cease to

be maintainable by reason of events

subsequent to its presentation. The withdrawal of consent by thirteen of the members, even
if true, could not affect either the right of the applicant to proceed with the application or the
jurisdiction of the court to dispose of it on its own merits.
Just and equitable clause not to be constructed ejusdem generis-The court rejecting the
argued of appellant held that the words "just and equitable" are not to be construed ejusdem
generis with the matter mentioned in clause (i) to (v) of s. 162. Further court opined that it is
well established principle that "..... mere misconduct or mismanagement on the part of the
directors, even although it might be such as to justify a suit against them in respect of such

misconduct or mismanagement, is not of itself sufficient to justify a winding-up order" 10.

Where nothing more is established than that the directors have misappropriated the funds of
the company, an order for winding up would not be just or equitable, because if it is a sound
concern, such an order must operate harshly on the rights of the shareholders. But if, in
addition to such misconduct, circumstances exist which render it desirable in the interests of
the shareholders that the Company should be wound up, there is nothing in section 162(vi)
which bars the jurisdiction of the court to make such an order. Thus whether mismanagement
of directors is a ground for a winding up order under section 162(vi) becomes a question to
be decided on the facts of each case.
Circumstance of Winding up on just and equitable ground exist- Answering the present
question court relied on the finding of Loch v. John Blackwood Ld. 11 was itself a case in
which the order for winding up was asked for on the ground of mismanagement by the
directors: "It is undoubtedly true that at the foundation of applications for winding up, on the
'just and equitable' rule, there must lie a justifiable lack of confidence in the conduct and
management of the company's affairs. But this lack of confidence must be grounded on
conduct of the directors, not in regard to their private life or affairs, but in regard to the
company's business. Furthermore the lack of confidence must spring not from dissatisfaction
at being out voted on the business affairs or on what is called the domestic policy of the
company. On the other hand, whenever the lack of confidence is rested on a lack of probity in
the conduct of the company's affairs, then the former is justified by the latter, and it is under
the statute just and equitable that the company be wound up."
In the present case the facts as found by the courts below are that the Vice-Chairman grossly
mismanaged the affairs of the Company, and had drawn considerable amounts for his
personal purposes, that arrears due to the Government for supply of electric energy as on 256-1955, was Rs. 3,10,175-3-6, that large collections had to be made, that the machinery was
in a state of disrepair, that by reason of death and other causes the directorate had become
greatly attenuated and "a powerful local junta was ruling the roost", and that the shareholders
outside the group of the Chairman were apathetic and powerless to set matters right. On these
findings, the courts below had the power to direct the winding up of the Company under
section 162(vi), and no grounds have been shown for our interfering with their order.
10 re Diamond Fuel Company [1879] 13 Ch. D. 400
11 [1924] A.C. 783

5. JUDGMENT ANALYSIS
The following analysis can be made in respect of the above discussed case:

The validity of a petition12 must be judged on the facts as they were at the time of its
presentation, and a petition which was valid when presented cannot, in the absence of a
provision to that effect in the statute,

cease to

be maintainable by reason of events

subsequent to its presentation.

Secondly, mere misconduct or mismanagement on the part of the directors, even although it
might be such as to justify a suit against them in respect of such misconduct or
mismanagement, is not of itself sufficient to justify a winding-up order. The question whether
something more than a mere misconduct exist shall be determined on the basis of facts and
circumstance of each individual case.
The courts have thus held the words just and equitable to be words of the widest
significance and as not limiting the jurisdiction of the court to any case. It is a question of fact
and each case must depend on its own circumstances 13. No general classification can be made
to show under what circumstances the court can invoke the just and equitable clause.
However, the courts have taken the assistance of this clause wherever it was of the opinion
that the running of the company was not viable or beneficial to the shareholders.
The court does not get jurisdiction only because of the provisions of law mentioned by the
applicant. At the foundation of applications for winding up, on the just and equitable rule,
there must lie a justifiable lack of confidence in the conduct and management of the
company's affairs. This lack of confidence must be based on the conduct of the directors, not
in regard to the private life or affairs, but with regard to the company's business. Furthermore,
the lack of confidence must spring, not from dissatisfaction at being outvoted on the business
affairs or on what is called the domestic policy of the company. On the other hand, wherever

12 For example the requirement under section 244 of 2013 Act must be satisfied at the time of
inception of the action before Tribunal.
13 Bleriot manufacturing Aircraft Co. Ltd., In Re, [1961] 12 TLR 253.

the lack of confidence is rested on the lack of probity in the conduct of the company's affairs,
the former is justified by the latter, and just and equitable that the company be wound up14.
6. SUGGESTIONS

14 Loch v. John Blackwood Ltd., [1924] AC 783 (PC).