Just and Equitable Clause for Winding Up of the Companies in Matters of Oppression and Mismanagement

To claim relief under the provisions of oppression and mismanagement (Sections 2412441 of the Companies Act, 2013), it is necessary to prove that there exists just and equitable ground for winding up the company. Such ground exists when there is a justifiable lack of confidence in the conduct of management of the company’s affairs. This concept of just and equitable ground flows from the law of partnership and has its roots in good faith, probity and mutual confidence. However, to impose that the company is a quasi-partnership, proper evaluation has been done by the courts from time to time.

Notwithstanding the wide nature of discretion available to the courts, the courts have always restrained themselves from invoking quasi-partnership principles other than in exceptional circumstances.2

Rationale behind inclusion of winding-up circumstances in oppression remedy

The courts do not interfere in the internal management of a company and it is the majority rule which prevails. However, only in grave circumstances such as oppression of the minority and gross mismanagement in a company, the courts are bound to interfere. Thus, mere acts of carelessness do not constitute oppression and in fact, the oppression or mismanagement should be so grave that it becomes justifiable to wind up the company due to such oppression.

In Loch v. John Blackwood3, it was held that there must be lack of confidence in the management of affairs of the company to justify its winding  up. However, such lack of confidence shall not arise merely out of dissatisfaction of being voted out from the affairs of the business.

In Baird v. Lees4, it was observed that a shareholder invests his money in a company upon certain conditions including the fact that the company shall be limited to specific purpose and will be run efficiently. It will be “just and equitable” to wind up the company only when these conditions are consistently and deliberately violated.

The oppression must be so cruel and burdensome that it leads to winding up of the company irrespective of the fact that the Tribunal will order winding up of the company as a remedy for the oppression.

Co-existence of oppression and winding-up clause

Earlier, winding up the company on just and equitable ground was the only remedy available to the shareholders for any offending act in a company. Such an action of completely winding up the company was held to be a nuclear option and the courts started to refrain from ordering winding up.  P.N. Bhagwati, J.5 also observed that the winding-up remedy was totally inadequate for it meant killing the company to put an end to the alleged oppression and mismanagement. But killing a company would be a clumsy method to end the oppression and such an action might as well turn out against the interests of the minority shareholders. The liquidation of the company will result into the sale of its asset at break-up value and the purchaser of the assets of the company may be the very majority shareholders who has oppressed the minority, affecting the minority shareholders altogether.

The Kerala High Court in Palghat Exports (P) Ltd. v. T.V. Chandran6, observed that while examining the factual situation in a case, the courts have to caution themselves that the oppression is the core element to be proved and the nature of the oppression to be tested in the context of “cause for winding up”. But it has to be kept in the minds that the provision is intended to avoid winding up and it is aimed to mitigate the oppression. The relief under Section 3977 of the 1956 Act is geared to help members who were oppressed and the relief under Section 3988 of the 1956 Act is geared to save the company and it is in the interest of the company alone and not of any particular member.

Under the Companies Act, 20139, the existence of dual criteria is a prerequisite before invoking the oppression and mismanagement remedy. First is that there should be prejudicial conduct of the company’s affairs and second is that the circumstances should be such that they form just and equitable ground to wind up the company, although such winding up may cause unfair prejudice to the members of the company. Thus, the onus of proof rests on the members proposing a case for oppression and mismanagement.10

In S.P. Jain v. Kalinga Tubes Ltd.11 the Supreme Court has clarified the position relating to the requirements of Section 397, it has observed that it is not enough for the petitioner to show that there is just and equitable cause for winding up of the company although that must be shown as a preliminary to the application of Section 397. It must further be proved that the conduct of the majority shareholders was oppressive to the members and this requires that the events have to be considered not in isolation but as a part of consecutive story. The conduct must be burdensome, harsh and wrongful and mere lack of confidence between majority and minority shareholders is not enough for considering the application unless such lack of confidence springs from oppression of the  minority by a majority.

In Maharashtra Power Development Corpn. Ltd. v. Dabhol Power Co.12, the Bombay High Court held that the appellant had failed to prove that the affairs of the company were conducted in manner prejudicial to public interest or in a manner oppressive to the appellant. In the absence of such proof and in the absence of any justification to pass an order for winding up of the company on the ground that it was just and equitable to do so, CLB lacked the jurisdiction to pass any order under Section 397 of the Act.

Where the petitioning shareholders have the burden to prove their case, the onus may shift to the respondents wherein they can demonstrate that the winding up of the company would be a harsh step and will cause inconvenience to the general public and rest of the shareholders. Along with proving that there is no oppression in a given case, the respondents can justify the reasons for not winding up the company for it becomes unfair to the members.

In Hanuman Prasad Bagri v. Bagress Cereals (P) Ltd.13, the Supreme Court has interpreted Section 397(2) of the 1956 Act and observed that in order to be successful to wind up a company on just and equitable ground, the petitioners have to make a case for it. If the facts fall short of the case set out for winding up a company on just and equitable grounds, no relief can be granted to the petitioners. The party who is opposing winding up can demonstrate that there are no just and equitable grounds for winding up and the winding up would be unfair to them.

In N.R. Murty v. Industrial Development Corpn. of Orissa Ltd.14, the Court held that the company’s affairs were conducted in a manner oppressive to some part of the members and against the interest of the company and on the facts, winding-up order under just and equitable grounds should ordinarily be made, however, taking into account that the factory is almost complete and with some more investments, the company can go into production. It would neither be in public interest nor in the interest of the members to wind up the company, as winding up would unfairly prejudice the members.

In Ebrahimi v. Westbourne Galleries Ltd.15, it was held that there are three instances to grant winding-up order on just and equitable ground—

(i) When the main object of the company has failed and it becomes impossible for the company to achieve the object.

(ii) Due to the shareholders’ dispute, a deadlock situation arises.

(iii) When there is complete loss of confidence amongst the shareholders.

Thus, the abovestated are the situation wherein the Tribunal can grant winding-up order on just and equitable ground.

In Suryakant Gupta v. Rajaram Corn Products (Punjab) Ltd.16, an appeal was filed for winding up of the company on ground of mismanagement. The Court while remitting the case back to CLB held that if neither the respondents nor the third party is willing to purchase shares at valuation so made, having regard to the finding that there are just and equitable circumstances for winding up of the company, the company shall be ordered to be wound up.

The Supreme Court in a landmark judgment17, has also observed the fact that just and equitable doctrine can only be invoked under two circumstances i.e. functional deadlock and quasi-partnership amongst members.

However, apart from the abovementioned circumstances, there could be other situations such as diversion of funds, large scale siphoning of money, repeated acts ultravires the articles of association (AoA) which are acts of oppression and require invocation of just and equitable doctrine for claiming relief under the Act.18

In Rajahmundry Electric Supply Corpn. Ltd. v. A. Nageswara Rao19, the Court held that where it is established that the directors have misappropriated the funds of the company and nothing more, an order of winding up would not be just and equitable because such an order must operate harshly on rights of shareholders.

In the recent landmark ruling, the Supreme Court of India in Tata Consultancy Services Ltd. v. Cyrus Investments (P) Ltd.20, has reiterated the position that removal of a person from the post of executive chairman/director could not be termed as oppressive/prejudicial. The Court held that the respondents neither pleaded nor proved functional deadlock for invoking just and equitable ground for winding up. As the majority shareholders of Tata Consultancy Services are owned by philanthropic trusts and the dividends are being used for charitable purposes, it would not otherwise be just and equitable to wind up the company and leave the charitable trusts to starve to death. Thus, no case of oppression and winding up on just and equitable ground was proved for granting any relief under the 2013 Act.

Thereafter, Cyrus Investment Pvt. Ltd. has approached the Court for review of the judgment. However, on 18-5-2022, the said review petition was dismissed by the Supreme Court21.

Section 242 of the 2013 Act places heavy burden on petitioning shareholders. They have to prove two conditions before claiming a relief—

1. The affairs of the company are oppressive and prejudicial to any member or in public interest.

2. Winding up the company would unfairly prejudice such members, but that the facts would otherwise justify winding up of the company on just and equitable ground.

The first requirement is the substantive limb and second requirement is the conditional limb and it is essential to prove both the situations for claiming relief. The second condition, is however, narrowing down the scope of the oppression remedy as it is tied to the winding up of the company.

The linkage of “just and equitable” cause for winding up with the remedy for oppression and mismanagement has made the alternative remedy of oppression all more complex. The section has imported the notions and principles of law of winding up on the “just and equitable” ground, founded on partnership as a precondition for granting relief. It is not possible that every case of oppression must have “just and equitable” grounds for winding up of the company. A heavy burden is cast upon the minority shareholders to satisfy the court to get relief for oppression22.

Conclusion

Despite the criticism revolving around the clause “winding up on just and equitable ground” in the oppression remedy, the Indian law seems unchanged. When compared, in England, such a clause was eliminated after the recommendations by Jenkins Committee in 196223 and the oppression remedy was turned into unfair prejudice remedy, thereby making it an independent remedy. Thus, the position in England now is that the petitioning shareholders need not demonstrate the existence of just and equitable ground for winding up the company to seek remedy for unfair prejudice24.

However, in India, the clause still exists in the provisions and more so after the 2013 Act, the just and equitable clause is applicable to mismanagement as well. The current position is that this condition is prerequisite for oppression, prejudice and mismanagement as well which is a dichotomous approach and now the petitioning shareholders need to demonstrate the existence of just and equitable ground for winding up the company in case of mismanagement, an onus they did not carry in 1956 Act.25 These conditions are unwanted, unnecessary and are hindering in administration of justice to minority shareholders.

Thus, Section 242(1) requires amendment, and the phrase “the facts would justify the making of a winding-up order on the ground that it was just and equitable that the company should be wound up” should be eliminated from the section. The removal of the phrase will lessen the burden of the petitioning shareholders for demonstrating winding-up circumstances and thus, the remedy for oppression and mismanagement can be granted effectively.


† Legal Officer at Apollo Med Skills Limited, Hyderabad; LLM from NALSAR University of Law, Hyderabad.

1. Companies Act, 2013, Ss. 241, 242, 243 and 244.

2. Umakanth Varottil, “Unpacking the Scope of Oppression, Prejudice and Mismanagement under the Companies Act, 2013” (2020) 6 SCC J-1.

3. 1924 AC 783.

4. 1924 SC 83 [Scotland].

5. Mohanlal Ganpatram v. Shri Sayaji Jubilee Cotton and Jute Mills Co. Ltd., 1964 SCC OnLine Guj 66.

6. 1993 SCC Online Ker 441. .

7. Companies Act, 1956, S. 397.

8. Companies Act, 1956, S. 398.

9. Companies Act, 2013.

10. Vinod Kothari Consultants, “Supreme Court Ruling in the Tata-Mistry Case”,  dt. 5-4-2021, <https://vinodkothari.com/2021/04/supreme-court-ruling-in-the-tata-mistry-case/>.

11. AIR 1965 SC 1535.

12. 2003 SCC Online Bom 1128.

13. (2001) 4 SCC 420.

14. (1977) SCC Online Ori 84.

15. 1973 AC 360 : (1972) 2 WLR 1289.

16. 2009 SCC OnLine P&H 11560. .

17. Tata Consultancy Services Ltd. v. Cyrus Investments (P) Ltd., (2021) 9 SCC 449.

18. Jaimin R. Dave, “Tata Consultancy Services Limited v. Cyrus Investments Pvt. Ltd.: A Magna Carta on Law of Oppression and Mismanagement”, [2021] 127 taxmann.com 319.

19. AIR 1956 SC 213.

20. (2021) 9 SCC 449.

21. Cyrus Investments (P) Ltd. v. Tata Consultancy Services Ltd., 2022 SCC OnLine SC 747.

22. Paridhi Jain, “Critical Review: Linkage of Winding Up Clause with Oppression Remedy” [2020] 117 taxmann.com 885.

23. Board of Trade, Report of the Company Law Committee (June 1962) at Para 201.

24. Companies Act, 2006, Ss. 994 to 996 [UK].

25. Umakanth Varottil, “Unpacking the Scope of Oppression, Prejudice and Mismanagement under the Companies Act, 2013” (2020) 6 SCC J-1.

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