Changes in the Provisions of Oppression and Mismanagement in Companies as per Companies Bill, 2011 vis--vis Companies Act, 1956

The provisions relating to Prevention of Oppression and Mismanagement in context of company administration is detailed in Clauses 241-246 of the new Companies Bill, 2011. In the existing Companies Act, 1956, the provisions of Oppression and Mismanagement are stipulated in Sections 397-409. Although the basic structure of the provisions relating to oppression and mismanagement has not been tinkered with in the Companies Bill, 2011, however, some procedural modifications have been made in the Bill which differentiates the provisions from the extant Companies Act, 1956. The Companies Bill, 2011 introduces a new concept of Class Action in respect of Oppression and Mismanagement which is contained in Clause 245. The concept of Class Action was non-existent in the Companies Act, 1956. Now let us see the major changes that have been brought about in the Companies Bill, 2011 in respect of Prevention of Oppression and Mismanagement. Question 1- Are there separate sections in the Companies Bill, 2011, each for Oppression and Mismanagement like in the Companies Act, 1956? Answer- No. Clause 241 of the Companies Bill, 2011 contains the provisions for both Oppression and Mismanagement, as against the Companies Act, 1956, in which Section 397 contained provisions relating to Oppression, whereas Section 398 stipulated provisions relating to Mismanagement. Question 2- Where an application for prevention of oppression and mismanagement shall be filed as per Companies Bill, 2011? Answer- An application for prevention of oppression and mismanagement shall now be filed before the NCLT. In the Companies Act, 1956, an application is to be made before the CLB. Question 3- Is there any change regarding the eligibility of the persons who can make an application before the NCLT for the prevention of Oppression and Mismanagement? Answer- No. No change has been made in respect of the eligibility of the persons who can make an application before the NCLT. The eligibility criteria for making an application with the NCLT is stipulated in Clause 244 of the Companies Bill, 2011, vis-a-v-s Section 399 of the Companies Act, 1956. Question 4- Who is authorized to waive off and relax the eligibility criteria for making an application before the NCLT?

Answer- The NCLT itself is authorized to waive off the eligibility requirements under Clause 244 of the Companies Bill, 2011 for making an application before it for the prevention of oppression and mismanagement. In the Companies Act, 1956, only the Central Government had the authority to do so. Question 5- Can the Central Government authorize any member of the Company to make an application before the NCLT under the Companies Bill, 2011? Answer- No, as per Clause 241(2), if the Central Government is of the opinion that the affairs of the company are being conducted in a manner prejudicial to public interest, it can itself make an application before the NCLT. The Companies Bill 2011 does not give power to the Central Government to authorize any member of the company to make an application before the NCLT. However, the Companies Act, 1956 gives the power to the Central Government to authorize any member of the company to make an application before the NCLT. Question 6- Can any member make an application before the NCLT if such member is of the opinion that the material change in the management, control or ownership of the company is likely to affect public interest? Answer- No. As per Clause 241(1)(b), a member cannot make an application before the NCLT if he is of the opinion that the material change in the management, control or ownership of the company is likely to affect public interest or the interest of the company. In case of material changes in the control, management or ownership of the company, a member can make an application before the NCLT only when such change is prejudicial to himself or other members or any class of members of the company. However, as per Sec 398 of the Companies Act, 1956, a member can make an application before the CLB is such material change in the management of the company is prejudicial to the public interest. Question 7- Is it required by the NCLT to give a notice to the Central Government before passing a final order in respect of an application for prevention of oppression and mismanagement under the Companies Bill, 2011? Answer- No. The NCLT is not required to give any notice to the central Government while passing a final order in respect of an application under this Chapter. In the Companies Act, 1956, Sec 400 mandated that the CLB shall give notice of every application made to it under section 397 or 398 to the Central Government, and shall take into consideration the representations, if any, made to it by that Government before passing final a order under that section. Question 8- Does the Companies Bill, 2011 give any additional powers to the NCLT while passing an order in respect of an application for prevention of oppression and mismanagement? Answer- Yes. Clause 242(2) of the Companies Bill, 2011 gives some additional power to the NCLT apart from those vested with the CLB as per Sec 402 of the Companies Act, 1956. The additional powers given to the NCLT in respect of passing an order for the prevention of oppression and mismanagement are: Restrictions on the transfer or allotment of the shares of the company. Removal of the managing director, manager or any of the directors of the company

 Recovery of undue gains made by any managing director, manager or director during the period of his appointment as such and the manner of utilization of the recovery including transfer to Investor education Protection Fund or repayment to identifiable victims The manner in which the managing director or manager of the company mat be appointed subsequent to an order removing the existing managing director or manager of the company. Appointment of such number of persons as directors, who may be required by the Tribunal to report before it on any matter as it may direct Imposition of any cost as may be deemed fit by the NCLT. Question 9- In case the company makes any amendment to its MOA or AOA contravening any order of the NCLT or inconsistent with any of its order, what is the penalty prescribed under the Companies Bill, 2011? Answer- In case the company makes any amendment to its MOA or AOA contravening any order of the NCLT or inconsistent with any of its order, then as per Clause 242(8) of the Companies Bill the company shall be punishable with fine not less than 1 lakh rupees but which may extend to 25 lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to 6 months or with fine which shall not be less than 25 thousand rupees but which may extend to 1 lakh rupees. No such penal provision exists in the Companies Act, 1956. Sec 404(4) of the Companies Act, 1956 only provides a punishment of Rs 50,000 against the company and every officer in default in case of failure to register an order of the CLB for alteration of the MOA or the AOA with the RoC within 30 days. Question 10- What is the penalty under the Companies Bill 2011 if any managing director or director whose agreement is terminated by an order of the NCLT as managing director or a director of the company within 5 years of such order without the leave of the Tribunal? Answer- As per Clause 243(2) of the Companies Bill, 2011, any person who knowingly acts as a managing director or other director or manager of a company in contravention of the NCLT order, and every other director of the company who is knowingly a party to such contravention, shall be punishable with imprisonment for a term which may extend to 6 months or with fine which may extend to 5 lakh rupees, or with both. However, as per Companies Act, 1956, under similar circumstances, any person who knowingly acts as a managing director or other director or manager of a company in contravention of the CLB order, and every other director of the company who is knowingly a party to such contravention is be punishable with imprisonment for a term which may extend to 1 year, or with fine which may extend to Rs. 50,000, or with both. Question 11- What are the new provisions relating to prevention of oppression and mismanagement which are incorporated in the Companies Bill 2011? Answer- Clause 245 provides that a certain number of shareholders or depositors can bring an action before the National Company Law Tribunal (NCLT). The action can be against the company for restraining it from

various acts such as those that are ultra vires the memorandum and articles of association, that are based on a resolution of shareholders obtained through suppression of material facts, or that are contrary to the provisions of the Companies Act or any other law. More importantly, a new addition in the 2011 version is that shareholders can claim damages for fraudulent actions, unlawful conduct or misstatements made by the company and its directors, and in certain cases its auditors (including the audit firm) or any expert or advisor or consultant of the company. This new provisions seems to be a result of the discourse that emanated from the Satyam episode so as to pin responsibility not only on insiders of the company but also on various gatekeepers who are responsible for ensuring compliance with the law. Certain other provisions also support the creation of a regime for shareholder actions. For example, failure to comply with an order of the NCLT will result in a criminal offence. Moreover, the NCLT may provide that the cost of bringing the action may be defrayed by the company or other responsible person. This is a key insertion especially in derivative actions where shareholders may not have the incentive to initiate an action if they have to directly bear the cost, while the ultimate relief will flow to the company. The Bill also provides for consolidation of similar petitions, while also specifying the manner in which the lead applicant will be chosen. Question 12- Are there any penal provisions in respect of any fraudulent application to the NCLT under Clause 2410245 of the Companies Bill, 2011? Answer- Clause 246 of the Companies Bill 2011 stipulates penal provisions in relation to a fraudulent application made to the NCLT under Clauses 241-245. As per Sec 246, the penal provisions as stipulated in Clauses 337-341 of the Companies Bill shall apply mutatis mutandis in such cases.