Wednesday, January 27, 2010

From 'Oppression' to 'Prejudice'?


In this post, I had noted that the proposed Companies Bill appears to introduce some substantive changes in the law dealing with oppression (covered under Section 397 of the present Act). The proposed Companies Bill, 2009 states, in Section 212:


“212. (1) Any member of a company who complains that—  (a) the affairs of the company have been or are being conducted in a manner prejudicial to public interest or in a manner prejudicial or oppressive to him or any other member or members  may apply to the Tribunal, provided such member has a right to apply under section 215, for an order under this Chapter.”


This language of “prejudicial or oppressive” is different from the present Section 397’s requirement of “oppression”. The basic difference appears to be that the proposed Section 212(1) allows actions in cases where the affairs of the company are being conducted in a manner “prejudicial” to the public interest or “prejudicial or oppressive” to the shareholders. Under the present Act, the acts complained of must be “prejudicial” to the public interest or “oppressive” to the shareholders (and not “prejudicial or oppressive” to the shareholders).



The impact of this development can be ascertained by a comparative reference to the English position. The earliest statutory development in this field appears to have been in Section 210 of the Companies Act, 1948 (UK). This provided a remedy only in cases of oppression. Furthermore, the facts much be such as would justify an order of winding up on the just and equitable ground (but for the hardship caused to the petitioners). The same requirements are now found in Section 397 of the Companies Act, 1956 (Indian).



Section 210 was interpreted to mean that it allowed for a remedy only when the petitioner was being oppressed qua member – only oppression against the petitioner in his capacity as member was covered. The leading case on this point is a decision from Scotland in Elder v. Elder, 1952 S.C. 49. That case involved two petitioners seeking relief under Section 210. One of the petitioners had been removed from the Board and had been forced to resign from his position as secretary. The other petitioner had dismissed from his post of factory manager. Both these petitioners were shareholders. The re-constituted Board had refused to buy the petitioners’ shares when called upon to do so. These facts were alleged to be oppressive. The Inner House of the Court of Session of Scotland however dismissed the petition, on the ground that the facts did not indicate any oppression of the petitioners in their capacity as shareholders. Thus, the decision seemed to limit the scope of Section 210 to oppression qua member. This was reaffirmed by English Courts in Ebrahimi v. Westbourne Galleries, [1973] A.C. 360 – a leading case on the principles of winding up of small companies which are in the nature of “quasi-partnerships”. It was held that while certain conduct must be oppressive qua shareholder for relief under Section 210 to be available; the “qua shareholder” requirement did not apply if the company was being wound up on the just and equitable ground. Conceivably, on the facts of Elder, while relief under Section 210 may not be available, a petition to wind up the company on the just and equitable ground would be available. The requirements for invocation of Section 210, then, appeared to be that there must be oppression qua shareholder; and the oppression must be such as would otherwise justify winding up on just and equitable grounds. The Supreme Court of India has approved of Elder in Shanti Prasad Jain v. Kalinga Tubes, AIR 1965 SC 1535, in the context of Section 397.

Section 210 (and the corresponding Section 397) with these requirements would seem to be a rather narrow Section. In the Companies Act, 1985 (UK), the scope was enlarged. English law moved away from “oppression” to “unfair prejudice”. Under Section 456, it was no longer necessary to show that the facts justified winding up; and the “qua shareholder” requirement was also diluted. This same position exists under Section 994 of the Companies Act, 2006 (UK). Furthermore, cases have held that “unfair prejudice” is broader than mere “oppression” – it might involve ‘breach of legitimate expectations’ and breach of the standards of fairness. Lord Hoffman has in fact stated that the legislative reforms have served to “free the Courts from technical considerations of legal right and to confer a wide power (to do what is fair)…” – O’Neill v. Philips, [1999] 2 BCLC 1. As Professors Gower and Davies argue, this would mean that “unfair prejudice” seems to encompass not just the rights of shareholders, but also their interests.

The proposed Indian Bill’s language seems to mirror these developments in the transition to “prejudice” from “oppression”. The change in the Section appears to have at least three consequences: (a) the requirement to demonstrate that the facts justify winding up has been done away with; (b) the “qua shareholder” requirement has been diluted; (c) the movement from an oppression-based test to a prejudice-based test is indicative of the widening of scope of the provision to deal with unfairness which would not necessarily amount to oppression. In interpreting this provision, therefore, the existing case-law under Section 397 may not be entirely suitable.

(These three changes are reflective of the position under the proposed Section 212. How the next Section - Section 213 - affects this analysis remains to be seen. Particularly, Section 213(1)(b) eems to indicate that the requirement in relation to winding up has not been done away with. This issue will be discussed in a subsequent post)

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