From Colonial Legacy to Modern Regulation: Tracing the Legislative Evolution of Mismanagement and Oppression of Minority in Company Law vis a vis England and India

Introduction

It is essential to examine the legislative history of oppression, mismanagement, and prejudice/unfair prejudice in both England and India, as the echoes of colonial practices continue to impact legislative drafting and judicial decision-making to this day.

In England, the regulation of incorporated companies began just 176 years ago with the Joint Stock Companies Act of 1844. Prior to this, the government granted corporations monopolies over specific territories through Royal Charters or Acts of Parliament. A notable example is the British East India Company, which held the exclusive right to trade with countries east of the Cape of Good Hope, bestowed upon it by Queen Elizabeth I. During this period, corporations acted as agents of the government, generating revenue from their overseas ventures.

Another significant company of the time was the South Sea Company, established in 1711 to trade in the Spanish South American colonies. The company’s monopoly rights were allegedly supported by the Treaty of Utrecht, signed in 1713 following the War of Spanish Succession. UK investors were promised exceptionally high returns, leading to speculative trading of the company’s shares at exorbitant premiums. By 1717, the South Sea Company became astonishingly wealthy despite its lack of real business activities and even assumed the public debt of the UK government. However, this speculative bubble eventually burst by the end of 1720, resulting in bankruptcies and the enactment of the Bubble Act in the same year.

The UK Bubble Act of 1720 prohibited the establishment of companies without a Royal Charter and remained in force until its repeal in 1825. As the Industrial Revolution gained momentum by 1825, necessitating legal changes, the Bubble Companies Act of 1825 lifted the restrictions. Nevertheless, it did not fully resolve the prevailing issues.

Consequently, in 1843, the Parliamentary Committee on Joint Stock Companies, chaired by William Gladstone, published a report that led to the enactment of the Joint Stock Companies Act of 1844. This act allowed ordinary individuals to incorporate companies through a simple registration procedure but did not permit limited liability.

The Limited Liability Act of 1855 introduced limited liability for investors in the event of business failure, restricting their liability to the amount they had invested in the company. These two features – a simplified registration procedure and limited liability – were subsequently consolidated in the first modern company law enactment, the Joint Stock Companies Act of 1856. This act enabled seven individuals subscribing to shares individually to form a limited liability company. It was further consolidated with other statutes in the Companies Act of 1862, hailed as the Magna Carta of Co-operative enterprises by Francis Palmer.

The Companies Act of 1862 consolidated the laws governing the incorporation, regulation, and winding up of trading companies and other associations. While this act did not provide remedies for minority shareholders regarding oppression and mismanagement, Section 79 empowered the court to wind up a company if it deemed it just and equitable to do so. Additionally, the act included a provision granting limited rights to dissenting members when a sale or transfer of the company’s business or property occurred during winding-up proceedings.

However, as fraudulent practices related to the formation and management of companies came to light, an investigation was ordered by a Committee chaired by Lord Davey. The Committee’s report, along with a draft Bill, led to the enactment of the Companies Act of 1900, which also did not address oppression and mismanagement. The Companies (Consolidation) Act of 1908 suffered from similar shortcomings. In 1929, the Companies Act was introduced following examinations by committees chaired by Lord Wrenbury in 1918 and Greene, K.G., in 1926.

During World War II, the Company Law Reforms Committee, chaired by Lord Cohen, was appointed in 1943 by the President of the Board of Trade to review and suggest major amendments to the 1929 Act. The committee specifically addressed two problems: the difficulties faced by legal heirs of deceased shareholders in disposing of shares due to restrictions on transferability, and the abuse of office by directors in diverting significant profits as remuneration to the detriment of small shareholders. The Cohen Committee recommended expanding the court’s power to issue winding-up orders, even when alternative remedies existed, as a step in the right direction.

The Companies Act of 1948, influenced by the Cohen Committee’s report, incorporated provisions related to an “alternative remedy to winding up in cases of oppression” in Section 210. However, the interpretation of the term “oppressive” in the 1948 Act became a subject of uncertainty. The House of Lords, in the case of Scottish Cooperative Wholesale Society vs. Meyer, construed “oppressive” to mean “burdensome, harsh, and wrongful.” This interpretation raised questions about whether it required actual illegality or infringement of legal rights. Furthermore, the provision faced criticism for the requirement to establish grounds justifying winding up under the “just and equitable” clause and for its limited application to a course of conduct rather than isolated acts.

To address these issues, the Jenkins Committee in 1962 recommended using the term “unfairly prejudicial.” Parliament adopted this recommendation in Section 75 of the Companies Act of 1980, which later became Section 459 of the Companies Act of 1985 with an amendment. Sections 459 to 461 of the Companies Act of 1985 were grouped under the caption “Protection of Company’s Members against Unfair Prejudice.” The Companies Act of 1985 was subsequently repealed by the Companies Act of 2006, which became the longest Act in British parliamentary history, consisting of 1300 sections and 16 schedules. Part 30 of the Companies Act of 2006 contains provisions, including sections 994 to 996, under the heading “Protection of Members against Unfair Prejudice.” These sections restate the provisions of sections 459, 460, and 461 of the 1985 Act.

Legislative History in India:

The legislation concerning the regulation of registered joint stock companies in India dates back to the 19th century. The earliest law in this regard was Act No. XLIII of 1850, which mandated the registration of unincorporated companies of partners. It allowed the transfer of shares in such companies without the consent of all the partners. Interestingly, this act granted the Supreme Courts of Judicature in Calcutta, Madras, and Bombay the authority to register these companies and enforce the directors’ responsibilities outlined in the act or the partnership agreement. These courts were also empowered to punish individuals for contempt if they disobeyed the court’s orders. However, the concepts of minority, majority, oppression, and mismanagement were not addressed in this 1850 Act.

The subsequent legislation, Act No. XIX of 1857, focused on the incorporation and regulation of joint stock companies and associations, with or without limited liability. The primary objective of this act was to allow members of these companies and associations to limit their liability for debts and engagements related to them. It introduced the provision that seven or more individuals associated for a lawful purpose could form an incorporated company by subscribing their names to a Memorandum of Association. It also prohibited partnerships involving 20 or more persons from engaging in trade or business with a profit motive unless they were registered as a company. However, even this act did not address concepts like oppression and mismanagement, possibly due to the privileges granted solely to the East India Company.

Subsequently, The Indian Companies’ Act of 1866 was enacted to consolidate and amend laws relating to the incorporation, regulation, and winding up of trading companies and associations. However, even this act did not provide any remedy in cases of oppression, mismanagement, or unfair prejudicial treatment. The Indian Companies Act, 1882, which repealed the Act of 1866, also did not contain provisions for shareholders or members to seek redressal against oppression, mismanagement, or unfair treatment.

The Indian Companies Act, 1913, repealed the 1882 Act and introduced Section 153C to address oppression and mismanagement, although the original enactment did not cover these issues. After India gained independence, the government appointed a Company Law Committee to revise the Companies Act, particularly with respect to Indian trade and industry. The Committee submitted its report in March 1952, which led to the Companies Act of 1956. This act included Chapter VI, which provided elaborate provisions for the prevention of oppression and mismanagement. It comprised two parts: Part A addressed the powers of the Court/Tribunal, while Part B focused on the powers of the Central Government. Sections 397, 398, and 402 of this act held significance in this context.

As the Indian economy opened up and the national and international economic environment changed, the government decided to replace the 1956 Act with a new one. Thus, the Companies Act of 2013 was enacted, incorporating various changes, including those pertaining to the protection of minority shareholders. Chapter XVI of the 2013 Act exclusively deals with the “Prevention of Oppression and Mismanagement,” with Sections 241 to 246 elaborating on the matter. This legislative journey in India, concerning provisions on oppression, mismanagement, and prejudice, can be summarized in three milestones: the introduction of the “just and equitable clause” for winding up in 1862, the provision of an alternative remedy for oppression of the minority in 1948, and the shift from oppression to “unfair prejudice” in 1980/1985.

It is worth noting that Section 210 of the English Companies Act, 1948, inspired the insertion of Section 153C into the Indian Companies Act, 1913, through an amendment in 1951. The 1956 Act introduced Sections 397 and 398, which underwent modifications. These provisions were further overhauled, resulting in Sections 241 and 242 of the 2013 Indian Act. While these sections were modeled after sections 459 to 461 of the English Companies Act, 1985, and sections 994 to 996 of the English Act of 2006, they were not exact reproductions. The changes made in India over time were significant.

To summarize the changes brought about by the Indian legislation:

1. The 1913 Act and the 1956 Act required the conduct of the company’s affairs warranting interference to be “present and continuing.” However, the 2013 Act expanded this scope to include “past or present and continuous” conduct. Notably, the conduct cannot be from a distant past.
2. Prejudice to public interest and the interests of members were not parameters prescribed in the 1913 Act. However, the 1956 Act included prejudice to public interest in both oppression and mismanagement provisions. Prejudice to the interest of the company was included only in the mismanagement provision. Under the 2013 Act, conduct prejudicial to any member, public interest, or the interest of the company is considered alongside oppression.
3. The 1913 Act required the court to be satisfied that winding up under the “just and equitable clause” would unfairly and materially prejudice the company or its members. However, the 1956 Act and the 2013 Act dropped the requirement for conduct to “materially” prejudice, and only unfair prejudice is considered. Additionally, under the 1956 Act and the 2013 Act, the focus is on whether the winding up will unfairly prejudice “such member or members,” indicating…

These changes reflect the evolution of Indian company law and its growing emphasis on protecting minority shareholders and addressing issues of oppression, mismanagement, and unfair prejudice. The Companies Act of 2013 marked a significant milestone in this regard with its dedicated chapter on the prevention of oppression and mismanagement (Chapter XVI).

There are a few notable features of the shift that happened in England. They are

(i) from a “conduct oppressive to some part of the members” the focus has shifted to “conduct unfairly prejudicial to the interests of the members generally or of some part of its members”:

(ii) conduct prejudicial to public interest or prejudicial to the company’s interest, does not form part of the scheme of English Law;

(iii) any actual or proposed act or omission, can also be challenged under English Law on the ground that it would turn out to be prejudicial;

(iv) the question of the Court forming an opinion that the facts would otherwise require an order for winding up on just and equitable ground but that the same will unfairly prejudice the complaining members, does not arise under the English Law any more. But despite the huge shift in England, there appears to be a common thread running in all the enactments, both in India and England.

In all the 3 Indian enactments, namely the 1913 Act, 1956 Act and the 2013 Act, the Court is ordained, generally to pass such orders “with a view to bringing to an end the matters complained of”. This sentence is found in Section 153C(4) of the 1913 Act. It is found in Section 397(2) as well as 398(2) of the 1956 Act and it is also found in Section 242 (1) of the 2013 Act. This is also the common thread that runs through the statutory prescriptions contained in the English Acts of 1948, 1985 and 2006.

Therefore, at the stage of granting relief in an application under these provisions, the final question that the Court should ask itself is as to whether the order to be passed will bring to an end the matters complained of.