Beyond Numbers: Qualitative Checks in Shareholder Disputes

(Kushagra Keshav is a 4th-year student at National Law University Odisha)

Introduction

One of the fundamental tenets of company law across jurisdictions is its ability to allow minority shareholders to hold the company board accountable for acts of oppression or mismanagement. This aspect can be found to be accounted for in Sections 241 and 242 of the Companies Act 2013. However, which acts can be said to be determinative of oppression or mismanagement and the eligibility criteria for seeking legal recourse stands subjective and interpretative. In that regard, in the case of Jitendra Virmani vs. MRO- Tek Reality Limited,the National Company Law Appellate Tribunal (NCLAT) Chennai explored this issue and illuminated the fine balances between the sharehslder rights and duties of the board.

At the heart of the case lies the issue, of whether Jitendra Virmani (Virmani) had the eligibility to maintain oppression and mismanagement proceedings against MRO- Tek Reality Limited (the company) and which was dismissed by National Company Law Tribunal (NCLT) Bangalore. This article traverses through the factual matrix of the case. It analyses the aforementioned issue, viz. the qualitative standard, whether satisfying it is sine qua non for a member to maintain oppression and mismanagement proceedings.

Case Background

Virmani, initially holding no shares, began acquiring company stock in 2015 after the board proposed selling/developing company property. By 2016, he held 19.83% of shares, starting from zero. He filed petitions alleging oppression and mismanagement before the NCLT, but only after the company rejected his offer to buy a certain property. The appellate tribunal noted that 91.13% of shareholders supported the property decision, finding it reasoned and fair. Virmani failed to prove that the company’s actions were unjust or prejudicial to members or public interest. Consequently, the tribunal dismissed his petition, finding no legal flaws in the decision.

Statutory essentials

Section 244 requires, that shareholders be in possession of 10% of the company’s issued share capital or 1/10^th of its total membership, whichever is less; or, in the case of a company without share capital, a minimum of 1/5^th of the total number of members, to maintain an action for oppression, mismanagement, and prejudicial acts before the NCLT. Thus, the aforementioned section plays a significant role in ensuring that only such qualified members- as has been stated above, can initiate oppression or mismanagement proceedings against the company. This serves as a legitimate filter against frivolous claims all the while maintaining the integrity of tribunals and corporate litigation.

The Qualitative criteria

An interesting aspect of oppression and mismanagement proceedings that came to light by means of this case was a test laid down by Calcutta HC in the case of Jodh Raj Laddha and Ors. V. Birla Corporation Limited & Ors. wherein the qualitative aspect of members’ shareholding pattern was held to be of essence while examining the eligibility of petitions under Section 399 of Companies Act 1956 (now Section 244 of Companies Act 2013). The Calcutta HC in the aforementioned case concluded that only after deeper scrutiny of facts and circumstances of a particular case and establishment of sufficient material the ‘qualitative standard’ can be invoked as a precursor to the maintainability of oppression and mismanagement proceedings.

Even in Rajiv Garg v. Waxpol Industries Limited the CLB relied upon Jodh Raj Laddha and Ors. v. Birla Corporation Limited & Ors and held that the numerical criteria as under section 399 of Companies Act 1956 shall not be the sole criteria for determining over the maintainability of such proceedings. The mode and manner of obtaining consent from other shareholders was taken note of. Similarly in the present case the mode and manner in which shares were acquired in the company was taken given due regard to dismiss the petition.

Despite not having any statutory backing, over the years tribunals and courts have evolved and accepted the ‘qualitative standard’ as one of the essential conditions to maintain the oppression and mismanagement proceedings. The qualitative criteria emphasized the fact that shareholders’ genuine interest in the affairs of the company must be present. Meeting only the numerical threshold under Section 244 is not determinative of the maintainability of oppression and mismanagement proceedings.

To that effect, in The United Kingdom (UK) courts assess the shareholder’s conduct and motives to determine if a petition is genuine or an abuse of process. In O’Neil v. Phillips the House of Lords clarified that unfair prejudice claims require evidence of conduct that breaches the company’s constitution or equitable considerations, such as legitimate expectations of shareholders, rather than mere dissatisfaction. Moreover, Section 244 which imposes a numerical threshold (10% shareholding), the UK’s Section 994 of Companies Act 2006 has no minimum shareholding requirement, allowing any shareholder to file a petition. However, UK courts impose a qualitative filter by requiring petitioners to demonstrate a genuine stake in the company’s welfare, similar to the tribunal’s focus on the “mode and manner” of share acquisition. For instance, in Re Bellador Silk Ltd., the petition was rejected as the shareholder’s motives were deemed collateral, reinforcing the need for bona fide intent.

This criterion introduces subjectivity and runs the risk of being applied inconsistently in different situations. Tribunals may interpret “mode and manner” differently in the absence of statutory foundations, which could compromise predictability. Because of this subjectivity, corporate litigation may become less predictable, which could discourage lawful minority shareholders from submitting petitions out of concern that they will be arbitrarily dismissed. It might also give tribunals more confidence to examine legitimate share purchases, which would raise questions about judicial overreach.

Given that results largely rely on the perspective of the presiding tribunal, the dearth of statutory codification results in uncertainty for petitioners and businesses. This might make minority shareholders who are looking for redress for legitimate complaints less confident in the NCLT’s adjudicatory process.

Scope of Change

The following suggestions are put forth to improve the Companies Act 2013’s framework for oppression and mismanagement proceedings under Sections 241–244. To ensure uniform application and reduce subjectivity, Section 244 should be amended to codify qualitative criteria by defining “mode and manner” of share acquisition to include duration, voting patterns, and the absence of ulterior motives. Second, require petitioners to reveal their shareholding history in order to filter out pointless petitions early through a preliminary hearing at NCLT. Third, give NCLT the authority to charge vexatious claims in order to prevent abuse and safeguard legitimate complaints. Fourth, strengthen NCLAT’s supervision by requiring thorough justification in decisions in order to establish a strong precedent bank. Lastly, create a centralized database and judicial training to standardize qualitative evaluations. These recommendations, which are modeled after UK’s Section 994, promote accountability and transparency in corporate governance by striking a balance between minority protections and defences against opportunistic litigation.

Conclusion

The primary case being discussed emphasizes how important the qualitative standards are for petitions submitted under Sections 241-246 of the Companies Act of 2013. The NCLAT Chennai order highlighted the necessity of adding a qualitative standard to Section 244, one of the current provisions. The potential for abusing legal provisions has never been low due to the changing dynamics in the corporate world; therefore, given the situation that faced NCLAT Chennai, it is now imperative to establish a criterion to assess the maintainability of petitions alleging oppression and mismanagement.

While navigating the complexities of corporate structure a nuanced approach that takes quantitative as well as qualitative aspects becomes essential. Fostering a corporate environment where legal actions of such a nature as has been discussed above are driven by bonafide concerns needs to be tested at the touchstone of qualitative criteria.