PREVENTION OF MISMANAGEMENT IN COMPANIES by : DR. T.K. JAIN AFTERSCHOOL centre for social entrepreneurship sivakamu veterinary hospital road bikaner 334001 rajasthan, india FOR ± PGPSE PGPSE PARTIC PARTICIPANT IPANTS S mobile : 91+9414430763 5 DECEMBER 09
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SEC. 397, 398
Majority rules over company. There is a possibility that majority may adopt measures which are not favourable to others. Thus there is oppression.. The minority can then go to to Tribunal for relief and the government will take steps to prevent oppression. 5 DECEMBER 09
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Examples of oppression Now allowing voting rights taking decision which are against company company changing objectives of company to more risky operations taking decisions, which are different from original path of company 5 DECEMBER 09
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What is not oppression?
Not declaring dividend carelessness not maintaining proper records etc.
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Mismanagement ?
Mismanagement Mismanagement is the situaiton when there is gross misconduct misconduct and deviation from company's original course of action which leads to substantial failures of company / loss to public / to company 5 DECEMBER 09
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What to do ? 1/10th of members members (1/10 of shares) / or / 100 (whichever is less) can apply to Tribunal with petition. If the company doesnt have shares, 1/5th of shareholders can apply the central government government can also apply to tribunal 5 DECEMBER 09
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Powers of tribunal It can set aside any decision of company / transaction of company it can investigate the working of company on its recommendation, recommendation, the govenrment can appoint directors of the company / takeover the t he management of a company (sec. 408) such directors will not be required to have qualification shares. 5 DECEMBER 09
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Interim orders by Tribunal
The tribunal will look into the management management of company and issue interim orders, which will be binding on company
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COMPROMISE & ARRANGEMENTS Comprom Compromise ise is a type type of settlem settlement ent ± where there is a settlement between company and its creditors arrangement arrangement is type of reorganisation of share capital. Compromise & arragements are undertaken when there is a dispute dispute / conflict. (sec. 390 & 391) 5 DECEMBER 09
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Sec. 391 Under this section, the court supervises arragnement / compromise between company and its creditor the court will take report of ROC before sanctioning the scheme
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Case : pioneer dyeing house (1967)
The court will not approve a scheme scheme just because it is to cover misdeeds of directors
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The scheme to be binding on all
Scheme of compromise / arrangement will be binding on all the parties.
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Case : Travancore National and Quilion Bank (1939)
The court may refuse to call a meeting when the scheme scheme is having illegal contents thus it is at the discretion of the court whether to call a meeting for compromise compromise or not.
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How does it work ? The court may fix meeting of creditors / class of members and ask them to have meeting, the court will also fix up quorum for the meeting, agenda and thus will make the ground for arrangement. As per sec. 393, all the provisions of the act must must be followed and must be properly adhered to the court can further supervise implementation 5 DECEMBER 09 www .afterschool.tk 14 of scheme
Four persons are the only members of a private company. All of them go for a pleasure trip in a car and due to an accident all the four die. Does the private company exist?
Yes ± the beautif beautiful ul aspect aspect of comp company any law is that members members and company are different, the legal status of company is different and thus t hus company remains, even if all the members die.
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at are t e powers o nspectors appointed under Section 235 or 237 of the Companies Act, 1956? As per sec. 239,240,240A, the inspectors can check any documents, documents, it is the duty of the company executives to produce all the documents before these inspctors. The inspectors can seize these documents. documents. They will study, take statements from people and give their report to CLB and government. government. 5 DECEMBER 09
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scuss t e prov s ons o Companies Act, 1956 which protects the employees of company during investigation. Sec. 635B: employees are protected when they make any disclosures during investigations under section 397,398, 235,237 or other laws.
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What is the rule given in Foss v. Harbottle In this case it was held that majority will always rule. If majority has taken a decision, which they can implement implement legally, it will be implemented. implemented. Now however, this rule is not very powerful as minority (at least 1/10) can also apply to government for their rights. 5 DECEMBER 09
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What procedure must must a company adopt to give effect to a compromise (with creditors) Prepare a scheme call a meeting with creditors request court to approve it inform ROC, Stock exchanges about it when the company is being wound up, the liquidator can give the scheme the court itself can make a scheme to revive the company 5 DECEMBER 09 www.afterschool.tk 19
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