Post on 29-May-2018
transcript
8/8/2019 9-10 Management of Co & Prevention of Oppresion and Mismanagement .
1/30
Company Management
DUTIES AND LIABILITIES OF
DIRECTORS
8/8/2019 9-10 Management of Co & Prevention of Oppresion and Mismanagement .
2/30
General Duties of Directors
DUTY OF GOOD FAITH
DUTY OF REASONABLE CARE
DUTY TO ATTEND BOARD MEETINGS
DUTY NOT TO DELEGATES
DUTY TO DISCLOSE INTEREST
8/8/2019 9-10 Management of Co & Prevention of Oppresion and Mismanagement .
3/30
DUTY TO GOOD FAITH
Directors must act honestlyand in the interest of thecompany andshareholders
Shouldnot exploit corporate opportunities to theirown use
shouldnot makesecret profits
If No obligation ordirection from company - no breach ofduty
- not liable to pay profits
8/8/2019 9-10 Management of Co & Prevention of Oppresion and Mismanagement .
4/30
DUTY OF REASONABLE CARE
With duediligenceandcaution, Directorhas to attend the workassigned
to him, If fails, he is guilty ofnegligence
Not liable formere errors of judgement
Exclusion ofliability fornegligence clause- inarticles or inany
agreement is void- as Companies Act doesnot allow
8/8/2019 9-10 Management of Co & Prevention of Oppresion and Mismanagement .
5/30
DUTY TO ATTEND BOARD MEETINGS
Directorexercise powersat the meeting of the Boardso:
heshouldattend them but
Not bound to attendall meetings
But if he, without obtaining permission of Board, fails:
to attend threeconsecutive meetings or
absents inall the meetings foraconsecutive period of three months
his officeshall bedeemed to have been vacated:
from thedate of first meeting from which thedirectorhasabsented
himself.
8/8/2019 9-10 Management of Co & Prevention of Oppresion and Mismanagement .
6/30
DUTY NOT TO DELEGATES
Directorsareappointed because of theirskill,competence,and
integrityso
They shouldperform theirfunctionspersonallyandnot to delegate
them to otherpersons
Exceptions:
Candelegate to theextent - Companies Act orArticles of Co.
authorizes (Sec.292)
Can beleft to otherofficials- incase of exigencies of business-but in
propermanner
8/8/2019 9-10 Management of Co & Prevention of Oppresion and Mismanagement .
7/30
DUTYTODISCLOSEINTEREST
To avoid theconflictbetween the personal interest of the Directorand
hisduties towards thecompany:
Directorsshoulddisclose his personal interest at the first meeting of
the Board held- after he becomes interested ina:
Contract orsomearrangements entered into oron behalf of the
company
Punishment fornon-disclosure- fine upto Rs.50 thousands
8/8/2019 9-10 Management of Co & Prevention of Oppresion and Mismanagement .
8/30
Interesteddirectorcannot participate in thediscussion orarrangement
of his interest
Cannot vote on such matters- if votes,it shallnot be taken into account
Presence ofsuch directorshallnot becounted forthe purpose of
forming a quorum (Sec 287)
No ban on thecompany to enterinto acontract in which directoris
interested
Company must haveseparateregisterforentry ofsuch contracts in
which directorsare interested(301)
8/8/2019 9-10 Management of Co & Prevention of Oppresion and Mismanagement .
9/30
Onlyrequirement - such interest must be fairlydisclosed
Non-disclosure- makes thecontract voidableat companys option
If whole body of thedirectors isalreadyaware of such interest -
formaldisclosure not necessary
Failure to disclose his interest liabilityto:
refund hisremuneration
cease to becomedirector&
Fine of Rs. 50 thousands
8/8/2019 9-10 Management of Co & Prevention of Oppresion and Mismanagement .
10/30
Statutory Duties ofDirectors
Duties underCompanies Act - include theduty :
to filereturn ofallotments,
to disclose receipt ofcompensation from transferof propertyandshares
to convene annualand theextraordinary general meeting
8/8/2019 9-10 Management of Co & Prevention of Oppresion and Mismanagement .
11/30
Liabilities of directorsLiability mayarise from due to :
breach of fiduciaryduty- trust andconfidence,
ultra vires acts,
negligence- lackofreasonablecareandskill, and
mala fide acts- willful misconduct / willfulnegligence
Can be heldliable to compensate company or members - forloss
occasioneddue to abovereasons
Directors may be personallyliable to third parties for untrue
statement in prospectus
8/8/2019 9-10 Management of Co & Prevention of Oppresion and Mismanagement .
12/30
Directors may be heldliable-forAllotment ofshares incontravention
of Companies Act- Sec 69, Sec 70, Sec 73 etc.
Forexceeding authority conferred-underAct orArticles. - ulta vires
Mayalso incurcriminalliability under Companies Act and otherstatutes
ForEx: Offence of Cheating for issuing acheque knowing
inadequacy of fundsand with intention to cheat
8/8/2019 9-10 Management of Co & Prevention of Oppresion and Mismanagement .
13/30
Directors maybe liable - If particulars ofa charge are not filed with
registrarwithin 30 days of its creation
Where annual return is not filed with the registrar within 60 days of
annual general meeting
Where dividends are not distributed within 42/30 ???days of itsdeclaration
Where register ofdirectors, managing directors and managers is not
maintained
8/8/2019 9-10 Management of Co & Prevention of Oppresion and Mismanagement .
14/30
Minority Protectionand
Prevention of oppression
&
Mismanagement
8/8/2019 9-10 Management of Co & Prevention of Oppresion and Mismanagement .
15/30
Supremacy of Majority and Protection of Minority
MAJORITYRULEORTHE RULEOFSUPREMACY.
Company is governedand managed by will of majority of
shareholders.
Wide powers may be misused by majorityshareholders to exploit the
minorityshareholders.
Need for balance for the smooth functioning of companyaffairs
8/8/2019 9-10 Management of Co & Prevention of Oppresion and Mismanagement .
16/30
WHY PROTECTIONOFMINORITY?
A properbalance of therights isdone by -
allowing minority to exercise theirpowers
To regulate powers of majorityand
majority to observe principles ofnatural justiceand fairplay
Companies Act and Common Law provide protection to minority
8/8/2019 9-10 Management of Co & Prevention of Oppresion and Mismanagement .
17/30
RULESOFSUPREMACYOFMAJORITY
RULE IN FOSS v. HARBOTTLE(1843)
The will of the majorityshareholders issupremeand it should prevail
overthe minority
Court should not interfere with the internal management ofcompaniesso long ascompanysactivitiesare within its powers
Ascompany isaseparatelegalentity independent from the members
who compose it.
So, ifa wrong isdone to Co., thecompany is the proper person to
bring anaction forthesame.
8/8/2019 9-10 Management of Co & Prevention of Oppresion and Mismanagement .
18/30
Principle of the Rule ofSupremacy of Majority
Where thealleged wrong ina transaction is binding on the companyby a simple majority of members-
no individual memberof thecompany isallowed to maintainanaction
inrespect of that matter.
Limitations:
Power of the majority is subject to companys memorandum of
association.
Majoritys act must not be inconsistent with the provisions of the
Companies Act or any other law
8/8/2019 9-10 Management of Co & Prevention of Oppresion and Mismanagement .
19/30
BASISOFTHERULEOFSUPREMACYOFMAJORITY
To honour the will of the majority shareholders
To avoid the multiplicity of suits
To Recongnise the separate legal entity of the company
To preserve the right of the majority to decide the matters :
The majority ofshareholders has theright to decide how the
companysaffairsshall beconducted.
Therule ofsupremacy of majorityseeks to preserve thisright of the
majority,as the minority isnot allowed to challenge thelawfulacts of
the majority.
8/8/2019 9-10 Management of Co & Prevention of Oppresion and Mismanagement .
20/30
EXCEPTIONSTOTHERULEOFSUPREMACYOFMAJORITY
Certainactscannot beapproved orratifiedeven by the majority.
Evenasingleshareholdermay bring alegalaction: Ex:-
Ultra-vires actscase ofadvance moneyat interest without security- directorsacting ultra vires thecompany contrary to provisions of thecompanys memorandum
Fraud on the minoritycase ofcompromise between two competing Co. A Co.sdecision was in favourof B Co. Minorityshareholders of A Co. may question thecompromise
resolution if it amounts to fraud.
8/8/2019 9-10 Management of Co & Prevention of Oppresion and Mismanagement .
21/30
Acts requiring special majority but passed by simple majority
Acts inconsistent with the articles of association- a company in need offurther capital- majority can not alter article to enable them to purchase minority shares
compulsorily.
Asaltering companysarticles is not beneficial to thecompanyasa
whole.
The majority powers must beexercised in good faith and forthe benefit
of thecompanyasa whole.
If powers exercisedamount to a fraud on minority- liable to bechallenged by the minority.
8/8/2019 9-10 Management of Co & Prevention of Oppresion and Mismanagement .
22/30
Personal rights of individual members :
Right to vote, Right to have his voterecorded / counted
It isno ground forrejecting a members vote that he has votedagainst the interest ofthecompany.
Right to receivedividend,
Right to contest theelection foradirectorof the company
Wrongdoers in control of the companyAs wrongdoer themselves maynot permit anaction to be brought against themselvesAs wrongdoer themselves maynot permit anaction to be brought against themselves
,any membermay bring anaction in thename of thecompany.,any membermay bring anaction in thename of thecompany.--
Oppression and mismanagement
If there is oppression of minority, orthe mismanagement ofcompanysaffairs.Minority haveright to bring anaction underCompanies Act.
8/8/2019 9-10 Management of Co & Prevention of Oppresion and Mismanagement .
23/30
PROTECTIONOFMINORITYUNDERTHE COMPANIESACT
Right to apply to the court for the cancellation of the variation of
class rights [S
ection 106, 107]
But if it leads to fraudulent variations of the rights to the prejudice of the
remaining one-fourth minority.
classrights may be varied with the writtenconsent of three-fourth majority of the
shareholders of that class [Section 106].
Right to apply to the Company Law Board/ National Company Law
Tribunal ( Now )for the investigation of companys affairs [Sections 235,
236]
The specified number of members (even if they constitute
minority) may apply to the Company Law Board for the
investigation of companys affairs. Co. with share capital- at least 100members or members having 1/10 of total voting powers/ No share capital- 1/5 of total
numbers
8/8/2019 9-10 Management of Co & Prevention of Oppresion and Mismanagement .
24/30
Right to apply to the court if not satisfied with the scheme of
reconstruction and amalgamation [Section 391 to 395]
Inaschemeapproved by the majority ofshareholders- the minorityshareholders who
do not give theirconsent to thescheme- mayapply to thecourt to prevent the
compulsoryacquisition of theirshares.
Right to apply to the court for winding up of the company [Section 433 ]
Ifaffairs of the company are conducted in a manner which is oppressive to the
members, or are mismanaged.
Right to apply to the Company Law Board for prevention of oppression andmismanagement [Section 397 and 398]
The required number of members who may apply for the prevention of oppression and
mismanagement under 397 and 398 is mentioned in Section 399
8/8/2019 9-10 Management of Co & Prevention of Oppresion and Mismanagement .
25/30
Prevention of Oppression and Mismanagement
Severalremediesareavailable to minority where majority indulges in
oppression ormismanagement
Anapplicationcan be made to theCLB underSec 397
&398
Complaining member must show that
he issuffering from oppression in hiscapacityas memberand
not inany othercapacityand
oppressions is ofcontinuing nature
8/8/2019 9-10 Management of Co & Prevention of Oppresion and Mismanagement .
26/30
Acts held to be oppressive by the Courts/CLB
(i) not calling a general meeting andkeeping shareholders indark
(ii) non-maintenance ofstatutoryrecords
(iii) not conducting affairs ofcompany inaccordance with the
companies Act
(iii) depriving a memberof hisright to dividend
(iv) transferofshares to selectedshareholders rather than making an
offerto all
8/8/2019 9-10 Management of Co & Prevention of Oppresion and Mismanagement .
27/30
(v) allotment of shares by directors in a manner by which an existing
majority of shareholders is reduced to a minority
(vi) continuousrefusal bycompany to registershares with an ulteriormotive ofretaining control overaffairs ofcompany
(viii) countermanding decision ofBoard - by a director who
controls majority voting powerandnot allowing Board to perform its
functions
(x) sale ofassets to directors simultaneously giving them loan to
purchase thesame
(xi) refusal to register transmission under will
(xii) issue of further shares benefiting a section of shareholders
(xiii) registration of transferofshares in violation ofarticles
8/8/2019 9-10 Management of Co & Prevention of Oppresion and Mismanagement .
28/30
Sec 398 CLB is empowered to grant relief in cases of
mismanagement
When CLB is of the opinion that
affairs ofcompanyare being conducted/ likely to conducted
ina mannerprejudicial to the public interest orinterests of thecompany
8/8/2019 9-10 Management of Co & Prevention of Oppresion and Mismanagement .
29/30
Courts/CLB held Actsamounting to mismanagement are :
serious infighting betweendirectors,
illegalconstitution of the Board ofdirectors,
grossneglect of interest ofcompany bysale of itsassets,
diversion of funds to benefit majority, operation of bankaccount by
an unauthorized person,
continuing in office of managing directorafterexpiry of theirterm
8/8/2019 9-10 Management of Co & Prevention of Oppresion and Mismanagement .
30/30
To end oppression and mismanagementCLB has been empowered under Sec 402 to grant certainspecific
relief which include:
(i) regulation of conduct of companys affairs in future
(ii) order to purchase shares or interests of any member by other
members thereof or by company and permission to reduce its
share capital
(iii) termination or modification of any agreement between
company and MD /director/manager/ third person,
(iv) set aside any transfer, delivery of goods, payment, execution
and other act relating to property,
Central Govt. may nominate a BO Dirs to prevent oppression and
mismanagement