The document discusses prevention of mismanagement in companies under the Companies Act of 1956. It describes how the majority rule of a company can lead to oppression of minorities, and the process by which minorities can petition the tribunal for relief. It also discusses what constitutes mismanagement, the powers of the tribunal to investigate companies and appoint new directors, and the process for approved compromises and arrangements between a company and its creditors.

1. PREVENTION OF
MISMANAGEMENT IN
COMPANIES
by :
DR. T.K. JAIN
AFTERSCHO☺OL
centre for social entrepreneurship
sivakamu veterinary hospital road
bikaner 334001 rajasthan, india
FOR – PGPSE PARTICIPANTS
mobile : 91+9414430763
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2. 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
Tribunal for relief and the government will
take steps to prevent oppression.
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3. Examples of oppression
Now allowing voting rights
taking decision which are against company
changing objectives of company to more risky
operations
taking decisions, which are different from
original path of company
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4. What is not oppression?
Not declaring dividend
carelessness
not maintaining proper records
etc.
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5. Mismanagement ?
Mismanagement is the situaiton when there is
gross misconduct and deviation from
company's original course of action which
leads to substantial failures of company / loss
to public / to company
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6. What to do ?
1/10th of 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 can also apply to
tribunal
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7. Powers of tribunal
It can set aside any decision of company /
transaction of company
it can investigate the working of company
on its recommendation, the govenrment can
appoint directors of the company / takeover the
management of a company (sec. 408) such
directors will not be required to have
qualification shares.
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8. Interim orders by Tribunal
The tribunal will look into the management of
company and issue interim orders, which will
be binding on company
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9. COMPROMISE &
ARRANGEMENTS
Compromise is a type of settlement – where
there is a settlement between company and its
creditors
arrangement is type of reorganisation of share
capital.
Compromise & arragements are undertaken
when there is a dispute / conflict. (sec. 390 &
391)
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10. 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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11. Case : pioneer dyeing house
(1967)
The court will not approve a scheme just
because it is to cover misdeeds of directors
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12. The scheme to be binding on all
Scheme of compromise / arrangement will be
binding on all the parties.
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13. Case : Travancore National and
Quilion Bank (1939)
The court may refuse to call a meeting when
the scheme is having illegal contents
thus it is at the discretion of the court whether
to call a meeting for compromise or not.
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14. 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 be followed and must be properly
adhered to
the court can further supervise implementation
5 DECEMBER 09
of scheme
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15. 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 beautiful aspect of company law is
that members and company are different, the
legal status of company is different and thus
company remains, even if all the members die.
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16. What are the powers of Inspectors
appointed under Section 235 or
237 of the Companies Act, 1956?
As per sec. 239,240,240A, the inspectors can
check any documents, it is the duty of the
company executives to produce all the
documents before these inspctors. The
inspectors can seize these documents. They
will study, take statements from people and
give their report to CLB and government.
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17. Discuss the provisions of
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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18. 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 legally, it will be
implemented. Now however, this rule is not
very powerful as minority (at least 1/10) can
also apply to government for their rights.
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19. What procedure 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
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