Prevention of Oppression and Mismanagement

Chapter XVI of the Companies Act 2013 (the Act) through an application to the National Company Law Tribunal (NCLT) under section 241 (read with other provisions under the said Chapter and applicable NCLT Rules) provides an extremely potent legal right and avenue for relief to the Members (especially those with minority or small holdings and/or not having ‘control’ of Company affairs) of Companies and the Central Government (through its officers), to prevent, rectify or stop the conduct of affairs of Companies in a manner that is —

  • Prejudicial or oppressive to Member interests, that of the public or of the concerned Company; or
  • Where such prejudice is likely to be caused by such conduct, brought about by a material change in the management or control of the said Company.

> Read about ‘Class Action’

Right to Apply

To generally prevent frivolous applications or those with malafide motives, the said Chapter via section 244 prescribes certain criteria to be pre-satisfied before an application under section 241 for prevention of oppression and mismanagement can be heard on merit by the NCLT, and are as follows —

  • Applicant must be a Member(s) of the concerned Company or the Central Government (through its appointed officer)
  • For a Company with Share Capital, such application(s) must be made by not less than 100 Members of the Company or not less than 1/10th of the total number of its Members (whichever is less), or by any Member(s) holding not less than 1/10th of the issued Share Capital of the said Company (subject to the condition that the applicant(s) has paid all calls and other sums due on such Shares)
  • For a Company without Share Capital, such application(s) must be made by not less than 1/5th of the total number of its Members

Waiver of Criteria and Representative/Co-Application

> The NCLT may however, on an application made to it in this behalf, waive all or any of the requirements above specified so as to enable the Members to so apply under section 241.

For the above said purposes, where any share(s) are held by two or more persons jointly, they shall be counted only as one member.

> Where any Members of a Company are so entitled to make the above said application, any one or more of them having obtained the consent in writing of the rest, may make the application on behalf and for the benefit of all of them.

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Application/Complaint to NCLT for Relief

The NCLT is empowered by the above said provisions to hear and adjudicate an application filed under section 241 of the Act (read with the applicable provisions of the National Company Law Tribunal Rules 2016 and filing of prescribed Form NCLT -1 with correct fees). For the just and equitable adjudication of such matters, section 242 of the Act provides the NCLT significant and almost plenary powers (see below).

Pursuant to an application under section 241 for the ‘prevention of oppression and mismanagement’, where the jurisdictional NCLT is of the opinion that grounds as provided under the said provision are made out in the following manner —

  • The concerned Company’s affairs have been/are being conducted in a manner prejudicial or oppressive to any Member(s) or prejudicial to public interest or in a manner prejudicial to the interests of the company; and
  • ‘Winding up’ of the said Company would unfairly prejudice such Member(s), but that otherwise the facts would justify the making of a ‘winding-up’ order on the ground that it was just and equitable that the Company should be wound up.

In the above stated circumstances, the NCLT may, with a view to bringing to an end the matters complained of, make such order as it thinks fit, and without prejudice to the generality of such powers, such an order may provide for —

  • Regulation of conduct of affairs of the Company in future
  • Purchase of Shares or interests of any Members of the Company by other Members thereof or by the Company
  • In the case of a purchase of its Shares by the Company as aforesaid, the consequent ‘Reduction’ of its Share Capital
  • Restrictions on the transfer or allotment of the Shares of the Company
  • Termination, setting aside or modification, of any agreement, howsoever arrived at, between the Company and the Managing Director (MD), any other Director or Manager, upon such terms and conditions as may, in the opinion of the NCLT, be just and equitable in the circumstances of the case
  • Termination, setting aside or modification of any agreement between the Company and any person other than those referred to above (no such agreement shall be terminated, set aside or modified except after due notice and after obtaining the consent of the party concerned)
  • Setting aside of any transfer, delivery of goods, payment, execution or other act relating to property made or done by or against the Company within 3 months before the date of the said application, which would, if made or done by or against an individual, be deemed in his insolvency to be a fraudulent preference
  • Removal of the MD, Manager or any of the Directors of the Company
  • Recovery of undue gains made by any such Managing Director, Manager or Director during the period of his/her appointment as such and the manner of utilisation of the recovery including transfer to Investor Education and Protection Fund or repayment to identifiable victims
  • Manner in which the MD or Manager of the Company may be appointed subsequent to an order removing the existing ones of the company
  • Appointment of such number of persons as Directors, who may be required by the NCLT to report to it on such matters as it may direct
  • Imposition of costs as may be deemed fit by the NCLT
  • Any other matter for which, in the opinion of the NCLT, it is just and equitable that provision should be made

Interim Orders

The NCLT may, on the application of any party to the proceeding, make any interim order which it thinks fit for regulating the conduct of the concerned Company’s affairs upon such terms and conditions as appear to it to be just and equitable.

Alteration of Memorandum/Articles of Association

Where an order of the NCLT for the above said purposes makes any alteration in the concerned Company’s Memorandum of Association (MoA) or Articles of Association (AoA), then, notwithstanding any other provision of the Act, the Company shall not have power, except to the extent (if any) permitted in the said order, to make, without the leave of the NCLT, any alteration whatsoever which is inconsistent with the order, either in the MoA or in the AoA.

> Such alterations (if any) so made by the said NCLT order, would in all respects, have the same effect as if they had been duly made by the Company in accordance with the provisions of the Act.

Consequence of Termination/Modification of certain Agreements

Where the NCLT order as made above under section 242 terminates, sets aside or modifies an agreement (as mentioned above) —

  • Such order shall not give rise to any claims whatever against the Company by any person for damages or for compensation for loss of office or in any other respect either in pursuance of the agreement or otherwise;
  • No MD or other Director or Manager whose agreement is so terminated or set aside shall, for a period of 5 years from the date of the order terminating or setting aside the agreement, without the leave of the NCLT, be appointed, or act as the MD or other Director or Manager of the said Company.

> Provided that the Tribunal shall not grant leave under this clause unless notice of the intention to apply for leave has been served on the Central Government and that Government has been given a reasonable opportunity of being heard in the matter.

> Any person who knowingly acts as a MD or other Director or Manager of a Company in contravention of the above disqualification, and every other Director of the Company who is knowingly a party to such contravention, would be punishable with imprisonment for a term which may extend to 6 months or with fine which may extend to Rs.5 lakhs, or with both.

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Fines and/or Imprisonment for Contravention of NCLT order altering MoA or AoA

Where the NCLT by order under section 242 of the Act, pursuant to an application under section 241, makes any alteration in the Memorandum (MoA) or Articles (AoA) of a concerned Company,  such Company shall not have the power, except to the extent (if any) permitted in the said order, to make, without the leave of the said NCLT, any alteration whatsoever to the MoA or AoA, which is inconsistent with such order.

> Read more about ‘Directors’,  ‘Key Managerial Personnel’ (KMP) and ‘Officer in Default’

If a Company contravenes the above said prohibition, such would be punishable with fine which shall not be less than Rs.1 Lakh but which may extend to Rs.25 lacs, and every officer of such Company who is in default woud be punishable with imprisonment for a term which may extend to 6 months or with fine (which shall not be less than Rs.25,000, but which may extend to Rs.1 lakh) or with both.

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