CS Professional:Resolution of Corporate Disputes,Non-Compliances & Remedies [Ch-4 Fraud under Co.Act,2013 and IPC,1860]

JJ Irani committee set up in 2004 submitted its report in 2005 with recommendations that took shape of co. act,2013

one recommendation being stringent/deterrent penalties for co. with irresponsible behaviour/conduct fraudulent activities and that compliances should be subject to strict penalty regimes.

The committee took note that corporate frauds might be too intricate for state law enforcement and should be referred to Serious Fraud Investigation Officer (SFIO).consequently, current co. act vide section 211 has provided SFIO establishment.

if investigation reveals fraudulent whereabouts,corporate veils should be lifted and promoters/shareholders can be held responsible. if co. is made aware of default,advisable to avail compounding so that co. remains fully compliant.

FRAUD

generally, refers to wrongful/criminal deception practiced intended to result in financial/personal gain or loss

per BUSINESS DICTIONARY,it's a deception act/course,intentional concealment,omission or truth perversion to:

1. gain unlawful/unfair advantage
2. induce another to part with some valuable item/surrender legal right
3. inflict injury

• 'wilful fraud' is a criminal offence calling for severe penalties/prosecution and punishment and not bound by limitation statute.
• however,incompetence/negligence/reckless wastage doesn't constitute fraud unless a clear deceitful intention is established but it does invites legal liabilities.
• fraud can be a civil as well as criminal wrong or it may cause no loss but still be an element of another wrong.

per the BLACK LAW DICTIONARY, it refers to all multifarious means which human ingenuity can devise and are resorted to get advantage over another by false suggestion/suppression of truth.

commonly understood as dishonesty calculated for advantage

Punjab National Bank scam added CRIMINAL BREACH OF TRUST under IPC 409 along with fraud under IPC 420.

fraud is an act of deceit subject to legal action as follows

UNDER CRIMINAL PROCEDURE CODE, 1973 (CrPC)

CrPC is a procedural law containing elaborate details/procedures regarding investigations, inquiry and trial but doesn't provide definitions except specific terms but Section 2(y) states "words and expressions used herein and undefined but defined in IPC 45 have meanings as respectively assigned.

In general, fraud is an act of deliberate deception with the design of securing something by taking unfair advantage of another. It is a deception in order to gain by another’s loss.

UNDER INDIAN PENAL CODE,1860 (IPC)

Section 25 defines what would amount to "fraudulently"- to do something with intention to defraud but not otherwise.

=deceit intention

=injury

implications of fraud are found in IPC 421,422,423 and 424

UNDER THE INDIAN CONTRACT ACT,1872

Section 17 defines FRAUD

means and includes any of the following committed by a party to contract,with connivance or by his agents with intent to deceive or to induce him to enter into a contract.

[17(1)] suggestion as to a fact which is not by one who doesn't believe it to be true=SUGGESTIO FALSI (suggestion of falsehood)

[17(2)] active concealment of a fact by having knowledge/belief=SUPPRESSIO VERI (fact suppression)

[17(3)] promising without intending to perform/falsely inducing for a reciprocal promise

[17(4)] another act fitted/designed to deceive

[17(5)] another act/mission declared by law

EXPLANATION:mere silence likely to affect willingness isn't fraud except when-duty to speak or silence=speech.

ILLUSTRATIONS:

• A sells, by auction, to B, a horse which A knows to be unsound. A says nothing to B about the horse's unsoundness. This is not fraud in A.
• B is A's daughter and has just come of age. Here, the relation between the parties would make it As duty to tell B if the horse is unsound.
• B says to A—“If you do not deny it, I shall assume that the horse is sound.” A says nothing. Here, As silence is equivalent to speech
• A and B, being traders, enter upon a contract. A has private information of a change in prices which would affect Bs willingness to proceed with the contract. A is not bound to inform B.

JUDICIAL VIEW

in Dr. S. Dutt v. State of Uttar Pradesh upon the words “with intent to deceive” 

• doesn't indicate mere intent but to cause a person to act,omit to act on deception
• defraud intention not synonymous with deceit intention and requires some action resulting in some disadvantage
• penal offence of fraud demands successful prosecution with elements of
• intention to deceive
• cause injury

FRAUD ELEMENTS

1. false/wilful representation/assertion which is untrue (doesn't believe to be true) except in case of:
• silence amounts to fraud
• active concealment of fraud
2. perpetrator be a party to contract/with connivance or an agent
3. intention to deceive is it's essence and assertion/misstatement made to be acted upon
• misrepresentation elevates to fraud when prefixed with intention
4. representation must relate to a fact material to contract
• mere opinion,belief,commendation can't be fraud
• an opinion on something general isn't included unless it states the specifics and if that specific is found to be incorrect, then it's fraud
5. active fact concealment distinguished from "passive concealment" which implies mere silence
• active is when positive/deliberate steps are taken to prevent info from reaching the other party
6. promise made without intention of performing it
7. representation must have actually deceived the other party by them being relied on it and so an attempt doesn't amount to fraud
8. another act fitted to deceive with intention to deceive
9. such act/omission that law specially declares as void
10. wrongful gain/loss is immaterial under co. act

as for IPC, only mens rea and actus reus matter, i.e. the foul intention and the wrongful act

examples of corporate fraud

• personal purchases from corporate funds
• ghost employees
• skimming payments through interception
• tax avoidance
• asset theft
• unauthorized use
• falsification of docs

these can be difficult to contain/impossible to stop if senior mgmt. engages too which contemplates the importance of forensic audit

fraud consists of deceitful practice/wilful devices,resorted to with intention to deprive another of his right or to cause injury. distinguished from negligence, it's always positive/intentional (Maher v. Hibernia Inst. Co., 67 N. Y. 292) 

The Hon’ble Supreme Court of India in the matter of Dr. Vimla vs Delhi Administration (29 November, 1962) citing Haycraft v. Creasy (1) LeBlanc, noted that: “by fraud means an intention to deceive; whether it be from any expectation of advantage to the party himself or from the ill-will towards the other is immaterial.”

SEBI (PROHIBITION OF FRAUDULENT AND UNFAIR TRADE PRACTICES RELATING TO SECURITIES MARKET) REGULATIONS, 2003

reg. 2(c) fraud includes any act,omission or concealment in a deceitful manner by person/connivance/agent to induce another/agent to deal in securities and shall include all elements as prescribed.

proviso provides that nothing shall apply to comments made in good faith regarding economic policy/situation/trends.

COMPANIES ACT,2013

Section 542 in erstwhile act  frauds detected at winding up were dealt with but in current act Section 447 explains fraud and related terms.

on close analysis,following are observed:

• inclusive definition
• relate to any body corporate,thus a large horizon
• intention matters
• gain or loss arising can't be a basis for deciding violation/punishment

USE IN VARIOUS PLACES

PUNISHMENTS 

Section 38: max in 68A of 1956 act=5 years but max in 2013 act=10 years

Section 46(5): (section 84 of 1956 act) fined 5-10 times FV of shares involved or 10 crores, whichever HIGHER and officers charged under 447

COMPOUNDABLE & NON-COMPOUNDABLE OFFENCES

co. (amendment) act,2019 & 2020 has decriminalized various compoundable offences of minor violations.

non-compliance will entail penalties/imprisonment

Section 441 compounding=process whereby an entity/person committing default will apply to a compounding authority accepting committing an offence and that same should be condoned. compounding authority may compound offence and ask the defaulting party to deposit the compounding fee as decided.

COMPOUNDABLE:offences with fine only OR offences with fine or imprisonment

NON-COMPOUNDABLE:offences with only imprisonment OR with imprisonment & fine

COMPOUNDING AUTHORITY: Regional Director ≺ 25 lakhs ≤ NCLT amended by co. (amendment)

after amendment, 447 reads as :

without prejudice to liability of debt repayment,person guilty of fraud involving at least 10 lakhs/1% turnover, whichever LOWER, imprisoned 6 months to 10 years + fined with amount involved upto 3 times.

if fraud involves public interest,imprisoned for 3 years/more

if fraud involves less than 10 lakhs/1% and doesn't involve public interest, the guilty are imprisoned for up to 5 years/fined up to 50 lakhs/both from the personal liability.

Section 143 : AUDITORS/CS/CMA on fraud reporting

(12) carries a non-obstante clause and casts a duty on auditors/PCS/PCMA to report to CG an offence of fraud. The first proviso requires auditors to report to the audit committee/board as specified. co. (audit and auditors) rules, 2014 contains operational procedures for fraud reporting.

non-compliance attracts the following penalty:

listed=5 lakhs

unlisted=1 lakh

WHO CAN COMMIT FRAUD ON CO. AND WHY?

limiting discussion to directors/employees since co. is vulnerable to their actions. motive can be greed/bringing disrepute to co. for being ousted/thrill of having power to circumvent law.

• by promoters/directors
• [Saradha chit fund scam]
• [Kingfisher Airlines / IDBI Bank]
• [Speak Asia scam]
• [Recent GST fraud]
• as they are expected to perform in the best interests of co. but it is not difficult for them to bend the rules.
• even if a single director intends to gain undue advantage, it can result in fraud of a significant amount
• fraud by one director makes others liable?
• non-executive/independent directors cannot escape responsibility
• 2(60) implies "every director" including 447 who consented to/aware of the fraud by participating in board proceedings without objecting OR receipt of proceedings which are circulated to the whole board per SS-1
• co. might be able to recover the loss from the director after making good third party losses/penalties
• In a 2013 UK case Jetivia SA & Anr vs. Bilta (UK) Limited (in liquidation) & ors [2013] EWCA Civ 968 the UK Court of Appeals decided that where the directors had acted to deprive the company of its assets and made it default in VAT payments to the UK HMRC, the company was the victim and did have a claim towards the breach of fiduciary duties owed to it by its directors.
• if any director is sentenced between 6 months to 7 years,appointment can be done after 5 years of sentence expiry but not if sentenced for more than 7 years.
• by senior mgmt./employees as they impact functioning of board is relevant after it has discovered that fraud actually took place and after discovery of who was involved.
• safeguarding strategies
• proper training about documented policies
• prevention/detection measures
• screening & background checking
• strong internal controls
• responsibility statements
• whistle blowing
• adequate remuneration
• exit checks and claw back provisions
• independent audit systems
• operational reporting system
• professional expert for fraud prevention

INTENTION TO COMMIT FRAUD

intention=essential condition to commit fraud

in Dr. Vimla vs. Delhi Administration in the year 1962, in the context of the matter that fraud has to satisfy two conditions viz.,(a) deceit or injury to the person deceived (b) intention to deceive.

in The State of Mysore vs. Padmanabhacharya etc., the Hon’ble Supreme Court of India held a view that the intention can be assumed and has been accorded wider amplitude and applicability.

unintentional/mere accidental omission/commission won't stand legal scrutiny.

in Ketan Parekh vs. Securities & Exchange Board of India (Appeal No. 2 of 2004) dated 14/07/2006, transaction executed with intention to manipulate/defeat mechanism will depend upon intention inferred from attending circumstances which are inclusive so that any one factor may or may not be decisive.

the object need not necessarily reap direct gain/loss, a deceit has to be established.

CRIMINAL BREACH OF TRUST

Section 405:criminal breach of trust

• whomever entrusted with property/given dominion, dishonestly misappropriated/converts to own use/disposes violating law/legal contract or wilfully suffers another so to do, commits criminal breach of trust.
• employers entrusted with deductions for other funds should deduct a sum as prescribed or said to have committed such.
• for illustrations, refer to ICSI study material

ESSENTIALS:

1. The accused must be entrusted with property/given dominion over it
• fiduciary relationship
• includes movable as well as immovable property
2. entrusted must use the property
3. dishonestly used/disposed by violating (crucial)
• law
• legal contract

in V.R. Dalal v. Yugendra Naranji Thakkar, 2008 (15) SCC 625, has held that the first ingredient of criminal breach of trust is entrustment.

in Pratibha Rani v. Suraj Kumar, AIR 1985 SC 628, the appellant alleged that her stridhan property was entrusted to her in-laws which they dishonestly misappropriated for their own use. She made out a clear, specific and unambiguous case against in-laws. The accused were held guilty.

in Onkar Nath Mishra v. State (NCT of Delhi), 2008 CrLJ 1391 (SC), has held that in the commission of offence of criminal breach of trust, two distinct parts are involved. obligation + misappropriation/dishonest dealing.

in Suryalakshmi Cotton Mills Ltd. v. Rajvir Industries Ltd., 2008 (13) SCC 678, it was held that a cheque is property

in S.K. Alagh v. State of U.P.and others, 2008 where demand drafts were drawn in the name of company for supply of goods and neither the goods sent by the company nor the money was returned, the Managing Director of the company cannot be said to have committed the offence under Section 406 of IPC.It was pointed out that in absence of any provision laid down under statute, a director of a company or an employer cannot be held vicariously liable.
Section 406: PUNISHMENT FOR 405

imprisoned up to 3 years/fine/both

Section 407/8: 405 by CARRIER,WHARFINGER OR WAREHOUSE-KEEPER/CLERK OR SERVANT

imprisoned  up to 7 years and also liable to fine

Section 409: 405 by PUBLIC SERVANT,BANKER,MERCHANT OR AGENT BROKER, ATTORNEY

imprisoned up to 10 years and liable to fine

done by strangers is treated less harshly as fiduciary relationship has honesty

IMP CASE LAWS

1. Bagga Singh v. State of Punjab, the appellant was a taxation clerk in the Municipal Committee, Sangrur. He had collected
2. Bachchu Singh v. State of Haryana, AIR 1999 SC 2285, the appellant was working as ‘Gram Sachiv’ for eight gram panchayats
3. Girish Saini v. State of Rajasthan

CHEATING 

whoever by deceiving fraudulently/dishonestly induces another to deliver property/consent that another shall retain/intentionally induce to do or omit which they wouldn't do had it not been for such deception and which cause damage or harm in body,mind,reputation or property is said to "cheat".

EXPLANATION:dishonest concealment=deception under this section

MAIN INGREDIENTS:

• deception
• fraudulently/dishonestly inducing
• to deliver a property
• to consent another to retain
• intentionally inducing to do/omit by deception causing damage/harm

IMP. CASE LAWS

Iridium India Telecom Ltd. v. Motorola Incorporated and Ors., (2005)

M.N. Ojha and others v. Alok Kumar Srivastava and anr, (2009)

T.R. Arya v. State of Punjab, 1987

Section 416 : CHEATING BY IMPERSONATION 

pretending to be some other person,knowingly substituting one for another, representing another person (whether a copied person is real/imaginary).

Section 417:PUNISHMENT FOR CHEATING

imprisoned up to a year/fined or both

Section 418:CHEATING WHICH MAY CAUSE WRONGFUL LOSS TO PERSON WHOSE INTEREST OFFENDER IS BOUND TO PROTECT

bound by law/legal contract imprisoned up to 3 years/fined/both

Section 419:PUNISHMENT FOR CHEATING BY PERSONATIONS

imprisoned up to 3 years/fined/both

Section 420:CHEATING/DISHONESTLY INDUCING PROPERTY'S DELIVERY

to make,alter or destroy,anything which is signed/sealed/capable of being turned into a valuable security,as a result of deceiving.

imprisoned up to 7 years and also be liable to a fine

IMP CASE LAWS

1. Kuriachan Chacko v. State of Kerala, (2004)
2. Mohd. Ibrahim and others v. State of Bihar and another, (2009)
3. Shruti Enterprises v. State of Bihar and ors, (2006)

Section 421:DISHONEST/FRAUDULENT REMOVAL/CONCEALMENT OF PROPERTY TO PREVENT DISTRIBUTIONS AMONG CREDITORS

without consideration preventing or knowing it would thereby prevent distribution according to law to creditors

imprisoned up to 2 years/fined or both

essential ingredients held in Ramautar Chaukhany v Hari Ram Todi & Anr, 1982 

• accused,removed,concealed/delivered/transferred
• transfer without considerations
• accused intended to prevent/likely to prevent distribution among creditors by law
• acted dishonestly and fraudulently

section refers to frauds connected with insolvency as it consists of wrongful loss to creditors; applies to movable/immovable property

Section 422:DISHONESTLY/FRAUDULENTLY PREVENTING DEBT AVAILABLE TO CREDITORS

imprisoned up to 2 years/fined or both

debt is defined in judicial pronouncements

Section 423:DISHONEST/FRAUDULENT TRANSFER DEED EXECUTION CONTAINING FALSE STATEMENT OF CONSIDERATION

imprisonment up to 2 years/fined/ or both

Section 424:DISHONEST/FRAUDULENT REMOVAL/CONCEALMENT OF PROPERTY

imprisoned up to 2 years/fined or both

ESSENTIAL INGREDIENTS:

1. property
2. accused concealed/removed such or assisted
3. done dishonestly/fraudulently

Section 463:FORGERY

making false doc/false records intending to cause damage/injury/supporting claim or injury/entering into a contract intending to commit fraud.

Section 464:MAKING A FALSE DOC

Section 465:PUNISHMENT FOR 463

imprisoned up to 2 years/fined or both

IMP CASE LAWS

1. Ramautar Chaukhany v Hari Ram Todi & Anr, 1982
2. Parminder Kaur v. State of UP
3. Balbir Kaur v. State of Punjab, 2011

FRAUD UNDER SEBI REGULATIONS 

Regulation 2 (c) SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003 deals with fraud as mentioned above.

Regulation 3 provides that no person shall

• buy/sell/deal fraudulently
• use or employ/purchase or sell a manipulative/deceptive device or contrivance in contravention
• employ device/scheme/artifice to defraud
• engage act,practice,course of business which operates/would operate as fraud or deceit contravening provisions/regulations

Regulation 4 prohibits manipulative,fraudulent and unfair trade practices

CS Professional:Resolution of Corporate Disputes,Non-Compliances & Remedies [Ch-3 Class Action Suits]

CLASS ACTION SUITS

a large group of people with similar injuries caused by the same person can collectively bring a claim to court for redressal,represented by 1/more of those injured.also called a REPRESENTATIVE ACTION. in India,governed by 245-246 of co. act,2013 as the SATYAM FIASCO put forth the need for such a provision.

• protecting member's interest
• reduce litigation duplication by combining proceedings with the same cause of action
• makes adjudication possible as not all members need to be made plaintiff

very popular in the USA ([started in 1842 with Equity Rule 48]; [1966]Federal Rules of Civil Procedure Rule 23 and 28 U.S.C.A. § 1332 (d)),UK (Rule 19.6 of the Civil Procedure Rule governs the Class Action Suits),Singapore (Order 15, Rule 12 of Rules of Courts) and other european countries.

Imp. case law: Enroll scandal, 2006 ;  Satyam fiasco,2009

the three other methods of representative action are: civil courts,consumer court or Public Interest Litigation (PIL) but they lack jurisdiction towards fraud on minority and lon adjudication periods discourage claims.

TYPES OF CLASS ACTIONS:

1. Employment Class Actions
2. Consumer Class Actions
3. Securities Class Actions

1. action by affected persons (37)
• for misleading statements/inclusions/omissions of matters in the prospectus under the following:
• (34) criminal liability for untrue/misleading misstatements in the prospectus under chapter iii resulting in fraud liability under section 447.
• (35) civil liability for misstatements to a subscriber of securities acting on such statement/inclusion/omission and sustained loss/damage resulting in compensation liability. 
• (36) punishment for fraudulently inducing people to invest w.r.t false,deceptive,misleading actions; resulting in 447
2. Class actions (245)
• by members/depositors/any class of them
• eligibility of members (245[3][i])
• eligibility of depositors (245[3][ii])
• also specified under NCLT(second amendment),rules 2019

CONDUCTING a class action (rule 85 of NCLT rules,2016)

1. without prejudice to 245(4),the tribunal may admit the application and additionally consider:
• Whether a class has so many members that joining them individually would be impractical
• questions of law/fact common to class
• claims/defences of representative parties are typically of the class
• whether representative parties fairly/adequately protect class interest
2. for 245(4)(c) while considering an individual's desirability/separate action, the tribunal shall consider risks in case of separate actions:
• inconsistent/varying adjudications
• adjudication would be dispositive of a member's interest
• adjudication would substantially impair/impede ability to protect interests

OPT OUT RULE (RULE 86)

1. any time before institution of class action with Tribunal's permission as per NCLT-1
2. whoever receives a notice under (5)(a) deemed member unless they expressly opt-out accordance with rule 38.
3. class members opting out shall not be precluded from pursuing claim on individual basis under another law, subject to tribunal imposed conditions.

NOTICE PUBLICATION (RULE 87)

1. per (5)(a),on admission of applications, tribunal issues a notice per NCLT-13 to all class members by-
• publishing within 7 days of admission at least once in RO's vernacular/english newspaper.
• co. to place notice on website in addition to above
• placed upon websites of Tribunal/MCA/ROC/stock exchange until application is disposed.
2. newspaper issue date considered as notice serving date to all class members
3. public notice shall inter-alia contain information as prescribed
4. publication cost/expenses borne by applicant and shall be defrayed/another responsible person in case order passed in favor of applicant.

SECTION 245

MEMBERS:

• subscribers to memorandum deemed to have agreed to become members
• agrees in writing to become a member and name entered into member's register
• every person holding shares and name entered as beneficial owners with depositories

DEPOSITORS: defined under co. (acceptance of deposits) rules,2014

NCLT jurisdiction for filing class action suit (order dated 19/07/2016): powers conferred on the president, NCLT by first proviso of 419(3) of co. act,2013; class actions are assigned to the principal bench of New Delhi.

AGAINST WHO CLASS ACTIONS CAN BE FILED

• company/directors
• auditor/audit firm
• expert/advisor/consultant

ORDERS SOUGHT FROM NCLT 245(1)

file an application before the tribunal on behalf of injured persons and seek:

1. restrain co. from committing an act ultra vires to MOA/AOA
2. restrain from committing breach of provisions
3. declare void an altering resolution,if passed by suppressing material facts/mis-statement.
4. restrain from acting on above resolution
5. restraint doing an act contrary to law
6. restrain  from acting contrary to a resolution passed
7. claim damages/compensation or demand suitable action for/against defendants
8. seek other remedies as tribunal deems fit

FACTORS CONSIDERED BY NCLT TO CONSIDER APPLICATION 245(4)

• whether plaintiffs acting in good faith
• evidence of involvement of another person
• The cause of action could be pursued in individual right
• evidence of having no personal interest
• cause of act/admission yet to occur (future) likely to be authorised/ratified by co. before/after it occurs.
• already occurred act/ omission likely to be ratified by co.

IN CASE APPLICATION IS ADMITTED (5) 

1. public notice served to all members/depositors
2. all similar applications in the jurisdiction be consolidated into a single one and plaintiffs/tribunal allowed to elect a lead applicant
3. two applications for the same cause of action shall not be allowed
4. cost/expenses be defrayed by co./person responsible

ORDER BINDING (6): binding on co./members /depositors/auditors/experts/consultants

PUNISHMENT FOR NON-COMPLIANCE (7): CO: fined 5L-25L; OFFICER: imprisoned up to 3 years AND fined 25K-1L

APP FILED IS FRIVOLOUS/VEXATIOUS (8): reject and state reasons and order for applicants to pay the opposite party upto 1L

EXEMPTION (9): nothing applicable to a banking co.

APPLICATION FILED ON BEHALF OF AFFECTED PERSONS (10)

Section 246 of Companies Act, 2013 provides that the provisions of sections 337, 338, 339, 340 and 341 (both inclusive) related to winding up, shall apply mutatis mutandis, in relation to an application made to the National Company Law Tribunal under section 241 or section 245. Section 337 to 341 relates to liability of officers, directors etc.

CLUBBING OF FUTURE APPLICATIONS AND BAR ON FUTURE LITIGATION

pertinent to note that the bar is only upon class action and it does not cover other measures. Thus, other civil actions can be invoked on the same cause of action. On a literal interpretation of the clause, it will not be wrong to state that any class action, whether brought by members or depositors, both are based on the same cause of action.

CLASS ACTIONS AND RELATED LAWS IN INDIA

Also refer to NEW CONSUMER PROTECTION LAW,2019 and DIFFERENCE BETWEEN SECTION 241 AND 245 OF COMPANIES ACT,2013

CS Professional:Resolution of Corporate Disputes,Non-Compliances & Remedies [Ch-2 Corporate Disputes]

OPPRESSION & MISMANAGEMENT UNDER CO. ACT, 2013 (Ch XVI)

Sec. 241-246: oppressive/biased affairs against minority shareholders or any other member.

"OPPRESSION","MISMANAGEMENT" NOT DEFINED IN ACT.

REGULATORY FRAMEWORK

IMP. CASE LAWS

1. Shanti Prasad Jain v. Kalinga Tubes Ltd. (1965)
2. Rajahmundry Electric Supply Corp. v. A. Nageswara Rao (1956)
3. SINGLE ACT TREATMENT:Maharashtra Power Dev. Corp. v. Dabhol Power Co. (2004)
4. NON-DECLARATION OF DIVIDEND:Mr. Vasudev P Hanji & Others v. Ashok Ironworks Pvt. Ltd. (2008, 145 Comp. Cases 717), and in the case of Jaladhar Chakraborty & Ors. v. Power Tools and Appliances Co. Ltd. (1994)
5. INCREASE OF SHARE CAP FOR OLE PURPOSE OF GAINING CONTROL=OPPRESSION:Dale and Carrington Investment (P) Ltd. v. P. K. Prathapan and Others [(2004) Vol. 122 CC 161]

 APP TO TRIBUNAL FOR RELIEF 

• App By MEMBER (241[1])
• any member having such rights under (244) complaining of prejudice

• App by CG (241[2]): if being of opinion that affairs are handled prejudicially to public interest.
• Initiating and Referring Cases to NCLT (241[3]):
• person connected to fraud, malpractice, malfeasance and negligence
• business not conducted/managed up to standards
• co. conducted/managed by a person likely to cause injury/damage to co.
• CG may request the tribunal to inquire about the case related to conduct/mgmt. of co.
• Signing/Verification of app (241[5])
• concise statement for inquiry purposes
• acc. to CPC,1908
• RIGHT OF MEMBERS TO APPLY (244)

• provided tribunal may waive off these requirements
• member, but not a shareholder
• beneficial owner = member
• If the company has made few calls and not yet made the remaining calls to make those shares fully paid, in those circumstances also the members holding those partly paid shares are eligible as per the criteria mentioned in this Section. But in case if the company has made calls for making the shares fully paid up and few members have not paid such calls, then members w.r.t. such party-paid shares shall not be eligible.
• preference shareholders = members
• debentureholders not members

TRIBUNAL'S DISCRETIONARY POWER W.R.T. WAIVER APPS: Cyrus Investments Pvt. Ltd. & Anr. v. Tata Sons Ltd. & Ors: Case Study

POWERS OF TRIBUNAL

1. (242[1]) tribunal makes a fitting order if satisfied:
• co. conducted in an oppressive/prejudicial manner
• winding up would unfairly prejudice in this case
2. (242[2]) order providing:
• future conduct regulation
• share/interest purchased amongst members
• following buy-back, subsequent reduction
• transfer/allotment restriction
• termination,setting aside or modifying agreements b/w co. & key managerial personnel (KMPs) or others
• setting aside acts related to property within 3 months before application be deemed fraudulent
• removal and subsequent allotment of MDs,directors or managers
• recovery of undue gains by KMPs and their utilisation
• tribunal nominated directors
• cost imposition
• any other just and equitable provision
3. (242[3]) certified order copy filed with registrar within 30 days of order
4. (242[4]) may make an interim order to suffice
• [4A] fitness of respondent to hold office
5. (242[5,6]) alterations made with the same effect as if made by co. under the same provisions
• [7] filed with registrar within 30 days
• [8] co. fined 1-25 lakhs and officer(s) 25,000 to 1 lakh
6. (243) terminate,set aside, modify agreement under (242)
• shall not give rise to claims against co.
• whose agreement is modified shall not hold the same designation for 5 years
• [1A] CG may reduce this time
• [1B] no compensation to the removed
• [2] conniving KMP fined 5 lakhs

 TRANSFER/TRANSMISSION (56,72) 

• conditions (56[1])
1. not recorded unless both beneficiaries unless proper instrument delivered within 60 days from execution
2. [2] co. can still register based on the board's indemnity.
3. [3] app by transferor for partly paid shares notified to transferee for objecting within 2 weeks of notice receipt
4. [4]subscribers to memorandum: 2 months from incorporation, 2 months from date of allotment, 1 month for transfer/transmission, 6 months from allotment of debenture
5. [5] transfer by legal representative as if made by actual holder
6. [6] co./officer fined 50,000 for contravention
• (72) transferred to nominee in case of death
• (57) impersonation of shareholders: imprisoned 1-3 years/fined 1-5 lakhs
• (58) registration refusal and appeal against refusal
1. [1] pvt. co. = per AoA and send notice within 30 days to applicant
2. [2] public co. = freely transferable but transfer agreement enforceable as contract
3. [3] appeal to the tribunal within 30 days of refusal notice or no response from co. within 60 days of submission
4. [4]public co. = appeal within 60 days of refusal or 90 days of submission
5. [5] tribunal orders as necessary and co. complies within 10 days of order receipt
6. violation of [5] not compoundable otherwise, as per (57)
• (59) rectification of members registers by member/aggrieved person or co.
• SUFFICIENT CAUSE
1. Benarsi Das Saraf v. Dalmia Dadri Cement Ltd. AIR 1959 Punj. 232
2. Indian Chemical Products Ltd. v. State of Orissa AIR 1967 SC 253
3. Smt. Mallina Bharathi Rao v. Gowthami Solvent Oils Ltd [2001] 31 SCL 60 (CLB – CHENNAI)
4. Asha Purandare v. Integrated Controls (P.) Ltd. [2002] 39 SCL 970 (CLB – MUM.)
5.  Gulshan Mahindru v. Reliance Industries Ltd. [2014] 47 taxmann.com 186 (CLB - Mumbai)
• [2] tribunal orders as necessary and may impose damages
• [3] no restriction on voting rights unless suspended by tribunal
• [4] transfer contravening law = app by depository,depository participants,co;holders or SEBI

(452) PUNISHMENT FOR WRONGFUL WITHHOLDING PROPERTY

1. If any officer/employee
• wrongfully obtains possession 
• wrongfully withholds or wrongfully applies to unexpressed purposes
• fined 1-5 lakhs
2. ordered to refund benefits or imprisoned for 2 years unless the court satisfied that payment doesn't relate to:
• PF,gratuity fund or welfare fund
• compensation/liability owed to workmen's death or disablement

CS Professional:Resolution of Corporate Disputes,Non-Compliances & Remedies [Ch-1 Shareholder's Democracy]

all shareholders have a right to speak,congregate,communicate with co-shareholders and to learn about what is going on in the company. members are only passive investors instead of being active participants; still the directors are answerable to all shareholders.

BUSINESS THAT CAN BE TRANSACTED AT SHAREHOLDER MEETINGS

1. Alteration of Memorandum of Association and Articles of Association. 
2. Further issue of share capital. 
3. Transfer a portion of uncalled capital to reserve capital to be called up only in the event of winding up of the company.
4. Reduce the share capital of the company.
5. Shift the registered office of the company outside the state in which the registered office is situated at present.
6. Decide a place other than the registered office of the company where the statutory books, required to be maintained may be kept.
7. Payment of interest on paid-up amount of share capital for defraying the expenses on Construction when plant cannot be commissioned for a longer period of time.
8. Appoint auditors
9. Approach Central Government for investigation into the affairs of the company
10. Allow Related Party Transaction
11. Allow a director, partner or his relative to hold office or place of profit
12. Payment of commission of more than 1% of the net profits of the company to a managing or a whole-time director or a manager.
13. Make loans, to extend guarantee or provide security to other companies or make investment beyond the limit specified.
14. Borrow money and to charge out the assets of the company to secure the borrowed money.
15. Appoint directors.
16. Increase or reduce the number of directors within the limits laid down in Articles of Association.
17. Cancel, redeem debentures etc.
18. Make contribution to funds not related to the business of the company.

director's obligation to send notices lest the meeting and it's proceedings become invalid.

despite the supremacy of shareholders, only the shareholder's holding majority or more voting power are able to exercise above mentioned rights.

for real shareholder's democracy, the shareholders have to unite at a district and a state level as associations.

SHAREHOLDER'S ACTIVISM

• Electronic Voting-section 108 of companies act,2013 read with rule 20 of companies (management and administration) rules,2014
• SEBI regulations-Reg. 44 of SEBI (LODR) regulations, 2015
• Approval of related party transactions by shareholders-section 188 of companies act,2013 read with rule 15 of companies (board meeting and its powers)

MAJORITY POWERS AND MINORITY RIGHTS

a company functions through board's instrumentality guided by the majority for the company's welfare. the general rule is that majority binds minority. the majority might even misuse powers which leads to an improper balance of rights and oppression. with the onset of companies act, special effect has been given to cases such as:

1. edwards v. halliwell, (1950) 2 All. E. R. 1064
2. North-West transportation Co. v. Beatty (1887) L.R. 12 A.C. 589
3. Ashbury Rly Carriage and Iron Co. v. Riche. (1875) L.R. 7 H.L. 653

PRINCIPLE OF NON-INTERFERENCE (RULE IN FOSS V. HARBOTTLE)

courts generally don't intervene in matters of internal administration/management of company at shareholder's instance so long as they act within powers conferred upon them.so, articles may be said to be protective shields to majority.The basic principle of non-interference with the internal management of company by the court is laid down in a celebrated case of Foss v. Harbottle 67 E.R. 189; (1843) 2 Hare 461 that no action can be brought by a member against the directors in respect of a wrong alleged to be committed to a company. The company itself is the proper party of such an action.

other important case laws:

    1. Pavlides v. Jensen (1956) Ch. 565

   2.Edwards v. Halliwell (1950) 2 All. E.R. 1064

Justification and Advantages of the Rule in Foss v. Harbottle

• on becoming a shareholder, one agrees to submit to majority's will so that if any wrong is done to company, only the company acting through majority can redress it.
• Recognition of the separate legal personality
• preserving majority's right to decide
• multiplicity of futile suits avoided
• Litigation at suit of a minority futile if majority does not wish it:if majority can ratify it, no point suing on the subject matter.

Exceptions to the Non-Interference Rule

recognized by palmer's co. law as minority protected by common law & companies act,2013.The cases in which the majority rule does not prevail are commonly known as exceptions to the rule in Foss v. Harbottle and are available to the minority. In all these cases an individual member may sue for declaration that the resolution complained of is void, or for an injunction to restrain the company from passing it.

1. ULTRA VIRES ACT (Bharat Insurance Ltd. v. Kanhya Lal, A.I.R. 1935 Lah. 792)
2. FRAUD ON MINORITY (Menier v. Hooper’s Telegraph Works, (1874) L.R. 9 Ch. App. 350--Allen v. Gold Reefs of West Africa, (1900) 1 Ch. 656--In Re. Transval Gold Exploration and Land Co. Ltd. (1885) 1 T.L.R. 604)
3. WRONGDOERS IN CONTROL (Cf. Birch v. Sullivan, (1957) 1 W.L.R. 1274--Par Jenkins L.J. in Edwards v. Halliwell, (1950) 2 All E.R. 1064, 1067--Glass v. Atkin (1967) 65 D.L.R. (2d) 501)
4. RESOLUTIONS REQUIRING SPECIAL MAJORITY (Baillie v. Oriental Telephone and Electric Co. Ltd., (1915) 1 Ch. 503 (C.A.)--Nagappa Chettiar v. Madras Race Club, 1 M.L.J. 662)
5. PERSONAL/INDIVIDUAL ACTIONS (Salmon v. Quin and Aztens, (1909) A.C. 442]--Nagappa Chettiar v. Madras Race Club, (1949) 1 M.L.J. 662 at 667--Joseph v. Jos, (1964) 1 Comp LJ 105)
6. DUTY BREACH (Daniels v. Daniels, (1978) 2 W.L.R. 73)
7. PREVENTION OF OPPRESSION/MISMANAGEMENT (Bennet Coleman & Co. and Ors. v. Union of India & Ors., (1977) 47 Com Cases 92 (Bom)--Panipat Woollen & General Mills Co.Ltd. v. R.L. Kaushik, (1969) 39 Com Cases 249 [Punj & Har])