Of big exceptions

Mohan R Lavi | Updated on March 09, 2018 Published on December 17, 2017

How cases like Unitech impact Company Law

The preamble to the Companies Act 2013 states that it is an Act to amend and consolidate the law relating to companies. One of the salient sections of all versions of the Companies Act has been the one relating to prevention of oppression and mismanagement. Most cases relating to oppression and mismanagement are decided at the Company Law Tribunal.

Section 241 (1) of the 2013 version of the Act states that any member of a company who complains that the affairs of the company have been or are being conducted in a manner prejudicial (damaging) to the interests of the company, its members or the public at large may apply to the Tribunal for an order under this Chapter. The Centre, if it feels the complaint is genuine, may itself apply to the Tribunal for an order under this Chapter.

Section 242 states that if, on any application made under Section 241, the Tribunal is of the opinion that the company’s affairs have been or are being conducted in a manner prejudicial or oppressive to any member or to public interest or the interests of the company, the Tribunal may, with a view to bringing to an end the matters complained of, make such order as it thinks fit.

The utility of this Section when higher courts are hearing cases relating to the same issue was tested recently in the high profile case of the real estate company Unitech.

That the affairs of Unitech were being conducted in a manner prejudicial to everyone apart from the promoters was clear. The company had taken large amounts as advances from 19000 persons keen to get a home but construction was not commenced.

The company also took deposits totalling about ₹723 crore from 51,000 depositors but quickly diverted the funds. There was rampant violation of other provisions of the Companies Act. It was only a matter of time before the law caught up with their misdeeds. The Economic Offences Wing of the Delhi Police arrested the promoter and the case reached the Supreme Court, which donned the role of a saviour to the home buyers and depositors by ordering Unitech to deposit some monies at regular intervals.

The present Central Government has proved that it will not hesitate to take radical decisions. Without worrying about the Supreme Court, the Centre approached the Company Law Tribunal quoting Section 241 of the Companies Act, 2013 and requested that all the directors of the company be removed.

The Tribunal did not waste too many words in agreeing with the Government and ordered removal and replacement of all directors even though it was reminded by a senior advocate that the Supreme Court is functioning as a caretaker for the company. Unitech approached the SC which expressed its displeasure over the way the Tribunal performed its duties and stayed the order.

While the reason for the Government to swim against the tide in this case is not very clear, it brings into focus the fact that when there are higher courts involved, the provisions of the Companies Act may not be of much practical utility. The provisions relating to oppression and mismanagement would be useful for non high-profile cases and instances where the aggrieved party does not have the inclination or the resources to approach higher courts. Hopefully, high-profile cases such as Unitech, Sterling or Satyam would be an exception rather than the rule.

The writer is a chartered accountant

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Published on December 17, 2017
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