Minority shareholders have to take a back seat as the National Company Law Tribunal’s focus has been on insolvencies, which has impacted its other duties, namely the oppression and mismanagement jurisdiction, write Aditya Vikram Bhat and Aadith Sridhar
ON9 January 2009, the Blackberrys of corporate lawyers, accountants, law enforcement officers and corporate executives started buzzing with forwards of a letter said to have been written by Ramalinga Raju, the then CEO of Satyam Computer Services. In summary, Raju admitted in the letter to inflating reported revenues and manipulating numbers in the financial statements of Satyam without the knowledge of its board.
Over the next few days, fingers also pointed towards other members of senior management of Satyam as well as the statutory auditors. The expectation was that Satyam – burdened with holes in its balance sheet, faced with class action suits in the US and as many as 13,000 fictitious employees – would soon be relegated to the corporate graveyard.
However, as we all know, Satyam saw a turnaround story with revival, a takeover by the Mahindra group, and finally merging with IT and consulting giant, Tech Mahindra. What very few people know is that part of the reason this turnaround was scripted was the government of India invoking the extraordinary jurisdiction of the erstwhile Company Law Board (CLB) under sections 388B, 397, 398, 401-408 of the Companies Act, 1956.
With a view to protect the interests of Satyam’s clients, shareholders and employees, along with the interests of Satyam itself, the CLB took several measures in the interim via a series of orders.
To name a few: (1) The directors of Satyam were suspended, and the board was reconstituted with 10 eminent persons appointed by the government; (2) state and central government agencies were restrained from taking any civil, criminal, punitive or coercive action against the newly appointed directors without the CLB’s go-ahead, to ensure that the board was undeterred in discharging its functions (later extended to the investor’s nominee directors); and (3) the authorised share capital of Satyam was increased to facilitate the entry of a strategic investor, subject to certain requirements. Such measures assisted significantly in pushing the company into its economic revival.
In comparison, the Enron scandal, which revolved around the American energy company Enron Corporation, was dealt with in a diametrically different manner. In the aftermath of the scandal, Enron Corporation filed for bankruptcy and its USD63.4 billion in assets made it one of the largest corporate bankruptcies in US history. Enron’s auditors, a firm by the name of Arthur Andersen, collapsed as a direct consequence of the scandal and no longer provide audit services.
Valuing corporate revivals
Although the Satyam scandal is probably the most visible case of corporate revival, it is certainly not the only one. The oppression and mismanagement jurisdiction was introduced in England around 1948 as an alternative to “just and equitable winding up”, to enable the court to act in the best interests of the company and its stakeholders in certain cases.
Under the earlier regime, a court, if it considered it just and equitable, could direct the winding up of a company. While what was “just and equitable” would be decided on the facts of each case, victims of oppression and mismanagement (including the company itself) would seldom benefit from a winding-up order. The Madras High Court, while discussing the remedy of just and equitable winding up, described it as a remedy that was “very often worse than the disease”.
The oppression and mismanagement jurisdiction introduced in India by the 1956 act, based on the principles of equity, has significantly widened the scope of relief that a court or tribunal can provide depending on the facts of a case. Principles of equity that have emerged from this jurisdiction include that of quasi-partnership and legitimate expectation, among others.
The principle of quasi-partnership recognises the individuals behind the company’s corporate structure and contemplates that measures deemed just and equitable that may be applicable in case of a partnership may be applied while deciding cases involving companies, if certain parameters are met.
The principle of legitimate expectation follows from the court’s ability to do substantial justice between parties, by recognising that in a company, there may be individuals with rights, expectations and obligations which may or may not be submerged in the corporate structure. The high court or the CLB also had the jurisdiction to pass any order in the interest of a company if it is of the opinion that the same would protect the company’s interests, even if oppression and mismanagement is not proved.
The Indian corporate bar has historically been highly regarded for its immense contribution to the jurisprudence of Indian company law. The corporate bar was active in the realms of mergers, amalgamations and restructurings, as well as relief against oppression and mismanagement, all before the relevant jurisdictional high court. High courts, probably owing to the nature of the institution, could effectively facilitate oppression and mismanagement matters by identifying cases that needed to be viewed through an equitable lens and accordingly exercise equitable jurisdiction.
In 1991, the CLB was constituted, which then took over the oppression and mismanagement regime from the high court. The board had its principal bench in New Delhi, an additional principal bench in Chennai, and four regional benches in New Delhi, Kolkata, Mumbai and Chennai. Over time, these cities witnessed extensive practice in oppression and mismanagement among other areas, resulting in the growth of a strong CLB bar. In addition to the bar, the effectiveness of the board in dealing with matters involving oppression and mismanagement can also be attributed to the longevity of its chairman, vice chairman and members, and their general experience with principles of equity.
NCLT takes over
In 2016, immediately after the enactment of the Insolvency and Bankruptcy Code (IBC), 2016, the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT) were constituted, and the CLB was dissolved. There is a distinct feeling among the corporate bar that the jurisdiction now exercised by the NCLT is not working in the same way as exercised by the board or the high court before.
For instance, the tribunal seems to predominantly focus on dealing with matters under the IBC, which emerges from the case status report released by the NCLT Registrar. As per the report, 44,486 cases under the IBC have been disposed of by the NCLT, while only 34,870 cases under the Companies Act, 2013, have been disposed of in the same timeframe. Cases dealing with oppression and mismanagement would be a subset of the cases under the Companies Act, 2013, which seems to already be an area of lesser focus. While such statistics are not indicative of the manner in which oppression and mismanagement cases are being handled by the tribunal, they shed light on the NCLT’s preference towards entertaining and disposing of cases under the code.
Apart from the NCLT prioritising insolvency as its core focus, there are other factors that contribute to the idea that the quality of disposals has also declined. The CLB, having benches in four major cities in India, created strongholds of the corporate bar in these cities. These strongholds no longer exist. Today, the tribunal has 15 benches across the country, with different numbers of courts per bench. While this has increased accessibility to the tribunal, it has resulted in the dilution of the practice and discourse in company law, specifically in the oppression and mismanagement jurisdiction.
Under the Companies Act, 2013, a person would be qualified to be a judicial member of the NCLT if they are or have been: (1) a high court judge; (2) a district judge for at least five years; or (3) an advocate for at least 10 years. A person would be qualified to be a technical member of the tribunal if they are or have been either a chartered accountant, cost accountant or a company secretary for at least 15 years. From the profiles of tribunal members available on the official NCLT website, judicial members are mainly from the district judiciary or the bar. Perhaps an indication that the tribunal’s bench today, which is dealing with cases relating to oppression and mismanagement, does not have the training to apply the principles of equity.
Commenting on the state of affairs, senior advocate KG Raghavan says, “Not only is the implementation not up to the standard, but the law also has been diluted considerably. The NCLT is understaffed, and acts as the adjudicating authority under the IBC, where statistics of disposal have to be furnished to the finance ministry, adhering to the timelines specified in the IBC. Per contra, insofar as company law proceedings are concerned, there is hardly any reporting, because the emphasis is not on resolving company disputes, but on providing favourable statistics to the Ministry of Finance under the IBC.”
Each practitioner of corporate law should try to nurture, preserve and unfortunately revive the oppression and mismanagement jurisdiction rather than relegate it to history. As a consequence of the suboptimal manner in which cases involving oppression and mismanagement are treated, much of the resolution that could have occurred under the said framework is now being referred to arbitration. Arbitration, being contractual and party-centric in nature, tends to focus on a binary outcome (either in favour or against the party initiating arbitration), and in the process, it often loses sight of the health of the company and the impact on its stakeholders.
If India is serious about corporate growth and the protection of all stakeholders in the corporate realm, including promoters, domestic investors, foreign investors, small investors, employees and third parties, as well as third-party contractors, the state and the central governments, the oppression and mismanagement jurisdiction is one that needs immediate attention and revival. It is capable of being wielded as a Brahmastra (a mythological weapon) in disputes that involve oppression and mismanagement.
Aditya Vikram Bhat is an advocate and the founder of Chambers of Aditya Vikram Bhat, and a former senior partner at AZB & Partners. Advocate Aadith Sridhar provided assistance with the article
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