[Namya is a student at National Law School of India University.]
In January 2024, a single-judge bench of the Bombay High Court referred to a larger bench the question of whether a non-member under Section 2(55) of the Companies Act 2013 (2013 Act) can file an oppression and mismanagement petition under Section 241 and 242 of the Act. The court noted that allowing any person other than a member as defined under Section 2(55) to approach the tribunal would render part of Section 241 ('any member') otiose, and the decision stands pending to be decided.
This post examines the requirement of being a ‘member’ to maintain oppression and mismanagement petitions. The author argues that the courts have failed to consider the shift in the schemes of the Companies Act 1956 (1956 Act) and 2013 Acts in terms of defining membership, leading to a misplaced reliance on the jurisprudence under the 1956 Act where a trend towards a lenient interpretation could be seen.
Sections 241 and 242 of the 2013 Act address oppression and mismanagement. The 2013 Act's scheme allows ‘any member’ to file an application under Section 241, provided they meet the numerical qualifications provided for under Section 244. However, the interpretation of ‘member' has been a source of judicial confusion.
Judicial Confusion under the 2013 Act
In 2023, the National Company Law Appellate Tribunal held that a ‘shareholder’ would become a ‘member’ only after his name has been entered in the Register of Members, and at the same time remarked that this definition has been relaxed in case of Section 244 where even “a shareholder is treated as a ‘member’”. However, no backing for such a stance was provided in the decision. A single judge bench of the Madras High Court went further, applying the doctrine of reading down to interpret 'member' in Section 241 when faced with the question of whether the director of a company can be allowed to maintain a petition. The court held that the term should include not only members in the strict sense but also those who "bear the character of a member" or have a "substantial interest in the internal affairs of the company".
In contrast, other judicial decisions have adhered to a stricter interpretation of ‘member’. The National Company Law Appellate Tribunal took the view that it is sine qua non for a petitioner to establish that he is a member of the company as per Section 2(55) of the 2013 Act. The tribunal categorically stated that an individual whose name does not appear on the ‘register of members’ has no locus to file a petition under Section 244. Hence, there still exists conflicting jurisprudence on the scope of flexibility in interpreting ‘member’ for allowing petitions under Section 241.
A general trend for the Indian judiciary has been to seek guidance from the jurisprudence existing under the 1956 Act to interpret provisions under the 2013 Act as well. The 1956 Act provided the initial framework for addressing oppression and mismanagement under Sections 397, 398, and 399, corresponding to Sections 241 and 244 of the 2013 Act with certain modifications. However, the interpretation of who qualified as a 'member' under these provisions had also led to diverse judicial opinions as discussed below.
Judicial Interpretation of ‘Member’ under the 1956 Act
In World Wide Agencies (Private) Limited v. Margarat T Desor, the Supreme Court of India allowed a non-member filing a petition under Sections 397/ 398, despite the absence of names on the register of members, however, not giving a determinate position by only making a limited to the circumstances of the case.
Membership requirement for oppression and mismanagement actions under the 1956 Act had been previously analysed by Mihir Naniwadekar, where he concluded that the case law on this point of law had been inconsistent. The Company Law Board has held that in order to maintain a petition under Section 397/398, the petitioner has to first apply under Section 111 for rectification of the register of members. In contrast, some decisions recognized the potential for companies to exploit this requirement by removing shareholders’ names from the register of members to disqualify them from filing petitions. Hence, in one of the cases, the Company Law Board suggested that membership could be recognized for the purposes of Sections 397 and 398 by following a lenient interpretation on criteria such as possession of share certificates, independent records establishing membership, or the company's treatment of the petitioner as a member. Hence, as noted, in later decisions, a lenient reading of Section 399(1) can be seen when complex questions of facts had been involved leading to a watering down of the membership requirement.
Changed Statutory Scheme of Membership from the 1956 Act to the 2013 Act
However, the question arises whether the courts should refer to the jurisprudence under the 1956 Act to decide on the said question of locus standi of ‘non-members’ under the 2013 Act. It is essential to break down the statutory schemes of the 1956 Act and 2013 Act on the membership requirement. While the oppression and mismanagement provisions have evolved, the locus standi of the petitioners requiring a status of 'member' remains the same.
The 2013 Act defines ‘member’ under Section 2(55) by providing three sub-sections of people who shall be qualified as members for the purposes of the Act. This is pari materia to Section 41 of the 1956 Act, with a few minor modifications. Under the 1956 Act, in addition to Section 41, there also existed under the definition clause, Section 2(27) defining a ‘member’. Essentially, under the 1956 Act, a definition for ‘member’ were to be found in two places i.e. Section 2(27) and Section 41. While Section 41 provided for specific conditions which need to be met to become a 'member', Section 2(27) defined ‘member’ in the negative manner by stating that a member does not ‘include a bearer of a share-warrant of the company issued in pursuance of Section 114’, rendering it non-exhaustive and expansionary. This presence of two definitions under the 1956 Act allowed for some flexibility in arriving at a lenient interpretation of the membership requirement, as can be hereinafter seen in the case of Shri Balaji Textile Mills Private Limited v. Ashok Kavle decided by the division bench of Karnataka High Court.
In this case, the maintainability of the petition under Sections 397 and 398 of the 1956 Act was objected to on the grounds that requirements under Section 41(2) were not complied with before obtaining the shares in their name. The court interpreted the membership requirement under the 1956 Act and held that the word ‘member’ has been defined in a very comprehensive manner in Section 2(27) and “this is not controlled by provisions of Section 41(2)". For Sections 397, 398 and 399, the meaning of member “cannot be tagged to Section 41(2), and rather the correct provision to assess is Section 2(27) of the Act.” Therefore, a person can claim relief under Sections 397 and 398 by satisfying that he is a ‘shareholder’ through statutory returns and documents maintained by the company, even if the name is absent from the register of the members, which was a necessary condition under Section 41 (now Section 2(55) under the 2013 Act). This reasoning of the Karnataka High Court was later applied by the tribunals to hold that a person holding shares and being ‘recognized by the company as a shareholder’ was entitled to apply under Section 397, despite his name not being there in the register of members.
Courts under the 2013 Act still rely n cases like Balaji Textiles decided under the 1956 Act to decide non-member petitions as per Section 2(55) in multiple cases.
However, what is important to take a note of is that the scheme of the 2013 Act presents a significantly different scenario. There is now only one definition of 'member' given under Section 2(55), which is pari materia to Section 41 of the 1956 Act. Hence, while a liberal understanding to ‘member’ as adopted by the Karnataka HC could be supported by the scheme of the 1956 Act by placing reliance on Section 2(27), the complete absence of any such expansive definition to a ‘member’ under the 2013 Act leaves little room for any statutory backing for such lenient interpretation.
This statutory shift in the scheme of the laws necessitates a critical reassessment of prior case law and statutory interpretation.
A Sound Interpretation to the Locus Standi of ‘Non-Members’
The principles of statutory interpretation dictate that the provisions of a statute must be construed in accordance with the language used unless there are compelling reasons to do otherwise. This is particularly relevant since Section 2(55) while defining the word 'member' uses the word 'means' implying its exhaustive nature. Now, Section 241 expressly mentions that ‘any member’ can file an application and further qualifies the locus standi by providing ‘such member has a right to apply under Section 244’. Section 244 provides what all qualifications need to be fulfilled in order for a ‘member’ to maintain a petition under Section 241. Hence, going by the text and scheme of the 2013 Act, a non-member in terms of Section 2(55) cannot present a petition under Sections 241 and 242 read with Section 244.
A stricter interpretation of the locus standi requirement under Sections 241 and 244 can be supported by first, the decision of the Supreme Court of India in the case of Severn Trent Water Purification Inc. v. Chloro Controls (India) (Private) Limited and second, the legislative intent.
First, the Supreme Court of India in the said case was interpreting the locus standi required under Section 439 for winding-up of a company. The court noted that Section 439(4) is a self-contained code, and its reference to ‘member’ has to be read strictly as per Section 41 (under the 1956 Act) and the requirement of register of members is mandatory to fulfill and cannot be objected to being mere “technical”. Additionally, the very fact that a remedy has been provided (in this case, rectification of the register of members), a strict interpretation must be followed. When the legislature has expressly excluded certain categories of people from being entitled to file a petition, the exhaustive nature of the provision cannot be extended by judicial construction. A similar logic seems to apply to locus standi for cases of oppression, mismanagement and prejudice as well.
Second, an analysis of the cases both under the 1956 and the 2013 Act shows that a large part of confusion stems from a lack of clear distinction between a ‘member’ and a ‘shareholder’, where despite the name being absent from the register, the locus standi has been held to be fulfilled by the mere fact of the applicant rendering proofs for being a holder of shares. While some courts have held them to be interchangeable, others have held that a member may be different from a holder. Here, the 2018 amendment to Section 439(2) is relevant. The legislature replaced the word ‘shareholder’ by the words ‘shareholder or member’ highlighting that there is indeed a difference existing between a ‘member’ and a ‘shareholder’ under the scheme of the 2013 Act which needs to be recognized and not blurred by the courts.
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