Section 241 and 242 of the Companies Act, 2013 are having power of nectar, for the shareholders who complains that the affairs of the company have been or are being conducted in a manner prejudicial to public interest or in a manner prejudicial or oppressive to him or any other member or members or in a manner prejudicial to the interests of the company; or, the material change, not being a change brought about by, or in the interests of, any creditors, including debenture holders or any class of shareholders of the company, has taken place in the management or control of the company, whether by an alteration in the Board of Directors, or manager, or in the ownership of the company’s shares, or if it has no share capital, in its membership, or in any other manner whatsoever, and that by reason of such change, it is likely that the affairs of the company will be conducted in a manner prejudicial to its interests or its members or any class of members.
In order to seek the remedy under section 241 and 242, the complainant, should be qualified under section 244 of the Act to file the petition. As per section 244 of the Act, the following members of a company shall have the right to apply under section 241, namely:—
in the case of a company having a share capital, not less than one hundred members of the company or not less than one-tenth of the total number of its members, whichever is less,or any member or members holding not less than one-tenth of the issued share capital of the company, subject to the condition that the applicant or applicants has or have paid all calls and other sums due on his or their shares;
in the case of a company not having a share capital, not less than one-fifth of the total number of its members:
The purpose of mentioning a specific shareholding percentage to file petition under section 241 is to avoid frivolous litigations by unconnected persons, In J.P. Srivastava & Sons (P.) Ltd. v. Gwalior Sugar Co. Ltd. [2004] 56 SCL 1 (SC), the Supreme Court considered the object of prescribing a qualifying percentage of shares to entertain petition under sections 397 and 398. It was held that the object is to ensure that frivolous litigation is not indulged in by persons, who have no legal stake in the company. If the Court is satisfied that the petitioners represents the body of shareholders holding the requisite percentage, the Court may proceed with the matter.
Who is a Member?
As section 244, prohibits all others other that member of a company to file petition under section 241 , it is important to understand the term “member” in proper manner.
As per Section 3(55) of the Act, "member", in relation to a company, means—
(i) the subscriber to the memorandum of the company who shall be deemed to have agreed to become member of the company, and on its registration, shall be entered as member in its register of members;
(ii) every other person who agrees in writing to become a member of the company and whose name is entered in the register of members of the company;
(iii) every person holding shares of the company and whose name is entered as a beneficial owner in the records of a depository;
From the above, it is very clear that, the subscriber to the memorandum of association of company and every other persons who agrees in writing to become a member of the company and whose name is entered in the register of members of the company are qualified to file petition, if they hold more than One-Tenth of the total paid up capital of the company. Two essential conditions have to be satisfied to constitute a person a member are:
(1) an agreement in writing to become a member; and
(2) an entry on the register
The burden of proof is on the Petitioner as it is upto him to submit adequate evidence to substantiate his claim of being a “member” as on the date of the Petition.
Whether a legal representative of a member is eligible to file petition under section 241?
In the event of death of a member, all the rights in his securities shall vest in the name of his/her legal representatives. It is interesting to explore, whether the legal representatives of a deceased shareholder can file the petition under section 241 of the Act. In World Wide Agencies (P.) Ltd. v. Margarat T. Desor [1990] 1 SCC 536, Supreme Court held that a legal representative has a right to maintain an application regarding oppression and mismanagement without being registered as a member against the securities of a company. However, the question of nomination was not involved in the said decision, as such, Court was not required to decide the question of the effect of nomination whether it vests all the rights in the securities in nominee to the exclusion of legal representatives.
However for a legal representative to be eligible to file a petition, he/she must get established the right of succession by following the provisions of the law applicable. In Santhush Mane V Vighnaharta Builders and Projects Private Limited [2012] 171 Comp. Cas 1, the Company Law Board had held that it did not have the power to declare a particular person a legal heir and successor to the estate of a deceased person. The Competent court of law had to be approached.
Power to Nominate
Section 72 of the Act details about the power of a shareholder of a company to nominate any person to whom his securities shall vest in the event of his death. If the securities of a company are held by more than one person jointly, the joint holders may together nominate, in the prescribed manner, any person to whom all the rights in the securities shall vest in the event of death of all the joint holders. Notwithstanding anything contained in any other law for the time being in force or in any disposition, whether testamentary or otherwise, in respect of the securities of a company, where a nomination made in the prescribed manner purports to confer on any person the right to vest the securities of the company, the nominee shall, on the death of the holder of securities or, as the case may be, on the death of the joint holders, become entitled to all the rights in the securities, of the holder or, as the case may be, of all the joint holders, in relation to such securities, to the exclusion of all other persons, unless the nomination is varied or cancelled in the prescribed manner. If the nominee is a minor, it shall be lawful for the holder of the securities, making the nomination to appoint, in the prescribed manner, any person to become entitled to the securities of the company, in the event of the death of the nominee during his minority.
It is quite apparent from a bare reading of the aforesaid provisions of section 72(1), every holder of securities has a right to nominate any person to whom his securities shall "vest" in the event of his death. In the case of joint-holders also, they have a right to nominate any person to whom "all the rights in the securities shall vest" in the event of death of all joint holders. Sub-section (3) of section 72 contains a non-obstante clause in respect of anything contained in any other law for the time being in force or any disposition, whether testamentary or otherwise, where a nomination is validly made in the prescribed manner, it purports to confer on any person "the right to vest" the securities of the company, all the rights in the securities shall vest in the nominee unless a nomination is varied or cancelled in the prescribed manner. It is prima facie apparent that vesting is absolute, and the provisions supersede by virtue of a non-obstante clause any other law for the time being in force. Prima facie shares vest in a nominee, and he becomes absolute owner of the securities on the strength of nomination. Rule 19(2) of the Companies (Share Capital and Debentures) Rules, 2014 framed under the Act, also indicates to the same effect. Under rule 19(8), a nominee becomes entitled to receive the dividends or interests and other advantages to which he would have been entitled to if he were the registered holder of the securities; and after becoming a registered holder, he can participate in the meetings of the company. Rule 19(8) is extracted hereunder:
"19(8). A person, being a nominee, becoming entitled to any securities by reason of the death of the holder shall be entitled to the same dividends or interests and other advantages to which he would have been entitled to if he were the registered holder of the securities except that he shall not, before being registered as a holder in respect of such securities, be entitled in respect of these securities to exercise any right conferred by the membership in relation to meetings of the company. Provided that the Board may, at any time, give notice requiring any such person to elect either to be registered himself or to transfer the securities and if the notice is not complied with within ninety days, the Board may thereafter withhold payment of all dividends or interests, bonuses or other moneys payable in respect of the securities, as the case may be, until the requirements of the notice have been complied with."
From the above it can be concluded that a legal representative of the deceased shareholder/member or a nominee under section 72 of the Act is eligible to file petition under section 241 in accordance with the qualification specified under 244 of the Act.
Bijoy P Pulipra