Oppression and Mismanagement: Understanding Section 244 of Companies Act: National Company Law Appellate Tribunal, Principal Bench, New Delhi

In the web of corporate law in India, certain sections under the corporate law serve as the pillar for governing, guiding, linchpins various aspects of corporate life. Section 244 Act is such pivotal law in order to deal with the right to apply under Section 241. In this article, we will delve deep into the nuances of Section 244, its significance in corporate litigation, and its impact on both companies and shareholders.

In the recent case of I.D. Chugh & Ors. Versus Vikram Kapur & Ors. And Girish Kapur & Ors., Sanjay Kapur & Ors, Vikram Kapur & Anr. Versus Atlas Cycles (Haryana) Ltd. & Ors., presented to National Company Law Appellate Tribunal, Principal Bench, New Delhi, Section 244 and Section 241 came into limelight when several appeals were filed regarding the maintainability of an application under Section 241 of the Companies Act. Let’s explore the different dimensions and intricacies of case further.

Understanding Section 244: Section 244 is interrelated with the Section 241 of Companies Act, 2013. It deals with the right to apply under Section 241 of Companies Act. In essence, it determines who has the legal standing to bring a petition against a company. Understanding the key components of this section below:

1. Qualifications for Application (Section 241):

(a) Companies with a Share Capital:

For companies with a share capital, the eligibility criteria are stipulated as follows:

- 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.

(b) Companies without a Share Capital:

For companies without a share capital, the criteria are somewhat less stringent:

- Not less than one-fifth of the total number of its members.

This section essentially defines who has the legal standing to bring a petition against a company. The purpose is to ensure that only those with a significant stake in the company or a substantial membership base can initiate such legal proceedings.

2. Waiver of Requirements (Section 244 proviso):

Crucially, Section 244 contains a proviso that grants discretionary power to the tribunal to waive the qualification requirements under certain circumstances. This waiver can be granted if it is deemed necessary to enable members to apply under Section 241. However, this discretion is not unfettered; the tribunal must make a reasoned and justifiable decision when considering a waiver.

3. Jointly Held Shares:

Section 241 clarifies how shares held jointly by two or more persons should be counted. In such cases, they are counted only as one member for the purpose of determining eligibility to apply. This provision avoids inflating the eligibility count in cases where multiple shareholders jointly hold shares.

4. Collective Application (Section 244(2)):

Section 244(2) permits one or more eligible members, with the written consent of others, to make the application on behalf of all eligible members. This provision simplifies the process, streamlines legal proceedings, and ensures that the rights of all eligible members are adequately represented.

Section 244 plays a significant role in ensuring that only qualified members of shareholders can initiate legal actions against a company, this role helps in to prevent frivolous or baseless claims, maintaining the integrity of corporate litigation. Furthermore, the provision allowing for the waiver of requirements underscores the importance of judicial discretion. Tribunals must carefully consider whether it’s justifiable to waive these requirements, emphasizing fairness and due process. It also reinforces the principles of natural justice, ensuring that all parties have a fair chance to represent themselves. By defining the eligibility criteria and the conditions for waiver, Section 244 provides legal clarity is essential for transparent and efficient legal processes.

In the case, the appellants argued that the tribunal had erred in granting waiver under Section 244 and the matter was remanded back to the tribunal for reconsideration of the applications, providing an opportunity to the contesting respondents.  Thus, Section 244 serves as a cornerstone in determining who can bring legal action against a company. Its provisions strike a balance between safeguarding the interests of shareholders and ensuring a fair and just legal process. Legal practitioners, corporate entities, and shareholders must be well-versed in the nuances of this section to navigate the complex landscape of corporate litigation effectively.