MAJORITY AND MINORITY RULES

WITH EXCEPTIONS
COMPANIES ACT, 2017

COMPANY LAW

COMPLILED BY TARUN INDER KAUR

B.A. LL.B. (HONS) A
273/14

SUPERVISED BY BHUPINDER
UNIVERSITY INSTITUTE OF LEGAL STUDIES
PUNJAB UNIVERSITY
 ACKNOWLEDGMENT

I express my sincere gratitude to Ms. Bhupinder for her inspiration, expert guidance, moral
boosting, continuous encouragement and appreciation which are the vital factors in successful
completion of my project work. I humbly acknowledge deep gratitude towards my teacher.

Tarun Inder Kaur

Thanking You.
 INDEX

 Introduction
 Rule of Majority
 Rule of Non-Interference
 Foss vs. Harbottle
 Exceptions to the rule of Foss vs. Harbottle
 Minority Rights
 Bibliography
 INTRODUCTION TO COMPANY LAWS

The Companies Act, 2013 does not define Company in terms of its features. Section 3 (1) (i)
of the Act merely states that a company means company formed and registered under this act
or any other already existing company. Like any other institution, a company is run by a
democratic process and administration of its affairs is carried on by resolution of majority of
shareholders passed at the duly convened general meeting and the meeting of the board of
directors. The matters on which the members are divided are decided by the majority votes of
the shareholders. Thus, majority power has great importance in the working of a company.

In a public limited company, the members holding paid up equity shares have a right to vote
in respect of every resolution placed. The right of a member to vote has been recognised as
right of property and he may exercise it in any way he likes.

With a view to protecting the rights of the minority shareholders, adequate provisions were
made in the Companies Act so that those who control the affairs of the Company exercise
their powers according to the set principles of natural justice. These provisions are
incorporated in Sections 397 to 409 of the Companies Act, 1956 and Sections 241 to 245 of
the Companies Act, 2013.
 RULE OF MAJORITY

The principle of Rule of Majority has been made applicable to the management of the affairs
of the company. the decisions on routine matters relating to internal administration are taken
by resolutions passed by ordinary majority but decsions on important matters require the
approval of a special majority. Once a resolution is passed by the requisite majority then it is
binding on all the members of the company. As a resultant corollary, the Court will not
ordinarily intervene to protect the minority interest affected by the resolution, as on becoming
a member, each member impliedly consents to submit to the will of the majority of the
members. Thus, if wrong is done to the company, it is the company which is the legal entity
having its own personality and only a company can institute a suit against the wrongdoer.

It therefore follows that the majority of the members enjoy the supreme authority to exercise
the powers of the company and generally to control its affairs and the minority shareholders
have to concede to the majority decision. This however, may lead to a possibility that the
members having the majority vote may tend to be oppressive towards the minority
shareholders misusing their majority strength and this may result in mismanagement of the
company.

It is for this reason that it has been said that the “protection of the minority shareholders
within the domain of corporate activity constitutes one of the most difficult problems facing
the modern company law. The aim must be to strike a balance between the effective control
of the company and the interests of the small shareholders. This proper balance is highly
essential for the proper functioning of a company.

With a view to protecting the rights of the minority shareholders, adequate provisions were
made in the Companies Act so that those who control the affairs of the company, exercise
their powers according to the set principles of natural justice.
 THE RULE OF NON INTERFERENCE AS IN

FOSS Vs. HARBOTTLE

The principle that the will of the majority should prevail over the will of the minority in
internal matters is the rule established in the case of Foss vs. Harbottle. According to this
principle, the courts will not, in general, interfere at the instance of shareholders, in
management of a company by its directors so long as they are acting within the powers
conferred on them by Articles of the Company. This principle is based on the assumption
that, the shareholders who provide the capital to the company and bear the risk should be
given the powers of control. Therefore, a resolution of majority of members passed at a duly
convened and constituted meeting is binding upon the minority as also the company as a
whole. This rule was, for the first time laid down in the present case.

The facts of the case are as follows. In this case an action was brought by two shareholders
(Foss and Turton) in an incorporated company called the ‘Victoria Park Company’ against
company’s five directors and others, alleging fraudulent and illegal transactions whereby the
property of the company had been misapplied and wasted and certain mortgages were
improperly given over the company’s property. The plaintiffs sought appointment of receiver
and action against the defendants for losses caused to the company. The court rejected the
petition and ruled that it was incompetent for the plaintiffs to bring such proceedings, the sole
right to do so being vested in the company in its corporate character. The Court observed:

“the conduct with which the defendants are charged is an injury not to the plaintiffs
exclusively, it is an injury to the whole corporation. In such cases, the rule is that the
corporation should sue in its own name and in its corporate character. It is not matter of
course for any individual members of a corporation thus, to assume to themselves the right of
suing in the name of the corporation. In law the corporation and the aggregate members of
the corporation are not the same thing for purposes like this.”

The rule established in this case was that Courts will not ordinarily intervene in a matter
which the company is competent to settle itself, or in case of an irregularity, can ratify or
condone it by its own internal procedure.
The supremacy of this rule was affirmed in Macdougall vs. Gardiner, wherein it was
observed:

“If the thing complained of is a thing which, in substance, the majority of the company are
entitled to do regularly, or if something has been done illegally which the majority of the
company are entitled to do legally, there can be no use of having litigation about it.

It has now been well settled that in order to redress a wrong done to the company or to
recover damages alleged to be due to the company, the action should be brought by the
company itself and not by its members. The principle holds good even in the case of an act of
a company which has been done in irregular manner provided that it is of such a nature that it
is within the power of the majority to regularise it.

The rule was again re-stated in Edward vs. Halliwell, wherein it was observed:

“First, the proper plaintiff in respect of a wrong alleged to be done to a company isprima
facie the company itself. Secondly, the alleged wrong is a transaction which might be made
binding on the company by a simple majority, no individual member of a company is allowed
to maintain an action in respect of that matter for the simple reason that, there is no valid
reason why the company itself shouldn’t sue”

In India, The importance of this rule has been recognised in Bhajekar vs. Shinkar. In this case
the directors of a company resolved to appoint a company as its managing agents. The
appointment was confirmed at two general meetings of the company despite objections from
certain shareholders. Thereupon, the dissenting shareholders who were in minority brought
action to restrain the managing agents from acting. Their argument was that the appointee
managing agents were a dummy company and it was not in the interests of the company to
appoint them. The court ordered a general meeting to be held under the supervision of a
chairman appointed by it. The chairman put a resolution the effect “whether the company is
willing to maintain the suit and proceed with it. “the resolution was lost. Under these
circumstances the Court held, “it is difficult to see how a few shareholders who represent a
minority are entitled to maintain the suit and ask the Court to interfere on the question as to
who should be managing agents.” The action therefore failed.

Again, in Jhajharia Bros Ltd. vs. Sholapur Spinning and Weaving Co. Ltd., the Court refused
to intervene in the majority decision of the company. The plaintiffs Jhajharias, were the
managing and the sole selling agents of the defendant company. They held minority interests
in the company. The company dismissed them from both offices. They owed the company
certain sums, for which a lot of their shares were forfeited and allotted to new managing
agents. These new agents combined with the directors managed to pass a resolution for
further increase of capital which was underwritten by them, placing them in a position of safe
majority. The plaintiffs challenged this action of majority. The court refused to intervene and
observed that “there was no inherent wring in the action, unless there is an element of
expropriation or coercion”
 EXCEPTIONS TO THE RULE

The rule is not absolute. There are certain cases where the minority shareholders may bring
action to protect their interests, so they are not left helpless. The minority shareholders are
protected under the common law and even under some provisions of Companies Act, 1956.
In all thesecases an individual member may sue for declaration that the resolution complained
of is void. These are the exceptions to the rule of majority:

A) ULTRA VIRES ACT

Where the directors representing the majority of shareholders perform an illegal or
ultra vires act for the company, an individual shareholder has the righto bring in
action. The shareholder here has the right to restrain the company by an order or
injunction of the Court from carrying out the ultra vires act. The majority shareholders
are not allowed to act beyond the extent of powers given to them by the company.
In Bharat Insurance Ltd. vs. Kanhya Lal, the plaintiff was a shareholder of the Bharat
Insurance Company. One of the objects of the company was to advance moneyat
interest on the security of land houses machinery and other property situated in India.
The plaintiff complained that several investments have been made by the company
without adequate security and contrary to the provisions of the memorandum and
therefore prayed for an injunction against the same. The Court observed
“in all matters of internal management, the company itself is the best judge of its
affairs and the Court should not interfere. But, application of assets of a company is
not a matter of internal administration. As the directors are acting ultra vires in the
application of the funds, a single member may maintain a suit.”

B) FRAUD ON MINORITY
Where an act done by the majority amounts to a fraud on the minority, an action can
be brought against an individual shareholder. The general test which is applied to see
whether a case falls in the category of fraud on the minority or not is whether a
resolution passed by the majority is “bona fide for the company as a whole” as held in
Allen vs. Gold Reefs of West Africa. It means that the shareholders must proceed on
what is in benefit for the company as a whole, where company doesn’t mean the
company only as a commercial entity as distinct from the corporators. It means the
corporators as a general body.

C) WRONGDOERS IN CONTROL
If the wrongdoers are in control of the company, the minority shareholders
representative action for fraud on the minority will be entertained by the Court as held
in Birch vs. Sullivan. The reason for it is that if the minority shareholders are denied
the right of action, their grievances in such case would never reach the Court, for the
wrongdoers being the controllers would never allow the company itself to sue.
D) RESOLUTION REQUIRING A SPECIALMAJORITY BUT IS PASSED BY A
SIMPLE MAJORITY
a shareholder can sue if an act requires a special majority but is passed by a
simplemajority. This formality need to be observed in order to provide validity to an
actwhich purports to impede the interests of the minority, as held in Nagappa Chettiar
vs. Madras Race Club.

E) PERSONAL ACTIONS
Individual membership rights cannot be invaded by the majority of shareholders. He
is entitled to all the rights and priveleges appertaining to his status as a member. An
individual shareholder can insist on the the strict compliance with the legal rules,
statutory provisions. Provisions in the memorandum and the articles are mandatory in
nature and cannot be waived by a bare majority of shareholders as held in Salmon vs.
Quin and Aztens.

F) BREACH OF DUTY
The minority shareholder may bring an action against the company, where although
there is no fraud, there is a breach of duty by the directors and the majority
shareholders to the detriment of the company. In Daniels vs. Daniels, the plaintiffs
who were the minority shareholders of a company brought an action against the two
directors of the company and the company itself. In their statement of the claim they
alleged that the company, on the instruction of the two directors sold the company’s
land to one of the other directors (wife of previous director) and they knew it to be
under value. Four years after, she sold the same land for an amount three times the
original. The directors applied for the statement of claim to be disclosed on reasonable
cause of action or otherwise as an abuse of the process of court. It was held that the
application by director by dismissed. Hence, the minority shareholders had a cause of
action.

G) PREVENTION OF OPPRESSION AND MISMANAGEMENT

The minority shareholders are empowered to bring action with a view to preventing
the majority from oppression and mismanagement. In Bennet Coleman and Co. and
Ors. vs. Union of India, the Division Bench of the Bombay High Court held that
Sections 397 and 398 of the Companies Act, 1956 are intended to avoid the winding
up of the company if possible and keep it going while at the same time relieving the
minority shareholders from acts of oppression and mismanagement or preventing its
affairs from being conducted in a manner prejudicial to public interest. Thus, the
Court has wide powers to supplant the entire corporate management by resorting to
non corporate management which may take the form of appointing an administrator,
in charge of the affairs of the company.
 MAJORITY RULEAND MINORITY RIGHTS UNDER
COMPANIES ACT

In India, the Companies Act attempts to maintain a balance between the rights of the
majority and minority shareholders in the rules of majority but limiting at the same
time by a number of well defined minority rights.

Companies Act, 1956 provided for protection of the minority shareholders from
oppression and mismanagement by the majority under Section 397 and 398 which
deal with application to company law board for relief in cases of oppression and
mismanagement. Oppression as per section 397(1) of the Companies Act, 1956 was
defined as ‘when affairs of the company are being conducted in a manner prejudicial
to public interest or in a manner prejudicial to the interests of the company. Right to
apply to the Company Law Board in case of oppression or mismanagement was
provided under section 399 to the minority shareholders meeting 10% shareholding or
100 members or 1/5th members limit, as the case maybe.

Chapter XVI of the Companies Act 2013 deals with the provisions relating to
prevention of oppression and mismanagement of a company. These mean that affairs
of the company are being conducted in a manner that is oppressive and biased against
the minority shareholders or any member/members of the company. To prevent the
same, there are provisions in the Act. The Ministry of Corporate Affairs vide its
notification S.O. 1934 dated June 1st 2016 notified section 241 to 245 of the
Companies Act 2013.
 APPLICATION TO TRIBUNAL FOR RELIEF

1) Application by member: According to section 241 (1), any member of the company
may apply to the tribunal, provided such member has a right to apply under section
244, IF he complains that
a) 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/s or in any manner prejudicial to the interests of the company.
b) The material change, not being 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
shares or whatsoever, and by this change, it is likely that the affairs of the
company will be conducted in a manner prejudicial to its interests or its members.

2) Central Government suo moto to apply to the Tribunal: Sections 241 (2) provides that
the Central Government, if it is of the opinion that the affairs of the company are
being conducted in a manner prejudicial to the public interest, it may itself apply to
the Tribunal.

Section 244 (1) provides that the following members shall have the rights to apply
under section 241.

 In the case of a company having a share capital, not less than

100members of the company or not less than one tenth of the total
number of its members, whichever is less, or any member holding not
less than one tenth of the issues share capital (subject to the condition
that the applicant has paid all calls)
 In the case of a company not having share capital, not less than one
fifth of the total number of its members

Any of these provisions may be waived by the Tribunal, if seemed fit. Any one member or
more of them, having obtained the consent of others, in writing, may make the application on
the behalf and in benefit of all, according to sections 244 (2).

Section 242 provides the powers constituted to the Tribunal.

 BIBLIOGRAPHY

 Majumdar, A.K. ; Kapoor, G.K., Company Law and Practice, Taxmann Publications,
Ed. 16,
 Singh, Avtar, Company Law, Eastern Book Company, Ed. 15, 2007.
 Paranjape, N.V., Central Law Agency, Ed. 3, 2006.
 The Institute of Company Secretaries of India, Company Law, reprint 2017.