Majority Rule in Company Law – An Analysis

Rule of Majority

The common notion surrounding our day-to-day lives is that majority opinion triumphs the minority opinion because the former is perceived as better of the two. Even the democratic principles of a country like India promote the majority opinion as a shaping force. However, this majority opinion is often portrayed as a unanimous opinion or an equitable opinion, baiting people into thinking less of the minority opinion. The situation is analogous in the corporate world as well. Every company comprises two vital organs: the general meeting and the board of directors, responsible for making decisions. Furthermore, in both these organs, the majority prevails. This majority is nothing but the thought-process of the majority of shareholders, who take decisions through ‘elected directors.’ This exploitation of power is one of the many facets of majority rule.

The inception of company law took place by using majority rule as a means of decision-making. However, with time, the advantages got eclipsed by the repercussions that this system brought with it. The majority were allowed to have their wishes, unfettered by any other consideration when they could ride rough-shod over the interests of the minority. Therefore, there were many changes brought in by the company legislation and even the court’s involvement, which was reluctant to interfere with the internal affairs. Both aimed at granting relief to the minority against abuse of their authority by the majority.

Court’s attitude of Non-Interference

Board of Directors

As discussed earlier, the courts have always tried to stay away from the internal affairs of a company acting within its powers. If a majority takes a decision which it is legally entitled to do so, the court would not interfere in such an exercise of power. This notion has been upheld several times, and Macdougall v. Gardiner is one such example. In this case, Lord Justice Mellish held that “a thing which the majority [of a company] are masters of, the majority in substance shall be entitled to have their will followed.” He opined that if the result of a suit is only that a meeting is called to rectify the wrong and grant the wishes of the majority, then there is no need for such a suit. Similarly, in Burland v. Earle, Lord Davey showed the same judicial approach in his judgment. He emphasized that if an irregularity or informality has occurred that can be rectified by the majority, assuming that such an act is within the company’s power, then the minority will not be entitled to sue. More so, this sort of judicial attitude has also emerged within Indian law. 

In Parshuram v. Tata Industrial Bank Ltd., the minority shareholders filed a suit against the company concerning a general meeting held on May 1, 1923. The minority prayed for an injunction to restrain the company from having its accounts audited by the auditors appointed at that meeting. They argued that due to improper conduct, the decisions of the meeting were invalid and prayed for a fresh meeting. However, Justice Pratt dismissed the suit and held such ‘irregularities’ as an internal affair of a company. If a court were to interfere in every such circumstance that a majority of a company has the right to decide, it would hinder such companies’ working.

In Ghandy v. Pugh, Justices Mookerjee and Rankin upheld the court’s non-interference attitude in the internal affairs of a company. They enunciated that if the acts, approved by the majority of the shareholders, are confirmed by the majority, then the minority cannot file a suit against the same. Even in Bhajekar v. Shinkar, the same reasons were given by Justice Rangnekar to dismiss a minority shareholder’s plea. This was reiterated by Justice Kapur, in Kirpa Ram v. Shriyans Prasad. He refused to take up the suit on the grounds of insufficient reason to interfere in the working of a company. 

Court’s interference in certain cases

However, there were few exceptions in which the court took up the matter in its own hands. In Bharat Insurance Co. Ltd. v. Kanhaya Lal Gauba, Justice Dalip Singh, while affirming the general principle of non-interference in the internal affairs of a company, held that where the main dispute was over the meaning of a certain clause in the memorandum of association of the company, it no longer remained a mere internal affair. Similarly, in M.R.S. Rathnavelusami Chettiar vs M.R.S. Manickavelu Chettiar, while approving the general rule of non-interference, Justice Raghav Rao held that the suit of a person who had been removed from the post of managing director, for a declaration that he, rather than the person who claimed to have been elected in his place, was still the managing director, was not a dispute to constitute as an internal affair. Hence, the court took cognizance of the matter. 

Besides the above-mentioned exceptions, the court also laid down certain fixed instances where such a rule would not be applied. Ultra vires and fraud on the minority are such few exceptions. The motive of these exceptions was to prohibit something illegal from happening or acts done to the detriment of the minority. In any instance, if the majority tries to bind the minority to improper use, then it no longer remains an internal affair of the company.

The same has been held over in the years in several cases. In Gobind Prasad Das v. Akhar Kumar Dey, the minority shareholders were curbed of their rights to vote. They took the matter to court and prayed for a declaration to hold the meeting invalid. Justices Rampini and Woodroffe held the suit in favor of the minority. Similarly, Vadilal Raghavji v. Maneklal Mansukhbhai was another suit concerning ‘fraud.’  The suit was brought by a shareholder representing all the shareholders except the first defendant. The defendant, being the manager and a member of the managing agency of the company, was alleged to have misappropriated the company’s goods for personal use, thereby ‘frauding’ the company. Justices Morten and Fawcett dismissed the defendant’s appeal and took the case to trial. 

In Dhakeshwari Cotton Mills Ltd. v. Neel Kamal, the concept of ultra vires was further explored by the court. In the said case, Justices Nasim Ali and Remfry held a suit admissible, brought by a minority against a company without its permission. The suit was concerning a particular resolution that, allegedly, had been passed without following the due procedure, thus ultra vires. The court struck down the said resolution, holding it ultra vires for a company to pass such special resolutions without an adequate majority.

Similarly, in Ram Kissendas Dhanuka v. Satya Charan Law, a suit against the parent company by its minority was held maintainable on the grounds of ultra vires. Lord Greene held that an article of association of a company required an ‘extraordinary resolution’ to terminate the present managing agents. It could only be done by following the said procedure and unless a particular majority favored it. Lord Greene observed that the procedure had not been followed in the present case, and the termination resulted from an ‘ordinary resolution.

Critical Analysis 

The preceding cases exhibit the judicial attitude towards the majority rule and minority rights. The principle of non-interference first emerged in Foss v. Harbottle, which defined the working of company law. The rule emphasized the majority’s will over the minority’s, which continued to be followed for a long time. However, with time, we saw a change in the court’s attitude. Certain exceptions were recognized by the court, which acted as a relief. But except in Gobind Prasad’s case, the relief given in the rest of the cases was hardly substantial. 

Moreover, “fraud on the minority” and “ultra vires” were never really defined to have a definite meaning; leaving the right of the minority to seek relief and court to grant relief, indefinite. Therefore, due to this inefficacy, the Indian Parliament added two sections, 153C and 153D, to the Companies Act, by amending the Act of 1951. This was further enumerated in the Companies Act of 1956, which replaced the 1913 Act. The provisions of Sections 153C and 153D were divided into eleven sections, from 397 to 407 in the 1956 Act. Though the Act proved to be beneficial for the minority seeking relief, there were some flaws in the said Act. In Section 153C or Section 397, one of the things which a minority must prove to avail this remedy is “oppression.”

However, this word is not defined anywhere and is left upon the interpretation of the court. Therefore, Section 397 cannot prove to be an infallible source of relief for the minority. Moreover, according to the section, a single act of oppression is not sufficient but a continuous process of oppression has to be proved. Nonetheless, this step was in the right direction to balance the majority rule and the minority rights. Doing away with these sections is not the right thing to do, but exploring and improvising these sections is what we need. 

Author – Shivam Singh Rathore is a proactive student, currently pursuing BA LLB(Hons) from Rajiv Gandhi National University of Law. He is an adventurous and a hardworking student, highly organized and dedicated towards work. He loves to volunteer for social causes and possesses the ability to work under pressure for long hours. 

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