Section 242 Powers of Tribunal and Orders in Oppression Cases

Understand Powers and Orders of the Tribunal

Key rules to remember

Two conditions for Section 242(1)

Prejudicial or oppressive conduct (or prejudicial to public interest or to the company) AND winding up would unfairly prejudice members, though just and equitable ground exists

Both must be satisfied before the Tribunal may pass an order as it thinks fit.

Orders under 242(2) (examples)

Regulate future affairs; purchase of shares; consequent capital reduction; restrict transfer or allotment; terminate or modify agreements; set aside fraudulent preference; remove directors; recover undue gains; appoint reporting directors; costs; any other just matter

Not exhaustive. The general power in 242(1) is wider.

Agreements with persons other than directors

Termination, setting aside or modification only after due notice and with the consent of the party concerned

This proviso applies to clause (f). An agreement with the managing director, a director or the manager falls under clause (e), with no consent requirement. A firm or company owned by the managing director is a separate person, so an agreement with it falls under clause (f).

Fraudulent preference look-back

Transfer, payment or act within 3 months before the date of the application

Applies if it would be a fraudulent preference had an individual done it in insolvency.

Filing of order

Certified copy of order to the Registrar within 30 days

Same 30 days for orders altering or giving leave to alter the memorandum or articles.

Interim orders

On application of any party, Tribunal may make any interim order it thinks fit, on just and equitable terms

Covers regulating the company's affairs during the case.

Section 243 effects

Order terminates, sets aside or modifies an agreement: no claim for damages or compensation. Managing director, director or manager whose agreement is terminated or set aside: barred for 5 years without Tribunal leave. Fit and proper finding under 242(4A): barred for 5 years under 243(1A)

Removal under 242(2)(h) alone does not trigger the 243(1)(b) bar. Leave for the 243(1)(b) bar needs notice to the Central Government. Contravention is punishable with fine up to ₹5,00,000.

Penalty for breaching alteration bar (242(8))

Company: fine ₹1,00,000 to ₹25,00,000. Officer in default: fine ₹25,000 to ₹1,00,000

Applies if the company alters the memorandum or articles against the order without leave. No imprisonment now.

How to solve Powers and Orders of the Tribunal questions

1. 1Identify the grievance from the facts: who is hurt, how, and whether it is oppression, mismanagement or harm to public interest.
2. 2State the two conditions of Section 242(1). Check that the facts show prejudicial conduct and that winding up would unfairly prejudice the members.
3. 3Match each problem in the facts to a power in 242(2). Example: removal of a director maps to clause (h); a minority wanting exit maps to clause (b).
4. 4Name the order clearly, with its conditions. For example, an agreement with an outsider (clause (f)) needs due notice and the party's consent. An agreement with the managing director or a director (clause (e)) does not.
5. 5State the effect of the order: filing with the Registrar in 30 days, binding alterations to articles, and no compensation claim under Section 243 where an agreement is terminated, set aside or modified.
6. 6Add consequences for a managing director, director or manager whose agreement is terminated or set aside: the 5-year bar and the leave of the Tribunal, plus any penalty. If the Tribunal records a fit and proper finding, a separate 5-year bar applies under 243(1A).
7. 7Conclude with a clear recommendation on the relief the Tribunal is likely to grant.

Quickest way: Problem-to-power matching

Common mistakes in Powers and Orders of the Tribunal

• Treating the list in 242(2) as the only orders the Tribunal can make.

  Students memorise the list and ignore the opening words.

  Fix: Remember sub-section (2) is without prejudice to the generality of sub-section (1), and clause (m) covers any other just and equitable provision.

• Forgetting the second condition, that winding up would unfairly prejudice the members.

  Students focus only on oppression.

  Fix: Always state both conditions in your answer.

• Saying consent is needed to terminate a managing director's agreement.

  The consent proviso sits just under clause (f) and gets applied to clause (e).

  Fix: Consent and notice apply only to clause (f) agreements, with persons other than the managing director, directors or manager. An agreement with the managing director himself falls under clause (e).

• Mixing up the time limits: 3 months, 30 days and 5 years.

  All three are short numbers in one section.

  Fix: 3 months is the preference look-back; 30 days is filing with the Registrar; 5 years is the bar under Section 243(1)(b) on a managing director, director or manager whose agreement is terminated or set aside by the order. Removal under clause (h) alone does not trigger it. A fit and proper finding under 243(1A) separately bars the person for 5 years.

• Saying a director whose agreement is terminated can claim compensation for loss of office.

  Students apply contract law ideas.

  Fix: Under Section 243, an order terminating, setting aside or modifying an agreement gives rise to no claim for damages or compensation against the company.

• Stating the old penalty of imprisonment under Section 242(8) or 243(2).

  Older notes still show imprisonment.

  Fix: The imprisonment words were omitted from 21 December 2020. Only fines apply now.

Worked examples