Companies Act Section 242

Companies Act, Section 242: Powers of the Tribunal to Grant Relief in Cases of Oppression, Mismanagement, or Prejudicial Conduct

Section 242 of the Companies Act, 2013 empowers the National Company Law Tribunal (NCLT) to grant wide-ranging and appropriate relief in cases where a company’s affairs are found to be oppressive, mismanaged, or prejudicial to the public interest or the company’s own interests. This section is intended to ensure that minority shareholders, stakeholders, or the public are protected, and that mismanagement is corrected without necessarily resorting to winding up the company which is often considered a last resort.

1. Tribunal’s Authority Upon Finding Oppression or Prejudice

Upon receiving an application under Section 241, and after examining the facts of the case, the Tribunal may exercise its powers under this section if it forms the opinion that:

(a) The affairs of the company have been or are being conducted:

In a manner that is oppressive or prejudicial to the interests of any member or group of members, or
In a way that is prejudicial to the public interest, or
In a manner that is prejudicial to the interests of the company itself.
(b) A winding-up order, although legally justifiable under the ground of being "just and equitable," would unfairly prejudice the member or members who have been affected.

In such cases, the Tribunal may make any order it considers appropriate, aimed at bringing an end to the matters that gave rise to the complaint or oppression, without requiring the company to be wound up.

2. Illustrative and Specific Powers of the Tribunal: To ensure comprehensive relief and rectification, the Tribunal may issue directions covering, but not limited to, the following matters:

(a) Regulation of Company’s Future Affairs: The Tribunal may prescribe how the company shall be managed going forward, including guidelines or restrictions on operations or governance.
(b) Purchase of Shares: The Tribunal can direct the purchase of shares or interests held by any member: Either by other members, or By the company itself.
(c) Share Capital Reduction: If the company is directed to purchase its own shares, it may be ordered to reduce its share capital accordingly, in accordance with law.
(d) Transfer or Allotment Restrictions: The Tribunal may impose restrictions on the transfer or allotment of shares to prevent misuse or manipulation.
(e) Termination or Modification of Certain Agreements (with Officers): The Tribunal can set aside, modify, or terminate agreements between the company and its managing director, other directors, or manager, based on what is just and equitable.
(f) Termination or Modification of Other Agreements

The Tribunal may also modify or annul agreements between the company and third parties (non-directors), provided:
Due notice is given, and
Consent is obtained from the concerned party.
(g) Setting Aside Fraudulent Transactions: Any transaction made within three months before the application date that would qualify as a fraudulent preference in insolvency law can be set aside, including transfers, payments, and deliveries of goods.
(h) Removal of Key Officers: The Tribunal may remove any managing director, manager, or director of the company if their conduct is found to be prejudicial.
(i) Recovery of Undue Gains

The Tribunal may direct the recovery of undue gains acquired by such officers during their term, and decide on the manner of utilization of such funds:
Either by repayment to victims, or Transfer to the Investor Education and Protection Fund (IEPF).
(j) Future Appointment of Key Officers: The Tribunal may prescribe how a new managing director or manager should be appointed after removal under clause (h), ensuring better governance in the future.
(k) Appointment of Reporting Directors: The Tribunal may appoint additional directors and require them to report back to the Tribunal on specific matters as deemed necessary.
(l) Imposition of Costs: The Tribunal may impose costs or penalties on any party as it considers appropriate.
(m) Other Just and Equitable Provisions: The Tribunal may include any other measures or directives that it finds necessary in the interest of justice and equity.
3. Filing of Tribunal Orders with the Registrar

Once an order under sub-section (1) is made, the company must:

File a certified copy of the order with the Registrar of Companies (ROC) within 30 days from the date of the order.
4. Power to Issue Interim Orders

At any stage during the proceedings, the Tribunal may:

Issue interim orders to regulate the company’s affairs.
Impose any terms and conditions it deems just and equitable.
This enables the Tribunal to maintain the status quo or prevent further harm during the course of litigation.

5. Tribunal’s Decision on Fitness of Officers

Where proceedings have been initiated under Section 241(3) regarding the fitness of an officer:

The Tribunal must record a specific finding at the conclusion of the hearing on whether the respondent is a “fit and proper person” to hold the office of director or any other managerial position.
This ensures accountability and prevents recurrence of misconduct by disqualified individuals.

6. Restrictions on Alterations to Memorandum and Articles 

(a) Tribunal-Imposed Restrictions

If the Tribunal’s order includes alterations to the memorandum or articles of association, then:

The company cannot alter these documents in any manner that contradicts the Tribunal’s order, unless explicit permission is granted by the Tribunal.
(b) Legal Validity of Alterations 

Any alteration made by the Tribunal under this section:

Shall be deemed to have been made in accordance with the Companies Act, and
Shall have the same legal effect as if the company had altered its documents voluntarily under the law.
(c) Filing Requirement

A certified copy of the Tribunal’s order altering (or granting leave to alter) the memorandum or articles must be:

Filed with the Registrar of Companies within 30 days of issuance.
7. Penalties for Contravention

If the company violates the restrictions under sub-section (5), the following penalties shall apply:

To the Company:

Minimum fine: ?1,00,000
Maximum fine: ?25,00,000
To Every Officer in Default:

Minimum fine: ?25,000
Maximum fine: ?1,00,000
This ensures that serious consequences follow non-compliance with Tribunal orders, particularly in relation to governance documents.