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Minority shareholders have to take a back seat as the ’s focus has been on insolvencies, which has impacted its other duties, namely the oppression and mismanagement jurisdiction, write Aditya Vikram Bhat and Aadith Sridhar

ON9 January 2009, the Blackberrys of corporate lawyers, accountants, law enforcement officers and corporate executives started buzzing with forwards of a letter said to have been written by Ramalinga Raju, the then CEO of Satyam Computer Services. In summary, Raju admitted in the letter to inflating reported revenues and manipulating numbers in the financial statements of Satyam without the knowledge of its board.

Over the next few days, fingers also pointed towards other members of senior management of Satyam as well as the statutory auditors. The expectation was that Satyam – burdened with holes in its balance sheet, faced with class action suits in the US and as many as 13,000 fictitious employees – would soon be relegated to the corporate graveyard.

However, as we all know, Satyam saw a turnaround story with revival, a takeover by the Mahindra group, and finally merging with IT and consulting giant, Tech Mahindra. What very few people know is that part of the reason this turnaround was scripted was the government of India invoking the extraordinary jurisdiction of the erstwhile Company Law Board (CLB) under sections 388B, 397, 398, 401-408 of the Companies Act, 1956.

With a view to protect the interests of Satyam’s clients, shareholders and employees, along with the interests of Satyam itself, the CLB took several measures in the interim via a series of orders.

To name a few: (1) The directors of Satyam were suspended, and the board was reconstituted with 10 eminent persons appointed by the government; (2) state and central government agencies were restrained from taking any civil, criminal, punitive or coercive action against the newly appointed directors without the CLB’s go-ahead, to ensure that the board was undeterred in discharging its functions (later extended to the investor’s nominee directors); and (3) the authorised share capital of Satyam was increased to facilitate the entry of a strategic investor, subject to certain requirements. Such measures assisted significantly in pushing the company into its economic revival.

In comparison, the Enron scandal, which revolved around the American energy company Enron Corporation, was dealt with in a diametrically different manner. In the aftermath of the scandal, Enron Corporation filed for bankruptcy and its USD63.4 billion in assets made it one of the largest corporate bankruptcies in US history. Enron’s auditors, a firm by the name of Arthur Andersen, collapsed as a direct consequence of the scandal and no longer provide audit services.

Valuing corporate revivals

Although the Satyam scandal is probably the most visible case of corporate revival, it is certainly not the only one. The oppression and mismanagement jurisdiction was introduced in England around 1948 as an alternative to “just and equitable winding up”, to enable the court to act in the best interests of the company and its stakeholders in certain cases.

Under the earlier regime, a court, if it considered it just and equitable, could direct the winding up of a company. While what was “just and equitable” would be decided on the facts of each case, victims of oppression and mismanagement (including the company itself) would seldom benefit from a winding-up order. The Madras High Court, while discussing the remedy of just and equitable winding up, described it as a remedy that was “very often worse than the disease”.

The oppression and mismanagement jurisdiction introduced in India by the 1956 act, based on the principles of equity, has significantly widened the scope of relief that a court or tribunal can provide depending on the facts of a case. Principles of equity that have emerged from this jurisdiction include that of quasi-partnership and legitimate expectation, among others.

The principle of quasi-partnership recognises the individuals behind the company’s corporate structure and contemplates that measures deemed just and equitable that may be applicable in case of a partnership may be applied while deciding cases involving companies, if certain parameters are met.

The principle of legitimate expectation follows from the court’s ability to do substantial justice between parties, by recognising that in a company, there may be individuals with rights, expectations and obligations which may or may not be submerged in the corporate structure. The high court or the CLB also had the jurisdiction to pass any order in the interest of a company if it is of the opinion that the same would protect the company’s interests, even if oppression and mismanagement is not proved.

The Indian corporate bar has historically been highly regarded for its immense contribution to the jurisprudence of Indian company law. The corporate bar was active in the realms of mergers, amalgamations and restructurings, as well as relief against oppression and mismanagement, all before the relevant jurisdictional high court. High courts, probably owing to the nature of the institution, could effectively facilitate oppression and mismanagement matters by identifying cases that needed to be viewed through an equitable lens and accordingly exercise equitable jurisdiction.

In 1991, the CLB was constituted, which then took over the oppression and mismanagement regime from the high court. The board had its principal bench in New Delhi, an additional principal bench in Chennai, and four regional benches in New Delhi, Kolkata, Mumbai and Chennai. Over time, these cities witnessed extensive practice in oppression and mismanagement among other areas, resulting in the growth of a strong CLB bar. In addition to the bar, the effectiveness of the board in dealing with matters involving oppression and mismanagement can also be attributed to the longevity of its chairman, vice chairman and members, and their general experience with principles of equity.