NMQs for CA FINAL Paper -4 CAL

Chapter- O& M
Ques:-
The profits of ABC Limited for the financial year 2014-2015 fell considerably due to recession. The Board of directors of the company, therefore, bonafide did not recommend any dividend for the year. At the Annual General Meeting of the company, a group of members objected to the Board's decision and wanted the Board to make recommendation for dividend. On refusal by the Board, the members, who feel oppressed by the Board's decision to skip the dividend, move to the Company Law Board and complain against the Board on the ground of oppression and mismanagement.
Examining the provisions of the Companies Act, 1956, decide:
(i) Whether the members contention shall be tenable?
(ii) Whether the act of Board of Directors not to recommend any dividend shall amount to oppression and mismanagement?
Ans:-
Oppression & Mismanagement: Under sections 397 and 398 of the Companies Act, 1956, members may apply to the Company Law Board in cases of oppression and mismanagement. However, bona fide decisions consistent with the company’s memorandum and articles are not to be equated with mismanagement even if they turn
out to be wrong in the circumstances or these cause temporary losses. The Court will not permit the machinery created by the sections to be used by the minority for compelling the majority to come to terms, where the company is honestly managed. Directors’ bona fide decision not to declare dividend and to accumulate available profits into reserves is not mismanagement. (Thomas Vettom (V.J.) vs. Kuttanad Rubber Co. Ltd. (1984) 56 Com. Cases 284 (Ker).
Thus in the given case, the group of members who complain to CLB against the decision of the Board not to declare any dividend and to accumulate available profits into reserves, would not succeed, as the act of directors does not amount to mismanagement.
Furthermore, the shareholders cannot compel the Board to recommend a dividend. The Board’s recommendations are placed in the general meeting. In the general meeting company can reduce the dividend, but cannot increase the dividend as recommended by the Board. Therefore, the members cannot compel the company to declare dividend and cannot charge the directors with oppression or mismanagement.
Applying the above, answers to the question shall be as under:
(i) The contention of shareholders/members shall not be tenable.
(ii) The act of the Board of directors who acted bona fide, not to recommend any
dividend shall not amount to oppression or mismanagement.