Introduction
Several Indian statutes and regulations prohibit actions done in a manner that is prejudicial to the interests of specified stakeholders. The term ‘prejudice’ has been defined as “damage or detriment to one’s legal rights or claims”.[1] The (Indian) Companies Act, 2013 (“Act”) contains multiple provisions which state that certain acts may be undertaken in a manner not prejudicial to the rights and interests of the company itself or its stakeholders or the public. Similarly, the (Indian) Income-Tax Act, 1961 and other state tax legislations use the term ‘prejudicial’ to denote a harm to the interest of the assessee or the revenue. Across different statutes and regulations, the term has been used to denote a negative effect on the affected party/stakeholder. These statutes and regulations typically do not prescribe guidelines on what constitutes prejudice, and hence it is essential to rely on caselaw to evaluate whether an action constitutes prejudice.
Constitutional Law Jurisprudence
In constitutional law, there is a requirement to ensure that no prejudice is often provided in the context of fundamental rights. Therefore, observing substantive and procedural fairness in taking the action in question is highly important.
In the landmark case of Maneka Gandhi v. Union of India,[2] the Supreme Court attempted to integrate the American jurisprudence of ‘due process of law’[3] onto the Indian standard of ‘procedure established by law’. The apex court held that even though the authorities were legally empowered to impound the petitioner’s passport under section 10(3)(c) of the Passports Act, 1967, their failure to observe a cardinal principle of natural justice, i.e., of presenting an opportunity to be heard (audi alteram partem), failed to mitigate procedural prejudice. Furthermore, unreasonably and unfairly impinging the fundamental rights granted under Article 19[4] and Article 21[5] of the Indian Constitution caused substantial prejudice which should not allow the administrative order to escape scrutiny behind the guise of following the procedure established by law. Therefore, an act done following the procedure established by law must not be oppressive, arbitrary or fanciful; it must be fair, just and reasonable in relation to substantive and procedural rights, to avoid being deemed prejudicial.[6]
However, it has also been seen where a provision of law which might be prejudicial to the interests of a person or class of persons, if made in the public interest, is not necessarily unconstitutional.[7] In Maganlal Chhagganlal (P) Ltd vs Municipal Corporation of Greater Bombay,[8] introduction of a special and quicker procedure for the removal of unauthorized occupants from municipal premises under the Bombay Municipal Corporation Act, 1888[9] was challenged. The Supreme Court held that the challenged provision did not violate Article 14,[10] despite it bypassing the usual civil suit procedure established for eviction from private premises. The Court concluded that bypassing the civil suit procedure was justified on grounds including the need for prompt eviction in the public interest, and the fact that the provision under challenge incorporated adequate procedural safeguards, like right to appeal and right to be heard.[11]
Tax Law Perspective
Under taxation law, the term ‘prejudicial’ is interpreted from two different standpoints: first, from the perspective of the government/ revenue authorities that are entitled to collect taxes and second, from the perspective of the assessee or the tax payer.
Any erroneous order, decision or assessment that results in a loss of tax revenue or prevents the government from collecting an amount of tax that a taxpayer is legally liable to pay, can be considered prejudicial to the interests of revenue.[12] However, every instance of loss of revenue as a consequence of an order of assessing officer cannot be deemed as prejudicial to the interest of revenue. For instance, where the assessing officer merely adopts one of the courses permissible in law and that leads to a loss in tax revenue or where he adopts one of the several possible interpretations of a provision that the commissioner disagrees with, the same cannot be deemed prejudicial unless the view (taken by the assessing officer) is legally untenable.[13] Prejudice requires an order passed to be erroneous. An order made without application of mind, without applying principles of natural justice, on an incorrect assumption of facts or incorrect application of law would be considered erroneous. For instance, the assessing officer’s error in categorizing an amount as taxable under ‘income from other sources’, thereby causing a loss in tax that the revenue authority is rightfully entitled to collect,[14] or an order made based on unverified data/unverified income leading to incorrect assessment,[15] would be considered erroneous.
For taxpayers, in the case of Jagadindra Kumar and ors. vs. Revenue Commr.[16], the Orissa High Court while reviewing a revised order made by the revenue commissioner, held that where an order does not enhance the assessment, or does not put the assessee in a worse position than before or merely maintains the status quo, such an order cannot be deemed prejudicial to the assessee. Therefore, in order to prove that an order is prejudicial, it is pertinent that it places the taxpayer in a worse position than he was in, prior to such order.
“Prejudicial” Under Company Law
The question of prejudice is decided on a case-by-case basis. Factors that lead to a conclusion that an action taken was prejudicial to a certain stakeholder or stakeholders include violation of applicable law, violation of constitutional documents or of internal policies of the company.[17]
Courts have had the occasion of evaluating whether prejudice has been inflicted in the context of sections 241 and 242 of the Act, which pertain to prevention of oppression and mismanagement. Section 241 of the Act, enables a member of a company to apply to the Tribunal if he has a complaint that the affairs of the company are being run in a manner that is prejudicial to his interests or interests of another member or class of members or the interests of the public or interests of the company itself. A member may also complain of any material change that has taken place because of which it is likely that the affairs of the company will be conducted in a manner that is prejudicial to the interests of the company or its members. It is noteworthy that the courts have opined that a single instance of harmful or adverse conduct is not sufficient to demonstrate prejudice/oppression/mismanagement, rather, a series of acts that inflict a detrimental effect must be shown to make a case under these sections.[18]
A leading case is the Supreme Court ruling in Tata Consultancy Services Ltd. vs Cyrus Investments Pvt. Ltd. and ors.[19] In this case, Mr. Cyrus Mistry’s grievances primarily stemmed from his ouster from the Board of Tata Sons, which he argued was carried out illegally and in violation of proper governance procedures. He also argued that the company’s articles of association contained provisions which were skewed to favour certain stakeholders and had a prejudicial effect on the interests of the minority. Further, he alleged that the company’s affairs were being prejudicially conducted owing to the concentration of decision making in the hands of Mr. Ratan Tata and the Tata Trusts, which led to poor corporate governance and a series of loss-incurring transactions.
The Supreme Court combined a conduct and effects-based approach to scrutinize the effect as well as the conduct of the company and whether the conduct caused unfair harm or detriment to the minority stakeholders. Reading prejudice alongside oppression/mismanagement, the Court observed that an infliction of disadvantageous position, or removal from directorship of the Board does not by itself, tantamount to prejudice under the section. It is pertinent to prove that there was mutual trust and confidence in the nature of quasi-partnership between the two groups and consequently, the acts complained of, led to the breakdown of that mutual trust to the extent that it became ‘just and equitable’ for the company to be wound up.[20] However, here, the Court observed that there was no quasi-partnership between the Tata group and the Shapoorji Pallonji group, and hence, the question of breakdown of mutual trust does not arise. Moreover, a mere lack of confidence between the majority and minority shareholder group does not qualify as a just and equitable cause.
The Court also highlighted several instances that weakened a claim of prejudice by the minority shareholder group, including, where the minority had benefited from the arrangement and policies of the Company, where the minority had consented to, had knowledge of or had participated in the formulation of the impugned articles of association, and the minority’s failure to oppose certain transactions at the time of their ratification. Additionally, a lapse of significant amount of time since the occurrence or ratification of the impugned acts coupled with the absence of a quasi-partnership or breakdown in trust severely undermined any claims of prejudice. The Court also highlighted that removal from directorship, or unwise commercial decisions or a mere dissatisfaction from being voted out does not suffice as ground for winding up the company and hence, cannot be deemed prejudicial to the interests of the company or any of its member(s).
Conclusion
As can be seen from above, an evaluation whether the challenged action was ‘prejudicial’ to the relevant stakeholder requires an inquiry into unfairness caused, disadvantage or detrimental position inflicted to the party in question. It is also seen that company law has a higher burden of proof to establish that an act is prejudicial. As a practical matter, an allegation/concern that an action is/might be prejudicial to a stakeholder can be mitigated to a great extent by proper compliance with law and relevant policies, following a reasonable procedure which includes proper notice and an opportunity for the complainer/potential complainer to be heard, a balanced commercial rationale (for taking the challenged action), etc.
This article was first published in Lexology.