Section 244 Waiver: How a Shareholder Below the 10% Threshold Gets Into the NCLT

A shareholder who believes a company’s affairs are being run oppressively cannot simply walk into the National Company Law Tribunal. Section 241 of the Companies Act 2013 confers the right; section 244 puts a gate in front of it. Miss the numbers in section 244 and the petition is not maintainable at all, however strong the grievance. The section 244 waiver — the power in the proviso to section 244(1) — is the way through that gate, and it is the step most often misunderstood in an oppression and mismanagement case.

What Section 244 Actually Requires

Section 244(1)(a) gives the right to apply under section 241 to:

“not less than one hundred members of the company or not less than one-tenth of the total number of its members, whichever is less, or any member or members holding not less than one-tenth of the issued share capital of the company, subject to the condition that the applicant or applicants has or have paid all calls and other sums due on his or their shares”.

For a company without share capital, section 244(1)(b) requires not less than one-fifth of the total number of members. Joint holders count as one member. Section 244(2) permits one or more qualified members, “having obtained the consent in writing of the rest”, to apply on behalf of all.

Then comes the proviso:

“Provided that the Tribunal may, on an application made to it in this behalf, waive all or any of the requirements specified in clause (a) or clause (b) so as to enable the members to apply under section 241.”

This is a genuine change of hands. Section 399(4) of the Companies Act 1956 gave the same dispensing power to the Central Government, which could authorise a member to apply “if in its opinion circumstances exist which make it just and equitable so to do”. Under the 2013 Act the power is judicial and belongs to the Tribunal. That matters: it is now exercisable only on reasons, and it is subject to appeal.

Why an Arithmetical Threshold Shuts Out Real Grievances

The threshold is not merely a formality for closely-held companies; in large companies it can be close to unattainable. In the leading decision, the appellants held about 2.17% of the issued share capital of a company in which their economic interest was roughly one-sixth — the arithmetic was distorted because a large tranche of non-voting preference capital counted towards “issued share capital”. The NCLAT recorded that of forty-nine members, only two individually crossed the 10% line, so the section 241 remedy “will remain only in the hands of major shareholders”. It added that a minority shareholder “cannot be asked or directed to form a group of 10%”, because whether others will join is their prerogative, not the petitioner’s.

This illustrates why the waiver provision under section 244 is important: it prevents statutory shareholding thresholds from making the oppression and mismanagement remedy inaccessible to minority shareholders in appropriate cases.

The Section 244 Waiver Test: Four Factors

In Cyrus Investments Pvt Ltd v. Tata Sons Ltd (NCLAT, Company Appeal (AT) Nos. 133 and 139 of 2017, decided 21 September 2017), the Appellate Tribunal set out the factors the Tribunal should notice before forming an opinion on waiver:

“(i) Whether the applicants are member(s) of the company in question? If the answer is in negative i.e. the applicant(s) are not member(s), the application is to be rejected outright… (ii) Whether (proposed) application under Section 241 pertains to ‘oppression and mismanagement’? If the Tribunal on perusal of proposed application under Section 241 forms opinion that the application does not relate to ‘oppression and mismanagement’ of the company or its members and/or is frivolous, it will reject the application for ‘waiver’… (iii) Whether similar allegation of ‘oppression and mismanagement’, was earlier made by any other member and stand decided and concluded? (iv) Whether there is an exceptional circumstance made out to grant ‘waiver’, so as to enable members to file application under Section 241 etc.?”

The list is expressly non-exhaustive. The Tribunal may take into account “other factors unrelated to the merit of the case”.

Two further points from the same judgment are as important as the factors. First, waiver is a judicial act: it “cannot be passed by Tribunal, in a capricious or arbitrary manner and can be passed only by a speaking and reasoned order after notice to the (proposed) respondent(s)”. Second, the applicant must show something out of the ordinary — the Tribunal is “required to record grounds to suggest that the applicants have made out some exceptional case for waiver”.

What the Tribunal May not Consider

This is where waiver applications are most often lost — and most often wrongly refused. The NCLAT held in terms that the Tribunal “cannot deliberate on the merit of a (proposed) application under Section 241, while deciding an application for ‘waiver'”. Three questions were expressly placed off-limits at that stage:

The refusal of waiver under appeal was set aside precisely because the Tribunal below “decided the application for ‘waiver’ taking into consideration the prima facie case / merit of the case”.

There is an honest tension here, and a practitioner should expect it to be argued both ways. The same judgment requires the Tribunal to satisfy itself that the proposed petition “merits consideration”, and factor (ii) directs it to screen out applications that do not relate to oppression and mismanagement “and/or [are] frivolous”. Screening for frivolousness without touching the merits is a fine line. The Supreme Court’s own approach in the case discussed next did involve a prima facie appraisal.

Where Waiver was Refused: A Disputed Title

In Aruna Oswal v. Pankaj Oswal (Supreme Court, Civil Appeal No. 9340 of 2019, decided 6 July 2020; AIR 2020 SC 3088), the petitioner’s claim to the shareholding rested on a succession dispute that was already the subject of a civil suit. His registered holding was “minuscule… 0.03%, that too, acquired after filing a civil suit”. The Court held that waiver ought not to have been granted while title was under a cloud, and that the section 241/242 proceedings should be dropped, with liberty to revive them if the civil suit succeeded and the holding reached the statutory level. It also observed, on the material before it, that the case “prima facie does not appear to be a case of oppression and mismanagement” and that from “transactions simpliciter, it cannot be inferred that it is a case of oppression and mismanagement”.

The practical lesson is narrow but firm: a waiver application is not a route to litigate ownership of shares. Establish the shareholding first.

1. The section 241 petition is filed in Form NCLT-1 with the documents in Annexure B (Rule 81(1), NCLT Rules 2016).
2. Where one member applies for several, annex the written consent of the rest with a schedule of names and addresses, and state that all calls have been paid (Rule 81(2); section 244(2)).
3. If the petitioner is below the threshold, apply separately under the proviso to section 244(1). No NCLT Rule prescribes a dedicated form for the waiver application; in Cyrus it was filed as an interlocutory application, and Form NCLT-1 covers interlocutory applications. Rule 11 (inherent powers) supplies the residual basis.
4. The sequence is settled: maintainability first, then waiver, then merits. If maintainability is answered against the applicant, the Tribunal proceeds to waiver; only if waiver is granted does the petition go to merits.
5. Withdrawal of a section 241 application later requires leave, in Form NCLT-9 (Rule 82).
6. An appeal lies to the NCLAT under section 421(1) within 45 days, extendable by up to 45 more.

On timing, two older but useful authorities survive. In Rajahmundry Electric Supply Corporation Ltd v. A. Nageswara Rao, AIR 1956 SC 213, the Court held that “the validity of a petition must be judged on the facts as they were at the time of its presentation”, so the later withdrawal of consent by supporting members did not defeat maintainability. In J.P. Srivastava & Sons Pvt Ltd v. Gwalior Sugar Co Ltd, (2005) 1 SCC 172, dealing with the 1956 Act, the Court read the consent requirement as one of substance rather than form. Note the limit of that reading: section 244(2) of the 2013 Act expressly requires consent “in writing”, so the argument today is about proof of consent, not about dispensing with writing.

• Aggregate. Combine holdings with other members to reach 100 members, one-tenth of the members, or one-tenth of the issued share capital, one applying with the written consent of the rest.
• Section 245 class action. The thresholds prescribed by Rule 84(3) of the NCLT Rules 2016 are lower: 5% of the total members or 100 members, whichever is less; or 5% of the issued share capital of an unlisted company, or 2% for a listed company. For a listed company this is a materially easier gate than section 244.
• Section 213(b) investigation. Unlike section 213(a), which needs 100 members or one-tenth of the voting power, section 213(b) permits the Tribunal to order an investigation “on an application made to it by any other person or otherwise” — no shareholding threshold at all.
• Section 241(2). Where public interest is engaged, the Central Government may itself apply.
• A civil suit is generally not available. Section 430 bars civil courts from matters the Tribunal is empowered to determine. The exception is a dispute about title to the shares, which remains a civil-court question.

Is a Liberal Waiver Dangerous?

The argument for restraint is not merely technical. As the respondents put it in Cyrus, section 244 “embodies a clear legislative policy of allowing, as a matter of right, only members holding specified numerical or shareholding numbers, to avail the remedy”, and Parliament “did not want all members of the company to be armed with the right to make an application under Section 241”. Even the appellants accepted that the purpose of the threshold is to ensure that “speculative actions of an insignificant percentage of shareholders are discouraged and thereby stop mischievous litigation”. An oppression petition is disruptive, expensive and reputationally costly; a low gate invites its use as leverage.

The argument the other way is the one the NCLAT accepted: an arithmetical rule that leaves the remedy in the hands of two members out of forty-nine, or that would notionally require a very large holding before an action could be maintained, defeats the section’s purpose. The proviso is the safety valve, and Aruna Oswal shows the Supreme Court is willing to police it.

Both positions are defensible. What is settled is the method: a reasoned order, on the four factors, after notice, without deciding the merits.

Frequently Asked Questions

Do I have to prove my case to get a waiver? No. The NCLAT held that the Tribunal “cannot deliberate on the merit of a (proposed) application under Section 241, while deciding an application for ‘waiver'”. Prima facie case, limitation and allegations concerning another company are all off-limits at that stage.

Does the Tribunal decide waiver before or after maintainability? After. The settled sequence is maintainability first; if that is answered against the applicant, then waiver; and only if waiver is granted, the merits.

Must I show an “exceptional” case? On the NCLAT’s formulation, yes. The Tribunal must record grounds showing that the applicant has “made out some exceptional case for waiver”, and “exceptional circumstance” is the fourth factor in the test.

If a supporting shareholder withdraws consent after filing, is my petition dead? No. Rajahmundry Electric Supply Corporation holds that validity is judged on the facts as at presentation; subsequent withdrawal of consent does not affect the petitioner’s right to proceed or the forum’s jurisdiction.

Can I appeal a refusal of waiver? There appears to be no decision squarely holding such an order appealable, so treat the point as open. But section 421(1) allows an appeal by “any person aggrieved by an order of the Tribunal” without excluding interlocutory orders, and in Cyrus the NCLAT in fact entertained an appeal against a refusal of waiver and allowed it.

Is there a cheaper route than a section 241 petition? Possibly. A section 245 class action has lower thresholds — 2% of the issued share capital of a listed company — and a section 213(b) investigation application carries no shareholding threshold at all.

Glossary

Oppression and mismanagement — the statutory grievance under section 241: affairs conducted prejudicially to public interest, to the company, or oppressively to a member. Maintainability — whether the petition may be entertained at all, as distinct from whether it succeeds. Issued share capital — the capital actually issued, which may include non-voting preference capital and so may not track economic or voting interest. Interlocutory application — an application made within pending proceedings, as opposed to an original petition. Speaking order — an order that records reasons.

Read Next

• Oppression and Mismanagement under Sections 241-242: A Shareholder’s Guide to NCLT/NCLAT Remedies — the cluster guide to the substantive remedy.
• NCLAT Appeal Limitation: The 45-Day Clock, the Certified Copy, and What Can Actually Be Challenged — what to do if waiver is refused.

Sources

• Companies Act 2013, sections 213, 241, 242, 244, 245, 421, 430
• Companies Act 1956, section 399 (including section 399(4))
• National Company Law Tribunal Rules 2016, Rules 11, 81, 82, 84
• Cyrus Investments Pvt Ltd v. Tata Sons Ltd, Company Appeal (AT) Nos. 133 and 139 of 2017, NCLAT, decided 21.09.2017
• Tata Consultancy Services Ltd v. Cyrus Investments Pvt Ltd, (2021) 9 SCC 449 (Supreme Court, 26.03.2021) — recording that the waiver order of 21.09.2017 was not challenged
• Aruna Oswal v. Pankaj Oswal, Civil Appeal No. 9340 of 2019, decided 06.07.2020; AIR 2020 SC 3088
• Rajahmundry Electric Supply Corporation Ltd v. A. Nageswara Rao, AIR 1956 SC 213
• J.P. Srivastava & Sons Pvt Ltd v. Gwalior Sugar Co Ltd, (2005) 1 SCC 172