2019 (8) TMI 1631 - HC - Companies Law

Rejection of plaint - rejection on the ground of (i) the plaint not disclosing any cause of action; (b) the suit claim being barred by time; and (c) the plaintiff being not entitled to maintain the suit as a derivative action on behalf of Umang - HELD THAT - Section 241 not only provides for a member to approach the NCLT when the affairs of a company are being conducted in a manner prejudicial to the member or any other member or members but also when the affairs are being conducted in a manner prejudicial to public interest and to the interests of the company itself. It thus appears to me that a derivative action which is filed to protect the interests of the company would come within the ambit of Section 241 and the Parliament in Section 241 supra of the Companies Act envisaged a remedy that included within its scope oppression mismanagement and derivative actions. Once it is found that the plaintiff as a member/shareholder of Umang for the cause of action of affairs of Umang being conducted in a manner prejudicial to Umang has statutory remedy available to him a derivative action for the benefit of Umang by way of civil suit would not be maintainable. It is also worth mentioning that while against the order of the erstwhile CLB appeals were provided to the High Court under Section 10 of the Companies Act 1956 under the Companies Act 2013 appeals against the order of NCLT lie to the NCLAT and against the order of NCLAT directly to the Supreme Court eliminating the subject jurisdiction of the High Court in matters relating to companies - the Parliament having constituted the NCLT and NCLAT and vested them with jurisdiction over all matters arising from Section 241 and having also vide Section 430 expressly barred the jurisdiction of civil courts in respect of any matter that the NCLT or NCLAT are empowered to determine derivative actions in common law to the extent the statutory regime for oppression and mismanagement is equipped to deal with are no longer maintainable in India and the proper remedy for suits such as the present one would be under Section 241 before the NCLT. Merit is also found in the contention of the counsel for Uppal that the plaintiff holding majority shares of Umang and also having its nominee as Managing Director of Umang was entitled to make Umang make a claim against Uppal as is made by the plaintiff by way of this derivative action and having not done so is not entitled to maintain a derivative action - A derivative action for the benefit of a company has always been held to be an exception to the democratic process governing the actions of a company. The said exception will not be permitted to be invoked in the aforesaid facts. Umang does not qualify as a deadlock company notwithstanding having equal representation of plaintiff and Uppal on its Board of Directors and notwithstanding having no provision in the Articles of Association for a casting vote for either. The plaintiff as majority shareholder of Umang could always in shareholder meeting take a decision binding on the Board of Directors. Thus not only is the present suit as a derivative action for the benefit of Umang on appointment of IRP with respect to Umang deadwood and liable to be struck off from the docket of this Court but for the reasons aforesaid this suit from the date of institution thereof is also not found to be maintainable - the suit is dismissed with costs in favour of Uppal and against the plaintiff and with professional fee assessed at 5 lacs.

Summary

Issues Involved:
1. Maintainability of the suit as a derivative action.
2. Effect of insolvency proceedings initiated against Umang.
3. Jurisdiction of the civil court in light of the Companies Act, 2013.
4. Plaintiff's entitlement to seek declarations of agreements as void.
5. Plaintiff's standing to maintain a derivative action.

Detailed Analysis:

Maintainability of the Suit as a Derivative Action:
The plaintiff, holding a majority share in Umang, filed a derivative suit to recover ?288,05,00,000/- from Uppal, alleging fraudulent misrepresentation. However, the court noted that derivative actions are typically initiated by minority shareholders when the company’s management fails to protect its interests. The plaintiff, being a majority shareholder, was found not entitled to maintain such an action, especially since the plaintiff had significant control over Umang's management.

Effect of Insolvency Proceedings Initiated Against Umang:
The court observed that the National Company Law Tribunal (NCLT) had initiated insolvency proceedings against Umang, appointing an Interim Resolution Professional (IRP). Under the Insolvency and Bankruptcy Code (IBC), the IRP takes control of the company’s affairs, superseding the Board of Directors. The court held that once insolvency proceedings are initiated, the IRP is responsible for taking any necessary legal actions on behalf of the company. Therefore, the derivative action by the plaintiff was deemed not maintainable as the plaintiff should approach the IRP for any grievances.

Jurisdiction of the Civil Court in Light of the Companies Act, 2013:
The court highlighted that the Companies Act, 2013, under Section 241, provides a statutory remedy for issues related to oppression and mismanagement, which includes actions prejudicial to the company’s interests. The court noted that the Parliament, by establishing the NCLT and NCLAT, intended to centralize company law matters, thereby barring the jurisdiction of civil courts under Section 430. Consequently, the court held that the proper remedy for the plaintiff would be to approach the NCLT under Section 241, rendering the civil suit not maintainable.

Plaintiff's Entitlement to Seek Declarations of Agreements as Void:
The plaintiff sought declarations that the agreements between Umang and Uppal were void due to fraudulent misrepresentation. However, the court emphasized that such grounds are personal to the parties to the contract. As the plaintiff was not a party to the agreements, it could not invoke these grounds. Only Umang itself could plead misrepresentation, and without Umang taking such a plea, the suit could not proceed.

Plaintiff's Standing to Maintain a Derivative Action:
The court found merit in the argument that the plaintiff, holding a majority share and having its nominee as Managing Director of Umang, could have influenced Umang to make the claim against Uppal. The plaintiff’s failure to do so and instead filing a derivative action was seen as an improper use of the derivative action mechanism, which is an exception to the democratic process governing corporate actions. The court concluded that Umang did not qualify as a deadlock company, and the plaintiff, as a majority shareholder, could have taken necessary actions through shareholder meetings.

Conclusion:
The court dismissed the suit as a derivative action, stating that it was not maintainable due to the initiation of insolvency proceedings against Umang and the availability of a statutory remedy under the Companies Act, 2013. The court also found the suit not maintainable from the date of its institution, as the plaintiff, being a majority shareholder, had other means to address the grievances. The suit was dismissed with costs assessed at ?5 lacs in favor of Uppal.