2024 (1) TMI 189 - AT - Companies Law

Oppression or Mismanagement - equal rights were denied to equal inheritors - Lifting of corporate Veil - Invoking the just and equitable standard - Appellant's rights as a shareholder of R1 Company - Restructuring of the boards - Legitimate Expectation - Buyout of Shares. Equal rights were denied to equal inheritors - HELD THAT - The principles of quasi-partnership and legitimate expectation, if at all applicable, can be invoked only when there is an agreement or an understanding for a Joint management or a specific promise for Board representation at the time of incorporation or inducement for investment in the Company, which in the present facts, admittedly do not arise. It is not the case of the Appellant that the Appellant's mother had claimed any such legitimate expectation during her lifetime. Be that as it may, a family held Company cannot be ipso facto be treated as a quasi-partnership. There was no pre-existing partnership prior to incorporation of the 1st Respondent Company nor was there any existence of promise to offer Directorship to any Appellant who had become a Shareholder only by inheritance and not by inducement. It is seen from the record that the 1st Respondent Company was incorporated as a Private Company on 22/12/1938 long before the Appellant had become a Shareholder. There is no claim of partnership by the Appellant or his mother or any other Shareholder subsequent to his becoming a Shareholder in 1974 - The contention of the Appellant that this Family Company be viewed as a 'quasi-partnership' concern cannot be sustained. Lifting of corporate Veil - HELD THAT - It is a settled law that Holding Company and its Subsidiaries are incorporated Companies each having a separate Legal identity, and each, a separate Corporate Veil. The Corporate Veil between the Holding Company and the Subsidiary Companies remains in the absence of which they would all be construed as one Company and one Corporate Personality, which within the framework of law, they cannot be so. It is the case of the Respondent that the Appellant had given up the issue of lifting of the Corporate Veil and therefore, the NCLT had not dealt with the specific issue - In the instant case, the contention of the Learned Senior Counsel for the Appellant that the Holding Company and the Subsidiaries constitute a single economic unity and therefore, the question of lifting the Corporate Veil does not arise, is untenable. The Holding and the Subsidiary Companies cannot be treated as a single economic unit and that the Corporate Veil which was required to be lifted keeping in view the nature of the Companies and specifically the direction of the Hon'ble Supreme Court, was not adhered to. Invoking the just and equitable standard - HELD THAT - The Appellant has not entered into any partnership argument or understanding with the other shareholders of the first Respondent Company or any other Company in the Group. The 'Amalgamation' group of Companies cannot be considered as a 'Partnership' in the light of the complex Shareholding pattern, independent management of each Company, Management participation from domestic / foreign investors and specifically in the absence of any kind of understanding between the Shareholders. This Tribunal is of the considered view that the equitable considerations can only flow from the fact if the Company had originally been started as a Partnership concern or if there was an Agreement or understanding that all or some of the Shareholders should participate in the conduct of the business. In the facts of the attendant case, there is neither any agreement nor understanding of any such nature and therefore, the question of the Respondent Company being viewed as a Partnership Concern, does not arise. Appellant's rights as a shareholder of R1 Company - HELD THAT - There is an absence of an element of lack of probity or fair dealing in the matter of his proprietary rights as a Shareholder. The Rights of a Shareholder include voting on Resolutions at Meetings of the Company; electing Directors and participating in the management of the Company; enjoying the profits of the Company in the shape of dividends as and when declared by the Company; applying to the Court/Tribunal for relief in case of Oppression and Mismanagement; and in the case of winding up a share in the surplus - In the facts of the instant case, having regard to the fact that the lack of confidence of the Appellant is grounded on the personal conduct of the Directors rather than a lack of probity in the conduct of the Company's affairs, it is opined that the Appellant's proprietary rights as a 'Shareholder' are not affected in any manner. Restructuring of the boards - HELD THAT - In the absence of any provision in the Articles of Association or any 'Agreement', the Appellant cannot be made a Director unless there is approval of the majority of the Shareholders, or the Articles provide for proportionate representation - also the Appellant does not have the Locus to seek restructuring of the Boards of the Subsidiaries where he is not a 'Shareholder'. Legitimate Expectation - HELD THAT - The 'legitimate expectation' for any participation in the Board cannot arise under Corporate Law without the mutual consent of the Shareholders and can be inferred only if it is founded on the sanction of law or custom or a precedent followed in regular sequence, which is not so in the instant case as the Appellant is unable to establish that there was any 'promise' of any position of Directorship in the Board, to construe that having such an 'expectation' is 'justifiable' and 'legitimate'. The Appellant's grievance that he has been unjustly treated by his family members, which cannot strictly constitute 'Oppression and Mismanagement' as defined under Section 397 and 398 of the Companies Act, 1956 or under Section 241 and 242 of the Companies Act, 2013 - The Appellant's Claim for Office of Profit is promised of 'Legitimate Expectation', being a Member of the family. But at the same time, the Appellant is a Shareholder of only the first Respondent Company and hence, the Claim for such an 'Office of Profit' in the other Subsidiary Companies, does not arise as the appointments in the Subsidiary Companies are controlled by the respective Board of Directors in accordance with their respective Articles of Association and any inheritance of Shares does not automatically entitle any of the family members to automatic post of Directorship and therefore any 'Legitimate Expectation' by the Appellant, in the facts of this situation, whether he is not a 'Shareholder' in the Subsidiary Companies, cannot be justified. Buyout of Shares - HELD THAT - This Tribunal is satisfied that 'the just and equitable proposition' cannot be made applicable in this case, where there is no irretrievable breakdown in trust and confidence, leading to a 'functional deadlock'. In the absence of any contractual right to demand any proportional representation in the Board, an Order in this direction is not justifiable. Moreover, facts arising subsequent to the filing of the Petition cannot be relied upon and the validity of the Petition will be judged on the facts existing at the time of the presentation of the Petition - there are no substantial grounds for concluding that there was any 'Oppression or Mismanagement' and therefore, the question of passing any Order directing buyout of shares, bringing to an end any matter complained of, cannot be done in the facts of this case. There is no case made out by the Appellant to exercise any equitable jurisdiction to grant such relief. Appeal dismissed.

Summary

Issues Involved:
1. Remuneration, Dividends & Quasi-Partnership
2. Lifting of the Corporate Veil
3. Invoking the Just and Equitable Standard
4. Appellant's Rights as a Shareholder of R1 Company
5. Legitimate Expectation
6. Buyout of Shares

Summary:

Remuneration, Dividends & Quasi-Partnership:
The appellant argued that equal rights were denied to equal inheritors, constituting oppression. The appellant inherited shares from his mother, who was one of the legal heirs of the original shareholder. The appellant contended that the majority shareholders appropriated excessive remuneration and commissions, thereby reducing the dividends available to the minority shareholders. The Tribunal noted that the remuneration was within legal limits and approved by shareholders, including the appellant, until the filing of the petition. The Tribunal found no lack of probity or fair dealing in the appellant's proprietary rights as a shareholder.

Lifting of the Corporate Veil:
The appellant argued that the associated companies were inextricably linked and should be treated as a single economic unit. The Supreme Court allowed the appellant to argue for lifting the corporate veil against specific subsidiaries. The Tribunal found that the nature of the companies and their separate legal identities did not justify treating them as a single economic unit. The Tribunal emphasized that lifting the corporate veil requires evidence of impropriety linked to the use of the company structure to avoid or conceal liability, which was not established in this case.

Invoking the Just and Equitable Standard:
The appellant claimed that the company should be treated as a quasi-partnership and invoked the just and equitable standard. The Tribunal referred to the Supreme Court's observations that a company, however small or domestic, is not a partnership or quasi-partnership. The Tribunal found no functional deadlock or lack of probity in the conduct of the company's affairs. The Tribunal concluded that the appellant's proprietary rights as a shareholder were not affected, and the lack of confidence was grounded on personal conduct rather than company management.

Appellant's Rights as a Shareholder of R1 Company:
The Tribunal reiterated that a shareholder does not have an interest in the company's property but only a right to participate in profits and vote on resolutions. The appellant's grievance that he was not given directorships in subsidiaries did not constitute oppression. The Tribunal emphasized that the right to appoint directors lies with the majority shareholders unless otherwise provided in the articles of association or an agreement.

Legitimate Expectation:
The Tribunal found that the appellant's claim of legitimate expectation for directorships was not supported by any agreement or understanding. Legitimate expectation arises from a right, not merely an anticipation or desire. The Tribunal concluded that the appellant's grievance of being unjustly treated by family members did not constitute oppression or mismanagement under corporate law.

Buyout of Shares:
The appellant sought a buyout of his shares at fair market value. The Tribunal noted that the company was not in a deadlock situation and was functioning profitably. The Tribunal found no grounds for oppression or mismanagement that would justify a buyout. The Tribunal emphasized that the relief sought relates to shares subject to ongoing litigation in the High Court. The Tribunal concluded that directing a buyout was not justified or legally permissible in the absence of a complete deadlock or lack of probity in the company's management.

Conclusion:
The Tribunal dismissed the appeals, finding no substantial grounds for concluding oppression or mismanagement. The Tribunal emphasized that the appellant's grievances did not affect his proprietary rights as a shareholder and that the company was functioning smoothly and profitably. The Tribunal found no basis for directing a buyout of shares or treating the company as a quasi-partnership.