2023 (2) TMI 1323 - HC - Companies Law

Rejection of the plaint under Order VII Rule 11 of the Code of Civil Procedure, 1908 - mismanagement and breach of fiduciary duties - HELD THAT - It needs no reiteration that for deciding an application under Order VII Rule 11 of the CPC, only the averments in the plaint will have to be referred to; the defence made by the defendant in the suit must not be considered while deciding the merits of the application. The Supreme Court in SHIPPING CORPORATION OF INDIA LTD. VERSUS MACHADO BROTHERS AND ORS. 2004 (3) TMI 799 - SUPREME COURT , has observed ' Thus it is clear that by the subsequent event if the original proceeding has become infructuous, ex debito justitiae, it will be the duty of the court to take such action as is necessary in the interest of justice, which includes disposing of infructuous litigation. For the said purpose it will be open to the parties concerned to make an application under Section 151 CPC to bring to the notice of the court the facts and circumstances which have made the pending litigation infructuous.' In Kedar Nath Agrawal (dead) Anr. v. Dhanraji Devi (dead) by LRs Anr., 2004 (10) TMI 631 - SUPREME COURT the Supreme Court stated the law on taking into account subsequent events for determining whether the suit should be allowed to be continued or not, has held that 'in our judgment the law is well settled on the point, and it is this the basic rule is that the rights of the parties should be determined on the basis of the date of institution of the suit or proceeding and the suit/action should be tried at all stages on the cause of action as it existed at the commencement of the suit/action.' Applying the above ratio to the facts of the present case, it is evident that after the filing of the suit, the plaintiff, for and on behalf of the defendant no.6 and as a 50% Shareholder thereof, agreed to the defendant no.1, who was executing the agreements for and on behalf of his family members, to incorporate new companies/form LLP with the use of the words 'Hitech Audio' or 'Hitech'. It was further agreed that the parties shall be allowed to continue in the same business as that of the defendant no.6. Having agreed to the same, nothing further survives in the present suit. The prayer made in the suit has clearly been rendered infructuous. While the present suit cannot be rejected under Order VII Rule 11 of the CPC, this Court under Section 151 of the CPC has ample power to dismiss the suit as having been rendered infructuous due to the subsequent events, that is, the Settlement Agreements - The present suit is dismissed as having been rendered infructuous in view of the Initial Settlement dated 22.01.2022; Settlement dated 22.04.2022; and the Minutes of Meeting dated 30.07.2022. The present application is allowed.

Summary

Issues Involved:
1. Application for rejection of plaint under Order VII Rule 11 of CPC.
2. Allegations of mismanagement and breach of fiduciary duties.
3. Impact of subsequent settlements on the suit.
4. Jurisdiction of the High Court versus NCLT.
5. Applicability of Section 151 of CPC for dismissing the suit as infructuous.

Issue-wise Detailed Analysis:

1. Application for rejection of plaint under Order VII Rule 11 of CPC:
The defendant no.1 filed an application under Order VII Rule 11 of the CPC, seeking rejection of the plaint on the grounds that the suit had become infructuous due to settlements dated 22.01.2022, 22.04.2022, and the Minutes of Meeting dated 30.07.2022. The High Court emphasized that for deciding an application under Order VII Rule 11, only the averments in the plaint should be considered, not the defense or subsequent documents.

2. Allegations of mismanagement and breach of fiduciary duties:
The plaintiff alleged that defendant no.1, along with defendants nos.2, 3, and 5, conspired to divert business and profits from defendant no.6 to a competing entity, defendant no.5, thereby breaching fiduciary duties and obligations under the Companies Act, specifically Section 166. The plaintiff sought a perpetual injunction against the defendants from using the name "Hi TECH" and from diverting business and clientele from defendant no.6 to defendant no.5.

3. Impact of subsequent settlements on the suit:
The court noted that subsequent settlements dated 22.01.2022, 22.04.2022, and 30.07.2022 indicated an agreement between the plaintiff and defendant no.1 to incorporate new entities using the name "Hi-tech" and to continue their respective businesses. The plaintiff had already acted upon these settlements by opening a new entity, "Hi-tech Audio and Image LLP," and transferring the retail sales business. The court found that these settlements rendered the relief sought in the suit infructuous.

4. Jurisdiction of the High Court versus NCLT:
The court observed that allegations of mismanagement and oppression fall within the exclusive jurisdiction of the National Company Law Tribunal (NCLT) and are not for the High Court to adjudicate. Therefore, such allegations in the plaint were deemed irrelevant for the relief sought in the present suit.

5. Applicability of Section 151 of CPC for dismissing the suit as infructuous:
The court relied on precedents from the Supreme Court, including *Shipping Corporation of India Ltd. v. Machado Brothers* and *Kedar Nath Agrawal v. Dhanraji Devi*, to assert that subsequent events can be considered to determine whether a suit has become infructuous. The court concluded that Section 151 of the CPC provides the inherent power to dismiss a suit that has lost its cause of action due to subsequent events. The court found that the settlements between the parties rendered the suit infructuous and dismissed it accordingly.

Conclusion:
The court allowed the application under Section 151 of the CPC and dismissed the suit as having been rendered infructuous due to the subsequent settlements. All pending applications were also disposed of in view of the dismissal of the suit.