2024 (10) TMI 1135 - AT - Companies Law

Nomination of 15 number of persons as Directors in General Committee of Delhi Gymkhana Club Limited. - Section 241-242 of the Companies Act, 2013 - conditions precedent for invoking provisions of Section 241(2) of the Companies Act, 2013 - formation of opinion by the Central Government under Section 241(2) - conduct of affairs of the Company in proper way or not - sufficient materials on the record for formation of requisite opinion - affairs of the Company (Delhi Gymkhana Club) were being conducted in a manner prejudicial to the public interest or not - interim order or final order - finding for exercising jurisdiction under Section 242 of the Companies Act, 2013 - supersession of the management of the Company by 15 members committee to be nominated by the Central Government without providing for any time period. What are the requisite conditions precedent for invoking provisions of Section 241(2) of the Companies Act, 2013? - HELD THAT - To enable the Central Government to apply for an order under Section 241, the conditions precedent i.e. (i) the Central Government is of the opinion; and (ii) that the affairs of the Company are being conducted in a manner prejudicial to the public interest, need to be satisfied. On fulfilment of the above two conditions, an application can be filed by the Central Government under Section 241 of the 2013 Act for an order. Whether the requisite conditions precedent within the meaning of Section 241(2) of the Companies Act, 2013 in the application filed by the Union of India under Sections 241 and 242 are met i.e. (i) formation of opinion by the Central Government under Section 241(2); and (ii) that the affairs of the Company are being conducted in a manner prejudicial to the public interest? - Whether there was sufficient materials on the record for formation of requisite opinion under Section 241(2) by the Central Government? - Whether affairs of the Company (Delhi Gymkhana Club) were being conducted in a manner prejudicial to the public interest so as to enable the Central Government to file an application under Section 241(2) of the 2013 Act? - HELD THAT - The statutory pre-condition for registration of a company under Section 26 of the Companies Act, 1913 is that it has been or is about to be formed for promoting Commerce, Art, Science, Charity or any other useful object . When the statute itself indicates that registration under Section 26 of the Companies Act, 1913 can be of the companies which were formed not for profit but for promoting commerce, art, science or any other useful object, the statutory requirement of promoting commerce, art, science, charity or any other useful object is clearly designed for public purpose. The special status and recognition of such companies by the Statute is since the said companies are formed not for profit but for promoting commerce, art, science, charity or any other useful object. Admittedly, the Delhi Gymkhana Club was incorporated under Section 26(1) if the Companies Act, 1913. Although the word sport is not specifically included in sub-section (1) of section 26 but the use of expression other useful object is wide enough to include sport also. As noted above, the Memorandum of Association of the Delhi Gymkhana Club specifically in Clause 3(a) lists the object to promote Polo, Hunting, Racing, Tennis, other games, athletic sports and pastime . The submission of learned counsel for the appellants thus cannot be accepted that object of the Company was not to promote sports. Non use of the word sport in Section 26(1) of the 1913 Act is in consequential. The question in the present case is not as to whether the Delhi Gymkhana Club is an industry or not. The expression that affairs of the Company are being conducted in a manner prejudicial to the public interest as required under Section 241(2) is a entirely different expression and right given to the Central Government to apply for an order is also for an entirely different purpose. As noted above, under Section 241(1) of the 2013 Act right has been given to the Members to apply for an order under Section 241 after fulfilling necessary requirements under Section 244 of the 2013 Act and by the same Statute power has been given to the Central Government to apply for an order under Section 241. The question to be answered is as to whether there were sufficient materials before the Central Government to form an opinion that affairs of the Company are being conducted in a manner prejudicial to the public interest. The materials which were before the Central Government, as noticed above, contained inspection report and the supplementary inspection report pointing out various violations of the 2013 Act as well as violation of the Articles of Association. The inspection report reported that only 3% of the entire expenditure by the Company is devoted towards sports. The findings returned by the NCLT on the materials before it that the Company has not been able to follow-up its main object and the affairs of the Company are being mismanaged which is prejudicial to the public interest - the submission of the appellants cannot be accepted that there was no public interest involved in carrying of the affairs of the Company and the Company is only for the benefit of its members and no public interest is prejudicially affected by the internal management and affairs of the Company. When a company is incorporated with an object, which is object of public interest, any impairment of such object in carrying out the affairs of the Company which do not truly promote the objects for which it has been incorporated, it is failed to see any substance in the submission of the appellants that in managing the affairs of the Company/Delhi Gymkhana Club, no public interest is involved. Thus, summarily, Requisite conditions precedent within the meaning of Section 241(2) of the 2013 Act in the application filed by the Union of India under Section 241-242 are met - There were sufficient materials on record for formation of requisite opinion under Section 241(2) of the 2013 Act by the Central Government - The affairs of the Company/Delhi Gymkhana Club are being conducted in a manner prejudicial to the public interest which enabled the Central Government to file an application under Section 241(2) of the 2013 Act. Whether the impugned order dated 1st April, 2022 is in nature of interim order under Section 242(4) and not a final order? - Whether the impugned order does not record any finding for exercising jurisdiction under Section 242 of the Companies Act, 2013? - Whether the NCLT vide its impugned judgment has delegated its jurisdiction to the 15 members committee which was to be nominated by the Central Government in pursuance of the impugned order? - HELD THAT - The task, which was entrusted to Fifteen Members Committee has been outlined in the order from the above two directions are clearly decipherable, i.e. (i) take all actions for restructuring Respondent No.1 Company in terms of Memorandum and Article of Association; and (ii) take corrective measures which are in violation of the Memorandum and Article of Association and the Companies Act, 2013. We, thus, are unable to accept the submission of the Appellant that the NCLT has delegated its jurisdiction to the Fifteen Members Committee. The Fifteen Members Committee, which was to replace all the General Council was entrusted with the task as noted above. Hence, the Fifteen Members Committee has to take its action as per the directions and it cannot be said that the NCLT has delegated its jurisdiction to the Fifteen Members Committee. It goes without saying that Fifteen Members Committee has to act in accordance with the NCLT s order, after taking into consideration the observations of the NCLT and directions issued thereunder. Direction No.3 has to be read with the findings as returned by the NCLT in the impugned order - the submission of the Appellant that NCLT abdicated its jurisdiction and delegated its jurisdiction to Fifteen Members Committee cannot be accepted. Whether the supersession of the management of the Company by 15 members committee to be nominated by the Central Government without providing for any time period or course of action with a view to bringing to an end the matters complained of requires interference by the Appellate Tribunal? - HELD THAT - The principal objective of order under Sections 241 and 242 is to pass order with a view to bringing to an end the matters complained of. Thus, the proceeding under Sections 241 and 242 is to take remedial action. The affairs of the Company, which are being conducted to the prejudicial to the public interest, should be remedied to protect the public interest, has to be the objective of the Court in proceeding under Sections 241 and 242. The order was passed by the NCLT on 01.04.2022 and more than two and a half years have been elapsed from passing of the order and Fifteen Members Committee (at present only eight Members are functioning) has acted in pursuance of the impugned order and has taken certain steps. It is not necessary for us to enter into details and the steps taken by Fifteen Members Committee, since the challenge in the present case is basically to the order impugned dated 01.04.2022. The Committee nominated by the Central Government has to complete the process of taking actions to bring to an end the matters complained of expeditiously. It is inclined to fix a time frame for completing the process of remedial actions by Committee to subserve the object for which NCLT passed an order under Section 241 and 242. We direct the Committee to complete its process of taking remedial actions to bring to an end the matters complained of by 31.03.2025. The Committee to also conduct the elections as per the Article of Association, Clause 20 of the Article of Association deals with Management of the Club to be vested in a General Committee , which provides the mode and manner of the election of General Committee from the prominent Members of the Club. The Committee, which is functioning in pursuance of the impugned order may take steps and conclude the remedial action and hold election as as per Clause 20 of the Article of Association to elect the President and other Members of the Committee. With regard to witness protection, liberty having been granted to approach the Witness Protection Cell, New Delhi District for dealing with the aspect of protection. Both, Col. Ashish Khanna and Niji Sapra can take recourse to the liberty given by Metropolitan Magistrate in the above order dated 29.05.2024. Hence, no directions are required in the present Appeal with regard to witness protection with respect to Complaint Case No.959/2021 in the Court of Metropolitan Magistrate. To what relief, if any, the appellants are entitled in the present appeals? - Course of Action with a view to bringing to an end the matters complained of - HELD THAT - The Application filed by Union of India under Sections 241 and 242 of the Companies Act, 2013, the Union of India was fully maintainable and NCLT has rightly exercised its jurisdiction under Sections 241 and 242 on the basis of materials on record - there are substance in the submission of the Appellant that management of the Club cannot be superseded for indefinite period and the object of Sections 241 and 242 proceeding is only to bring to an end the matters complained of. Certain steps have been claimed to be taken by the Fifteen Members Committee appointed in consequent to the impugned order dated 01.04.2022 - the ends of justice will be served in directing the existing Committee nominated by Central Government to conclude remedial steps and conduct the election of Delhi Gymkhana Club in accordance with Clause 20 of Article of Association. The order dated 01.04.2022 passed by NCLT is upheld - The Committee nominated by the Central Government in pursuance to the order dated 01.04.2022 passed by NCLAT is directed to complete the all remedial measures, so as to end the matters complained of on or before 31.03.2025 - The Committee nominated by the Central Government in pursuance of the impugned order dated 01.04.2022, is directed to conduct the election of President and Members of the General Council in accordance with Clause 20 of the Article of Association within three months after 31.03.2025 and install the duly elected General Council accordingly - The General Council of the Club with whom management is entrusted, shall act in accordance with Memorandum of Association and Article of Association and conduct its affairs accordingly. Appeal disposed off.

Summary

Issues Involved:

1. Conditions precedent for invoking Section 241(2) of the Companies Act, 2013.
2. Formation of opinion by the Central Government under Section 241(2).
3. Conduct of affairs prejudicial to public interest.
4. Nature of the impugned order as interim or final.
5. Delegation of jurisdiction by NCLT.
6. Supersession of management without a time frame.
7. Reliefs entitled to the appellants.

Issue-wise Detailed Analysis:

I. Conditions Precedent for Invoking Section 241(2) of the Companies Act, 2013:

The judgment outlines that to invoke Section 241(2), two conditions must be met: (i) the Central Government must form an opinion, and (ii) the company's affairs must be conducted in a manner prejudicial to the public interest. The judgment refers to the legislative history and judicial interpretations to emphasize that these conditions are essential for the Central Government to apply for an order under the Companies Act.

II. Formation of Opinion by the Central Government:

The appellants contended that the Central Government did not form an opinion as required under Section 241(2). The judgment clarifies that the opinion was formed based on inspection reports and supplementary reports detailing mismanagement and violations. The letter dated 18th March 2020, issued with the approval of the competent authority, reflects the Central Government's opinion, satisfying the statutory requirement.

III. Conduct of Affairs Prejudicial to Public Interest:

The judgment examines the concept of "public interest" and concludes that the affairs of the Delhi Gymkhana Club were conducted in a manner prejudicial to public interest. The inspection reports highlighted financial irregularities, mismanagement, and deviation from the Club's primary objective of promoting sports. The judgment emphasizes that the Club, being a Section 8 company, must align its activities with its public-oriented objectives.

IV. Nature of the Impugned Order as Interim or Final:

The judgment clarifies that the order dated 01.04.2022 is a final order passed by the NCLT, not an interim one. The order was issued following the Supreme Court's directive to decide the matter expeditiously. The NCLT's decision to appoint a 15-member committee was a conclusive action to address the issues raised in the petition.

V. Delegation of Jurisdiction by NCLT:

The appellants argued that the NCLT delegated its jurisdiction to the 15-member committee. The judgment refutes this, stating that the committee's role is to restructure the company and take corrective measures as per the NCLT's directions. The NCLT retained its supervisory role by requiring periodic reports from the committee.

VI. Supersession of Management Without a Time Frame:

The judgment acknowledges the appellants' concern about the indefinite supersession of the General Council. It emphasizes that the objective of Sections 241 and 242 is to bring an end to the matters complained of. The judgment directs the committee to complete remedial actions by 31.03.2025 and conduct elections for a new General Council, ensuring the Club's management is not superseded indefinitely.

VII. Reliefs Entitled to the Appellants:

The judgment upholds the NCLT's order but provides a timeline for the committee to conclude its remedial actions and conduct elections. The committee is directed to complete its tasks by 31.03.2025 and hold elections for the General Council within three months thereafter. This ensures the Club's affairs are aligned with its objectives and statutory requirements.

The judgment comprehensively addresses each issue, ensuring the Club's management aligns with its public interest objectives while providing a clear path for restoring its governance structure.