Madras High Court
Valluvar Kuzhumam Private Limited vs Apc Drilling & Construction Private ... on 30 November, 2022
Author: R.N.Manjula
Bench: R.N.Manjula
CRP (NPD) NO.2044 OF 2022
IN THE HIGH COURT OF JUDICATURE AT MADRAS
ORDER RESERVED ON : 23 / 08 / 2022
ORDER PRONOUNCED ON : 30 / 11 / 2022
CORAM
THE HON'BLE MS.JUSTICE R.N.MANJULA
CRP (NPD) NO.2044 OF 2022
AND
CMP NOS.10516 AND 10518 OF 2022
Valluvar Kuzhumam Private Limited
Represented by its Managing Director
Mrs.Maragathamani Shanmugam
Having its registered office at
No.16, Cenotaph Road, Teynampet,
Chennai – 600 018. ... Petitioner
VS.
1.APC Drilling & Construction Private Limited
Represented by its Director Pari Appusamy
Having its registered office at
153/C7, Third Floor,
R.Gopal Complex, Salem Road,
Namakkal – 637 001.
2.Pari Appusamy
Director
APC Drilling & Construction Private Limited
153/C7, Third Floor,
R.Gopal Complex, Salem Road,
Namakkal – 637 001.
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CRP (NPD) NO.2044 OF 2022
3.Chandran Appusamy
Director
APC Drilling & Construction Private Limited
153/C7, Third Floor,
R.Gopal Complex, Salem Road,
Namakkal – 637 001.
4.APC International
Represented by its Director Pari Appusamy
Having its office at
Rue De L'Institut, 4th Floor,
Ebene Skies, Ebene,
Mauritius – 80817.
5.Thriveni Metals Private Limited
Represented by its authorised signatory
Having office at
F-277, Block No. - F, New
Rajendra Nagar, Delhi – 110 060.
6.Shruti Geo Consultancy Private Limited
Represented by its Director Pari Appusamy
Having its office at
263, Karunkattu Palanisamy Street,
A.S.Pettai, Namakkal,
Tamil Nadu – 637 001. ... Respondents
PRAYER: Civil Revision Petition filed under Article 227 of the
Constitution of India against the order dated 23.06.2022 (the “Impugned
Order”) passed in CR-19, S.No.4575/2022 in Unnumbered
O.S.No.____/2022, on the file of the Principal Sub-Judge, Namakkal.
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CRP (NPD) NO.2044 OF 2022
For Petitioner : Mr.M.S.Krishnan
Senior Counsel
Assisted by Mr.Anirudh Krishnan
Mr.Adarsh Subramanian
Mr.N.Sasank Iyer
Mr.Varun Venkatesan
For Respondents
1 to 4 & 6 : Mr.P.S.Raman
Senior Counsel
Assisted by Mr.P.S.Suman
Mr.R.Saravana Bhavan
For Respondent 5 : Mr.V.P.Raman
Assisted by Mr.K.Seshasayee
Mr.R.B.Rishabh
ORDER
This Civil Revision Petition has been preferred to set aside the order of rejecting the plaint filed by the learned Principal Subordinate Judge, Namakkal, dated 23.06.2022, made in CR-19, S.No.4575/2022 in Unnumbered O.S.No.____ / 2022.
1.The Revision Petitioner is the plaintiff, who has filed the Unnumbered Suit, which he claims as a derivative suit against the defendants and sought the following reliefs:- 3/110
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(a) To declare that the Revised Proposed Prejudicial Share Transfer of Defendant No.1's shares held in Defendant No.4 Company pursuant to the minutes of meeting dated 20.05.2022 is null and void;
(b) To declare that the revised draft of the share transfer agreement dated 20.05.2022 that is against the interests of Defendant No.1 – APC India as null and void;
(c) To grant an order of permanent injunction restraining the defendants, their men, agents and any other persons from giving effect to the minutes of meeting dated 20.05.2022 or the revised draft of the share transfer agreement dated 20.05.2022;
(d) to grant an order of permanent injunction restraining the defendants, their men, agents and any other persons dealing through or under them from, in any manner, dealing with the shares of APC International held by APC India; and
(e) To pass any such further order/s and/or direction/s this Court may deem fit and proper in the facts and circumstances of the case and thus render justice.4/110
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2.The learned Principal Subordinate Judge, Namakkal was pleased to reject the plaint at the threshold itself by observing that the Civil Suit has got no jurisdiction to entertain the Suit filed by the plaintiff in view of Section 430 of the Companies Act, 2013. Aggrieved over the same, this Civil Revision Petition has been preferred.
3.The facts of the case in brief:-
3.1. The petitioner/plaintiff is a Company by name Valluvar Kuzhumam Pvt.Limited, represented through its Managing Director one Mrs.Maragathamani Shanmugam. She is also one of the Directors of the first respondent Company APC Drilling and Construction Private Limited, who is the first defendant in the Suit. The first respondent Company APC Drilling and Construction Private Limited is frequently referred as “APC India” in the plaint filed by the petitioner / plaintiff. The respondents 2, 3 and 6 are also the Directors of the first respondent Company APC India.
The fourth respondent – APC International is the subsidiary company of the first respondent and it was incorporated on 08.09.2014 under Section 24 of the Mauritius Company Act, 2001. It is a limited company by shares. 5/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 When the company was incorporated, first respondent (APC India) owned 100% of the shares of APC International. In the year 2018, when the shares of APC International was diluted, the petitioner / plaintiff acquired 10.18% of direct shareholding by purchasing 1,52,000 shares.
3.2. Even now, the first respondent APC India is a major shareholder and it holds 51.24 % of shareholdings. The respondents 2 and 3 – Pari Appusamy and Chandran Appusamy are also Directors of the first respondent Company and they are brothers. During March – April 2022, the second and third respondents proposed to sell 51.24% of shares of APC India to the fifth respondent / fifth defendant Triveni Metals Private Limited for a grossly undervalued consideration of Rs.20,09,58,870/-.
3.3. The plaintiff sent an email dated 31.05.2022 to the defendants 2 and 3 and said that the proposed share transfer is prejudicial to the interest of the company itself. Despite that, the defendants 2 to 6 have proceeded to draft a revised draft for share transfer and that did not have any better effect on the interest of the company. Even as per the data shared by the defendants to the plaintiff on some earlier occasion would 6/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 show that the APC International had projected a revenue through its mining activities for the year 2022-2023 is to the tune of 5,40,00,000 USD.
3.4. There has been a complete lack of transparency in the manner in which the defendants 2 and 3 who are the Directors of both APC India and APC International have conducted the affairs of the company with respect to the proposed share transfer. The plaintiff was not given with any basic information for the purpose of valuation. On 19.06.2022, the plaintiff requested some documents with regard to the proposed share transfer and she was not given with those documents and that would reveal that there is lack of transparency. The plaintiff has learnt that a cash exchange is happening in respect of the proposed transaction behind the backs of the shareholders. Despite the repeated objections made by the plaintiff, who is also one of the Directors of APC India and APC International, the defendants 1 and 2 continued to conduct the Board Meeting on 20.06.2022 in order to ratify the Revised Draft Share Transfer Agreement.
7/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 3.5. APC International through its wholly owned subsidiary company of APC Mining SARL holds mining licences for Chromite and Gold for a vast stretch of 592 sq.kms in Madagascar. The Directors of the Company have committed fraud against APC India and its minority shareholders and there are serious triable issues have arisen that has to be adjudicated by the Civil Court and not by the National Company Law Tribunal which has a summary procedure. By giving effect to the Revised Draft Share Transfer Agreement (RDSTA) the indirect shareholdings of the plaintiff company in APC International to the extent of 5.96% (11.63% of 51.24%) is also attempted to be eliminated for a measly price.
3.6. Since the defendants 2 and 3 are brothers and they are the majority shareholders of APC India, they constitute majority of the Board and they do actions prejudicial to the interest of the company. Hence, the plaintiff, on behalf of the first defendant APC India, has filed a derivative Suit before the learned Principal Subordinate Judge, Namakkal, by seeking the reliefs mentioned already.
3.7. Since the company has been registered at Namakkal, the 8/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 plaintiff had chosen to file the Suit in the Civil Court having jurisdiction over Namakkal. As stated already, the said Suit was rejected at the threshold in view of the bar under Section 430 of the Companies Act. In the impugned order, the learned Principal Subordinate Judge, Namakkal, has observed that the plaintiff can file proceedings by invoking Section 242 of the Companies Act before the National Company Law Tribunal (NCLT) and the Civil Courts do not have jurisdiction to entertain such a Suit.
4. Heard the submissions made on either side and perused the materials available on record.
5. Mr.M.S.Krishnan, learned Senior Counsel for the petitioners submitted that the derivative suits are very much maintainable in India and the remedy open to the petitioner is by way of filing a Civil Suit. The contention of the learned Senior Counsel for the petitioner is that Indian Company Law does not have any provision to initiate derivative action by invoking the Company Law jurisdiction and hence, the remedy open to the petitioner is only by way of filing a Civil Suit. 9/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022
6. Before adverting into the maintainability of derivative suits in the civil courts, there are certain fundamental objections raised by the learned counsel for the respondents and that has to be dealt.
7. Mr.P.S.Raman, learned Senior Counsel appearing for respondents 1 to 4 & 6 and Mr.V.P.Raman, learned counsel for the fifth respondent submitted that the fourth respondent company is incorporated at Mauritius and the situs of the share of fourth respondent APC International is being dealt at Mauritius and hence the Courts at Mauritius alone has got the jurisdiction; Section 34 of the Constitution of the Company has got an international arbitration clause and hence the suit itself is not maintainable; since the order of rejection of plaint should be construed as a decree, the plaintiff ought to have challenged the impugned order by way of preferring an appeal under Section 96 C.P.C. and hence it is wrong on the part of the petitioner to invoke the revisional powers of this Court under Article 227 of the Constitution of India.
8. In support of the above contention, the learned counsels cited the decision of the Hon’ble full bench of the Supreme Court held in 10/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 R.VISWANATHAN AND OTHERS VS. RUKN-UL-MULK SYED ABDUL WAJID AND OTHERS [AIR 1963 SC 1] . In the said judgment it is held under:
The dispute in the appeal filed by the plaintiffs primarily relates to the shares of the India Sugars & Refineries Ltd, and movables in Madras. The judgment of the Mysore Court qua the immovables in Mysore has become final and is not and cannot be challenged in this Court. The Mysore High Court was competent to adjudicate upon title to immovables within the territory of the State of Mysore, in the suits instituted by the plaintiffs against the executors. In considering whether a judgment of a foreign Court is conclusive, the courts in India will not inquire whether conclusions recorded thereby are supported by the evidence, or are otherwise correct, because the binding character of the judgment may be displaced only by establishing that the case falls within one or more of the six clauses of s. 13, and not otherwise. The registered office of the India Sugars & Refineries Ltd., was in Bellary in the Province of Madras, and the situs of the shares which are movables-may normally be the place where they can be effectively' dealt with (see Erie Beach Co. v. Attorney-General for Ontario(1) and Brasssard v. Smith(2). The situs of the (1) [1930] A.C. 161.11/110
https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 (2) [1925] A.C. 372, shares of the India Sugars & Refineries Ltd. may therefore be properly regarded as without the territorial' jurisdiction of the Mysore Court at the date of the institution of the suit by the plaintiffs.
......
It only remains to consider the argument in relation to the shares of the Indian Sugars and Re. fineries Ltd. It was contended that the, shares must be deemed to be situated where they could be effectively dealt with and that was Madras, where the Head Office of the Company was situated. Learned counsel relied upon some English cases in support of his contention. It is not necessary to refer to those cases. The suits of shares between the Company and the shareholders is undoubtedly in the Country where the business is situated. But in a dispute between rival claimants both within the jurisdiction of a Court over shares the Court has jurisdiction over the parties and the share scripts which are before the Court.”
9. It is held in the above case that the suit filed at Mysore with regard to shares of the India Sugars and Refineries Pvt. Ltd., which was situated at Bellary under the province of Madras, is without territorial 12/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 jurisdiction. In the instant case in hand, there is no dispute with regard to the entitlement of shares and hence the parties do not claim any right over the shares. The parties do not deny about the percentage of shares owned by APC India with the fourth defendant APC International. There is no dispute with regard to the ownership of the said share holdings. The dispute is only with regard to the manner in which the shares of fourth respondent company have been valued and dealt and hence it is claimed that the interest of the first respondent company is affected. Hence, it cannot be accepted that the territorial jurisdiction to file this kind of suit is only at Mauritius and not in India.
10. The dispute among the shareholders of the Company which is registered at India namely the first defendant who is the holding company of the fourth respondent and whose shareholdings with the fourth respondent were proposed to be sold at a price which is not agreeable to the plaintiff and others. So the suit cannot be construed as a dispute over the entitlement of shareholdings in the company. Hence, the suit which has arisen in R.Viswanathan's case (cited supra) has to be read in its own context and not applicable to the facts of the present case. 13/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022
11. The plaintiff has pleaded that she has brought a derivative suit in order to save the interest of the first defendant company which is situated at India and he had chosen to file the suit within the jurisdiction of Namakkal where the first respondent company is registered. Hence the question of jurisdiction will not be a bar to maintain a suit at Namakkal, if the plaintiff could prove that the suit filed by him was a derivative suit and that the Civil Court has got jurisdiction to entertain derivative suits.
12. Mr. V.P. Raman, the learned counsel for the fifth respondent is that the petitioner cannot maintain revision petition on the order passed by the learned Principal District Judge for rejecting the plaint. It is submitted that the plaint was rejected for want of jurisdiction under Order 7 Rule 11 (d) C.P.C. In support of his above contention, the learned counsel for the fifth respondent cited the judgment of this Court rendered in SELVARAJ & OTHERS VS. KOODANKULAM NUCLEAR POWER PLANT INDIA LTD., & OTHERS [MANU/TN/4835/2021] and SAYYED AYAZ ALI VS. PRAKASH G.GOYAL AND OTHERS [2021 (7) SCC 456]. In the Sayyed Ayaz Ali's case (cited supra), the Hon'ble Supreme Court has held as under: 14/110
https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 The definition of “decree” in Section 2(2) “shall be deemed to include the rejection of a plaint”. Hence, the order of the Trial Court rejecting the plaint is subject to a first appeal under Section 96 of the CPC. The writ petition filed by the appellant was liable to be rejected on that ground. We therefore affirm the judgment of the High Court rejecting the writ petition, though for the above reason leave it open to the appellant to pursue the remedy available in law.
13. In the said case, a Writ Petition was filed challenging the order of rejection of plaint. So the Court held that the rightful course for the plaintiff is to file an appeal and not a Writ Petition. The learned counsel for the fifth respondent also attracted the attention of this Court to the judgment of this Court held in C.ANANTHA BASKARAN VS. S.VENKATESAN AND OTHERS [MANU/TN/4658/2022]. In the above judgment, the unsuccessful plaintiff has filed an appeal even though his plaint was rejected at the threshold level. According to Section 2(2) C.P.C. the following can be construed as decree:
15/110
https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 “2(2). “decree” means the formal expression of an adjudication which, so far as regards the Court expressing it, conclusively determines the rights of the parties with regard to all or any of the matters in controversy in the suit and may be either preliminary or final. It shall be deemed to include the rejection of a plaint and the determination of any question within Section 144, but shall not include—
(a) any adjudication from which an appeal lies as an appeal from an order, or
(b) any order of dismissal for default.”
14. In C.Anantha Baskaran's case (cited supra), the plaintiff himself had chosen to file an appeal even though the plaint was rejected at threshold without giving notice to the defendants. Now the question is whether the petitioner is not entitled to invoke the supervisory jurisdiction of the High Court against the impugned order. When a revision petition is filed under Article 227 of the Constitution of India, the party aggrieved requests this Court to invoke its supervisory jurisdiction. If an appeal is filed under Section 96 C.P.C., then it would only mean that the parties are contesting the rejection order on its merits and not on any error of jurisdiction in the order passed. The petitioner had filed this petition by 16/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 stating that the Court has not exercised its jurisdiction appropriately and thereby filed a petition under Article 227 Constitution of India by invoking supervisory jurisdiction of this Court.
15. In SURYA DEV RAI VS. RAM CHANDER RAI & OTHERS [2003 (6) SCC 675] wherein it is held that the High Court in its administrative as well as judicial side is capable of invoking its power under Article 227 of the Constitution of India and there cannot be any disagreement on the said point. To add more add clarity, the relevant portion of the said judgement is extracted as under:
Supervisory jurisdiction under Article 227 Article 227 of the Constitution confers on every High Court the power of superintendence over all courts and tribunals throughout the territories in relation to which it exercises jurisdiction excepting any court or tribunal constituted by or under any law relating to the armed forces. Without prejudice to the generality of such power the High Court has been conferred with certain specific powers by sub-Articles (2) and (3) of Article 227 with which we are not concerned hereat. It is well-17/110
https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 settled that the power of superintendence so conferred on the High Court is administrative as well as judicial, and is capable of being invoked at the instance of any person aggrieved or may even be exercised suo motu. The paramount consideration behind vesting such wide power of superintendence in the High Court is paving the path of justice and removing any obstacles therein. The power under Article 227 is wider than the one conferred on the High Court by Article 226 in the sense that the power of superintendence is not subject to those technicalities of procedure or traditional fetters which are to be found in certiorari jurisdiction. Else the parameters invoking the exercise of power are almost similar.”
16. Even though the order of rejection of the plaint would amount to decree, when the aggrieved does not challenge the same not only on merits but also on the ground that the Court did not exercise its powers, it cannot be strictly said that in the context in which the impugned order is challenged in this revision, the petitioners are not entitled to maintain the petition under Article 227 of Constitution of India. 18/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022
17. The subsequent judgment of the Supreme Court in RADHEY SHYAM & ANR Vs CHHABI NATH & OTHERS [2015 (5) SCC 423] got overruled. In the case in hand, the suit has been rejected at the threshold and the petitioner felt that there is an error of jurisdiction in rejecting the plaint at threshold and hence he has chosen to invoke the jurisdiction of this Court under Article 227 Constitution of India. In the recent judgment of the Supreme Court held in K.P.NATARAJAN AND ANOTHER Vs MUTHALAMMAL AND OTHERS [2021 SCC OnLine SC 467], it is held that setting aside the ex parte decree by invoking the powers of the High Court under Article 227 of the Constitution of India is not an error of jurisdiction. Even if the order of rejection is a decree in the line of proposition laid down by the Hon'ble Supreme Court in K.P.Natarajan's case (cited supra), I feel there is no fundamental wrong on the part of the petitioner to file a petition under Article 227 Constitution of India instead of filing an appeal. In this regard, it is worthwhile to extract the relevant part of the judgment of K.P. Natarajan (cited supra) which reads as under:
“22. The contention that in a revision arising out of the dismissal of a petition under Section 5 of the Limitation Act, 1963, the High Court cannot set aside 19/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 the exparte decree itself, by invoking the power under Article 227, does not appeal to us. It is too well settled that the powers of the High Court under Article 227 are in addition to and wider than the powers under Section 115 of the Code. In Surya Dev Rai vs. Ram Chander Rai and Others, this Court went as far as to hold that even certiorari under Article 226 can be issued for correcting gross errors of jurisdiction of a subordinate Court. But the correctness of the said view in so far as it related to Article 226, was doubted by another Bench, which resulted in a reference to a three member Bench. In Radhey Shyam & Anr. vs. Chhabi Nath & Others, the three member Bench, even while overruling Surya Dev Rai (supra) on the question of jurisdiction under Article 226, pointed out that the jurisdiction under Article 227 is distinguishable. Therefore, we do not agree with the contention that the High Court committed an error of jurisdiction in invoking Article 227 and setting aside the exparte decree.”
18. In the above judgment, the Supreme Court has observed that even while overruling Surya Dev Rai (cited supra) by the later 20/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 judgment held in Radhey Shyam (cited supra), the jurisdiction of the High Court between Articles 226 and 227 of the Constitution of India has been distinguished. So long as a Writ Petition is not filed under Article 226 of Constitution of India by challenging the order of the Court, but only a petition under 227 is filed, it is maintainable.
19. The relevant portions of the judgment of Radhey Shyam (cited supra) is extracted for a better appreciation.
“ 22. The Bench in Surya Dev Rai also observed in para 25 of its judgment that distinction between Articles 226 and 227stood almost obliterated. In para 24 of the said judgment distinction in the two articles has been noted. In view thereof, observation that scope of Article 226 and 227 was obliterated was not correct as rightly observed by the referring Bench in Para 32 quoted above. We make it clear that though despite the curtailment of revisional jurisdiction under Section 115 CPC by Act 46 of 1999, jurisdiction of the High Court under Article 227 remains unaffected, it has been wrongly assumed in certain quarters that the said jurisdiction has been expanded. Scope of Article 227 has been explained in 21/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 several decisions including Waryam Singh and another vs. Amarnath and anotherst, Ouseph Mathai vs. M. Abdul Khadir[12], Shalini Shyam Shetty vs. Rajendra Shankar Patil[13] and Sameer Suresh Gupta vs. Rahul Kumar Agarwal[14]. In Shalini Shyam Shetty, this Court observed :
"64. However, this Court unfortunately discerns that of late there is a growing trend amongst several High Courts to entertain writ petition in cases of pure property disputes. Disputes relating to partition suits, matters relating to execution of a decree, in cases of dispute between landlord and tenant and also in a case of money decree and in various other cases where disputed questions of property are involved, writ courts are entertaining such disputes. In some cases the High Courts, in a routine manner, entertain petitions under Article 227 over such disputes and such petitions are treated as writ petitions.
65. We would like to make it clear that in view of the law referred to above in cases of property rights and in disputes between private individuals writ court should not interfere unless there is any infraction of 22/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 statute or it can be shown that a private individual is acting in collusion with a statutory authority.
66. We may also observe that in some High Courts there is a tendency of entertaining petitions under Article 227 of the Constitution by terming them as writ petitions. This is sought to be justified on an erroneous appreciation of the ratio in Surya Dev and in view of the recent amendment to Section 115 of the Civil Procedure Code by the Civil Procedure Code (Amendment) Act, 1999. It is urged that as a result of the amendment, scope of Section 115 CPC has been curtailed. In our view, even if the scope of Section 115 CPC is curtailed that has not resulted in expanding the High Court's power of superintendence. It is too well known to be reiterated that in exercising its jurisdiction, High Court must follow the regime of law.
67. As a result of frequent interference by the Hon'ble High Court either under Article 226 or 227 of the Constitution with pending civil and at times criminal cases, the disposal of cases by the civil and criminal courts gets further impeded and thus causing serious problems in the administration of justice. This 23/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 Court hopes and trusts that in exercising its power either under Article 226 or 227, the Hon'ble High Court will follow the time honoured principles discussed above. Those principles have been formulated by this Court for ends of justice and the High Courts as the highest courts of justice within their jurisdiction will adhere to them strictly."
(emphasis added)
20. The above discussion would only give an understanding that though an appeal would lie against the order of the rejection of the plaint, there is no harm in invoking the jurisdiction of the High Court under Article 227 for the reasons best known to the petitioner, provided a regular writ is not disguised in a petition filed under Article 227.
21. Now coming back to the main issue, it is relevant to extract the observation made by this court in an earlier order dated 12.07.2022 passed in C.M.P.10516/2022 and para No.11 is extracted as under:
“ 11. Since any order on the maintainability of the derivative claim will have a significant impact in the Company law affairs, I feel sufficient opportunity should be given to both sides before taking a final decision on the 24/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 issue. The questions for consideration in this regard will range from the difference between direct claim and derivative claim, safeguards against misuse, powers of National Company Law Tribunal in the matters of derivative claim; whether the absence of specific words of derivative claim under Sec. 242 should be taken as exclusion for those matters, despite it speaks about public interest and company’s interest etc., The above points need to be dealt at length and law should be settled down on these aspects.”
22. In view of the same, the learned counsels for both sides had advanced their arguments with regard to the difference between derivative claim and direct claim, whether the Civil Court or the National Company Law Tribunal has jurisdiction to entertain derivative suits and the scope of Section.242 of Company Law Act 2013.
23. The concept of derivative action was borrowed from United States. But it is recognised in United Kingdom also. A company is a legal entity and hence it has a separate identity distinct from its Directors and Shareholders. So a company is a juristic person in the eyes of law. The 25/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 evolution of derivative claim can be traced back to the 'proper plaintiff rule' affirmed in FOSS VS HARBOTTLE [(1843) 67 ER 189]. In the said case, the minority shareholders had claimed damages against the Directors because of the fraudulent acts committed by them. However, in the general meeting held it was resolved by the majority shareholders not to take action against them. So, two of the minority shareholders initiated legal proceedings against those Directors and compelled them to pay damages for the loss made to the company. But the Court did not appreciate the said action by stating that the act of the directors were confirmed by the majority and it is the internal affairs of the company.
24. In view of the above ruling, the majority can override the minority in decision making and that cannot be questioned by the minority shareholders.But the ruling was primarily because of the importance given to the procedural aspect while laying a claim before the Court. Since the company is a juristic person by itself, when the company is affected, a suit has to be preferred by the company. The directors who are at the helm of the affairs of the company and who have to represent the company are the wrongdoers, it is not possible to expect them to act in the interest of the 26/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 company and file a suit on behalf of the company. Because it will be like filing a Suit against oneself. The above difficulty faced by the minority and the loss suffered by the company due to the rule of FOSS VS. HARBOTTLE, is the starting point for evolving the mechanism of ‘derivative claim’ in due course.
25. In a later decision in EDWARDS VS. HALLIWELL [1950 (1) ALL ER 1064], a more rational and progressive view has been taken, by making out certain exceptions to FOSS VS HARBOTTLE. It is held that the majority cannot confirm the following actions:-
(i) an act which ultravires the company are
illegal.
(ii) the act which constitutes fraud against the
minority and the wrongdoers are themselves in control of the company; or
(iii) a resolution which requires qualified majority has been passed by a simple majority.
26. Thereafter, in HEYTING VS. DUPONT [1964 (1) WLR 843] it is made clear that the rule in Foss vs Harbottle is not rigid and exceptions can be made when the justice of the case demands. Indian Courts also were not shy to deviate from 'proper plaintiff rule', when the interest of 27/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 company is affected. In JOSEPH VS. JOS [1964 (34) COMP CAS 931 (KER)], it is held that Foss vs Harbottle is not applicable to cases of infringement of the individual membership and rights. The Bombay High Court in BSN (UK) LTD. AND OTHERS VS. JANARDAN MOHANDAS RAJAN PILLAI [1993 (3) BOM CR 228] has approved the general rule that the company is entitled to maintain an action for the wrong done to it. A shareholder’s locus standi to file a suit during exceptional circumstances where the wrongdoers are in control of the company is also not disapproved. However, the shareholder who files such a suit has the burden to prove that the persons in control of the company are the wrongdoers.
27. Mr.M.S. Krishnan, the learned Senior Counsel for the petitioner has cited the decision of the Bombay High Court in NIRAD AMILAL MEHTA VS. GENELEC LTD. AND OTHERS [2008 SCC ONLINE BOM 1243], to show that that the courts have tended to follow suit. In ONYX MUSICABSOLUTE.COM PVT. LTD. AND OTHERS VS. YASH RAJ FILMS PVT. LTD. AND OTHERS [2008 (6) BOM CR 416] , the High Court of Bombay has made a reference about the judgment of the Federal Court in Dr. SATYA CHARAN LAW AND OTHERS VS. RAMESHWAR PRASAD BAJORIA AND OTHERS [AIR 1950 28/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 (FC) 133] and accepted in principle that if the wrongdoers are insiders of the company like Directors, the shareholders can bring an action on behalf of the company. The relevant part of the judgement is extracted below:
“13. I see no reason to depart from the view which I have taken earlier. I therefore hold that a suit at the instance of a minority shareholder for a wrong done to a company is maintainable where it is shown that the wrong doers are insiders, say directors of the company or majority of the shareholders who are unlikely to take any action for the wrong done to the company. I am, however, not prepared to go thus far as to hold that even a derivative action by way of an arbitration can be taken by initiating arbitration before an arbitral tribunal, for the reasons indicated a little later.
14.The form of action to be taken by the minority shareholder however may admit of a debate. In case of Dr.Satya Charan Law (Supra) an action was of the company taken by the majority shareholders in the by joining the company name as co-plaintiff. A Single Judge of the High Court of Calcutta held that the company was not properly impleaded as the plaintiff. The learned Judge 29/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 however observed that it was open for the plaintiffs to make the company a defendant. A Division Bench of the High Court, on appeal, held that the action was correctly made by joining the company as co-plaintiff in the suit.
That decision was upheld by the Federal Court. It therefore appears that it would be open to the shareholders who sue for the wrong done to a company on the ground that the persons causing the wrong are insiders and unlikely to take any action for wrong done to the company by joining the company as co-plaintiff along with them. However no final opinion needs to be expressed, at this stage, whether a suit filed by minority shareholders by joining the company as a defendant would be bad in law and not maintainable at all. The issue can be left to be decided at the stage of trial.
Maintainability of Arbitration Petitions by or against the persons who are not parties to the arbitration agreement.”
28. In STARLIGHT REAL ESTATE (ASCOT) MAURITIUS LIMITED 30/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 VS. JAGRATI TRADE SERVICES PRIVATE LIMITED [2015 SCC ONLINE CAL 6583], the difference between the individual claim and derivative claim was dealt. The High court of Calcutta has categorized the four different actions involved in company matters in para 29 of the judgement and the derivative action is one among the same. The difference between the individual action and derivative action and the source of law to invoke the respective remedies have also been explained as under:
“26.Company actions, in the wide sense including by and on behalf of the Company and also actions by shareholders have always been considered to be a vexed question in Company Law. Since Foss Vs. Harbottle reported at (1843) 2 Hare 461, numerous attempts have been made to find escape routes leading to various modifications.
27.Since a criticism is made with regard to the frame of suit and it is submitted that the plaintiffs are only seeking to enforce their personal rights as opposed to derivative action and a suit as framed is a personal action by the shareholders it is necessary to examine the frame of the suit vis-à-vis derivative action.31/110
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28.The principles of derivative action as enunciated in various judgements and treaties on the subjects of which special reference can be made to 'Company Actions in the Modern Set-Up' by S. C. Sen, First Edition, 'The New Frontiers of Company Law' by S. C. Sen, 1971 Edition and 'Guide To Companies Act', by A. Ramaiya, 17th Edition, are summarized, hereinafter.
29. In company jurisprudence, company actions are divided into different groups:-
(a) Actions by the Company - for enforcement of Company's rights.
(b) Derivate actions - i.e., actions by shareholders for enforcement of the Company's rights (as distinguished from class rights of shareholders).
(c) Representative actions - i.e., actions by shareholders for enforcement of their class or corporate rights.
(d) Personal actions by shareholders - for enforcement of their personal rights.32/110
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30.There is a clear distinction between individual and corporate membership rights of shareholders. A member can always sue for wrongs done to himself in his capacity as a member. The individual rights of a member arise in part from the general law. Under the contract emanating from his memberships, he is entitled to have his name entered and kept on the register of members, to vote at meetings of members, to receive dividends which have been duly declared, to exercise pre-emption rights conferred by the articles, and to have his capital returned in proper order of priority on a winding up or on a properly authorized reduction of capital. Under the general law he is entitled to restrain the company from doing acts which are ultra vires, to have a reasonable opportunity to speak at meetings of members and to move amendments to resolutions proposed at such meetings to transfer his shares; not to have his financial obligations to the company increased without his consent; and to exercise the many rights conferred on him by the Companies Act, such as his right to inspect various documents and registers kept by the Company. The dividing line between personal and corporate rights is not always very easy to draw. The 33/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 Courts, however, incline to treat a provision in the memorandum or articles as conferring a personal right on a member, if he has a special interest in its observance distinct from the general interest which every member has in the company adhering to the terms of its constitution. In an action for violation of personal rights a single shareholder suing alone and not even on behalf of other shareholders may make the company a defendant and obtain his reliefs. Where a wrong has been done to the company and an action is brought to restrain its continuance or to recover the company's property or damages or compensation due to it, it is a derivative action. Here the company is the only true plaintiff. The dispute is not an internal one between those who constitute the membership of the company but one between the company on the one hand and third parties on the other. It makes no difference in principle that the third parties may accidentally happen to be the directors or controlling shareholders of the company. Foss Vs. Harbottle itself is an illustration of such an action. Where such an action is allowed the member is not really suing on his own behalf nor on behalf of the members generally but 34/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 on behalf of the company itself. In a derivative action, in the framing of the suit for the purpose of compliance of the formalities the plaintiff had to describe himself as a representative suing for and on behalf of all the members other than the wrong-doers. In a true derivative action the plaintiff shareholder is not acting as a representative of the other shareholders but is really acting as a representative of the company. The expression "derivative action" was basically borrowed from the United States, but has in recent years also been in use in the United Kingdom.
31.In a derivative action, the company would be the only party entitled to sue for redressal of any wrong done to it. However, since a company is an artificial person, it must act through its directors. Where the wrong is being done to the company by the directors in control, the company obviously cannot take action on its own behalf. It is in these circumstances that the derivative action by some shareholders (even if they are in a minority) becomes necessary to protect the interest of the company. The minority shareholders sue on behalf of themselves and all other shareholders except those who are defendants, and 35/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 may join the company as a defendant. The directors are usually defendants. This action is brought instead of an action in the name of the company. The form of the action is always: 'A.B. (a minority shareholder) on behalf of himself and all other shareholders of the company against the wrongdoing directors and the company: (per Lord Denning M.R. in Wallersteiner v. Moir (No.2), (1975) QB 373 at 390 (CA). It is a "procedural device for enabling the Court to do justice to a company controlled by miscreant directors or shareholders." (Per Lawton in Nurcomba vs. Nurcomba; 1985 (1) WLR 370 at Page 376)”.
29. The Calcutta High Court in the above judgement has stated that the derivative action can be taken by minority shareholders and through such an action they can sue for themselves and on behalf of the company except the defendants and further that the company can also be added as a defendant. A derivative suit can be maintained by any shareholder when it is not possible for the company to exercise its right to sue for the purpose of safeguarding its own rights and interests. Since the individual has derived the said right from the company and is not his own 36/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 right, the action so taken by him is called derivative action and the suit so filed is called as derivative suit.
30. In fact, the Companies Act, 2006 of United Kingdom has got a separate Chapter under Part-11 for derivative claims. It’s worthwhile to extract Section 260 of the Companies Act 2006 (United Kingdom) for reference:
Part 11- sec.260 260 - Derivative claims (1) This Chapter applies to proceedings in England and Wales or Northern Ireland by a member of a company—
(a) in respect of a cause of action vested in the company, and
(b) seeking relief on behalf of the company. This is referred to in this Chapter as a “derivative claim”.
(2) A derivative claim may only be brought—
(a) under this Chapter, or
(b) in pursuance of an order of the court in proceedings under section 994 (proceedings for protection of members against unfair prejudice).
(3) A derivative claim under this Chapter may be brought only in respect of a cause of action arising from an actual 37/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director of the company.
The cause of action may be against the director or another person (or both).
(4 )It is immaterial whether the cause of action arose be- fore or after the person seeking to bring or continue the derivative claim became a member of the company. (5)For the purposes of this Chapter—
(a)“director” includes a former director;
(b)a shadow director is treated as a director; and
(c) references to a member of a company include a person who is not a member but to whom shares in the company have been transferred or transmitted by operation of law.
31. According to English Company law any member can bring derivative action on the order of the court in proceedings under section 994. The proceedings under Section 994 would only refer to protection of members against unfair prejudice as classified part 30, which is nothing but proceedings against oppressive action. For the sake of clarity section 994(1) is extracted below:
38/110
https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 Part 30 - Sec.994 (1) A member of a company may apply to the court by petition for an order under this Part on the ground—
(a) that the company's affairs are being or have been con-
ducted in a manner that is unfairly prejudicial to the in- terests of members generally or of some part of its mem- bers (including at least himself), or
(b) that an actual or proposed act or omission of the com- pany (including an act or omission on its behalf) is or would be so prejudicial.
32. So in U.K, the derivative claim can be brought either by a member of the company on his own or on an order of the court during the proceedings for protection of members against unfair prejudice. The cause of action can be against the director or any other persons or both. It is im- material whether the cause of action arose either before or after the plain- tiff becomes a member of the Company. However, if such an action is brought by a member, leave of the court should be obtained on the proving that a claim of the company amounts to abuse of process of court and 39/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 hence the company’s interest would be affected or that the company has failed to prosecute the claim diligently (sec.262). If a prima facie case is made out, the court may direct the company to produce the evidence, be- fore granting permission. While considering the permission to continue derivative claim, the Court shall among several other aspects would also consider whether the claim brought gives rise to cause of action for the member to pursue the claim on his own right rather than on behalf of the company.
33. The United States Model Business Corporation Act has got a separate Chapter under 7-D for derivative proceedings. The US chapter is more elaborate than U.K in several aspects. Sec.7.40 of the U.S Act says that the derivative proceedings means a civil suit in the right of the domestic corporation. Unlike the Company law of the United Kingdom, under the U.S model a shareholder should be a share holder of the Corporation at the time of the act or omission complained of, in order to commence a derivative proceedings and the plaintiff should fairly and adequately represent the interest of the Corporation in enforcing the right of the Corporation (7.41). A statutory notice of 90 days has to be sent 40/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 before initiating an action for derivative claim. However 90 days mandatory period can be waived for appropriate reasons (7.42). If the company starts enquiry in to the demands made in the derivative claim, then the court would stay the proceedings for a reasonable time until the company finished its enquiry and comes out with a report (7.43). The logic is to allow the company to work out a remedy within itself instead of allowing the court to do that. A derivative claim will be dismissed on the motion of the company if majority of the independent directors or the majority of the committee of independent directors appointed by the independent directors determine in good faith after due enquiry that the derivative claim is not in the interest of the company (7.44). The burden is on the company to prove that a reasonable enquiry has been made in good faith and its conclusion has been taken by examining the best interest of the corporation. The court can also appoint one or more independent persons at the request of the corporation for the purpose of making a determination whether maintenance of derivative proceedings is in the best interest of the corporation. If the plaintiff wishes to maintain the proceedings, the plaintiff has the burden to prove that the determination has been taken without proper enquiry and a good faith or in the best 41/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 interest of the company. The derivative proceedings can be withdrawn or brought to the end or settled without the approval of the court. If the court deems it fit that a proposed settlement or withdrawal of the derivative proceedings might affect the interest of the share holders or a class of shareholders, notice shall be given to the parities whose interest is affected (7.45). If the courts finds that the proceedings had resulted in the substantial benefit of the corporation the court can order the corporation to pay the costs to the plaintiff. If it is found that the proceedings have been taken without reasonable cause or a proper purpose, the costs that might be imposed on either party will be inclusive of the hardship caused due to unnecessary delay (7.46).
34. A special chapter under 7-D, for derivative proceedings under United States model is a complete code within itself. Part 11 of United Kingdom is not as exhaustive as that of the United States’ model, though it has all details, procedure or relief about derivative claim. Though Indian Courts have recognised the derivative actions taken on behalf of the company by minority shareholders, there is no separate chapter for derivative claim is seen in the Indian Companies Act. As 42/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 already stated, the company actions can be divided into four categories. If a company is aggrieved due to the third party’s action, depending on the cause of action, the Company can file a Suit before the Civil Court.
35. The representative action or class action would fall under Section 245 of the Act. If any member of the company is affected due to the oppressive manner in which the management of the company is conducted he can file an application under Section 241, provided he fulfils the requirement of Section 244 of the Act. If some of the members, depositors or any such class is aggrieved due to the conduct of the management of the company, they can initiate class action against the company by invoking Section 245. But the total number of such members shall not be not less than hundred or such percentage of total number as may be prescribed, if the company has a share capital. If the company does not have a share capital, it should be not less than one fifth of the total number of its members.
36. The difference between class action provided under section 245 and the action against oppression and management under 43/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 sec.241 is that the applicant under class action need not necessarily be a member of the company or a shareholder and it can be an action through a representative. It can be understood from the elaboration made in S.S.DHANOA Vs. MUNICIPAL CORPORATION, DELHI AND OTHERS [1981 (3) SCC 431], that the following ingredients must be present for an action against oppression and mismanagement.
(i) It should be proved that the conduct of the business of the company is in such a way that it oppresses the minority members.
(ii) The said oppression ought to have been caused because of the dominant voting power enjoyed by the majority members due to their larger share holdings in the company.
(iii) Though the grounds furnished by the petitioner are sufficient to wind up the company, such winding up order would unfairly prejudice the minority members.
37. However, the word ‘oppressive’ has not been defined anywhere. Though the word ‘oppressive’ would mean harsh and wrongful 44/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 action, not every such action can be called as oppressive. The act of the complaint should be of such a standard that it deviates from fairness, accountability and it happens because of the majority power enjoyed by a section in the company. The factum of oppression cannot be seen as an isolated action, but series of actions or faults. There must be some continuous acts on the part of the majority shareholders. In S.P.JAIN VS. KALINGA TUBES LTD. [AIR 1965 SC 1535] , after illustrating a few cases, the gravity and the nature of the actions which would amount to oppressive actions has been explained as under:
“18.These observations from the four cases referred to above apply to s. 397 also which is almost in the same words as s. 210 of the English Act, and the question in each case is whether the conduct of the affairs of a company by the majority shareholders was oppressive to the minority shareholders and that depends upon the facts proved in a particular case. As has already been indicated, it is not enough to show that there is just and equitable cause for winding up the company, though that must be shown as preliminary to the application of s. 397. It must further be shown that the conduct of the majority shareholders was oppressive to the minority as members 45/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 and this requires that events have to be considered not in isolation but as a part of a consecutive story. There must be continuous acts on the part of the majority shareholders, continuing up to the date of petition, showing that the affairs of the company were being conducted in a manner oppressive to some part of the members. The conduct must be burdensome, harsh and wrongful and mere lack of confidence between the majority shareholders and the minority shareholders would not be enough unless the lack of confidence springs from oppression of a minority by a majority in the management of the company's affairs, and such oppression must involve at least an element of lack of probity or fair dealing to a member in the matter of his proprietary rights as a shareholder.”
38. There must be several acts or series of events, by which the minority members could have felt oppressed and burdened. Though series of actions or series of events are one of the features to show that the actions of the majority shareholders are oppressive in nature, at times even a single large event consisting of series of actions can also be oppressive in nature and that would affect the interest of the minority in a major way. 46/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022
39. In the order dated 06.03.2017 of the National Company Law Tribunal, Mumbai Bench, CYRUS INVESTMENTS PVT. LTD., AND OTHERS Vs TATA SONS LTD., AND OTHERS [MANU/NC/0112/2017] it has been categorically held that the appellant is eligible to maintain the petition for oppressive management only if he holds 1/10th of the total of the issued share capital and that the issued share capital would refer both the preferential share capital and equitable share capital of the company. In case the company does not have a share capital, the total number of applicants shall not be less than the 1/5th of the total number of its members. However, for a valid reason, the above conditions can be waived.
40. In SANGRAMSINH P.GAEKWAD AND OTHERS VS. SHANTADEVI P.GAEKWAD [2005 (11) SCC 314], it is held that what is an oppression has to be appreciated on the basis of the facts of each case. The interest of the individual or group of individual is saved through class action or action against oppression and mismanagement. But in derivative action, the interest of the company is involved and the proceedings are aimed at to save the interest of the company.
47/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022
41. In S.P.JAIN VS. KALINGA TUBES LTD., [AIR 1965 SC 1535], it is observed that Section 397 of the Companies Act, 1956, is similar to Section 210 of the English Companies Act. The element of malafide intention cannot be inferred from an isolated act like failure to give notice of the Board meeting. But series of illegal acts following one after another, which should lead to a justifiable conclusion that they are part of the same transaction and the object of which is to cause unfair prejudice to persons against whom it is directed.
42. The judgment in CHATTERJEE PETROCHEM (INDIA) PRIVATE LIMITED VS. HALDIA PETROCHEMICALS LIMITED AND OTHERS [2011 (10) SCC 466], would clarify that unwise, inefficient and character conduct of Director cannot give rise to claim for relief for oppressive management. In order to become eligible to get relief due to oppressive management, the applicant needs to prove that the conduct of the majority of the shareholders was lacking in probity and it was unfair and prejudicial to the minority.
43. The judgment of the Division Bench of this Court in V.M.RAO AND OTHERS VS. RAJESWARI RAMAKRISHNAN AND OTHERS [1985 SCC 48/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 ONLINE MAD 151] has also summed up the essential ingredients for the claim against oppressive management as below:-
“89.These decisions are, therefore, clear authority for the position (1) that the oppression complained of must affect a person in his capacity or character as a member of the company; harsh or unfair treatment in any other capacity, e.g., as a director or a creditor is outside the purview of the section; (2) there must be continuous acts constituting oppression up to the date of the petition; (3) the events have to be considered not in isolation but as a part of a continuous story; (4) It must be shown as a preliminary to the application of section 397 that there is just and equitable ground for winding up the company; (5) The conduct complained of can be said to be "oppression" only when it could be said that it is burdensome, harsh and wrongful; oppression involves at least an element of lack of probity and fair dealing to a member in matters of his proprietary right as a shareholder. “
44. Mr.M.S. Krishnan, learned Senior Counsel appearing for the petitioner, after having submitted his arguments that the oppressive 49/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 action is different from that of the derivative action, concluded his argument by stating that Indian Companies Act 2013 does not consist of a separate chapter for derivative actions and hence the aggrieved can only file a civil suit.
45. As pointed out already, the Indian Companies Act does not have a separate or a sub-chapter for derivative claims, similar to the English Companies Act, 2006. Though derivative actions are in vogue in India and its maintainability is also accepted, nothing much is spoken about the jurisdiction of the Civil Court to entertain the derivative suits. There is no word as ‘derivative action’ anywhere in the Indian Companies Act.
46. Mr.M.S.Krishnan, learned Senior Counsel for the petitioner submitted that exclusion of Civil Court in view of Section 430 of the Companies Act cannot be readily inferred unless such exclusion is either expressly mentioned or clearly implied. It is further submitted that the National Company Law Tribunal has got no jurisdiction to entertain proceedings for derivative action and hence, the remedy open to the plaintiff is only thorough common law.
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47. In support of his above contention he cited the decision of the Supreme Court in DHULABHAI AND OTHERS Vs. THE STATE OF MADHYA PRADESH AND OTHERS [AIR 1969 SC 78] and RALEIGH INVESTMENT CO. VS. GOVERNOR GENERAL COUNCIL [AIR 1947 PC 78]. In Raleigh Investment's case, it was observed that the exclusion of the jurisdiction of the Civil Court cannot be readily inferred but it must be either explicitly expressed or clearly implied. Even if the jurisdiction of the Civil Courts has been excluded, the Civil Courts still have jurisdiction to examine into cases where the provisions of the act have not been complied or the statutory Tribunal has not acted in conformity with the fundamental principle of judicial procedure.
48. In DHULABHAI's case (cited supra) the Constitutional Bench of the Hon'ble Supreme Court dealt about the bar of the Civil Court stipulated under Section 17 of the Madhya Bharat Sales Tax Act (Act 30 of 1950). In the said case, it is held as under:
“9.The question that arises in these appeals has been before this Court in relation to other statutes and has been answered in different ways. These appeals went before a 51/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 Divisional Bench of this Court but in view of the difficulty presented by the earlier rulings of this Court, they were referred to the Constitution Bench and that is how they are before us. At the very start we may observe that the jurisdiction of the Civil Courts is all embracing except to the extent it is excluded by an express. provision of law or by clear intendment arising from such law. This is the purport of s. 9 of the Code of Civil Procedure. How s. 9 operates is perhaps best illustrated by referring to the categories of cases, mentioned by Willes, J. in Wolverhampton New Waterworks co. v. Hawkesford [1859] 6 C.B. (NS) – 336 - They are :
"One is where there was a liability existing at common law, and that liability is affirmed by a statute which gives a special and peculiar form of remedy different from the remedy which existed at common law: there, unless the statute contains words which expressly or by necessary implication exclude the common law remedy the party suing has his election to pursue either that or the statutory remedy. The second class of cases is, where the statute gives the right to sue merely, but provides, 52/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 no particular form of remedy : there, the party can only proceed by action at common law. But there is a third class, viz., where a liability not existing at common law is created by a statute which at the same time gives a special and particular remedy for enforcing it........ The remedy provided by the statute must be followed and it is not competent to the party to pursue the course applicable to cases of the second class."
49. So, the well settled proposition is that Section 9 of the Code of Civil Procedure would embrace all types of Suits except the extent it is excluded by the express provision of law. In DHULABHAI's case (cited supra) the Five Judges Bench of the Hon'ble Supreme Court has concluded by laying down the following proposition:-
“54.Neither of the two cases of Firm of Illuri Subayya MANU/SC/0211/1963 or Kamla Mills MANU/SC/0291/1965 can be said to run counter to the series of cases earlier noticed. The result of this inquiry into the diverse views expressed in this Court may be stated as follows :-53/110
https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 (1) Where the statute gives a finality to the orders of the special tribunals the Civil Courts' jurisdiction must be held to be excluded if there is adequate remedy to do what the Civil Courts would normally do in a suit. Such provision, however, does not exclude those cases where the provisions of the particular Act have not been complied with or the statutory tribunal has not acted in conformity with the fundamental principles of judicial procedure.
(2) Where there is an express bar of the jurisdiction of the court, an examination of the scheme of the particular Act to find the adequacy or the sufficiency of the remedies provided may be relevant but is not decisive to sustain the jurisdiction of the civil court.
Where there is no express exclusion the examination of the remedies and the scheme of the particular Act to find out the intendment becomes necessary and the result of the inquiry may be decisive. In the latter case it is necessary to see if the statute creates a special right or a liability and provides for the determination of the right or liability and further lays down that all questions about the said right and liability shall be determined by the tribunals 54/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 so constituted, and whether remedies normally associated with actions in Civil Courts are prescribed by the said statute or not.
(3) Challenge to the provisions of the particular Act as ultra vires cannot be brought before Tribunals constituted under that Act. Even the High Court cannot go into that question on a revision or reference from the decision of the Tribunals.
(4) When a provision is already declared unconstitutional. or the constitutionality of any provision is to be challenged, a suit is open. A writ of certiorari may include a direction for refund if the claim is clearly within the time prescribed by the Limitation Act but it is not a compulsory remedy to replace a suit.
(5) Where the particular Act contains no machinery for refund' of tax collected in excess of constitutional limits or illegally collected a suit lies.
(6) Questions of the correctness of the assessment apart from its constitutionality are for. the decision of the authorities and a civil suit does not lie if the orders of the 55/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 authorities are declared to be final or there is an express prohibition in the particular Act. In either case the scheme of the particular Act must be examined because it is a relevant enquiry.
(7) An exclusion of the jurisdiction of the Civil Court is not readily to be inferred unless the conditions above set down apply.”
50. As per the above dictum, the Civil Courts jurisdiction cannot be barred unless there is an express exclusion. Even if such an exclusion is provided that can be construed only in cases where right itself is created and the machinery for enforcement of such right is also provided in the statute. If the right is not provided or created in the statute and no machinery for enforcement of such right is provided, then the right can only be said as a common law right and for which remedy can be availed only by way of filing a Civil Suit.
51. A statute without creating a right within itself and without providing machinery for enforcement of such right, cannot place a bar for 56/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 civil jurisdiction. Even if there is an explicit bar for Civil Courts, the Civil Court can still exercise its power when the statute had failed to create the right and the machinery to enforce the same. It is not out of place to mention here that a derivative action cannot be maintainable if the plaintiff has some other ulterior motive without having any bonafide interest of the company. If some other adequate remedy is available to the plaintiff, no derivative actions can be allowed. So the forum which has jurisdiction to deal with derivative action should find out from the pleadings and other materials whether a shareholder is seriously canvassing a derivative claim or in the guise of derivative claim he is trying to promote his own personal interest.
52. In RAJEEV SAUMITRA VS. NEETU SINGH AND OTHERS [2016 SCC ONLINE DEL 512] after going through the entire documents placed on record, the High Court of Delhi has held that the plaintiff is entitled to maintain a Suit on behalf of the company. In this regard, it is relevant to extract the following portions of the said judgment:
“67. After going through the documents placed on record, it appears that the present suit is filed on behalf of the Company. If the Company was in a position to pass a 57/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 resolution to institute a suit against a Director indulging in competing business, the suit would have been filed on behalf of the Company itself. As the Company is prevented from passing a resolution, the suit has been instituted in the name of the plaintiff on behalf of the Company. The Company in the present circumstances itself is not in a position to file the suit or any petition before the Company Law Board. Therefore, the Court is to read the plaintiff to be the company and not Mr.Rajeev Saumitra in view of peculiar facts and circumstances in the present case.
68.The language of Sections 397 and 398 of 1956 Act is quite similar to Sections 241 and 242 of the 2013 Act. The said Sections do not exclude the jurisdiction of the Civil Court.”
53. On the strength of the above judgments, Mr.M.S.Krishnan, learned Senior Counsel for the petitioner would claim that even in Companies Act, 2013, there is no right is given for raising derivative claim akin to English Law and hence, the one and only remedy available to the plaintiff is to knock the doors of the Civil Court. 58/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022
54. In this regard Mr.M.S.Krishnan, learned counsel for the petitioner drew the attention of this Court to the 57 th report of Standing Committee of Finance on The Companies Bill, 2011. It is seen in the 57th report that certain suggestions were made about the class actions during the debate about the bill. In suggestions 124(i) and 124(iv) that following comments have been made:
S.No. Section Suggestion Comments 124(i) 245:Class Action The clause does not expressly Kind attention is provide for filing of derivative suits drawn to by shareholders of a company recommendation at whereby shareholder initiates legal Para 16.25 of report action when management fails to of Hon'ble do so. Express provision dealing Committee. The with derivative action by provisions proposed shareholders on behalf of a n the new Bill are in company be incorporated in clause accordance with
245. such recommendation.
Hence there may not be change in the clause.
124(iv) 245: Derivative Class action suits are poor These types of action substitutes for derivative actions concepts evolve and would not be effective in India over time and where effective corporation action should not be is available only to the rich and included hurriedly. mighty. Provision for derivative The provisions action should be considered to proposed are in empower shareholders to go against accordance with the wrong doings of the companies 2009 Bill and as at the expense of such companies. recommendations made by Hon'ble Committee. At this stage, inclusion of 59/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 S.No. Section Suggestion Comments new concepts may not be accepted.
55. So it is claimed by the learned senior counsel for the petitioner that the exclusion of derivative action under the Companies Act, 2013 is a conscious omission and hence the only remedy open to the plaintiff is to invoke the jurisdiction of the Civil Court. Clause 16.25 of the Companies Bill, 2009 is extracted hereunder:
“16.25 Incorporation of the provisions enabling for filing class action suits in terms of clause 215 is a progressive measure, which would be in the interest of investors. Nevertheless, while on the other hand, the Chambers of Commerce have emphasized the need for putting in place adequate safeguards to preclude filing of frivolous or vexatious class action suits etc., suggestions have also been made inter-alia to enable for defraying of expenses on such suits by the companies held responsible for oppressive acts, enlarging the scope of class action to cover fraudulent conduct of auditors of companies etc. While the revised clause 216 proposed by the Ministry in response to the questioning of the Committee which 60/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 inter-alia prescribes the minimum number of persons required for filing class action suits is expected to address the issue of possible misuse of the provisions by way of filing frivolous complaints etc., the concerns expressed on making the provisions productive to the interest of small investors have been proposed to be addressed separately. The committee recommended that this exercise be carried out in right earnest inter-alia by studying the cross country experience on class action and the provisions proposed revisited and reviewed so as to ensure that the measure of class action works out to be true beneficial.”
56. It is seen from the suggestions and comments that derivative action is understood as either a substitute for class action or a branch of class action. But, as it appears from the language of Section 245 of the Companies Bill, 2011, the class action can be brought by a member or members of any class like shareholders, depositors, etc., For the sake of clarity, Section 245 of the Companies Bill, 2011 is extracted hereunder:
“245. (1) Such number of member or members, depositor or depositors or any class of them, as the case may be, as are indicated in sub-section (2) may, if they 61/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 are of the opinion that the management or conduct of the affairs of the company are being conducted in a manner prejudicial to the interests of the company or its members or depositors, file an application before the Tribunal on behalf of the members or depositors for seeking all or any of the following orders, namely:—
(a) to restrain the company from committing an act which is ultra vires the articles or memorandum of the company;
(b) to restrain the company from committing breach of any provision of the company’s memorandum or articles;
(c) to declare a resolution altering the memorandum or articles of the company as void if the resolution was passed by suppression of material facts or obtained by mis-statement to the members or depositors;
(d) to restrain the company and its directors from acting on such resolution;
(e) to restrain the company from doing an act which is contrary to the provisions of this Act or any other law for the time being in force;62/110
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(f) to restrain the company from taking action contrary to any resolution passed by the members; Right to apply under section 241.
(g) to claim damages or compensation or demand any other suitable action from or against—
(i) the company or its directors for any fraudulent, unlawful or wrongful act or omission or conduct or any likely act or omission or conduct on its or their part;
(ii) the auditor including audit firm of the company for any improper or misleading statement of particulars made in his audit report or for any fraudulent, unlawful or wrongful act or conduct; or
(iii) any expert or advisor or consultant or any other person for any incorrect or misleading statement made to the company or for any fraudulent, unlawful or wrongful act or conduct or any likely act or conduct on his part;
(h) to seek any other remedy as the Tribunal may deem fit.
(2) (i) The requisite number of members provided in sub-section (1)shall be as under:— 63/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022
(a) in the case of a company having a share capital, not less than one hundred members of the company or not less than such percentage of the total number of its members as may be prescribed, whichever is less, or any member or members holding not less than such percentage of the issued share capital of the company as may be prescribed, subject to the condition that the applicant or applicants has or have paid all calls and other sums due on his or their shares;
(b) in the case of a company not having a share capital, not less than one-fifth of the total number of its members.
(ii) The requisite number of depositors provided in sub-section (1) shall not be less than one hundred depositors or not less than such percentage of the total number of depositors as may be prescribed, whichever is less, or any depositor or depositors to whom the company owes such percentage of total deposits of the company as may be prescribed.
(3) In considering an application under sub-section (1), the Tribunal shall take into account, in particular— 64/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022
(a) whether the member or depositor is acting in good faith in making the application for seeking an order;
(b) any evidence before it as to the involvement of any person other than directors or officers of the company on any of the matters provided in clauses (a) to (f) of subsection (1);
(c) whether the cause of action is one which the member or depositor could pursue in his own right rather than through an order under this section;
(d) any evidence before it as to the views of the members or depositors of the company who have no personal interest, direct or indirect, in the matter being proceeded under this section;
(e) where the cause of action is an act or omission that is yet to occur, whether the act or omission could be, and in the circumstances would be likely to be— (i) authorised by the company before it occurs; or
(ii) ratified by the company after it occurs;
(f) where the cause of action is an act or omission that has already occurred, whether the act or omission could be, and in the circumstances would be likely to be, 65/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 ratified by the company.
(4) If an application filed under sub-section (1) is admitted, then the Tribunal shall have regard to the following, namely:—
(a) public notice shall be served on admission of the application to all the members or depositors of the class in such manner as may be prescribed;
(b) all similar applications prevalent in any jurisdiction should be consolidated into a single application and the class members or depositors should be allowed to choose the lead applicant and in the event the members or depositors of the class are unable to come to a consensus, the Tribunal shall have the power to appoint a lead applicant, who shall be in charge of the proceedings from the applicant’s side; 5 10 15 20 25 30 35 40 45 50 156
(c) two class action applications for the same cause of action shall not be allowed;
(d) the cost or expenses connected with the application for class action shall be defrayed by the company or any other person responsible for any oppressive act.
66/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 (5) Any order passed by the Tribunal shall be binding on the company and all its members, depositors and auditor including audit firm or expert or consultant or advisor or any other person associated with the company.
(6) Any company which fails to comply with an order passed by the Tribunal under this section shall be punishable with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to three years and with fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupees.
(7) Where any application filed before the Tribunal is found to be frivolous or vexatious, it shall, for reasons to be recorded in writing, reject the application and make an order that the applicant shall pay to the opposite party such cost, not exceeding one lakh rupees, as may be specified in the order.
(8) Nothing contained in this section shall apply to a banking company.
(9) Subject to the compliance of this section, an 67/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 application may be filed or any other action may be taken under this section by any person, group of persons or any association of persons representing the persons affected by any act or omission, specified in sub-section (1).”
57. A derivative action is an action taken in the interest of the company by any shareholder, either by himself or along with other such shareholders by impleading the company also as a defendant. As it is stated already, it is an exception to the general rule that the plaintiff should be the one who is affected or against whom a wrong is done. Since the Company should be represented through its Directors or other stake holders, it may not be possible for the company to file a suit for itself because of the obvious indifference of the Directors, who alone are the wrong doers. Even though the Company has not filed the suit by being a plaintiff, the member of the company who files the suit will be presumed as the Company, whose interest is affected. The derivative action is an exception to the general procedure. Even though the affected company is arrayed as defendant, it is construed as the plaintiff only. In class action, it is not the interest of the company but it is the interest of the group of 68/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 individuals that is sought to be protected. The plaintiff in class action will have their remedy against the company and its management. So the 'class action' is altogether is a different genre.
58. Mr.P.S.Raman, learned senior counsel for the respondents 1 to 4 and 6, submitted that the National Company Law Tribunal has got exclusive jurisdiction under Sections 241 & 430 of the Companies Act which completely excludes the jurisdiction of the Civil Courts. It is further submitted that the plaintiff who has filed the suit for winding up before the Supreme Court of Mauritius has suppressed the same and filed a suit by calling it as a derivative suit; the plaintiff states that being the majority shareholder, the defendants 2 and 3 along with the sixth defendant as Directors took advantage of their majority in the board and did acts prejudicial to the interest of the minority shareholders; the petitioner who holds 11.63% of share in the APC India, can very well maintain an application under Section 241 of the Companies Act; since he has got 1/10th of the issued share capital of the Company, he cannot suffer from any ineligibility to maintain an application under Section 241 of the Companies Act; Section 241 of the Companies Act also covers complaints 69/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 prejudicial to the interest of the company and on minority members; the National Company Law Tribunal has got power to grant all reliefs under Section 242 (2) of the Companies Act; hence in whatsoever manner the plaintiff is aggrieved, he can maintain an application before the National Company Law Tribunal itself without filing a civil suit.
59. Mr.V.P.Raman, the learned counsel for the fifth respondent submitted that as per the constitution of the fifth respondent APC International, the Court at Mauritius has got the jurisdiction and not the Courts in India and further the fifth respondent's company constitution has got a clause for arbitration and hence no civil suit can be filed. The learned counsel for the fifth respondent cited the decisions of Vidya Drolia's case (cited supra) in order to canvas his point that the matter in dispute will not fall under non-arbitrable dispute.
60. It is further submitted that, the plaintiff had filed a suit before the Supreme Court of Mauritius for winding up the company and the said fact was suppressed while filing the suit. However, during the pendency of the suit it is stated that the petitioner had withdrawn the said proceedings.
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61. The petitioner being one of the shareholders of APC International had filed the proceedings at Mauritius by seeking the relief of winding up the fourth respondent company. Since the Courts at Mauritius alone has got jurisdiction over the affairs of the fourth respondent company, the petitioner could have filed a suit of that nature at Mauritius. According to the petitioner, the suit filed in India is a derivative suit filed on behalf of the first respondent to safeguard the interest of the first respondent only.
62. By taking cue from Dhulabai and the submissions made by both side counsels, I feel the following tests are relevant to find out whether the civil court has jurisdiction to entertain derivative suits or whether such claims can be laid down before the Tribunal. And they are:
(i) Whether Special act has got avenues for derivative actions along with other actions?
(ii) Whether the Special act has provided the machinery to deal with such kind of actions?
(iii) Whether effective and enforceable remedy is available under the Special Act for derivative actions and other actions?71/110
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(iv) Whether the jurisdiction of the Civil Courts is barred either by express terms or by clear implication?
63. Mr.P.S.Raman, cited the judgment of Delhi High Court rendered in The DELHI AND DISTRICT CRICKET ASSOCIATION Vs. SUDHIR KUMAR AGGARWAL AND OTHERS [MANU/DE/1751/2020] and submitted that Section 430 of the Companies Act completely bars the jurisdiction of the Civil Court.
64. It is seen in the said case a comparative table is drawn and thereby the provisions and relief provided, under the Companies Act, 2013, corresponding to the reliefs sought by the plaintiff in the suit is shown. The above endeavour is to show that the remedies sought by the plaintiff by way of filing the suit, are very much available under the Companies Act itself by filing an application before the National Company Law Tribunal (NCLT). An incidental reference was also made to the judgment of the Supreme Court held in SHASHI PRAKASH KHEMKA VS. NEPC MICON [2019) 18 SCC 569] and DHULABHAI AND OTHERS VS. THE STATE OF MADHYA PRADESH AND OTHERS [MANU/SC/0157/1968] and held that 72/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 the special statute has created the rights sought by the plaintiff in itself along with the machinery and remedy and hence the suit is not maintainable.
65. It is further shown that sec.420 empowers the NCLT 'to pass orders thereon as it deems fit' and sec. 424, the NCLT has the similar powers of the civil court. For a better understanding the relevant portion of the judgment of DELHI AND DISTRICT CRICKET ASSOCIATION VS. SUDHIR KUMAR AGGARWAL AND OTHERS [MANU/DE/1751/2020], is extracted as below:
“7. The decision of the Supreme Court in Shashi Prakash Khemka vs NEPC Micon & Ors. 2019 SCC Online SC 223 is relied upon. It held inter alia as under:
"The submission of the learned counsel is that the subsequent legal developments to the impugned order have a direct effect on the present case as the Companies Act, 2013 has been amended which provides for the power of rectification of the Register under Section 59 of the said Act. Learned counsel has also drawn our attention to Section 430 of the Act, which reads as under:73/110
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430. Civil court not to have jurisdiction.
No civil court shall have jurisdiction to entertain any suit or proceeding in respect of any matter which the Tribunal or the Appellate Tribunal is empowered to determine by or under this Act or any other law for the time being in force and no injunction shall be granted by any court or other authority in respect of any action taken or to be taken in pursuance of any power conferred by or under this Act or any other law for the time being in force, by the Tribunal or the Appellate." The effect of the aforesaid provision is that in matters in respect of which power has been conferred on the NCLT, the jurisdiction of the civil court is completely barred.
It is not in dispute that were a dispute to arise today, the civil suit remedy would be completely barred and the power would be vested with the National Company Law Tribunal (NCLT) under Section 39 of the said Act. We are conscious of the fact that in the present case, the cause of action has arisen at a stage prior to this enactment. However, we are of the view that relegating the parties to civil suit now would not be the appropriate 74/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 remedy, especially considering the manner in which Section 430 of the Act is widely worded.
We are thus of the opinion that in view of the subsequent developments, the appropriate course of action would be to relegate the appellants to remedy before the NCLT under the Companies Act, 2013. In view of the lapse of time, we permit the appellants to file a fresh petition within a maximum period of two months from today."
8. The appellant also relies upon the judgment in SAS Hospitality Pvt. Ltd. Vs Surya Constructions Pvt. Ltd. 2018 SCC Online Del 11909:
".... 10. Before going into the question as to whether this Court has the jurisdiction to entertain and try the present suit and grant reliefs prayed for, it is necessary to analyze the scheme of the Companies Act, 2013, along with the constitution of the NCLT. The NCLT has been vested with powers that are far reaching in respect of management and administration of companies. The said powers of the NCLT include powers as broad as "regulation of conduct of affairs of the 75/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 company" under Section 242(2)(a), as also various other specific powers. NCLT is a tribunal which has been constituted to have exclusive jurisdiction in the conduct of affairs of a company and its powers can be contrasted with that of the CLB under the unamended Companies Act, 1956.
11. In the 2013 Act, Sections 407 onwards deal with the constitution of the Tribunal. Section 420 has vested the Tribunal with powers to 'pass such orders thereon as it thinks fit'. The Tribunal is also vested with the power of review. Under Section 424 of the Companies Act, 2013, the Tribunal also has the same powers and functions as are vested with a Civil Court. In addition to the above, the Tribunal also has the power to punish for contempt which was hitherto not available with the CLB. In various ways, the NCLT is not merely exercising the jurisdiction of a Company Court under the new Act, but is also vested with inherent powers and powers to punish for contempt. It is in this background that the court has to decide the issue of jurisdiction, which has been raised by the Defendant.76/110
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12. Under Section 62 of the 2013 Act, a procedure has been prescribed for issuance of share capital. The said procedure involves sending of a letter of offer to existing shareholders [Section 62(1)(a)] and to employees [Section 62(1)(b)]. The manner of sending of the said offer is also prescribed. The said offer also has to contain the details as to the terms under which the offer is being made, including the terms for conversion of debentures or loans to shares. Upon this procedure being followed, the subscribed share capital can be increased by the company.
13. The effect of the increase in the share capital and allotment of the same to any person has an automatic effect, i.e., it results in the alteration of the register of members under Section 59 of the 2013 Act. Thus, while the power to issue share capital vests in the company, the said power, without the section implementing the said issuance, is of no effect, and has no consequence. Any dispute in respect of rectification of the register of members under Section 59, can be raised by any person aggrieved to the Tribunal i.e., the NCLT.
14. Section 430 of the 2013 Act, which bars the 77/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 jurisdiction of the Civil Court, has to be given effect to in this background, and reads as under:
"Section 430: Civil court not to have jurisdiction. No civil court shall have jurisdiction to entertain any suit or proceeding in respect of any matter which the Tribunal or the Appellate Tribunal is empowered to determine by or under this Act or any other law for the time being in force and no injunction shall be granted by any court or other authority in respect of any action taken or to be taken in pursuance of any power conferred by or under this Act or any other law for the time being in force, by the Tribunal or the Appellate Tribunal."
15. The bar contained in Section 430 of the 2013 Act is in respect of entertaining "any suit", or "any proceedings" which the NCLT is "empowered to determine". The NCLT in the present case would be empowered to determine that the allotment of shares in favour of the Defendant Nos.5 to 9 was not done in accordance with the procedure prescribed under Section 62 of the 2013 Act. The NCLT is also empowered to determine as to whether rectification of the register is 78/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 required to be carried out owing to such allotment, or cancellation of allotment ordered, if any. The NCLT can also determine if in the interregnum, the Defendant Nos.5 to 9 ought to exercise any voting rights. The NCLT would be empowered to pass any such orders as it thinks fit, for the smooth conduct of the affairs of the company, which would include an injunction order protecting the assets of the Defendant No.1 Company. The NCLT would also be empowered to oversee and supervise the working of the company, and also appoint such persons as it may deem necessary to regulate the affairs of the company.......
...... 25. In Jai Kumar Arya (supra), a Division Bench of this Court, dealing with the bar under Section 430 of the 2013 Act, held as under:
"99. While examining the merits of these rival contentions, we are fully aware of the interpretative principle, now trite in law, that provisions which operate to exclude the ordinary jurisdiction of civil courts are to be strictly construed, and exclusion of such jurisdiction is 79/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 not to be lightly inferred. The principle of exclusion of jurisdiction is, moreover, never absolute."
26. The bar under Section 430 of the 2013 Act has, therefore, to be strictly construed and there can be no doubt about that. The Division Bench also considered Dhulabai v. State of M.P. AIR 1969 SC 78 (hereinafter, 'Dhulabai'), and held as under:
"101. As, perhaps, the most authoritative pronouncement on the issue, the Constitution Bench of the Supreme Court, in Dhulabhai v State of M.P., AIR 1969 SC 78, set out the following 7 clear principles (of which only the first and last are really relevant to the present case), to be applied for deciding whether a suit was barred under Section 9 of the CPC:
"(1) Where the statute gives a finality to the orders of the special Tribunals the civil courts' jurisdiction must be held to be excluded if there is adequate remedy to do what the civil courts would normally do in a suit. Such provision, however, does not exclude those cases where the provisions of the particular Act have not been complied with or the statutory Tribunal has not acted in 80/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 conformity with the fundamental principles of judicial procedure. (2) Where there is an express bar of the jurisdiction of the court, an examination of the scheme of the particular Act to find the adequacy or the sufficiency of the remedies provided may be relevant but is not decisive to sustain the jurisdiction of the civil court.
Where there is no express exclusion the examination of the remedies and the scheme of the particular Act to find out the intendment becomes necessary and the result of the inquiry may be decisive. In the latter case it is necessary to see if the statute creates a special right or a liability and provides for the determination of the right or liability and further lays down that all questions about the said right and liability shall be determined by the Tribunals so constituted, and whether remedies normally associated with actions in civil courts are prescribed by the said statute or not. (3) Challenge to the provisions of the particular Act as ultra vires cannot be brought before Tribunals constituted under that Act. Even the High Court cannot go into that question on a revision or reference from the decision of the Tribunals. (4) When a provision is already declared unconstitutional or the 81/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 constitutionality of any provision is to be challenged, a suit is open. A writ of certiorari may include a direction for refund if the claim is clearly within the time prescribed by the Limitation Act but it is not a compulsory remedy to replace a suit.
(5) Where the particular Act contains no machinery for refund of tax collected in excess of constitutional limits or illegality collected a suit lies. (6) Questions of the correctness of the assessment apart from its constitutionality are for the decision of the authorities and a civil suit does not lie if the orders of the authorities are declared to be final or there is an express prohibition in the particular Act. In either case the scheme of the particular Act must be examined because it is a relevant enquiry. (7) An exclusion of the jurisdiction of the civil court is not readily to be inferred unless the conditions above set down apply."
(Emphasis supplied)"
..... 34. Yet another reason for holding that this Court would have no jurisdiction is fact that the matter is also pending before the CLB (now transferred to the NCLT at 82/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 the instance of one of the directors). The interim order passed by this Court has been in operation since 12th March, 2014. The said interim order would, continue for a further period of 4 weeks in order to enable the Plaintiff to approach the NCLT..." .
9. Therefore, the appellant submits that the relief sought in the suit is barred from being adjudicated before a civil court, in view of the sweeping ambit of Section 430 of the Companies Act, 2013, it should have been dismissed as not maintainable.”
66. In TATA CONSULTANCY SERVICE LTD. VS. CYRUS INVESTMENTS PVT. LTD., AND OTHERS, [2021 SCC Online SC 272 ] dated 26.3.2021, the Hon’ble full bench of the Supreme Court has recorded the change of language and parameters with regard to oppression and mismanagement and its evolution and presented in a table as under:
“15.26 The change of language and the consequential change of parameters for an inquiry relating to oppression and mismanagement from 1951 to 1956 and from 1956 to 2013 and thereafter can be best 83/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 understood, if the anatomy of the statutory provisions are dissected and presented in a table.
1913 Activities 1956 Act 2013 Act
(After the Amendment Act (with the Amendment
52 of 1951) made under Act 53 of
1963)
(1) Company's affairs are (1) Company's affairs are (1) Company's affairs have being conducted in a being conducted in a been or are being manner- manner- conducted in a manner-
(a) Prejudicial to any
(a) Prejudicial to the (a) Prejudicial to public member or members;
company' interest; interest; (b) Prejudicial to public
(b) Oppressive to some or interest; or
part of the members; (b) Oppressive to any (c) Prejudicial to the
and member or members; interests of the company;
(2) Winding up will (c) Prejudicial to the or unfairly and materially interest of the company; (d) Oppressive to any prejudice the interest of the and member or membership company's or any part of its 2) Winding up will unfairly members prejudice such member or (2) Winding up will members. unfairly prejudice such (3) The object should be to member or members.
bring to an end, the matters complained of.
67. A comparative analysis has also been given in an another table which presents the legislative development in United Kingdom from 1948 to 2006. The said table is extracted hereunder:
15.28. Having thus seen the shift in the Indian legislative policy under Act 52 of 1951 (amending the 1913 Act) and then under the 1956 Act as amended by 84/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 Act 53 of 1963 and thereafter under the 2013 Act, let us also see how the shift in the legislative policy happened in the United Kingdom. A table similar to the one given in para 15.26, is presented below insofar as the English Law is concerned:
1948 English Act 1985 English Act with 2006 Act Amendment in 1991
(i) the company's affairs i) the company's affairs are i) the company's affairs are are being conducted in a being or have been being or have been manner oppressive to some conducted in a manner conducted in a manner part of the members. unfairly prejudicial to the unfairly prejudicial to the interest of some part of its interests of the members
ii) to wind up the company members or; generally or of some part of would unfairly prejudice its members and:
that part of the members, ii) that any actual or though winding up on just proposed act would be so ii) that any actual or and equitable ground may prejudicial then the Court proposed act would be so be justified. would be so prejudicial prejudicial then the Court then the Court may pass may pass such order as it Iii) the order of the Court such order as it thinks fit thinks fit for giving relief should be passed with a for giving relief in respect in respect of the matters view to bringing to an end of the matters complained complained of.
the matters complained of. of.
15.29. There are a few notable features of the shift that happened in England. They are (i) from a “conduct oppressive to some part of the members” the focus has shifted to “conduct unfairly prejudicial to the interests of the members generally or of some part of its members”: (ii) conduct prejudicial to public interest or prejudicial to the company’s interest, does not form 85/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 part of the scheme of English Law; (iii) any actual or proposed act or omission, can also be challenged under English Law on the ground that it would turn out to be prejudicial; (iv) the question of the Court forming an opinion that the facts would otherwise require an order for winding up on just and equitable ground but that the same will unfairly prejudice the complaining members, does not arise under the English Law any more.
68. With these materials available on hand, it has to be seen whether the grievance of this plaintiff can be redressed by way of preferring an application under Section 241 of the Companies Act and whether National Company Law Tribunal has got powers to grant the reliefs prayed by the plaintiff in his suit. If the answer is in affirmative, then the Civil Court's jurisdiction is completely barred.
69. Before passing on to do the tests, the judgment of the Delhi High Court in ICP INVESTMENTS (MAURITIUS) LTD. VS. UPPAL HOUSING PVT. LTD., AND OTHERS [MANU/DE/3232/2019] which is also relevant 86/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 on the point of jurisdiction of the Civil Court to entertain the suits for derivative action can be seen. In the said case it is observed that one of the driving concerns behind the introduction of National Company Law Tribunal and National Company Law Appellate Tribunal was the multiplicity of forum for company law matters such as High Court, Company Law Board, Board of industrial and financial reconstruction, etc., and the introduction of National Company Law Tribunal and National Company Law Appellate Tribunal is to serve as an one stop forum to take care of the functions of these multiple forums.
70. In ICP Investments, the Delhi High Court had taken up the issue of maintainability of the derivative suit and at the end it is held that in view of the sufficient remedial measures provided under Section 241 of the Companies Act, derivative action is not maintainable. However, the co-ordinate bench in RAJEEV SAUMITRA VS. NEETU SINGH & OTHERS [2016 SCC ONLINE DEL 512] has held that the derivative action is maintainable. In ICP Investment (cited supra), it is held as under: 87/110
https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 “37. I must however hasten to add that while an application under Section 397 of the Companies Act, 1956 for relief in cases of oppression was available to a member of the company, only when the affairs of the company were being conducted in a manner oppressive to such member or other members, but under Section 398 thereof an application for relief in cases of mismanagement could lie even on complaint that affairs of the company were being conducted in a manner prejudicial to the interests of the company itself, just like under Section 241 of the Companies Act, 2013. Therefore the only change which has been brought about by Section 241 of the Companies Act, 2013 is that the separate remedies of oppression and mismanagement under Sections 397 and 398 of the erstwhile Act of 1956 have been combined, though under the 1956 Act also, a petition was mostly filed, both under Sections 397 and 398. However notwithstanding which, derivative actions for the benefit of a company were held to be maintainable in India. However, my research does not reveal the said aspect to have been considered in any of the judgments holding a derivative action to be 88/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 maintainable in India. I therefore take the liberty of a holding a derivative action to be per se not maintainable, specially claiming a relief of declaration, which under Section 34 of the Specific Relief Act, 1963 is a discretionary relief, and which discretion will not be exercised in favour of the plaintiff when a statutory remedy for a relief is available.”
71. It is observed in the said case that those cases in India, which dealt the derivative action in India, the changes brought under Section 241 of the Companies Act did not surface.
72. But derivative actions are indispensable in the interest of the Company, when people in control of the affairs of the company do things contrary to the interest of the company. Hence the focus can be, whether such actions are maintainable in the Civil Court, even though exhaustive powers are vested in the Tribunal under Sections 242, 420 and 424 and also the rights provided to the affected under Section 241 of the Companies Act, 2013.89/110
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73. The learned counsel for the fifth respondent drew the attention of this court to the vision of the National Company Law Tribunal with regard to the above subject and how they perceive their power to deal derivative actions, by referring some of the judgements of the Tribunals.
74. In CYRUS INVESTMENTS PVT. LTD.,AND OTHERS VS. TATA SONS LTD., AND OTHER dated 17.04.2017 [MANU/NC/0280/2017], the National Company Law Tribunal, Mumbai has viewed that Section 241 of the Companies Act is the combination of both personal actions and derivative actions. And the relevant part is extracted as under:
“ ...
9. Law permits to seek a remedy to the grievances of one's own, but the unique feature in Section 241 in Chapter-XVI is that member qualified can seek a reedy either on his behalf or on others behalf. The reason behind to complain on others behalf is company on its own cannot seek remedy. When the Directors themselves become perpetrators, it is quite natural that they will not come forward to seek a remedy on company's behalf. To get over a situation like this, exceptional remedy has 90/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 been carved out to prevent oppression and mismanagement against its shareholders or company. So this section is combination of personal actions and derivative actions. In Sec.24(1), it has been categorically mentioned that the members complaining u/s. 241 hall have 10% shareholding or not less than one tenth of members of its number of members.”
75. The exclusive nature of representative action in the interest of the company by way of a derivative action has been rightly appreciated by the Tribunals and it is reflected in the judgment of the very same Tribunal in CYRUS INVESTMENTS PVT. LTD.,AND OTHERS VS. TATA SONS LTD., AND OTHER dated 21.09.2017 [MANU/NL/0100/2017].
76. In the light of these discussions, the provisions of Section 241 and 242 of the Companies Act need to be read together for the purpose of the issue in hand. The provision under Section 241 of the Companies Act, 2013, opens up by referring the eligible person, who has the 'standing' to initiate action under this provision. It is ‘any member’ of the company. Suiting to the present context of discussion, Sec.241 is reproduced as under:
91/110
https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 “241.Application to Tribunal for relief in cases of oppression, etc. (1) Any member of a company who complains that--
(a) the affairs of the company have been or are being conducted in a manner prejudicial to public interest or in a manner prejudicial or oppressive to him or any other member or members or in a manner prejudicial to the interests of the company; or
(b) the material change, not being a change brought about by, or in the interests of, any creditors, including debenture holders or any class of shareholders of the company, has taken place in the management or control of the company, whether by an alteration in the Board of Directors, or manager, or in the ownership of the companys shares, or if it has no share capital, in its membership, or in any other manner whatsoever, and that by reason of such change, it is likely that the affairs of the company will be conducted in a manner prejudicial to its interests or its members or any class of members, may apply to the Tribunal, provided such member has a right to apply under section 244, for an order under this Chapter.
(2) The Central Government, if it is of the opinion that the affairs of the company are being conducted in a manner prejudicial 92/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 to public interest, it may itself apply to the Tribunal for an order under this Chapter.
[Provided that the applicants under this sub-section, in respect of such company or class of companies, as may be prescribed, shall be made before the Principal Bench of the Tribunal which shall be dealt with by such Bench.] [(3) Where in the opinion of the Central Government there exist circumstances suggesting that--
(a) any person concerned in the conduct and management of the affairs of a company is or has been in connection therewith guilty of fraud, misfeasance, persistent negligence or default in carrying out his obligations and functions under the law or of breach of trust;
(b) the business of a company is not or has not been conducted and managed by such person in accordance with sound business principle or prudent commercial practices;
(c) a company is or has been conducted and managed by such person in a manner which likely to cause, or has caused, serious injury or damage to the interest of the trade, industry or business to which such company pertains; or
(d) the business of a company is or has been conducted and managed by such person with intent to default its creditors, members or any 93/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 other person or otherwise for a fraudulent or unlawful purpose or in a manner prejudicial to public interest, the Central Government may initiate a case against such person and refer the same to the Tribunal with a request that the Tribunal may inquire into the case and record a decision as to whether or not such person is a fit and proper person to hold the officer of director or any other office connected with the conduct and management of any company. (4) The person against whom a case is referred to the Tribunal under sub-section (3), shall be jointed as a respondent to the application. (5) Every application under sub-section (3)--
(a) shall contain a concise statement of such circumstances and materials as the Central Government may consider necessary for the purpose of the inquiry; and
(b) shall be signed and verified in the manner laid down in the Code of Civil Procedure (5 of 1908), for the signature and verification of a plaint in a suit by the Central Government.]
77. In this regard, it is also relevant to see the definition of 'member' Section 2 (55) defines ‘member’ as below 2(55).— In this Act, unless the context otherwise requires,— member, in relation to a company, means— 94/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022
(i) the subscriber to the memorandum of the company who shall be deemed to have agreed to become member of the company, and on its registration, shall be entered as member in its register of members;
(ii) every other person who agrees in writing to become a member of the company and whose name is entered in the register of members of the company;
(iii) every person holding shares of the company and whose name is entered as a beneficial owner in the records of a depository.
78. The above definition includes the shareholder also within its fold. As per sec.241, any member of a company is eligible to make complaint if the affairs of the company are being done in a way prejudicial to the interest of the company. If the locus standi of the member to file applications is read along with the object of protecting the interest of the company, it will give an inescapable conclusion that such action can be nothing but derivative action on behalf of the company.
79. In India, the derivative action is not packed distinctly under the scheme of the act, as it has been done so in United Kingdom or 95/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 United States of America. However, one can not deny the fact that the derivative action is more a ‘concept’ than a ‘type’. Since it paved a different concept by deviating from the general concept of 'proper plaintiff rule' of Foss Vs Harbottle, it is to be seen whether that concept was accommodated in India, despite the absence of the words ‘derivative action’ in Indian Company Law. As stated in the earlier paragraphs the Indian Company Law under sec. 241 approves both the ‘standing of the member’ to initiate action and the object of protecting ‘ the interest of the company’ and thus opens up avenues for derivative actions. And Sec. 242 empowers the National Company Law Tribunal to deal with all applications filed under sec.241, which is inclusive of derivative actions.
80. It is already noted that American law entitles a shareholder to file a derivative claim only if he had become a share holder at the time when the cause of action had arisen. However, In English law it doesn’t matter whether a person had become the share holder either before or after the cause of action. Indian law doesn’t make any explicit restriction on timing of becoming a share holder for the purpose of taking any proceedings in the interest of the company. 96/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022
81. Though derivative action has been loosely packed under Sec. 241, the difficulty is that the member who brings derivative action should fulfil the requirement of Section 244 (a) or (b) of the Companies Act. It is because of the absence of any Chapter/sub-chapter for derivative action as seen in the English or American law. In U.K and U.S.A, there is no requirement of specific numbers in respect of the plaintiffs or their shares to initiate a derivative action. The only requirement there is that the plaintiff in a derivative claim should sufficiently and adequately represents the interest of the company. It is the quality of the plaintiff and not the quantity that really matters.
82. So far as the safeguard against misuse the English law mandates previous permission of the court to file a derivative claim. As stated already American law has an extensive procedure for derivative action and hence that itself is inherent with checks and balance against misuse. In India, even though there is no specific mechanism to prevent misuse, the pre-requisite contemplated under sec.244 for the plaintiff to become eligible to file an Application under sec.241 can prevent misuse to 97/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 certain extent. Since the concept is yet to fully evolve in India, the powers of the Tribunal under sec.420, to pass such orders as it thinks fit would also help to prevent abuse.
83. But Section 244 of the Indian Companies Act 2013 sets out the pre-requisite for a plaintiff to initiate any action under sec.241 as under:
“244. Right to apply under Section 241:
1) The following members of a company shall have the right to apply under section 241, namely:--
(a) in the case of a company having a share capital, 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;
(b) in the case of a company not having a share capital, not less than one-fifth of the total number of its members:98/110
https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 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.
Explanation.--For the purposes of this sub- section, where any share or shares are held by two or more persons jointly, they shall be counted only as one member.
(2) Where any members of a company are entitled to make an application under subsection (1), any one or more of them having obtained the consent in writing of the rest, may make the application on behalf and for the benefit of all of them.”
84. The above requirement is essentially for a class action or representative action against unfair prejudice or oppressive management. Since Indian law does not accommodate the derivative claims under a separate chapter, but placed it under the broader chapter XVI, which is captioned as Prevention of Oppression and Mismanagement. Under English law during the proceedings initiated for protection of the members from unfair prejudice, courts can order for derivative action. It only conveys that the prejudice to the interest of the company can also be one 99/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 among the several consequences of oppression and mismanagement of the affairs of the company.
85. One of the essential features of Section 244 of the Companies Act is that the pre-requirements to initiate an action can be waived by the Tribunal for appropriate reasons on application. Having said that Section 241 of the Companies Act has opened an avenue for derivative action by conferring the right on any member and sec. 242 has provided a Forum, it is to be seen whether the statute provides remedy as well.
86. Both section 241 and 242 of the Companies Act 2013, employ the words ‘prejudicial to the interest of the company’. While Section.241 speaks about the various situations and rights, Section.242 speaks about the various powers and remedies available. Section 242 of the Companies Act 2013 reads as under:
100/110
https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 “242. Powers of Tribunal (1) If, on any application made under section 241, the Tribunal is of the opinion--
(a) that the company's affairs have been or are being conducted in a manner prejudicial or oppressive to any member or members or prejudicial to public interest or in a manner prejudicial to the interests of the company; and
(b) that to wind up the company would unfairly prejudice such member or members, but that otherwise the facts would justify the making of a winding-up order on the ground that it was just and equitable that the company should be wound up, the Tribunal may, with a view to bringing to an end the matters complained of, make such order as it thinks fit.
(2) Without prejudice to the generality of the powers under sub- section (1), an order under that subsection may provide for--
(a) the regulation of conduct of affairs of the company in future;101/110
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(b) the purchase of shares or interests of any members of the company by other members thereof or by the company;
(c) in the case of a purchase of its shares by the company as aforesaid, the consequent reduction of its share capital;
(d) restrictions on the transfer or allotment of the shares of the company;
(e) the termination, setting aside or modification, of any agreement, howsoever arrived at, between the company and the managing director, any other director or manager, upon such terms and conditions as may, in the opinion of the Tribunal, be just and equitable in the circumstances of the case;
(f) the termination, setting aside or modification of any agreement between the company and any person other than those referred to in clause (e):
Provided that no such agreement shall be terminated, set aside or modified except after due notice and after obtaining the consent of the party concerned;
(g) the setting aside of any transfer, delivery of goods, payment, execution or other act relating to 102/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 property made or done by or against the company within three months before the date of the application under this section, which would, if made or done by or against an individual, be deemed in his insolvency to be a fraudulent preference;
(h) removal of the managing director, manager or any of the directors of the company;
(i) recovery of undue gains made by any managing director, manager or director during the period of his appointment as such and the manner of utilisation of the recovery including transfer to Investor Education and Protection Fund or repayment to identifiable victims;
(j) the manner in which the managing director or manager of the company may be appointed subsequent to an order removing the existing managing director or manager of the company made under clause (h);
(k) appointment of such number of persons as directors, who may be required by the Tribunal to report to the Tribunal on such matters as the Tribunal may direct;
(l) imposition of costs as may be deemed fit by the Tribunal;103/110
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(m) any other matter for which, in the opinion of the Tribunal, it is just and equitable that provision should be made.”
87. The whole range of reliefs listed under sec. 242(2) that can be granted by the Special Tribunal along with its residuary power to pass such ‘orders thereon as it thinks fit' under sec.420 in any of the proceedings brought before the same, would only ensure that the person aggrieved or the person interested need not knock the doors of the Civil Courts to protect the interest of the company and file suits therein. Further the powers of the Tribunal to formulate procedure beyond the bounds of Civil Procedure Code, subject to the principles of natural justice, mandate for time bound disposal, appellate remedies along with the power to punish for contempt would only reassert that the Civil Court’s jurisdiction is not required and its bar is complete.
88. In other words, the Companies Act, 2013 is a self contained code which has a scope for individual action, derivative action, representative action or class action. However, the derivative action is not 104/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 placed as sophisticated as it is seen under English or American law. Since the rights, effective remedies and machineries have been provided under the company's Act, the tests laid down supra and its results only gives an answer that the Civil Court's jurisdiction is completely barred in respect of any matter which the Tribunal or the Appellate Tribunal is empowered to determine. At this juncture it is relevant to extract sec. 430 of the Companies Act as below:
“430.Civil court not to have jurisdiction.
No civil court shall have jurisdiction to entertain any suit or proceeding in respect of any matter which the Tribunal or the Appellate Tribunal is empowered to determine by or under this Act or any other law for the time being in force and no injunction shall be granted by any court or other authority in respect of any action taken or to be taken in pursuance of any power conferred by or under this Act or any other law for the time being in force, by the Tribunal or the Appellate Tribunal.”
89. One cannot disagree the fact that the ultimate intention of giving rights to initiate action and conferring power on a Special machinery like National Company Law Tribunal is to bring an end to the 105/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 matter complained of. The combination of judicial members and technical members available in the tribunals can have a better expertise and get better assistance to deal with the special set of litigations brought under the Companies Act than the civil court and hence a more effective and faster remedy is provided under the act for all types of actions packed under sec.241. The whole object of establishing the National Company Law Tribunal and the Appellate avenues is to avoid multiple forum for initiating actions under the Company Law.
90. In this regard it is also appropriate to extract para 15.30 of the judgement of the Hon’ble Supreme Court held in TATA CONSULTANCY SERVICE LTD., VS. CYRUS INVESTMENTS PVT. LTD AND OTHERS., [2021 SCC Online SC 272 ] dated 26.3.2021 as under:
15.30 But despite the huge shift in England, there appears to be a common thread running in all the enactments, both in India and England. In all the 3 Indian enactments, namely the 1913 Act, 1956 Act and the 2013 Act, the Court is ordained, generally to pass such orders “with a view to bringing to an end the matters complained of”. This sentence is found in Section 106/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022 153C(4) of the 1913 Act. It is found in Section 397(2) as well as 398(2) of the 1956 Act and it is also found in Section 242 (1) of the 2013 Act. This is also the common thread that runs through the statutory prescriptions contained in the English Acts of 1948, 1985 and 2006. Therefore, at the stage of granting relief in an application under these provisions, the final question that the Court should ask itself is as to whether the order to be passed will bring to an end the matters complained of.
91. Even though the legislature in its wisdom did not provide a special chapter for derivative action, the phrases included under Sections 241 and 242 of the Companies Act, would show that even without reserving a special chapter, scope for such an action is very much available in India before the Special tribunals. Since the Special Act gives right, provides remedy, confers powers upon Special Tribunals and explicitly bars the jurisdiction of the Civil Courts for all actions that can be taken by a member of the company in pursuant to his rights given under sec.241, the civil court has got no jurisdiction to entertain such matters, which is inclusive of derivative claims as well. 107/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022
92. It is relevant to add that in terms of Section.1(3) of the Companies Act 2013 the Central Government has appointed 1st day of June 2016 as the date on which Section. 241 and 242 along with several other provisions have come into effect and in pursuant to which all matters or proceedings or cases pending before the Company Law Board stood transferred to the National Company Law Tribunal.
93. Mr.P.S.Raman, learned senior counsel for respondents 2 to 6 submitted that except the petitioner, all other minority shareholders have approved the share transfer agreement and hence it cannot be said that the petitioner has brought a derivative suit in the interest of the minority shareholders or that the respondents 2, 3 and 5 have acted against the interest of the Company.
94. Since I have limited my appreciation only with regard to the entitlement of a member to initiate the derivative action in India and its maintainability before the Civil Court, I feel it is appropriate to leave all other questions like whether the plaintiff has made out an action for derivative claim etc., open to the appreciation of the Appropriate Forum. 108/110 https://www.mhc.tn.gov.in/judis CRP (NPD) NO.2044 OF 2022
95. In the result, the Civil Revision Petition is dismissed and the impugned order dated 23.06.2022 passed by the learned Principal Sub- Judge, Namakkal, in CR-19, S.No.4575/2022 in Unnumbered O.S. No.____/2022, is hereby confirmed. Since the broader questions like the nature of the claim, relief etc., made by the petitioner in his suit are left open, it is clarified that the order of the learned Principal Sub-Judge, Namakkal is confirmed only on the point of bar of Civil Court’s jurisdiction. No costs. The petitioner is at liberty to file an Application before the Tribunal within 2 weeks from the date of receipt of the copy of this order. Consequently, connected miscellaneous petitions are closed.
Before parting, this Court is pleased to record the appreciation for the effective assistance rendered by the learned Senior counsels, counsels on record and their junior counsels of both sides, for placing extensive materials to the attention of this Court out of their hard work and expertise.
30 / 11 / 2022
Index : Yes/No
Internet : Yes/No
bkn/tk/jrs
109/110
https://www.mhc.tn.gov.in/judis
CRP (NPD) NO.2044 OF 2022
R.N.MANJULA, J.
bkn/tk/jrs
To
The Principal Sub-Judge
Principal Sub Court
Namakkal.
PRE-DELIVERY ORDER MADE IN
CRP (NPD) NO.2044 OF 2022
30 / 11 / 2022
110/110
https://www.mhc.tn.gov.in/judis