Delhi High Court
Icp Investments (Mauritius) Ltd vs Uppal Housing Pvt. Ltd. & Ors on 30 August, 2019
Author: Rajiv Sahai Endlaw
Bench: Rajiv Sahai Endlaw
* IN THE HIGH COURT OF DELHI AT NEW DELHI
% Date of decision: 30th August, 2019
+ CS(COMM) 1079/2018 & IA No.17779/2018 (u/O VII R-
11(a)&(d) CPC)
ICP INVESTMENTS (MAURITIUS) LTD. ..... Plaintiff
Through: Mr. Pranav Vyas with Mr. Parinay T.
Vasandani, Advs.
Versus
UPPAL HOUSING PVT. LTD. & ORS ..... Defendants
Through: Mr. Manoj K. Singh with Ms. Nilava
Bandyopadhyay, Ms. Vijaya Singh &
Mr. Satwik Singh, Advs. for D-1.
CORAM:
HON'BLE MR. JUSTICE RAJIV SAHAI ENDLAW
1. The plaintiff has instituted this suit against defendants no.1 to 5, viz.
(i) Uppal Housing Pvt. Ltd., (ii) Mangalmay Holdings Pvt. Ltd., (iii) Manoj
Talwar, (iv) Jitendra Singh, and, (v) Umang Realtech Pvt. Ltd., for (A)
declaration, that (a) the Agreement dated 27th March, 2009 entered between
defendant no.5 Umang Realtech Pvt. Ltd. (Umang) and defendant no.1
Uppal Housing Pvt. Ltd. (Uppal) with respect to property at Paprawat is
void, having been brought about by fraudulent misrepresentation by Uppal
to Umang; (b) the Agreement, also dated 27th March, 2009 entered between
Umang and Uppal with respect to property at Daulatpur is void, having been
brought about by fraudulent misrepresentation of Uppal to Umang; (c) the
Agreements dated 27th March, 2009 aforesaid with respect to properties at
Paprawat and Daulatpur were "impossible from the date of Agreement" and
CS(COMM) No.1079/2018 Page 1 of 22
thus void; (d) the Agreements dated 27th March, 2009 aforesaid with respect
to properties at Paprawat and Daulatpur are vague and uncertain and thus
void; (e) the defendants no.2 to 4 Mangalmay Holdings Pvt. Ltd.
(Mangalmay), Manoj Talwar (Manoj) and Jitender Singh (Jitender) have
acted contrary to the interest of Umang; (f) Umang has unreasonably failed
to take steps to recover its monies from Uppal and has thus acted to its own
detriment; and, (B) consequential direction to Uppal to pay the amount of
Rs.288,05,00,000/- to Umang together with interest at 18% per annum.
2. The suit, unaccompanied with any application for urgent relief, came
up before the Joint Registrar on 20th August, 2018, when summons thereof
were ordered to be issued.
3. Pleadings in the suit have since been completed.
4. Uppal has filed IA No.17779/2018 under Order VII Rule 11 (a) and
(d) of the CPC for rejection of the plaint, on the ground of (i) the plaint not
disclosing any cause of action; (b) the suit claim being barred by time; and,
(c) the plaintiff being not entitled to maintain the suit as a derivative action
on behalf of Umang.
5. The aforesaid application of Uppal came up before this Court on 13th
February, 2019, when though the counsel for the plaintiff appeared, but
sought adjournment.
6. The counsel for the plaintiff and the counsel for Uppal have been
heard.
7. None appears for any of the other defendants, all of whom were
reported to be served as far back as on 4th September, 2018 and of which,
Manoj as well as Jitender and Umang together, have also filed written
statements. The right of Mangalmay to file written statement was closed on
CS(COMM) No.1079/2018 Page 2 of 22
23rd January, 2019. Mangalmay, Manoj, Jitender and Umang are proceeded
against ex-parte.
8. It is the case of the plaintiff in the plaint, that (i) the plaintiff and
Uppal are shareholders of Umang, with plaintiff having 52% shareholding
of Umang and Uppal having 45% of the shareholding of Umang; (ii)
Mangalmay has remaining 3% of the shareholding of Umang; (iii) Manoj
and Jitender are the Directors of Umang; (iv) the plaintiff, in its capacity as
a shareholder of Umang, is filing this derivative suit to protect the interest of
Umang and secure recovery of the amount of Rs.288,05,00,000/- due from
Uppal to Umang; (v) the said amount was paid by Umang to Uppal, to
"obtain" approximately 44,43,120 sq. ft. Floor Space Index (FSI) of certain
land parcels located at Daulatpur and Paprawat area; (vi) the said amount
was paid as advance by Umang to Uppal and which monies Umang, in
dereliction of its duty, has failed to recover back from Uppal; (vii) Uppal, in
the year 2007, misrepresented to Umang that development of residential
premises in the Najafgarh area of Delhi had become a permissible activity
and that investments in residential projects in the Najafgarh area of Delhi
would be a profitable investment for Umang; (viii) Uppal, at that time being
a majority shareholder of Umang, insisted that Umang enter into the
Agreements dated 27th March, 2009 with Uppal for obtaining FSI aforesaid;
(ix) the plaintiff has now come to know that Uppal, being a seasoned
developer in Delhi, devised a crooked strategy to obtain huge sums of
monies from Umang, by making false promises which made Umang believe
that by payment of the money aforesaid, it would acquire FSI; (x) that
though Master Plan for Delhi 2021 (MPD 2021) introduced a policy for
development as represented by Uppal, but no steps were ever taken by Delhi
CS(COMM) No.1079/2018 Page 3 of 22
Development Authority (DDA) to give effect to the said policy; (xi) as on
the 27th March, 2009, i.e. the date of the Agreements, there was no land
policy under MPD 2021 and Uppal misguided Umang; (xii) even after
introduction of the Chapter on land policy in MPD 2021, other formalities
and steps were required to give effect to the said policy; (xiii) Umang has
not benefited in any manner whatsoever after being induced by fraud and
misrepresentation to advance Rs.288,05,00,000/- to Uppal and Uppal has
not taken any step whatsoever to give effect to its obligations under the
Agreements dated 27th March, 2009; (xiv) Umang is required to recover
Rs.288,05,00,000/- paid to Uppal but has failed to take any action; (xv) that
several litigations have been initiated against Umang by numerous
homebuyers from whom Umang has received advances for sale of FSI to be
delivered by Uppal to Umang under the Agreements aforesaid; (xvi) Uppal,
for 9 years preceding the suit, has been the beneficiary of the sum of
Rs.288,05,00,000/-; (xvii) the plaintiff sent an email dated 11th June, 2018 to
Uppal, suggesting that the Board of Umang should seek a refund of monies
advanced by Umang to Uppal but Uppal responded that the monies should
be refunded only when certain land was sold; and, (xviii) it thus becomes
clear that Umang is not going to make any demand to seek refund of the
advance of Rs.288,05,00,000/- paid to Uppal; the plaintiff is thus
constrained to file the present suit as a derivative suit.
9. I may record that the plaint, besides the pleas aforesaid, also contains
the pleas of fraud and misrepresentation practiced by Uppal in the matter of
entering into the Agreements dated 27th March, 2009, but the need to record
the same herein for the present purpose is not felt.
CS(COMM) No.1079/2018 Page 4 of 22
10. Uppal seeks rejection of the plaint, contending (i) that the plaintiff, in
the plaint having admitted to be the majority shareholder of Umang, holding
52% of the share capital of Umang, is not entitled to maintain a derivative
action, which under the English law has been permitted to be initiated by a
minority shareholder with respect to the refusal of the management to
protect the interest of a company; (ii) before a derivative action can be
maintained, the test, whether the company on whose behalf derivative action
is initiated was entitled to the relief claimed or not, also has to be the
satisfied; (iii) the Agreements dated 27th March, 2009 between Uppal and
Umang contain an arbitration clause, disentitling Umang from initiating a
suit for any relief arising out of the said agreement; once Umang could not
have instituted the suit, the plaintiff also is not entitled to institute the suit;
(iv) that the plaintiff, in the plaint has admitted that till the year 2016, the
nominee of the plaintiff was the Managing Director of Umang; even then
Umang did not seek any relief as has been sought by the plaintiff in this suit
on behalf of Umang; (v) that proceedings under the Insolvency and
Bankruptcy Code, 2016 (IBC) have been initiated against Umang and
Interim Resolution Professional (IRP) thereunder appointed with respect to
Umang; (vi) that vide Section 238 of the IBC, the provisions thereof have an
overriding effect and therefore no derivative action on behalf of Umang can
be maintained; and, (vii) that no grievance having been made by Umang
with respect to Agreements dated 27th March, 2009, the plaintiff cannot
make a grievance on behalf of Umang.
11. Per contra, the counsel for the plaintiff has argued, (a) that the
plaintiff became a shareholder of Umang on 1st April, 2009 i.e. after the
Agreements dated 27th March, 2009; (b) that as per the Shareholders
CS(COMM) No.1079/2018 Page 5 of 22
Agreement dated 19th February, 2010 between plaintiff, Uppal and Umang,
Umang is managed by its Board of Directors comprising of six Directors,
with the plaintiff as well as Uppal having right to appoint three Directors
each; and, (c) that owing to equal representation of plaintiff and Uppal on
the Board of Umang, the plaintiff, in spite of being majority shareholder,
was/is not in a position to make Umang take action against the Board of
Directors.
12. On enquiry, whether not there is a provision in the Shareholders
Agreement for the eventuality of a deadlock between nominees of the
plaintiff and Uppal on the Board of Directors of Umang, it is stated that
there is no such provision. On further enquiry, whether the Shareholders
Agreement to the aforesaid extent had been incorporated in the Articles of
Association of Umang, the counsel for the plaintiff replies in the affirmative.
13. The counsel for Uppal, in support of his arguments, has referred to:
(I) Starlight Real Estate (ASCOT) Mauritius Limited Vs. Jagrati
Trade Services Private Limited AIR 2018 Cal 173 holding that (a) the
Courts will not interfere in matters of internal administration of a
company; (b) it is for the majority of shareholders to decide the
manner in which the affairs of the company are to be conducted; (c) in
the case of an injury to the corporation, it is for the corporation to sue
in its own name and individual shareholders cannot assume
themselves the right of suing in the name of corporation; (d) the
majority shareholders cannot complain of any irregular act which the
majority are entitled to do regularly; (e) the circumstances in which
minority shareholders actions are allowable, constitute exceptions to
CS(COMM) No.1079/2018 Page 6 of 22
the rule; (f) such an action is filed by the shareholder in his own name
but is for the benefit and advantage of the company; and, (g) the
person filing a derivative claim has to show that the company has a
right to sue but being indulgent in the matter is not likely to sue and
therefore he gets a derivative authority to sue;
(II) Darius Rutton Kavasmaneck Vs. Gharda Chemicals Limited
2014 SCC OnLine Bom 1851 holding that (a) derivative action is an
exception to the rule that only a company can sue on its own behalf;
(b) in exceptional circumstances, an individual shareholder is
permitted to sue the alleged wrongdoers on behalf of the company
because the wrongdoers are themselves in control of the company;
and, (c) the requirements to be complied with, to permit an individual
shareholder to sue on behalf of the company, are very strict; and,
(III) Daniels Vs. Daniels [1978] 2 All ER 89, holding that minority
shareholders are entitled to bring an action where the majority of the
directors, negligently, though without fraud, had benefited themselves
at the expense of the company.
14. I have considered the rival contentions.
15. Before taking up the contention of the counsel for Uppal with respect
to maintainability of this suit as a derivative action on behalf of Umang,
presuming such a derivative action to be maintainable, I will first consider
the effect of proceedings under the IBC having been initiated with respect to
Umang.
16. Though neither party has filed any document in this regard, but I find
that the National Company Law Tribunal (NCLT) vide judgment dated 20 th
CS(COMM) No.1079/2018 Page 7 of 22
August, 2019 in Rachna Singh Vs. Umang Realtech Pvt. Ltd.
MANU/NC/3054/2019 has admitted the application under Section 7 of IBC
read with Rule 4 of Insolvency and Bankruptcy (Application to Adjudicating
Authority) Rules, 2016 for initiation of corporate insolvency resolution
process in respect of Umang and appointed an IRP and declared moratorium
in terms of Section 14 of IBC prohibiting institution of suits or continuation
of pending suits or proceedings against Umang and restraining Umang from
transferring, encumbering, alienating or disposing off any of its assets or
legal rights or beneficial interest.
17. Section 17 of the IBC inter alia provides for the management of the
affairs of the corporate debtor to vest with the IRP from the date of his
appointment, and for the powers of the Board of Directors to stand
superseded and to be exercised instead by the IRP. Under Section 18 of the
IBC, the IRP has the duty inter alia to take control and custody of all assets
over which the corporate debtor has ownership rights, as recorded in the
balance sheet of the corporate debtor, to constitute a Committee of Creditors
and to monitor the assets of corporate debtor and manage its operation until
a Resolution Professional (RP) is appointed by the Committee of Creditors.
Section 19 of the IBC mandates the personnel of the corporate debtors and
its promoters and other persons associated with the management of the
corporate debtor, to extend all assistance and cooperation to the IRP, as may
be required by him in managing the affairs of the corporate debtor. Section
20 of the IBC requires the IRP to make every endeavour to protect and
preserve the value of the property of the corporate debtor and manage the
operations of the corporate debtor as a going concern and to take all such
actions as may be necessary to keep the corporate debtor as a going concern.
CS(COMM) No.1079/2018 Page 8 of 22
18. The IRP appointed with respect to Umang, under the law having
powers / authorities as aforesaid, I have wondered about the maintainability
of a derivative action on behalf of Umang.
19. The essence of a derivative action as captured as far back as in Dr.
Satya Charan Law Vs. Rameshwar Prasad Bajoria AIR 1950 FC 133, is as
under:
"The correct position seems to us to be that ordinarily the
directors of a company are the only persons who can conduct
litigation in the name of the company, but when they are
themselves the wrongdoers against the company and have acted
mala fide or beyond their powers, and their personal interest is
in conflict with their duty in such a way that they cannot or will
not take steps to seek redress for the wrong done to the company,
the majority of the shareholders must in such a case be entitled
to take steps to redress the wrong. There is no provision in the
articles of association to meet the contingency, and therefore the
rule which has been laid down in a long line of cases that in such
circumstances the majority of the shareholders can sue in the
name of the company must apply. In MacDougall v. Gardiner
(1875) 1 Ch.D. 13 and Pender v. Lushington (1877) 6 Ch.D.70,
specific reference was made to the fact that the directors, being
the custodians of the seal of the company, were the persons who
should normally sue in the name of the company, but
nevertheless it was held that the majority of the shareholders
were entitled to sue in the name of the company when relief was
sought against the directors themselves. Even in Automatic Self-
Cleansing Filter Syndicate Company Ltd. v. Cunninghame
[1906] 2 Ch.34, it was recognized that "misconduct" on the part
of the director provided an exception to the rule laid down in that
case."
It is felt that once the affairs of the Umang are taken over by an IRP,
the Directors of Umang can no longer be blamed for not taking the requisite
CS(COMM) No.1079/2018 Page 9 of 22
steps to seek redress for the wrong if any done to Umang, and a derivative
action by plaintiff, as a majority shareholder, for the benefit of Umang
would not be maintainable. The plaintiff now has to approach the IRP for
taking action against Uppal and it is the IRP who has to, if finds any merit in
the grievance of the plaintiff, take appropriate remedy on behalf of Umang.
Moreover, if the plaintiff remains dissatisfied with the decision of IRP, has
remedy before the NCLT.
20. I find the question to be not res integra, as far as foreign jurisdictions
are concerned. Reference in this regard may be made to:
(i) Fargro Vs. Godfroy [1986] 3All ER279, which was a case of
derivative action on behalf of a "deadlock company" i.e.
Articles of Association whereof did not provide a casting vote
for the nominee director of either of two shareholders in the
company. It was held that once such a company goes into
liquidation, the situation is completely changed because there is
neither a board nor any shareholders‟ meeting which in any
sense is in control of the activities of the company let alone its
litigation, and it is the liquidator who is the person in whom
that right is vested. It was held that there is a vast distinction
between the position where the company is a going concern and
the minority shareholders‟ action can be brought as a derivative
action, and a case where a company goes into liquidation,
where there is no longer any necessity for bringing a minority
shareholders‟ action.
CS(COMM) No.1079/2018 Page 10 of 22
(ii) Barrett Vs. Duckett [1995] B.C.C. 362 where the Court of
Appeal (UK), relying on Ferguson Vs. Wallbridge [1935] 3
DLR 66, held that as soon as company goes into liquidation, the
necessity for any such expediency in procedure (derivative
action) disappears; the minority shareholders are then no longer
at the mercy of majority and when even if the liquidator, acting
at the behest of the majority, refuses when requested to take
action in the name of the company, it is open to any
contributory to apply to the Court.
(iii) Cinematic Finance Ltd. Vs. Ryder [2012] B.C.C. 797, where a
Chancery Division of UK held that a derivative action is not
maintainable where the company cannot or will not enforce its
rights due to malfeasance of the Directors. It was held that if a
company is placed into liquidation or administration, then it
would be for the liquidator or the administrator to decide
whether or not to pursue the claims, and thus derivative action
should not normally be brought on behalf of a company in
liquidation or administration. It was further held that the
controlling shareholder should not seek to circumvent the
insolvency regime by starting a derivative action.
(iv) Petroships Investment Pte Ltd. Vs. Wealthplus Pte Ltd. [2016]
SGCA 17 where the Supreme Court of Singapore also held that
a derivative action, enshrined in Section 216A of the
Companies Act, 2006 of that country, is one where there exist
directors who are capable of taking action to vindicate the
CS(COMM) No.1079/2018 Page 11 of 22
company‟s right i.e. they remain in active management. It was
held that whilst a company is a going concern, it is normally for
the Board of Directors to authorize legal proceedings, as the
power to manage is usually vested in the Board; however when
a company enters into liquidation, the board is effectively
functus officio and the liquidator is in the driver seat and the
directors have no power to react to any notice, whether to
prosecute, defend or discontinue an action on the company‟s
behalf.
21. I must however note that the aforesaid cases involved a company
which was at the stage of liquidation, as distinct from Umang in the present
case, against which only the insolvency process has begun. However
considering the duties and role of the IRP under the IBC as discussed
hereinabove, the principle in each of the aforesaid cases i.e. of the
management of the company, on whose fraud/mismanagement a derivative action
becomes maintainable, being no longer in power/control, and consequently a derivative
action being no longer maintainable, also applies to the present case.
22. I also find a Single Judge of the High Court of Madras in Jai
Rajkumar Vs. Stanbic Bank Ghana Ltd. 2018 SCC OnLine Mad 10472 to
have held a suit by way of a derivative action to be not maintainable when
the company, for whose benefit derivative action was initiated, was under
insolvency. It was held that it is for the RP to act on behalf of the corporate
debtor and to initiate suitable proceedings if any deemed necessary for the
benefit of the corporate debtor and its creditors.
23. I respectfully concur.
CS(COMM) No.1079/2018 Page 12 of 22
24. Though this suit is found to have been instituted in or about August,
2018 i.e. nearly one year prior to the NCLT admitting the insolvency
proceedings against Umang, but the insolvency proceedings are also found
to have been initiated in or about the same year i.e. 2018.
25. Resultantly, this suit as a derivative action, on corporate insolvency
proceedings with respect to Umang being admitted and IRP with respect to
Umang being appointed, is deadwood and even if maintainable on the date
of institution thereof, is now not maintainable, the cause of action for this
suit having dissipated.
26. Though the suit is liable to be dismissed on this ground alone, but for
the sake of completeness, I also proceed to adjudicate the maintainability of
the derivative action de hors the aspect of the insolvency proceedings in
respect of Umang having been initiated.
27. I have already noticed hereinabove the dicta of the Federal Court in
Dr. Satya Charan Law supra extending the maintainability of a derivative
action to India. Recently in Ahmed Abdulla Ahmed Al Ghurair Vs. Star
Health and Allied Insurance Company Ltd. 2018 SCC OnLine SC 2554
also, a derivative action was held to be maintainable, though as an exception
to the general principle of locus, and claimable only in a particular situation.
A Division Bench of this Court also in Globe Motors Ltd. Vs. Mehta Teja
Singh (1983) 24 DLT 214 held a derivative action to be maintainable
against directors who are in control of the company, to compel such
directors to account to the company for profits made by appropriating for
themselves a business opportunity which the company would otherwise
have enjoyed. Again, in Rajeev Saumitra Vs. Neetu Singh 2016 SCC
CS(COMM) No.1079/2018 Page 13 of 22
OnLine Del 512, a Co-ordinate Bench, referring to several judgments, held
the derivative action to be maintainable. Reference in this regard may also
be made to N.V.R. Nagappa Chettiar Vs. The Madras Race Club AIR 1951
Mad 831, Anil Madhavdas Ahuja Vs. Marvel Fragrances Pvt. Ltd. 2011
SCC OnLine Bom 1108, Narendra Kumar Berlia Vs. Om Prakash Berlia
2011 SCC OnLine Cal 923, Darius Rutton Kavasmaneck Vs. Gharda
Chemicals Ltd. 2015 SCC OnLine Bom 5813 (DB) and Starlight Real
Estate (Ascot) Mauritius Ltd. supra.
28. The trend of judicial opinion thus, is in favour of maintainability of a
derivative action under the Indian law also.
29. I may however note a few other developments, both international and
national. Internationally, the trend appears to be of codification of the
remedy of derivative action, the origin of which is in common law.
Countries including Canada, Australia, New Zealand, Ghana, Hong Kong,
South Africa, U.K., U.S.A., Malaysia and others, have included the remedy
of derivative action in their respective legislations governing company law.
South Africa and Australia, in their Companies Act, 2008 and Corporations
Act, 2001 respectively, have gone to the extent of expressly abolishing any
common law rights for derivative action, so that the statutory regime alone
remains applicable. As for the U.K., the birthplace of derivative action, their
Parliament for the first time, in the Companies Act, 2006, introduced a
statutory mechanism for derivative claims through Sections 260-264. While
the U.K. Act did not expressly abolish common law rights for derivative
actions, a Chancery Division of the U.K. in Universal Project Management
Services Ltd Vs. Fort Gilkicker MANU/UKCH/0190/2013 held that the
CS(COMM) No.1079/2018 Page 14 of 22
Parliament, by enacting a comprehensive statutory code relating to
derivative actions, had impliedly abolished the common law derivative
action to the extent of derivative claims by members of the company.
30. Though the Indian Parliament also, in the year 2013 has re-enacted
the law relating to companies earlier enshrined in the Companies Act, 1956,
but in its wisdom and notwithstanding the codification of the law relating to
derivative action in other countries, including in the U.K., common law
principles wherefrom were borrowed to hold derivative action to be
maintainable in India, has chosen not to do so. There is however nothing to
show whether decision not to do so was deliberate.
31. In India, while there is no express statutory remedy for a derivative
action, the Companies Act, 2013, in Section 241 provides for a member of a
company to apply to the NCLT for the relief of oppression and
mismanagement, and which section is as under-
"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 company„s 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
CS(COMM) No.1079/2018 Page 15 of 22
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 to public interest, it may itself apply to the Tribunal
for an order under this Chapter.
(emphasis added)
32. A perusal of the relevant company law of Canada, Australia and the
U.K shows that derivative action and the relief of
oppression/mismanagement, or its most similar counterpart, co-exist with
each other. The scope of the two reliefs is distinct, though likely to overlap.
While the relief of oppression/mismanagement is available to a member for
a harm done to him, or another member, the relief of derivative action is for
a member to bring a suit on behalf of the company to protect the interest of
the company itself. For the sake of comparison, it is deemed apposite to set
out herein below Section 459 of Companies Act, 1985 of U.K. as well as
Section 994 of Companies Act, 2006 of U.K. providing for the remedy of
oppression, to a member/shareholder of a company. While Section 459 was
as under:
"PROTECTION OF COMPANY'S MEMBERS AGAINST
UNFAIR PREJUDICE
459. Order on application of company member
(1) A member of a company may apply to the court by petition
for an order under this Part on the ground that the company's
affairs are being or have been conducted in a manner which is
unfairly prejudicial to the interests of some part of the members
(including at least himself) or that any actual or proposed act
CS(COMM) No.1079/2018 Page 16 of 22
or omission of the company (including an act or omission on its
behalf) is or would be so prejudicial.
(2) The provisions of this Part apply to a person who is not a
member of a company but to whom shares in the company have
been transferred or transmitted by operation of law, as those
provisions apply to a member of the company; and references to
a member or members are to be construed accordingly.",
the present Section 994 is as under:
"PROTECTION OF MEMBERS AGAINST UNFAIR
PREJUDICE
994. Petition by company member
(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
conducted in a manner that is unfairly prejudicial to the
interests of members generally or of some part of its
members (including at least himself), or
(b) that an actual or proposed act or omission of the
company (including an act or omission on its behalf) is
or would be so prejudicial.
(2) The provisions of this Part apply to a person who is not a
member of a company but to whom shares in the company have
been transferred or transmitted by operation of law as they
apply to a member of a company.
(3) In this section, and so far as applicable for the purposes
of this section in the other provisions of this Part, "company"
means--
(a) a company within the meaning of this Act, or
CS(COMM) No.1079/2018 Page 17 of 22
(b) a company that is not such a company but is a
statutory water company within the meaning of the
Statutory Water Companies Act 1991."
As would immediately be noticed, under the English codified law
pertaining to companies, now or earlier, a member/shareholder could
complain only when the affairs of a company were being conducted in a
manner prejudicial to the complaining members/shareholders or other
shareholders AND NOT when the affairs of the company were being
conducted in a manner prejudicial to the company itself. The Court of
Appeal for Ontario in Rea Vs. Wildboer 2015 ONCA 373 also considered
this distinction, and held, a) that the derivative action and the oppression
remedy are not mutually exclusive; b) the legislature created two different
remedies, one a corporate remedy and the other a personal remedy; c) the
remedy of oppression can be claimed only when the interests of the
complainant are impacted personally and gives rise to a personal action; and,
d) derivative actions provides aggrieved minority stakeholders with the
ability to pursue a cause of action on behalf of the company to redress
wrongs done in respect of the corporation.
33. In India, however this distinction disappears. Section 241 as
aforesaid, not only provides for a member to approach the NCLT when the
affairs of a company are being conducted in a manner prejudicial to the
member or any other member or members, but also when the affairs are
being conducted in a manner prejudicial to public interest and to the
interests of the company itself. It thus appears to me that a derivative action,
which is filed to protect the interests of the company, would come within the
CS(COMM) No.1079/2018 Page 18 of 22
ambit of Section 241, and the Parliament, in Section 241 supra of the
Companies Act envisaged a remedy that included within its scope
oppression, mismanagement and derivative actions. Once it is found that
the plaintiff, as a member/shareholder of Umang, for the cause of action of
affairs of Umang being conducted in a manner prejudicial to Umang, has
statutory remedy available to him, a derivative action for the benefit of
Umang, by way of civil suit would not be maintainable.
34. It must also be noted that vide the Companies (Second Amendment)
Act, 2002, the Parliament introduced provisions for the constitution of the
NCLT and National Company Law Appellate Tribunal (NCLAT), the
constitutional validity of which was upheld by a Constitutional Bench of the
Supreme Court in Union of India Vs. R. Gandhi (2010) 11 SCC 1. One of
the driving concerns behind the introduction of NCLT and NCLAT was the
multiplicity of fora for company law matters such as the High Court,
Company Law Board (CLB), Board for Industrial and Financial
Reconstruction (BIFR) etc., and to remedy which the NCLT and NCLAT
were envisaged and introduced as a one stop forum which takes over the
functions performed by CLB, BIFR, High Courts etc.
35. It is also worth mentioning that while against the order of the
erstwhile CLB, appeals were provided to the High Court under Section 10 of
the Companies Act, 1956, under the Companies Act, 2013, appeals against
the order of NCLT lie to the NCLAT and against the order of NCLAT
directly to the Supreme Court, eliminating the subject jurisdiction of the
High Court in matters relating to companies.
CS(COMM) No.1079/2018 Page 19 of 22
36. What flows from the above is, that the Parliament having constituted
the NCLT and NCLAT and vested them with jurisdiction over all matters
arising from Section 241, and having also vide Section 430 expressly barred
the jurisdiction of civil courts in respect of any matter that the NCLT or
NCLAT are empowered to determine, derivative actions in common law, to
the extent the statutory regime for oppression and mismanagement is
equipped to deal with, are no longer maintainable in India, and the proper
remedy for suits such as the present one would be under Section 241 before
the NCLT.
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
maintainable in India. I therefore take the liberty of a holding a derivative
CS(COMM) No.1079/2018 Page 20 of 22
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.
38. There is another reason for which I find a derivative action by the
plaintiff for the benefit of Umang to be not available on the pleaded facts. It
is not the case of the plaintiff that Umang, under its agreements with Uppal,
is entitled to refund. Rather, the relief of a refund against Uppal, in favour of
Umang, is premised on relief of declaration of the agreements as void, and
which declaration is sought on the ground of misrepresentation amongst
others. The grounds on which declaration as null and void of the agreements
entered into by Umang with Uppal are sought, are grounds which are
personal to the party to a contract. In my view, a non party to the agreement
between Umang and Uppal, as the plaintiff in the capacity of a shareholder
is, cannot invoke such grounds. It is only Umang itself which can plead
having entered into the agreements with Uppal on account of account of
misrepresentation by Uppal. Without Umang having taken any such plea, no
purpose will be served in proceeding with such suit.
39. Merit is also found in the contention of the counsel for Uppal that the
plaintiff holding majority shares of Umang and also having its nominee as
Managing Director of Umang was entitled to make Umang make a claim
against Uppal as is made by the plaintiff by way of this derivative action,
and having not done so, is not entitled to maintain a derivative action.
40. A derivative action for the benefit of a company has always been held
to be an exception to the democratic process governing the actions of a
CS(COMM) No.1079/2018 Page 21 of 22
company. The said exception will not be permitted to be invoked in the
aforesaid facts. Umang does not qualify as a deadlock company
notwithstanding having equal representation of plaintiff and Uppal on its
Board of Directors, and notwithstanding having no provision in the Articles
of Association for a casting vote for either. The plaintiff, as majority
shareholder of Umang could always, in shareholder meeting, take a
decision, binding on the Board of Directors.
41. Thus, not only is the present suit as a derivative action for the benefit
of Umang, on appointment of IRP with respect to Umang, deadwood and
liable to be struck off from the docket of this Court, but for the reasons
aforesaid, this suit from the date of institution thereof is also not found to be
maintainable.
42. Resultantly, the suit is dismissed with costs in favour of Uppal and
against the plaintiff, and with professional fee assessed at Rs.5 lacs.
43. Decree sheet be drawn up.
RAJIV SAHAI ENDLAW, J.
AUGUST 30, 2019 „ak/bs/gsr‟ (corrected and released on 28th September, 2019) CS(COMM) No.1079/2018 Page 22 of 22