[By Saket Agarwal]
The author is a student of National Law University, Jodhpur
Abstract
Oppression and mismanagement has been provided under Section 241 of the Companies Act, 2013.[1] Oppression is an act which lacks probity and fair dealing to a member and is burdensome, harsh and wrongful.[2] Mismanagement comes into play when there is a mismanagement or apprehension of mismanagement of the affairs of the company.[3] The section itself makes it clear that only the members are entitle to file a petition for oppression and mismanagement. But when it comes to the directors of a quasi-partnership company the situation somewhat changes. Throughout the study, we will see as to how this actually works.
Case: Vikram Bakshi & Ors. v. Connaught Plaza Restaurants Ltd. & Ors.[4]
Facts:
The petitioner; Vikram Bakshi along with the ‘Bakshi Holding’ were the holders of 50% of total shares in the Connaught Plaza Restaurants Ltd.; the respondent company. The rest 50% of the shares were held by the McDonald’s India Pvt. Ltd. The arrangement was entered into through a joint venture agreement between the parties. The petitioner was initially appointed as the managing director of the partnership. He had the right to get appointed for successive years unless there being some exception like incompetency etc. It was agreed that there shall be four directors in the board, two from each side. Further, in case of his exit from the joint venture, he was obliged to sell all his shareholding to the respondent at a fair price.
During the course of business, some disputes arose between the parties. Ultimately, the petitioner was removed from his post of managing director and was asked to sell his shares in the partnership. Hence, the petitioner approached the NCLT for his re-appointment as the managing director.
Judgment:
The NCLT pronounced the order in favour of the petitioner. The NCLT ordered for the re-instatement of the petitioner as the managing director.
Reasoning applied by the NCLT:
The NCLT opined that the petitioner had the right to remain as the managing director of the joint venture. It was also observed that the joint venture, in essence was a partnership between the parties. This is corroborated by the fact that they were holding equal number of equity shares in the joint venture. Additionally, both the parties had the right to appoint equal number of directors. Moreover, in case of ousting of the petitioner, he was under an obligation to sell his shares. These facts show that the like a partnership firm this arrangement was being operated where the partners had the equality in shareholding, participation in the management etc.
Hence, the removal of the petitioner from the post of managing director was unjustified.
Analysis:
It is generally understood that company and partnership are two different concepts having their own peculiar advantages and disadvantages. But there is also something like a ‘quasi-partnership’, which although is a partnership but not in the true sense. It has the features of both a company and a partnership firm. A quasi-partnership may have its articles of association, board of directors, shares etc. like that of a company. But it differs from a company when it comes to the rights of its promoter-director. Generally, in a company a person cannot claim that he has a right to remain as the director of the company. Therefore, he can be easily removed from his position. But in a quasi-partnership company, the promoter-director has a legitimate expectation to continue as the director of the company.[5] This legitimate expectation can validly raise his rights under oppression. The reason being that partners in a partnership firm; have equal rights in terms of profit sharing, participation in the management etc. On the similar lines, partners in a quasi-partnership exercise equal rights.
Under oppression and mismanagement, directorial complaints are not entertained as the section is specifically for the protection of the members of the company. Filing a petition in any other capacity such as a lessee of the company is not maintainable.[6] But when it comes to the family companies and companies functioning as quasi-partnership companies, a petition filed by a director is justified.[7] The reason being that in case of such companies it is very difficult to distinguish between the rights of the person as a member and a director due to the complex structure involved in such kind of companies.
Qualifications for a Quasi-Partnership
Whether there is an existence of quasi-partnership or not, depends upon several factors. This includes: (1) approximate equality in shareholding, (2) approximate equality in participation in the management and (3) restriction on the transferability of shares.[8] As mentioned above, the partners in a quasi-partnership company have equal shares and involvement in the operation of the management. With respect to the third criteria i.e. restriction on the transferability of the shares; it has a much wider implication. This condition is inserted in order to dissuade the parties from leaving the company. Even if that person wants to leave the company, he is bound to liquidate his shareholding in the company in favour of other partners. Further, this third condition is so inherently linked with the employment that in case the founder-director has not made an exit from the organization but merely has changed his position within the company, then also this condition becomes operative. In the Vikram Bakshi case, Vikram Bakshi was not elected as the managing director by the respondents themselves but still he was asked to sell his stakes in the company as per the articles of the company.
Tussle of Contract Law and Company Law
A quasi-partnership company arises just like any other form of partnership through a contract. A quasi-partnership company usually arises through a joint venture agreement. If the terms of the joint venture agreement have been validly entered into the articles of the company, then they are enforceable under section 241. But problem arises when this joint venture has not been incorporated in the articles.
In the Vikram Bakshi case also, the respondent raised this argument that the terms of the joint venture agreement had not been incorporated in the articles of the company. For this, they relied upon the pleadings of the petitioner where it was mentioned that a particular provision of the joint venture agreement was not entered into the articles. But court refuted this argument by maintaining that the petitioner has made this reference with respect to a particular provision and not the complete agreement. Further, there were other documents to prove that the agreement was included in the articles. This shows that the court in this case did not answer the question of failure of incorporation of joint venture in the articles.
The position of law is shady in this regard. In the case of Gamlestaden Fastigheter AB v. Baltic Partners Ltd.,[9] it was held that suits filed under section 241 regarding the joint venture agreement are maintainable. The court reasoned that, in these cases it is impossible to distinguish a person’s right as a member and as a creditor; where a sum of money was advanced by that person to the company relying on that joint venture.
But if this proposition is accepted, then it will amount to a transgression into the jurisdiction of contract law. A joint venture agreement although a term synonymous in the companies act; is actually like any other contact. If the jurisdiction of the companies act is enlarged, this will engulf in itself every possible contract of a company which it enters into. Therefore, it is holy duty of the legislature as well as the judiciary to provide clarity on this enigma.
[1] Section 241, Companies Act, 2013.
[2] V.M. Rao v. Rajeshwari Ramkrishnan, (1976) 1 Mad LJ 393.
[3] Shanti Prasad Jain v.Kalinga Tubes Ltd., AIR 1965 SC 1535 pp. 22.
[4] Vikram Bakshi v. Connaught Plaza Restaurants Ltd. & Ors., [2017] 140 CLA 142.
[5] Kamal Kumar Datta v. Ruby General Hospital, (2005) 67 CLA 1.
[6] P.O. Titus v. Narmada Consumer Stores P. Ltd., (2004) 58 CLA 69.
[7] Adorsamia Ltd. v. Indocam Engineering Systems Ltd., (2000) 100 Comp Cas 370.
[8] A Ramaiya, Guide to the Companies Act pp. 4063.
[9] Gamlestaden Fastigheter AB v. Baltic Partners Ltd., [2007] Bus LR 1521.