Whether Non-Member Director can Approach NCLT for Acts of Oppression and Mismanagement

[By Amarpal Singh & Abhishek Attri]

The authors are students at UPES Dehradun.

INTRODUCTION

A person can be appointed as an additional or alternate director in the company without being a member (“non-member director”) as per Section 161 of the Companies Act, 2013 (“Companies Act”). Further Section 169 of the Companies Act provides the procedure for the removal of directors. In case the non-member director is illegally removed from the company, traditionally, the remedy available to him would have been to approach the civil court.

 Au contraire, after the establishment of the National Company Law Tribunal (“NCLT”), it has been conferred with exclusive jurisdiction over all company matters under Section 430 of the Companies Act. Further, the jurisdiction of the civil courts has been barred. In a situation where an application is made by a member under Section 241, provided the requirements stated in Section 244 of the Companies Act must be satisfied, the NCLT has the power to regulate the affairs of the company under Section 242 of the Companies Act.

 In case, a non-member director is illegally removed from the company, he cannot approach the NCLT under Section 241 considering he is not a member of the company. In addition, he will be rendered remediless since the jurisdiction of the civil court is barred under Section 430. The above question of law is pending before the Supreme Court of India (“Supreme Court”) in the case of Manish Kumar v. Topworth Urja & Metals Limited. The courts have expressed divergent views on the aforementioned proposition which has led to certain confusion. This article aims to provide an analysis of the above proposition of law.

 Facts

Two persons were appointed as additional directors of Topworth Urja & Metals Limited. Manish Kumar (“Appellant”) alleged that the appointment of additional directors was done in contravention of provisions of the Companies Act, 2013, and the Article of Association of the company. He alleged that the appointment was done without his knowledge and by passing a resolution at the purported board meeting. Subsequently, the appointment was ratified by passing a special resolution in the Annual General Meeting. The Appellant aggrieved by the irregularities had filed a suit before the civil court seeking the appointment of directors as illegal and void ab initio. The civil court denied the relief claimed by the Appellant along with a direction to approach NCLT in view of Section 430 of the Companies Act.

 The Appellant instead of approaching the NCLT had filed an appeal before the Bombay High Court (“HC”). He contended that he cannot approach the NCLT for seeking relief under Section 241 of the Companies Act as the right rightfully available to the member as per Section 242 of the Companies Act. The Appellant did not fall under the definition of the member as prescribed by Section 2(55) of the Companies Act, 2013. Therefore, the following issue arose before the HC.

 Issue

Whether a non-member director can approach the civil court for seeking relief against the oppressive acts of the company?

 Decision

The Bombay HC relied on the decision of the Madras HC in the case of Chiranjeevi Rathnam v. Ramesh and held that the word “any member” used in Section 241 of the Companies Act, 2013 should not be interpreted in a confined way as it may lead to abuse in regards to the process of law. Any person who is interested in the management of the company should not be restricted to approach the NCLT because of the words employed in Section 241 i.e., “any member”. Under Section 242, the NCLT is expected to exercise its power upon an application preferred by any member of the company.

 It was further held by the Bombay HC that Section 430 of the Companies Act has to be read along with Section 241. Section 430 bars the jurisdiction of civil courts in respect of any matter which the NCLT or the National Company Law Appellate Tribunal (“NCLAT”) is empowered to determine by or under the Companies Act. The word “any matter” used in Section 430 is of the widest amplitude and includes all company matters. Therefore, the HC dismissed the appeal.

 ANALYSIS

In the case of Jithendra Parlapalli v. Wirecard India (P) Ltd., the same question arose before the NCLT Chennai bench i.e., whether a non-member director can file a petition for oppression and mismanagement. The applicant relied on the decision of Madras HC in the case of Chiranjeevi Rantham v. Ramesh and contended that the word “any member used in Section 241 of the Companies Act should not be read in a confined way. The NCLT distinguished the case of Chiranjeevi by giving detailed reasoning and held that in the case of Chiranjeevi the judgment was passed by the Madras HC by taking into consideration the facts and circumstances of that particular case. Further, it was held that the case of Chiranjeevi included intermingled issues of a member director adopting a non-member director. Consequently, it was held by the NCLT that a non-member director cannot file an application for oppression and mismanagement as the legislature in its wisdom has granted the right to file an application alleging acts of oppression and mismanagement only to the “members” of the company. If non-member directors are allowed to file an application alleging acts of oppression and mismanagement the intention of the legislature will be defeated and it would lead to torrent of litigation. Therefore, due to the divergent views of the courts, the position of law is still not clear leading to confusion.

Illegal removal/ appointment of a director is an act of oppression and mismanagement

The NCLAT in the case of Vijaya Hospital C. Kity & Resorts & Ors v. Sibi C.K & Ors.,  held that appointment of a Chairman and Managing Director without holding a board meeting is in non-compliance with the provisions of the Companies Act. Therefore, it amounts to an act of oppression. Similarly, in the present case, the appointment of additional directors was done in non-compliance with the provisions of the Companies Act. Thus, the NCLT has jurisdiction under section 241 of the Companies Act to decide upon the issue of illegal appointment or removal of a director.

 The jurisdiction of civil court is barred

Section 430 of the Companies Act bars the jurisdiction of civil courts in respect of any matters which the NCLT or NCLAT is empowered to determine by or under the Companies Act. Further, NCLAT in the case of MAIF Investment India PTE Ltd. v. Ind- Barath Power Infra Limited & Ors., held that due to the bar on the jurisdiction of civil courts by virtue of Section 430, the NCLT has exclusive jurisdiction to try all matters including contentious and complex ones under any provision of the Companies Act.

 The intention of the legislature was to create a special forum in the form of a quasi-judicial authority for dealing with disputes that are of civil nature and arising under the Companies Act which includes disputes relating to oppression and mismanagement. Therefore, a non-member director should not be restricted to approach the NCLT for acts of oppression.

 The doctrine of reading down

The doctrine of reading down states that “the courts must interpret the provisions of any law for the purpose of rendering justice.” In the case of Maharao Saheb Shri Bhim Singh Ji v. Union of India, the Supreme Court explained the doctrine of reading down and observed that reading down words with loose lexical amplitude is permissible as a process of law. The courts can and must interpret the words so that the public good is promoted and the misuse is undirected. Therefore, the word “any member” employed in Section 241 of the Companies Act should not be given a restricted meaning and should also include non-member directors.

 International Position

Section 241 of the Canada Business Corporation Act (R.S.C. 1985, c.C-44) provides that a complainant can file an application before the court for the act of oppression. Further, the word “complainant” has been defined in Section 238 as follows:

  • any person who is a registered holder or beneficial owner, and a former registered holder or beneficial owner of a security of a corporation or any of its affiliates;
  • a director or an officer or a former director or officer of a corporation or any of its affiliates;
  • the Director; or
  • any other person who is a fit and proper person to make an application as per the discretion of a court.

Hence, in Canada, a non-member director can approach the court for an act of oppression under Canada Business Corporation Act (R.S.C 1985, c. C-44).

 CONCLUSION

The Companies Act, 2013 was enacted to amend and consolidate the laws relating to companies.  During the course of its implementation, the gaps in the provisions appear on the surface which can only be filled through judicial interpretation. The wording used in Section 430 bars the jurisdiction of civil courts with respect to all company matters. Therefore, a non-member director cannot approach the civil court due to the bar imposed through Section 430 and he cannot approach the NCLT due to the word “any member” employed in Section 241 of the Companies Act. This will lead to injustice and abuse of the process of law. Consequently, the word “any member” under Section 241 of the Companies Act should not be given a restricted meaning, and a non-member director should be allowed to file a petition for oppression and mismanagement.

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