2019 (8) TMI 1631 - HC - Companies Law

Derivative suit dismissed due to insolvency proceedings and statutory remedy availability. Majority shareholder found not entitled.

ICP Investments (Mauritius) Ltd. Versus Uppal Housing Pvt. Ltd. & Ors.

ICP Investments (Mauritius) Ltd. Versus Uppal Housing Pvt. Ltd. & Ors. - TMI Issues Involved:1. Maintainability of the suit as a derivative action.2. Effect of insolvency proceedings initiated against Umang.3. Jurisdiction of the civil court in light of the Companies Act, 2013.4. Plaintiff's entitlement to seek declarations of agreements as void.5. Plaintiff's standing to maintain a derivative action.Detailed Analysis:Maintainability of the Suit as a Derivative Action:The plaintiff, holding a majority share in Umang, filed a derivative suit to recover Rs. 288,05,00,000/- from Uppal, alleging fraudulent misrepresentation. However, the court noted that derivative actions are typically initiated by minority shareholders when the company’s management fails to protect its interests. The plaintiff, being a majority shareholder, was found not entitled to maintain such an action, especially since the plaintiff had significant control over Umang's management.Effect of Insolvency Proceedings Initiated Against Umang:The court observed that the National Company Law Tribunal (NCLT) had initiated insolvency proceedings against Umang, appointing an Interim Resolution Professional (IRP). Under the Insolvency and Bankruptcy Code (IBC), the IRP takes control of the company’s affairs, superseding the Board of Directors. The court held that once insolvency proceedings are initiated, the IRP is responsible for taking any necessary legal actions on behalf of the company. Therefore, the derivative action by the plaintiff was deemed not maintainable as the plaintiff should approach the IRP for any grievances.Jurisdiction of the Civil Court in Light of the Companies Act, 2013:The court highlighted that the Companies Act, 2013, under Section 241, provides a statutory remedy for issues related to oppression and mismanagement, which includes actions prejudicial to the company’s interests. The court noted that the Parliament, by establishing the NCLT and NCLAT, intended to centralize company law matters, thereby barring the jurisdiction of civil courts under Section 430. Consequently, the court held that the proper remedy for the plaintiff would be to approach the NCLT under Section 241, rendering the civil suit not maintainable.Plaintiff's Entitlement to Seek Declarations of Agreements as Void:The plaintiff sought declarations that the agreements between Umang and Uppal were void due to fraudulent misrepresentation. However, the court emphasized that such grounds are personal to the parties to the contract. As the plaintiff was not a party to the agreements, it could not invoke these grounds. Only Umang itself could plead misrepresentation, and without Umang taking such a plea, the suit could not proceed.Plaintiff's Standing to Maintain a Derivative Action:The court found merit in the argument that the plaintiff, holding a majority share and having its nominee as Managing Director of Umang, could have influenced Umang to make the claim against Uppal. The plaintiff’s failure to do so and instead filing a derivative action was seen as an improper use of the derivative action mechanism, which is an exception to the democratic process governing corporate actions. The court concluded that Umang did not qualify as a deadlock company, and the plaintiff, as a majority shareholder, could have taken necessary actions through shareholder meetings.Conclusion:The court dismissed the suit as a derivative action, stating that it was not maintainable due to the initiation of insolvency proceedings against Umang and the availability of a statutory remedy under the Companies Act, 2013. The court also found the suit not maintainable from the date of its institution, as the plaintiff, being a majority shareholder, had other means to address the grievances. The suit was dismissed with costs assessed at Rs. 5 lacs in favor of Uppal.