2017 (8) TMI 47 - HC - Companies Law

Civil court lacks jurisdiction for challenging director appointments under Companies Act; NCLT has exclusive authority.

The court held that the civil court lacked jurisdiction to entertain a civil suit challenging the appointment of directors under the Companies Act, 2013. ... Civil suit to declare the appointment/co-option of some of the defendants/Directors of a Private Limited Company - grant permanent injunction restraining them from any manner functioning as Directors of that company - injunction restraining the said company from conducting any Extraordinary General Body Meeting/Annual General Body is maintainable in a civil court, in the light of Section 430 of the Companies Act, 2013 - Held that:- The word member employed in Section 241 of the Act cannot be given a restricted meaning. If restricted meaning is given, it may lead to abuse of the process law, as it is found in this case. Hence, it is essential to apply the doctrine of reading down to make the provisions under Chapter XVI of the Act purposeful. The golden Rule of statutory construction is that the words and phrases or sentences should be interpreted according to the intent of the legistature that passed the Act. Section 241 and 242 should be read together. If the words of the statutes raises doubt, it is inevitable to call in aid the ground and cause of making the statute and the mischiefs, which the Act intends to redress. Under the new Companies Act, 2013, the intention of the legistature is to vest the power of adjudication the matters referred in Section 242 to the Tribunal. On applying the Doctrine of Reading Down, an internal aid to construe the word in a statute to give reasonable meaning, so as to give the supposed purpose the word member referred in Section 241 of the Act, should not be read in isolation or in strict meaning. The word should be read down along with Section 242 of the Act. Therefore, the phrase 'member of the company' in Section 241 mean and include person not only member of the company is strict sense but, also person who bears the character of a member or have substantial interest in the internal affairs of the company . If the plaintiffs claim status as non-member, the disclosed cause of action in the plaint is illusion and irrelevant for third parties, since they have no locus standi to interfere with the affairs of the indoor- management of a Private Limited Company. If they claim status as Directors of the Company, they carry all trappings/characters of a member of the Company. So, to protect the interest of the Company, the remedy for them is under Section 242 of the Companies Act, 2013. Either way the Civil Court has no jurisdiction to entertain the subject matter of the suit. In the light of Section 430 of the Companies Act, 2013 and the alternate redressal forums being adequately provided under the Act, the plaint is not maintainable. Civil Revision Petition is allowed. Issues Involved:1. Maintainability of a civil suit challenging the appointment/co-option of directors in light of Section 430 of the Companies Act, 2013.2. Jurisdiction of Civil Courts versus National Company Law Tribunal (NCLT) under the Companies Act, 2013.3. Rights and remedies available to non-members of a company under the Companies Act, 2013.Detailed Analysis:1. Maintainability of a Civil Suit:The core issue was whether a civil suit to declare the appointment/co-option of certain directors as illegal and void, and to restrain them from functioning as directors, is maintainable in a civil court given Section 430 of the Companies Act, 2013. The plaintiffs sought a declaration that the appointment of certain directors was illegal and sought injunctions to prevent them from functioning as directors and to stop the company from conducting any Extraordinary General Body Meeting (EGM) or Annual General Body Meeting (AGM).The trial court initially took the plaint on file and dismissed the defendants' application to reject the plaint under Order VII, Rule 11 of CPC, stating that Section 430 does not completely bar the jurisdiction of civil courts and that the plaintiffs, being non-members, could not approach the Tribunal for relief under Sections 241 and 242 of the Companies Act.2. Jurisdiction of Civil Courts versus NCLT:The defendants argued that the civil court’s jurisdiction is ousted under Section 430 of the Companies Act, 2013, which states that 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. They contended that the issues raised in the suit fell within the exclusive jurisdiction of the NCLT.The court examined the principles laid down in the Supreme Court's judgment in Dhulabai vs. State of M.P., which clarified that the civil court’s jurisdiction is excluded if there is an adequate remedy provided by the statute and if the statute creates a special right or liability to be determined by a tribunal.3. Rights and Remedies Available to Non-Members:The plaintiffs argued that as non-members, they could not approach the NCLT under Section 241 of the Companies Act, which is available only to members of the company. They contended that the civil court’s jurisdiction was not ousted for non-members.The court, however, found that the relief sought and the cause of action related to the internal management of the company, which falls within the ambit of Sections 241 and 242 of the Companies Act. The court emphasized that the term 'member' in Section 241 should be interpreted broadly to include individuals who bear the character of a member or have a substantial interest in the company’s internal affairs.Conclusion:The court concluded that the plaintiffs, whether as non-members or as directors, could not bypass the statutory mechanism provided under the Companies Act by approaching the civil court. It held that the NCLT had exclusive jurisdiction to deal with matters of company management, including allegations of oppression and mismanagement. Consequently, the civil court had no jurisdiction to entertain the suit, and the plaint was rejected.The Civil Revision Petition was allowed, the trial court's order was set aside, and the plaint was rejected. The court emphasized the adequacy of the alternate redressal mechanism provided under the Companies Act, 2013, and reinforced the ouster of civil court jurisdiction in such matters.