2022 (9) TMI 1689 - HC - Companies Law

Members' club audit and EGM resolutions ordering forensic audit and member enquiry barred from civil suit; directed to ss.241-242 remedies.

The dominant issue was whether a civil suit seeking to restrain a members' club from acting on audit findings and resolutions to order a forensic audit ... Suit for declaration, perpetual injunction, mandatory injunction and damages - application for grant of temporary injunction under Order 39, Rule 1 and 2 of the CPC read with Section 151 of the CPC - whether the petitioner is entitled to get a temporary injunction, the issue with regard to maintainability of the suit as raised by the defendant is to be decided first? - HELD THAT:- In the instant case admittedly, the plaintiff is the member of the defendant no.1 club. During 2018-2019, the plaintiff was the chairman of the Finance Sub-Committee. The defendant no.1 came to know that during his tenure as Chairman of the Finance Sub Committee has committed large scale of financial irregularities. To find out the truth of the said irregularities, the defendant no.1 has appointed a Chartered Accountant and he had prepared a report. On receipt of report, the same was discussed in the management committee of the club wherein the majority members of the club expressed their dissatisfaction over the issue of loss caused to the club. Subsequently, an Extraordinary General Meeting of the club was held and in the said meeting a decision was taken to conduct a detailed Forensic Audit for the year 2018-2019 and 2019-2020 by a reputed Charted Accountant Firm. On receipt of the forensic audit report, a decision has been taken to conduct enquiry by the management committee and to issue show cause to the members including the plaintiff who are responsible for the lapses. As per Section 242 of the Act of 2013, if on any application under Section 241 are made, the Tribunal may, with a view to bringing to an end the matters complaint of, make such order as it thinks fit. The judgments referred by the plaintiff in the Case of Karan Singh Grewal [2020 (8) TMI 431 - CALCUTTA HIGH COURT] the facts are different. In the said cases, the plaintiff has not challenge the resolutions of any Extra Ordinary General Meeting or Annual General Meeting and contrary the plaintiff has challenge the procedure of Audi Altrem Partem but in the instant case from the pleading of the plaint, the defendants have given proper opportunity to the plaintiff and the plaintiff has acted upon by submitting his reply and appearing before the committing and filing supplementary reply. This court finds that the suit filed by the plaintiff is not maintainable and thus this court has not considered the application for grant injunction on merit - the suit and the injunction application are dismissed as not maintainable. 1. ISSUES PRESENTED AND CONSIDERED (i) Whether the civil court's jurisdiction was barred under Section 430 of the Companies Act, 2013 in respect of the reliefs claimed, including challenge to the decision in an extraordinary general meeting to conduct a forensic audit, the consequent show-cause notice, and the suspension order. (ii) Whether the grievances pleaded fell within the scope of Sections 241 and 242 of the Companies Act, 2013 (oppression/mismanagement type reliefs before the Tribunal), thereby rendering the civil suit not maintainable and disabling the civil court from granting injunction. 2. ISSUE-WISE DETAILED ANALYSIS Issue (i)-(ii): Bar of civil court jurisdiction under Section 430 and maintainability in light of Sections 241-242 Legal framework (as discussed by the Court): The Court examined Sections 241 and 242 of the Companies Act, 2013 as provisions enabling a member to seek relief where the company's affairs are conducted in a manner prejudicial or oppressive to a member or prejudicial to the company, and empowering the Tribunal to make orders to bring an end to the matters complained of. The Court also considered Section 430, which ousts civil court jurisdiction in respect of matters the Tribunal is empowered to determine and further mandates that no injunction shall be granted by any court in respect of action taken pursuant to powers conferred under the Act. Interpretation and reasoning: The Court treated maintainability as a threshold issue before considering temporary injunction. On the pleadings, it found that the plaintiff (a member) challenged (a) the extraordinary general meeting resolution initiating a forensic audit for specified years, (b) the show-cause notice issued on the basis of the forensic audit, and (c) the suspension order passed thereafter. The Court held that these grievances were covered by Sections 241, 242 (and 244 was noted as part of the statutory scheme) because they concerned the manner in which the company's affairs were conducted and the consequences flowing from corporate decisions/resolutions and committee action within the company's governance framework. Since the Tribunal is empowered to determine such matters and grant appropriate relief, Section 430 was applied to conclude that the civil suit was barred. Distinguishing authorities relied on by the plaintiff: The Court held those decisions inapplicable on the facts as pleaded. It noted that, unlike situations where the dispute was confined to the legality of a show-cause process or violation of natural justice/bye-laws without challenging corporate resolutions, here the plaintiff challenged the extraordinary general meeting decision and subsequent steps taken on acceptance of the forensic audit report. The Court further observed that, on the plaint's own averments, the plaintiff had been given opportunity (reply, personal appearance, supplementary response), undermining reliance on decisions turning on lack of hearing or breach of mandatory procedure. Conclusions: The Court concluded that the suit was not maintainable due to the statutory bar under Section 430 read with the availability of Tribunal jurisdiction under Sections 241-242 for the grievances raised. Consequently, the Court declined to examine the temporary injunction request on merits and dismissed both the suit and the injunction application as not maintainable.