2025 (6) TMI 366 - AT - Companies Law

Partnership firms cannot challenge company proceedings as they lack recognized membership under Companies Act 2013 sections 59, 241-244

Mr. Kandimalla Bhaskar Versus M/s. Amaravathi Textile Private Limited And 32 Others

The NCLAT Chennai dismissed a petition challenging proceedings under sections 59, 241, 242, and 244 of the Companies Act, 2013 regarding division of ... Mismanagement and oppression - Division of shares among partners where shares were held in the name of partnership firm - Challenge to proceedings held u/s 59, 241, 242, and 244 of the Companies Act, 2013 - Partnership firm was not a recognized member under the Companies Act, 2013 - HELD THAT:- When the Company Petition was taken up as fresh before this Appellate Tribunal on 19.03.2025, the Appellant had since failed to place on record certain relevant documents, they were granted time, which was further extended by an order of 26.03.2025. This Appellate Tribunal has passed an order on 28.03.2025, whereby the request was made to the parties to venture to settle the dispute and find out the avenues so that the controversy may be laid to rest and for which they were directed to complete the instructions. When the Appeal was taken up next date i.e. on 01.04.2025 in compliance of the order dated 28.03.2025 passed in this Appeal, the parties to the Appeal submitted that they are open for mediations subject to certain conditions and restrictions, that they had in settling the controversy among themselves, for which both the parties have sought three days’ time to place the terms of settlement on record. The controversies inter- se between the parties were to be settled based on the memorandum as submitted by the Appellant. The Respondents were apprehensive with regards to the conditions contained under Clause C of para 6 pertaining to the cost payable towards the mediation, which was observed to be borne by the 1st Respondent Company. The same has been vehemently objected by the Respondent’s Counsel, though they had kept themselves open for mediation, but the cost aspect was not acceptable by them. During the course of the proceedings, the parties have expressed their unanimity that both the parties would be bearing the 50% of the cost of mediation”. Conclusion - i) The petition for division of shares held by a partnership firm was dismissed as not maintainable. ii) The allegations of mismanagement and oppression were found unsubstantiated and dismissed. Appeal closed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Tribunal in this appeal revolve around:(a) Whether the shares held in the name of a partnership firm, which is not a recognized member under the Companies Act, 2013, can be divided among the individual partners in their respective profit-sharing ratios;(b) Whether the Tribunal is the appropriate forum to grant relief concerning the division of shares held by an erstwhile partnership firm in a company;(c) Whether allegations of mismanagement and oppression under Sections 59, 241, 242, and 244 of the Companies Act, 2013, are substantiated to warrant intervention;(d) The procedural issue of whether the parties can be directed to mediation to resolve the dispute and the terms under which such mediation should proceed, including cost-sharing and the preservation of rights to judicial remedies post-mediation.2. ISSUE-WISE DETAILED ANALYSISIssue (a) and (b): Legality of Shareholding by a Partnership Firm and Division of Shares Among PartnersThe legal framework under the Companies Act, 2013, explicitly prohibits a partnership firm from being a member or shareholder in a company. The Tribunal examined whether the shares held by the partnership firm could be treated as held by the individual partners in their respective profit-sharing ratios (40:30:30).The Court noted that the shares have been held in the name of the partnership firm since 1985. The Appellant contended that the shares should be divided among the partners according to their agreed profit-sharing ratio. However, the Respondents argued that the concept of partnership is not applicable for the purpose of shareholding in a company and that the Appellant was attempting to use the partnership concept to settle personal disputes.Relying on the provisions of the Companies Act and established legal principles, the Tribunal held that a partnership firm cannot be a shareholder in a company, and consequently, the relief seeking division of shares held by the partnership firm among individual partners does not lie before the Tribunal. The Tribunal emphasized that it is not the proper forum to grant relief relating to the division of shares of an erstwhile partnership firm.The Tribunal's reasoning was grounded in the statutory prohibition and the procedural limitations of the forum. It rejected the Appellant's contention, finding the petition devoid of merit and substance on this point.Issue (c): Allegations of Mismanagement and Oppression under Sections 59, 241, 242, and 244 of the Companies Act, 2013The Appellant raised allegations of mismanagement and oppression concerning the affairs of the company. The Tribunal examined whether the facts and evidence presented substantiated these claims to warrant intervention.The Tribunal's order indicates that the allegations were not sufficiently substantiated. The dismissal of the petition was premised on the lack of merit or substance in the claims raised. The Tribunal did not find any compelling evidence or legal basis to interfere with the company's affairs under the cited provisions.Although the detailed evidentiary analysis is not exhaustively set out in the judgment, the Tribunal's conclusion reflects a considered evaluation of the submissions and materials before it.Issue (d): Mediation as a Mechanism for Dispute Resolution and Related Procedural MattersUpon hearing the appeal, the Tribunal encouraged the parties to explore mediation to amicably resolve the dispute. The Appellant submitted a memorandum proposing terms for mediation, including:Limiting mediation strictly to issues raised in the Company Petition and Appeal, excluding personal relationship matters;Completion of mediation within 2-3 months with a report to be submitted to the Tribunal;The cost of mediation to be borne by the 1st Respondent Company;Preservation of all contentions, facts, and legal questions for pursuit if mediation fails.The Respondents objected to the cost-bearing clause, refusing to accept the 1st Respondent Company's liability for mediation costs. However, both parties agreed to share mediation costs equally (50% each).The Tribunal also addressed the Appellant's reservation that if mediation failed, all legal contentions would remain open. The Court upheld this position, stating that parties' rights to judicial remedies cannot be curtailed by the mediation process. The Tribunal emphasized that mediation is a consensual process aimed at settlement but does not extinguish the right to seek judicial redress if the mediation outcome is unsatisfactory.The Tribunal thus carved out a procedural framework for mediation, balancing the need for dispute resolution with preservation of parties' substantive rights. The appeal was closed subject to these terms, with the right to judicial remedy explicitly preserved.3. SIGNIFICANT HOLDINGSThe Tribunal's crucial legal reasoning includes the following verbatim excerpts:'As per the procedures and the norms of the Companies Act, a Partnership firm cannot be a member/shareholder in a company registered under the Companies Act.''This Tribunal is not the proper forum to grant relief, relating to the division of shares of the erstwhile partnership firm. Therefore, this relief is hereby rejected.''The present petition is devoid of any merit or substance. Hence, the same is liable to be dismissed.''It will be open for either of the parties to the Appeal that in case if they are aggrieved by any of the observations or the decision itself, which is taken by the Mediator, their right to judicial remedies cannot be curtailed.'Core principles established by the Tribunal include:The statutory prohibition against partnership firms holding shares in companies under the Companies Act, 2013, precludes division of such shares among partners by the Tribunal;The Tribunal is not the appropriate forum to adjudicate disputes relating to shareholding by partnership firms;Allegations of mismanagement and oppression must be substantiated with credible evidence to warrant intervention under Sections 59, 241, 242, and 244;Mediation is a viable and encouraged mechanism for resolving company disputes, but mediation outcomes do not extinguish parties' rights to pursue judicial remedies;Costs of mediation should be borne equally by parties unless otherwise agreed.Final determinations on each issue were:The petition for division of shares held by a partnership firm was dismissed as not maintainable;The allegations of mismanagement and oppression were found unsubstantiated and dismissed;The appeal was closed subject to parties engaging in mediation under agreed terms, including cost-sharing and preservation of judicial rights.