2025 (10) TMI 332 - AT - Companies Law

Appeal allows setting aside waiver of s.244(b) membership threshold; applicants lacked membership to invoke proviso to s.244

Madras Race Club Versus R.D. Ramasamy and M. Magesh Kumar

NCLAT allowed the appeal and set aside the NCLT order that had waived the s.244(b) membership threshold to permit a s.241/242 petition. The tribunal held ... Remedial measures against the acts of Oppression and Mismanagement - Seeking a waiver of the requirements of Section 244(b) in order to enable to pursue Company Petition, under Section 241 read with Section 242 and 59 of the Company Act, 2013 - exceptional circumstances which may permit waiver - HELD THAT:- Section 244 of the Companies Act starts with the word, “the following members of the Company, shall have the right to apply under Section 241”. This implies that only those members having a Share Capital not less than 1/10th or, constituting not less than one-tenth or one-fifth of the total number of members, can file Petition against any act of oppression and mismanagement, under Section 241 of Companies Act. However, an exception under law has also been carved out for the members of the Company, holding less than 1/10th of the Share Capital of the Company or, constituting one-fifth of total number of members who can apply for a waiver under the proviso to sub-section (b) of Section 244 of the Companies Act, to draw a proceedings of oppression and mismanagement, as contemplated under Section 241 & 242 of the Companies Act. Since Section 244 of the Companies Act, enables only a member to invoke Section 244 of the Companies Act, for the grant of waiver to overcome the restrictions imposed by Section 244 of Companies Act, the pre-condition is, that the Respondents should have established themselves to be members of the Club before invoking Section 244 of Companies Act, for grant of waiver, in which they have failed. Thus, there cannot be any presumption or gratuitous treatment under law to treat them to be members for the purposes of Section 244 of Companies Act. Having not done so and having admitted the fact that they are not the members of the Appellant / Club, and there having been established and admitted fact due to the two unrebutted reports that, they are not the members of the Appellant Club who have been validly inducted in the light of the provisions contained under the relevant Articles of Association, the Application under Section 244 of the Companies Act, for grant of waiver, would not be maintainable - a proceedings under Section 244 of Companies Act, are judicial proceedings taken up, before a right to sue is crystallized and it does not entail an exercise of an equitable jurisdiction because, it entails consideration of a substantive right if it already exists under law and only then Section 244 of Companies Act, can be made applicable, to be exercised otherwise not. Regarding the “exceptional circumstances”, that has been sought to be carved out by the Ld. Tribunal while passing the Impugned Order for the purposes of grant of waiver, it could be observed that, first of all, there is no definite logical conclusion that has been drawn by the Ld. Tribunal as to what were the exceptional circumstances, which could have permitted a waiver in relation to an Applicant in the proceedings before Ld. NCLT, who is not a member of the Company and moreover, there is no discussion of the circumstances to establish exceptional circumstances, which could have necessitated permitting the waiver for initiation of the proceedings under Section 241 / 242 of Companies Act. The very fact that, the Respondents have not been able to establish themselves to the members of Appellant Club, and rather admitted that, they are not the members, the Application preferred for grant of waiver at their behest would not be maintainable. If that be so, the Impugned Order, which grants the waiver on the basis of a hypothetical constraint without the same, being foundationed upon a sound principle of law, cannot be sustained. The impugned order is set aside - appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether an application for waiver under the proviso to Section 244(1)(b) of the Companies Act can be granted to persons who are not existing members of the company at the time of filing. 2. Whether prior judicial findings and independent audit/enquiry establishing that certain persons were not validly inducted as members preclude those persons from seeking a waiver under Section 244(1)(b). 3. What constitutes relevant 'exceptional circumstances' warranting exercise of the Tribunal's discretion to waive the numerical/member-status requirements in Section 244(1), and whether the Tribunal applied the correct legal test. 4. Whether a direction to an AGM to 'additionally consider' the question of admission on payment of entrance fee with interest creates substantive membership rights sufficient to satisfy the definition of 'member' under Section 2(55) for purposes of Section 244. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Maintainability of waiver application by non-members Legal framework: Section 244(1) confers the right to apply under Section 241 only on members meeting prescribed numerical/holding thresholds, with a proviso permitting the Tribunal to waive those requirements. Section 2(55) defines 'member' by reference to entry in the register or written agreement to become a member. Precedent treatment: The Tribunal relied on the tests and guidance in the jurisprudence (cited as Cyrus Mistry and Nasik Diocesan Trust extracts) establishing that being a member is a pre-condition for any waiver; if applicants are not members the waiver application must be rejected outright. Interpretation and reasoning: The Court held that the proviso to Section 244 does not abolish the threshold requirement that the applicant be a member; the proviso merely allows relaxation of numerical/percentage thresholds for members who lack requisite numbers/holding. The existence of a substantive membership right (entry in register or equivalent) at the time of filing is a jurisdictional pre-condition for the Tribunal to entertain a waiver application. A person who is not a member cannot be treated as a member by presumption or by equitable indulgence for purposes of invoking Section 244. Ratio vs. Obiter: Ratio - a waiver under Section 244(1)(b) is not available to persons who are not members at the relevant time; membership is a jurisdictional pre-condition. Obiter - remarks on policy consequences of allowing non-members to initiate Section 241 proceedings if waiver permitted. Conclusion: The waiver application filed by persons who were not members at the time of filing was not maintainable; Section 244 cannot be invoked by non-members. Issue 2 - Effect of prior judicial and audit findings that applicants are not members Legal framework: Section 2(55) and Section 244 read together require actual membership (entry in register / written agreement). Judicial determinations and independent audit/enquiry reports that a person is not a validly inducted member bear on the existence of the pre-condition. Precedent treatment: The Court treated the independent audit report and the retired judge's enquiry report as conclusive factual findings up to the stage of the NCLT and NCLAT orders; reliance was placed on authority holding that if applicants are not members the application for waiver must be rejected. Interpretation and reasoning: Where available, credible adjudicatory findings and audit conclusions that a person is not in the register and was not validly admitted negate any claim to membership for purposes of Section 244. A gratuitous or prospective direction (e.g., to 'consider' admission at an AGM) cannot retroactively confer the status of member on a person at the time the waiver application was filed. The Court emphasised that membership status must exist at the time of institution of the application; previous enjoyment of club facilities or historical participation does not suffice once membership has been judicially determined to have ceased. Ratio vs. Obiter: Ratio - prior adjudicatory findings and audit/enquiry reports establishing non-membership preclude waiver under Section 244; gratuitous directions do not confer retrospective membership. Obiter - observations on the non-indefeasible nature of erstwhile membership and the need to pursue statutory remedies to revive membership. Conclusion: The prior findings that the applicants were not members were determinative and precluded their entitlement to obtain a waiver under Section 244. Issue 3 - Nature and proof of 'exceptional circumstances' for waiver under Section 244 Legal framework: The proviso to Section 244 allows the Tribunal discretion to waive numerical/member thresholds in 'exceptional circumstances'; jurisprudence requires the Tribunal to form an opinion on exceptional circumstances based on the proposed Section 241 application and relevant factors (including whether applicants are members). Precedent treatment: The Court applied the established multi-factor approach from authority (factors at paras 145-146 extract), requiring (i) applicant's membership, (ii) prima facie relation of proposed 241 application to oppression/mismanagement, (iii) whether similar allegations were previously adjudicated, and (iv) existence of exceptional circumstances. Interpretation and reasoning: The Tribunal must identify and record cogent, fact-based exceptional circumstances justifying waiver. Hypothetical or conclusory statements that 'there could be exceptional circumstances' are insufficient. Exceptional circumstances cannot be predicated on social objectives of the company, long prior use of facilities by non-members, or on speculative considerations. The discretion is not equitable relief to be exercised without satisfying the statutory pre-condition of membership and careful scrutiny of the proposed 241 allegations. Permitting non-members to obtain waiver based on hypothetical exceptional circumstances would invite procedural chaos and abuse of the 241/242 regime. Ratio vs. Obiter: Ratio - exceptional circumstances must be established on record and be consistent with the statutory requirement that applicants be members; mere past association or social object of the company does not qualify. Obiter - policy warnings regarding unending litigation if non-members were permitted to invoke Section 241 via waiver. Conclusion: The impugned order failed to identify or justify exceptional circumstances grounded in record evidence; the Tribunal's grant of waiver on speculative or gratuitous grounds was legally unsustainable. Issue 4 - Effect of an earlier direction to AGM to 'consider' admission upon payment on membership status Legal framework: Membership under Section 2(55) requires a person's name to be entered in the register or a written agreement to become a member; judicial directions to consider admission do not themselves effectuate membership absent compliance with governing articles and formal admission. Precedent treatment: The Court distinguished a direction requiring an AGM to 'consider' admission (and to consider payment of entrance fee with interest) from a binding adjudicatory determination that a person is a member; it treated such direction as gratuitous or permissive and not conferring substantive legal status. Interpretation and reasoning: A permissive direction to an AGM to consider admission or payment cannot be equated with actual membership for purposes of Section 244; rights under Section 244 cannot be created by such a gratuitous accommodation. The legal test focuses on existing legal right at the time of application, not on possibilities of future admission which require compliance with the Articles and proper registration. Ratio vs. Obiter: Ratio - an AGM's duty to consider admission, or a court's direction to consider payment, does not, by itself, convert a person into a 'member' under Section 2(55) for the purpose of invoking Section 244. Obiter - commentary on the difference between substantive rights and gratuitous accommodations. Conclusion: The NCLAT/NCLT direction to 'additionally consider' admission upon payment did not create the substantive membership necessary to sustain a Section 244 waiver application filed prior to any actual revival of membership. Final Disposition and Legal Conclusion The Tribunal concluded that the waiver granted under Section 244(1)(b) to persons who admitted and were judicially determined to be non-members was unsupportable: membership is a jurisdictional pre-condition, exceptional circumstances were not shown on record, and permissive directions to consider admission do not confer membership retrospectively. Accordingly, the impugned order granting waiver was quashed. This conclusion follows the established legal framework and precedents requiring a member-status check and concrete exceptional circumstances before waiving Section 244 thresholds.