2025 (10) TMI 975 - AT - Companies Law

Appeal allowed; irretrievable deadlock between equal shareholders - powers under s.241/242 used to appoint independent MD

Mrs. C. Valli Narayan Versus C. Krishniah Chetty & Sons Private Limited, Mr. C. Vinod Hayagriv, Mr. C.V. Hayagriv, Mrs. Triveni Vinod, Mrs. C. Visala Hayagriv, Mr. Chaitanya V. Cotha, Mr. Shreyas V. Cotha, Mr. Shyam Ramadhyani, Mr. C. Ganesh Narayan and C. Krishniah Chetty Jewellers Pvt. Ltd. And Mr. C. Ganesh Narayan, Smt. C. Valli Narayan, C. Ganesh Narayan HUF, Deepali Co. Pvt. Ltd. Versus C. Krishniah Chetty & Sons Pvt. Ltd., C. Krishniah Chetty & Sons Manufacturers Pvt. Ltd., C. Krishniah Chetty & Sons Firm, C. Krishniah Chetty & Sons Charitable Trust, C. Krishniah Chetty Foundation, C. Krishniah Chetty Jewellers Pvt. Ltd., Mr. Shyam Ramadhyani, C. Vinod Hayagriv, Mr. C.V. Hayagriv, Mrs. Triveni Vinod, Mrs. C. Visala Hayagriv, Mr. Chaitanya V. Cotha and Mr. Shreyas V. Cotha, Bangalore

NCLAT allowed the appeal, set aside the impugned NCLT orders, and held that there was an irretrievable deadlock between equal shareholder groups ... Oppression and mismanagement in the affairs of the company - dismissal of Recall Application by Appellants - orders can be passed u/s 241 and 242 of the Companies Act to redress the grievance of both parties - HELD THAT:- The Impugned Order fails to consider that the interlocutory applications were filed in a petition filed under Section 241 of the Act. The Impugned Order records that the entire management of the R-1 Company lies with R-8 to R-13. There is not even a mention of the phrase “oppression and mismanagement” in the reasoning and findings of the Impugned Order. Triple test of Prima facie case, balance of convenience, irreparable injury was not met. The ex-parte order does not provide any reasons for urgency in passing the ex-parte interim order. NCLT has not even discussed how a prima facie case of oppression and mismanagement is made out against the Appellants and in the background of Appeal before this Tribunal issue of irreparable damage was not clearly brought out. The effect of the impugned order granting the prayers in IA Nos. 5, 6 and 7 are so wide that they virtually prevent the Appellants from ever conducting jewellery business in any form or manner, in any location. This is all the more significant considering the family history and the tradition of engaging in this very business. Extent or volume of business appears irrelevant in determining whether the Appellants were engaged in the jewellery business prior to the impugned restraint order - The interim orders were issued on 12th July 2021 and the final orders were issued on 24th Aug 2023. NCLT was fully aware of the proceedings before this Tribunal relating to oppression and mismanagement filed by the Appellant. It is inclined to set aside the orders of the adjudicating authority in the second appeal. Oppression and mismanagement u/s 241 and 242 and against whom? - HELD THAT:- The respondent group opposes the petition of the Appellants on the grounds that being directors of R1 company, the Appellant Group has no rights to file the petition for oppression end mismanagement. At the same time, they themselves have filed company petition No 4 of 2020 before Bengaluru bench on the same grounds of oppression and mismanagement and obtained a favorable order. Respondent claims that the R1 company in first appeal (CA(AT) No. 65 of 2019) is a 156-year-old business named as C. Krishniah Chetty & Sons Pvt. Ltd(CKC). The Appellant and Respondent No. 9 are a mother-son duo who are directors and 50% shareholders in the R1 company, i.e., CKC. Appellant is a Director of R1 Company while her son - R9 was the Joint Managing Director of R1 Company. Respondent Nos. 2-7 are also directors and 50% shareholders in the Respondent No. 1 company. Though the Petition for oppression and mismanagement has been filed by the Appellant as a 'minority shareholder', the Petition in effect sought appointment of a larger number of Directors from the Appellant's group on the Board of the R1 Company. The FSA will not come to the rescue of the Appellants for justifying the action of starting a competing and conflicting showroom on 15.03.2023 as the FSA defines the effective date as “(i) the date on which the final order of the High Court of Karnataka / Company Law Tribunal is made and filed with the Registrar of Companies giving effect to the Demerger; or (ii) the date on which the transfer of undertakings pursuant to the Alternate Structure shall come into effect; as applicable”. It is admitted that neither the Demerger nor the transfer of undertakings, nor the transfer of shares took place, therefore the FSA is not enforceable as the effective date was never reached. Further, the said undertakings were not even available and were yet to be drafted, which, as later ascertained, was not possible then, nor is it possible now. Thus, establishing the failure of the FSA in ever reaching the effective date for the rights accrued therein to become enforceable. All rights available to the Appellant Nos. 1-2 under the said FSA are enforceable only after the effective date, which, was never reached. However, rights under these clauses are already being exercised by the Appellant nos. 1-2 despite the pre-conditions not being met in an unlawful and brazenly entitled manner. The City Civil Court, Bengaluru has also observed in an interim order dated 28.03.2023 that no steps were taken by either party to implement the FSA which consequently remains unenforceable and restrained the Appellant Nos. 1-3 from hindering the enjoyment of the subject property. For these reasons, FSA is an inchoate, still-born, escrow document, entered into in 2014, in good faith by both parties which is unenforceable as on date owing to the fact that the requisite pre conditions were never satisfied, and with the change in events and circumstances, mainly opening of the unauthorized competing showroom by the Appellant Nos. 1-2, the same has been rendered infructuous and unenforceable - Clause 3(e) of the FSA which provides for the opening of new stores, specifically refers to the 100% owned store now unlawfully opened by the Appellants and states that the right to operate the same will only be available after the effective date is reached, which, as previously submitted, was never reached. Whether the Petitioner can be allowed reliefs under Sections 241 and 242 of the Act if she is not only a shareholder in the R1 company, but also a director? - HELD THAT:- There is irretrievable breakdown in trust and confidence between the two group of shareholders. Hence, it is fit case for the exercise of powers under Section 241 of the Companies Act, 2013 to break the deadlock and pass appropriate orders to bring an end to the matters complained of. Appellant places its reliance on Needle Industries (India) Ltd & Ors. v. Needle Industries Newey (India) Holding Ltd. and Others [1981 (5) TMI 89 - SUPREME COURT] wherein it was held that it is just and equitable to wind up the Company (Ebrahimi Case). And just because company is prosperous and makes profits is no obstacle to it being wound up. Herein the records reflect that there is a situation of shareholder deadlock between the two equal shareholding groups of the family and hence it was incumbent upon the NCLT to exercise its powers and implement the Binding FSA. Furthermore, Probir Kumar Misra v. Ramani Ramaswamy & Ors. [2009 (8) TMI 713 - HIGH COURT OF MADRAS] holds that wider power are with the CLB under 402 (now NCLT/ NCLAT) to investigate into the affairs of the Company. Absence of any specific prayer to investigate will not refrain the Court from doing so. Thus the NCLT has wide powers to grant an equitable relief to enforce the FSA to bring an end to the matters complained of, specifically when there is no meeting point between the parties. It is a different question whether we rely upon FSA or not, which is being dealt in separately. There was a dispute in the family and to resolve that sometime in 2014 a family settlement agreement was arrived at which has not been fully acted upon by both the parties. The dispute went initially to company law board and later on to NCLT Bengaluru bench. Respondent claims that appellants have violated section 166 of the Act in starting a new Business in A4 company - there is an irretrievable breakdown in trust and confidence between the two group of shareholders and we may have to exercise our powers under Section 421(4) read with Section 241 of the Companies Act, 2013 to break the deadlock and pass appropriate orders to bring an end to the matters complained of. Thus, the finding returned in the impugned order is contrary to the record and the provisions of the Act and therefore erroneous. In the facts and circumstances of the case, particularly since both groups have equal voting rights leading to irretrievable deadlock in the conduct of the affairs of the R1 company, we hereby order to regulate the affairs of the R1 company under Section 242 of the Act. All Directors will continue to remain the Director of the R1 company but one additional Director i.e. Mr Shyam Ramadhayani, CA, who is well versed with the affairs of the R1 company and is a professional, is nominated to act as the Chairman and Managing Director - there are sufficient grounds to recall the orders in appeal. Appeal allowed. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether a petition under Sections 241 and 242 of the Companies Act, 2013 discloses a case of oppression and mismanagement in the affairs of the company. 1.2 Whether the Family Settlement Agreement dated 09.01.2014 (FSA) was valid, binding, acted upon or remained an escrow/inchoate instrument and what legal consequence follows. 1.3 Whether interim/status-quo orders (including ex parte order dated 12.07.2021) issued in interlocutory applications were sustainable and whether recall (CA 62/2021) of such orders was maintainable. 1.4 Whether directors operating or enabling a competing business while being directors of the company contravene duties under Section 166 of the Companies Act, 2013 and whether related-party status and diversion of business were made out. 1.5 If oppression/mismanagement is found, what reliefs are appropriate under Section 242 (including equitable remedies, management regulation, appointment of managers/commissioners or buy-out) to end the deadlock. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Oppression and mismanagement under Sections 241/242 Legal framework: Sections 241 and 242 permit members to petition where company affairs are conducted oppressively or are mismanaged and empower the Tribunal to make varied equitable orders (regulation of conduct, removal/appointment, purchase of shares etc.). Relief requires showing conduct prejudicial/oppressive to members or company and, in some circumstances, just and equitable considerations including deadlock. Precedent treatment: The Court considered authorities establishing high threshold for oppression (recurring, harsh, wrongful acts), the Ebrahimi/needle line on deadlock and just and equitable relief, and modern NCLAT/Supreme Court guidance on proprietary/member rights and director/member capacity to invoke remedies. Interpretation & reasoning: The Tribunal found an irretrievable breakdown of trust between equal shareholding groups and concurrent evidence of exclusion, alleged diversion of business and other adverse acts. It rejected the characterization that the dispute was merely 'personal.' The Tribunal concluded that, on the materials, the affairs were being conducted in a manner prejudicial to company interests and there existed a deadlock warranting intervention under Sections 241/242. Ratio vs. Obiter: Ratio - where equal shareholding plus evidence of exclusion, diversion and trust deficit exists, Tribunal may exercise powers under Sections 241/242 to break deadlock and regulate affairs. Obiter - commentary on family-run/quasi-partnership features as context. Conclusion: Petitioners (members) were entitled to relief under Sections 241/242; NCLT's categorical dismissal on merits was erroneous insofar as it failed to address the deadlock and substantive indicia of oppression/mismanagement. Issue 2 - Validity, enforceability and character of the Family Settlement Agreement (FSA) Legal framework: Contract, stamp/registration and escrow principles; courts may treat family settlements as estoppel where acted upon; parties may keep instruments in custody subject to conditions precedent (escrow doctrine). Precedent treatment: The Tribunal balanced precedents holding (i) unstamped/unregistered family settlements may nevertheless operate as estoppel if acted upon, and (ii) escrowed/writings delivered as escrow remain inoperative pending conditions. It referenced cases both for enforceability by estoppel and for escrow/inchoate character. Interpretation & reasoning: The Tribunal found the FSA was executed, tendered to the designated expert for safe custody, and was partially acted upon (communications, board resolutions, internal conduct). The NCLT's finding that the FSA was merely an escrow and not acted upon was rejected as inconsistent with record. Nevertheless the Tribunal recognised unfulfilled pre-conditions and competing forum orders bearing on enforceability; it held the FSA to be a binding family settlement in substance, though some clauses required actions to be completed for full effect. Ratio vs. Obiter: Ratio - where a family settlement is executed and subsequent conduct corroborates implementation, it can operate as binding by estoppel even if formalities are imperfect; escrow characterization requires clear intention and conditions precedent. Obiter - observations on specific clauses and timing in the present FSA. Conclusion: The FSA was not a mere unenforceable draft in all respects; it had been executed and partially acted upon and could not be summarily treated as non-existent. However, some operative rights depended on completing stipulated steps. Issue 3 - Interlocutory ex parte/status-quo orders and maintainability of recall Legal framework: Interim relief requires satisfaction of the 'triple test' - prima facie case, balance of convenience, and irreparable injury. Recall/review of ex parte orders is maintainable where a party was not served or denied opportunity to be heard; appropriate remedy is to approach the adjudicating authority first. Precedent treatment: The Tribunal applied authorities permitting recall where notice was not served and reiterating that final relief cannot be granted at interim stage; also relied on rules that routine cause-list publication may suffice for notice but technical inability to access virtual hearing may justify recall in appropriate circumstances. Interpretation & reasoning: The Tribunal found the impugned ex parte/status-quo order (12.07.2021) issued in the absence of representation, without clear urgency reasons, and later confirmed after further hearings; the order's scope was extremely wide (effectively restraining future business nationwide) and ambiguous as to the precise meaning of status quo. Applying the triple test, the Tribunal held NCLT failed to demonstrate prima facie case and irreparable injury sufficient for such sweeping interim relief and that the recall application was maintainable in circumstances of virtual-hearing non-access and inadequate notice of listing. Ratio vs. Obiter: Ratio - ex parte interim orders in complex company disputes must satisfy the triple test and be precise in scope; recall is maintainable where lack of notice or inability to be heard is shown. Obiter - observations on virtual hearing logistics in pandemic context. Conclusion: The Tribunal set aside the NCLT orders allowing IA Nos. 5,6,7 and recalled dismissal of the recall application; the ex parte/status-quo orders were disproportionate and procedurally infirm. Issue 4 - Directors' duties (Section 166), related-party character and competing business Legal framework: Section 166 imposes duties of good faith, care, and no conflict of interest; related-party definition (Section 2(76)) captures companies with common directors/shareholders; directors carrying competing business may breach fiduciary duties and justify corrective orders. Precedent treatment: The Tribunal considered authority disallowing directors to compete and decisions on related-party analysis; it recognised that whether a given entity competes and whether diversion occurred are fact-sensitive inquiries needing investigation. Interpretation & reasoning: On the record the Tribunal found indicia that both groups used related entities and that directors on both sides had interests in other entities. Evidence of diversion, client poaching, and conduct prejudicial to company interests justified concern under Section 166. The Tribunal concluded that both sides had contravened director duties to varying extents and that impartial investigation and management regulation were necessary. Ratio vs. Obiter: Ratio - where directors retain interests in rival entities and conduct indicates diversion or prejudicial competitive activity, duties under Section 166 are engaged and corrective measures may be warranted. Obiter - specific findings as to which entity competed were left to further process. Conclusion: Violations of Section 166 and related-party concerns were established sufficiently to warrant regulatory intervention and neutral management oversight to investigate and prevent further prejudice. Issue 5 - Appropriate reliefs under Section 242 and disposition Legal framework: Section 242 empowers varied remedies including regulation of affairs, appointment/removal of directors, purchase of shares, reporting directors, and other equitable measures to end complaints and deadlocks. Precedent treatment: The Tribunal invoked authorities endorsing equitable powers to break deadlocks in family/quasi-partnership situations and the availability of managerial appointments to restore functionality. Interpretation & reasoning: Given equal shareholding, entrenched deadlock, disputed FSA and continuing prejudicial conduct, the Tribunal found it just and equitable to regulate management rather than dissolve. It appointed an independent experienced professional as an additional director and Chairman/Managing Director for a fixed term with reporting obligations and remuneration, and directed NCLT Bengaluru to issue procedural directions. It also set aside the impugned interim orders discussed above. Ratio vs. Obiter: Ratio - in deadlock between equal shareholders of a family company where affairs are prejudicially conducted, Tribunal may appoint an independent professional director/manager and frame orders under Section 242 to restore corporate governance. Obiter - suggested buy-out option and other consensual mechanisms as alternatives. Conclusion: Appeals were allowed in part: NCLT orders granting interim reliefs were set aside; recall allowed; substantive appeal under Sections 241/242 was allowed insofar as the Tribunal exercised its powers to regulate affairs by appointing a neutral Chairman/MD and directing further NCLT oversight; other pending applications disposed without costs.