2025 (12) TMI 827 - HC - Companies Law

Employment dispute not a commercial dispute u/s 2(1)(c); Section 430 inapplicable; Order VII Rule 11 rejected

The HC held that the dispute, though involving allegations of misuse of confidential information, breach of non-compete and non-solicitation obligations, ... Nature of dispute arising out of Employment Agreement - Commercial dispute or Not - suit relate to breaches of personal service obligations, misuse of confidential information, and violations of director fiduciary duties under Section 166 of the Companies Act. - commercial dispute within the meaning of Section 2(1)(c)(xii) of the Commercial Courts Act, 2015 or not - Order VII Rule 11(d) of the Code of Civil Procedure, 1908 - Whether the suit is barred by law - HELD THAT:- This Court in Meena Vohra v. Master Hosts (P) Ltd. [2025 (3) TMI 1560 - DELHI HIGH COURT] discussed the position, emphasizing that the objective of Order VII Rule 11 CPC is to prevent irresponsible or frivolous lawsuits from proceeding. The Court observed that this provision offers an independent remedy to the defendant to question the maintainability of a suit, irrespective of the merits of the case. Relying on the Supreme Court’s reasoning in Sopan Sukhdeo Sable v. Assistant Charity Commissione, [2004 (1) TMI 726 - SUPREME COURT] it reiterated that when a suit appears to be an abuse of the court’s process, the court is duty-bound to reject the plaint under Order VII Rule 11. Importantly, the Court noted that the rule imposes an obligation on the judiciary to act whenever the infirmities listed in Rule 11 are present, and such rejection does not bar the plaintiff from filing a fresh plaint under Order VII Rule 13. The definition of “commercial dispute” is undoubtedly inclusive and expansive, covering mercantile relationships arising from contracts or otherwise, joint venture agreements, business cooperation arrangements, and a long list of specified relationships - the mere presence of ancillary business-related clauses such as confidentiality, intellectual property assignment, or non- compete obligations does not metamorphose an employment contract, which is fundamentally a contract of personal service, into a commercial arrangement. This position has been affirmed by various High Courts. In Ekanek Networks Pvt. Ltd. [2024 (5) TMI 1642 - DELHI HIGH COURT], this Court considered whether breaches of an employment agreement containing detailed terms on remuneration, non-compete, non-solicitation, confidentiality, IP assignment, and termination could be treated as a “commercial dispute” under Section 2(1)(c)(xviii) of the CC Act. The Court held that the expression “provision of services” in the said clause must be accorded a strictly commercial connotation, and cannot be conflated with a contract of service, which is inherently a personal service relationship governed by the employer’s control, supervision, and disciplinary authority. Any dispute relating to an employment agreement cannot be treated to be a commercial dispute within the purview of Section 2(1)(c) of the CC Act. Turning to the facts of the present dispute, the core allegations clearly arise out of the Employment Agreement dated 08.09.2016 and the defendant’s statutory fiduciary duties as a director under Section 166 of the Companies Act, 2013. The allegations include unauthorized self-approved salary hikes, failure to ensure statutory secretarial compliances, misuse of confidential information post-resignation, joining a direct competitor (Icogz), solicitation of clients, and attempts to disrupt corporate meetings through frivolous and malicious requisitions. Every one of these allegations flows from personal service obligations and director’s fiduciary duties not from any commercial contract. The alleged misconduct, even when it touches upon corporate governance, remains inextricably anchored in the defendant’s role as an employee and Managing Director. The defendants’ contention that the suit is barred under Section 430 of the Companies Act is wholly misconceived. The gravamen of the dispute, arises out of the Employment Agreement and the defendant’s personal service obligations, coupled with his fiduciary duties under Section 166 of the Companies Act. Disputes of this nature lie outside the exclusive domain of the NCLT, which has no jurisdiction to adjudicate breaches of employment contracts, enforce personal service obligations, or grant consequential reliefs such as injunctions, damages, and confidentiality-related remedies. Hence, the civil court’s jurisdiction remains intact. Accordingly, the bar under Section 430 has no application to the present suit. In the present case, the plaintiffs have sought several reliefs such as declarations of breach of non-compete and non-solicitation obligations, injunctions restraining competitive activity and misuse of confidential information, damages, and ancillary reliefs which fall squarely within the jurisdiction of a civil court and lie wholly outside the competence of the NCLT. Therefore, at this preliminary stage, the plaint cannot be dissected or rejected in part, and the suit must be permitted to proceed for adjudication on all surviving issues. Therefore, the suit is fundamentally civil in nature, centered on employment and related obligations, and is maintainable as a regular civil suit - In any case at this stage the Court may not require to consider the above aspects in great detail and hence the liberty is granted to the defendant to raise all the issues during the course of trial. The defendant’s application under Order VII Rule 11 lacks merit and is liable to be dismissed - the application is dismissed. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether the disputes arising from the Employment Agreement and alleged breaches of fiduciary duties constitute a 'commercial dispute' under Section 2(1)(c) of the Commercial Courts Act, 2015, thereby ousting the ordinary civil jurisdiction and attracting the bar of non-compliance with Section 12A of the said Act. 1.2 Whether the suit is barred under Section 430 of the Companies Act, 2013 on the ground that the subject-matter falls within the exclusive jurisdiction of the National Company Law Tribunal. 1.3 What is the scope of examination under Order VII Rule 11 CPC in determining whether the plaint is barred by law or discloses a cause of action, including whether partial rejection of the plaint is permissible. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Characterisation of the dispute as a 'commercial dispute' under Section 2(1)(c) of the Commercial Courts Act, 2015 and consequences under Section 12A Legal framework 2.1 The Court examined Section 2(1)(c) of the Commercial Courts Act, 2015, which provides an inclusive and expansive definition of 'commercial dispute' covering specified categories such as mercantile transactions, joint venture agreements, shareholders' agreements, subscription and investment agreements, and agreements for sale of goods or provision of services. The Court relied on prior interpretation in Meena Vohra to emphasise that, though broad, the provision is not without limits and is informed by a common 'commercial thread' across all listed categories. 2.2 The Court referred to decisions including Ekanek Networks, Elior India Food Services LLP, Rachit Malhotra, and foreign jurisprudence (Borrowski v. Heinrich Fiedler Perforiertechnik GmbH, Johnson v. Unisys Ltd, Ross v. Christian & Timbers Inc.) affirming that pure employment contracts and personal service relationships are not 'commercial' legal relationships for purposes of commercial court jurisdiction. Interpretation and reasoning 2.3 The Court held that, notwithstanding the wide language of Section 2(1)(c), all enumerated categories relate to transactions involving trade, business operations, commercial obligations, or mercantile dealings. Applying the principle of ejusdem generis, the expression 'commercial dispute' was confined to relationships that are primarily commercial in character, and not to all agreements merely involving a company. 2.4 The Court reasoned that employment contracts are fundamentally contracts of personal service, characterised by control, supervision, and disciplinary authority of the employer. The mere inclusion of ancillary clauses (confidentiality, IP assignment, non-compete, non-solicitation) does not convert such personal service agreements into commercial contracts. Importing employment disputes into the commercial courts framework would be contrary to the object of the Commercial Courts Act. 2.5 On the facts, the Court found that the core allegations arise from the Employment Agreement dated 08.09.2016 and the defendant's statutory fiduciary duties under Section 166 of the Companies Act. The plaint alleges unauthorised self-approved salary hikes, failure to ensure statutory and secretarial compliances, misuse of confidential information, joining a direct competitor, solicitation of clients, and disruption of corporate meetings. All these are rooted in personal service obligations and director's duties, not in a commercial or shareholders' agreement. 2.6 The Court rejected the defendant's contention that the Employment Agreement is inseparably part of the Share Subscription-cum-Shareholders' Agreement (SSSA) and that enforcement of the former necessarily enforces the latter. It held that: (i) the SSSA stood terminated under a subsequent Share Purchase Agreement, whereas the Employment Agreement remained operative; (ii) the Employment Agreement is between the company and the executive, with its own terms and termination mechanism; and (iii) no relief or allegation in the plaint requires adjudication or enforcement of the SSSA. Consequently, the 'inseparable agreements' doctrine did not apply. 2.7 The Court noted that attempts to recharacterise employment-linked arrangements as 'shareholders' agreements' or similar commercial instruments had been rejected in earlier cases such as Rachit Malhotra, where an ESOP scheme, though incidentally connected to shareholding, was held to be fundamentally an incident of employment and not a shareholders' agreement within Section 2(1)(c)(xii). 2.8 The Court distinguished Baskar Naidu, relied upon by the defendant, on the basis that it concerned a standalone shareholders' agreement, not an employment agreement intertwined with personal service obligations. Conclusions 2.9 The Court concluded that disputes arising out of an employment agreement constitute disputes regarding personal service and do not fall within the ambit of 'commercial dispute' under Section 2(1)(c) of the Commercial Courts Act. 2.10 On a holistic reading of the plaint, the present dispute is essentially an employment and fiduciary-duty dispute, not a shareholders' agreement or commercial-contract dispute. The jurisdiction of the ordinary civil court is not ousted by the Commercial Courts Act. 2.11 As the suit is not a 'commercial dispute' under the Act, the requirement of pre-institution mediation under Section 12A of the Commercial Courts Act is inapplicable. The plaint is not barred on this ground. Issue 2 - Applicability of Section 430 of the Companies Act, 2013 and alleged bar of civil court jurisdiction Legal framework 2.12 The Court considered Section 430 of the Companies Act, which bars the jurisdiction of civil courts in respect of matters which the NCLT or NCLAT is empowered to determine under the Companies Act. It also referred to Section 166 governing directors' fiduciary duties, and to Section 242(2)(a) which empowers the NCLT to regulate the conduct of a company's affairs in oppression and mismanagement proceedings. Interpretation and reasoning 2.13 The Court reiterated that Section 430 excludes civil court jurisdiction only when the specific controversy is one that the NCLT/NCLAT is empowered to decide under the statutory scheme. The mere involvement of a company or a director does not suffice to oust the civil court's jurisdiction. 2.14 On the pleadings, the Court found that the gravamen of the suit lies in alleged breaches of the Employment Agreement, misuse of confidential information, violation of non-compete and non-solicitation obligations, and breaches of statutory duties under Section 166. Such disputes concern enforcement of personal service obligations, injunctive reliefs and damages tied to an employment relationship, and are not within the statutory remit of the NCLT. 2.15 The Court held that the NCLT has no jurisdiction to adjudicate pure employment contract breaches or to grant the specific injunctions, damages, and confidentiality-related reliefs claimed in the suit. Although some pleadings intersect with shareholder dynamics and there are parallel oppression and mismanagement proceedings, the present action does not seek reliefs that require the NCLT's exclusive powers under Section 242. 2.16 The Court distinguished the decision in Suraj Prakash as one where civil court jurisdiction was barred in respect of a 'pure' oppression and mismanagement dispute. In contrast, the instant suit is centred on personal employment and fiduciary breaches by a managing director/non-executive director, and not on company-level oppression or systemic mismanagement. 2.17 The Court also noted that, out of several substantive prayers, only two were specifically targeted by the defendant as allegedly falling within the NCLT's domain. The bulk of the reliefs (declarations of breach of employment covenants, injunctions against competitive and solicitation activities, and damages) are classic civil remedies. Conclusions 2.18 The Court held that the subject-matter of the suit does not fall within the exclusive jurisdiction of the NCLT and lies properly within the jurisdiction of the civil court. Section 430 of the Companies Act has no application to bar the present suit. Issue 3 - Scope of scrutiny under Order VII Rule 11 CPC, including bar by law and partial rejection of plaint Legal framework 2.19 The Court reiterated the settled principles governing Order VII Rule 11 CPC, relying on precedents including Sopan Sukhdeo Sable, Hardesh Ores, and Meena Vohra. At this stage, the Court is confined to a comprehensive reading of the plaint as it stands, without reference to the written statement or defences, to determine whether (i) the plaint discloses a cause of action, or (ii) the suit is barred by any law on its face. 2.20 It was emphasised that the object of Order VII Rule 11 is to weed out frivolous or irresponsible suits and that the Court has an obligation to act where the infirmities listed in Rule 11 are present. At the same time, it cannot undertake a roving enquiry or evaluate the truth or evidentiary sufficiency of the allegations. 2.21 The Court further relied on the Supreme Court's decision in Central Bank of India v. Prabha Jain to hold that partial rejection of a plaint under Order VII Rule 11 is impermissible. If any one relief or cause of action in the plaint survives scrutiny and is not barred by law, the plaint as a whole cannot be rejected at the threshold. Interpretation and reasoning 2.22 Applying these principles, the Court held that the plaint in the present case sets out detailed factual averments supported by documents, disclosing multiple intertwined causes of action-breaches of the Employment Agreement, misuse of confidential information, violation of non-compete and non-solicitation obligations, and breaches of fiduciary duties under Section 166. 2.23 The objections based on the Commercial Courts Act and Section 430 of the Companies Act required consideration of the true nature and source of the obligations pleaded, and involved mixed questions of fact and law. Such issues are not suitable for determination under Order VII Rule 11 at the threshold, particularly where the plaint on its face supports a maintainable civil action. 2.24 Even assuming, arguendo, that any particular relief might potentially fall within a statutory bar, the Court held that: (i) several other reliefs clearly remain within civil court jurisdiction; and (ii) in view of Central Bank of India v. Prabha Jain, the plaint cannot be dissected to reject only part of the claim or to record adverse findings against specific reliefs in an Order VII Rule 11 proceeding. Conclusions 2.25 The Court concluded that the plaint discloses a clear cause of action and is not demonstrably barred by law on its face. The high threshold for rejection under Order VII Rule 11 is not met. 2.26 Partial rejection of the plaint is legally impermissible; as several reliefs are unquestionably within civil jurisdiction, the application under Order VII Rule 11 CPC could not succeed even on the defendant's own assumptions. 2.27 The application under Order VII Rule 11 CPC was accordingly dismissed, with liberty reserved to the defendant to raise all jurisdictional and other objections at trial, and with an express clarification that the present observations are confined to the determination of the application and shall not prejudice final adjudication of the suit.