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The Progressive Decline Of An Equitable Jurisdiction

Nikhil Parikshith
9 Jan 2022 9:05 AM GMT
The Progressive Decline Of An Equitable Jurisdiction
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Shareholder Disputes Are Often 'Family' Disputes Family run companies continue to dominate the corporate landscape in India. Ownership and governance of such companies are often dictated by pre-existing family arrangements /settlements which reflect the wishes and vision of the founders of such companies. Shareholding in such companies is acquired by way of inheritance or by way...

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Shareholder Disputes Are Often 'Family' Disputes

Family run companies continue to dominate the corporate landscape in India. Ownership and governance of such companies are often dictated by pre-existing family arrangements /settlements which reflect the wishes and vision of the founders of such companies. Shareholding in such companies is acquired by way of inheritance or by way of gratuitous share transfers. The articles of association of such companies ensure that shareholding and management is confined within the family and not to outsiders.

In this closed setup, professionalism and corporate governance norms are non-existent. Such companies are run in an informal manner. The incumbent management is driven by self preservation and therefore adopts policies to consolidate power rather than create a sense of harmony within the family. Fraudulent acts by one faction of the family on another to gain control over the affairs of the Company are not uncommon. As a consequence, disputes occur. Most shareholder disputes in India are in reality 'family' disputes. There is always an oppressor and a victim in such disputes. Oppression does not occur overnight but is an outcome of incremental and concerted steps. Shareholder disputes arise in myriad ways. The common trend in most of these disputes is one faction within a family attempting to gain control over the entire affairs of the company to the exclusion of other family members - who may eventually become minority shareholders.

This is precisely why the rights of minority shareholders in family run companies stand on a 'special' footing as compared to the rights of an ordinary shareholder of a large conglomerate or a publicly held company. Given the informal nature of family run companies they are viewed in law as akin to being "quasi- partnerships". The superimposition of a quasi-partnership dimension to a family run company is of immense legal significance. In law, quasi-partnerships are required to function in accordance with "conceptions of probity, good faith and mutual confidence" towards its members / shareholders.[1] In simple terms, the board of directors and the majority shareholders of family run companies cannot ride roughshod over the rights and interests of the minority shareholders. The majority shareholders who hold significant control (either by hook or cork) are required in law to act in a fair and equitable manner towards the minority shareholders. They are also required to respect the "legitimate expectations" of the minority shareholders which are derived from the past practices followed in a particular family run company. Such legitimate expectations may include assured representation on Board of the Company or a guarantee that pre-existing family arrangements which have been followed in the past are respected and are not breached. Such pre-existing arrangements may contemplate that the proportion of shareholding between the different branches of a family remains constant with no particular faction being allowed to gain a stronghold over other factions. Equal and fair representation for different branches of a family on the Board is also envisaged in such arrangements. In law, family arrangements / settlements are governed by "special equities" and are therefore binding on the Company.[2]

Important Civil Right Founded On Equity

It is in this background that vindication of minority rights of shareholders in family run companies becomes crucial. In law the oppressed minority shareholders are not remediless as their rights for redressal against unfair and oppressive actions of the majority are governed by principles that have been derived from English Common Law (developed over centuries). India has by and large based in its Company Law on English common law with some alterations tailor made to our environment. Sections 397 & 398 of the erstwhile Companies Act, 1956 empowered minority shareholder to file a petition complaining of oppression and mismanagement for redressal against concerted illegal and oppressive acts by majority shareholders. Such petitions were earlier heard before the erstwhile Company Law Board and are today being heard by the National Company Law Tribunal (NCLT) under Sections 241 & 242 of the Companies Act, 2013. The right to approach the NCLT is an important civil right of a shareholder. This jurisdiction has been repeatedly described by India Courts as an 'equitable jurisdiction' in that legal technicalities cannot deter the Courts from granting relief to the oppressed minority.[3] The NCLT is equipped with vast powers to ensure that voices of dissent within a closed family structure are not suppressed and that the legitimate expectations of the minority shareholders are not trampled upon. The NCLT is also empowered to appoint an administrator to ensure that the Company is run in a just and equitable manner. It can also replace the entire incumbent Board if their actions are prejudicial or oppressive to the minority faction. And pass orders to ensure smooth and effective functioning of the company in the future.

One final aspect may be stated about this unique jurisdiction – the NCLT has 'exclusive' jurisdiction to decide shareholder actions which allege oppression or prejudicial action (s) by the majority (see Section 430, CA 2013). In other words, no other forum can hear and decide such petitions.

Bleak House

Given the significance this jurisdiction holds for minority shareholders, it is unfortunate today that the NCLT benches across the country are placed in a position of being unable to hear and decide such shareholder petitions expeditiously. This situation has arisen with the introduction of the IBC regime (in 2016) under which the NCLT is the "adjudicating authority" to hear insolvency petitions, to supervise the Corporate Insolvency Resolution Process (CIRP) of a Debtor Company and to oversee the liquidation proceedings in case the CIRP process fails. The IBC has today taken over the majority work load of the NCLT and therefore the efficacy of shareholder petitions under Sections 241 & 242 of the Companies Act, 2013 is being set at naught. This fact is apparent from the cause list of various NCLT benches. IBC or IBC related cases dominate the daily cause list and shareholder petitions (albeit few in number) filed under Sections 241-242 of the Companies Act, 2013, are often at the tail end of the daily cause list of matters. Experience shows that these matters often don't get taken up owing to the heavy board of the Bench. Today, shareholder petitions filed since 2017 still remain pending adjudication.

As per data furnished by NCLT, 21,259 cases were pending in NCLT and its benches as on 31.12.2020.[4] Out of these 12,438 cases were related to the IBC (i.e. more than 50%) – note that the IBC came in to operation only in the year 2016 and this figure is going to increase exponentially. Reports suggest that the NCLT is under pressure to dispose off IBC matters from the Central Government as delays in disposal of IBC cases are having an adverse impact on efforts by banks and financial institution to recover non-performing assets (NPAs).[5]

The overwhelming work load of the NCLT and the priority it has to accord to IBC cases has enabled incumbent managements of family run companies to create fait accompli situations thereby causing irreparable harm to minority shareholders. With the Central Government dragging its feet when it comes to filling up vacancies for the NCLT benches and with the pandemic afflicting the functioning of the NCLT (much like other forums), the future of shareholder actions appears bleak.

Shareholders may soon become disillusioned with the prevailing system and will ultimately be forced to enter into Faustian bargains with the majority shareholders (out of self preservation). Another casualty would be the decline in the development of shareholder jurisprudence especially in the context of Sections 241-242 of the Companies Act, 2013, whose contours remain unexplored.

Simply put, the situation cannot brook any further delay as this jurisdiction holds vital relevance to ordinary citizens several of whom cannot bear the financial burden of prolonged litigation. Most family owned companies run modest businesses and the outcome of such disputes have a direct bearing on their livelihood and survival. As citizens, they have a "legitimate expectation" to be able to access an effective forum where they can obtain a "certain quality of justice".[6]

While decrying about the current state of affairs I find it difficult to recommend a creative and out of the box solution to the problem at hand. Appointments and that too large scale appointments at the NCLT can be the only logical panacea to the maladies of pendency and non-prioritisation of shareholder actions. The Central Government has recently made some appointments at the NCLT after being pulled up by the Supreme Court.[7] However, a lot more needs to be done to save this equitable jurisdiction from becoming irrelevant.

The author is an Advocate-on-Record at Supreme Court of India and views are personal.

[1] See Ebrahimi v. Westbourne Galleries Ltd. [1972] 2 WLR 1289 & Re Saul D. Harrison and Sons Plc. 1994 BCC 475; See Indian decisions: Rajahmundry Electric Supply Corpn. Ltd. v Nageshwara Rao., (1955) 2 SCR 1066 and S.P. Jain v Kalinga Tubes Ltd., AIR 1965 SC 1535 and Needle Industries (India) Ltd. and Ors. v. Needle Industries Newey (India) Ltd. and Ors., (1981) 3 SCC 333;

[2] See Dinesh Gupta & Ors v Rajesh Gupta & Ors., 2018 SCCOnLine Del 12387 at paragraph 33 wherein reliance has been placed on the landmark decision of Kale & Ors. v Deputy Director of Consolidation & Ors., (1976) 3 SCC 119 and at paragraph 34 wherein reliance was decision of K.K. Modi v K.N. Modi & Ors., (1998) 3 SCC 573;

[3] See Needle Industries (supra)., para 171;

[6] Words borrowed from J. RF Nariman's farewell address.

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