The Corporate Democracy And Demarcation Of Powers Of NCLT & Civil Courts

Mantul Bajpai & Priyam Sharma

31 March 2022 6:34 AM GMT

  • The Corporate Democracy And Demarcation Of Powers Of NCLT   & Civil Courts

    The recent developments appear to suggest that Invesco, one of the investors of Zee, has decided to withdraw its requisition notice which sought the removal of MD and CEO Mr. Punit Goenka from Board of Directors ("Board") of Zee. Though the withdrawal might end the dispute, the Order of the Division Bench of the Hon'ble Bombay High Court ("Division Bench") will be significant in reaffirming...

    The recent developments appear to suggest that Invesco, one of the investors of Zee, has decided to withdraw its requisition notice which sought the removal of MD and CEO Mr. Punit Goenka from Board of Directors ("Board") of Zee. Though the  withdrawal might end the dispute, the Order of the Division Bench of the Hon'ble Bombay High Court ("Division Bench") will be significant in reaffirming the position as far as corporate democracy and shareholder's statutory rights are concerned. The Bombay High Court in its recent judgement had the occasion to dwell upon Section 430 of the Companies Act, 2013 which bars the jurisdiction of a civil court in the determination of any matter or proceeding that the National Company Law Tribunal ("NCLT") and National Company Law Appellate Tribunal ("NCLAT") are expressly empowered to determine.

    The legal tussle started when Invesco Developing Market Fund and OFI Global China Fund LLC ("Invesco"), holder of 17.88% equity in Zee Entertainment Enterprises Ltd ("Zee") issued a requisition notice on 11.09.2021 under section 100(2)(a) of the Companies Act, 2013 ("Act") calling upon Zee to convene an Extra Ordinary General Meeting ("EGM") to remove Punit Goenka as Managing Director, and reconstitute Zee's Board with six new directors, while alleging breach of corporate governance norms.

    Section 100 of the Act is a democratic right given to any group of shareholders having 10 per cent share capital to requisition an EGM. The procedure as laid down under section 100 of the Act provides that the Board of Directors are required to call for an EGM within 21 days from date of receipt of the requisition, and the non-compliance of the same enables the requisitonists to suo moto call for an EGM on any day within 3 months from the date of requisition.

    Since the requisition notice was dated 11.09.2021, Zee's Board had time till 03.10.2021 to call for the requisitioned EGM. However, Zee's Board deliberated and unanimously concluded that that the requisition notice is not valid and suffers from multiple legal infirmities.

    Thereafter, on 29.09.2021, Invesco filed Petition before the NCLT under sections 98(1) and 100 of the Act, seeking an order to call and hold an EGM of Zee. In the meanwhile, Zee approached the Bombay High Court with a civil suit, seeking declaration that the requisition notice was bad in law and Zee's refusal to act upon the same is justified. An interim application was filed praying for an injunction restraining Invesco from taking any steps in furtherance of the requisition notice.

    One of the questions which had arisen for consideration of the Bombay High Court was whether Zee could have filed a suit for a subject matter which otherwise falls within the purview of the Tribunal i.e. NCLT.

    Proceedings Before The Ld. Single Judge And Judgment Dated 26.10.2021 Granting Injunction In Favour Of Zee

    It was Invesco's contention before the High Court that Section 430 of the Act bars the civil court's jurisdiction in the determination of any matter or proceeding that the NCLT and NCLAT are specifically empowered to adjudicate which includes the issues pertaining to requisition notice. On the other hand, Zee contended that Section 430 is not attracted to a proceeding such as the present Suit wherein the legality / illegality of a requisition issued under Section 100 is under challenge.

    Deviating from the settled position in law, the Ld. Single Judge observed that the High Court has jurisdiction to adjudicate upon the legality of the requisition considering the resolutions proposed are ineffective in nature. The Single Judge observed that in such a scenario, a court is not forbidden, either expressly or by necessary implication, from intervening.

    Moreover, on the contention raised by Invesco regarding bar of Civil Court under section 430, the Ld. Single Judge discarded the submissions holding that NCLT Rules do not include Sections 100, 149, 150 or 168 in the list of provisions over which NCLT/NCLAT have jurisdiction.

    Overview Of Section 430 Vis A Vis Section 9 Of The Code Of Civil Procedure ("CPC"):

    Section 430 of the Act bars civil courts from entertaining any suit or proceeding which the NCLT/NCLAT is empowered to adjudicate upon. It is pertinent to note that this section also bars Courts/Authorities other than the NCLT/NCLAT to grant injunctions in respect of an action taken in pursuance of any power conferred under the Act.

    Legislative intent behind the introduction of Section 430 can be attributed to Justice Eradi Committee Report[1]. Noting the existence of multiple forums for adjudication of company matters, Justice Eradi Committee emphasized on the formation of a single tribunal. Moreover, the Companies Second Amendment Act, 2002 conferred jurisdiction of Company Law Board upon NCLT and NCLAT. Hence, it is apparent that the formation of NCLT/NCLAT was to confer special jurisdiction on tribunals and to enable one forum to deal with similar cases in order to avoid multiplicity of jurisdiction and/or proceedings.

    \Zee filed the present suit before the High Court inter alia seeking injunction restraining Invesco from acting in furtherance of the requisition notice. In this regard, it is necessary to understand the scope of jurisdiction conferred upon civil courts u/s 9 of the CPC. Section 9 of the CPC states that the Courts have the jurisdiction to try all suits of a civil nature except suits of which cognizance is either expressly or impliedly barred. Hence, when a matter is within the specified jurisdiction under a special act or provision, the civil court cannot possibly interfere except when there has been a non-compliance of statutory procedure or if the tribunal has acted without conforming to the principles of Judicial Procedure[2].

    The Supreme Court in Abdul Waheed vs Bhawani[3] affirmed the position that a statute which ousts the jurisdiction of a Civil Court is to be strictly construed. In the case before the Supreme Court, matters pertained to jurisdiction of the Board for Industrial and Financial reconstruction by virtue of section 26 of the Sick Industrial Companies Act, 1985 thereby completely barring the jurisdiction of the Civil Court. The Supreme Court held that matters which exclusively fell within the jurisdiction of BIFR or the Appellate Authority could alone be adjudicated by them leaving the jurisdiction of the civil courts untouched in respect of other areas.

    The Constitution Bench of the Supreme Court in Dulabhai vs State of M.P[4] examined whether the jurisdiction of Civil Court is barred u/s 9 of the CPC. The Supreme Court laid down various principles to be applied for deciding whether a Suit is barred under Section 9 of the CPC, one of them being an express bar upon the jurisdiction of the court when the remedies provided under that particular act are sufficient on a perusal/ analysis of the scheme of that act.

    Appeal By Invesco Before The Division Bench And The Judgement Dated 22.03.2022 Upholding Invesco's Appeal

    Aggrieved by the order passed by the Ld. Judge, Invesco preferred an appeal before the Division Bench challenging the same. The High court ruled in favour of Invesco and set aside the impugned judgement which declared the requisition illegal and which granted Zee an injunction against Invesco from calling upon the EGM.

    Before the Division Bench, Invesco reiterated that the present suit is barred by section 430 of the Act. Zee strenuously contended that the bar under section 430 would be applicable only if the law specifically empowered the NCLT to deal with a particular matter. Moreover, a suit challenging the requisition notice flows from the plenary jurisdiction under section 9 of the CPC to try suits of all civil nature. Lastly, it was Zee's contention that a suit challenging the legality of a valid requisition does not fall within the purview of section 98 of the Act. Zee relied upon the foreign jurisprudence to support its submission that a requisition ought to be injuncted when the object of the requisition was to do something which cannot be lawfully effectuated.

    The Division Bench set aside the impugned judgement. While interpreting section 430, the Division Bench came to a conclusion that there are only two limited points surrounding section 430 being – the bar of jurisdiction on civil courts, and second being the disability of the Civil Courts from granting any injunction in respect of action taken by the NCLT:

    As for the Ld. Single Judge's observation that the High Court can decide upon matters not listed in the NCLT Rules, the Division Bench strenuously held that the purpose of section 98 is to govern circumstances where convening of a meeting is impractical. In the present case, it is impracticable for Invesco to call for a meeting and hence the petition before the NCLT was filed. In this context, the Division Bench observed:

    69 …We do not see how such a matter would not fall within the purview of the NCLT and if it does, how a Civil Court could interfere by passing an order of injunction, which would have the effect of preventing the NCLT from considering the Appellants' prayer. We find no credence on the reasoning based on the NCLT Rules or Schedule of Fees. We do not see how these Rules or Schedule of Fees can defeat the plain and simple language contained in Section 430 of the Act. Be that as it may, the Schedule of Fees in fact specifically provides for an application under Section 98, which, as we have already noted, has been filed by the Appellants.

    Division Bench's Reaffirms Unconditional Right Of A Shareholder To Call An EGM: A Step In The Right Direction

    If the interpretation of the Ld. Single Judge prevailed, it would have far-fetched effects including setting a bad precedent for shareholders' rights in the long run. By the reasoning of the Ld. Single Judge, any unwilling member of the Board of Directors using company's resources would move an application for interim reliefs on the pretext of illegalities, and in order to balance the convenience, the Court would injunct holding such meeting. This would be followed by multiple rounds of litigation, destroying the very foundation of corporate democracy and the basic legislative intent behind section 100 which expressly allows a shareholder to call for a requisitioned meeting. This position has also been reiterated by the Apex Court in LIC vs Escorts[6].

    Another important finding by the Division Bench was the pivotal role of corporate governance machinery as enshrined in Section 100 of the Act that gives a chance to shareholders to exercise their democratic rights of voice and vote and the curtailment of such a right, if the interpretation of the Single Judge was affirmed. The Division Bench observed:

    62. If we were to open this flood gate, corporate democracy, as we understand it, would be rendered nugatory. Shareholders will be repeatedly restrained and injuncted from exercising their statutory rights. Civil Courts will grant injunctions at the ad-interim stage and thereafter embark on an analysis as to whether or not the resolutions proposed are illegal or legal and only thereafter, vacate the injunction, if at all.

    The Zee-Invesco saga was one of the few instances of private shareholder activism in India involving a listed company and the judgment of the Division Bench will have consequences beyond the present case. While the Ld. Single Judge has erred in holding that the jurisdiction of the High Court is not ousted despite an express bar under section 430 of the Companies Act, the Division Bench of the High Court has reaffirmed the settled position in law relating to requisitions and the exclusive jurisdiction conferred upon the NCLT/NCLAT for such matters. The judgement of the Division Bench also brings to light the importance of corporate democracy vis a vis the democratic rights of the minority shareholders to exercise the same as per the statutory scheme. Having said that, it is worthwhile to note that the Companies Act, 2006 in England has been amended to inter alia provide that a resolution may be properly moved at the requisitioned meeting unless, it would, if passed, be ineffective and the Courts in India, at some stage would require to consider and strike balance between corporate democracy and abuse of the process to halt the business of a company by issuance of unwarranted, motivated and illegal requisition notices.

    Mantul Bajpai is a lawyer practicing at Mumbai High Court and Priyam Sharma is a student at University of Mumbai Law Academy. Views are personal.

    [1] Report of the High-Level Committee on Law Relating to Insolvency and Winding Up of Companies, 2000 (relevant paragraphs – Para 3.25, 7.1 and 7.2)

    [2]Ramaiya, (2015) Companies Act, 2013: Section 430. In Guide to the companies act: Providing guidance on the Companies Act, 2013 (18th ed., Vol. 3, p. 5635), LexisNexis.

    [3] (1966 SCN 90)

    [4] (AIR 1969 SC 78)

    [5] Isle of Wight Railway Co vs Tahourdin 1884 25 Ch 320; Queensland Press Ltd vs Academy Investments No.3 Pty Ltd 1987 No 110

    [6] (1986) 1 SCC 264

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