Oppression And Mismanagement Plea Not Maintainable Without Company Membership On Filing Date: NCLAT

The National Company Law Appellate Tribunal (NCLAT) at Chennai recently reaffirmed that a petition alleging oppression and mismanagement under Sections 241 and 244 of the Companies Act, 2013, cannot be entertained unless the person filing it establishes that he was a “member” of the company on the date the petition was filed.

While setting aside an order of the National Company Law Tribunal (NCLT) at Bengaluru, the Appellate Tribunal said that the tribunal failed to examine this basic jurisdictional requirement in the manner required by law and did not record proper findings on maintainability.

A bench comprising Judicial Member Justice Sharad Kumar Sharma and Technical Member Jatindranath Swain made it clear that once a petitioner's status is questioned, the burden is on him to prove that the petition is maintainable.

The bench observed, “once the Respondent/Petitioner has instituted the company petition, the burden to prove its maintainability and his status as a member is required to be discharged by him, particularly when such status is put to challenge. His claim of being a member of the company, so as to sustain proceedings under Section 241 of the Companies Act, 2013, must therefore be established by him..”

A former director of Apex Luminaires Pvt. Ltd. approached the tribunal accusing the company's majority shareholders of running the company in an oppressive manner. He alleged that his shares were illegally transferred and that company funds were siphoned off. He asked the tribunal to invalidate certain board decisions, restore the shares transferred in December 2021, and order a forensic audit of the company's affairs.

The company and its directors immediately objected. They argued that the case itself could not be heard because the former director did not own any shares when he filed it. They relied on official records, including the company's annual return, which showed that he had already transferred his entire shareholding before approaching the tribunal. The NCLT rejected this objection. It relied on the fact that original resignation and share transfer documents were not produced and on observations made by the Registrar of Companies to assume that the petitioner was still a member of the company.

The appellate tribunal disagreed with this approach. It said there was no legal basis to presume membership in this manner. According to the tribunal, a person must clearly prove that he is a member under the Companies Act, and membership cannot be assumed merely because certain documents are not available.

It said, “The non-furnishing or non-availability of the Respondents' original resignation letter will not automatically confer upon the Respondent/Petitioner the status of a member, especially in view of the admitted position pleaded by them in the company petition namely, that they were not holding any shares on the date the company petition was preferred before the Ld. Tribunal.”

The NCLAT therefore set aside the impugned order and sent the matter back to the NCLT with a direction to first decide the issue of maintainability as a preliminary question, in accordance with law.

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