Case BriefsSupreme Court

Supreme Court: In the case relating to winding up of six schemes of the Franklin Templeton Mutual Fund, the bench of SA Nazeer and Sanjiv Khanna*, JJ has, rejecting the objections to poll results, held that the unitholders of the six schemes have given their consent by majority to windup the six schemes.

It held that for the purpose of clause (c) to Regulation 18(15) of the Mutual Fund Regulations, consent of the unitholders would mean consent by majority of the unitholders who have participated in the poll, and not consent of majority of all the unitholders of the scheme.


Key takeaways from the judgment


  • Clause (c) to sub-regulation (15) of Regulation 18 per se does not prescribe any quorum or specify the criterion for computing majority or ratio of unitholders required for valid consent for winding up. Clause (b) of Regulation 39(2), on the other hand, specifies that seventy-five per cent of the unitholders of a scheme can pass a resolution that the scheme be wound up.
  • When there is choice between two interpretations, we would avoid a ‘construction’ which would reduce the legislation to futility, and should rather accept the ‘construction’ based on the view that draftsmen would legislate only for the purpose of bringing about an effective result. We must strive as far as possible to give meaningful life to enactment or rule and avoid cadaveric consequences. We would neither hesitate in stating the obvious, that modern regulatory enactments bear heavily on commercial matters and, therefore, must be precisely and clearly legislated as to avoid inconvenience, friction and confusion, which may, in addition, have adverse economic consequences.
  • Reading prescription of a quorum as majority of the unitholders or ‘consent’ as implying ‘consent by the majority of all unitholders’ in Regulation 18(15)(c) of the Mutual Fund Regulations will not only lead to an absurdity but also an impossibility given the fact that mutual funds have thousands or lakhs of unitholders. Many unitholders due to lack of expertise, commercial understanding, relatively small holding etc. may not like to participate. Consent of majority of all unitholders of the scheme with further prescription that ‘fifty percent of all unitholders’ shall constitute a quorum is clearly a practical impossibility and therefore would be a futile and foreclosed exercise.
  • In the case of unitholders, the number is fluctuating and ever changing and, therefore, indefinite. Numbers of unitholders can increase, decrease and change with purchase or redemption. Therefore, in the context of clause (c) of Regulation 18(15), we would not, in the absence of any express stipulation, prescribe a minimum quorum and read the requirement of ‘consent by the majority of the unitholders’ as consent by majority of all the unitholders. On the other hand, it would mean majority of unitholders who exercise their right and vote in support or to reject the proposal to wind up the mutual fund scheme.
  • The unitholders who did not exercise their choice/option cannot be counted as either negative or positive votes as either denying or giving consent to the proposal for winding up.
  • Mutual funds managed by professional fund managers with advantages of pooling of funds and operational efficiency are the preferred mode of investment for ordinary and common persons. It would be wrong to expect that many amongst these unitholders would have definitive opinion required and necessary voting in a poll on winding up of a mutual fund scheme. Such unitholders, for varied reasons, like lack of understanding and expertise, small holding etc., would prefer to abstain, leaving it to others to decide. Such abstention or refusal to express opinion cannot be construed as either accepting or rejecting the proposals. Keeping in view the object and purpose of the Regulation with the language used therein, a ‘construction’ which would lead to commercial chaos and deadlock cannot be accepted. Therefore, silence on the part of absentee unitholders can neither be taken as an acceptance nor rejection of the proposal.
  • The underlying thrust behind Regulation 18(15)(c) is to inform the unitholders of the reason and cause for the winding up of the scheme and to give them an opportunity to accept and give their consent or reject the proposal. It is not to frustrate and make winding up an impossibility.
  • The words ‘all’ or ‘entire’ are not incorporated and found in the said Regulation. Thus, consent of the unitholders for the purpose of clause (c) to sub-regulation (15) of Regulation 18 would mean simple majority of the unitholders present and voting.
  • Regulation 18(15)(c) mandates and requires consent of the unitholders for winding up, but does not prescribe any mode or manner for taking consent. Therefore, by implication, the Regulation gives option of holding a physical meeting, postal poll or e-poll.
  • The objectors to the e-voting results are sixteen in number and, as per details, they hold 20,02,114.041 units in the six schemes of value of Rs. 8,69,28,507.62. In percentage terms, the share of objectors in the total units is merely 0.024% and their share in the total AUM is 0.033%.
  • The unitholders were given a chance and option to vote and about 38% of the unitholders in numerical terms and 54% in value terms had exercised their right to give or reject consent to the proposal for winding up. In the absence or need for minimum quorum, which is not provided or stipulated in the Regulations nor mandated under law, the e-voting result cannot be rejected on the ground that 38% of the unitholders in numerical terms and 54% in value terms, even if we do not account for the rejected votes, had participated. This cannot be a ground to reject and ignore the affirmative result consenting to the proposal for winding up of the six mutual fund schemes.
  • It is but obvious that the trustees had already taken a decision to wind up the six schemes. Regulation 39(3) requires the trustees to disclose the circumstances leading to winding up of the schemes. The trustees accordingly, in the notice for e-voting and meeting of the unitholders, had furnished their explanation and reason for winding up of the six schemes.
  • The unitholders were aware and conscious of the litigation against the winding up, including the procedure. At the same time, many in the general public may not be fully aware of the commercial considerations and niceties relating to mutual funds and debt securities market.
  • The notice had also informed the investors that there would be suspension of subscription and redemption post the cut-off time from 23rd April, 2020. All Systematic Investment Plans, Systematic Transfer Plans and Systematic Withdrawal Plans into and from the abovementioned funds stood cancelled post the cut off time from 23rd April, 2020.
  • The notice had also furnished information and clarification regarding distribution of monies from the Fund Assets, inter alia stating that following the decision to wind up the six schemes, the trustees would proceed for orderly realization and liquidation of the underlying assets with the objective of preserving value for unitholders. Their endeavour would be to liquidate the portfolio holdings at the earliest opportunity, to enable an equitable exit for all investors in the ‘unprecedented circumstances’. Hence, the notice for e-voting and the contents would not justify annulling the consent given by the unitholders for the winding up of the six schemes.

[Franklin Templeton Trustee Services Private Limited v. Amruta Garg, 2021 SCC OnLine SC 88, decided on 12.02.2021]

Op EdsOP. ED.

With the introduction of the Insolvency and Bankruptcy Code 2016 (“the IBC”), the multiple Benches of the National Company Law Tribunal have been flooded with petitions (mainly under Sections 7 and 9 of IBC). Two features of the IBC found attraction with petitioners that invoked the jurisdiction of the NCLT: (i) the time-bound nature offered by the IBC vis-à-vis completion of resolution, revival and rehabilitation of companies; and (ii) the lack of discretionary jurisdiction provided to the NCLT whilst admitting/rejecting petitions. To elaborate, under the erstwhile winding-up regime, the High Courts could exercise its discretion in considering whether or not to wind up a company. Seeing as the NCLT was not assigned such discretionary jurisdiction, creditors have used the IBC as a tool for quick resolution of the debts due to them. However, serious questions of law are bound to arise when substituting a legal regime, especially to established legal credit and debt practices. The authors, being regular practitioners before the NCLT have sought to address some of these questions.

Issues

  1. Can the National Company Law Tribunal pass an order inter alia admitting a petition under Sections 7, 9 or 10 of the Insolvency and Bankruptcy Code, 2016[1] against a company even after the passing of an order by the High Court concerned inter alia directing the commencement of winding up of the same company under inter alia Section 433(e) r/w Section 434 of the Companies Act, 1956[2]?

If yes, then:

  1. Is it necessary to obtain leave from the High Court concerned prior to admitting a petition under inter alia Sections 7, 9 or 10 of the Insolvency and Bankruptcy Code, 2016?

Analysis

  1. One of the reasons why the Insolvency and Bankruptcy Code, 2016 (“IBC”) was enacted was to ensure speedy resolution of insolvent and bankrupt companies in India. The erstwhile regime of winding up under the provisions of the Companies Act, 1956 and the Sick Industrial Companies (Special Provisions) Act, 1985[3] (“SICA”) were seemingly ineffective insofar as providing a timely resolution of such companies that were unable to pay their debts are concerned. With no definitive timeline set out in the provisions of the Companies Act, 1956, winding up proceedings before the respective High Courts in India took up years in litigation (especially including appellate proceedings). The same could be said about the proceedings before the Board of Industrial and Financial Reconstruction (“BIFR”) under the provisions of SICA. In effect, the IBC is a successor statute to the provisions relating to winding up under the Companies Act, 1956 and SICA. In fact, as per the information published by the Official Liquidator attached to the Bombay High Court on its website, 1478 companies are currently undergoing liquidation under the provisions of the Companies Act, 1956. In case of one of them, Akhil Bharat Printers Ltd. , the order of winding up had been made on 22-6-1956 – making it amongst the first companies to be ordered to be wound up under the (then new and novel) Companies Act[4]. Needless to say, a need was felt to streamline the manner in which corporate insolvency could be dealt with. The SICA, as has been noted by the Supreme Court of India in Swiss Ribbons (P)   v. Union of India [5], also failed to ameliorate the situation and rather contributed to the creation of what  R.F. Nariman, J. referred to as a “defaulter’s paradise[6].
  1. The path towards the IBC began in the year 1999 when the Central Government established the Justice Eradi Committee to formulate a framework to replace SICA, as it was felt insufficient and inefficient. The report of this committee culminated in the promulgation of the Companies (Amendment) Act, 2002, and the Sick Industrial Companies (Special Provisions) Repeal Act, 2003. A framework was sought to be created within the Companies Act, 1956, itself for restructuring of stressed corporations. However, the relevant portion of this amendment, and consequently the entirety of the Sick Industrial Companies (Special Provisions) Repeal Act of 2003, was not brought into force due to several legal challenges and hurdles, including challenges to the formation and constitution of National Company Law Tribunals.
  1. The framework mooted in the amendment, however, continued to evolve notwithstanding that it was stillborn. The framework proposed in the Companies (Amendment) Act, 2002, found its way, with some modifications, into the Companies Act, 2013. However, the legal challenges to the National Company Law Tribunals persisted and Chapter XIX of the Companies Act, 2013, which was to be the comprehensive framework for corporate insolvency could not be enforced. Ultimately, the Bankruptcy Law Reforms Committee submitted its report[7] to the Government of India on 4-11-2015 and this report became the basis for the IBC. As things would transpire, the IBC came into force by repealing Chapter XIX of the Companies Act, 2013, before it could be enforced.
  1. Since its enactment, the IBC has been, largely, well received and has even been considered as one the reasons attributed to India’s rise in the Ease of Doing Business Index[8]. However, like most newly enacted legislations in India, several questions of law arose from various proceedings before the National Company Law Tribunal (“ NCLT”), the National Company Law Appellate Tribunal, the High Courts and the Supreme Court of India. One of these questions of law is the first issue that the authors shall address, can the NCLT pass an order inter alia admitting a petition under Sections 7, 9 or 10 of the IBC against a company even after the passing of an order by the High Court concerned inter alia directing the commencement of winding up of the same company under inter alia Section 433(e) r/w Section 434 of the Companies Act, 1956? While there are multiple judgments of our courts and tribunals that address this question, not all lawyers and Judges in our country seem to have a unified answer to this question.

5. Pre-IBC Jurisprudence

5.1 Before referring to judgments that address the first issue, it is of relevance to understand an aspect of erstwhile winding-up regime vis-à-vis the SICA. For example, a question of law akin to the aforementioned first issue arose in Real Value Appliances Ltd. Canara Bank[9] (Real Value Appliances), where a Division Bench of the Supreme Court of India held inter alia that the intent of the SICA is to:

(a) revive and rehabilitate a company before it can be wound up under the provisions of the Companies Act, 1956;

(b) ensure that no proceedings against the assets of a company are taken before a decision has been arrived at by BIFR for in the event a company’s assets are sold, or if a company is wound up it may become difficult later to restore status quo ante.

The relevant portions of the judgment delivered by the Supreme Court of India in Real Value Appliances[10] have been culled out and reproduced hereinbelow:

“23.… the [SICA] is intended to revive and rehabilitate sick industries before they can be wound up under the [Companies Act, 1956]. Whether the Company seeks a declaration that it is sick or some other body seeks to have it declared as a sick company, it is, in our opinion, necessary that the Company be heard before any final decision is taken under the Act. It is also the legislative intention to see that no proceedings against the assets are taken before any such decision is given by  BIFR for in case the Company’s assets are sold, or the Company wound up it may indeed become difficult later to restore the status quo ante…

5.2 In Rishabh Agro Industries Ltd. P.N.B. Capital Services Ltd.[11] (Rishabh Agro Industries), a Division Bench of the Supreme Court of India, whilst following the holding in Real Value Appliances[12], held that a reference in terms of Section 15 of the SICA could be made to BIFR for revival/resolution of a company even after the passing of a winding up order by the High Court. Furthermore, the Supreme Court held that the passing of a winding up order under inter alia Section 433(e) r/w Section 434 of the Companies Act, 1956 is not a culmination of proceedings before the High Court concerned. The Court further noted that the passing of a winding up order under inter alia Section 433(e) r/w Section 434 of the Companies Act, 1956 is, in fact, the commencement of the process which only meets its end when an order of dissolution is passed under Section 481 of the Companies Act, 1956. The relevant portions of this judgment have been culled out and reproduced hereinbelow:

“9.… it cannot be said that … the provision of Section 22 [of the SICA] [which is para materia to Section 14 [of the IBC] would not be attracted after the order of winding up of the company is passed… the effect of [Section 22 of the SICA] would be applicable even after the winding-up order is passed…

*                                    *                       *

  1. It may also be noticed that winding-up order passed under [the Companies Act, 1956] is not the culmination of the proceedings pending before the Company Judge but is in effect the commencement of the process. The ultimate order to be passed in such a petition is the dissolution of the company in terms of Section 481 of [the Companies Act, 1956] …

5.3 In Madura Coats Ltd. Modi Rubber Ltd.[13] (Madura Coats), a Full Bench of the Supreme Court of India:

(a) affirmed the aforementioned holdings of its Division Bench judgments in Real Value Appliances[14] and Rishabh Agro Industries[15];

(b) held that once a reference was made to BIFR under Sections 15 and 16 of the SICA, the provisions of the SICA would come into play and would prevail over the provisions of the Companies Act, 1956. Therefore, in such circumstances, proceedings under the Companies Act, 1956 shall give way to proceedings under the SICA.

The relevant portions of Madura Coats[16] have been culled out and reproduced hereinbelow:

“20. While referring to the provisions of  SICA, this Court in Real Value [Appliances] […][17] […] held that [the] SICA is intended to revive and rehabilitate a sick industry before it can be wound up under [the Companies Act, 1956]. The legislative intention is to ensure that no proceedings against the assets of the company are taken before any decision is taken by BIFR because if the assets are sold or the company is wound up, it may become difficult to later restore the status quo ante…

                                    *                              *                      *

  1. … this Court in Rishabh Agro [Industries] […][18] took the view that it could not be said that the provisions of Section 22 of SICA would not be attracted after an order of winding up is passed. While referring to this section it was held that there was no doubt that the provision would be applicable even after the winding-up order is passed and no proceedings even thereafter could be taken under [the Companies Act, 1956]. It was noted that a winding-up order passed under [the Companies Act, 1956] is not the culmination of the proceedings before the Company Court but is in effect the commencement of the process which ultimately would result in the dissolution of the company in terms of Section 481 of [the Companies Act, 1956]…

                                           *                                      *                                  *

  1. From the above it is quite clear that different situations can arise in the process of winding up a company under [the Companies Act, 1956] but whatever be the situation, whenever a reference is made to BIFR under Sections 15 and 16 of SICA, the provisions of SICA would come into play and they would prevail over the provisions of [the Companies Act, 1956] and proceedings under [the Companies Act, 1956] must give way to proceedings under SICA.”

6. Post-IBC Jurisprudence

6.1 In Jotun India (P) Ltd. PSL Ltd.[19] (Jotun II), a Division Bench of the Bombay High Court whilst inter alia adjudicating the conflict of law between the provisions of the IBC and the Companies Act, 1956, held that the provisions of the IBC shall prevail over the provisions of the Companies Act, 1956. What is interesting to note here is that while adjudicating this question of law, the Bombay High Court drew a parallel with the provisions of the SICA and the holding of the Supreme Court of India in Madura Coats[20]. The relevant portions of the judgment of the Division Bench of the Bombay High Court in Jotun II[21] have been culled out and reproduced hereinbelow:

“35. A comparative analysis of the provisions of [the] SICA clearly indicates that under the provisions of Section 22 of [the] SICA once the proceeding was initiated, the other proceedings pending before the different forums were suspended. In fact, there was an injunction operating in case the jurisdiction under [the] SICA was invoked by a concerned party. The learned counsel for the appellant made efforts to persuade us that the provisions of [the] SICA and [the] IBC are not pari-materia legislations to make it applicable to the saved petitions under [the Companies Act 1956] …In case the forum [i.e. the NCLT] under the IBC fails to revive the company or to successfully complete the resolution plan, then whether the Company Court and the NCLT would go ahead simultaneously in liquidating the company and complete the winding up proceedings. This situation needs to be harmonized and balanced.

36.We may refer to observations made by the Supreme Court in respect of provisions of [the] SICA in [Madura Coats][22], in paras 27 and 28 which read as under:

                           *                         *                        *

  1. There could be a situation where there are two special statutes operating in the field or a special statute and statute generally governing the field, which may be referred to as general law. Even if it is considered that in respect of subject-matter there are two special statutes operating, one [the Companies Act, 1956] and other [the] IBC […], we need to have a purposive approach and harmonious interpretation to the provisions of law. A harmonious and balanced approach is required to be adopted for the purpose of interpreting the IBC […] and the jurisdictional limitations and areas operating in respect of saved petitions before the Company Court.
  2. The purpose of the IBC […] and the NCLT hearing petitions is primarily to revive the company by having a resolution method. Whereas in the winding up petition pending before the Company Court, ultimate approach and object is to wound up the company. Even under the IBC, if efforts to revive the company fails, then the liquidation proceedings get initiated under Chapter III of the IBC […]. Taking into consideration the statutory scheme of the IBC […] we are of the view that [the] NCLT constitutes a separate and distinct forum and it cannot be attributed to be a subordinate forum to the Company Court as constituted under [the Companies Act, 1956].
  3. The general legal principles of interpretation of statute state that the general law should yield to the special law. In the context of the present statute i.e. [the] IBC […], we are of the view that [the Companies Act, 1956] could be treated as general law and IBC […] to be a special statute to the extent of the provisions relating to revival or resolution of the company as per provision under Chapter II of the IBC. Even if [the Companies Act, 1956] and the IBC […] are considered as special statutes operating in their respective field, we are of the view that the IBC […] being later enactment and in view of the statement and objects and the purpose for which it was enacted, the provisions relating to revival/resolution of the company incorporated under Chapter II will have to be given primacy over the provisions of the winding up proceeding pending before the Company Courts […]

6.2 In Bank of Baroda Topworth Pipes & Tubes (P) Ltd.[23] (Topworth Pipes & Tubes), a Division Bench of the NCLT (Mumbai Bench) whilst inter alia relying on Rishabh Agro Industries[24], Madura Coats[25] and Jotun II[26], admitted a petition filed under Section 7 of the IBC against a company even after the passing of an order directing the commencement of winding up against the same company. The underlying inspiration for admitting the petition in Topworth Pipes & Tubes[27] by the NCLT (Mumbai Bench) appears to be drawn from the reasoning adopted by the Supreme Court of India in Rishabh Agro Industries[28], viz the passing of an order under Section 433(e) r/w Section 434 of the Companies Act, 1956 inter alia directing the commencement of winding up is in not a culmination of proceedings, rather the proceedings culminate when an order of dissolution under Section 481 of the Companies Act, 1956 is passed. The NCLT (Mumbai Bench) did, however, note that in view of the provisions of Section 11(d) of the IBC, a petition filed under Section 10 of the IBC cannot be admitted should a winding up order under Section 433(e) r/w Section 434 of the Companies Act, 1956 already have been passed. The relevant portions of Topworth Pipes & Tubes[29] have been culled out and reproduced hereinbelow:

“8… the Division Bench of the Bombay High Court [in Jotun II][30] […] held as under:                                                                                                                                                      ***

  1. The [IBC] itself contemplates a bar on filing an application for insolvency resolution under specific circumstances by certain entities. Section 11(d) of the [IBC] inter alia prohibits a corporate debtor against which a liquidation order has been passed from making an application for initiating corporate insolvency resolution process… The intention of the legislation is clear from Section 11(d) of the [IBC], which only bars insolvency proceedings against a corporate debtor, after an order of liquidation against it, in case of an application by the said corporate debtor itself and conspicuously omits any such restriction for applications by financial or operational creditors.

                                                    ***

  1. The Supreme Court in [Rishabh Agro Industries][31] has held that:

    *                                                 *                                            *

  1. The aforesaid findings in the matter of [Rishabh Agro Industries][32] have been relied upon by the Supreme Court in para 25 in [Madura Coats][33]

      *                                          *                                                      *

  1. In light of the aforesaid, the position seems settled that an order of winding up or liquidation in no manner means a culmination of proceedings and it is only once an order under Section 481 of [the Companies Act, 1956] is passed for dissolution of the company that the proceedings culminate.

15.… not only can a company be revived post an order of winding up but the ‘proceedings’ post an order of winding up would be covered under the term ‘proceedings’ under Section 14 of the [IBC] and would necessarily be stayed upon admission of an insolvency application under the [IBC].

  1. The question of applicability of the moratorium under SICA to ‘proceedings’ post a winding up order was before the Supreme Court in [Madura Coats][34]. The Supreme Court has held as under: […]

18.The  Supreme Court in  [Rishabh Agro Industries][35] examined the operation of the moratorium under the SICA to ‘proceedings’ post winding up in greater detail and held as under:

                           *                         *                     *

21… The object of the Code, as is evident from its “Statement and Objects” is to provide a consolidated legal framework for insolvency resolution in a time bound manner. Under the winding up provisions under [the Companies Act, 1956] a single creditor, whose debt was undisputed could wind up a company, thus bringing about its untimely financial death of a debtor. The [IBC] on the other hand mandatorily requires that an attempt at revival be made by appointing an [Interim Resolution Professional] to examine whether such company can be revived…

22.… It is hence clear that the object of the [IBC] would be defeated in its entirety if a petition for insolvency resolution could not be admitted after an order of winding up has been passed. As discussed above, till an order under Section 481 of [the Companies Act, 1956] is passed there is scope to revive a company…

23.… Hence, it could never be the intention of the legislature that despite the existence of the provisions of [the IBC], a company should be wound up without giving it a chance for resolution of its insolvency…

*                                                       *                                                                       *

  1. … We hereby admit this petition filed under Section 7 of [the IBC] against the corporate debtor for initiating corporate insolvency resolution process against the corporate debtor and declare moratorium with consequential directions…

6.3 In Forech India Ltd. Edelweiss Assets Reconstruction Co. Ltd.[36] (Forech India), a Division Bench of the Supreme Court of India, while validating Jotun II[37], held that the bar imposed vide Section 11(d) of the IBC only applies to petitions under Section 10 of the IBC and not to petitions under Sections 7 or 9. The relevant portions of Forech India[38] have been culled out and reproduced hereinbelow:

“20. … We may hasten to add that the law declared [in Jotun II[39]] has our approval.

*                                                    *                                                                  *

  1. … Section [11(d)] is of limited application and only bars a corporate debtor from initiating a petition under Section 10 of the [IBC] in respect of whom a liquidation order has been made. From a reading of this section, it does not follow that until a liquidation order has been made against the corporate debtor, an insolvency petition may be filed under Section 7 or Section 9 as the case may be, as has been held by the [National Company Law] Appellate Tribunal…”

7. Addressing the 1st Issue

7.1 What can be stated without any uncertainty is that in view of the specific provisions of Section 11(d) read with Topworth Pipes & Tubes[40] and Forech India[41], is that a petition filed under Section 10 of the IBC against a company cannot be admitted by the NCLT in the event a prior order directing the commencement of winding up is passed under Section 433(e) r/w Section 434 of the Companies Act, 1956 against the same company.

7.2 However, a harmonious reading of Real Value Appliances[42], Rishabh Agro Industries[43], Madura Coats[44], Jotun II[45], Topworth Pipes & Tubes[46] and Forech India[47] seems to suggest that petitions filed against a company under Sections 7 or 9 can be admitted by the NCLT even after the passing of an order directing the commencement of winding up is passed under Section 433(e) r/w Section 434 of the Companies Act, 1956 against the same company unless an order of dissolution has already been passed under Section 481 of the Companies Act, 1956.

7.3 It is also noteworthy to mention the IBC, in a sense, is a successor statute to the SICA insofar as resolution, revival and rehabilitation are concerned. The Supreme Court in Real Value Appliances[48], Rishabh Agro Industries[49] and Madura Coats[50] has unequivocally held that a reference could be made to BIFR under the provisions of the SICA even after the passing of a winding up order. Considering this, the proposition that a company that has been ordered to be wound up (in accordance with inter alia Section 433(e) r/w Section 434 of the Companies Act, 1956) cannot be resolved, revived or rehabilitated under the provisions of the IBC, but could be under the provisions of the SICA seem to be manifestly arbitrary and wholly unjust for the simple reason that such a company would lose an opportunity to resolve, revive and/or rehabilitate itself before being wound up/liquidated.

7.4 In summation, the specific answer to the 1st issue is: Yes, the NCLT can pass an order inter alia admitting a petition under Sections 7 or 9 of the IBC against a company even after the passing of an order passed by the High Court concerned inter alia directing the commencement of winding up of the same company under inter alia Section 433(e) r/w Section 434 of the Companies Act, 1956. However, the NCLT cannot do the same in a petition filed under Section 10 of the IBC.

7.5 Of course, the matter does not necessarily end here. The IBC, through Section 255 read with the Eleventh Schedule, carried out several amendments to the Companies Act, 2013; including substitution of Section 434 of the Companies Act, 2013. The substituted Section 434 of the Companies Act, 2013 was also amended through the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018, and the Companies (Removal of Difficulties) Fourth Order, 2016. Section 434 of the Companies Act, 2013 now reads as below:

434. Transfer of certain pending proceedings.- (1) On such date as may be notified by the Central Government in this behalf, —

(a) all matters, proceedings or cases pending before the Board of Company Law Administration (herein in this section referred to as the Company Law Board) constituted under sub-section (1) of Section 10-E of [the Companies Act, 1956], immediately before such date shall stand transferred to the [NCLT] and the [NCLT] shall dispose of such matters, proceedings or cases in accordance with the provisions of this Act;

(b) any person aggrieved by any decision or order of the Company Law Board made before such date may file an appeal to the High Court within sixty days from the date of communication of the decision or order of the Company Law Board to him on any question of law arising out of such order:

Provided that the High Court may if it is satisfied that the appellant was prevented by sufficient cause from filing an appeal within the said period, allow it to be filed within a further period not exceeding sixty days; and

(c) all proceedings under [the Companies Act, 1956], including proceedings relating to arbitration, compromise, arrangements and reconstruction and winding up of companies, pending immediately before such date before any District Court or High Court, shall stand transferred to the [NCLT] and the [NCLT] may proceed to deal with such proceedings from the stage before their transfer:

Provided that only such proceedings relating to the winding up of companies shall be transferred to the Tribunal that are at a stage as may be prescribed by the Central Government:

Provided further that any party or parties to any proceedings relating to the winding up of companies pending before any Court immediately before the commencement of the Insolvency and Bankruptcy Code (Amendment) Ordinance[…] 2018, may file an application for transfer of such proceedings and the Court may by order transfer such proceedings to the [NCLT] and the proceedings so transferred shall be dealt with by the [NCLT] as an application for initiation of corporate insolvency resolution process under the [IBC]:

Provided further that only such proceedings relating to cases other than winding-up, for which orders for allowing or otherwise of the proceedings are not reserved by the High Courts shall be transferred to the [NCLT]:

Provided further that –

(i) all proceedings under [the Companies Act, 1956] other than the cases relating to winding up of companies that are reserved for orders for allowing or otherwise such proceedings; or

(ii) the proceedings relating to winding up of companies which have not been transferred from the High Courts;

shall be dealt with in accordance with provisions of [the Companies Act, 1956] and the Companies (Court) Rules, 1959.

(2) The Central Government may make rules consistent with the provisions of this Act to ensure timely transfer of all matters, proceedings or cases pending before the Company Law Board or the courts, to the Tribunal under this section.”

                                                                                                      (emphasis supplied)

7.6 The second proviso to Section 434(1)(c) allows any party to a winding up proceeding to apply to the High Court where such winding up proceeding is pending for the purpose of transferring those proceedings to the NCLT which would thereafter initiate a Corporate Insolvency Resolution Process of that company in accordance with the provisions of the IBC. The Supreme Court of India had the occasion to examine the history and intent behind this provision in Jaipur Metals and Electricals Employees Organisation Jaipur Metals and Electricals Ltd. [51], where it was held:

“15.…This is further made clear by the amendment to Section 434(1)(c), with effect from [17 August 2018], where any party  to a winding up proceeding pending before a Court immediately before this date may file an application for transfer of such proceedings, and the Court, at that stage, may, by order, transfer such proceedings to the NCLT. The proceedings so transferred would then be dealt with by the NCLT as an application for initiation of the corporate insolvency resolution process under the Code. It is thus clear that under the scheme of Section 434 (as amended) and Rule 5 of the 2016 Transfer Rules, all proceedings under Section 20 of the [SICA] pending before the High Court are to continue as such until a party files an application before the High Court for transfer of such proceedings post [17 August 2018]. Once this is done, the High Court must transfer such proceedings to the NCLT which will then deal with such proceedings as an application for initiation of the corporate insolvency resolution process under the Code.”

7.7 Thus, the legislative intent appears to favour the IBC as a method of dealing with insolvent corporate entities even in respect of companies for which proceedings relating to their winding up are pending before a High Court under the provisions of the Companies Act, 1956. A perusal of these provisions would show that the legislative intent is to give an option to the stakeholders of a company being wound up under inter alia Section 433 of the Companies Act, 1956 to apply to the High Court concerned for transfer of the proceedings so that they may be dealt with by the NCLT in accordance with the provisions of the IBC. It may also be noted that since the proceedings are being “transferred”, the bar of Section 11 of the IBC may also not apply to the transferred proceedings, as Section 434(1)(c) does not seem to suggest that the transferred proceeding is to be admitted as a normal petition under Sections 7, 9 or 10. In fact, this would be perverse as that would give scope to the NCLT to reject a transferred petition – thus indirectly reviving a company which had been ordered to be wound up.

8. Addressing the 2nd Issue

8.1 This brings us to an important question of law the 2nd issue which had not been addressed in Topworth Pipes & Tubes[52]. The provisions of Section 446 of the Companies Act, 1956 make it manifestly clear that once a company has been be directed to be wound up, the continuance or initiation of any legal proceeding against the company can only be done after obtaining leave of the High Court that directed the commencement of winding up of that company.

8.2 In fact, in Murli Industries Ltd. Primo Pick N. Pack (P) Ltd. [53] (Murli Industries), a Single Judge Bench of the Bombay High Court has specifically held that in the event a company has been directed to be wound up/liquidated under the provisions of the Companies Act, 1956, Section 446 mandates that leave of the High Court be sought prior to initiation or continuance of proceedings under Sections 7 or 9 of the IBC. The relevant portions of Murli Industries[54] have been culled out and reproduced hereinbelow:

“33. Section 446 [of the Companies Act, 1956] is an intrinsic part of that process. It mandates that leave of the Company Court to file or continue with any such proceeding, must be obtained. The rationale being that the Company Court must be made aware of any other claims raised against the Company so that it can effectively go about its job of liquidation of the Company. If this is not to happen, there would be a reasonable possibility of two conflicting claims being made and allowed in respect of the Company and authorities allowing such claims would be at their wit’s end in implementing them. Resolution of insolvency of a Company and liquidation of a Company are two processes which pull at each other. Former is about rejuvenation of life and the latter is about termination of life. In such a case, the logic of law, here Section 446 of [the Companies Act, 1956], would require that a forum dealing with a proceeding more drastic in consequences is allowed to take a call on the revival possibility of the Company before it is too late in the day. This would mean that no application can be filed or continued with regard to initiation of resolution process under Chapter II of Part II of the IBC without leave of the Company Court under Section 446(1) of [the Companies Act, 1956]. It would then follow that if any resolution process is initiated without leave of the Company Court, it would be a defective proceeding in the eye of the IBC read with [the Companies Act 1956]. Such a proceeding will acquire sanctity only when leave under Section 446(1) of [the Companies] Act 1956] is granted…

  1. Such an interpretation, in my considered view, is also consistent with the legislative intent as broadly reflected by the aims and objects of the IBC.

 *                                                 *                                  *

  1. The object of the IBC is to consolidate and amend the law relating to re-organisation and insolvency resolution of the corporate persons, partnership firms and individuals in a time-bound manner for maximisation of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders. The whole theme of [the] IBC is based upon efficacy and speed to be achieved in making efforts to revive a dying Company, and securing protection of the interests of its creditors and other stakeholders. The object of the IBC is not to repeal [the Companies Act, 1956] and substitute it by another enactment, but it is to consolidate and amend relevant laws. Such an object of the IBC should underline the need for attaining harmony while interpreting the provisions of […] the IBC […] qua Section 446 of [the Companies Act, 1956] so that what is in the best of interests of the Company and its stakeholders is allowed to happen in a natural way. This is what I have done in the present case and accordingly, I conclude that leave to continue with the proceedings before the NCLT, under Section 446(1) of [the Companies Act, 1956], is necessary …

8.3 In view of this, the answer to the 2nd issue is: Leave of the concerned would be required to be obtained for the continuation or initiation of proceedings filed under Sections 7 or 9 of the IBC. However, we would have to also consider Section 434 of the Companies Act, 2013, described above. Taking the essence of the judgments set out above and applying them to Section 466(1) of the Companies Act, 1956, as well as Section 434(1)(c) of Companies Act, 2013, a picture emerges where the legislature intends for pending winding up proceedings to be transferred rather than for individual creditors to invoke the IBC without involving the High Court seized of the winding up proceedings. This would make sense as the High Court cannot be denuded of any discretion in the matter. For example, if the Official Liquidator has identified avoidable transactions during the course of his activities, or has taken out proceedings alleging misfeasance against the erstwhile management of the company in liquidation, the High Court may choose to decline transferring the proceedings out of its jurisdiction pending the outcome of those proceedings. That being said, judicial pronouncements consistently suggest that the route of IBC is preferable to winding up under the Companies Act, 1956.

9. To summarise, in the event a company has been directed to be wound up by a High Court under Sections 433(e) r/w Section 434 of the Companies Act, 1956, the NCLT may admit a petition filed under Sections 7 or 9 of the IBC provided leave has been granted by the High Court concerned in terms of Section 446 of the Companies Act, 1956, or the High Court concerned makes an order for transferring the proceedings under Section 434(1)(c) of the Companies Act, 2013. However, in the former case, petitions under Section 10 of the IBC are not maintainable in the event an order directing the commencement of winding up has already been passed.


*Advocate-on-Record, Supreme Court of India, BBA LLB, Symbiosis Law School (a constituent of Symbiosis International University)

**Advocate, Bombay High Court, BA LLB, Symbiosis Law School (a constituent of Symbiosis International University)

[Authors’ Note: The views expressed herein are personal and independent. No third party has funded inter alia the issuance of this paper or the research conducted by the authors. The authors have based their views in this research paper on prevalent legislation, judicial opinions/interpretations pertaining to the same and their experience as practicing advocates in India.]

[1] Insolvency and Bankruptcy Code, 2016

[2] Companies Act, 1956

[3] Sick Industrial Companies (Special Provisions) Act, 1985 

[4]http://www.officialliquidatormumbai.com/pdf/Alphabetical%20List%20Under%20Liquidation.pdf

[5] (2019) 4 SCC 17

[6]Ibid  at para 121, p. 121

[7] Reports on Insolvency and Bankruptcy, Viswanathan Committee Report (Insolvency and Bankruptcy)

[8]Srivastava, P. “Ease of Doing Business 2019: GST, IBC big winners; list of reforms that put India among top 10 improvers”. Financial Express (dated 31 October 2018). https://www.financialexpress.com/economy/ease-of-doing-business-2019-gst-ibc-big-winners-list-of-reforms-that-put-india-among-top-10-improvers/1368186/

[9] (1998) 5 SCC 554

[10]Ibid

[11] (2000) 5 SCC 515

[12] (1998) 5 SCC 554

[13](2016) 7 SCC 603

[14] (1998) 5 SCC 554

[15] (2000) 5 SCC 515

[16] (2016) 7 SCC 603

[17] (1998) 5 SCC 554

[18]  (2000) 5 SCC 515

[19] 2018 SCC OnLine Bom 1952

[20]  (2016) 7 SCC 603

[21] 2018 SCC OnLine Bom 1952

[22] (2016) 7 SCC 603

[23] 2018 SCC OnLine NCLT 31299

[24] (2000) 5 SCC 515

[25] (2016) 7 SCC 603

[26] 2018 SCC OnLine Bom 1952

[27] 2018 SCC OnLine NCLT 31299

[28] (2000) 5 SCC 515

[29] 2018 SCC OnLine NCLT 31299, pp. 8-14

[30] 2018 SCC OnLine Bom 1952

[31] (2000) 5 SCC 515

[32]Ibid

[33]  (2016) 7 SCC 603

[34] (2016) 7 SCC 603

[35] (2000) 5 SCC 515

[36] 2019 SCC OnLine SC 87

[37] 2018 SCC OnLine Bom 1952

[38]  2019 SCC OnLine 87

[39] 2018 SCC OnLine Bom 1952

[40] 2018 SCC OnLine NCLT 31299

[41]  2019 SCC OnLine 87

[42] (1998) 5 SCC 554

[43] (2000) 5 SCC 515

[44] (2016) 7 SCC 603

[45]  2018 SCC OnLine Bom 1952

[46] 2018 SCC OnLine NCLT 31299

[47] 2019 SCC OnLine 87

[48] (1998) 5 SCC 554

[49]  (2000) 5 SCC 515

[50] (2016) 7 SCC 603

[51] (2019) 4 SCC 227

[52] 2018 SCC OnLine NCLT 31299

[53] 2018 SCC OnLine Bom 4178  

[54]Ibid

Case BriefsSupreme Court

Supreme Court: The 3-judge bench of SA Bobde, CJ and AS Bopanna and V. Ramasubramanian*, JJ has held that the proceedings for winding up of a company are actually proceedings in rem to which the entire body of creditors is a party and the words “party  or parties” appearing in the 5th proviso to Clause (c) of Sub-section(1) of Section 434 the Companies Act, 2013 would take within its fold any creditor of the company in liquidation.

Scheme of Section 434

  • For the purpose of transfer, Section 434 classifies the winding up proceedings pending before the High Courts into two categories namely:

(a)Proceedings for voluntary winding up where notice of resolution by advertisement has been given under Section 485(1) of the Companies Act, 1956, but the company has not been dissolved before 01.04.2017; and

(b) Other types of winding up proceedings.

  • The first of the above 2 categories of cases are covered by the fourth proviso under Clause (c) of Sub­section (1) of Section 434, which states:

“Provided also that proceedings relating to cases of voluntary winding up of a company where notice of the resolution by advertisement has been given under subsection (1) of section 485 of the Companies Act, 1956 but the company has not been dissolved before the 1st  April, 2017 shall continue to be dealt with in accordance with provisions of the Companies Act, 1956 and the Companies (Court) Rules, 1959”.

  • Such cases of voluntary winding up covered by the above proviso shall continue to be dealt with by the High court. It is only (i) cases of voluntary winding up falling outside the scope of the 4th Proviso and (ii) other types of winding up proceedings, that can be transferred by the High Courts to the Tribunal, subject however to the Rules made by the Central Government under Section 434 (2).
  • The transferability, by operation of law, of winding up proceedings, other than those covered by the 4th Proviso, depends upon the stage at which they are pending before the Company Court. But this is left by the law makers to be determined through subordinate legislation, in the form of Rules.
  • Apart from providing for the transfer of certain types of winding up proceedings by operation of law, Section 434 (1)(c) also gives a choice to the parties to those proceedings to seek a transfer of such proceedings to the NCLT. This is under the fifth proviso to Clause (c).
  • The 5th proviso uses the words “any party or parties to any proceedings relating to the winding up of companies pending before any Court. Hence, the right to invoke the 5th proviso is specifically conferred only upon the parties to the proceedings. Therefore, on a literal interpretation, such a right should be held to be confined only to “the parties to the proceedings.”

Scheme of Companies (Transfer of Pending Proceedings) Rules, 2016

The pending proceedings for winding up are classified into three types namely:

  • proceedings for voluntary winding up covered by the fourth proviso to Clause (c) of Subsection (1) of Section 434, which shall continue to be dealt with in accordance with the provisions of the 1956 Act;
  • proceedings for winding up on the ground of inability to pay debts; and
  • proceedings for winding up on grounds other than inability to pay debts.

The transferability of a winding up proceeding, both under Rule 5 as well as under Rule 6, is directly linked to the service of the winding up petition on the respondent under Rule 26 of the Companies (Court) Rules, 1959. The normal requirement of Rule 26 is that the copy of the petition under the Act shall be served on the respondent along with the notice of the petition, unless otherwise ordered. The notice of the petition, required under Rule 26 to be served along with the copy of the petition, should be in Form No.6, due to the mandate of Rule 27.

If the winding up petition has already been served on the respondent in terms of Rule 26 of the 1959 Rules, the proceedings are not liable to be transferred. But if service of the winding up petition on the respondent in terms of Rule 26 had not been completed, such winding up proceedings, whether they are under Clause (c) of Section 433 or under Clauses (a) and (f) of Section 433, shall peremptorily be transferred to the NCLT.

“Rules 5 and 6 of the Companies (Transfer of Pending Proceedings) Rules 2016, fix the stage of service of notice under Rule 26 of the Companies (Court) Rules, 1959, as the stage at which a winding up proceeding can be transferred. This is because the first proviso under Clause (c) of Sub-section (1) of Section 434 enables the Central Government to prescribe the stage at which proceedings for winding up can be transferred and subsection (2) of section 434 confers rule making power on the Central Government.”

Further, the restriction under Rules 5 and 6 of the 2016 Rules relating to the stage at which a transfer could be ordered, has no application to the case of a transfer covered by the 5th proviso to clause (c) of sub-section (1) of Section  434.

Who can be a “party to the proceedings”?

There are certain clues inherently available in the Companies Act, 1956, to indicate who can be a “party to the proceedings”. The provisions which contain such clues are as follows:

(i) Section 447 of the Companies Act, 1956, which is equivalent to Section 278 of the Companies Act, 2013 states that an order for winding up shall operate in favour of all the creditors and of all the contributories of the company as if it has been made on the joint petition of a creditor and of a contributory. There is a small change between the wording of Section 278 of the 2013 Act and the wording of Section 447 of the 1956 Act. Section 278 of the 2013 Act shows that any petition by a single creditor or contributory is actually treated as a joint petition of creditors and contributories, so that the order of winding up operates in favour of all the creditors and all the contributories.

(ii) Under Section 454(6) of the 1956 Act, any person stating himself in writing to be a creditor shall be entitled to inspect the statement of affairs submitted to the official liquidator. If the claim of such a person to be a creditor turns out to be untrue, such a person is liable to be punished under Section 454(7) of the 1956 Act.

(iii) The powers of the liquidator are enumerated in Section 457 of the 1956 Act. Section 457 actually divides the powers of a liquidator into two categories namely (i) those available with the sanction of the Tribunal and (ii) those generally available to the liquidator. But Section 290 of the 2013 Act has done away with such a distinction. However, the 1956 Act, as well as 2013 Act make the exercise of the powers by the liquidator, subject to the overall control of the Tribunal. This is made clear by Section 457(3) of the 1956 Act and Section 290(2) of the 2013 Act. Additionally, Section 457(3) of the 1956 Act enables any creditor or contributory to apply to the Court with respect to the exercise by the Liquidator, of any of the powers conferred by Section 457.

(iv) Section 460 of the 1956 Act and Section 292 of the 2013 Act make it clear that in the administration of the assets of the   Company   and   the   distribution   thereof   among   its creditors, the liquidator should have regard to any directions given by resolution of creditors at any general meeting. If the liquidator does something, in exercise of his powers, any person aggrieved by such Act or decision of the liquidator, is entitled to apply to the Company Court, under Section 460(6) of the 1956 Act and Section 292(4) of the 2013 Act.

(v) Section 466(1) of the 1956 Act enables any creditor to apply for stay of all proceedings in relation to the winding up. This right can be exercised by any creditor at any time after the making of a winding up order.

Hence, the proceedings for winding up of a company are actually proceedings in rem to which the entire body of creditors is a party. Such proceeding might have been initiated by one or more creditors, but by a deeming fiction the petition is treated as a joint petition. The official liquidator acts for and on behalf of the entire body of creditors. Therefore, the word “party” appearing in the 5th proviso to Clause (c) of Sub-section (1) of section 434 cannot be construed to mean only the single petitioning creditor or the company or the official liquidator.

Hence,

“If any creditor is aggrieved by any decision of the official liquidator, he is entitled under the 1956 Act to challenge the same before the Company Court. Once he does that, he becomes a party to the proceeding, even by the plain language of the section. Instead of asking a party to adopt such a circuitous route and then take recourse to the 5th proviso to section 434(1)(c), it would be better to recognise the right of such a party to seek transfer directly.”

[Kaledonia Jute and Fibres Pvt. Ltd v. Axis Nirman and Industries Ltd, 2020 SCC OnLine SC 943, decided on 19.11.2020]


*V. Ramasubramanian has penned this judgment

Advocates who appeared in the matter

For appellant: Senior Advocate Huzefa Ahmadi,

For 1st respondent: Senior Advocate A.N.S. Nadkarni

For Official Liquidator: Advocate-on-Record Gp. Capt. Karan Singh Bhati

OP. ED.SCC Journal Section Archives

Introduction

Much like sovereign democracy, corporate democracy plays to the will of the majority. The majority rule enforces a contractual bargain among shareholders that puts collective decision-making ahead of individual interests. By placing business decisions in the hands of the Board of Directors, it introduces an element of efficiency. However, what is to prevent a tyranny of the majority that steamrolls minority shareholders? Here, company law intervenes to moderate the behaviour of dominant shareholders to ensure they do not adversely affect the interests of the minority. Minority shareholders can resort to various remedies under company law, such as oppression, prejudice and mismanagement, to restore the balance of power.

While Indian company law has incorporated versions of shareholder remedies since the mid-20th century, the design of the remedies as they currently operate finds place in Sections 241 and 242 of the Companies Act, 2013 (“the 2013 Act”). No sooner than these provisions took effect,[1] they faced a litmus test in one of India’s fiercest corporate battles in recent times. On 24-10-2016, the Board of Tata Sons Ltd., the holding company of the revered Tata group of companies, ousted its Executive Chairman, Mr Cyrus Mistry, from the position. The Shapoorji Pallonji group, of which Mr Mistry is a part, is a minority shareholder in Tata Sons. The group promptly initiated action under Sections 241 and 242 of the 2013 Act against Tata Sons and its controlling shareholders, being two Tata trusts.

The Shapoorji Pallonji group challenged various decisions taken by Tata Sons. These included several business decisions taken in various Tata group companies (referred to as “legacy issues”), the amendments to the articles of association of the holding company Tata Sons to enhance the powers of the Tata shareholders and ultimately the removal of Mr Mistry as the Executive Chairman and thereafter as a Director of Tata Sons. While the dispute was pending adjudication, Tata Sons converted itself from a public company into a private one, a matter also contested legally. After marathon hearings, the Mumbai Bench of the National Company Law Tribunal (“NCLT”) issued a 368-page ruling[2] declining to grant any relief to the minority shareholders.

Understandably dissatisfied with the NCLT’s ruling, the minority shareholders of Tata Sons preferred an appeal before the National Company Law Appellate Tribunal (“Nclat”). In a significant ruling, the Nclat held[3] that the removal of Mr Cyrus Mistry as Executive Chairman by the Board of Tata Sons was illegal, and called for his reinstatement to that position. It also decided that consequential actions taken in the interim, including the appointment of a new Executive Chairman were illegal. In doing so, the Nclat overturned the NCLT decision2, which had not found any case of oppression in the conduct of the Board and majority shareholders of the company, or the need to grant the minority shareholders of Tata Sons any remedy. The NCLATalso declared as illegal the conversion of Tata Sons from a public limited company to a private limited company.

Aggrieved by this, Tata Sons preferred an appeal to the Supreme Court, which stayed[4] the operation of the NCLAT ruling. The matter is pending hearing before the Supreme Court at the time of this writing. The Tata Sons dispute is noteworthy, as it is the first significant dispute under Sections 241 and 242 of the 2013 Act to receive the attention of the higher judiciary. In testing the mettle of these provisions, it presents an opportunity for the Supreme Court to elucidate the scope of the oppression, prejudice and mismanagement provisions in India, especially under the 2013 Act. This is also because the Nclat, in its ruling, missed the occasion to clarify the legal position relating to minority shareholders’ remedies, as it did not address the law in the requisite depth. This stands in stark contrast with the ruling of the NCLT wherein the adjudicatory body took great pains to chalk out the evolution of the law and set out the jurisprudence. Given this scenario, apart from the broader ramifications of a ruling in Tata Sons to corporate India, it is reasonable to anticipate from the Supreme Court a clearer delineation of the contours of the oppression, prejudice and mismanagement remedies in India.

A conspectus of Sections 241 and 242 of the 2013 Act leads us to their analysis through the lens of two principal questions, as the Nclat outlined in Tata Sons[5].

(i) Whether the company’s affairs have been or are being conducted in a manner “prejudicial” or oppressive to any member or members or prejudicial to the public interest or in a manner prejudicial to the interests of the company? and

(ii) If that be so, whether to wind up the company would unfairly prejudice such member or members, but that otherwise, the facts would justify the making of a winding-up order on the ground that it was just and equitable that the company should be wound up.[6]

For ease of reference, the first paragraph above is referred to as the “substantive limb” and the second as the “conditional limb”. In order for a shareholder to obtain remedies under the previously mentioned statutory provisions, it must demonstrate the satisfaction of both the limbs cumulatively. If so, the petitioning shareholder[7] is entitled to relief from the court[8] “with a view to bringing to an end the matters complained of”.[9]

In this background, the goal of this article is to unpack the shareholder remedies of oppression, prejudice and mismanagement under the 2013 Act. While this legislation substantially tracks its predecessor in the form of Sections 397 and 398 of the Companies Act, 1956 (“the 1956 Act”), it has also deviated, and that too in material fashion, on some counts. The 2013 Act has the effect of both expanding as well as contracting the shareholder remedies. The upshot here is that Section 241 of the 2013 Act considerably expands the scope of the substantive limb, thereby ensnaring within it conduct that was previously excluded. By introducing the concept of “prejudice” caused to a member as objectionable conduct apart from “oppressive” behaviour, Parliament has arguably lowered the standard of conduct that a petitioning shareholder must satisfy before it can invoke the remedy. However, by remaining steadfast in its insistence that petitioners must satisfy the conditional limb no matter what the nature of the conduct of the offending shareholders,[10] the 2013 Act retains a considerable burden on petitioning shareholders. Moreover, while conduct involving mismanagement was not subject to the conditional limb under the 1956 Act, the 2013 Act alters the position and introduces the cumulative nature of the two limbs even for mismanagement, thereby narrowing the scope of the remedies. The 2013 Act, therefore, offers a mixed bag.

Part II of this article focuses on the substantive limb enshrined in Section 241 of the 2013 Act, and Part III on the conditional limb enshrined in Section 242(1). Both Parts track evolution of the law, how the Indian courts have interpreted the two limbs, including with reference to English law, and identify areas that call for courts to fill the interpretative gaps. Part IV analyses the remedies that adjudicatory bodies can award in such cases, whether or not the petitioning shareholder can discharge the burden of establishing the substantive and conditional limbs. Part V concludes. While the introduction to this article is set in the background of the Tata Sons2, 3 rulings merely to provide a context, this article confines itself to an analysis of the legal issues. Given that the matter is presently sub judice, it is clearly the intention to avoid any application to the specific dispute at hand therein.

Conduct and Effect: The Substantive Limb

Section 241(1) of the 2013 Act governs the substantive limb, and provides:

  1. Application to Tribunal for relief in cases of oppression, etc.—(1) Any member of a company who complains that—

(a) the affairs of the company have been or are being conducted in a manner prejudicial to public interest or in a manner prejudicial or oppressive to him or any other member or members or in a manner prejudicial to the interests of the company; or

(b) the material change, not being a change brought about by, or in the interests of, any creditors, including debenture-holders or any class of shareholders of the company, has taken place in the management or control of the company, whether by an alteration in the Board of Directors, or manager, or in the ownership of the company’s shares, … or in any other manner whatsoever, and that by reason of such change, it is likely that the affairs of the company will be conducted in a manner prejudicial to its interests or its members or any class of members, may apply to the Tribunal … for an order.

Viewed from the point of view of offending conduct perpetrated against the petitioning shareholder, clause (a) deals with the concepts of “oppression” and “prejudice”, while clause (b) “mismanagement”.[11] Note that Section 241 uses the three expressions disjunctively such that, in order for a petitioning shareholder to be successful, only one of the three offending types of conduct needs to be established. Hence, it is appropriate to consider each one of them separately.

Oppression

Origins of the Remedy

The very first antecedent of Section 241 of the 2013 Act can be found in Section 153‑C(1)(a) of the Companies Act, 1913 (“the 1913 Act”), which Parliament introduced by way of amendment in 1951.[12] Its substantive limb encompassed conduct that is “oppressive to some part of the members”. This aspect found its way onto Indian shores through Section 210 of the English Companies Act, 1948. Historically, in case of irresolvable disputes between shareholders and the company or among shareholders themselves, the only remedy available was winding up the company.[13] However, given the inefficiencies in winding up the company in such circumstances,[14] the Cohen Committee in England recommended the introduction of an alternative remedy that took the form of oppression in Section 210 of the English legislation, which rationale applies to Indian company law as well. The oppression remedy received attention during the enactment of the 1956 Act,[15] and found its place in Section 397 of that legislation as conduct of affairs of the company “in a manner oppressive to any member or members (including any one or more of themselves)”.[16]

Oppression under Section 397 of the 1956 Act has constituted the mainstay of shareholder remedies in India for over half a century. The courts have developed substantial jurisprudence on the oppression remedy, and have consistently cross-referred to the principles emanating from the English courts under the statutory counterpart in Section 210 of the English Companies Act, 1948. Since the language on this specific count in Section 241 of the 2013 Act is in pari materia with that of Section 397 of the 1956 Act, this article takes the position that the said jurisprudence is entirely applicable to the present dispensation as well. Moreover, the courts have interpreted the oppression remedy quite narrowly, thereby imposing a high burden on petitioning shareholders to be able to enjoy the fruits of that remedy.

The (Restrictive) Scope of “Oppression”

Since the statute does not define oppression, the courts have taken on the role of expounding the principles for determining the concept, and that too contextually, based on the facts and circumstances of each case.[17] Given the proximity with the English statute, it is not surprising that the initial guidance emanated from English courts.[18] In Elder v. Elder & Watson Ltd.[19] the court stated that “the essence of the matter seems to be that the conduct complained of should at the lowest involve a visible departure from the standards of fair dealing, and a violation of the conditions of fair play on which every shareholder who entrusts his money to a company is entitled to rely”[20] and that “[m]ere loss of confidence or pure deadlock does not” come within the purview of oppression.[21] In Scottish Coop. Wholesale Society Ltd. v. Meyer[22], the House of Lords adopted the dictionary meaning of the word to mean “burdensome, harsh, and wrongful” conduct.[23]

Indian courts have had to address a number of specific issues pertaining to the scope of oppression. First, a question arose whether a petitioning shareholder has the burden to prove illegality of the offending shareholder’s conduct before it can succeed in an oppression action. Here, the courts have been categorical that illegality is not a sine qua non for oppression. As the Gujarat High Court clarified in an early case under Section 397 of the 1956 Act:[24]

A particular action of the directors or controlling shareholders may be in violation of any provisions of law in the sense that some particular provision of law may not have been complied with before taking such action and yet such action may be very much in the interests of the company and the shareholders. On the other hand another action of the directors or controlling shareholders may be wholly within the limits of the law and yet it may be oppressive to the minority shareholder or prejudicial to the interests of the company.

Second, in terms of timing and frequency, courts have clarified that in determining oppression the “events have to be considered not in isolation but as a part of a consecutive story”.[25] Further, there is a need to establish “continuous acts on the part of the majority shareholders, continuing up to the date of the petition, showing that the affairs of the company were being conducted in a manner oppressive to some part of the members”.[26] Hence, petitioning shareholders carry an onerous burden of demonstrating a series of acts on the part of the offending shareholders that have not only occurred in the past, but also continue to occur at the time of the oppression petition.

Interestingly, a seemingly innocuous change in the text of Section 241 of the 2013 Act (as compared to Section 397 of the 1956 Act) has attracted some attention. The position enumerated above arose because Section 397 used, with reference to the offending conduct, the language “are being conducted”. However, Section 241 uses the expression “have been or are being conducted”. Some commentators take this to mean that past isolated acts, which are neither serial in nature nor are ongoing, could also be subsumed within the purview of oppression, thereby expanding the scope of the substantive provision.[27] However, Nclat has supplied a somewhat narrow interpretation in Power Finance Corpn. Ltd. v. Shree Maheshwar Hydel Power Corpn. Ltd.,[28] where it noted that the expression “ ‘have been’ relates to present perfect tense. It relates to action that began sometime in the past and is still in progress”.[29] Further supplementing the position, it stated: “[t]here is a difference between ‘have been’ and ‘had been’. ‘Had been’ would be past perfect tense indicating acts which were committed in the past and which came to an end in the past”.28 Such a semantic approach arguably sets at naught the deliberate deviation from the previous language in the oppression remedy, as now contained in Section 241 of the Companies Act.

Third, the courts have been called upon to consider whether the oppression remedy is available only when petitioners seek it in their capacity as shareholders i.e. qua member, or whether they can exercise it when they suffer oppression in other capacities such as Directors of the company.[30] Here, courts have generally been insistent that the “ ‘oppression’ complained of must be suffered by the petitioners in their character as members, and not, for example, in their character as Directors”.[31] By circumscribing the scope of the remedy, it imposes additional challenges on petitioner shareholders making an oppression claim.

Despite the fact that the Indian courts have encountered several questions of interpretation over the years, they have induced a great deal of clarity that is now pervasive on the matter.[32] This is epitomised by the set of principles the Supreme Court, after analysing a number of judgments, laid down in V.S. Krishnan v. Westfort Hi-tech Hospital Ltd.[33]:

From the above decisions, it is clear that oppression would be made out:

(a) Where the conduct is harsh, burdensome and wrong.

(b) Where the conduct is mala fide and is for a collateral purpose where although the ultimate objective may be in the interest of the company, the immediate purpose would result in an advantage for some shareholders vis-à-vis the others.

(c) The action is against probity and good conduct.

(d) The oppressive act complained of may be fully permissible under law but may yet be oppressive and, therefore, the test as to whether an action is oppressive or not is not based on whether it is legally permissible or not since even if legally permissible, if the action is otherwise against probity, good conduct or is burdensome, harsh or wrong or is mala fide or for a collateral purpose, it would amount to oppression under Sections 397 and 398.

(e) Once conduct is found to be oppressive under Sections 397 and 398, the discretionary power given to the Company Law Board under Section 402 to set right, remedy or put an end to such oppression is very wide.

(f) As to what are the facts which would give rise to or constitute oppression is basically a question of fact and, therefore, whether an act is oppressive or not is fundamentally/basically a question of fact.[34]

The popularity of these guidelines is evident in that subsequent courts have wholeheartedly embraced them verbatim.[35] Admittedly, some level of subjectivity is inevitable, as oppression is a fact-based determination. Subject to this constraint, the evolution of the jurisprudence in India illuminates two themes. The first is that, for a term that is devoid of a statutory definition, “oppression” has received a great deal of lucidity over the years. Any dispute or controversy regarding its scope as a matter of law is limited to a very narrow sphere. The second is that, in order to invoke the oppression remedy, the petitioning shareholder must satisfy the court that the offending conduct meets the high bar set by the courts.[36] That leads to the next element of the remedy i.e. “prejudice”, which exhibits the converse features: its novelty in the jurisprudence of shareholder remedy in India introduces considerable uncertainty in its interpretation and implementation but, by imposing a comparatively lower burden, it fathomably mitigates, at least to some extent, the challenges that petitioner shareholders face in India.

Prejudice

Section 241 of the 2013 Act introduced additional language to suggest that a petitioning shareholder can initiate legal action if the offending shareholders conduct the company’s affairs in a manner “prejudicial … to him or any other member or members”. Such a remedy that refers to prejudice suffered by shareholders was absent from Section 397 of the 1956 Act.[37] Hence, by a legislative sleight of hand, Section 241(1)(a) of the 2013 Act supplements the pre-existing oppression remedy with the newly introduced remedy of prejudice.

Given the novelty of this language, it is necessary at the outset to determine whether one ought to read the concept of “prejudice” to clarify or explicate the oppression remedy, or whether the prejudice remedy operates on a standalone basis dehors oppression. Judging by the language of Section 241(1)(a), it is evident that the prejudice remedy stands on its own footing, and aside from the oppression remedy. This is because the plain text of Section 241(1)(a) uses the expressions “prejudicial or oppressive” disjunctively, which must be given its ordinary meaning.[38] Hence, under the 2013 Act, a petitioner shareholder has the option of demonstrating to the court the existence of oppression, prejudice, or both. In such a background, it is necessary to consider the genesis of the prejudice remedy and its scope (including in comparison with the oppression remedy).

Genesis of the Prejudice Remedy

The precise legislative intention behind the introduction of the prejudice language in Section 241 is shrouded in mystery. The concept first appeared in the Companies Bill, 2008,[39] without any analysis or even mention in the lead up to the draft legislation. In fact, the report of the J.J. Irani Committee that shaped the 2013 Act felt that there were “adequate provisions in the existing [1956] Act to prevent Oppression and Mismanagement”.[40] The report only refers to the two existing remedies in the 1956 Act and makes no mention of prejudicial conduct towards shareholders. Similarly, the two reports of Parliament’s Standing Committee on Finance are silent on this count.[41] The concept has also not received any attention in the follow-up to the enactment of the 2013 Act.[42]

In the absence of adequate guidance as to the legislative intention behind the prejudice remedy, it becomes imperative to survey parallel developments under English law. After all, the evolution of the oppression remedy under Section 397 of the 1956 Act is attributable not only to the express language of Section 210 of the English Companies Act of 1948, but also to the jurisprudence developed therein.[43] The Jenkins Committee[44] unearthed the inefficiencies of the oppression remedy and recommended that a newly devised “unfair prejudice” remedy substitute it. The Committee observed that the oppression remedy does not appear “to have produced the results expected of it”[45] and that “ ‘oppressive’ is too strong a word to be appropriate in all the cases in which applicants ought to be held entitled to relief under the section”.[46] It concluded: “it should be made clear that Section 210 extends to cases where the affairs of the company are being conducted in a manner unfairly prejudicial to the interests of some part of the members and not merely in an ‘oppressive’ manner”.[47] The Jenkins Committee’s labour was belatedly realised by the enactment of Section 459 of the English Companies Act of 1985 that has now found a place in Section 994 of the English Companies Act of 2006 currently in force.[48]

While the emergence of the equivalent remedy under English law will aid an appreciation of the rationale for the prejudice remedy in India, it is necessary to be conscious of two material differences between the legislative designs in the two jurisdictions. First, the unfair prejudice remedy under English company law substituted the erstwhile oppression remedy, a term the English statute obliterated. In India, however, oppression and prejudice coexist. The Indian Parliament found it apposite to supplement the oppression remedy with the prejudice remedy rather than to replace it. This arguably enhances the options available to petitioning shareholders in Indian companies. Second, by way of the “unfair prejudice” remedy, English law combines the concept of unfairness with prejudice: courts ought to consider both elements. On the other hand, the 2013 Act in India refers only to “prejudice” without any mention whatsoever to unfairness. It appears at a superficial level that the petitioning shareholders bear a lower burden to meet the threshold required to invoke the remedy. If the findings emanating from the Jenkins Committee are anything to go by, this is not altogether surprising because the inadequacy of the oppression (due to its stringent requirements) motivated an expansion of the remedy to accommodate petitioning shareholder concerns.[49] The introduction of the “prejudice” remedy into Section 241(1)(a) of the 2013 Act with limited (if no) legislative guidance would call upon the Indian courts to lay down the guiding principles to interpret the term.

Possible Jurisprudence in Relation to “Prejudice”

Beginning with a lexicographical survey, the Black’s Law Dictionary defines “prejudice” to mean “[d]amage or detriment to one’s legal rights or claims” and “prejudicial” as “[t]ending to harm, injure or impair; damaging or hurtful”.[50] Superimposing this on to a corporate structure, under this relatively liberal dispensation, all that petitioning shareholders need to demonstrate is that the conduct of the offending shareholders adversely affects them. In other words, the test focuses on the effect on the petitioning shareholder rather than whether or not such conduct is itself within the bounds of acceptability. Such a meaning conferred upon “prejudice” in Section 241(1)(a) will enable petitioning shareholders to bring and succeed in claims with relative ease. Interestingly, Black’s Law Dictionary also provides for a stricter definition of “prejudicial” as “[u]nfairly disadvantageous; inequitably detrimental”.50 By interspersing prerequisites such as “unfairly” and “inequitably”, the focus is not solely on the effect on the victim, but also on the nature of the conduct of the alleged offender.

In this background, a question arises whether Indian courts must supply an effect-oriented (arguably liberal) interpretation of prejudice by solely examining the impact on the petitioning shareholders, or whether they must go by a conduct- and effect-oriented (arguably strict) approach and impose a requirement that the offending shareholders’ conduct must also be unfair or inequitable. Before seeking an answer to this question, it would be apt to take a brief sojourn into the manner in which English law has developed that could help enlighten one’s understanding of Section 241 of the 2013 Act.

By utilising the expression “unfair prejudice”, the English Companies Act per force adopts the strict approach to prejudice as enshrined in the statute itself. As the editors of the Gowers’s Principles of Modern Company Law note:[51] “In a number of cases the courts have stressed that the section itself requires prejudice to the minority which is unfair, and not just prejudice per se.” More specifically, Neill, LJ expounded in Saul D. Harrison & Sons Plc, In re[52]:

“The conduct must be both prejudicial (in the sense of causing prejudice or harm to the relevant interest) and also unfairly so; conduct may be unfair without being prejudicial or prejudicial without being unfair, and it is not sufficient if the conduct satisfies only one of these tests …”

Interestingly, it is the “unfairness” requirement that has been at play before the English courts, which “is simply another way of putting the point that only legitimate expectations are protected by the section, not every factual expectation which the petitioner may entertain”.[53] Courts have embarked upon considering whether the offending shareholders’ conduct amounts to “commercial unfairness”.[54] In order to constitute commercial unfairness, it is necessary to consider whether the petitioning shareholders are entitled to “something more”[55] than the legal rights they enjoyed under company law as well as the memorandum and articles of association of the company. While English courts initially treated these additional factors as “legitimate expectations” of the petitioner shareholders, a term borrowed from public law, the more recent jurisprudence treats them as “equitable considerations”, thereby drawing from private law instead.[56] The existence of these factors would enable the petitioner shareholders to succeed in invoking the unfair prejudice remedy. The jurisprudence developed in England focuses cumulatively on both the conduct of the offending shareholders and its effect on the petitioning shareholders.

In this light, at least three methods are available to the Indian courts in interpreting the scope of the prejudice remedy. First, courts may adopt a literal interpretation of prejudice using the liberal dispensation, whereby they only consider the effect of possible corporate conduct on the petitioning shareholders i.e. whether they have suffered any harm, injury or impairment, regardless of the nature and acceptability of the conduct.50 Attractive as this may be for petitioning shareholders, such interpretation fails to fit within the legislative scheme of Section 241(1)(a). From the statutory perspective, such an interpretation will lower the bar so significantly for petitioning shareholders that it will likely render the oppression remedy under the very same statutory provision otiose. After all, why would any petitioning shareholder even attempt to discharge the higher burden of establishing oppression (which requires the elements of both conduct of the offending shareholder and effect on the petitioning shareholder) when it can simply grab the low hanging fruit by displaying effect? This is bound not only to open the floodgates for prejudice litigation, but also disrupt the conduct of the business enterprise of the company if all corporate decisions, even those that are taken in the broader interest of the company and its shareholders as a whole, are liable to questioning by petitioning shareholders whose specific interests may be adversely affected. This article advocates against the liberal effect-oriented approach, which then leads to other plausible methods.

Second, and in order to address the concerns arising from the previous method, courts may adopt the more stringent definition of prejudice that takes into account both the nature of the offending conduct as well as its impact on the petitioning shareholders. This will necessitate the incorporation of principles of fairness as well as equitable considerations, an approach that make this similar to that prevailing under English law. Another way of looking at this method is as if the courts were to read in the concept “unfairness” into the prejudice remedy to treat it as “unfair prejudice”, which then leads courts to examine whether the acts of the offending shareholders amount to “commercial unfairness”.[57] Under such a dispensation, Indian courts may well rely upon English case law for inspiration.[58] Given the legislative history under the English Companies Act, the fact that the unfair prejudice remedy sought to mitigate the rigidity of the oppression remedy would suggest that the bar for petitioning shareholders would be lower than that of oppression, but not as low as in the case of the first method above.

Third, and a method that will produce nearly the same result as the second above, is for courts to apply the rule of construction of noscitur a sociis in interpreting the term “prejudicial” in Section 241(1)(a) of the 2013 Act. Black’s Law Dictionary refers to it as a “cannon of construction holding that the meaning of an unclear word or phrase … should be determined by the words immediately surrounding it”. 50 The Supreme Court noted that

71. … where the intention of the legislature in associating wider words with words of narrower significance is doubtful, or otherwise not clear that the said Rule of construction can be usefully applied. It can also be applied where the meaning of the words of wider import is doubtful.[59]

The Court went on to note that “noscitur a sociis is a legitimate rule of construction to construe the words of an Act of Parliament with reference to the words found in immediate connection with them”.[60] It also clarified that the rule is most useful “when the intention of the legislature in associating wider words with words of narrowest significance is doubtful or otherwise not clear”.[61] Given the lack of any indication regarding parliamentary intention in the introduction of the concept of prejudice (wider in terms) along side that of the previously well-established concept of oppression (narrower in scope), there is sufficient reason to interpret prejudice in a more stringent manner in light of the concept of oppression.

No matter which methods the courts adopt, and similar to the context of oppression, the incidence of prejudice will have to be determined based on the facts and circumstances of each case. As Hoffmann, LJ noted, albeit in the context of unfair prejudice under English law, the “concept of fairness must be applied judicially and the context which it is given by the courts must be based upon rational principles”, and that the court “has a very wide discretion, but it does not sit under a palm tree”.[62] Given the novelty surrounding the prejudice remedy and the lack of guidance regarding the legislative intention behind its introduction, one cannot but await rationalisation of the principles by the judiciary.

Mismanagement

The mismanagement remedy, contained in Section 241(1)(b) of the 2013 Act, knows of no English parallel.[63] It first took the form of Section 398 of the 1956 Act at the instance of the Bhabha Report which, after reviewing the oppression provision in the English Companies Act, 1948, noted that “its scope may be appropriately enlarged to cover not only the cases of oppression to a minority of shareholders but also of gross mismanagement of the affairs of a company which cannot be otherwise suitably dealt with under the other provisions of the Act”.[64] In some ways, the mismanagement remedy seeks to mitigate the rigour of the oppression remedy.

The mismanagement remedy applies when two conditions are fulfilled.[65] First, there must be a material change in the management or control of the company, which could occur in various ways including alteration of the board, manager or ownership of the company (the cause). Second, such change must be the reason that the company conducts its affairs in a manner that is prejudicial to the interests of the company or its shareholders (the effect). The courts have observed that the mismanagement remedy is wider than the oppression remedy.[66] This is not only evident from the language of Section 241(1)(b), but also the rationale for the introduction of mismanagement as a distinct remedy. In comparison with Section 398 of the 1956 Act, which applied only if the change was prejudicial to the interest of the company, Section 241(1)(b) of the 2013 Act expands the effect to include a change that is prejudicial to the shareholders or any class thereof.

Apart from having to recognise the statutory change described above, the jurisprudence developed under Section 398 of the 1956 Act continues to hold good under the new legislation as well.[67] However, unlike the 1956 Act, under which mismanagement was a standalone remedy, the 2013 Act incorporates a material change by which cases involving mismanagement are subject to the conditional limb by which, in order for petitioning shareholders to successfully invoke the remedy, they must also establish the existence of the grounds for just and equitable winding up. It is to the conditional limb, and its impact on the exercise of shareholder remedies, that the next Part turns.

“JUST AND EQUITABLE” GROUNDS: THE CONDITIONAL LIMB

Section 242(1) of the 2013 Act governs the conditional limb, and provides:

  1. Powers of Tribunal.—(1) If, on any application made under Section 241, the Tribunal is of the opinion—

(a) that the company’s affairs have been or are being conducted in a manner prejudicial or oppressive to any member or members or prejudicial to public interest or in a manner prejudicial to the interests of the company; and

(b) that to wind up the company would unfairly prejudice such member or members, but that otherwise the facts would justify the making of a winding-up order on the ground that it was just and equitable that the company should be wound up,

the Tribunal may, with a view to bringing to an end the matters complained of, make such order as it thinks fit.

The conditional limb contained in clause (b) above makes amply clear that oppression, prejudice and mismanagement are alternative remedies to winding up, not independent ones.

Rationale and Evolution

Historically, the only remedy available to shareholders victimised by offending conduct of the company or its dominant shareholders was a winding up of the company on “just and equitable” grounds, something that modern day vocabulary would refer to as a “nuclear option”. As P.N. Bhagwati, J. noted:[68]

25. … That remedy was however totally inadequate for it meant killing the company for the purpose of putting an end to the oppression and mismanagement. But killing the company would be a singularly clumsy method of ending oppression and mismanagement and such a course might well turn out to be against the interests of the minority shareholders. The liquidation of the company may result in the sale of its asset at break-up value, which may be small and the minority who, urged by the oppression of the majority, petitions for a winding-up order may in effect play its opponent’s game, for the only available purchaser of the assets of the company may be the very majority whose oppression has driven the minority to seek redress.[69]

Based on similar reasoning, the Cohen Committee in England recommended the oppression remedy as an alternative to winding up.13 This not only found its way into Section 210 of the English Companies Act, 1948, but also into Sections 153-C and 153-D of the Companies Act, 1913.[70] Interestingly, the 1956 Act introduced a material difference. It imposed the conditional limb only for oppression,[71] but not for mismanagement (which took the shape of an independent remedy)[72]. Hence, under that legislation, petitioning shareholders bringing a case for oppression had to demonstrate the satisfaction of the conditional limb, but those asserting mismanagement were free of that burden. The rationale behind such a dichotomous approach is yet unclear.[73]

Rumblings of discontent with the conditional limb soon began developing. The Jenkins Committee in England noted “that a case for winding up under the just and equitable rule at the instance of a contributory is difficult to establish and it is suggested that there is no sufficient reason for making the establishment of such a case an essential condition of intervention by the Court”.[74] A Committee in India headed by Rajinder Sachar, J. echoed similar sentiments: “We are also of the opinion that [the conditional limb] impose[s] as an essential condition of intervention by the Court a state of facts often difficult to establish. We see no sufficient reason for making out a case of oppression that the facts should also justify the making of a winding-up order.”[75]

Despite the commonality of the critique surrounding the conditional limb, the law reform process in England and India have proceeded in diametrically opposite ways. In transforming the oppression remedy into one of unfair prejudice, Section 459 of the English Companies Act, 1985 also eliminated the conditional limb, thereby making it an independent remedy rather than an alternative one.[76] Hence, petitioning shareholders under English law bringing an unfair prejudice claim need not demonstrate the existence of grounds for just and equitable winding up, and that to wind up the company would be unfairly prejudicial to the shareholders. However, in India, the conditional limb has continued to hold sway even in the 2013 Act, and that too without any deliberations whatsoever regarding its continued utility.40 Even more, it is now applicable to the mismanagement remedy as well. By making the conditional limb a prerequisite for oppression, prejudice, as well as mismanagement, the 2013 Act, unifies the earlier dichotomous approach. Accordingly, petitioning shareholders claiming mismanagement now have to establish the conditional limb, an onus they did not carry under the 1956 Act, thereby making the remedy more stringent under the current legislation. The courts too have constantly reiterated that without establishing the conditional limb, petitioning shareholders are not entitled to relief under the substantive limb (previously oppression, and now prejudice as well as mismanagement).[77]

Equitable Considerations: “Quasi Partnership”

The concept of “just and equitable” winding up precedes that of remedies such as oppression, prejudice and mismanagement. Hence, the jurisprudence developed thereunder is relevant for determining whether the conditional limb is satisfied. The statutory manifestation is contained in Section 271(e) of the 2013 Act, which provides that a company may be wound up by a court if it is “of the opinion that it is just and equitable that the company should be wound up”.[78] The courts have retained for themselves considerable discretion in defining the boundaries of this ground.[79] Having been statutorily conferred the explicit licence to do so, the courts have embraced equitable considerations in arriving at a finding whether a company is to be wound up on just and equitable grounds.

More than a century ago, courts for this purpose began to analogise small and closely held companies to partnerships, and draw upon principles relating to dissolution of partnerships. In Yenidje Tobacco[80], an English court held that it is necessary to apply partnership principles to a company “where in substance it is a partnership in the form or the guise of a private company”. Accordingly, considerations pertaining to the dissolution of a partnership pervade the space of liquidation of a company on just and equitable grounds.[81]

The House of Lords developed these principles in the locus classicus of Ebrahimi v. Westbourne Galleries Ltd.,[82] where it re-emphasized that the words “just and equitable” enabled courts to look beyond simply the legal rights of the parties:[83]

… The words are a recognition of the fact that a limited company is more than a mere legal entity, with a personality in law of its own: that there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals, with rights, expectations and obligations inter se which are not necessarily submerged in the company structure.[84]

Treating such companies as “quasi-partnerships”, it enables courts to look past the formal legal structure of a company, the memorandum and articles of association and other agreements to the substantive nature of the relationships between the parties to apply equitable considerations. In doing so, the House of Lords laid down its precise tests that are now renowned in the common law world for when a company becomes a quasi-partnership for this purpose:83

… The superimposition of equitable considerations requires something more, which typically may include one, or probably more, of the following elements: (i) an association formed or continued on the basis of a personal relationship, involving mutual confidence—this element will often be found where a pre-existing partnership has been converted into a limited company; (ii) an agreement, or understanding, that all, or some (for there may be “sleeping” members), of the shareholders shall participate in the conduct of the business; (iii) restriction upon the transfer of members’ interest in the company—so that if confidence is lost, or one member is removed from management, he cannot take out his stake and go elsewhere.

Despite sounding a note of caution that Indian courts will have to “adjust, adapt, limit or extend”[85] principles from English decisions to suit the local circumstances, they have lent credence to the broader principles without upending them.[86] In Hind Overseas[87], the Supreme Court aptly observed:

33. … In a given case the principles of dissolution of partnership may apply squarely if the apparent structure of the company is not the real structure and on piercing the veil it is found that in reality it is a partnership. …

34. The principle of “just and equitable” clause baffles a precise definition. It must rest with the judicial discretion of the court depending upon the facts and circumstances of each case. These are necessarily equitable considerations and may, in a given case, be superimposed on law. Whether it would be so done in a particular case cannot be put in the straitjacket of an inflexible formula.[88],[89]

The last observation above gains prominence because the existence of a quasi-partnership is ultimately a fact-based determination. This is because, as the Supreme Court has noted, “Parliament, while enacting a statute, cannot think of all situations which may emerge in giving effect to the statutory provision” and hence courts need to adopt “a holistic approach of the matter”.[90] Given that “the just and equitable clause could kick-in in myriad situations”,[91] courts have adopted varying approaches to the application of the quasi-partnership principle. At one end of the spectrum, courts have been unwilling to recognise a quasi-partnership unless the business was first set up as a partnership that the partners then converted into a company, of which they became shareholders and directors.[92] On the other end, they have been open to conferring the status of quasi-partnership even to a public listed company.[93]

Although courts have recognised the lack of limitations in ascribing the character of a quasi-partnership to a company, they adopt such measures usually in the case of a deadlock, which cannot be resolved through means stipulated in its articles of association.[94] A common feature in these cases of stalemate arises when the ownership of the company is distributed equally among the shareholders and where one of them is ousted from the management of the company that also adversely affects their position as a shareholder.[95] Judged by the broader guidance emanating from the case law, it becomes clear that the notion of a quasi-partnership is capable of invocation only if the petitioning shareholder can establish an arrangement based on mutual trust and confidence, which exists over and above the legal agreements between the shareholders and Directors and the constitutional documents pertaining to the company. While it is imprudent to rule out the existence of such equitable considerations in a large, professionally managed company, the circumstances of a small company or one that a group of friends or family members own and manage render it more feasible to attribute the character of a quasi-partnership to such companies.

Notwithstanding the wide nature of the discretion available to courts, they have sounded a note of restraint in that they must desist from invoking the principle of quasi-partnership other than in exceptional circumstances. In the leading case of Hind Overseas[96], the Supreme Court noted: “When more than one family or several friends and relations together form a company and there is no right as such agreed upon for active participation of members who are sought to be excluded from management, the principles of dissolution of partnership cannot be liberally invoked”. The Court has also counselled that the “submission that a limited company should be treated as a quasi-partnership should, therefore, not be easily accepted”.[97] Hence, the burden on petitioning shareholders to establish the existence of grounds for just and equitable winding up is relatively high.

Winding-up and Unfair Prejudice

Even if just and equitable grounds exist, courts are required to determine whether to wind up the company would unfairly prejudice such member or members.[98] This is an essential requirement because the oppression, prejudice and mismanagement remedies continue in India to be alternatives to winding up and a means to preserve the business of the company and protect the interest of various stakeholders. This requirement is satisfied if petitioning shareholders can show that, although just and equitable grounds exist, the winding-up will unfairly prejudice either the petitioning shareholders themselves or the other shareholders.[99]

If the petitioning shareholders are able to prove either oppression, prejudice or mismanagement in terms of Section 241(1)(a) of the 2013 Act and also that there exist grounds for just and equitable winding up, it would be unfairly prejudicial to the petitioning shareholders if they are likely to suffer upon winding up. This would occur when the company’s business is proceeding as a going concern, or when the petitioning shareholders hold a significant shareholding in the company for which they are only likely to retrieve a break-up value upon winding up. In such circumstances, it would be unfairly prejudicial to wind up the company.[100]

Even where a winding up maybe in the interest of the petitioning shareholders, courts must weigh that against the unfair prejudice the winding up may cause to the remaining shareholders of the company. In that sense, the effort is to balance the somewhat divergent interests of the various shareholders, and even other stakeholders. For instance, the Supreme Court noted in Hind Overseas[101]: “The interest of the applicant alone is not of predominant consideration. The interests of the shareholders of the company as a whole apart from those of other interests have to be kept in mind at the time of consideration as to whether the application should be admitted”. The question surrounding whether the just and equitable winding up is likely to be unfairly prejudicial to the shareholders of the company has been somewhat straightforward in its application and has been devoid of legal controversy.

To conclude the discussion on the conditional limb, it is clear that it is insufficient for petitioning shareholders to establish the substantive element of oppression, prejudice or mismanagement. In order to be successful in obtaining a suitable remedy, they must also demonstrate the conditional limb, which draws upon equitable considerations (such as the legal fiction of quasi-partnership). As seen above, the petitioning shareholders bear a rather undue burden in proving the conditional limb. From a macro perspective, the legal regime comprising the statute and as well as the considerable discretion the courts possess (and exercise) continues to rely upon the corporate democratic principle of recognising majority decisions in a company, and permitting the invocation of shareholder remedies only in extraordinary circumstances.

Order and Relief

Once a court decides the question of whether the petitioning shareholder is entitled to relief for oppression, prejudice or mismanagement, it has wide powers to grant relief. The general power to grant relief under Section 242(1) of the 2013 Act stipulates that the court may use it “with a view to bringing to an end the matters complained of”. This objective guides the nature of relief granted. Moreover, Section 242(2) provides for various types of specific relief that the court may grant, including regulating the future conduct of affairs of the company, purchase of shares by a shareholder or the company and termination or modification of agreements, among others. Given the wide nature of the power that courts may exercise in light of specific illustrative situations, they have sought to lay down guiding principles to the grant of relief in shareholder remedy cases.

At the outset, the Supreme Court has found that “the jurisdiction of the Court to grant appropriate relief … indisputably is of wide amplitude”,[102] and that “[r]eliefs must be granted having regard to the exigencies of the situation”.102 However, these seemingly wide powers are circumscribed by the objective of granting relief, which is to put an end to the matters in dispute.[103] In Mohanlal Ganpatram[104], Bhagwati, J. observed:

26. … The language of Sections 397 and 398 leaves no doubt as to the true intendment of the legislature and it is transparent that the remedy provided by these sections is of a preventive nature so as to bring to an end oppression or mismanagement on the part of the controlling shareholders and not to allow its continuance to the detriment of the aggrieved shareholders or the company. The remedy is not intend[ed] to enable the aggrieved shareholders to set at naught what has already been done by the controlling shareholders in the management of the affairs of the company.[105]

By this, it is clear that the design of the relief must be such that it breaks a stalemate, and prevents it from perpetuating. The quintessential way of achieving this outcome is to provide for an exit of either the petitioning shareholder or the offending shareholder. Hence, such an exit mechanism would naturally be at the forefront of the types of the relief a court may order, and that too even though a wide array of relief options are available to the court under Section 242(2). Such a rationale is evident from an early House of Lords decision:[106]

One of the most useful orders mentioned in the section—which will enable the court to do justice to the injured shareholders—is to order the oppressor to buy their shares at a fair price: and a fair price would be, I think, the value which the shares would have had at the date of the petition, if there had been no oppression. Once the oppressor has bought the shares, the company can survive. It can continue to operate. … It is, no doubt, true that an order of this kind gives to the oppressed shareholders what is in effect money compensation for the injury done to them: but I see no objection to this.[107]

Such an exit mechanism is the only solution when there is a deadlock and loss of trust and confidence among the parties, as it not only puts the dispute to an end, but it also enables the continuation of the business of the company without adversely affecting the interests of the other stakeholders such as employees.[108] In certain cases, and contrary to popular wisdom, courts may even order the minority shareholders to acquire the shares of the controlling shareholders.[109]

While the exit mechanism is the most natural technique to put an end to matters complained of, courts have granted other forms of relief as well. These include reinstating the Managing Director of the company,[110] and setting aside the issue of shares to a shareholder that was carried out through questionable means.[111] These are arguably exceptional scenarios, and such reliefs would call upon the existence of special factors such as the nature of the oppression, prejudice or mismanagement perpetrated, the effect on the petitioning shareholder, the relative shareholding and management position of the parties and, in case of a deadlock, whether the relief will resolve the same. Ordinarily, reinstating a petitioning shareholder whom the company wrongly removed from a management position would only perpetuate a stalemate that could be adverse to the interest of the company without bringing to an end the matters complained of. In that sense, exit ought to be the default option, unless there are compelling reasons to choose others.

Interestingly, the law has developed such that courts can grant relief even where they do not find a valid claim of oppression, prejudice or mismanagement. In Needle Industries[112], the Supreme Court, despite finding no evidence of oppression, called upon the respondent shareholders (in this case, the minority) to acquire the shares of the petitioning shareholders (majority). The Court also noted that, having rejected the plea of oppression, it did not ask the minority to pay a premium to the petitioning shareholders “as a price of oppression”, and that “the course which [it adopted] is intended primarily to set right the course of justice”.[113] In doing so, the Court drew upon its general powers to do justice in the facts and circumstances of the case.

The law that courts may grant relief without a finding of oppression or, for that matter, prejudice or mismanagement has received general acceptance. In M. Ethiraj[114], the Madras High Court noted that “even where a petitioner fails to make out a case of oppression, the Court is not powerless to do substantial justice between contesting parties, and thus, if, the situation so demands order purchase of shares of the minority group.” Even in these circumstances devoid of a finding of the substantive remedy, courts are at liberty to pass orders to “put an end to matters complained of”, taking into consideration the interest of the company and the shareholders. Even though the exit option is available both in circumstances where there is a finding of oppression, prejudice or mismanagement or not, courts are required to mould the precise terms of the relief to align with the nature of the substantive outcome.

Conclusion

The oppression, prejudice and mismanagement provisions in Sections 241 and 242 continue to form the mainstay of shareholders’ remedies under Indian company law. Anecdotal evidence suggests that reliance by petitioning shareholders on these remedies far exceed other shareholder remedies such as derivative actions and class actions.[115] Despite nearly 70 years of legislative and judicial activity seeking to shape the contours of the oppression, prejudice and mismanagement remedies, a number of concerns remain. English law has witnessed reforms to mitigate the harshness of the oppression remedy by transitioning to the concept of unfair prejudice and jettisoning the conditional limb to make it a standalone remedy. However, while Indian law has sought to expand the remedies by retaining the concept of mismanagement and introducing the notion of prejudice, the fact that as a species they cohabit with the continued existence of the oppression remedy may have the effect of muddying the waters. More importantly, the conditional limb necessitates that the petitioning shareholders establish the grounds for just and equitable winding up, which limits the scope of the remedy substantially.

As evident from the Appendix to this article, the analysis of whether to grant relief in action by petitioning shareholders represents a somewhat complex one in the Indian scenario. It requires petitioning shareholders to pass through several hoops before arriving at an outcome. Matters are even more complicated given that several steps involve a fact-based determination, which is bound to generate greater uncertainty for the corporate sector. Given the trends thus far, it would be imprudent to expect any significant changes from the legislature to address outstanding matters, such as whether there is a need for a triumvirate of remedies — oppression, prejudice and mismanagement — which is likely to cause considerable overlap, or whether there is a need for consolidation, as has occurred in England. Moreover, an existential question for these remedies is whether their evolution as an alternative remedy rather than a standalone one still holds today. Possibly bereft of legislative attention, courts will bear the burden of interpreting the statutory provisions to delineate conduct that deserves reproach, a role they have been performing actively for more than half a century. In doing so, the key is to evaluate issues against the touchstone of the balance between paying obeisance to the principle of corporate democracy and protecting vulnerable shareholders against conduct that is worthy of intervention by the courts.


†  Associate Professor, Faculty of Law, National University of Singapore. I would like to thank Souryaditya Sen for research assistance. Errors or omissions remain mine.

** This Article was first published in Supreme Court Cases. It has been reproduced with the kind permission of Eastern Book Company

[1]  Ministry of Corporate Affairs, Government of India, Notification S.O. 1934(E) dated 1-6-2016 (being also the effective date).

[2]  Cyrus Investments (P) Ltd. v. Tata Sons Ltd., 2018 SCC OnLine NCLT 24460 (hereinafter “the NCLT Ruling”).

[3]  Cyrus Investments (P) Ltd. v. Tata Sons Ltd., 2019 SCC OnLine NCLAT 858 : (2020) 154 CLA 47 (hereinafter “the Nclat Ruling”).

[4]  Tata Sons (P) Ltd. v. Cyrus Investment (P) Ltd., 2020 SCC OnLine SC 595.

[5]  Cyrus Investments (P) Ltd. v. Tata Sons Ltd., 2019 SCC OnLine NCLAT 858 : (2020) 154 CLA 47 at para 105 (Nclat Ruling).

[6]  Ibid.

[7]  Since these remedies are not necessarily confined to minority shareholders, and are available to majority shareholders as well, this article uses the expression “petitioning shareholder”.

[8]  Unless otherwise specified, references to “courts” in this article also include the NCLT and the Nclat, as appropriate.

[9]  Companies Act, 2013, Section 242(1).

[10]  Since not only majority shareholders can be the target of the remedies, but also minority shareholders, depending upon the circumstances, this article uses the expression “offending shareholder”.

[11]  For simplicity of analysis, this article focuses on oppression, prejudice or mismanagement caused to the shareholders (including the petitioning shareholders), but excludes from its ambit conduct that causes prejudice relatedly to the “interests of the company” or to “public interest”.

[12]  The Indian Companies (Amendment) Act, 1951, Section 7.

[13]  Report of the Committee on Company Law Amendment (Cohen Report 1945) (hereinafter the “Cohen Report”), at para 60.

[14]  For a detailed discussion on this count, see Part III. A below.

[15]  Government of India, Report of the Company Law Committee (1952) (hereinafter the “Bhabha Report”) at paras 199-202.

[16]  Companies Act, 1956, Section 397(1).

[17]  Shanti Prasad Jain v. Kalinga Tubes Ltd., (1965) 35 Comp Cas 351 at para 15 (SC); Yashovardhan Saboo v. Groz-Beckert Saboo Ltd., 1992 SCC OnLine CLB 10 : (1995) 83 Comp Cas 371 at para 68.

[18]  Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd., (1981) 3 SCC 333 at para 46; M. Ethiraj v. Sheetala Credit Holdings (P) Ltd., 2017 SCC OnLine Mad 4407 : (2017) 204 Comp Cas 325 at para 96; Shanti Prasad Jain v. Kalinga Tubes Ltd., (1965) 35 Comp Cas 351 (SC) at para 16.

[19]  1952 SC 49.

[20]  Id at p. 55, per Lord President Cooper.

[21]  Id at p. 59, per Lord Keith. See also, H.R. Harmer Ltd., In re, (1959) 1 WLR 62 at p. 75 (CA).

[22]  1959 AC 324 (HL).

[23]  Id at p. 342.

[24]  Mohanlal Ganpatram v. Shri Sayaji Jubilee Cotton and Jute Mills Co. Ltd., 1964 SCC OnLine Guj 66 : (1964) 34 Comp Cas 777 at para 25.

[25]  Shanti Prasad Jain v. Kalinga Tubes Ltd., (1965) 35 Comp Cas 351 (SC), at para 20 (SC); Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd., (1981) 3 SCC 333, at para 51; Hanuman Prasad Bagri v. Bagress Cereals (P) Ltd., (2001) 4 SCC 420.

[26]  Ibid. See also, Sangramsinh P. Gaekwad v. Shantadevi P. Gaekwad, (2005) 11 SCC 314 at para 189; Vikram Bakshi v. Connaught Plaza Restaurants Ltd., 2017 SCC OnLine NCLT 560 : (2017) 140 CLA 142 at para 25.

[27]  A. Ramaiya, Guide to the Companies Act (18th Edn., LexisNexis, 2015) at p. 4007.

[28]  2018 SCC OnLine NCLAT 110 : (2019) 213 Comp Cas 560.

[29]  Id at para 43.

[30]  H.R. Harmer, In re, (1959) 1 WLR 62 at p. 87 (CA).

[31]  K.R.S. Narayana Iyengar v. T.A. Mani, 1959 SCC OnLine Mad 134: AIR 1960 Mad 338 at para 13; Needle Industries (India Ltd.) v. Needle Industries Newey (India) Holding Ltd., (1981) 3 SCC 333 at para 75. But see, Vikram Bakshi v. Connaught Plaza Restaurants Ltd., 2017 SCC OnLine NCLT 560 : (2017) 140 CLA 142 at para 25 (where, under a joint venture, the removal of a petitioner as a Managing Director would result in a sale of his shares in the company, and this was found to go “to the roots of proprietary rights of the petitioners as shareholders”). For the position under English law, see O’Neill v. Phillips, (1999) 1 WLR 1092 at p. 1105 (HL), per Hoffmann, LJ.

[32]  See Sangramsinh P. Gaekwad v. Shantadevi P. Gaekwad, (2005) 11 SCC 314 at para 183.

[33]  (2008) 3 SCC 363 at para 14 (emphasis in original).

[34]  Id, 373.

[35]  See e.g. Ram Parshotam Mittal v. Hotel Queen Road (P) Ltd., 2019 SCC OnLine SC 699, paras 67‑69; Suresh Kumar Jalan v. Eastcoast Steel Ltd., 2019 SCC OnLine Mad 23940 at para 12.

[36]  See e.g. Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd., (1981) 3 SCC 333 at para 52 (noting that “an unwise, inefficient or careless conduct of a Director in the performance of his duties cannot give rise to a claim for relief”). See also, V.S. Krishnan v. Westfort Hi-Tech Hospital Ltd., (2008) 3 SCC 363 at para 37 (finding that “mere unfairness does not constitute oppression”); Sangramsinh P. Gaekwad v. Shantadevi P. Gaekwad, (2005) 11 SCC 314, at para 185 (cautioning that it is necessary that “… the conduct of the majority shareholders is pleaded and proved with sufficient clarity and precision. If the pleadings and/or the evidence adduced in the proceedings remains unsatisfactory to arrive at a definite conclusion of oppression or mismanagement the petition must be rejected”).

[37]  Section 241(1)(a) of the 2013 Act also grants remedy in case of conduct that is “prejudicial to the interests of the company”. See also, Ministry of Corporate Affairs, Twenty-First Report-Companies Bill 2009, Fifteenth Lok Sabha, Standing Committee on Finance (August 2010) at paras 16.1-16.4. However, this is outside the scope of this article. See supra note 11.

[38]  LIC v. D.J. Bahadur, (1981) 1 SCC 315 at para 144. Furthermore, the heading in Section 241 of the 2013 Act uses the words “oppression, etc.” in an open-ended manner, suggesting the existence of more than one cause of action, while the erstwhile provisions in the 1956 Act referred to “oppression” (in Section 397) and “mismanagement” (in Section 398).

[39]  Clause 212.

[40]  Expert Committee on Company Law, Report on Company Law (31-5-2005).

[41]  Twenty-First Report—Companies Bill 2009, supra note 37. The report, though, recommended the introduction of the words “or in a manner prejudicial to the interests of the company”, with which this article is not concerned. See supra note 11. See also, Ministry of Corporate Affairs, Fifty-Seventh Report-Companies Bill 2011, Fifteenth Lok Sabha, Standing Committee on Finance (June 2012).

[42]  See e.g. Ministry of Corporate Affairs, the Government of India, Report of the Companies Law Committee (February 2016) (noting in para 16.1 that “[t]he Committee did not recommend any changes to Chapter XVI of the Act” that relates to the prevention of oppression and mismanagement).

[43]  See supra Part II.A.1.

[44]  Board of Trade, Report of the Company Law Committee (June 1962).

[45]  Id at para 200.

[46]  Id at para 202.

[47]  Id at para 212.

[48]  Paul L. Davies & Sarah Worthington, Gower’s Principles of Modern Company Law (10th Edn., Sweet & Maxwell, 2016) at p. 661 (observing that “[Section 994 of the English Companies Act of 2006] repeats rather than reforms the provision previously found in Section 459 of the Companies Act, 1985”).

[49]  See Saul D. Harrison & Sons Plc., In re, 1994 BCC 475 at p. 488, per Hoffman, LJ. See also, Prateek Kumar Singh, “Indian Company Law Making Way for Unfair Prejudice Remedy?” RGNUL Financial and Mercantile Law Review (11-1-2020).

[50]  Bryan A. Garner (Editor-in-Chief), Black’s Law Dictionary (11th Edn., 2019).

[51]  Paul L. Davies & Sarah Worthington, Gower’s Principles of Modern Company Law (10th Edn. Sweet & Maxwell, 2016) at p. 672.

[52]  1994 BCC 475 at p. 499.

[53]  Paul L. Davies & Sarah Worthington, Gower’s Principles of Modern Company Law (10th Edn. Sweet & Maxwell, 2016) at p. 673.

[54]  Saul D. Harrison & Sons Plc., In re, 1994 BCC 475 at p. 488.

[55]  Id, at p. 490.

[56]  O’Neill v. Phillips, (1999) 1 WLR 1092 at p. 1102 (HL); Paul L. Davies & Sarah Worthington, Gower’s Principles of Modern Company Law (10th Edn., Sweet & Maxwell, 2016) at p. 665. Such equitable considerations are discussed in detail in Part III below in the context of the conditional limb in Section 242 of the 2013 Act.

[57]  Interestingly, Indian courts have not been averse to alluding to the expression “unfair prejudice” in the context of affected shareholders even in the pre-2013 Act era. See e.g. V.S. Krishnan v. Westfort Hi-Tech Hospital Ltd., (2008) 3 SCC 363 at para 25.

[58]  See also, Shreyas Jayasimha & Rohan Tigadi, “Arbitrability of Oppression, Mismanagement and Prejudice Claims in India: Need for a Re-think?”, 11 NUJS Law Review 4 (2018).

[59]  Subramanian Swamy v. Union of India, (2016) 7 SCC 221 at para 71, citing State of Bombay v. Hospital Mazdoor Sabha, AIR 1960 SC 610.

[60]  Subramanian Swamy v. Union of India, (2016) 7 SCC 221, at para 74, citing Ahmedabad (P) Primary Teachers’ Assn. v. Administrative Officer, (2004) 1 SCC 755.

[61] Subramanian Swamy v. Union of India, (2016) 7 SCC 221, at para 74.

[62] O’Neill v. Phillips, (1999) 1 WLR 1092, at p. 1098 (HL).

[63] Shreyas Jayasimha & Rohan Tigadi, “Arbitrability of Oppression, Mismanagement and Prejudice Claims in India: Need for a Re-think?”, 11 NUJS Law Review 4 (2018). A. Ramaiya, Guide to the Companies Act (18th Edn., LexisNexis, 2015) at p. 4079.

[64] Government of India, Report of the Company Law Committee (1952) at p. 149.

[65]  See A. Ramaiya, Guide to the Companies Act (18th Edn., LexisNexis, 2015) at p. 4079.

[66]  See e.g. Mohanlal Ganpatram v. Shri Sayaji Jubilee Cotton and Jute Mills Co. Ltd., 1964 SCC OnLine Guj 66 : (1964) 34 Comp Cas 777 at para 24.

[67]  Hence, this remedy does not require further elaboration.

[68]  Mohanlal Ganpatram v. Shri Sayaji Jubilee Cotton and Jute Mills Co. Ltd., 1964 SCC OnLine Guj 66 : (1964) 34 Comp Cas 777 at para 25.

[69] See also, Elder v. Elder & Watson Ltd., 1952 SC 49 at p. 54, per Lord President (Cooper) (observing: “In many cases, moreover, the cure would have been worse than the disease owing to the prejudice likely to be inflicted upon the applicants for relief as a result of compulsory liquidation of the company”).

[70] Mohanlal Ganpatram v. Shri Sayaji Jubilee Cotton and Jute Mills Co. Ltd., 1964 SCC OnLine Guj 66 : (1964) 34 Comp Cas 777, at para 29; K.R.S. Narayana Iyengar v. T.A. Mani, 1959 SCC OnLine Mad 134: AIR 1960 Mad 338, at para 10.

[71] Companies Act, 1956, Section 397(2)(b).

[72] Companies Act, 1956, Section 398.

[73] The Bhabha Committee, which spearheaded the effort leading to the 1956 Act, had stated that “under our proposals we do not contemplate that shareholders who complain that the affairs of their company are being managed in a manner prejudicial to the interests of the company should be required also to prove that the facts disclose such a state of affairs as would justify the making of a winding-up order”. See Government of India, Report of the Company Law Committee (1952) (hereinafter “the Bhabha Report”), at para 202. The draftspersons of the 1956 Act appear to have shut their eyes partly to these recommendations, as the legislation accepts them for mismanagement, but not for oppression.

[74] Board of Trade, Report of the Company Law Committee (June 1962) at para 201.

[75] Ministry of Law, Justice & Company Affairs, Government of India, Report of the High-Powered Expert Committee in Companies and MRTP Acts (August 1978), para 7.11.

[76] Such a regime finds a mirror image in Section 994 of the Companies Act, 2006, which is currently in force.

[77] See, Hanuman Prasad Bagri v. Bagress Cereals (P) Ltd., (2001) 4 SCC 420 at para 3 (noting that petitioning shareholders “have to make out a case for winding up of the company on just and equitable grounds. If the facts fall short of the case set out for winding up on just and equitable grounds no relief can be granted”); Rajahmundry Electric Supply Corpn. Ltd. v. A. Nageshwara Rao, (1956) 26 Comp Cas 91 at para 6 (SC) (observing that where “the facts proved do not make out a case for winding up … no order could be passed [for the substantive remedy]”)

[78]  Its predecessor can be found in Section 433(f) of the 1956 Act. Since this remedy is based on equitable consideration, petitioning shareholders are required to come with clean hands. Atmaram Modi v. ECL Agrotech Ltd., 1999 SCC OnLine CLB 14 : (1999) 98 Comp Cas 463 at para 18; CR Datta on Company Law (7th Edn., LexisNexis, 2017) at p. 3.311.

[79]  For instance, courts have been unanimous in holding that, even though the “just and equitable” ground appears in the statute after several more specific grounds, the principle of ejusdem generis is inapplicable in interpreting it. See, Yenidje Tobacco Co. Ltd., In re, (1916) 2 Ch 426 at p. 432 (CA). See also, Rajahmundry Electric Supply Corpn. Ltd. v. A. Nageshwara Rao, (1956) 26 Comp Cas 91 at para 10 (SC).

[80]  Yenidje Tobacco Co. Ltd., In re, (1916) 2 Ch 426, at p. 432 (CA).

[81] See also, Loch v. John Blackwood Ltd., 1924 AC 783 (PC).

[82]  1973 AC 360 (HL).

[83]  Id at p. 379, per Lord Wilberforce.

[84]  Ibid.

[85]  Hind Overseas (P) Ltd. v. Raghunath Prasad Jhunjhunwalla, (1976) 3 SCC 259 at para 32.

[86]  See also, Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd., (1981) 3 SCC 333, at para 48; Sangramsinh P. Gaekwad v. Shantadevi P. Gaekwad, (2005) 11 SCC 314, at para 238 (noting: “It is now well-known that principles of quasi-partnership is not foreign to the concept of Companies Act”); M. Ethiraj v. Sheetala Credit Holdings (P) Ltd., 2017 SCC Online Mad 4407 : (2017) 204 Comp Cas 325 at para 117; Kilpest (P) Ltd. v. Shekhar Mehra, (1996) 10 SCC 696 at paras 11-12; Radharamanan v. Chandrasekara Raja, (2008) 6 SCC 750 at para 32.

[87]  Hind Overseas (P) Ltd. v. Raghunath Prasad Jhunjhunwalla, (1976) 3 SCC 259 at paras 33‑34.

[88]  Id, 270-71.

[89]  See also, Sangramsinh P. Gaekwad v. Shantadevi P. Gaekwad, (2005) 11 SCC 314 at para 237 (observing: “The true character of the company, the business realities of the situation should not be confined to a narrow legalistic view”).

[90]  Radharamanan v. Chandrasekara Raja, (2008) 6 SCC 750 at para 30.

[91]  M. Ethiraj v. Sheetala Credit Holdings (P) Ltd., 2017 SCC OnLine Mad 4407 : (2017) 204 Comp Cas 325 at para 173.

[92]  Cyrus Investments (P) Ltd. v. Tata Sons Ltd., 2018 SCC OnLine NCLT 24460, at para 532 NCLT Ruling.

[93]  M. Ethiraj v. Sheetala Credit Holdings (P) Ltd., 2017 SCC OnLine Mad 4407 : (2017) 204 Comp Cas 325 at para 173 (supporting the conclusion with the reasoning that a public company controlled by a group of shareholders could also be run like a family-owned company).

[94]  Yashovardhan Saboo v. Groz-Beckert Saboo Ltd. 1992 SCC OnLine CLB 10 : (1995) 83 Comp Cas 371 at para 59.

[95]  Abnash Kaur v. Lord Krishna Sugar Mills, 1972 SCC OnLine Del 163 : (1974) 44 Comp Cas 390 at para 84; Atmaram Modi v. ECL Agrotech Ltd., 1999 SCC OnLine CLB 14 : (1999) 98 Comp Cas 463 at para 12.

[96]  Hind Overseas (P) Ltd. v. Raghunath Prasad Jhunjhunwalla, (1976) 3 SCC 259 at para 33 followed in Sangramsinh P. Gaekwad v. Shantadevi P. Gaekwad, (2005) 11 SCC 314 at para 228.

[97]  Kilpest (P) Ltd. v. Shekhar Mehra, (1996) 10 SCC 696. See also, A. Ramaiya Guide to the Companies Act (18th Edn., Lexis Nexis, 2015) at p. 4599.

[98]  Companies Act, 2013, Section 242(1)(b).

[99]  Note that in contrast to the concept of “unfair prejudice” discussed in Part II-B, which related to the conduct of the offending shareholders, the unfair prejudice in the present scenario relates to the act of winding up the company.

[100]  See e.g. Vikram Bakshi v. Cannaught Plaza Restaurants Ltd., 2017 SCC OnLine NCLT 560 : (2017) 140 CLA 142 at para 24, where the NCLT found that it would be unfairly prejudicial to the petitioning shareholder to wind up the company, as he held 50% shareholding in the company.

[101]  Hind Overseas (P) Ltd. v. Raghunath Prasad Jhunjhunwalla, (1976) 3 SCC 259, 271 at para 35.

[102]  Sangramsinh P. Gaekwad v. Shantadevi P. Gaekwad, (2005) 11 SCC 314 at para 181.

[103]  K.R.S. Narayana Iyengar v. T.A. Mani, 1959 SCC OnLine Mad 134 : AIR 1960 Mad 338 at para 18.

[104]  Mohanlal Ganpatram v. Shri Sayaji Jubilee and Jute Mills Co. Ltd., 1964 SCC OnLine Guj 66 : (1964) 34 Comp Cas 777 at para 26.

[105]  Ibid.

[106]  Scottish Coop. Wholesale Society Ltd. v. Meyer, 1959 AC 324 at p. 369 (HL), per Denning, LJ.

[107]  Ibid.

[108]  Yashovardhan Saboo v. Groz-Beckert Saboo Ltd., 1992 SCC OnLine CLB 10 : (1995) 83 Comp Cas 371 at para 55.

[109]  Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd., (1981) 3 SCC 333 at para 175; M. Rishi Kumar Dugar, “Minority Shareholders Buying Out Majority Shareholders — An Analysis”, (2010) 22 National Law School of India Review 105.

[110]  Vikram Bakshi v. Connaught Plaza Restaurants Ltd., 2017 SCC OnLine NCLT 560 : (2017) 140 CLA 142 at para 40.

[111]  Dale and Carrington Invt. (P) Ltd. v. P.K. Prathapan, (2005) 1 SCC 212 at para 38.

[112]  Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd., (1981) 3 SCC 333.

[113]  Id., para 175.

[114]  M. Ethiraj v. Sheetlala Credit Holdings (P) Ltd., 2017 SCC OnLine Mad 4407 at para 136 : (2017) 204 Comp Cas 325 at para 136.

[115]  For an earlier account on this point, see Vikramaditya Khanna & Umakanth Varottil, “The Rarity of Derivative Actions in India: Reasons and Consequences, in Dan W. Puchniak, et al. (Eds.), The Derivative Action in Asia: A Comparative and Functional Approach (Cambridge University Press, 2012) at pp. 386-88.

Legislation UpdatesRules & Regulations

Ministry of Corporate Affairs notifies — Companies (Winding-Up) Rules, 2020 through Notification No. G.S.R. 46(E).

The notification has been divided into 6 Parts, which comprises of the procedure of winding up in detail.

These rules shall apply to winding up under of Companies Act 2013.

These rules will come into force from 01-04-2020.

Winding Up: The process by which an insolvent estate is distributed, as far as it will go, amongst the persons having claims upon it. The term is most frequently applied to the winding-up of joint-stock companies.

*Please click on the link for detailed notification: Companies (Winding Up) Rules, 2020


Ministry of Corporate Affairs

[Notification dt. 24-01-2020]

Hot Off The PressNews

The Central Registrar of Cooperative Societies, Department of Agriculture, Cooperation and Farmers’ Welfare, Ministry of Agriculture and Farmers’ Welfare, Government of India has passed an Order for winding up the Adarsh Credit Cooperative Society Ltd., Ahmedabad and has appointed a Liquidator for the purpose under the provisions of the MSCS Act, 2002 (& Rules made thereunder) today.

The Adarsh Credit Cooperative Society Ltd., Ahmedabad, Gujarat has been found to indulge in misusing the funds of the members/ depositors for personal gains, indulged in gross irregularities and has violated Cooperative Principles.


Ministry of Agriculture & Farmers Welfare

[Press Release dt. 29-11-2019]

[Source: PIB]

Case BriefsSupreme Court

Supreme Court: In a case dealing with companies defaulting a loan of Rs. 48 Crores including interest from Kotak Mahindra Bank, the question relating to the right of a secured creditor to file a winding up petition after such secured creditor has obtained a decree from the Debts Recovery Tribunal [DRT] and a recovery certificate based thereon arose before the bench of RF Nariman and Navin Sinha, JJ. On the issue, the bench said:

“cases like the present one have to be decided by balancing the interest of creditors to whom money is owing, with a debtor company which will now go in the red since a winding up petition is admitted against it. It is not open for persons like the appellant to resist a winding up petition which is otherwise maintainable without there being any bona fide defence to the same.”

The Court said that when it comes to a winding up proceeding under the Companies Act, 1956, since such a proceeding is not “for recovery of debts” due to banks, the bar to jurisdiction contained in Section 18 read with Section 34 of the Recovery of Debts Act would not apply to winding up proceedings under the Companies Act, 1956. It further added:

“As a matter of fact, sub-paragraphs (i) and (iv) of paragraph 18 would show that proceedings before the DRT, and winding up proceedings under the Companies Act, 1956, can carry on in parallel streams. That is why paragraph 18(i) states that a Debts Recovery Tribunal, acting under the Recovery of Debts Act, would be entitled to order sale, and sell the properties of the debtor, even of a company in liquidation, but only after giving notice to the Official Liquidator, or to the Liquidator appointed by the Company Court, and after hearing him.”

Citing Lord Atkin’s judgment in Lissenden v. C.A.V. Bosch, Ltd., [1940] 1 All E.R. 425 at 436-437, where he said that one has not lost one’s right to a second helping because one has taken the first, the Court said that the Bank cannot be said to be blowing hot and cold in pursuing a remedy under the Recovery of Debts Act and a winding up proceeding under the Companies Act, 1956 simultaneously, in fact:

“When secured creditors like the respondent are driven from pillar to post to recover what is legitimately due to them, in attempting to avail of more than one remedy at the same time, they do not “blow hot and cold”, but they blow hot and hotter.”

[Swaraj Infrastructure Pvt. Ltd. v. Kotak Mahindra Bank Ltd., 2019 SCC OnLine SC 92, decided on 29.01.2019]

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal (NCLAT): A two-member bench comprising of Justice S.J. Mukhopadhaya, Chairperson and Justice Bansi Lal Bhat, Member (Judicial) allowed an appeal filed against an order of National Company Law Tribunal (Mumbai).

The respondent preferred an application under Sections 433 and 434 of the Companies Act, 1956 before the Bombay High Court for winding up of the Corporate Debtor pertaining to a debt of Rs 21,63,359. The case was transferred pursuant to Rule 5 of the Companies (Transfer of Pending Proceedings) Rule, 2016 before National Company Law Tribunal (Mumbai). The respondent therein filed Form 5 to treat the same as an application under Section 9 of the Insolvency and Bankruptcy Code, 2016 for initiation of Corporate Insolvency Resolution Process against the Corporate Debtor. By the order impugned, NCLT admitted the application, passed an order of moratorium and appointed Interim Resolution Professional. The appellant – Director of the Corporate Debtor, challenged the order on the ground that notice under Section 8(1) was issued on the same date when Form 5 was filed.

The Appellate Tribunal perused Section 9 of the I&B Code and observed that an application under Section 9 preferred before the completion of 10 days from the giving of notice under Section 8(1) cannot be entertained and admitted by the Adjudicating Authority. Holding the application under Section  9 as not maintainable on the date on which it was filed, the High Court set aside the order impugned. Resultantly, the order passed by NCLT appointing Interim Resolution Professional, declaring moratorium, freezing of account, etc. were declared illegal. The appeal was, thus, allowed. [Jaya Patel v. Gas Jeans (P) Ltd., 2018 SCC OnLine NCLAT 783, dated 08-10-2018]

Case BriefsTribunals/Commissions/Regulatory Bodies

Securities and Exchange Board of India (SEBI): The whole time member of SEBI,  G.Mahalingam in accordance to the interim order given earlier issued directions under Section 19 of the Securities and Exchange Board of India Act, 1992 and Sections 11(1), 11(B) and 11(4) thereof and regulation 65 of the SEBI (Collective Investment Schemes) Regulations, 1999  to NICL India Ltd. for engaging in Collective Investment Schemes without ‘certificate of  registration’ from SEBI.

NICL  India Ltd. was involved in illegal mobilization of funds from the public through ‘Collective Investment Schemes’, without obtaining the certificate of registration resulting in the contravention of Section 12(1B) of the SEBI Act, 1992 with Section 11 AA and Regulation 3 of CIS Regulations. It has also been stated that NICL was alleged of contravention of Regulation 4(2)(t) of ‘Prohibition of Fraudulent & Unfair Trade Practice Relating to Securities Market Regulations, 2003.

The interim order that had been said to be passed carried certain directions towards the NICL directors and further in reference to that,  they were asked to file reply, if any.  NICL through the further correspondence of letters kept asking for the extension of time to refund the investor’s money.

SEBI received complaints subsequently in which one was from RBI as well, in regard to the ‘mobilization of public fund’, after NICL had claimed to adhered all the stated directives in the interim order.

Therefore, it was noted by the board that, after providing opportunity of personal hearing and absenteeism in that, SEBI had to conclude by stating that ‘Noticees’ that were engaged in the Collective investment scheme had failed to address prima facie conclusions in the interim order, for which the directors of NICL would be liable which further lead SEBI for the issuance of certain directions that involved the winding up of the NICL’s Collective Investment Scheme and certain other directives for refund of the invested funds. [NICL India Ltd., In Re,2018 SCC OnLine SEBI 128, order decided on 21-06-2018]

Case BriefsHigh Courts

Hyderabad High Court: While deciding the instant appeal under Section 483 of the Companies Act, 1956 read with Clause 15 of the Letters Patent against the admission of Company Petition No. 231 of 2015, filed for its winding-up under Section 433(e) read with Sections 434(1)(a) and 439 of the Companies Act, 1956, the Division Bench of Sanjay Kumar and Uma Devi, JJ., observed that it would not be true to say that a person who commits a breach of the contract incurs any pecuniary liability, nor would it be true to say that the other party to the contract who complains of the breach has any amount due to him from the other party. Thus no pecuniary liability arises till the Court has determined that the party complaining of the breach is entitled to damages.

The appellant company was awarded a contract by Surana Ventures Limited to set up a 35 MW per annum capacity photo-voltaic cell manufacturing plant at Fab City, Hyderabad. In turn, the appellant company engaged services of several sub-contractors and suppliers for discharging this contractual obligation. The respondent company was one of the sub contractors upon whom a Purchase Order dated 15.04.2011 was placed by the appellant company to manufacture and supply of certain water and waste-water plant components for use in the proposed manufacturing plant. The Purchase Order contained the terms and conditions of the contract as it contemplated that time was the essence of the work and all deliveries/works had to be completed. However Surana Ventures shelved the project in August, 2011 and the contract was frustrated thereafter. As a result the appellant company claimed that it could not proceed further thereafter, in so far as Purchase Order. The respondent company stated that it had invested its entire monies into the project and kept the plant ready and was at the disposal of the appellant company and thus requested them to pay the balance amount. With the appellant denying the liability to pay, the company petition for winding-up the appellant company was presented by the respondent on 01.05.2015. The Company Judge admitted the winding up petition stating that the appellant company’s defense of Surana Ventures shelving the project is unsustainable and did not make any observation on the issue as to whether there was breach of contract by the appellant company in respect of its obligation under the Purchase Order.

The Court observed that the Company Judge lost sight of such an important issue as to the presence of a breach of contract by the appellant company as this was a crucial aspect which was raised by way of a bonafide dispute by the appellant company and required to be addressed at the threshold to assess as to whether the respondent made out a prima facie case for admission of the winding-up petition. The Court also observed that when damages are assessed the Court in the firstly must decide that the defendant is liable and then it proceeds to assess what that liability is. But till that determination there is no liability at all upon the defendant. Noticing the existence of several debatable issues raised by the appellant which were ignored by the Company Judge, the Court thus set aside the order of admission dated 25.10.2017 and dismissed Company Petition No. 231 of 2015. [MW High Tech Projects India Pvt. Ltd. v. M/s. Grauer & Weil (India) Ltd., 2017 SCC OnLine Hyd 409, decided on 06.12.2017]

Case BriefsHigh Courts

Bombay High Court: In a case dealing with petitions pending admission before the High Court filed under the Companies Act, 1956 where winding up of a company was sought, the Single Bench of S.C. Gupte, J held that every winding up petition under clause (e) of Section 433 which is pending before the High Court and which is not served by the petitioner on the respondent company shall stand transferred to NCLT under Rule 5 of the Companies (Transfer of Pending Proceedings) Rules, 2016.

The petitioners in the present case contended that the petitions having been served on the respondent as required by Rule 26 of the Companies (Court) Rules, 1959, the transfer notification does not apply to them and accordingly, this court retains its jurisdiction over them. It is the case of the respondent that these petitions stand transferred to NCLT as they are covered in the mandate of the notification which confers powers on the Central Government to constitute NCLT and NCLAT for transfer of various proceedings pending before the High Courts to NCLT.

Analysing the submissions put forward by the counsel, the Bench considered the relevant provisions of the Act in light of the facts of the case and held that Rule 26 has no reference to the order of admission of the petition. It further said that if such pending petition is served by the petitioner on the respondent, the petition will continue to be dealt with by this court and the applicable provisions will be the provisions of 1956 Act. Accordingly, the petitions in this case were not transferred to NCLT. Conversely, it implied that unserved pending petitions are to be transferred to NCLT to be governed by the Companies Act, 2013. [West Hills Realty Private Ltd. v. Neelkamal Realtors Tower Pvt. Ltd., 2016 SCC OnLine Bom 10038 , decided on 23.12.2016]

Case BriefsSupreme Court

Supreme Court : While dealing with the issue relating to jurisdiction of BIFR in winding up proceedings, the Court held that winding up proceedings before the Company Court cannot continue after a reference has been registered by the BIFR and an enquiry has been initiated under Section 16 of the SICA

In the present case, the appellants Madura Coats had filed a petition in the Company Court for winding up of Modi Rubbers on the allegation that Modi Rubbers was unable to pay its huge undisputed debts. The Company Court passed an order for winding up of the Company. Modi Rubbers appealed before the Divisional bench of the High Court which had set-aside the order of the Company Court on the pretext that Modi Rubbers had made an application to BIFR- Board of Industrial & Financial Reconstruction under the provisions of Sick Industrial Companies (Special Provisions) Act, 1985 (SICA) and hence should be entitled to the benefits of the provisions of Section 22 of the SICA. The  Court discovered that Modi Rubbers was willing to pay the dues to Madhura Coats in terms of the rehabilitation scheme passed by BIFR. The Court also based it’s reliance on Real Value Appliances Ltd. v. Canara Bank, (1998) 5 SCC 554, where the question was raised that whether on the registration of a reference, the Division Bench of the High Court could pass orders in an appeal against an interim order passed by the Company Court , to which the Court had replied that the SICA is intended to revive and rehabilitate a sick industry before it can be wound up under the Companies Act. The legislative intention is to ensure that no proceedings against the assets of the company are taken before any decision is taken by the BIFR because if the assets are sold or the company is wound up, it may become difficult to later restore the status quo ante.

The bench comprising of Madan B. Lokur J., finally concluded that the Company Court and the BIFR do not exercise concurrent jurisdiction. Till the company remains a sick company having regard to the provisions of sub-section (4) of Section 20 [of the SICA], BIFR alone shall have jurisdiction as regards sale of its assets till an order of winding up is passed by a Company Court and hence set aside the order passed by the Company Court and upheld the order passed by the Divisional bench of High Court. [Madura Coats Limited v. Modi Rubber Ltd., 2016 SCC OnLine SC 626, decided on 29.06.2016]