{"id":344038,"date":"2025-03-21T10:00:53","date_gmt":"2025-03-21T04:30:53","guid":{"rendered":"https:\/\/www.scconline.com\/blog\/?p=344038"},"modified":"2025-04-05T09:27:49","modified_gmt":"2025-04-05T03:57:49","slug":"protection-of-minority-shareholder-rights-nclt-lays-down-a-structured-buy-out-mechanism-to-resolve-deadlock-between-shareholders-scc-times","status":"publish","type":"post","link":"https:\/\/www.scconline.com\/blog\/post\/2025\/03\/21\/protection-of-minority-shareholder-rights-nclt-lays-down-a-structured-buy-out-mechanism-to-resolve-deadlock-between-shareholders-scc-times\/","title":{"rendered":"Protection of minority shareholder rights | NCLT lays down structured buy-out mechanism to resolve deadlock between shareholders"},"content":{"rendered":"
\n

National Company Law Tribunal, Hyderabad:<\/span> In a company petition seeking relief under Sections 241<\/a> and 242<\/a> of the Companies Act, 2013<\/a> (the Companies Act), and requested a buyout order, a Division bench of Dr. Venkata Ramakrishna Badarinath Nandula (Judicial Member) and Charan Singh (Technical Member), allowed the petition and held that the Deccan Group’s actions amounted to “grave acts of oppression” and was not mere instances of internal shareholder disputes. The NCLT laid out a structured buy-out mechanism to resolve the deadlock between shareholders.<\/p>\n

Factual Matrix<\/h3>\n

In the instant matter, the dispute arose from a conflict between the original promoters of Escientia Group and the Deccan Group, which had acquired a significant stake in Escientia Advanced Sciences Private Limited and Escientia Biopharma Private Limited, engaged in the pharmaceutical contract development and manufacturing sector. The petitioners, who were the founding members of Escientia, alleged that the Deccan Group, despite being a passive investor initially, had engaged in acts of oppression and mismanagement by taking active control of the companies’ affairs. It was alleged that the Deccan Group is siphoning business opportunities, making unauthorised appointments, involved in financial mismanagement, and failed to adhere to the agreed governance structure. The petitioners filed a petition and sought relief under Sections 241<\/a> and 242<\/a> of the Companies Act<\/a> and requested a buyout order.<\/p>\n

Moot Point<\/h3>\n
    \n
  1. \n

    Whether the Deccan Group’s actions amounted to oppression and mismanagement under Sections 241<\/a> and 242<\/a> of the Companies Act<\/a>?<\/p>\n<\/li>\n

  2. \n

    Whether the special rights of the original promoters under the Articles of Association (AoA) were violated?<\/p>\n<\/li>\n

  3. \n

    Whether there was a conflict of interest in Deccan Group’s control of a competing pharmaceutical CDMO business?<\/p>\n<\/li>\n

  4. \n

    Whether the appointment of Chief Operating Officer (COO) was legally sustainable?<\/p>\n<\/li>\n

  5. \n

    Whether the NCLT should grant a buyout order and, if so, in whose favor?<\/p>\n<\/li>\n<\/ol>\n

    Petitioners’ Contentions<\/h3>\n

    The petitioners contended that the Deccan Group, which originally committed to being a passive investor, had actively taken control and undermined the interests of the original promoters. It was contended that the Deccan Group’s involvement in a competing business through Primopus, based in Switzerland and Goa, violated the fiduciary duties of its nominee directors. It was stated that business opportunities, including contracts from Eli Lilly and GlaxoSmithKline, were unfairly diverted to Primopus. It was contended that the financial mismanagement occurred through inter-company loans and unjust enrichment via supply chain manipulations. It was further contended that the appointment of a COO was an attempt to wrest control from the original promoters. The petitioners cited Dale & Carrington Investment (P) Ltd.<\/span> v. P.K. Prathapan<\/span>, (2004) 4 SCR 334 and Needle Industries (India) Ltd.<\/span> v. Needle Industries Newey (India) Holding Ltd.<\/span>, (1981) 3 SCR 698 and argued that the remedy of buyout cannot be given as a reward to the oppressor.<\/p>\n

    Respondents’ Contentions<\/h3>\n

    The respondents contended that the petitioners failed to prove oppression or mismanagement under Section 241<\/a> of the Companies Act<\/a>. It was contended that the appointment of a COO was a strategic decision necessary for the company’s growth. It was stated that there is no conflict of interest as Primopus AG was legally distinct from EASPL and EBPL. It was argued that the petitioners, as minority shareholders, mismanaged the companies and has themselves engaged in acts detrimental to business growth. The respondents cited Yashovardhan Saboo<\/span> v. Groz-Beckert Saboo Ltd.<\/span>, (1995) 83 Comp Cas 371 and Synchron Machine Tools (P) Ltd.<\/span> v. U.M. Suresh Rao<\/span>, (1994) 14 CLA 199 and argued that the first right of purchase must be given to the majority shareholder.<\/p>\n

    NCLT’s Observations<\/h3>\n

    Oppression and Mismanagement<\/p>\n

    The NCLT noted that the Deccan Group had effectively assumed control over EASPL’s and EBPL’s affairs, despite their initial representation as a passive investor. The NCLT asserted that Deccan Group’s action amounted to a breach of trust and deviation from the originally agreed governance framework. The NCLT asserted that the actions of the Deccan Group’s nominee directors, particularly in financial matters, corporate decision-making, and operational policies, demonstrated clear oppression of minority shareholders.<\/p>\n

    Conflict of Interest and Diversion of Business<\/p>\n

    The NCLT noted that multiple email correspondences and internal communications presented as evidence indicated that key business opportunities meant for Escientia were systematically redirected to Primopus. The NCLT noted that in the internal discussions between the respondents, they acknowledged that customers were facing confusion regarding whether Escientia or Primopus was the actual supplier. The NCLT observed that such diversion, coupled with the active involvement of nominee directors of EASPL in Primopus, created an undeniable conflict of interest, thereby violating corporate governance norms.<\/p>\n

    Financial Mismanagement and Unfair Advantage to Deccan Group<\/p>\n

    The NCLT observed that inter-company loans extended to Primopus AG were structured in a manner that conferred an unfair financial advantage upon the Deccan Group at the expense of EASPL and EBPL. The NCLT stated that evidence showed that loans were granted at an exceptionally low interest rate while simultaneously, EASPL was charged a significantly higher rate for funds borrowed from Deccan Group entities and held that this demonstrated financial impropriety and mismanagement.<\/p>\n

    Unilateral Appointment of COO<\/p>\n

    The NCLT scrutinised the process of being appointed as the COO of EASPL and found that the appointment was not made with the unanimous consent of the Board and had been pushed through by the Deccan Group’s nominee directors. The NCLT found that the justification given for appointing the COO, such as improving operational efficiencies, was unsubstantiated, as the company had already shown strong financial performance without such a role. The NCLT deemed this as an attempt to consolidate power and marginalise the founding promoters.<\/p>\n

    Violation of AoA and Shareholders’ Agreement<\/p>\n

    The NCLT held that the special rights granted to the original promoters under the AoA had been blatantly disregarded. The NCLT stated the AoA was formed based of the agreement between the parties and their unilateral disregard by the Deccan Group amounted to a breach of contract and corporate governance principles. The NCLT held that Deccan Group’s actions eroded shareholder confidence and was prejudicial to the interests of the minority shareholders.<\/p>\n

    Need for Equitable Remedy<\/p>\n

    In determining the appropriate relief, the NCLT referred to Tata Consultancy Services Ltd.<\/span> v. Cyrus Investments (P) Ltd.<\/span>, (2021) 9 SCC 449<\/a>, and emphasised that the Court must prevent the possibility of future oppression. The NCLT observed that allowing the Deccan Group to continue managing EASPL and EBPL would only perpetuate the ongoing mismanagement and disputes, necessitating an equitable resolution.<\/p>\n

    Recognizing the complete breakdown of trust between the parties, the NCLT observed that<\/p>\n

    “Despite resolving unanimously to work together, both groups started blaming each other with serious allegations. The lack of trust between the Pendris and Deccan Group has irretrievably broken down. In such a scenario, the only solution is severing of the relationship through a buy-out of shares.”<\/p>\n

    Relying on the Needle Industries<\/span> (Supra), the NCLT held that even in the absence of fully proven oppression, it had the power to grant equitable relief.<\/p>\n

    Court’s Decision<\/h3>\n

    The NCLT ruled in favor of the petitioners and held that<\/p>\n

      \n
    1. \n

      The Deccan Group had acted in a manner oppressive to the interests of the original promoters and mismanaged the affairs of EASPL and EBPL.<\/p>\n<\/li>\n

    2. \n

      The special rights granted to the original promoters under the Articles of Association remained enforceable and could not be unilaterally annulled.<\/p>\n<\/li>\n

    3. \n

      A buyout order was necessary, but the original promoters would be given the first right to purchase the shares of the Deccan Group, ensuring that control remained with the founding members.<\/p>\n<\/li>\n

    4. \n

      The appointment of the COO is null and void.<\/p>\n<\/li>\n<\/ol>\n

      The NCLT allowed both company petitions to the extent indicated in the order. The NCLT directed the appointment of an independent Administrator, subject to confirmation of appointment. The NCLT quashed the appointment of COO. The NCLT directed the enforcement and compliance of Articles 44, 69 and 72 of the AOA. The NCLT restrained the respondents from diverting business to Primopus or engaging in financial misconduct. The NCLT deferred the enforcement of the order until 18-03-2025, to allow the opportunity to appeal against the decision. An appeal is presently pending before the National Company Law Appellate Tribunal, Chennai Bench numbered Company Appeal (AT) (CH) No. 27 of 2025.<\/p>\n

      [Escientia Life Sciences<\/span> v. Escientia Advanced Sciences (P) Ltd.<\/span>, 2025 SCC OnLine NCLT 1251<\/a>, Decided on 07-03-2025<\/span>]<\/p>\n\n

      Advocates who appeared in this case :<\/p>\n

      For CP No. 45\/241\/HDB\/2023:<\/p>\n

      Mr. K. Vivek Reddy, Senior Counsel, Mr. D.V. Seetharam Murthy, Senior Counsel, Mr. P. Sri Raghu Ram. Senior Counsel, Mr. Rajesh Maddy, Advocate on Record, Mr. Soumya Dasgupta, Mr. Dwijesh Kapila, Mr. Aviral Singhal, Mr. Bheemachary, Mr. Pranay Bahuguna, Mr. P. Shamanthak Hande, and Ms. Mounika Donur, Counsel for the Petitioners<\/p>\n

      Mr. S. Niranjan Reddy, Senior Counsel, Mr. Anirudh Arun Kumar, Mr. Tarun G. Reddy, and Mr. Sairam, Counsel for the Respondent No. 2 and 3<\/p>\n

      Mr. P.H. Aravind Pandian, Senior Counsel & Mr. Rusheek Reddy KV, Counsel for the Respondent No. 4 to 6<\/p>\n

      Mr. Aatif, Counsel for the Respondent No. 7 to 9<\/p>\n

      For CP No. 44\/241\/HDB\/2023:<\/p>\n

      Mr. K. Vivek Reddy, Senior Counsel, Mr. D.V. Seetharam Murthy, Senior Counsel, Mr. P. Sri Raghu Ram. Senior Counsel, Mr. Rajesh Maddy, Advocate on Record, Mr. Soumya Dasgupta, Mr Dwijesh Kapila, Mr. Aviral Singhal and Mr. G. Bheemachary, Counsel for the Petitioners<\/p>\n

      Mr. S. Niranjan Reddy, Senior Counsel, Mr. K. Sairam, Mr. Anirudh Arun Kumar, Mr. Amit Dhingra, Mr. Siddharth, and Ms. Kesang Tenzin, Counsel for the Respondent No. 2 and 3<\/p>\n

      Mr. P.H. Arvind Pandian, Senior Counsel, Counsel for the Respondent No. 4 to 7<\/p>\n

      Mr. G. Bheemachary, Counsel for the Respondent No. 11 and 12<\/p>\n<\/div>\n","protected":false},"excerpt":{"rendered":"

      The NCLT gave the first right to buy shares to the petitioners and then the Deccan Group. If neither party purchased the other’s shares, the NCLT would consider winding up the company under Section 242(1)(b) of the Companies 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