Understanding Commercial And Shareholders Disputes In India

Introduction

Commercial and shareholders' disputes are an inevitable facet of corporate life, often arising from divergent interests, power struggles, or alleged misconduct within a company. Commercial and shareholders' disputes represent a significant challenge in the corporate landscape, often threatening the very existence and smooth functioning of companies. These disputes frequently arise from deep-seated disagreements over management, control, and financial integrity and such disputes only necessitate a robust legal framework for resolution. In India, the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT) serve as the primary adjudicatory bodies for such matters, particularly under the Companies Act, 2013. This blog post delves into key aspects of these disputes, focusing on oppression and mismanagement, injunctions, deadlock remedies, forensic audits, and board control issues.

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Oppression & Mismanagement: The Core of Shareholder Grievances (Sections 241-242, Companies Act, 2013)

At the heart of many shareholder disputes lies the allegation of oppression & mismanagement. Sections 241 and 242 of the Companies Act, 2013¹, provide a robust framework for minority shareholders to seek redressal when the affairs of the company are being conducted in a manner prejudicial to public interest, oppressive to any member(s) or prejudicial to the interests of the company. The Hon'ble Supreme Court in the case titled Tata Consultancy Services ltd. v. Cyrus Investments (P) ltd. (2021) clarified the contours of "oppression" and held that mismanagement must be continuous, burdensome, harsh, and wrongful².

• What constitutes oppression?

  It refers to a continuous course of conduct by the majority shareholders or those in control, which is burdensome, harsh, and wrongful to the minority. It's not merely a lack of confidence or a difference of opinion, but rather a visible departure from the standards of fair dealing and a violation of the conditions of fair play.

• What constitutes mismanagement?

  This typically involves actions or omissions by the management that are detrimental to the company's interests, such as diversion of funds, siphoning off profits, or gross negligence in decision-making.

The Ld. NCLT upon receiving a petition under the aforesaid sections, has wide-ranging powers to make such orders as it thinks fit, with a view to adjudicate upon the complaints efficiently. These orders can include regulating the conduct of the company's affairs in the future, the purchase of shares of any members by other members or by the company, or even the termination, setting aside, or modification of any agreement.

A prominent example of a high-stakes shareholder dispute that garnered significant attention is the case of Tata Consultancy Services Limited vs Cyrus Investments Pvt Ltd³. This case dealt with the allegations of oppression mismanagement and highlighted the intricate nature of such conflicts and their potential to escalate to the highest judicial echelons. The Hon'ble Supreme Court clarified the contours of "oppression" and held that mismanagement must be continuous, burdensome, harsh, and wrongful. The Apex Court also emphasised that NCLT's powers under Section 242 are equitable and discretionary.

Mismanagement Injunctions: Halting Detrimental Actions

In situations where immediate action is required to prevent further damage to the company or its shareholders due to ongoing mismanagement, parties can seek a mismanagement injunction from the NCLT. An injunction is a judicial order restraining a person from beginning or continuing an action threatening or invading the legal right of another, or compelling a person to carry out a certain act. When allegations of mismanagement arise, petitioners frequently seek injunctions to restrain the respondents from continuing prejudicial actions, alienating assets, or making significant policy decisions that could further damage the company.

The NCLT has the inherent power to grant interim orders, including injunctions, to protect the interests of the company and its shareholders during the pendency of a petition. The Hon'ble Delhi High Court, in Vistra Itcl (India) Limited & Anr. vs Lalit Kumar Jain & Ors.⁴, acknowledged the NCLT's jurisdiction to grant injunctions, particularly when the relief sought before the civil court can be granted by the NCLT. This highlights the NCLT's comprehensive jurisdiction over company law matters.

Such injunctions are vital for:

• Preserving the status quo: Preventing further erosion of company value or assets.
• Protecting shareholder interests: Safeguarding the investments of minority shareholders from detrimental actions.
• Ensuring fair play: Preventing the dominant faction from taking irreversible steps that could prejudice the outcome of the dispute.
• Maintaining corporate stability: Allowing for a structured resolution process without ongoing disruptive activities.

The ability to secure timely injunctions is a powerful tool in the arsenal of aggrieved shareholders, providing immediate relief and preventing the escalation of harm.

Deadlock Remedies: Breaking the Stalemate

Corporate deadlocks occur when there is an equal division of power within the company, typically at the board or shareholder level, leading to an inability to make crucial decisions. This paralysis can severely impede the company's operations and growth. The NCLT plays a crucial role in resolving such impasses.

In Hormouz Phiroze Aderianwalla v. Del. Seatek India (P) Ltd. (2024 SCC ONLINE NCLT 3570) the NCLT noted that there is a deadlock in the company's management due to the equal shareholding and representation of directors. The NCLT noted that both the parties failed to cooperate in resolving the issue and no independent valuation was submitted by the respondents, despite opportunities. The NCLT acknowledged the deadlock and referred precedents where one shareholder group purchases the shares of the other to resolve such disputes⁵.

While winding up the company is an extreme measure, often considered a last resort, the NCLT prefers to explore other remedies that allow the company to continue as a going concern. These remedies include:

• Buy-out orders: Directing one group of shareholders to purchase the shares of the other, thereby consolidating control and breaking the deadlock. This is a common and effective solution, particularly in closely held companies.
• Appointment of independent directors: Introducing neutral parties to the board to facilitate decision-making and mediate disputes.
• Restructuring of shareholding or management: Implementing changes to the company's governance structure to prevent future deadlocks.
• Mediation and conciliation: Encouraging parties to reach an amicable settlement through alternative dispute resolution mechanisms.

The NCLT's approach is often pragmatic, aiming to find a solution that is fair to all parties and serves the best interests of the company. The emphasis is on revival and continuity rather than dissolution, wherever possible.

Forensic Audit: Unearthing Financial Irregularities

A forensic audit is an examination and evaluation of a firm's or individual's financial information for use as evidence in the court of law. A forensic audit can be conducted in order to prosecute a party for fraud, embezzlement or other financial claims⁶. In disputes involving allegations of financial mismanagement, fraud, or diversion of funds, a forensic audit becomes an indispensable tool. Unlike a regular financial audit, a forensic audit is specifically designed to investigate and uncover financial irregularities, identify fraudulent activities, and quantify the extent of financial damage.

Why is a Forensic Audit Crucial?

• Evidence Gathering: It provides concrete evidence of financial misconduct, which is essential for substantiating claims of mismanagement and oppression before the NCLT.
• Quantification of Loss: It helps in accurately determining the financial losses suffered by the company due or to the actions of the respondents.
• Identification of Perpetrators: It can pinpoint individuals responsible for fraudulent activities, aiding in accountability.
• Strengthening Legal Arguments: The findings of a forensic audit can significantly bolster a petitioner's case, providing an objective and expert assessment of the financial situation.
• Supporting Recovery Actions: The audit report can form the basis for seeking recovery of misappropriated funds or assets.

The NCLT frequently directs forensic audits in complex cases where financial impropriety is suspected, recognizing its importance in achieving a just and equitable resolution. In Shashi Prakash Khemka v. NEPC India Ltd. (2019) NCLAT ordered a forensic audit to investigate allegations of siphoning and misappropriation of funds⁷.

Board Control Disputes: The Battle for Governance

Disputes over board control are common, especially in companies with closely held shareholding or where different factions vie for strategic direction. These disputes can arise from disagreements over appointments, removals, strategic decisions, or the overall management philosophy.

The NCLT has the authority to intervene in board control disputes to ensure good corporate governance and prevent any single faction from abusing its power. This can involve:

• Setting aside illegal board resolutions: Nullifying decisions made without proper procedure or in bad faith.
• Directing reconstitution of the board: Ordering changes to the board's composition to ensure fair representation or to remove directors found to be acting against the company's interests.
• Appointing independent directors: To bring impartiality and expertise to the board, especially when there is a lack of trust among existing directors.
• Overseeing shareholder meetings and elections: Ensuring transparency and fairness in the democratic processes of the company.
• Issuing directions on specific governance matters: Providing guidance on how certain decisions should be made or how conflicts of interest should be managed.

The NCLT's intervention in board control disputes is aimed at restoring stability and ensuring that the company's affairs are conducted in a manner that serves the collective interest of all stakeholders, rather than the narrow interests of a dominant group. In Cyrus Mistry / Tata Sons Case. Reinforced that removal of a director, even a chairperson, is valid if done in accordance with statute and Articles—but can still be reviewed for fairness⁸.

Conclusion

Commercial and shareholders' disputes are intricate and demand a nuanced understanding of company law and corporate governance principles. The NCLT and NCLAT provide a specialized forum for addressing these complex issues, offering a range of remedies from preventing ongoing harm through injunctions to resolving fundamental disagreements over control and management. Whether it's proving oppression and mismanagement under Sections 241-242, navigating a corporate deadlock, leveraging a forensic audit to uncover financial truths, or resolving a contentious board control battle, expert legal guidance is paramount. Engaging experienced legal counsel is crucial for effectively navigating these disputes, protecting shareholder interests, and ensuring the long-term health and stability of the company.

Footnotes

1. Companies act 2013

2. 2021 SCC Online SC 272

3. https://api.sci.gov.in/supremecourt/2020/212/212_2020_31_1503_27229_Judgement_26-Mar-2021.pdf

4. 2019 SCC Online Del 9435

5. https://www.scconline.com/blog/post/2024/09/26/to-resolve-deadlock-in-equal-shareholding-companies-buy-out-of-one-group-by-other-is-preferred-remedy-nclt-scc-times/

6. https://www.icsi.edu/media/webmodules/FINAL_Forensic_Audit_BOOK.pdf

7. 2019 SCC OnLine SC 223

8. 2019 SCC OnLine NCLAT 858 & 2021 SCC OnLine SC 272

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.