Directorial Disputes: Unresolved Questions On Remedies And Jurisdiction

Giving every slighted director the power to bring a company to its knees by initiating oppression and mismanagement proceedings arising out of an acrimonious separation may result in the abuse of this plenary provision under the Companies Act

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The musical chair for directorial positions on the board of a company is a common phenomenon in management and operations of large corporates and businesses. The shareholders of a company, in exercise of corporate democracy, control the music which decides the fate of members of the board of directors. Therefore, one could reason that replacing/removing a board member would be a fairly proforma function of corporate management and would likely not result in any significant risks. However, emerging trends reveal a changing paradigm in the litigations involving disgruntled directors.

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The provisions of the Companies Act, 2013 (Companies Act) dictate the process to be followed for a removal of a director from the board of a company. Traditionally, an aggrieved director would approach civil courts seeking remedies arising from their removal. Post the introduction of the National Company Law Tribunal (NCLT), it would ideally follow that the NCLT would have the jurisdiction to decide on directorial disputes in accordance with applicable law. However, divergent views have been taken on the issue by different courts.

Most recently, the Delhi High Court while inter alia dealing with the issue of whether the elections to the board could be adjudicated upon by a civil court or whether such jurisdiction vests exclusively with the NCLT, held that the NCLT has been conferred with the powers to deal with issues regarding appointment of directors and that the jurisdiction of the civil court accordingly stood barred by inter alia relying on the provisions of Section 430 of the Companies Act (which ousts jurisdiction of civil courts on matters where the NCLT has jurisdiction).

However, peculiarly, there is no express provision under the Companies Act enabling disgruntled directors to approach the NCLT with any grievances pertaining to their removal. In the absence of a specific provision pertaining to grievance redressal for such directors, consequently the nature and extent of reliefs that such a director may be entitled to is also not specifically spelt out. Thus, for a director looking to challenge his removal from the board of a company, two questions emerge (i) in the absence of any specific provision would the NCLT have jurisdiction over the matter or would jurisdiction vest with a Civil Court? and (ii) what are the reliefs that can be granted under law to such an aggrieved director?

The prevailing view on the subject is that NCLT would be appropriate judicial forum to adjudicate directorial disputes even in the absence of a specific enabling provision. However, the question becomes slightly more complex when it comes to the potential remedies available to such a director and the reliefs that can be granted by the NCLT in such a scenario. The issue was taken up before the Madras High Court in Chiranjeevi Rathnam v Ramesh, wherein the Court held that directors of a company carry all trappings and/characters of a ‘member’ of the Company and that to protect the interest of the company’ the remedy such directors would be to approach the NCLT under Section 242 of the Companies Act for oppression and mismanagement. The Court applied the doctrine of reading down to include not only members in the strict sense of the term but also persons who ‘bear the character of a member’ or ‘have substantial interest in the internal affairs of the company’ and thus possibly enabling an aggrieved director to bring an action of oppression against the company. A subsequent judgement of the Madras High Court takes the same view as well.

A right to file an oppression and mismanagement petition under Section 242 the Companies Act has historically been available to only a ‘member’ for matters concerning oppression of its members or for acts which are prejudicial to the interests of the company and was not a remedy previously available to non-shareholder directors. It is the opinion of the authors that the definition of ‘member’ under the Companies Act does not indicate that non-shareholder directors could be included within the scope of the definition and further, there are no direct judicial precedents which can be relied upon to arrive at the conclusion that non-shareholder directors would qualify as ‘member’. Therefore, the ratio of the Madras High Court inChiranjeevi Rathnam, when applied outside the facts of the said case, unfortunately raises more questions and provides answers.

The provisions pertaining to oppression and mismanagement was introduced to tackle situations involving majoritarian tyranny in the functioning of a company. The interpretation adopted by the High Court in Chiranjeevi Rathnam could catapult non shareholders to a pedestal ordinarily reserved for ‘members’ (those who are financial invested in the company’s performance), as opposed to non-shareholders who do not have any interests in the company’s performance. The judgement in Chiranjeevi Rathnam has resulted in instances of disgruntled directors approaching the NCLT seeking waiver from meeting thresholds prescribed under Section 244 of the Companies Act and initiating oppression and mismanagement petitions against a company stemming from an acrimonious parting of ways from the board. This issue is currently pending consideration before the Chennai bench of the NCLT.

Giving every slighted director the power to bring a company to its knees by initiating oppression and mismanagement proceedings arising out of an acrimonious separation may result in the abuse of this plenary provision under the Companies Act. While the provisions of Section 430 make it clear that the NCLT would have exclusive jurisdiction to decide on issues arising out of compliance of provisions of the Companies Act, the authors respectfully disagree with the corollary: that non-shareholder directors would qualify as ‘member’ for the purposes of initiating proceedings for mismanagement and oppression. It is the opinion of the authors that incorporation of a specific provision by the legislation would resolve the issue, in the meanwhile, non-shareholder directors would be best served by invoking the inherent powers of the NCLT and approach the tribunal for specific reliefs pertaining to non-compliance with provisions of Section 169 of the Companies Act, if any.

* Samudra Sarangi is Partner Law offices of Panag & Babu and Shruti Raina is Principal Associate Law offices of Panag & Babu