Corporate Disputes – Resolution of Corporate Disputes, Non-Compliances & Remedies Important Questions

Question 1.
A group of shareholders of ABC Developers Limited consisting of 24 members decided to file a petition before the Tribunal for relief against oppression and mismanagement by the Board of Directors. The company has a total of 250 members and the group of 24 members holds one-tenth of the total paid-up share capital accounting for one-fifteenth of the issued share capital. The main grievance of the group is that due to mismanagement by the Board of directors, the company is incurring losses and the company has not declared any dividends even when profits were available in the past years for declaration of dividends.

In the light of the provisions of the Companies Act, 2013, advise the group of shareholders regarding the chances of success for:
(i) getting the petition admitted,
(ii) obtaining relief from the Tribunal.
(i) Members of a Company can apply for relief against oppression and mismanagement under section 244 of the Companies Act, 2013. Section 244(1) provides that the following members of a company shall have the right to apply under section 241:
(a) In the case of company having a share capital, not less than 100 members of the Company or not less than 1 /10th of the total number of its members whichever is less, or any member or members holding not less than 1 /10th of the issued share capital of the company: Provided that the applicant(s) have paid all calls and other dues on the shares.

(b) In the case of company not having share capital, not less than 1 /5th of the total number of its members.
In the present case 24 members have decided to apply who hold 1/15 of issued capital of the company. The company has 250 members so at least 1/10 Le. 25 are required to make an application.

They do not number to 100 or constitute 1/10 of the total number of members or hold 1/10 of the issued capital. Therefore they do not have right to approach the Tribunal for relief.

However, as per Section 244, an application can be made to the Tribunal to waive the above requirements (a) and (b) and the Tribunal may waive all or any of the requirements so as to enable the members to apply under section 241.

(ii) In Lalita Rajya Lakshmi v. Indian Motor Co. A.I.R. 1962 the petitioner alleged that dividends were being declared at too low a figure and income was less due to excessive expenditure. It was held that there was no oppression.

In light of above declaring less dividend or incurring losses does not amount to oppression. And the members may not be able to get relief from the Tribunal.

Question 2.
“The minority shareholders are empowered under the Companies Act, 2013 to bring action with a view to prevent the majority from oppression and mismanagement”. Justify the statement with rights available to minority shareholders under the Act.
The various rights which are available to the minority shareholders under the Companies Act, 2013 to bring action with a view to prevent.

oppression and mismanagement are as under:
1. Oppression and Mismanagement: The minority shareholders can file an application with the National Company Law Tribunal (NCLT) under the provisions of the Companies Act, 2013. Sections 241, 242 and 244 of the Companies Act, 2013 under prescribes the remedies that minority shareholders can resort to in cases of oppression and mismanagement.

2. Class Action Suit: A class-action suit usually means a legal suit wherein a group of members can file an application to NCLT if they are of the view that the affairs of the company are being conducted in a manner that is prejudicial to the interests of the company or members or depositors. Sections 245 and 246 of the Companies Act, 2013, lays down the remedies and procedure for filing the Class Action Suit.

Class Action Suit allows the members to claim damages from not only the company and its directors but also from the auditor, an expert, an advisor or a consultant.

3. Right to appoint Small Shareholders’ Directors: The small shareholders or minority shareholders of a listed company have a right to appoint a shareholder of their choice on the board and such shareholder may be called as a ‘Small Shareholders’ Director’ under section 151 of the Companies Act, 2013.

Question 3.
Write a short note on Cyrus Mistry Case.
1. Tata Group is an Indian multinational conglomerate founded in 1868 by Jamsetji Tata, the company gained international recognition after purchasing several global companies. One of India’s largest conglomerates, Tata Group is owned by Tata Sons. The group operates in more than 100 countries across six continents.

2. Tata Sons is the principal investment holding company and promoter of Tata companies. Approximately 66% of the equity share capital of Tata Sons is held by philanthropic trusts, which supports education, health, livelihood generation, art, culture etc. The next major chunk of approx 18% is controlled by Shapoorji Pallonji Group, whose heir apparent is Cyrus Mistry.

3. Mr. Cyrus Mistry was appointed as the chairman of Tata Sons in the year December 2012 who was the sixth chairman of Tata Sons.

Cyrus Mistry’s Ouster:
1. In the Board meeting of Tata Sons Limited held on 24th October 2016, Mr. Cyrus Mistry, was replaced from the post of Executive Chairman with immediate effect on ground of growing trust deficit and repeated departures from the culture and ethos of the Tata Group and Mr.Ratan Tata was appointed as the interim Chairman of Tata Sons and a committee was formed to hunt for a new chairman in four months.

2. On 25Uh1 October 2016, Tata Sons filed caveats in Supreme Court, Bombay High Court and National Company Law Tribunal to prevent ousted Tata Sons Chairman Cyrus Mistry from getting an ex-parte order against his sacking. They don’t want any court to pass any ex-parte orders without hearing their side of the story.

Legal Battle:
1. In December 2016, two Mistry family backed investment Finns -‘Cyrus Investments Private Limited’ and ‘Sterling Investment Corporation Private Limited’, the minority group of shareholders! ‘Shapoorji Paflonji Group’ (‘SP Group’ for short) holding 1837% of equity share capital ‘hereinafter referred to as Petitioner’ filed a suit in National Company Law Tribunal (NCLT) Mumbai bench under Sections 24 1-242 of the Companies Act, 2013 alleging prejudicial and oppressional acts of the majority shareholders. They also challenged Cyrus Mistry’s removal.

2. In reply to this suit, Tata Sons alleged that Mistry family backed investment firms don’t have the necessary qualification to file a suit against them. As the petitioners do not hold at least 10% of the “issued share capital” of Tata Sons or representing at least one-tenth of the total number of members, as required by the Companies Act, 2013. According to Tata Sons, though the petitioners hold 18.37% of equity share capital of the company, their holding fell to approximately 2.17% when both equity and preference shares were taken into account.

With regard to the power of a tribunal to waive off such requirements if applied for by a petitioner, Tata Sons has contended that since the petitioners had not sought such a waiver during the filing of the petition, such a request should not be accommodated at a later stage.

3. In the application filed by Mistry family firms stated that the Tata Sons’ understanding of the legal provision is not correct. They hold 18.37% of equity shares in the Company and if preference shareholding is considered none of the groups would have the requisite 10% issued and paid-up share capital and would lead to an absurdity as none of them would be able to maintain an application.

Further, it asked the tribunal to waive off the 10% minimum shareholding norm requirement stating that there are enough ‘facts, circumstances and, sufficient reasons’ which warrants the tribunal to exercise its powers so that the petition can be heard on its merits. If not done so “the grave issues raised in the petition would go entirely un-investigated”. Provision of the Companies Act, 2013:

4. The National Company Law Tribunal (NCLT), Mumbai Bench, initially dismissed the petition under Sections 241-242 of the Companies Act, 2013 being non-maintainable, citing that no cause of action was established in any of the allegations raised by the Petitioners, they didn’t meet the criteria of 10% ownership in a company for the filing of a case of alleged oppression of minority shareholders under the Companies Act, 2013 and also dismissed the petition for waiver.

5. Petitioner moved The National Company Law Appellate Tribunal (NCL-AT), challenging NCLT order which rejected their petitions over maintainability. They also challenged rejection of their waiver plea.

6. NCLAT by its order dated 21st September 2017 allowed the plea by the petitioners seeking waiver in filing case of oppression and mismanagement against Tata Sons taking into consideration the exceptional circumstances and directed the Mumbai bench of the NCLT to proceed in the matter.

7. On December 18, 2019, the NCL-AT gave its judgment in favour of Mistry camp and set aside the order of NCLT. The NCLAT reinstated Mr. Mistry as the Executive Chairperson for Tata Sons for his remaining term and declared that the appointment of Nataraj and Chandrasekaran as executive chairman of Tata Sons was illegal, but suspended its implementation for four weeks in order to provide time for Tatas to appeal.

The NCLAT order had also set aside Tata Sons’ decision to convert itself into a private company. The NCLAT enquired the Registrar of Companies (RoC) to explain the rationale behind allowing Tata Sons to convert into a private company and also sought details of the process for the permission.

8. In January 2020, Tata Sons appealed to the Supreme Court against National Company Law Appellate Tribunal (NCL-AT) decision to re-instate Mr. Cyrus Mistry as its Chairman as this decision is a blow to corporate democracy and rights of the Board of Directors.

9. Supreme Court on 10th January 2020 stayed NCL-AT order reinstating Mr. Cyrus Mistry as the executive chairman of Tata Sons and restoring his directorships in the holding company, with a preliminary observation that the first impression of the order was “not good” and that the tribunal ‘could not have given consequential relief that had not been sought in the first place.

10. On 24th January 2020 the Supreme Court put stay on the NCL-AT order of dismissing the Registrar of Companies (RoC). plea seeking modification of its verdict in the Tata-Cyrus Mistry matter.

Question 4.
Mrs. P who holds 500 equity shares of Zeta Limited made an application through instrument of transfer to the Company for transfer of 300 equity shares in favour of Mrs. H. Zeta Limited refused to register the transfer of shares in favour of Mrs. H, stating that she has been declared as a wilful defaulter by the banks. What are the rights available to Mrs. H, under the Companies Act, 2013 for such refusal?
As per section 58(4) of the Companies Act, 2013, a public company must register the transfer of securities within 30 days of date of delivery to the company of instrument of transfer or intimation of transmission.
If the public company without sufficient cause refuses to register the transfer of securities within the said period of 30 days the transferee may, within a period of 60 days of such refusal, or where no intimation has been received from the company, within 90 days of the delivery of the instrument of transfer or intimation of transmission, file an appeal to the Tribunal.

As per Section 58(5), the Tribunal, while dealing with such an appeal, may, after hearing the parties, either dismiss the appeal or by order –
(a) direct that the transferor transmission shall be registered by the company and the company shall comply with such order within a period of 10 days of the receipt of the order; or
(b) direct rectification of the register and also direct the company to pay damages, if any, sustained by any party aggrieved.
Thus Mrs. H can file an appeal with the Tribunal as mentioned above.

Question 5.
Write a short note on Transfer and Transmission of securities.
Section 56(1) states that a company shall not register a transfer of securities of the company, or the interest of a member in the company – in the case of a company having no share capital, other than the transfer between persons both of whose names are entered as holders of beneficial interest in the records of a depository, unless a proper instrument of transfer in such form as may be prescribed, duly stamped, dated and executed by –
or on behalf of the transferor and the transferee and specifying the name, address and occupation, if any, of the transferee has been delivered to the company by the transferor or the transferee within a period of sixty :
days from the date of execution, along with the certificate relating to the securities, or if no such certificate is in existence, along with the letter of allotment of securities:

When the transfer instrument has been lost or presented late:
Provided that where the instrument of transfer has been lost or the instrument of transfer has not been delivered within the prescribed period, the company may register the transfer on such terms as to indemnity as the Board may think fit. ‘

Exception to section 56(1):
Section 56(2) states that nothing in sub-section (1) shall prejudice the power of the company to register, on receipt of an intimation of transmission of any right to securities by operation of law from any person to whom such right has been transmitted.

Transfer in case of partly paid shares:
Section 56(3) states that where an application is made by the transferor alone and relates to partly paid shares, the transfer shall not be registered unless the company gives the notice of the application, in such manner as may be prescribed, to the transferee and the transferee gives no objection to the transfer within two weeks from the receipt of notice.

Time limit for delivery of certificates:
Section 56(4) states that every company shall, unless prohibited by any provision of law or any order of Court, Tribunal or other authority, deliver the certificates of all securities allotted, transferred or transmitted –
within a period of two months from the date of incorporation, in the case of subscribers to the memorandum;
within a period of two months from the date of allotment, in the case of any allotment of any of its shares;
within a period of one month from the date of receipt by the company of the instrument of transfer under sub-section
(1) or, as the case may be, of the intimation of transmission under sub-section
(2), in the case of a transfer or transmission of securities;
within a period of six months from the date of allotment in the case of any allotment of debenture:

Provided that where the securities are dealt with in a depository, the company shall intimate the details of allotment of securities to depository immediately on allotment of such securities.

Transfer of shares of deceased person:
Section 56(5) states that the transfer of any security or other interest of a deceased person in a company made by his legal representative shall, even if the legal representative is not a holder thereof, be valid as if he had been the holder at the time of the execution of the instrument of transfer.

Transmission in case of nomination:
Section 72 provides that when a shareholder nominates any person, then in case of the death of the shareholder company needs to transfer only to the nominee duly notified. In this case company has no further responsibility. In case of claim or any dispute in this regard the decision of the courts shall be final and binding.

Punishment for Default:
Section 56(6) states that Where any default is made in complying with the provisions of sub-sections (1) to (5), the company shall be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees and every officer of the company who is in default shall be punishable with fine which shall not be less than ten thousand rupees but which may extend to one lakh rupees.

In case of transfer of dematerialized shares in a listed company, the company has no role to play. The depository participants would ensure the transfer is effected in accordance with law. In case a depository participant, with intention to defraud a person, transfers the shares illegally it shall be punishable under Section 447. This penalty is in addition to any other liability that may be attracted under Depositories Act, 1996.

Question 6.
Write a short note on Refusal of Registration and Appeal against Refusal under section 58.
Transfer/transmission of shares in case of private company Section 58(1) provides thai transfer or transmission of securities or interest of a member in respect of a private limited company is to be effected strictly as per its articles of association. In case the same is refused the company, the company within thirty days to send the notice of refusal along with the reason for the same. This refusal notice is to be sent to the person (transferor or transferee) who has lodged the transfer/transmission documents with the company.

Transfer/transmission of shares in case of public companies:
Section 58(2) provides that securities or other interests shall be freely transferable in a public company. But in case of any contract or arrangement between two or more persons with respect of transfer of securities the same shall be enforceable as a contract.

Appeal to Tribunal by Transferee in case of private companies:
Section 58(3) provides that the transferee (not the transferor) may appeal to tribunal within 30 days of refusal notice by the company and in case company does respond in any manner than within 60 days of delivery of instrument of Transfer or intimation given to the company in case of transmission.

Appeal to Tribunal by Transferee in case of public companies:
Section 58(4) provides that in case of public companies, which refuses to register transfer without sufficient cause within a period of thirty days from the date on which the instrument of transfer or the intimation of transmission, as the case may be is delivered to the company, the transferee may within a period of sixty days of such refusal or where no intimation has been received from the company, within ninety days of the delivery of the instrument of transfer or intimation of transmission, appeal to the Tribunal.

As per ruling given by Calcutta High Court in Peerless General Finance and Investments Limited y. Poddar Projects Limited (2008 81 SCL 51 Cal), the above mentioned time limits can be extended if sufficient reasons can be attributed for the delay.

Tribunal to pass order after hearing both parties:
The tribunal after hearing the parties may pass appropriate order [section 58(5)]. In case it orders for registration of securities and order for rectification of register, in addition, it may also order for damages. Once transfer/ transmission is ordered the concerned company has to implement the order within 10 days of the receipt of the order.

Non-compliance of order of Tribunal:
In case orders of Tribunal are not complied with, the concerned person shall be liable for imprisonment of minimum one year which may extend to three years in addition to minimum fine of Rupees 1,00,000 which may go up to Rupees 5,00,000. Violation of subsection (5) is not compoundable.

Question 7.
Write a short note on Rectification of Register of Members under section 59.
The person aggrieved, or any member of the company, or the company may appeal in such form as may be prescribed, to the Tribunal, for rectification of the register, if:
If the name of any person is, without sufficient cause, entered in the register of members of a company, or
after having been entered in the register, is, without sufficient cause, omitted therefrom, or
if a default is made, or
unnecessary delay takes place in entering in the register, the fact of any person having become or ceased to be a member.

If foreign members or debenture holders residing outside India, want to file case under this section then they may appeal to a competent court outside India, specified by the Central Government by notification.

The meaning of sufficient cause has not been given in the Act. However, there are several case laws which have elaborated the same.

Some extracts of such case laws have been given below:
1. Benarsi Das Saraf v. Dalmia Dadri Cement Ltd. AIR 1959:
“The word ‘sufficient means, ‘adequate’, ‘enough’, ‘as much as may be necessary to answer the purpose intended. It embraces no more than, that which provides a plentitude which, when done, suffices to accomplish the purpose intended in the light of existing circumstances and when viewed from reasonable standard of practical and cautious men.” ’

2. Indian Chemical Products Ltd. v. State of Orissa AIR 1967 SC 253:
“The power under article 11 to refuse registration of the transfer is a discretionary power. The directors must exercise this power reasonably and in good faith. The Court can control their discretion if they act capriciously or in bad faith….”.

3. Smt. Mallina Bharathi Rao v. Gowthami Solvent Oils Ltd. [2001] 31 ‘ SCL 60:
“Whether since company had not only authorised a director to sign transfer instrument on behalf of petitioner but effected transfer without share certificates, entire process of transfer was in violation of mandatory provisions of section 108 and as such omission of petitioner’s name from Register of Members was without sufficient cause – Held, yes – Whether transfer of shares being in contravention of mandatory )
provisions of Section 108 and consequent omission of petitioner’s name being without sufficient cause, company should restore her name on Register of Members in respect of her shares and rectify register accordingly – Held, yes”

4. In Asha Purandare v. Integrated Controls (P.) Ltd. [2002] 39 SCL 970 1 (CLB – MUM.)
“Whether minor typographical omission can be said to be sufficient cause for refusal by company to register transfer of shares in name of petitioners – Held, no” 7

5. Gulshan Mahindru v. Reliance Industries Ltd. [2014] 47 taxmann. com 186 (CLB – Mumbai)
“Reason attributed by a company for refusal of transmission of shares and rectification of register of members that company had already transferred duplicate shares to its registered owners and shares had been dematerialized, cannot be said to be a sufficient and cogent reason as contemplated .under Section 111A.”

Question 8.
G is the General Manager (HR) of XYZ Limited. He wrongfully withholds the flat of the Company and also lets it out on rent to someone. XYZ Limited has filed a complaint against G. What are the penalties for such a conduct under the Companies Act, 2013?
What are the provisions of punishment for wrongful withholding of the property of the company under the Companies Act, 2013?
1. As per section 452 of the Companies Act, 2013:
If any officer or employee of a company:

  • Wrongfully obtains the possession of any property of the company including cash, or
  • Wrongfully withholds any property already in his possession or knowingly applies it for any unauthorised use, then the company or any member or creditor or contributory can file a complaint under this section. The offence is punishable with a fine which shall not he less than ₹ 1 lakh but which may extend to ₹ 5 lakh.

2. The Court trying an offence under section 452 may also order such officer or employee to deliver up any such property wrongfully obtained. It may also order to refund any cash wrongfully obtained or the benefits derived from such property or cash. The court allows such time as it deems fit to comply with this. In case of default, imprisonment for a term which may extend to two years will be ordered.

3. In the present case G who is an employee of the company has wrongfully withheld the property and also derived benefits from it in the form of rent. The company can file complaint against G under section 452 and penalties for the same are given above.

Resolution of Corporate Disputes Non-Compliances & Remedies Notes