The New Delhi Bench of the National Company Law Appellate Tribunal (NCLAT) has held that in a closely held quasi-partnership, exclusion of a 40% founder-shareholder from management and remuneration without due process constitutes oppression. The NCLAT explained that where a substantial shareholder of a family-owned quasi-partnership company is kept away from management and denied the fruits of the company without due process or justification, allegations of oppression under Section 241 of the Companies Act, 2013 stand confirmed.
The NCLAT clarified that the vacation of office of a Director under Section 167(1)(b) for absence from all board meetings during twelve months is not triggered unless notices of the meetings were actually served on the Director. At the same time, the NCLAT said that the NCLT has the power under Section 242(2)(b) of the Companies Act, 2013 to direct a competitive inter se bidding process through the Swiss Challenge Method under the supervision of an independent observer, where both warring groups are willing to buy out the other and are competent to run the company.
Further, the NCLAT asserted that a duly executed settlement between family factions recording the exit terms, consideration and absence of a non-compete clause is binding, and attempts to expand its scope after the payment deadline has expired will not be entertained. The Tribunal also said that where a minority shareholder first agrees to sell his shares to the majority at an agreed price and, on default, offers to buy out the majority at the same terms with a premium, the spirit of pre-emptive rights under the Articles of Association stands substantially complied with.
The Division Bench comprising Justice Yogesh Khanna (Officiating Chairperson) and Ajai Das Mehrotra (Technical Member) noted that both sides were ad idem that Cheers Interactive (India) Private Limited (CIPL) is a closely held family company in the nature of a quasi-partnership, and that both sides are competent to run the company having sufficient experience. The Tribunal observed that the settlement expressly recorded that ‘no other monetary or other new points should be brought up’ and that there would be no non-compete clause. The attempt by the appellants to expand the scope of the settlement to include family lands was held to be an afterthought raised only after the payment deadline had expired.
On the question of vacation of office of Respondent No. 2 as Director under Section 167(1)(b) of the Companies Act, 2013, the NCLAT held that there was no evidence on record to show that notices of board meetings were ever served on Respondent No. 2. The minutes of meetings were also not served on him. The Tribunal placed reliance on Raj Singh Chopra v. Jagat Singh Chopra [(2018) 206 Comp Cas 440] and held that for vacation of office under Section 167(1)(b), service of notice of the meetings which the director is alleged to have not attended is a must, and meetings held without notice are not valid meetings.
On the allegation of misuse of confidential company data by Respondent No. 2, the NCLAT observed that no evidence had been furnished by the appellants. Respondent No. 2 had voluntarily handed over his laptop for deletion of all company data immediately after the settlement, which was not denied by the appellants. On the allegation of poaching of employees, the NCLAT noted that nearly 100 employees had left the company but only 18 had joined Futurescalex. The movement of employees in the private sector was held to be a norm rather than an exception, and no adverse inference could be drawn absent direct evidence of soliciting.
The NCLAT observed that Respondent No. 2, being a substantial shareholder holding more than 40% shares, was the original founder of the company and had been side-lined from management and denied the fruits of the company without due process or justification. Important financial decisions including borrowings and grant of interest-free loans to the appellants were taken in his absence, ignoring his legitimate expectation to participate in management.
On Articles 11 and 12 of the Articles of Association conferring pre-emptive rights, the NCLAT observed that the spirit of these articles had been substantially complied with through the settlement dated Oct 13, 2022, under which Respondent No. 2 had first agreed to sell his shares to the majority for Rs. 60 crores, and on failure of payment, had offered to buy out the appellants at the same terms with a 10% premium.
Briefly, the dispute arises out of a company appeal filed by Nayan Shah and Jigna Nayan Shah against Cheers Interactive (India) Private Limited (CIPL), Hitesh Chunilal Shah and Chunilal Meghji Shah, assailing the order passed by the NCLT, Mumbai Bench. CIPL is a closely held family company in the nature of a quasi-partnership, engaged in the business of Knowledge Process Outsourcing (KPO) and market research, incorporated on July 14, 2000, by Respondent No. 2 (Hitesh), Respondent No. 3 (Chunilal, the patriarch/father) and Appellant No. 2 (Jigna, the daughter), each holding 100 shares. Appellant No. 1 (Nayan Shah), the son-in-law of Respondent No. 3 and husband of Appellant No. 2, was inducted as CEO in 2001/2002, though he does not hold any shares in the company.
The shareholding pattern evolved over the years through gifts by Respondent No. 3 to Appellant No. 2. As on Sep 30, 2005, Respondent No. 2 and Respondent No. 3 together held 50% and Appellant No. 2 held 50%. On July 22, 2020, Respondent No. 3 gifted 67,150 shares to Appellant No. 2, resulting in Appellant No. 2 holding 53.67%, Respondent No. 2 holding 40.19% and Respondent No. 3 holding 0.44% shares. The balance 5.7% shares are held by employees and other relatives. The company never declared dividends and profits were distributed as salaries and other benefits across the family factions.
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On Oct 13, 2022, a settlement was signed between the parties under which Respondent No. 2 agreed to exit the company for a consideration of Rs. 60 crores to be paid by Jan 27, 2023, with an express stipulation that there would be no non-compete clause and the only restriction was that no company data would be used by the outgoing party. A sum of Rs. 1.01 crores were paid to Respondent No. 2 on Oct 17, 2022, but no further payment followed.
Pursuant to the settlement, Respondent No. 2 took leave from the company in October 2022, extended the leave, ceased attending board meetings, and handed over his laptop for deletion of company data. Respondent No. 2 and Respondent No. 3 later incorporated competing entities, namely Meg One on Dec 28, 2022, (from which they later resigned) and Futurescalex Insights Private Limited. The appellants unilaterally stopped payment of remuneration to Respondent No. 2 from 2022-23 and to Respondent No. 3 from January 2025. Respondent No. 2 was denied access to company records and was excluded from management.
Respondent No. 2 filed petition before the NCLT, Mumbai under Sections 241 and 242 of the Companies Act, 2013 alleging oppression and mismanagement. The NCLT allowed the petition and directed a competitive bidding process through the Swiss Challenge Mechanism under the supervision of an independent observer to determine which group would buy out the other.
