It is trite law that where a statute prescribes something to be done in a particular manner, then it ought to be done in that manner alone and not in any other manner. This is a well-recognized position, with courts having the duty to filter out any misguided attempts by litigants to bypass statutory mandates.
Recently, however, the Calcutta High Court in Eastern Indian Motion Picture Association & Ors. v. Mr. Milan Bhowmik (“EIMPA”) took a slightly different approach. It allowed parties to bypass the bar under section 430 of the Companies Act, 2013 (“Act”), to agitate a shareholder dispute before a civil court. In this post, we discuss the circumstances which led the High Court to make the deviation, its justification for bypassing the bar contained under section 430 of the Act and the impact thereof.
Statutory Bar against Civil Courts from Entertaining Shareholder Disputes
The National Company Law Tribunal (“NCLT”) and the National Company Law Appellate Tribunal (“NCLAT”) are specialised forums established in June 2016 under the Act. Section 430 of the Act grants these tribunals the exclusive jurisdiction to “entertain any suit or proceeding in respect of any matter which the Tribunal or the Appellate Tribunal is empowered to determine by or under this Act or any other law for the time being in force.”
Thus, there is an express bar in the Act against civil courts from trying any matter that the NCLT is solely empowered to consider by the Act. This bar was brought into effect in 2016 when the NCLT and the NCLAT were established. Since then, the Act has taken away the jurisdiction of civil courts from considering certain categories of disputes. One such category is shareholder disputes. These are covered by section 241 of the Act, giving shareholders the right to file a complaint before the NCLT, if a company’s affairs are mismanaged or conducted in a manner that is prejudicial or oppressive to the company or its shareholders. We assess the Calcutta High Court’s decision in EIMPA through the lens of the above statutory framework laid down by the Act.
Position Taken by the Calcutta High Court
In EIMPA, two members of a company (having no share capital) approached the single judge of the Calcutta High Court challenging the election of the execution committee of the company for the term 2021-2023. The members alleged that this election was null and void, being in violation of the company’s articles of the association and election conduct rules.
In response, the defendants filed an application under Order 7 Rule 11 of the Code of Civil Procedure, 1908. They drew the attention of the High Court to the statutory bar in section 430, highlighting that the subject matter of the suit squarely fell within the ambit of section 241(1)(a). Thus, they argued that the Calcutta High Court had no jurisdiction to entertain, try and determine the suit in question.
The members countered this with a peculiar argument. They alleged that section 244 of the Act granted only 1/5thmembers of a company applying together the right to approach the NCLT under section 241. Since only two members were raising the grievance in the present case, the NCLT did not have the jurisdiction to entertain the subject matter of the suit under the said section. Instead, this action would lie before a civil court.
Interestingly, the single judge found merit in this argument despite the defendants highlighting that the NCLT had the power to waive this minimum requirement in section 244. As recorded by the division bench, the single judge opined that “since the plaintiffs were only two in number they did not possess the requisite strength to apply and had rightly approached the civil court by this suit.” Pertinently, he rejected the section 244 waiver submission by stating that “consideration of the application would involve consumption of time and that the civil suit was a more efficacious remedy for the plaintiffs.”
The single judge ultimately rejected the Order 7 Rule 11 application. The defendants challenged this rejection before the division bench.
After due consideration, the division bench agreed with the single judge’s approach, finding his reasoning to be a plausible one. In fact, the division bench further built on the single judge’s reasoning to hold that “if the plaintiffs approached the tribunal for dispensing with the eligibility criteria, there was no guarantee that the tribunal would allow the application. In the event the tribunal rejected the application the plaintiffs would have to approach the civil court. The plaintiffs were justified in availing of a certain remedy rather than one which did not exist but could come into existence on fulfillment of an uncertain condition”.
In view of the above, the division bench proceeded to dispose off the appeal, holding that the suit filed by the members was maintainable and their decision to directly approach the civil Court was correct.
Impact of the High Court’s Judgment
Interestingly, the Calcutta High Court at both stages was mindful of the special remedy created under section 241 for raising shareholders disputes. It also took note of the statutory bar contained in section 430. Nonetheless, the High Court permitted the members in question to side-step the mandatory framework of the Act.
In order to assess the impact of the Court’s decision, it is important to trace the history of the statutory bar which was introduced to prevent civil courts from venturing into the NCLT’s territory. The concept of the NCLT and the NCLAT was introduced for the first time by the Companies (Second Amendment) Act, 2002, which sought to replace Company Law Board with these specialised forums. This amendment led to the insertion of Parts 1B–1C in the erstwhile Companies Act, 1956. As a part of these amendment, a statutory bar was inserted for the first time, preventing civil courts from considering any matter falling under the domain of the NCLT and the NCLAT in terms of the erstwhile Act or any other law for the time being in force (the then section 10GB of the Companies Act, 1956). This was done to make the NCLT and the NCLAT a one-stop destination for adjudicating disputes relating to the conduct of a company’s affairs. However, subsequently, the Supreme Court in Union of India v. R. Gandhi, President, Madras Bar Association struck down Part 1B-1C as unconstitutional, resulting in the statutory bar contained in section 10GB becoming ineffective. Consequently, the civil courts continued to have the powers to consider such disputes.
This bar was then reintroduced as a part of the Act in the form of section 430. Once this bar became effective in 2016, civil courts in India ceased to have the necessary jurisdiction to entertain such category of disputes, which now fall solely under the NCLT’s domain.
Pursuant to the above, High Courts around the country have been complying with the statutory bar. For instance, the Delhi High Court has time and again acknowledged the absolute nature of the bar contained in section 430. It has further recognised that the NCLT alone has exclusive jurisdiction over matters relating to the conduct of the company’s affairs.
Similarly, the Madras High Court has also recognised that the whole objective of establishing the NCLT and the NCLAT is to avoid multiple forums for initiating actions under company law. It has acknowledged that given the legislative intent and construct of the Act, which is a special legislation giving rights, providing remedy, and conferring powers upon special tribunals, and explicitly barring the civil courts, a civil court has no jurisdiction to entertain such matters.
In the above backdrop, the Calcutta High Court’s judgment appears to be a deviation from the path which has been followed by the other High Courts since the bar under section 430 came into effect. It may even be said to have opened the doors of the civil courts to agitate shareholder disputes, which were firmly shut by the legislature in 2016, when it made the bar under section 430 effective.
Interestingly, the High Court’s decision is premised on the qualification criteria in section 244, which in any event can be waived. Section 244 is a guardrail to protect the company and avoid a situation wherein it is held hostage by a recalcitrant shareholder holding minimal shareholding. The qualification requirement ensures that the disruption, which follows any action against oppression and mismanagement, is only caused when a sizeable voice of shareholders raises such concerns. In case of companies having share capital, this number has been set at a minimum of 100 or 1/10thmembers, whichever is less, or any member or members holding minimum 1/10th of the company’s issued share capital. In the case of a company not having a share capital, as in EIMPA, such shareholders should be at least 1/5th of the total number of members. However, the Act expressly provides that such minimum qualification criteria can be waived. Such a waiver has been granted in the past on sufficient cause being shown.
Given the provision for this waiver remedy, it may be argued that the correct forum for agitating shareholder disputes, even for members who do not meet the minimum qualifying criteria, would be the NCLT. However, despite acknowledging the existence of this remedy, the Calcutta High Court nonetheless proceeded to permit the parties to sidestep the bar under section 430 of the Act.
Conclusion
No doubt, the Calcutta High Court’s judgment is an aberration, taking a path different from the course mandated by the Act as well as followed by other High Courts since the bar under section 430 came into effect. Until now, no challenge has been raised before the Supreme Court in EIMPA. It will be interesting to see if this is a one-off instance or if we see further deviations in the coming years, with courts allowing parties to bypass the bar against civil courts from entertaining shareholder disputes.