Buy-Out of one Group by other a preferred remedy to resolve deadlock in equal shareholding companies: NCLT Mumbai

Case Brief: Buy-Out of one Group by other a preferred remedy to resolve deadlock in equal shareholding companies: NCLT Mumbai

Case Name: Mr. Hormouz Phiroze Aderianwalla & Anr. v. Del Seatek Pvt Ltd.

Tribunal: National Company Law Tribunal, Mumbai

Date of Judgment: 05.09.2024

Case Name: Mr. Hormouz Phiroze Aderianwalla & Anr. v. Del Seatek Pvt Ltd.

Facts

  • Hormouz Phiroze Aderianwalla and others (collectively, the “Aderianwalla Group”) filed Company Petition No. 199/2022 against Del Seatek India Pvt. Ltd. (“R1 Co.”) and others, alleging oppression and mismanagement in the company’s affairs.
  • Delzad Aspy Karani and others (collectively, the “Karani Group”) filed a cross-petition (Company Petition No. 50/2023) against R1 Co. and others, also alleging oppression and mismanagement.
  • Both the Aderianwalla Group and the Karani Group held a 50% shareholding in R1 Company, essentially forming a quasi-partnership.
  • The Aderianwalla Group was responsible for R1 Co.’s daily operations and finances, while the Karani Group focused on executing the company’s projects.
  • Disagreements arose between the two groups, leading to allegations of financial mismanagement and oppressive conduct from both sides.

Aderianwalla Group’s Allegations:

  • The Karani Group had been absent from actively participating in R1 Co.’s business for over six years but continued to receive significant remuneration, dividends, and other benefits, despite not contributing to the company’s success.
  • The Karani Group obstructed a potential loan opportunity from Mr. Chadha, who was willing to provide funds subject to being appointed as an independent director.
  • The Karani Group made unfounded allegations regarding suspicious transactions in R1 Co.’s financial records for the fiscal year 2019-2020, despite the statutory auditors confirming the legitimacy of these transactions.
  • The Karani Group unilaterally attempted to take control of R1 Co.’s finances and made unauthorized payments, disrupting the company’s cash flow.
  • The Karani Group submitted fabricated minutes of a board meeting that never took place and attempted to use these fraudulent minutes to change the company’s bank account signatories.
  • The Karani Group disrupted a legitimate board meeting, preventing any productive discussion about R1 Co.’s statutory compliance.
  • The Karani Group illegally removed the company’s minute book from R1 Co.’s office and refused to improve R1 Co.’s insecure IT system.
  • The Karani Group refused to engage in discussions regarding a buyout or dissolution of R1 Co. to resolve the stalemate.
  • Due to the deadlock, R1 Co. was unable to file financial statements, comply with statutory filings, hold board meetings, or address pending litigation, leading to potential penalties and reduced credit limits.

Karani Group’s Allegations:

  • The Aderianwalla Group illegally appointed Mr. Rajiv Chadha as a fifth director on the board of R1 Co. without their knowledge or consent.
  • The Aderianwalla Group siphoned funds from R1 Co. and transferred business opportunities to entities they controlled in Dubai and Qatar.
  • The Aderianwalla Group, with the assistance of R1 Co.’s employees and auditors, obstructed the Karani Group’s access to the company’s financial records.
  • The Aderianwalla Group attempted to pressure the Karani Group into selling their shares at an undervalued price.
  • The Aderianwalla Group, in collusion with R1 Co. employees, established companies in Dubai and Qatar to defraud the Karani Group and siphon funds from R1 Co.’s operations in Abu Dhabi and Qatar.

Issues

  • Whether the actions of either the Aderianwalla Group or the Karani Group constitute oppression and mismanagement under Sections 241-242 of the Companies Act, 2013?
  • Whether a shareholder buyout the most appropriate solution to resolve the deadlock in the management of R1 Co.?

Judgment

  • The National Company Law Tribunal (NCLT), Mumbai Bench, directed the Aderianwalla Group to purchase the Karani Group’s shares in R1 Co. within six months.
  • The purchase price was to be determined based on the valuation report submitted by the Aderianwalla Group, as the Karani Group failed to produce their own valuation report despite being given the opportunity.
  • The NCLT emphasized that this buyout order aimed to resolve the deadlock within R1 Co. and was in the best interest of the company, without making a specific determination on the oppression allegations levied by each group.

Legal Analysis

  • The NCLT based its judgment on established legal principles and cited precedent cases that support the use of shareholder buyouts as a remedy in situations involving equal shareholding and a complete breakdown in management due to shareholder disputes.
  • The NCLT cited the following cases as precedents:

M.S.D.C. Radharamanan vs M.S.D. Chandrasekara Raja and Another

Vidharbha Bottles Pvt. Ltd. vs. Devilal Hardeolal Jaiswal and Others

MS.D. Chandrasekar Raja vs Jayabharath Textiles Pvt. Ltd. and Ors

  • The NCLT’s decision to order a buyout emphasized the importance of resolving the deadlock to protect R1 Co.’s operations, ensure statutory compliance, and prevent further harm to the company’s interests.

Conclusion

  • This case exemplifies the inherent difficulties in managing companies structured as quasi-partnerships with equal shareholding. The lack of a clear majority shareholder can lead to deadlock situations when disagreements arise.
  • The NCLT’s approach demonstrates a preference for resolving such shareholder disputes, particularly when they result in a complete management standstill, through buyouts. This solution allows the company to move forward under the control of a single shareholder group.
  • The judgment reinforces the principle that in cases of irreconcilable shareholder disputes, the NCLT will prioritize the company’s overall welfare and the interests of all stakeholders over the individual interests of the disputing shareholders.

 

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