| Reference Date | Version | December 09, 2024 | 1.0 |
|---|---|
| Keywords | Buy-out, Deadlock, NCLT, Oppression, Mismanagement |
| Legislation(s)/Policies | Companies Act, 2013 |
| Jurisdiction | India |
Guidance from experienced corporate and commercial lawyers from the start of a business relationship can prove beneficial in more ways than one.
Effective documentation is helpful because it sets the ground rules of the relationship in clear terms which encourages parties to work within the defined structure – whether working together in the joint venture or disengaging in case of a deadlock.
Introduction
A business partnership is as much about people as it is about the business.
A thorough diligence exercise to evaluate various aspects including the business goals of the parties, working style and work culture compatibility is essential for a joint venture to succeed.
Nevertheless, just like it is important to agree on business plans and fundraising plans for the joint venture, it is important to agree on a process for resolution of a deadlock situation.
Exit from the joint venture can also be a solution to a deadlock, depending on the situation.
Parties to a joint venture would find it fruitful to spend adequate time discussing various issues in respect of the joint venture including deadlock resolution.
It is not the role of the courts to adjudicate on a deadlock.
The decision of the National Company Law Tribunal, Mumbai (‘NCLT Mumbai’) in Mr. Hormouz Phiroze Aderianwalla & Anr. v. Del. Seatek India Pvt. Ltd. and Ors. (‘Hormouz Case’) is a case in point.
This article discusses the Hormouz Case with a view to explain the court’s perspective on the resolution of shareholders’ deadlock.
Facts of the Case
The Petitioners i.e., Mr. Hormouz Phiroze Aderianwalla and Zinnia Hormouz Aderianwalla filed a company petition no. 199/2022 under Sections 241 and 242 of the Companies Act, 2013 (‘Act’).
Respondent Nos. 2 and 3 also filed a cross-petition alleging that the affairs of the Company are being mismanaged by the Petitioners.
According to Section 241(1) of the Act, the member(s) of a company meeting the minimum shareholding criteria may make an application to the National Company Law Tribunal.
- The affairs of the company have been or are being conducted in a manner that is:
- prejudicial to the public interest or
- prejudicial or oppressive to such member or any other member or members or
- prejudicial to the interests of the company;
- material change has taken place in the management or control of the company.
Said Section 242(1) of the Act provides that if, on an application made under Section 241, the National Company Law Tribunal is of the opinion that:
- the company’s affairs have been or are being conducted in a manner prejudicial or oppressive.
- to wind up the company would unfairly prejudice such member or members.
the National Company Law Tribunal may make such order as it thinks fit.
As per Section 242(2) of the Act, any such order may provide for:
- the regulation of the conduct of affairs of the company in future;
- the purchase of shares or interests of any members of the company;
- the termination, setting aside or modification of agreements.
In the case at hand, the Petitioners and the Respondents Nos. 2 and 3 held an equal stake, i.e., 50:50, in the Company.
The Petitioners among other things alleged that:
- Respondents Nos. 2 and 3 have not participated in the affairs of the Company since the year 2016.
- Respondents created repeated roadblocks in approval of unsecured loans.
- Respondent No. 2 unilaterally took operational and financial matters under his sole control.
- Board meetings were objected to and delayed.
- Fraudulent and illegal minutes of meetings were circulated.
The Respondents among other things alleged that:
- Appointment of a fifth director was illegal.
- Petitioner No. 1 siphoned company funds.
- Investments were written off without consultation.
- Petitioners suggested that both parties should part ways.
Findings and Directions of the NCLT Mumbai
- Both groups held equal 50:50 shareholding.
- Both parties agreed to nominate valuers for valuation of shares.
- Respondents failed to place independent valuation reports on record.
- The only practical solution was a buy-out/sell-out proposition.
- There was an absolute deadlock impacting statutory compliances.
The NCLT Mumbai stated that in cases of equal shareholding and director representation among shareholders, deadlocks should be resolved by one group purchasing the shares of the other.
On the issue of valuation, the Respondents contested the valuation report but failed to provide an independent report.
Accordingly, the Petitioners were directed to purchase the shareholding of Respondent Nos. 2 and 3 within six months.
The direction was passed considering the deadlock and the inability of the parties to continue business together.
Viewpoint
The NCLT Mumbai adopted a pragmatic approach to address the dispute among the parties.
The dispute was between two member groups with 50:50 shareholding.
Even if oppression by either side had been established, the fundamental issue remained that the parties could not continue business together.
Therefore, the buyout of one party by the other would serve the best interest of the Company.
Deadlock among shareholders may also arise on account of oppression and mismanagement.
Ashwini Panwar (Mr) and Rachit Singh (Mr)
Associate at Alaya Legal
