Notable Company Law Judgments: February 2023

I started writing this series in February this year. Therefore, the first month covered was December 2022. With a legroom of two months, it was easy to roll out two articles in quick succession. However, as I stand in March, it's hardly been 12 days, and I am exhausting my last option- February 2023. Hence the next article in this series may take some time. Or maybe, I can look at pre-December judgments.

One additional benefit one gets from reading HC company law cases is the exposure to aspects of Civil Procedure and adjacent areas. Therefore, I am summarizing five cases which I found noteworthy. Unfortunately, I had to skip two more good ones for some reason.

The highlight of February is a judgment by the Orrisa High Court, having roots in the pre-independence era. Here are the notable company cases from February 2023.

1.????“Raaj gaye, rajwade gaye ab to razai ka astar bhi fatne laga hai."

Forum: High Court of Orrisa

Bench: Cuttack

Citation: RSA no. 206 of 2022.

Applicable law: Sec. 100 CPC; Sec. 59 r/w Sec. 430 of Companies Act, 2013; Sec. 111 of Companies Act, 2013

The movie "Bhool Bhulaiya-1" had a dialogue that resonates with this case – "raaj gaye, rajwade gaye ab to razai ka astar bhi fatne laga hai." (by the way, BB1 was much better than BB2, thanks to Priyadarshan).

Returning to the case, Plaintiff assailed the decision by a Bonai Civil Judge. The facts briefly are: Bonai was a princely state before 1947. The Princely State held the title over all property in the State. A company was incorporated under the Companies Act 1913 with royal imprimatur (I couldn't resist using this heavy legal word). Nine hundred fifty shares were issued, of which the Raja held five hundred (54% stake). Post Independence, new Articles were adopted, and three individuals were appointed founder/ promoter Directors, including Kumar Harischandra. Owing to his health issues, the Company was being managed by a Managing Agent. A few mining and leasing rights were granted in favour of third parties (Defendants).

It is alleged that the Managing Agent connived with one other person, inducted him as a Director, and added his name to all official records. As a result, the 54% stake was transferred fraudulently. All this, per the Petitioners, violates the Companies Act 1956 (along with the Mining law and Rules). There are multiple other allegations too.

Naturally, the case landed at the Court of first instance, which dismissed it, among other reasons, for lack of jurisdiction (The tribunal being the correct forum). Hence this Appeal.

The High Court meticulously examined the facts and held – (a) Some aspects of this case fall under Sec. 242(2) [oppression and mismanagement] granting NCLT the powers to pass appropriate Orders. Such powers are much broader than a Civil Court. The NCLT is a specialized court. The bar under Sec. 430 is absolute in nature. As such, the Appeals assailing the subordinate court orders is/are dismissed.

Doesn't this seem contrary to a recent Delhi High Court judgment which held that a Civil Court might better resolve certain complex facts than the NCLT? So let's watch if it lands (and if it lands) at the NCLT. Phew!

2.????Disqualification comes as a blessing in disguise for Directors

Forum: Bombay High Court

Citation: Criminal Applications Nos. 651 to 658 of 2022

Coram: R.G. Avachat J.

Applicable law: 482 of Cr.P.C.; 138 of Negotiable Instruments Act 1881, Sec. 164 of Companies Act 2013

A Disqualified Director is an accused in a Sec. 138 NI Act case. Cheques issued against certain loans advanced to a Company bounced. A complaint was filed post statutory notice issuance, and the Metropolitan Magistrate issued a process against the Appellant. The main argument is that there is no vicarious liability on behalf of the Company as the Director was already disqualified before the Cheque issuance.

After checking the documentary records, the High Court held that the Director's office was vacated in 2017, before cheque issuance. Therefore, no vicarious liability under Sec. 141, and the applications are allowed.

3.????Threshold of enquiry for Club-like bodies slightly different

Forum: Madras High Court

Citation: CMA No.2518 of 2022

Applicable law: Sec. 105(1) of Companies Act 2013

Plaintiff, a permanent member of a Club – a Sec. 8 Company - ?moved the Madras High Court challenging an Order of the District Judge (Nilgiris, Udhagamandalam). He stood for election to the Club's Managing Committee and raised questions about the club's governance. He also pointed out other issues, including discrepancies in the proxy register. As a result, the Management Committee suspended his registration, which he alleges is due to a malicious conspiracy.

The Petitioner challenged the suspension before the Munsiff Court, and the District Court also denied certain interim reliefs.

Citing a judgment by the Privy Council and other Courts, the Madras High Court discussed:

?"Clubs are not to be held at the same standard as that of Courts/tribunals and have a wide latitude, that in disciplinary enquiries, strict proof of legal evidence, finding etc., are not relevant and that clubs are entitled under private law to take steps to maintain internal discipline and protect their fair image and status." ?

After examining certain records, the Court dismissed the case and also the Petitioner's request to keep the Order in abeyance till further appeal (would he have gone to the Supreme Court or maybe an LPA)

4.????Forum confusion for aggrieved investors

Forum: Madras High Court

Citation: WP No. 3114 of 2010

Aggrieved investors in a financial scheme approached the Madras High Court. They sought a Mandamus asking the Registrar of Companies, State-Secretary, Tamil Nadu, District Collector and others to take suitable actions against a Company which floated money schemes. However, considering that authorities had already initiated Criminal action against the management and an investigation against the Company, the High Court held that the matter requires an analysis of facts. As such, the Investors must approach the Police, who should take action within six weeks of the Order, the Court ordered while dismissing the petition.

God save investors from money schemes. Not a single month goes when gullible investors have not faced issues in money schemes.

5.????The wheels of justice move slowly

Forum: Madras High Court

Crl.O.P.Nos.3203, 3123 of 2023 and 30700 of 2022

Coram: Justice G. Chandrasekharan

Law: Tamil Nadu Protection of Interests of Depositors Act 1997, Companies Act 2013

The case relates to the intricacies of examining witnesses and documentary records in a criminal proceeding but equally having elements of Company law. The Madras High Court noted that the Judge, Special Court under TNPID Act, did not provide certain opportunities to the parties before posting the case for arguments. As such, it passed Orders to allow cross-examination of witnesses and certain other reliefs.

That's it for this week.

Click the below links for previous editions

December 2022

January 2023