Gati Limited vs Neera and Children Trust & Ors.

[Per : Justice Sharad Kumar Sharma, Member (Judicial)]

The instant Company Appeal has been preferred by the Appellant, who is aggrieved by the order dated 06.02.2020, as it was passed in IA No. 887/2019 in the proceedings of CP No. 535/241/HDB/2019, whereby, by virtue of the application filed by the Respondent, the application preferred under Section 244(1) read with Rule 83A of the Companies Act, 2013, was allowed. Consequently, a waiver was granted to override the legal and procedural restrictions imposed therein, thereby enabling the Petitioners, Respondents herein to initiate proceedings under Sections 241 & 242 of the Companies Act.

Owing to the provisions of Section 244(1) of the Companies Act, 2013, in case of a company having share capital, members constituting less than one-tenth of the total number of members or holding less than one-tenth of the total issued share capital of a company are barred from initiating proceedings under Section 241 of the Companies Act, 2013. An exception is, however, carved out by the proviso to sub-section (1) of Section 244, which contemplates that the Tribunal, on an application, may grant a waiver of the conditions required under sub-clauses (a) and (b) of sub-section (1) of Section 244 of the Companies Act, 2013.

The Appellant company, in support of its challenge to the impugned order, has submitted that the impugned order reflects a non-application of mind by the Learned NCLT, as it did not consider that Respondent Nos. 2 & 3, who filed the Company Petition, did so in their capacity as beneficiaries of a trust. He contends that a beneficiary of a trust under law, does not have a tangible, legally enforceable right to initiate proceedings against a third party in respect of trust property. Hence, the Appellant submits that Respondent Nos. 2 & 3 could not seek a waiver merely in their capacity as beneficiaries of the trust. Relying on the NCLAT judgment in Cyrus Investments Pvt. Ltd. & Anr. v. Tata Sons Ltd. & Ors., the Appellant further goes on to argue that waiver is to be exercised sparingly and only after prescribed statutory parameters are satisfied. According to the Appellant, the following parameters must be tested independently for each member before granting a waiver under Section 244(1) of the Companies Act, 2013:

At this juncture, we note that the second question framed by the Appellant whether the applicant has made out a case under Section 241 of the Companies Act, 2013, need not be examined at the stage of considering an application under Section 244 of the Companies Act, 2013; the merits under Section 241 of the Companies Act, 2013, are not to be gone into at this stage. Similarly, the third contention that a concluded proceeding by other members bars the present petition does not automatically prevent Respondent Nos. 2 & 3 from initiating proceedings under Sections 241 & 242 of the Companies Act, 2013; res judicata will not apply where facts and circumstances differ. The findings required to establish “exceptional circumstances” for the grant of a waiver are not to be construed with rigid precision, nor should the Tribunal decide merits while considering the waiver. The two processes are independent, save that the Section 244 application may precede grant of waiver where mandatory conditions under Section 244(1)(a) and (b) are not fulfilled.

The Appellant contends that Respondent Nos. 2 & 3 approached the NCLT as beneficiaries of a trust constituted by certain equity holdings of the Appellant company. He argues that because a trust is not a separate legal entity, the trustees not the beneficiaries are the proper legal entities to represent the trust in litigation. Therefore, an application filed by beneficiaries under Section 244 would be unsustainable.

Learned Counsel for the Appellant further argues that a beneficiary lacks an independent right to represent the trust unless the trust deed so permits. She relies on Section 56 of the Indian Trusts Act, 1882, which permits a beneficiary to file a suit for recovery of trust property only where the beneficiary’s interest is adversely affected to contend that apart from this limited exception, the beneficiaries of a trust cannot maintain proceedings under Sections 241 & 242 of the Companies Act, 2013.

We answer this point by noting that Section 56 enables beneficiaries to sue for recovery of trust property in limited circumstances. However, proceedings under Section 244 of the Companies Act are not standalone recovery suits; they are a preliminary mechanism enabling a person to seek relief under Sections 241 & 242. It is common ground that Mr. Dhruv Agarwal (sole beneficiary of Dhruv Agarwal Benefit Trust) and Mr. Manish Agarwal (sole beneficiary of Manish Agarwal Benefit Trust) held 0.04% and 0.16% shareholding respectively in their individual capacity as of September 2019. Both are parties to the Company Petition. The mere fact that they are beneficiaries does not render the Company Petition filed by them automatically non-maintainable. Whether their shareholding meets the statutory threshold is a prescribed parameter to be considered; it does not decide the merits of the claim, which must be considered only after initiation of proceedings under Sections 241 & 242 of the Companies Act, 2013.

Accordingly, the Appellant’s submission that beneficiaries cannot seek waiver under Section 244 is not an issue that requires full adjudication at the Section 244 stage. All allegations of oppression and mismanagement are to be examined on the merits when the Company Petition proceeds. The Appellant’s additional contention that no exceptional circumstances exist (for example, because the dispute arises from family matters such as alleged illicit relationships) also goes to the merits and is not determinative at the waiver stage. Allegations that Mr. Mahendra Agarwal misused trust assets for personal benefit, which prima facie are of a private or family nature and ought to be gone into by the Civil Court, do not automatically exclude relief under Sections 241 & 242 of the Companies Act, 2013.

In response, Learned Counsel for the Respondent submitted that the Respondents filed a composite petition under Sections 241 & 242 read with Sections 59, 113, 213 & 244, and that their aggregate shareholding stood at 13.44% prior to reduction of the same due to oppression and mismanagement and that the undisputed shareholding of the petitioners in the Appellant Company at the time of filing was 5.59%. Accordingly, he contends that the Section 244 application for waiver to initiate Sections 241 & 242 of the Companies Act, 2013, proceedings is not impermissible or procedurally flawed.

The Respondent relied on Margaret T. Desor & Ors. v. Worldwide Agencies (P.) Ltd. & Ors. [(1989) 66 CompCas 5 (Delhi)], wherein it was held that, for the purposes of initiating proceedings under the corresponding provisions of the Companies Act, 1956, what is required at the threshold is membership as per the register of members; however, to establish exceptional circumstances the applicant must show an undisputable and unchallengeable title or an interest in the company. The Respondent further submitted that beneficiaries with such an unquestionable interest may seek rectification of the register of members under Section 59 read with Section 430 of the Companies Act, 2013, which vests jurisdiction in the Tribunal.

It follows that when the Tribunal considers an application under Section 244 of the Companies Act, 2013, it need not decide the merits under Section 241; rather, it must be prima facie satisfied from the records that exceptional circumstances exist to justify a waiver of the statutory thresholds under Section 244(1)(a) and (b). A detailed merits inquiry is not appropriate at this stage. The proviso to Section 244 grants the Tribunal discretionary powers to waive the statutory restrictions, with the objective of ensuring that members who do not satisfy the prescribed thresholds are not unduly deprived of remedies for oppression and mismanagement, provided exceptional circumstances exist.

We are of the view that the restrictions in Section 244(1)(a) and (b) are not absolute; they were enacted to prevent frivolous litigation and also to prevent multiplying of litigation in the hands of stray shareholders. The proviso renders the conditions flexible and vests discretion in the Tribunal to balance equitable considerations protecting bona fide members’ rights while avoiding multiplicity of litigation. Grant of waiver remains subject to satisfying the basic legal requirements.

Our consideration in this appeal is therefore limited to the exceptions relied upon for the grant of waiver by the impugned order. We do not address the merits of any oppression or mismanagement allegations, which are to be decided when the principal petition proceeds after grant of waiver. It is settled law that the Tribunal should refrain from delving into merits when deciding a Section 244 application.

In the application, before Learned NCLT the petitioners (Respondents herein) had asserted that they hold shares in the Appellant company (M/s. Gati Limited) and had pleaded that Neera and Children Trust (Respondent No.1) holds 5.16% (55,99,995 equity shares), Dhruv Agarwal Benefit Trust (of which Mr. Dhruv Agarwal Respondent No.2 is sole beneficiary) held 4.14% (45,00,000 equity shares). Manish Agarwal Benefit Trust of which Mr. Manish Agarwal is the sole beneficiary held 4.14% (45,00,000 equity shares) and because illegal pledging of shares of latter 2 Trusts and subsequent invocation of pledge, shareholding of these 2 Trusts, namely Dhruv Agarwal Benefit Trust and Manish Agarwal Benefit Trust has come down to 43,700 & 2,43,048 respectively, that prior to oppression and mismanagement, these 3 Trusts together held 13.44% of total shares of the company which has come down to 5.34% & both Dhruv Agarwal and Manish Agarwal hold 13,100 shares and 2,43,048 shares in their individual capacity and that their aggregate shareholding warrants consideration of grant of waiver under the proviso to Section 244(1)(b) of the Companies Act, 2013. The Respondents contended that their total shareholding had fallen to 5.34%, and that they were therefore entitled to seek permission to file a petition under Section 241 read with Section 242 of the Companies Act, 2013.

The Respondents asserted that although they held more than 10% at an earlier point, they filed the waiver application as a matter of abundant caution. The application was contested by Mr. Mahendra Kumar Agarwal (husband of Applicant No. 1 trustee and father of Applicants No. 2 & 3), who challenged maintainability and filed counter-affidavits. After exchange of pleadings and consideration of the rival contentions including objections filed on 21.12.2019 and 09.01.2020, and adoption memos filed on 09.01.2020 the Tribunal applied the ratio in Cyrus Investments Pvt. Ltd. v. Tata Sons Ltd. & Ors. (2017 SCC Online NCLAT 261) and concluded that the proviso to Section 244(1)(b) permits the Tribunal to grant a waiver of any of the requirements in Section 244(1)(a) & (b) to enable a person to proceed under Section 241 of the Companies Act, 2013.

The Appellant argued that a Section 244 application filed subsequent to a petition under Sections 241 & 242 undermines its sanctity and that the waiver application should have been filed along with the Company Petition, not afterwards. The Respondents replied that there is no statutory bar to a subsequent Section 244 application, and that mismanagement or oppression may become apparent only later; hence a subsequent waiver application can be valid.

The NCLT, after considering Cyrus Investments and applying its tests, considered the Section 244 application and the safeguards to ensure that a waiver is not granted lightly. The wider parameters as prescribed therein; in the aforesaid Judgment is enumerated hereunder: -

The Learned Tribunal observed that while precautions must be taken when considering a Section 244 application, the inquiry should be confined to determining the genuineness of the waiver application and should not stray into deciding the merits of the underlying allegations. The Tribunal recorded its findings accordingly in paragraph 4 of the impugned order.

On the facts of the case, Applicant Nos. 2 & 3 to the Application are sons of Respondent No. 2 and beneficiaries of Applicant No. 1 Trust. Their mother is the trustee of Applicant No.1 Trust, and intra-family disputes over trust management by Respondent No.2 (Father) and over management of the company were pleaded. The Tribunal found that the basic spirit for granting a waiver under Section 244 was satisfied.

For the limited purpose of testing propriety of the impugned order, the Tribunal had to ascertain whether exceptional circumstances existed to grant the waiver. The Tribunal found that although the applicants’ shareholdings fell short of statutory thresholds, the admitted configuration of shares and the potential for prejudice justified prima facie consideration of waiver; and held that deep scrutiny of maintainability was unnecessary at this stage.

Finally, because the proviso to Section 244(1) uses the word “may”, the discretion to grant waiver is prima facie in nature. The Tribunal is required to record only prima facie satisfaction rather than decide the controversy on merits. On the facts before it, the Tribunal held that exceptional circumstances prevailed to grant the waiver, reserving all issues of mismanagement and oppression for adjudication in the principal proceedings under Sections 241 & 242.

The logic which has been assigned by the Tribunal while passing of the Impugned Order does not seem to be contrary of the records, so far as it relates to the holding of shares by the Applicants to the Application under Section 244 of the Companies Act, 2013. The arguments extended that the order impugned is without rational and without application of mind is contrary to the records, which was otherwise established. Even otherwise, we are of the view that the pendency of the civil suits or its ultimate decision which will be taken thereof, do not create any restriction as such for granting of a waiver under Section 244 of the Companies Act, for the purposes of initiation of the proceedings under Sections 241 & 242 of the Companies Act, 2013. Hence, the orders that were passed on Suit No.56/2019, as well as Suit Nos.736 & 737/2019, though they were shown to be pending in the relevant point of time either the decision taken there on it or its pendency is absolutely an independent civil issue which is to be considered by the Competent Civil Court and as such the closure of the Application by disallowing the application under Section 244 would be in disruption to the principal interest of rendering of substantiate justice for enabling a party for letting their grievances being adjudicating on its merits. Since, there was a prima facie case made out by the Applicants/Respondents herein, owing to the shareholding, which they already possessed, the grant of a waiver would fall to be within an exceptional circumstance for the purposes of initiation of Section 241 & 242 of the Companies Act, 2013, so that the lis relating to the alleged act of oppression and mismanagement may be decided on its merit and thus, the exception granted cannot be said to be suffering from any derogation of law, which would be creating a restriction in considering the application for the grant of a waiver. Hence, the logic which has been assigned by the Learned Adjudicating Authority in the observations that has been recorded in para 12,13 & 14 of the Impugned Order and allowing of the application under Section 244(1)(a) of the Companies Act, 2013, is not bad in the eyes of law, which could call for any interference by this Appellate Tribunal. Thus, the Company Appeal lacks merit, and the same is accordingly dismissed.