Deadlocks In Equal Shareholding Should Be Resolved By Buyout Of Shares: NCLT Mumbai

The National Company Law Appellate Tribunal (NCLT), Mumbai bench, comprising Mr. Kishore Vemulapalli Hon'ble Member (Judicial Member) and Ms. Anu Jagmohan Singh (Technical Member) has held that in cases of equal shareholding and director representation among shareholders, where a deadlock arises in the day-to-day management of the company, the deadlock should be resolved by one group purchasing the shares of the other.

Background:

The Petitioners filed the Company Petition, challenging illegal acts of oppression and mismanagement carried out by Respondent Nos. 2 and 3 (“R2” and “R3”) in relation to the affairs of Respondent No. 1, i.e., Del. Seatek India Pvt. Ltd. (“R1”). R1 filed a cross-petition, similarly alleging oppression and mismanagement. The issues of both petitions revolve around allegations of breaches of fiduciary duties by R2 and R3, illegal meetings, and wrongful handling of company assets and shares.

The Petitioners sought the following reliefs in Company Petition No. 199/2022:

• A declaration of mismanagement and oppression in the affairs of R1.
• Imposition of fines on R2 and R3 for breaches of fiduciary duties under Sections 166 and 172 of the Companies Act, 2013.
• Removal and disqualification of R2 and R3 from their positions as directors of R1.
• A permanent injunction restraining R2 and R3 from selling, transferring, or encumbering the assets of R1.
• A declaration that the board meeting dated 3rd January 2022 was non-est, illegal, and void ab initio.
• A direction to R2 and R3 to hand over all assets, intellectual property, and data related to R1.
• Reimbursement of any remuneration or benefits drawn by R2 and R3 since FY 2016-17.
• A direction for R2 and R3 to sell their shareholding in R1 to the Petitioners at Fair Market Value, to be determined by an independent valuer appointed by the Tribunal.

Analysis and Findings of the NCLT:

The NCLT, after considering the following acts, concluded that the Petitioners had engaged in acts of oppression and mismanagement:

(i) Appointing Mr. Chaddha as a Director of R1;

(ii) Siphoning off funds and business of R1 to entities ultimately controlled by the Petitioners;

(iii) Attempting, through the employees and auditors of R1, to prevent R2 and R3 from accessing R1's accounts and records; and

(iv) Making bogus attempts to buy out R2 and R3's stake in R1.

Regarding the C.P. No. 50/2023, the Tribunal noted that the Petitioner, i.e., the Aderianwalla Group, held 50% of the shares in the Company. The rest 50% shares were held by M/s Delzad Aspy Karani and others. Both parties had agreed to nominate independent valuers for the valuation of shares of the company. However, even after several opportunities were provided for settlement, R2 and R3 didn't file their valuation report.

R2 had filed Application No. 154 of 2024, challenging the valuation report by the Petitioner, where it was alleged that the valuation was based on financials as of 31.12.2022, which was incorrect, as it should reflect the financials on the date of the report. The application was dismissed by the Tribunal on 16.05.2024, with the observation that the Tribunal does not have the expertise to decide on the correctness of such technical documents.

The Tribunal observed that as there was a deadlock in the functioning of the company which was adversely impacting even the statutory compliances, it had no option but to rely on the valuation report provided by the Petitioner.

The Tribunal held that:

“In cases of equal shareholding and director representation among shareholders, where a deadlock arises in the day-to-day management of the company, the deadlock should be resolved by one group purchasing the shares of the other.”

It relied upon the judgments cited by the Applicant, namely, M.S.D.C. Radharamanan vs. M.S.D. Chandrasekara Raja [2008 (6) SCC 750], Vidharbha Bottles Pvt. Ltd. vs. Devilal Hardeolal Jaiswal [2016 (3) MHLJ 849], and M.S.D. Chandrasekar Raja vs. Jayabharath Textiles Pvt. Ltd., 2017 [SCC Online NCLT 7338].

The Tribunal directed the Aderianwalla Group to buy out the shareholding of R2 and R3 in R1 within 6 months, keeping in view the deadlock in the company and the fact that the warring factions could no longer conduct business together.

Case Title: Mr. Hormouz Phiroze Aderianwalla & Anr. vs. Del. Seatek India Pvt. Ltd. and Ors.

Case Number: Company Petition/199/MB/2022 & Company Petition/50/MB/2023

Counsel for the Petitioner: Adv. Nausher Kohli a/w Adv. Rustam Mulla, Adv. Sohan Kinkhabwala i/b Desai Desai Carrimjee & Mulla.

Counsel for the Respondent: Adv. Prachi Wazalwar a/w Adv. Armin Wandrewala and Adv. Arusha Bapat.

Date of Order: 05.09.2024.

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