2025 (5) TMI 1764 - HC - Companies Law

Validity of the suspension and termination letter - Seeking interim injunction and stay of operation of the notice - principles of natural justice - It is the appellants case that the benefit has been granted by the Committee of Respondent No. 1 in consonance with Articles 13 (3b) 13 (3c) of the AoA of Respondent No. 1 - HELD THAT - The Articles merely provide that the dependents of regular members must apply to become a full members should they wish to continue using the facilities. The words should he continue to use the Club in Article 13(3c) of the AoA merely informs the members that their dependents will have to apply to become full members in order to continue using the facilities. The same prima facie cannot be read to mean that dependents even after attaining the age of 21 can continue using the same facilities as they were enjoying as dependents despite not being full members. A plain reading of Articles 13(3a) 13 (3b) of the AoA prima facie reveals that the said Articles have been incorporated for a limited purpose to allow dependents to use the facilities until they attain the age of 21 on payment of certain monthly subscription. The provisions serve as information to members that their dependants on turning 21 and wishing to continue using the Club must apply for full membership. These Articles are in the nature of benefits / courtesies extended to the members. However the same do not confer an independent right on the dependent children to continue using the facilities despite not being full members of Respondent No. 1. It is evident that this privilege is inherently temporary ceasing once the dependent turns 21. It neither establishes a right to permanent access nor confers any expectation of preferential treatment or entitlement to continued use - The absence of any vested rights for dependents underscores the transient nature of their entitlement highlighting that it does not translate into an automatic or enduring claim to Club privileges. The right to use the facilities cannot be disputed to be available only to the members of Respondent No. 1 Club. The AoA are binding on the company and any deviation from the same can only be through formal amendments and not through the informal practices adopted by the Committees. This fact was also specifically noted in the Naidu Committee s Report and also by the learned NCLAT which found the said practice to be inconsistence with the AoA - As rightly observed by the learned Single Judge by adopting such a practice a new category of members has been created without there being any express provision in the AoA. Once it is prima facie evident that the appellants were granted the right to use the Club facility in contravention of the AoA no grievance can be raised against the Administrator suspending the same. In regard to principles of natural justice not followed on the appellants not given a hearing it cannot be ignored that the appellants were only given a right to use the facilities which prima facie was dehors the AoA. It is not denied by the appellants that they were not the members of Respondent No. 1 company. The act of Respondent No. 1 Company to suspend and thereafter terminate the privilege granted to the appellants finds its root in the Naidu Committee Inquiry Report which highlighted the procedural lapses. These lapses were also noted by the learned NCLT which led to the appointment of the Administrator for the purpose of restructuring and ensuring compliance with the provisions. The action therefore was corrective in nature. Conclusion - The view taken by the learned Single Judge is a plausible one and the discretion has not been exercised arbitrarily or perversely or by ignoring the settled principles of law regarding the grant or refusal of interlocutory injunctions. There are no reason to interfere with the impugned judgment - appeal dismissed.

Summary

1. ISSUES PRESENTED and CONSIDERED

- Whether the appellants, as Green Card Holders (overage dependents of members), have a legal right to continue using the facilities of Respondent No. 1 Club despite not being full members under the Articles of Association (AoA).

- Whether the issuance and continuation of Green Cards to overage dependents beyond the age of 21 is valid under the AoA and Companies Act, 2013.

- Whether the termination and suspension of the appellants' Green Card privileges by Respondent No. 1 pursuant to the Naidu Committee Report and directions of the NCLT/NCLAT was lawful.

- Whether the appellants were entitled to the principles of natural justice, including a hearing, before termination of their Green Card privileges.

- Whether the appellants acquired enforceable contractual rights to use the Club facilities based on historical practices, payment of fees/penalties, and resolutions passed by the Club's General Committee.

- Whether the learned Single Judge erred in dismissing the interlocutory application seeking interim injunction and stay of termination orders.

- Whether the balance of convenience and irreparable harm favored the appellants.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Legal Right of Green Card Holders to Use Club Facilities Beyond Age 21

Legal Framework and Precedents: The Respondent No. 1 Club is governed by its Memorandum of Association (MoA) and Articles of Association (AoA), which form a binding contract among members under the Companies Act, 2013. Articles 13(3a), 13(3b), and 13(3c) specifically regulate the use of Club facilities by dependents of members, limiting usage to those under 21 years or requiring application for full membership thereafter. The Indian Contract Act principles apply to implied contracts and practices but cannot override express provisions of the AoA.

Court's Interpretation and Reasoning: The Court held that the AoA provisions clearly restrict the use of Club facilities by dependents to the age of 21, after which they must apply for full membership to continue usage. The so-called Green Card category, allowing overage dependents to use facilities without full membership, is not recognized within the AoA and is therefore ultra vires. The Court emphasized that the privileges granted to dependents are temporary and do not confer any permanent or enforceable rights.

Key Evidence and Findings: The Naidu Committee Report declared the Green Card system void ab initio. The NCLT and NCLAT found the issuance of Green Cards to be unauthorized and contrary to the AoA. The Club's statutory auditors raised concerns about the collection of fees from Green Card Holders. The General Committee's resolutions and past practices did not override the AoA.

Application of Law to Facts: The appellants, having attained over 21 years, were not full members and their continued use of facilities via Green Cards contravened Articles 13(3b) and 13(3c). The informal practice of granting Green Cards was inconsistent with the Club's constitutional documents and thus invalid.

Treatment of Competing Arguments: The appellants argued that historical practices, payment of penalties, and resolutions granted them enforceable rights. The Court rejected this, holding that no implied contract or past practice can override express provisions of the AoA. The appellants' reliance on Article 13(3c) for unmarried daughters was considered but found insufficient to confer rights beyond the AoA's framework.

Conclusions: The appellants had no legal right to continue using the Club facilities as Green Card Holders beyond 21 years without full membership. The Green Card system was void ab initio and contrary to the AoA.

Issue 2: Lawfulness of Suspension and Termination of Green Card Privileges

Legal Framework and Precedents: The NCLT and NCLAT issued orders appointing an Administrator and restraining unauthorized membership practices under the Companies Act, 2013. The Specific Relief Act, 1963, Section 14(b) and Section 41(e), prohibits specific enforcement of contracts of determinable nature and injunctions preventing termination of such contracts.

Court's Interpretation and Reasoning: The Court held that the suspension and termination of Green Card privileges were corrective measures pursuant to the orders of the NCLT and NCLAT to restore lawful governance of the Club. The Green Card privileges were terminable and did not amount to enforceable contractual rights. The Court relied on established precedent that private club membership privileges are terminable and not subject to specific performance or injunctive relief.

Key Evidence and Findings: The Naidu Committee Report and the NCLT/NCLAT orders highlighted irregularities and violations in membership practices, including the unauthorized issuance of Green Cards. The Administrator's directives to suspend and terminate Green Card privileges were consistent with these findings.

Application of Law to Facts: The appellants' privileges were suspended and terminated lawfully under the authority of the Administrator appointed by the Tribunal. The appellants' failure to apply for full membership within the stipulated time further weakened their claim.

Treatment of Competing Arguments: The appellants contended that the termination was illegal as it did not follow the termination clauses of the AoA and violated natural justice. The Court rejected this, noting that the appellants were not members under the AoA and the privileges granted were outside the AoA's scope. The corrective action was necessary to comply with statutory orders and restore proper governance.

Conclusions: The suspension and termination of Green Card privileges were lawful, valid, and consistent with the directions of the NCLT and NCLAT, and the principles of the Companies Act and Specific Relief Act.

Issue 3: Applicability of Principles of Natural Justice

Legal Framework and Precedents: Principles of natural justice, including the right to be heard (audi alteram partem), apply when decisions affect rights. However, these principles do not apply where no legal right exists or where the decision is administrative or corrective in nature.

Court's Interpretation and Reasoning: The Court observed that the appellants were not members of the Club and only held privileges outside the AoA. The suspension and termination were administrative actions pursuant to statutory orders and corrective measures. Therefore, the principles of natural justice did not mandate a hearing before termination.

Key Evidence and Findings: The appellants admitted non-membership status. The Naidu Committee Report highlighted procedural lapses. The actions were taken by the Administrator appointed by statutory authority.

Application of Law to Facts: Since the appellants had no vested legal right, the absence of a hearing did not violate natural justice.

Treatment of Competing Arguments: The appellants relied on Supreme Court precedents to argue for natural justice. The Court distinguished those cases on the basis that the appellants' rights were not legal rights but privileges outside the AoA.

Conclusions: No breach of natural justice occurred in terminating the appellants' Green Card privileges.

Issue 4: Enforceability of Contractual Rights Based on Historical Practices and Payment of Penalties

Legal Framework and Precedents: The AoA is the constitution of the company and overrides any informal or implied contracts. The Indian Contract Act requires that implied contracts be consistent with express contracts. The Specific Relief Act disallows specific enforcement of terminable contracts.

Court's Interpretation and Reasoning: The Court held that past practices and resolutions cannot override the express provisions of the AoA. The Green Card scheme was an informal arrangement without legal foundation. Payment of penalties does not create enforceable rights if the underlying arrangement is ultra vires the AoA.

Key Evidence and Findings: The Green Card category is absent from the AoA. The Committee's resolutions and past practices were inconsistent with the AoA. The Naidu Committee and NCLAT found the Green Card system unauthorized.

Application of Law to Facts: The appellants' contractual claims failed as the Green Card rights were not legally sustainable under the Club's constitutional documents.

Treatment of Competing Arguments: The appellants argued that long-standing practice gave rise to enforceable rights. The Court rejected this, emphasizing the primacy of the AoA and the ultra vires nature of the Green Card system.

Conclusions: The appellants have no enforceable contractual rights arising from historical practices or payment of penalties.

Issue 5: Appropriateness of Interlocutory Relief and Balance of Convenience

Legal Framework and Precedents: The grant of interlocutory injunctions under Order XXXIX Rules 1 and 2 of the CPC requires a prima facie case, balance of convenience, and irreparable harm. The appellate court's interference with interlocutory orders is limited to cases of arbitrariness or perversity.

Court's Interpretation and Reasoning: The Court found no prima facie case in favor of the appellants as the Green Card system was void ab initio. The balance of convenience favored Respondent No. 1, especially as the appellants were offered refunds. The Court held that loss of recreational facility does not amount to irreparable harm.

Key Evidence and Findings: The appellants delayed applying for full membership beyond the permitted period. The Administrator directed refunds. The NCLT and NCLAT orders supported corrective measures.

Application of Law to Facts: The appellants failed to satisfy the requirements for interim relief. The Single Judge's refusal to grant injunction was a plausible exercise of discretion.

Treatment of Competing Arguments: The appellants contended irreparable harm and violation of rights. The Court rejected these, emphasizing statutory compliance and absence of vested rights.

Conclusions: The interlocutory relief was correctly refused; the appeal against the interlocutory order was without merit.

3. SIGNIFICANT HOLDINGS

"The Articles, in our opinion, merely provide that the dependents of regular members must apply to become full members should they wish to continue using the facilities. The words 'should he continue to use the Club' in Article 13(3c) of the AoA, merely informs the members that their dependents will have to apply to become full members in order to continue using the facilities. The same, prima facie, cannot be read to mean that dependents, even after attaining the age of 21, can continue using the same facilities as they were enjoying as dependents, despite not being full members."

"The system of granting benefits to the dependents of full members through an alternative method bypasses the restrictions imposed by the AoA, making it, prima facie, a violation of Article 13 (3b) of the AoA."

"Even if we assume, for the sake of argument, that a contract of grant of privilege of use of the club under the concept of 'Green card holder rights' exists between the Plaintiffs and the Club, this contract is terminable in nature and cannot be specifically enforced. According to Section 14 (d) of the Specific Relief Act contracts of a determinable nature cannot be specifically enforced. Additionally, Section 41(e) of the Specific Relief Act prohibits the granting of an injunction to prevent the termination of such contracts."

"The AoA forms the bedrock of the Club's constitution and serves as the definitive guide for membership criteria and rights. The General Committee, while empowered to make policy decisions, cannot contravene the explicit provisions of the AoA. The Plaintiffs' suggestion that the Committee acted within its discretion to grant them Green Card user rights ignores the fact that any such decision contradicts the AoA, rendering it legally untenable."

"The Plaintiffs' reliance on past practices as a basis for asserting contractual rights is also conceptually misplaced... any practices that contradict or deviate from the express terms of the AoA are ultra vires- beyond the powers granted under the Club's constitution."

"The impugned action is taken pursuant to the orders passed by the learned Tribunals in order to restore corporate governance. In the absence of any prima facie case in favour of the appellants, no fault can be found at this stage."

"The loss of recreational facilities does not amount to irreparable harm, and the balance of convenience does not lie in favour of the appellants."

"The appeals against the exercise of discretion by the Single Judge in refusing interlocutory relief cannot be interfered with unless the discretion was exercised arbitrarily or perversely. The discretion here was exercised judicially and reasonably."