TMI Blog2019 (8) TMI 1631X X X X Extracts X X X X X X X X Extracts X X X X ..... ble to him, a derivative action for the benefit of Umang, by way of civil suit would not be maintainable. It is also worth mentioning that while against the order of the erstwhile CLB, appeals were provided to the High Court under Section 10 of the Companies Act, 1956, under the Companies Act, 2013, appeals against the order of NCLT lie to the NCLAT and against the order of NCLAT directly to the Supreme Court, eliminating the subject jurisdiction of the High Court in matters relating to companies - the Parliament having constituted the NCLT and NCLAT and vested them with jurisdiction over all matters arising from Section 241, and having also vide Section 430 expressly barred the jurisdiction of civil courts in respect of any matter that the NCLT or NCLAT are empowered to determine, derivative actions in common law, to the extent the statutory regime for oppression and mismanagement is equipped to deal with, are no longer maintainable in India, and the proper remedy for suits such as the present one would be under Section 241 before the NCLT. Merit is also found in the contention of the counsel for Uppal that the plaintiff holding majority shares of Umang and also having its n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted 27th March, 2009 aforesaid with respect to properties at Paprawat and Daulatpur were impossible from the date of Agreement and thus void; (d) the Agreements dated 27th March, 2009 aforesaid with respect to properties at Paprawat and Daulatpur are vague and uncertain and thus void; (e) the defendants no.2 to 4 Mangalmay Holdings Pvt. Ltd. (Mangalmay), Manoj Talwar (Manoj) and Jitender Singh (Jitender) have acted contrary to the interest of Umang; (f) Umang has unreasonably failed to take steps to recover its monies from Uppal and has thus acted to its own detriment; and, (B) consequential direction to Uppal to pay the amount of ₹ 288,05,00,000/- to Umang together with interest at 18% per annum. 2. The suit, unaccompanied with any application for urgent relief, came up before the Joint Registrar on 20th August, 2018, when summons thereof were ordered to be issued. 3. Pleadings in the suit have since been completed. 4. Uppal has filed IA No.17779/2018 under Order VII Rule 11 (a) and (d) of the CPC for rejection of the plaint, on the ground of (i) the plaint not disclosing any cause of action; (b) the suit claim being barred by time; and, (c) the plaintiff being ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by Uppal, but no steps were ever taken by Delhi Development Authority (DDA) to give effect to the said policy; (xi) as on the 27th March, 2009, i.e. the date of the Agreements, there was no land policy under MPD 2021 and Uppal misguided Umang; (xii) even after introduction of the Chapter on land policy in MPD 2021, other formalities and steps were required to give effect to the said policy; (xiii) Umang has not benefited in any manner whatsoever after being induced by fraud and misrepresentation to advance ₹ 288,05,00,000/- to Uppal and Uppal has not taken any step whatsoever to give effect to its obligations under the Agreements dated 27th March, 2009; (xiv) Umang is required to recover ₹ 288,05,00,000/- paid to Uppal but has failed to take any action; (xv) that several litigations have been initiated against Umang by numerous homebuyers from whom Umang has received advances for sale of FSI to be delivered by Uppal to Umang under the Agreements aforesaid; (xvi) Uppal, for 9 years preceding the suit, has been the beneficiary of the sum of ₹ 288,05,00,000/-; (xvii) the plaintiff sent an email dated 11th June, 2018 to Uppal, suggesting that the Board of Umang shou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (a) that the plaintiff became a shareholder of Umang on 1st April, 2009 i.e. after the Agreements dated 27th March, 2009; (b) that as per the Shareholders Agreement dated 19th February, 2010 between plaintiff, Uppal and Umang, Umang is managed by its Board of Directors comprising of six Directors, with the plaintiff as well as Uppal having right to appoint three Directors each; and, (c) that owing to equal representation of plaintiff and Uppal on the Board of Umang, the plaintiff, in spite of being majority shareholder, was/is not in a position to make Umang take action against the Board of Directors. 12. On enquiry, whether not there is a provision in the Shareholders Agreement for the eventuality of a deadlock between nominees of the plaintiff and Uppal on the Board of Directors of Umang, it is stated that there is no such provision. On further enquiry, whether the Shareholders Agreement to the aforesaid extent had been incorporated in the Articles of Association of Umang, the counsel for the plaintiff replies in the affirmative. 13. The counsel for Uppal, in support of his arguments, has referred to: (I) Starlight Real Estate (ASCOT) Mauritius Limited Vs. Jagrati Trade ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 7 of IBC read with Rule 4 of Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 for initiation of corporate insolvency resolution process in respect of Umang and appointed an IRP and declared moratorium in terms of Section 14 of IBC prohibiting institution of suits or continuation of pending suits or proceedings against Umang and restraining Umang from transferring, encumbering, alienating or disposing off any of its assets or legal rights or beneficial interest. 17. Section 17 of the IBC inter alia provides for the management of the affairs of the corporate debtor to vest with the IRP from the date of his appointment, and for the powers of the Board of Directors to stand superseded and to be exercised instead by the IRP. Under Section 18 of the IBC, the IRP has the duty inter alia to take control and custody of all assets over which the corporate debtor has ownership rights, as recorded in the balance sheet of the corporate debtor, to constitute a Committee of Creditors and to monitor the assets of corporate debtor and manage its operation until a Resolution Professional (RP) is appointed by the Committee of Creditors. Section 19 of the IBC man ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Umang are taken over by an IRP, the Directors of Umang can no longer be blamed for not taking the requisite steps to seek redress for the wrong if any done to Umang, and a derivative action by plaintiff, as a majority shareholder, for the benefit of Umang would not be maintainable. The plaintiff now has to approach the IRP for taking action against Uppal and it is the IRP who has to, if finds any merit in the grievance of the plaintiff, take appropriate remedy on behalf of Umang. Moreover, if the plaintiff remains dissatisfied with the decision of IRP, has remedy before the NCLT. 20. I find the question to be not res integra, as far as foreign jurisdictions are concerned. Reference in this regard may be made to: (i) Fargro Vs. Godfroy [1986] 3All ER279, which was a case of derivative action on behalf of a deadlock company i.e. Articles of Association whereof did not provide a casting vote for the nominee director of either of two shareholders in the company. It was held that once such a company goes into liquidation, the situation is completely changed because there is neither a board nor any shareholders‟ meeting which in any sense is in control of the activitie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd or discontinue an action on the company‟s behalf. 21. I must however note that the aforesaid cases involved a company which was at the stage of liquidation, as distinct from Umang in the present case, against which only the insolvency process has begun. However considering the duties and role of the IRP under the IBC as discussed hereinabove, the principle in each of the aforesaid cases i.e. of the management of the company, on whose fraud/mismanagement a derivative action becomes maintainable, being no longer in power/control, and consequently a derivative action being no longer maintainable, also applies to the present case. 22. I also find a Single Judge of the High Court of Madras in Jai Rajkumar Vs. Stanbic Bank Ghana Ltd. 2018 SCC OnLine Mad 10472 to have held a suit by way of a derivative action to be not maintainable when the company, for whose benefit derivative action was initiated, was under insolvency. It was held that it is for the RP to act on behalf of the corporate debtor and to initiate suitable proceedings if any deemed necessary for the benefit of the corporate debtor and its creditors. 23. I respectfully concur. 24. Though this suit is found ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rnational and national. Internationally, the trend appears to be of codification of the remedy of derivative action, the origin of which is in common law. Countries including Canada, Australia, New Zealand, Ghana, Hong Kong, South Africa, U.K., U.S.A., Malaysia and others, have included the remedy of derivative action in their respective legislations governing company law. South Africa and Australia, in their Companies Act, 2008 and Corporations Act, 2001 respectively, have gone to the extent of expressly abolishing any common law rights for derivative action, so that the statutory regime alone remains applicable. As for the U.K., the birthplace of derivative action, their Parliament for the first time, in the Companies Act, 2006, introduced a statutory mechanism for derivative claims through Sections 260-264. While the U.K. Act did not expressly abolish common law rights for derivative actions, a Chancery Division of the U.K. in Universal Project Management Services Ltd Vs. Fort Gilkicker MANU/UKCH/0190/2013 held that the Parliament, by enacting a comprehensive statutory code relating to derivative actions, had impliedly abolished the common law derivative action to the extent of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hough likely to overlap. While the relief of oppression/mismanagement is available to a member for a harm done to him, or another member, the relief of derivative action is for a member to bring a suit on behalf of the company to protect the interest of the company itself. For the sake of comparison, it is deemed apposite to set out herein below Section 459 of Companies Act, 1985 of U.K. as well as Section 994 of Companies Act, 2006 of U.K. providing for the remedy of oppression, to a member/shareholder of a company. While Section 459 was as under: PROTECTION OF COMPANY'S MEMBERS AGAINST UNFAIR PREJUDICE 459. Order on application of company member (1) A member of a company may apply to the court by petition for an order under this Part on the ground that the company's affairs are being or have been conducted in a manner which is unfairly prejudicial to the interests of some part of the members (including at least himself) or that any actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial. (2) The provisions of this Part apply to a person who is not a member of a company but to whom shares in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wever this distinction disappears. Section 241 as aforesaid, not only provides for a member to approach the NCLT when the affairs of a company are being conducted in a manner prejudicial to the member or any other member or members, but also when the affairs are being conducted in a manner prejudicial to public interest and to the interests of the company itself. It thus appears to me that a derivative action, which is filed to protect the interests of the company, would come within the ambit of Section 241, and the Parliament, in Section 241 supra of the Companies Act envisaged a remedy that included within its scope oppression, mismanagement and derivative actions. Once it is found that the plaintiff, as a member/shareholder of Umang, for the cause of action of affairs of Umang being conducted in a manner prejudicial to Umang, has statutory remedy available to him, a derivative action for the benefit of Umang, by way of civil suit would not be maintainable. 34. It must also be noted that vide the Companies (Second Amendment) Act, 2002, the Parliament introduced provisions for the constitution of the NCLT and National Company Law Appellate Tribunal (NCLAT), the constitutional v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er Sections 397 and 398. However notwithstanding which, derivative actions for the benefit of a company were held to be maintainable in India. However, my research does not reveal the said aspect to have been considered in any of the judgments holding a derivative action to be maintainable in India. I therefore take the liberty of a holding a derivative action to be per se not maintainable, specially claiming a relief of declaration, which under Section 34 of the Specific Relief Act, 1963 is a discretionary relief, and which discretion will not be exercised in favour of the plaintiff when a statutory remedy for a relief is available. 38. There is another reason for which I find a derivative action by the plaintiff for the benefit of Umang to be not available on the pleaded facts. It is not the case of the plaintiff that Umang, under its agreements with Uppal, is entitled to refund. Rather, the relief of a refund against Uppal, in favour of Umang, is premised on relief of declaration of the agreements as void, and which declaration is sought on the ground of misrepresentation amongst others. The grounds on which declaration as null and void of the agreements entered into by Umang ..... X X X X Extracts X X X X X X X X Extracts X X X X
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