‘David and Goliath’: Facets of Oppression and Mismanagement

LE Desk

New Delhi, December 21, 2021: On December 14, 2021, the National Company Law Appellate Tribunal (NCLAT) delivered its verdict in Solar Industries India Limited v. Kailash Chandra Nuwal and Ors., with an order that mirrors minority and majority shareholders of one of the largest defence manufacturing companies in India at variance with each other on issues of ‘oppression and mismanagement’ within the company they co-founded.

In this matter, the controversy arose when the Company Secretary(one of the respondents) sent an email on July 31,2020 to Mr. KC Nuwal (minority shareholder director/minority director) enclosing a letter stating that he had automatically vacated the office w.e.f. November 7,2019 as he failed to disclose his interest in AGT in proper format and at the board meeting of the Appellant Company (Solar Industries India Ltd.). Therefore, the  minority shareholder director was requested to not function as Director of the Appellant Company.The vacation letter sent to the minority director further recorded that the disclosure as necessitated under law was not in the requisite format under Section 184 (1).

It was also stated that the Appellant Company shall not allow the minority director to attend the board meeting held on July 31, 2020 and in the event he continued to act as Director of Appellant Company it may result in appropriate consequences under the Companies Act, 2013 and Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulation, 2015. 

According to the minority shareholder group,the ouster of  the minority director, in the early hours of July 31,2020, just few hours before the board meeting of the Appellant Company was to stop him from raising substantial issues of mismanagement, unlawful and unethical practices, non-compliance, frauds and action against the interest of Appellant Company and its stakeholders.

Aggrieved by this abrupt, illegal ouster under Section 184 (1) and the continued acts of oppression and mismanagement, the minority director, Mr. KC Nuwal approached the NCLT, Mumbai bench. The NCLT by way of an interim order dated February 9,2021 granted injunction against the operation of the vacation letter dated July 30,2020 and allowed Mr. KC Nuwal, that is the minority director, to act as a director and Vice Chairman of the company. 

The company (that is, Solar Industries India Limited (SIIL)) along with its majority shareholders (Appellants), approached the Hon’ble NCLAT by way of Company Appeal No. 29 of 2021 on February 24,2021, which appeal was dismissed by an order dated December 14,2021. 

The NCLAT by its order dated December 14,2021 reaffirmed the findings of the NCLT against the majority shareholders and compliance officer, i.e., Mr. SN Nuwal, Mr. Manish Nuwal and Ms. Khushboo Pasari, respectively, and held the following:

(a) The board of SIIL was at all times aware about the interest of Mr. KC Nuwal in the related entity (AGT).

“…In the meeting, dated 07.11.2019 director S N Nuwal and Manish Nuwal (R-5 and R-6) and Company Secretary Khushboo Pasari were present and they were well informed that K C Nuwal is a director in AGT but they have not raised any objection. Therefore, we are of the view that K C Nuwal has not contravened the provisions of Section 184(2) of the Act.”

(b)  Reaffirming the findings of the NCLT, the NCLAT has held that the compliance officer and company secretary of SIIL has failed in her duty to guide the directors. 

“(xiv) R14, the Company Secretary of R1 has received the information as to the shareholding of the Applicants in AGT and in view of this as a professional, R14, was expected to guide and advise the Director in filing proper form in consonance with the Rules and Regulations.”

(c) Even in not filing form MBP-1, Mr. KC Nuwal has ensured substantial compliance with the provisions of Section 184 (1) of the Companies Act. 

“…Undisputedly, K C Nuwal vide email dated 03.05.2019 informed Khushboo Pasari that he became the director in AGT from 02.05.2019 and requested to inform RoC and others. Thereafter, vide email dated 28.06.2019 informed Khusbhoo Pasari that he has acquired 31,76,751 shares in AGT. It is true that K C Nuwal has not furnished information in prescribed form i.e., MBP-1. We are of the view that K C Nuwal has substantially complied with the requirement of Section 184 (1) of the Act.”

(d) Violation of Section 184 (1) does not lead to an automatic vacation under Section 167 of the Companies Act.

“We are in agreement with the Ld. Sr. Counsel for the Respondent No. 1 that non-compliance of Section 184(1) has no link with Section 167 of the Act. Section 184(4) of the Act provides that if a director of the company contravenes the provisions of sub-section (1) or sub-section (2), such director shall be punishable with imprisonment for a term which may extend to one year or fine which may extend to one lakh rupees, or with both. Thus, non-compliance of Section 184(1) would not lead to automatic vacation of the office as director of the Company.”

(e) The interim order passed by the NCLT is good in law and suffers from no infirmity. 

“47. The Tribunal has rightly granted the interim relief, we find no ground to interfere in the impugned order. Thus, the Appeal is dismissed. However, no order as to costs. Interim order passed by this Appellate Tribunal stands vacated.”

It is likely that NCLT Mumbai will now adjudicate on the key issues of oppression and mismanagement, as raised by the minority shareholders. The NCLT is likely to set critical precedents on several pertinent questions which continue to remain unanswered under the Companies Act, 2013. 

One of the key take-aways so far includes the interpretation rendered to sections 184(1) and section 184(2) and section 167 of the Companies Act. Both, the NCLT Mumbai Bench and NCLAT have stated in unambiguous terms that it is indeed only section 184(2) and violation thereunder which can result in the consequences emerging out of section 167 (that is, automatic vacation of office). This will surely settle all issues of interpretation regarding filing of forms and related disclosure under section 184 of the Companies Act. 

According to legal experts, a round of appeals before the Supreme Court of India, challenging the order of the NCLAT is imminent.

The company (Solar Industries India Limited) along with the majority shareholder group was represented by AZB & Partners and the minority shareholder group (Sh, Kailashchandra Nuwal) was represented by AnantLaw.