The Corporate Ministry – Delhi Gymkhana Club Tussle : By Angad Mehta
I am not a member of the Delhi Gymkhana Club (DGC). I wish I was, but I’m not. I’m not even in queue to become a member. Which is I why I will try to give an unbiased analysis of the recent developments surrounding the government’s attempts to take over the DGC.
Brief History [1]
The DGC is nestled at 2 Safdarjung Road, New Delhi, and abuts the Prime Ministers residence at 7, Lok Kalyan Marg, New Delhi [2]. It occupies 27.3 acres of space on a perpetual lease. It is one of the oldest clubs in India and was established in 1913. Originally known as the ‘Imperial Delhi Gymkhana Club’, it moved to its present address on 03rd July 1917 [3]. When India gained independence in 1946, the word ‘Imperial’ was dropped, and the club came to be known simply as the Delhi Gymkhana Club. The DGC boasts of 26 grass tennis courts, 4 hard courts, 3 flex cushion courts, a covered, temperature-controlled swimming pool with solar heating, three squash courts, two badminton courts, a basketball court, a gymnasium, and three rummy rooms [4]. DGC was incorporated on 14th July 1913 under Section 26 of the Companies Act, 1913 [5] (1913 Act) as a company limited by guarantee, without having share capital. It is a members Club which is commonly understood as “an association of people formulated mainly for social purposes and having promised meals, temporary residents, etc., for the use of members…establish private entertainment to members…” It is governed and managed by a Governing Body. Being a company registered under the 1913 Act, the DGC is governed by its Memorandum & Articles of Association.
Whilst I am still discussing the history of the DGC, it is also important to discuss how the DGC functions, and indeed, do all other distinguished clubs in India. The DGC is a private Club formed for the use of its members or other permitted persons for various activities. DGC is operated/managed by and for its members alone. Neither the club nor its facilities are open to the public, and the DGC, like any other incorporated company, continues to be governed by its Memorandum & Articles of Association.
The Legislations
The 1913 Act was replaced by the Companies Act, 1956 (1956 Act), which in turn was replaced by the Companies Act, 2013 (2013 Act). Section 26 of the 1913 Act was replaced by Section 25 of the 1956 Act, which was in turn replaced by Section 8 of the 2013 Act. Section 8(6) of the 2013 Act allows for the revocation of a license issued by the Central Government under Section 8 of the Act. However, the power to revoke is circumscribed by the proviso which provides that no order for revocation shall be made unless a reasonable opportunity of hearing has been granted [6]. Section 8(7) of the 2013 Act provides that the Central Government may order either the winding up or amalgamation of a company whose license has been revoked, if, in the opinion of the Central Government, it is “…essential in public interest…” Similar to Section 8(7) of the 2013 Act, Section 26(4) of the 1913 Act provided for revocation of the license of a company after affording an opportunity of submitting a representation in opposition to the revocation. Significantly, whilst the 1956 Act did also have a provision empowering the Central to revoke the license [7], it was untrammeled by any restriction. The element of ‘public interest’ was reintroduced in the 2013 Act.
Chapter XVI of the 2013 Act deals with ‘Prevention of Oppression and Mismanagement’. Under this Chapter, Section 241(2) allows for the Central Government to apply for relief under this Chapter “…if it is of the opinion that the affairs of the company are being conducted in a manner prejudicial to public interest…” A similar provision empowering the Central Government to apply to the Tribunal in cases of oppression and mismanagement was also contained in the 1956 Act, though not circumscribed by any limitation of ‘public interest’.[8]
What is ‘public interest’?
Black’s Law Dictionary (6th Edition) defines “Public Interest” to mean something in which the public, the community at large has some pecuniary interest, or some interest by which their legal rights and liabilities are affected …… interest shared by citizens generally in affairs of local, state or national act.
Black’s Law dictionary (8th Edition) states ‘public interest’ as “(1) the general welfare of the public that warrants recognition and protection, (2) something in which the public as a whole has a stake; esp., an interest that justifies governmental regulation.”
‘Public Interest’ as understood, comprehends public order, public health, public security, morals, economic welfare of the community and the objects mentioned in Part IV of the Constitution of India.”
In R. v. Bedfordshire [9], Cambel C.J. defined ‘public interest’ as “…A matter of public or general interest does not mean that which is interesting as gratifying curiosity or a love of information or amusement; but that in which a class of the community have a pecuniary interest, or some interest by which their legal rights or liabilities are affected…”
The Orissa High Court in the case of N.K. Mohapatra v. State of Orissa [10] defined ‘public interest’ as “…an elusive abstraction meaning general social welfare or regard for social good and predicating interest of the general public in matters where regard for the social good is of the first moment. To be meaningful, it must relate to the good life of those with reference to whom it is used…”
What constituted ‘public interest’ has been more recently elucidated by the Supreme Court in 63 Moons Technologies Ltd vs Union of India [11], and though in the context of amalgamations, the judgment is informative. After running through several judgments which defined ‘public interest’ in different context, Justice Nariman went on to hold that “…the expression “public interest” would mean the welfare of the public or the interest of society as a whole, as contrasted with the “selfish” interest of a group of private individuals…”
From the above, it is quite clear that ‘public interest’ means the interests of the larger public over the interests of a group of private individuals.
Setting the bar
Though the sections of the 1956 and 2013 Act are sufficiently clear, it need to be stated that a pre-condition for the invocation of the oppression and mismanagement sections by the government is ‘public interest’. In Peerless General Finance and Investment Co. Ltd. v. Union of India [12], the Calcutta High Court held that the Central Government should be satisfied that the affairs of the company are being conducted in a manner prejudicial to public interest and interests of the company and such satisfaction should be based on evidence. The court went a step ahead to hold that the legislature had in Section 408 of the 1956 Act consciously used the words “…are being conducted…”, and therefore, the action complained of has to relate to a present state of affairs. [13]
Further, the Division Bench of the Delhi High Court in South India Viscose Ltd. v. Union of India [14] held, in the context of Section 408 of the 1956 Act, that the Central Government has to establish, in an objective manner that requisite conditions have been fulfilled to satisfy itself that it is necessary to make appointment of Government directors in order to prevent the affairs of the company being conducted in a manner oppressive to members or in a manner prejudicial to the interest of the company or public interest-this was so because the Central Governments right to appoint directors under Section 408 of the 1956 Act entails serious consequences for a company. In doing so, the court applied the principle laid down by the Supreme Court in Rampur Distillery and Chemical Co. Ltd. v. Company Law Board [15], where the Supreme Court held that the satisfaction must be with reference to the conditions mentioned therein, and the satisfaction of the Government which is determinative is the satisfaction as to the existence of certain objective facts.
A critique of the proceedings initiated by the Ministry of Corporate Affairs (MCA)
Whilst the nation was grappling with and in the midst of the nation-wide lockdown, the MCA clandestinely approached the Principal Bench of the National Company Law Tribunal (NCLT) at Madras, in a petition u/s 241-242 of the 2013 Act [16]. Whilst proceedings before the NCLT’s across the country remained suspended and with only urgent matters being listed, it is interesting to note the priority and speed with which the NCLT is pursuing this matter [17]. What is shocking is that whilst litigants are locked-in and the government has the upper hand, the MCA has moved with alarming speed in seeking a takeover of the administration of the DGC [18]. Hearing in the matter has proceeded on an almost day-to-day basis in the hearing of the application for interim measures, with the issue now being reserved for orders. Unless significant public impact is established, one fails to understand really what the urgency in the matter is. Secondly, and more importantly, one fails to understand what the ‘public interest’ in the petition is. The club is a private club established for the benefit of its members. Issues relating to management and the affairs of the club are private matters to be dealt with by the management of the club and there can be no public interest in the matter of its management and the members. Unless it is established beyond all doubt that the manner in which the DGC is being managed impacts society as a whole, any petition/interference under Section 241(2) of the 2013 is misguided and untenable. ‘Public interest’ is not a term to be loosely thrown around, and it is hoped that the NCLT seizes this opportunity to set the standards of government interference under Section 241(2) of the 2013 Act.
The future: Nationalisation of Clubs
It needs to be remembered that much like a lot of other clubs in India, the DGC is a club constituted and managed by private members and threshold for government interference is, or at least ought to be, extremely high. The carte-blanche misuse of Section 241(2) of the 2013 Act under the garb of ‘public interest’ will set a scary precedent and will open the floodgates for takeovers of other clubs by the government. There are several other prestigious clubs in India which operate in the same manner as the DGC, for e.g., Bombay Gymkhana, Madras Gymkhana, Wellington Gymkhana, etc., and I would not be pessimistic in foreseeing a similar trajectory for all of them. The clubs have retained their individuality because of the exclusivity that is attached to their membership and the standards that their members have maintained. A forced intrusion into the management of the DGC is nothing short of nationalization of the DGC. One hopes that the courts muster the courage to check the governments muscle-flexing so that the sanctity of such institutions is maintained.
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Angad Mehta is an advocate with an independent practice at the NCLT, NCLAT, and Delhi High Court. Apart from court-focused litigation, he specializes in construction project arbitrations and has represented several public companies against the Government of India and the National Highways Authority of India. In 2019, he was empaneled as a panel counsel for the Govt. of Delhi, and has represented the government in several arbitrations before tribunals and before the Delhi High Court.
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[1] https://delhigymkhana.org.in/history.aspx
[2] The PM’s residence is spread over 12 acres comprising of 5 bungalows. Also see https://www.jagranjosh.com/general-knowledge/amazing-facts-about-prime-ministers-residence-1471857128-1
[3] https://delhigymkhana.org.in/about.aspx
[4] https://delhigymkhana.org.in/sports.aspx
[5] “26. Power to dispense with “Limited” name of charitable and other companies. (1) where it is proved to the satisfaction of the Local Government that an association capable – of being formed as a limited company has been or is about to be formed for promoting commerce, art, science, charity, or any other useful object, and applies or intends to apply its profits (if any) or other income in promoting its objects, and to prohibit the payment of any dividend to its members, the Local Government may, by license under the hand of one of its Secretaries, direct that the association be registered as a company with limited liability, without the addition of the word “Limited” to its name, and the association may be registered accordingly. (2) A license by the Local Government under this section may be granted on such conditions and subject to such regulation as the Local Government thinks, fit, and those conditions and regulation shall be binding on the association, and shall, if the Local Government so directs, be inserted in the memorandum and articles, or in one of those documents. (3) The association shall on registration enjoy all the privileges of limited companies, and be subject lo all their obligations, except those of using the word “Limited” as any part of its name and of publishing its name, and of filing lists of members and directors and managers with the registrar. (4) A license under this section may at any time be revoked by the Local Government, and upon revocation the registrar shall enter the word “Limited” v the end of the name of the association upon the and the association shall cease to enjoy the, exemptions and privileges granted by this section: Provided that, before a license is so revoked, the Government shall give to the association notice in writing of its intention, and shall afford the association an opportunity of submitting a representation in opposition to the revocation.”
[6] “8. Formulation of companies with charitable objects, etc.— …(6) The Central Government may, by order, revoke the licence granted to a company registered under this section if the company contravenes any of the requirements of this section or any of the conditions subject to which a licence is issued or the affairs of the company are conducted fraudulently or in a manner violative of the objects of the company or prejudicial to public interest, and without prejudice to any other action against the company under this Act, direct the company to convert its status and change its name to add the word ―Limited‖ or the words ―Private Limited‖, as the case may be, to its name and 29 thereupon the Registrar shall, without prejudice to any action that may be taken under sub-section (7), on application, in the prescribed form, register the company accordingly:
Provided that no such order shall be made unless the company is given a reasonable opportunity of being heard:
[7] Section 25(7) & 25(8) of the 1956 Act.
[8] “401. RIGHT OF CENTRAL GOVERNMENT TO APPLY UNDER SECTIONS 397 AND 398: The Central Government may itself apply to the 1 [Tribunal] for an order under section 397 or 398, or cause an application to be made to the 1 [Tribunal] for such an order by any person authorised by it in this behalf. Pending the making by it of a final order under section 397 or 398, as the case may be, the 1 [Tribunal] may, on the application of any party to the proceeding, make any interim order which it thinks fit for regulating the conduct of the company’s affairs, upon such terms and conditions as appear to it to be just and equitable.”
[9] 24 LJ QB 84
[10] AIR 1994 Ori. 301
[11] Civil Appeal No.4476 of 2019
[12] [1991] 71 Comp Cas 300- “…28.Here, I find that the expression is in the present tense and not in the future or past tense. Even assuming that the finding, in this behalf, of the Company Law Board is correct, in that event, it was commenting on something which may happen in the future and in the future it may be held that the company would be acting in a manner prejudicial to public interest. The Legislature, in the particular case, significantly used the present tense and not the past or future tense. In this connection, reference may be made to the decision of the Privy Council in the case of Maradana Mosque v. Badi-ud-Din Mahmud, [1966] 1 All ER 545, wherein the Privy Council considered a provision wherein, before a Minister had jurisdiction to take action, he was required to be satisfied that “any school… is being so administered in contravention of any of the provisions of this Act”. It was held that, because of the present tense, the Minister should concern himself with the present conduct of the school and not the past when making the order…”
[13] Section 241(2) of the 2013 Act also uses identical language, i.e., “…the affairs of the company are being conducted in a manner prejudicial to public interest…”
[15] AIR 1970 SC 1789
[16] Order dated 13.05.2020 in Union of India, MCA v. Delhi Gymkhana Club.
[17] See orders at https://nclt.gov.in/sites/default/files/Feb-Interim-Order-pdf/Sl%20No-6-%20Delhi%20Gymkhana%20PB.pdf, https://nclt.gov.in/sites/default/files/Feb-Interim-Order-pdf/Sl%20No-7-%20Delhi%20Gymkhana%20pb.pdf and https://nclt.gov.in/sites/default/files/Feb-Interim-Order-pdf/Sl%20No-5-%20Delhi%20Gymkhana%20Club.pdf.
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