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Supreme Court Reiterates the Requisite Locus Standi to Entertain a Petition under Sections 241 & 242 of the Companies Act, 2013

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The case arises out of a family brawl. The Appellant’s husband held shares in M/s. Oswal Agro Mills Ltd. He was also the shareholder in M/s Oswal Greentech Ltd. Before he died, he nominated the shares according to Section 72 of the Companies Act, 2013 (“Act”). By the said nomination rights over the shares vested in the Appellant. Thereafter, Respondent No. 1 filed a suit for partition. Therein, he claimed rights over the deceased’s shareholding. An interim injunction was ordered by the High Court. In this regard, the Appellant continues to be the shareholder.

Thereafter, Respondent No. 1 filed a company petition. The petition alleged oppression and mismanagement of the company. The Appellant challenged the maintainability of the petition under Sec. 241 and 242 of the Act. The NCLT dismissed the challenge. It held that Respondent No. 1 was entitled to one-fourth share. This order was upheld by NCLAT in appeal. The same is challenged before the Supreme Court.

Appellant’s Arguments

It has been submitted that the Appellant is the sole nominee of the shares. Hence, according to Section 72 of the Act all the rights were vested with the Appellant. Moreover, Respondent No.1’s application under Section 241 of the Act is not maintainable. It is because the Respondent No.1 held only 0.03% of shares. Whereas, the requisite of Section 241 of the Act is 10%. Furthermore, the NCLT and the NCLAT overlooked the fact that the deceased vested the rights to the nominee. Since the matter of inheritance is pending before the civil court, the NCLT cannot determine the same.

Respondent No. 1’s Arguments

It has been argued that the application is maintainable. The nomination made the nominee merely the holder of shares for the legal representative’s benefits. As such the nominee did not have rights over the same. In this regard, the legal representative can maintain an application under Section 241 of the Act. Further, it has been argued that a waiver requirement was placed in the company petition. Lastly, the pendency of civil suit has no effect on the maintainability of the company petition. Reliance was placed on certain case laws.

Court’s View

The Court observed that Section 72 (1) of the Act, “vest” in the nominee the right over the securities. Furthermore, Section 72(3) is a non-obstinate clause. It overrides the operation of all other laws as against Section 72 (1). Including testamentary or non-testamentary laws. Hence, itis prima facie apparent that the vesting is absolute. Furthermore, Rule 19(2) of the Companies (Share Capital and Debentures) Rules, 2014 indicates the same.

The Court referenced to Sangramsinh P. Gaekwad and Ors. v. Shatadevi P. Gaekwad (Dead) through LRs. and Ors., (2005) 11 SCC 314. Therein, the Court held that dispute as to inheritance cannot be said to be a dispute as regard oppression/mismanagement. Hence, the application of Sections 397 and 398 does not arise. Sections 397 & 398 are pari mateira to Section 241 of the Act.

Furthermore, the Court reference to M/s. Dale & Carrington Invt. (P) Ltd. and Anr. v. P. K. Prathapan and Ors., AIR 2005 SC 1624. Therein, the question of locus standi was considered. It was observed that at the date of filing of the petition, the petitioner needs to hold the requisite number of shares. Moreover, the relied-on J. P. Srivastava & Sons Pvt. Ltd. and Ors. v. M/s. Gwalior Sugar Co. Ltd. and Ors., AIR 2005 SC 83. Therein, the Court made observations on the objective of the requisite percentage. It held that the object was to avoid frivolous litigation.

Court’s Decision

The Court held that because of the status quo ordered by the High Court, the Appellant was vested with the rights. Respondent No. 1 has not fulfilled the minimum requirements to file the company petition. The question of ownership rights over the shares is to be adjudicated in the civil suit. Hence, the NCLT must not entertain the petition filed under Sections 241 & 242 filed by Respondent No. 1. Accordingly, the appeal was allowed. is now on Telegram. Follow us for regular legal updates and judgements from the court. Follow us on Google News, InstagramLinkedInFacebook & Twitter. You can also subscribe for our Weekly Email Updates. You can also contribute stories like this and help us spread awareness for a better society. Submit Your Post Now.

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