The Redefined Boundaries Of Section 397 After The McDonald Case

24th June, 2021 - 11:23 am Categories: Legal Issues 0 Comments

Introduction

In Vikram Bakshi v. Connaught Plaza Restaurants Limited[1] (‘McDonald’s case’), Vikram Bakshi approached the National Company Law Tribunal (‘NCLT’) on the grounds of oppression by McDonald’s. He alleged that the act of not re-electing him as the Managing Director (‘MD’) of Connaught Plaza Restaurants (‘the company’) amounted to oppression under section 397 of the Companies Act, 1956 (‘the Act’). The NCLT decided in Vikram Bakshi’s favor holding the action in question as oppressive and restored his position as the MD. In this paper, the author will argue that the NCLT’s reasoning has broadened the scope for application of the provision on oppression.

The capacity of the Petitioner

In SP Jain v. Kalinga Tubes[2], the Supreme Court held that the action that is alleged to be oppressive must involve a lack of probity and fair dealing with a member, in the matter of his proprietary rights, as a shareholder. Therefore, the act complained of must affect the petitioner in his capacity or character as a member or a shareholder, and not in any other capacity such as a director or a creditor.

Vikram Bakshi alleged that his non-election as the MD of the company amounted to oppression. The alleged act of oppression does not directly affect Vikram Bakshi in his capacity as a shareholder. Instead, it relates to his position in the management of the affairs of the company. Applying the above rule, his non-election as MD would not amount to oppression.

However, the NCLT held that the action amounted to oppression. While doing so, it considered the ultimate consequence of the acts alleged to be oppressive. As per para 32 of the Joint Venture Agreement (‘JVA’), Vikram Bakshi’s shares in the company would become saleable to McDonald’s if he suffered termination of his relation as its MD. The value at which the shares must be sold would be determined in accordance with clause 26 of the JVA. Therefore, the non-election as MD would ultimately affect Vikram Bakshi in his capacity as a shareholder. The NCLT decided the question of whether his non-election as MD amounts to oppression in light of these consequences.

Breach of Contract

In Chatterjee Petrochem v. Haldia Petrochemicals[3], the Supreme Court held that a breach of contract does not amount to oppression. Similarly, in R Balakrishnan v. Vijaya Dairy and Farm Products, the Company Law Board held that even if certain acts satisfy the requirement for oppression under section 397, relief cannot be granted if the grievance and relief flow from an independent contract between the parties. Therefore, if the acts that are alleged to be oppressive are based on and flow from a contractual obligation, the parties cannot approach the NCLT under provisions on oppression.

In the McDonald’s case, the election of the MD of the company is dealt with under para 7 of the JVA and under Articles 35 and 36 of the Articles of Association (‘AoA’). Under para 7(e) of the JVA, the parties agreed to re-elect Vikram Bakshi as the MD as long as he complied with certain conditions laid out therein. Whether para 7(e) was incorporated in the AoA would determine whether the NCLT could decide the issue of non-election under section 397.

A simple reading of Article 35 of the AoA indicates that the parties have subjected it to para 7 of the JVA only in certain situations, i.e., management responsibilities. Para 7(c) of the JVA deals with the MD’s scope of authority. The MD’s management responsibilities under Article 35 are subject to para 7(c). Further, Article 36, which deals with the salary of the MD, is subjected to para 7(d). However, the election of the MD has not been subjected to para 7, specifically para 7(e), and has only been subjected to the Act. This would mean that Vikram Bakshi’s non-election as MD is a purely contractual dispute arising out of the JVA.

Despite the text of Articles 35 and 36 indicating the contrary, the NCLT held that the entirety of para 7 was incorporated in the AoA. In para 4 of the Conclusion, it held that para 7 of the JVA was incorporated by reference in Article 35. However, the Supreme Court in VB Rangaraj v. VB Gopalakrishnan[4] held that a restriction must be specified in the AoA, failing which it is not incorporated. In this case, restrictions laid out in the JVA are specified only in one part of Article 35 and in Article 36, but not in the portion relating to the election of the MD in Article 35.

Further, in paras 30 and 31 of the Conclusion, the NCLT held that para 7 of the JVA was incorporated in Article 35 as the past conduct of the parties was in accordance with the JVA. However, in SP Jain v. Kalinga Tubes, the Supreme Court held that the past conduct of parties, based on an agreement, cannot bind a company, especially when it is not a party to the agreement. In this case, the company was not a party to the JVA, and hence, the parties’ actions on the basis of para 7 would not bind it.

Contrary to Supreme Court rulings, the NCLT’s reasoning allowed it to decide that para 7 of the JVA was incorporated in the AoA. This was crucial to enable it to decide on the issue of non-election under section 397.

Broadening the Scope for Application of Oppression

It is submitted that the NCLT’s approach in the McDonald’s case broadens the scope for application of the provision on oppression in two ways.

First, it allows a party to approach the NCLT on the grounds of oppression in a capacity other than a shareholder or member, as long as he can show that ultimately his shareholding or membership is being affected.

Second, it provides a method for petitioners to base their claim of oppression on independent contracts. Firstly, the NCLT’s reasoning to hold that para 7(e) was incorporated in the AoA makes it extremely easy for future petitioners to bring contracts within the scope of the AoA. A mere reference of the contract in the AoA (see para 4 of the Conclusion) or even past conduct of the parties in compliance with the contract (see paras 30 and 31 of the Conclusion) would be sufficient to consider it incorporated in the AoA. Consequently, parties can bring a breach of contract disputes under provisions on oppression, under the guise that they are incorporated in the AoA. Secondly, while the NCLT deals with the issue of incorporation of para 7(e) in the JVA, it does not do so for paras 26 and 32. Despite this, it excessively relies on them to justify its decision. This approach allows parties to rely on the immediate and ultimate effects of independent contractual obligations to demonstrate why the act in question is oppressive.

In its decision to provide relief to Vikram Bakshi, the NCLT went to great lengths to bring his petition within the scope of section 397. However, by doing so, the NCLT’s reasoning broadens the scope for applying the provision on oppression and presents creative opportunities to future petitioners to justify new kinds of claims under it.

Author: Poorvi Yerrapureddy- a Student of The National University of Advanced Legal Studies (Kochi), an intern at Khurana & Khurana, Advocates and IP Attorneys. In case of any queries please contact/write back to us at aishani@khuranaandkhurana.com.

References:

[1] [2017] 143 SCL 37.

[2] AIR 1965 SC 1535.

[3] AIR 2012 SC 2753.

[4] AIR 1992 SC 453.