Famous cases under Company Law
Updated: Oct 3, 2022
#CompanyLaw #LandmarkCases #FamousJudgements
#corporatecases
By: Arryan Mohanty
Introduction
The corporate sector has seen tremendous expansion all across the world. The business sector is the backbone of many countries economies, particularly India.
It accounts for over 53% of the Indian economy. Individuals in this field have numerous options to advance.
As a result of this expansion, a proper and well-formed corporate law was established, which includes monitoring all legal and external affairs problems such as investigations, litigation, mergers and acquisitions, international trade issues, and so on.
Hence, to ensure the legitimacy of economic transactions, employees are advised of their rights and responsibilities, and firms are represented. This also focuses on the corporate governance that is required for a company's smooth operation.
Landmark Cases under Company Law
Salomon v Salomon & Co. Ltd[1]
Facts of the Case
Aaron Salomon's business was organized into a company in 1892, with his wife, daughter, four sons, and himself as shareholders.
Mr. Salomon, the company's managing director, sold the company for £39,000 and took a £10,000 debt out of it.
Edmund Broderip paid Mr. Salomon a £5000 advance on the security of the debentures.
Soon after, there was a drop in sales, followed by strike action, resulting in a business downturn.
Because of his position and duty in the company, Mr. Edmund sued Mr. Salomon to enforce security.
Judgment
In this case, Mr. Salomon, the company's founder, is protected from the personal obligation to creditors because the company is a separate legal entity from its members.
The notion of corporate personhood established by the Companies Act of 1862 was upheld by the court.
Thus, creditors of a bankrupt firm cannot sue the company's shareholders for payment of outstanding debts.
Royal British Bank v Turquand[2]
Facts of the Case
Mr. Turquand was the insolvent Cameron's Coalbrook Steam, Coal, and Swansea and Loughor Railway Company's official manager (liquidator).
It was established in 1844 under the Joint Stock Companies Act.
The company had issued a £2000 bond to the Royal British Bank, which guaranteed the company's current account draws.
The bond was signed by two directors and the secretary and was under the company's seal. For non-payment of the same, the claimants, the Royal British Bank, sued him.
The company stated that the directors had only the ability to borrow the company's resolution had allowed what under its registered deed of settlement (the articles of association).
The defendants also claimed that no resolution authorizing the issuance of the bond had been passed and that no bond was issued without the approval and consent of the company's shareholders.
Judgment
Sir Jervis was of the opinion that the Court of Queen's Bench's decision should be affirmed. He was inclined to believe that the issue, which had been raised primarily in this case and in that Court, did not always arise and did not require a decision.
His impression is that the replication's resolution goes far enough to satisfy the deed of settlement's criteria.
According to Sir Jervis, the deed allows directors to borrow on a bond the sum or sums of money that may be borrowed from time to time by a resolution passed at the Company's General Meeting, and the replication of the resolution, adopted at the General Meeting, authorizes the directors to borrow such sums on bonds for such periods and at such interest rates as they may deem expedient, in accordance with the act of settlement and the Act of Parliament; however, the resolution authorizes the directors to borrow such sum.
It seemed to me to be enough, said Sir John Jervis CJ.
If this is the case, the other point does not arise, and we do not need to determine; for it appears to us that the plea, whether we regard it as a confession and rejection or a unique non-est factum, does not create any obstacle to the Company's advance.
He went on to say that - we can now assume that dealings with these firms are not the same as dealing with other partnerships and that the parties involved must read the statute and the settlement act. But they're not obligated to go any further.
And the party here would discover permission to do so under specified conditions in the settlement statute rather than a prohibition on borrowing.
It would have the right to infer the fact of a resolution allowing what appears to have been adequately done in the face of the document if it found that the authority might be accomplished by a resolution.
Cyrus Investments Pvt. Ltd. & Anr. v. Tata Sons Ltd.& Ors[3]
Facts of the Case
The National Company Law Tribunal, Mumbai Bench ("NCLT") handed down a significant ruling in the case of Cyrus Investments Private Limited & Others ("Petitioners") v. Tata Sons Limited & Others1 ("Respondents") on oppression and mismanagement under the company law regime. Hon'ble Mr. B.S.V. Prakash Kumar, Member (Judicial), and Hon'ble Mr. V. Nallasenapathy, Member (Judicial), delivered the decision (Technical).
In this case, Cyril Mistry joined the Shapoorji Pallonji group's board and became TATA and Sons' largest stakeholder in 1991.
In 1994, he was named a director of the company. His firm owns around 80% of the shares in TATA Sons.
Cyrus Mistry joined the Tata Sons Board of Directors in September 2006, following his father's retirement from the TATA Group in November 2011.
Following Ratan Tata's retirement, Cyrus Mistry was named Deputy Chairman; in December 2012, Cyrus Mistry was named Chairman of Tata Sons.
N. Chandrasekhar, CEO of Tata Consultancy Services Limited, was chosen as Chairman of Tata and Sons in January 2017.
The Board called Cyrus Pallonji Mistry to be removed as a director on February 6, 2017.
This resulted in a dispute between Cyrus Mistry and TATA, which was broadcast throughout the world, and everyone learned of Cyrus Mistry's dismissal from his position.
This elimination was not made on the spur of the moment but rather after much thought. Ratan Tata's next move was to write a letter to the Prime Minister in which he mentioned the termination of the group's chairman.
The reason given for Cyrus Mistry's dismissal was that he did not perform his duties properly.
Cyrus Mistry filed a petition with the National Company Law Tribunal; however, it was dismissed since the TATA Group company had no such mismanagement.
Judgment
On December 18, 2019, the National Company Law Tribunal reinstated Cyrus Mistry as chairman of TATA Sons and gave TATA a four-week period to file an appeal against the NCLAT judgment.
The Supreme Court then issued an injunction against the NCLAT's order, stating that it has gaps and several flaws. The Supreme Court ordered that the matter be thoroughly investigated.
Cyrus Mistry won the case because he demonstrated that he had done nothing wrong and that his dismissal was unconstitutional.
The Shapoorji Pallonji Group has stated that they are not going through any difficulties and that no legal action against TATA Sons will be considered.
Even though TATA filed a caveat in all courts, Cyrus Mistry stated that he would not take legal action against the corporation but that he would consult a law firm about possible steps ahead of his dismissal.
Because of Cyrus Mistry's dismissal from his post, the corporate sector was stunned, and the company's stocks plunged 3.16 percent in the stock market.
According to the company's Articles of Association, the chairman can only be removed by the board members if he is found to have committed any fraud, been involved in any kind of internal mismanagement, or been found disloyal to the company; however, Cyrus Mistry has not met any of the above conditions.
Finally, the National Company Law Appellate Tribunal (NCLAT) ruled that Cyrus Mistry's removal was unconstitutional.
The NCLAT also halted TATA Sons' transition from a public to a private corporation. It also announces the return of mystery to the TATA Sons.
The Supreme Court has delayed the NCLAT's order because it contains "fundamental mistakes."
According to the Court, the Tribunal had approved a prayer that had not been requested.
Tata Consultancy Services Limited v. Cyrus Investments Pvt. Ltd.[4]
Facts of the Case
The Sapoorji Pallonji Group (SP Group), led by Cyrus Mistry, owned 18.37 percent of Tata Sons Limited's total paid-up share capital. Cyrus Mistry was named as the Tata Sons' Executive Deputy Chairman for a five-year term in 2012.
By the end of the year, the Board of Directors had named Cyrus as the Executive Chairman of Tata Sons, effective December 29, 2012, while Ratan Tata was named Chairman Emeritus.
On October 24, 2016, the Tata Sons Board of Directors issued a resolution removing Cyrus from his role as Executive Chairman of the company.”
After separate shareholder votes, Cyrus was dismissed from the board of directors of Tata Industries Ltd., Tata Consultancy Services Ltd., and Tata Teleservices Ltd..
Following that, Cyrus resigned from a few additional board positions. Following that, two SP Group firms, Cyrus Investments Pvt. Ltd. and Sterling Investment Corporation Pvt. Ltd., filed a company petition under Sections 241, 242, and 244 of the Companies Act, 2013, alleging mismanagement, oppression, and discrimination.
The complainants also questioned Tata Sons' shift from a public to a private company.”
The National Company Law Tribunal ruled that Cyrus Mistry's dismissal as executive chairman was unconstitutional and ordered that he be reinstated.
The Supreme Court delayed the NCLAT order in January 2020, and the verdict was postponed until December 17, 2020.
The Supreme Court has now ruled that Tata Sons' conduct did not amount to minority shareholder persecution or mismanagement.
Judgment
The judgment went in the Tata Group's favor.
The bench dismissed Cyrus Mistry's allegations of persecution and mismanagement against Tata Sons Limited. A Supreme Court bench led by Chief Justice S A Bobde, Justice V Ramasubramanian, and Justice A S Bopanna made the judgment.
On December 18, 2019, the Supreme Court postponed the National Company Law Appellate Tribunal (NCLAT) ruling to reinstate Cyrus Mistry as executive chairman of Tata Sons.
The Supreme Court held that the Company Law Tribunal could not intervene in the removal of a person as a Chairman of a Company in a petition filed under Section 241 of the Companies Act, 2013, unless the removal is oppressive, mismanaged, or done in a prejudicial manner harming the company, its members, or the public at large.
The court decided that removing a person as Chairman of the Company is not a subject matter under Section 241 of the Companies Act unless it is proven to be "oppressive or harmful." Sections 241 and 242 of the Companies Act of 2013 do not specifically give reinstatement authority, according to the court.
As a result, on December 18, 2019, the Supreme Court overturned the National Company Law Appellate Tribunal's (NCLAT) order to reinstate Cyrus Mistry as executive chairman of Tata Sons.
AK Bindal vs Union of India[5]
Facts of the Case
In 1961, two fertilizer businesses, Hindustan Fertilizers Limited and Sindri Fertilizers and Chemicals Limited, merged to form Fertilizer Corporation of India (hence referred to as FCI).
FCI had seventeen fertilizer units under its control from 1961 to 1977; seven of them were operational, and the other ten were in various phases of implementation.
The Government of India established a committee in 1978 to figure out the mechanisms for reorganizing the fertilizer business, and the committee suggested that FCI and National Fertilizer Ltd be split up (hereinafter referred to as the NFL).
FCI and NFL were split into five new enterprises as a result of the recommendation, and the units were dispersed among the new undertakings.
The Hindustan Fertilizer Corporation ltd was one of the newly established businesses (hereinafter referred to as HFC).
Haldia, Namrup, Durgapur, and Barauni were the four units assigned to HFC. Sindri, Gorakhpur, Ramagundam, Talcher, Korba, and Jodhpur were among the six units preserved by FCI. Rashtriya Chemicals and Fertilizers Ltd, National Fertilizers Ltd, and Project and Development India Ltd were the other companies formed as a result of the split.
Following the reorganization, a new pattern of industrial payment and dearness allowance was implemented, beginning September 1, 1977.
On September 3, 1979, the Government of India's Department of Chemicals and Fertilizers published a circular announcing that the pay scale and fringe benefits of all FCI/NFL personnel would be revised at the same time.
Hence, all five firms' officers were to be treated the same in terms of compensation raises and fringe perks.
It's safe to say that the September 3, 1997 circular established the principle of uniform treatment, which the petitioner later claims.
The pay scale modification was due on August 1, 1986, but it was not implemented since the government did not pursue it.
Nonetheless, the administration decided to provide ad hoc aid to all public-sector officers. The relief was paid to all officers at a uniform rate beginning August 1, 1986, and was based on the pattern of the industrial DA and related pay grades.
The Bureau of Public Officers proposed a second ad hoc relief to the officers because the government had not decided on revising the pay scales and benefits of all officers working in public sector enterprises (hence referred to as PSEs) across the country.
As a result, on January 24, 1990, FCI and HFC issued circulars providing for the payment of ad hoc relief to its officers.
Until this point, the five corporations' officers were treated the same way regarding compensation revisions and other fringe benefits.
It's worth noting that the updated pay scales that went into effect on January 1, 1987, stayed in effect for the next five years.
The next pay scale change was due on August 1, 1992. However, the salary schedule and fringe perks for FCI and HFC officers were not changed because the two companies were losing money.
What's crucial to notice here is that the improved pay scale was extended to the remaining enterprises of the former FCI/NFL group.
Following that, the Department of Public Enterprises issued an office memorandum on wage policy for the fifth round of wage negotiations in public sector enterprises in April 1993, which directed PSE management to begin wage negotiations with trade unions and associations while also notifying them that under the new wage policy, management had the liberty to negotiate wage structure subject only to the generation of resources and profits by the individual.
This was followed by the Department of Public Enterprises' disputed office memorandum dated July 19, 1995, which stated that pay revisions and other benefits would be granted to sick PSEs registered with the Board for Industrial and Financial Reconstruction only if the unit was decided to be revived, and the revival package would include the increased liability on this account.
The present writ petitions were filed in the Delhi High Court and transferred to the Supreme Court to be disposed of by a common order because of the differential treatment meted out to the officers of HFC and FCI in terms of payment of wages and fringe benefits based on profits and losses incurred by the companies.
Judgment
The decision has its roots principally in corporate and labour law.
The petitioners also included fundamental rights in the form of a right to livelihood, but the court's decision clearly delineated the rights' bounds.
The parameters thus established are appropriate for the case's unique circumstances and do not depict a dismal scenario in which the court has abandoned the cause of justice.
The court took into account the government's ongoing attempts to resuscitate the ill units and the government's non-budgetary assistance. Given the tremendous losses both companies have been experiencing, the fact that the employees were paid remuneration is due to the government.
All attempts to resurrect the ill units failed. The government's voluntary retirement scheme effectively addressed the problems of both companies' employees.
When using this decision as a precedent, however, the individual facts and circumstances of the case must be considered before pressing for its adoption.
Because the many concepts developed in this judgment are unique to the facts and circumstances of this case, it must be read in context.
Would employees have a claim if the benefits under the voluntary retirement arrangement were woefully inadequate, for example?
Would the court have gone one step further in the interests of justice and permitted payment of the claim for 60% of the benefits due, as requested in the prayer?
Another concern is whether the verdict would have been different if the sick units had been given a fair chance to recover.
Finally, would the court have recognized the employees' right to livelihood if the petitioners had presented evidence that the wages paid to the employees were insufficient to meet their fundamental needs?
It cannot be denied that the courts have applied stringent laws and precedents to the current case, but they have also highlighted the case's unique circumstances.
Sri Gopal Jalan & Co. v. Calcutta Stock Exchange Association Ltd[6]
Facts of the Case
In this case, the appellant, who was accepted as a shareholder in the respondent Company for the purposes of the proceedings, claimed that the company had failed to file a return of the allotment of his shares with the registrar as required by law and filed a complaint with the High Court in Calcutta.
Judgment
The definition of the word allocation as defined under Section 75(1) of the Companies Act, 1956 was challenged in court. The Court determined that re-issuing a forfeiture share is not the same as an allotment of a share as defined by Section 75 (1).
The term "allotment" refers to the company's acceptance of a share offer.
Seth Mohan Lal v. Grain Chambers Ltd[7]
Facts of the Case
The respondent corporation was established to conduct specific operations in the area of commodity exchange, which included jaggery.
The company's AOA made it mandatory for all of the company's members to engage in the company's commercial transactions.
These transactions were carried out under the 1913 Companies Act, which did not restrict a director from conducting business with the corporation.
In 1936, the Act was revised to make it illegal for directors to engage in business with the corporation.
However, the Company's business model remained unchanged. The appellant company had entered into a transaction with the respondent and had made significant financial deposits in the respondent's account in connection with the transaction.
The appellant company had entered into a transaction with the respondent and had made significant financial deposits in the respondent's account in connection with the transaction.
On February 15, 1950, the Indian government issued a decree prohibiting anyone from engaging in 'future' in jaggery transactions or making or receiving payments relating to any futures after that date.
Filing a petition against the corporation following such resolution and closing down their business for settling all outstanding transactions before the closing day at the prevailing rate.
Judgment
The appeal court ruled that the notification voids outstanding guts and future transactions.
As a result, no case was made out from the company's closure, and the notification against futures trading in the gut was to function in the viewpoint.
Shanti Prasad Jain v. Kalinga Tubes Ltd[8]
Facts of the Case
The current problems are a dispute between two parties for the company's management, notably M/s Kalinga Tubes.
The appellant's main claim is that the majority of shareholders are oppressing minority shareholders and mismanaging the company's activities. Patnaik and Loganathan, two sets of owners, were in charge of the corporation.
The appellant, Patnaik, and Loganathan entered into an arrangement under which the appellant was awarded the same number of shares as the current shareholders, giving him equal power and voice in the company's finances and management.
This agreement was made in the personal capacity of the stockholders, with the firm being excluded as a party.
However, the AOA was not updated to reflect the subsequent revisions. The three groups of shareholders turned the corporation into a publicly-traded company.
A notice of the general meeting was issued to raise capital and allot extra equity shares to outsiders rather than current shareholders.
Following that, the appellant filed an application under sections 397, 398, 402, and 403 of the Companies Act, 1956, to stop the majority shareholders from oppressing smaller shareholders.
The application further claims that the majority shareholders group excluded the minority group from the company's management by attaining 75 percent voting rights in violation of the 1954 agreement.
The appellant further claimed a lack of fair play, a fair deal, a lack of probity, firm mismanagement, and a lack of faith and trust.
Judgment
It concluded that no such oppression had been established as a result of mismanagement of the Act under S 397 and S 398.
Even if they were friends of the majority group of shareholders, the seven people to whom the new shares were offered were independent.
Section 81 of the Act does not prohibit the general meeting from passing resolutions. When the public corporation was established in 1957, the agreement on which the case of oppression was based was not binding even on the private firm.
It was truly an agreement between a non-member and two company members, and while the agreement was mostly followed for a while, some of its stipulations could not be incorporated into the public company's articles of the association because the company was not obliged by it.
Recent Cases under Companies Act, 2013
The petition for oppression and mismanagement was submitted by the Government of India in the case of Union of India v. Delhi Gymkhana Club[9].
When the Central Government files a complaint under Section 241(2), it is required to state its opinion as to whether the company's activities are being conducted in a way harmful to the public interest, and expressing such opinion is a sine qua non for filing to the Tribunal under Section 241(2).
The Tribunal is unable to assess the sufficiency or otherwise of the material on which the government has formed its opinion, particularly when no mala fide is imputed to the Central Government.
The term 'public interest' cannot be interpreted to mean all Indian nationals.
It would be sufficient if the rights, security, economic well-being, health, and safety of even a small segment of society - such as candidates seeking membership in the category of common citizen - were impacted.
The NCLAT concluded in Smruti Shreyans Shah v. The Lok Prakashan Ltd. & Ors.[10] that if a prima facie case is made out, the Tribunal might make interim directions under Section 242.
It was noted that the Tribunal's entry of an interim order under Section 242(4) presupposes that the company's affairs have not been or are not being conducted in compliance with the provisions of law and the Articles of Association.
To establish a prima facie case, the member alleging tyranny and mismanagement must show that he has asked reasonable questions in the Company Petition that demand investigation.
In Aruna Oswal v Pankaj Oswal & Ors[11], the Supreme Court held that because questions of right, title, and interest in shares as a result of nomination were pending before a civil court, which had ordered status quo in relation to the SC matter, it would not be open to a shareholder whose title to the shares had been disputed and who was not eligible to maintain a petition under Section 244, to agitate matters relating to the disputed shares by way of a petition for oppression and mismanagement, including by seeking a waiver of the requirements under Section 244.
The NCLAT was held in Dhananjay Mishra v Dynatron Services Private Limited & Ors[12]. That acts of non-service of notice of meetings, financial discrepancies, and non-appointment of directors, all of which are specifically dealt with under the Companies Act and fall within the Tribunal's jurisdiction to consider grant of relief under Section 242 of the Companies Act, render the dispute non-arbitrable, even though it cannot be disputed as a broad proposition that the dispute arising out of breach of contractual obligations referable to the MOUs or otherwise would be arbitrable.
The NCLAT enabled the government to imprison a company's auditors in the instance of fraud and mismanagement in Deloitte Haskins & Sells LLP v Union of India[13]. The Central Government filed a petition against Infrastructure Leasing & Financial Services ("IL&FS") and IL&FS Financial Services (IFIN) alleging fraud, mismanagement, and conduct of affairs injurious to the public interest, among other things, under Section 241(2).
The Central Government also sought to prosecute IL&FS and IFIN's statutory auditing companies and the auditing firms' partners (those who were still working with the firm or who had resigned).
The auditors disputed this, claiming that they were not essential parties to the proceedings and that they had resigned as auditors prior to the Central Government's institution of the proceedings.
The NCLAT rejected the argument, holding that the Tribunal's powers under Section 242 are broad and that the Tribunal might hear any party, including the former auditors, before issuing an order to preserve the public interest or the company's interests.
Conclusion
We came across several issues that a company, its shareholders, employees, and employers encounter while at work.
Issues such as whether or not a corporation can be sued and sued in its name or whether or not a company's members can be held accountable for any wrongdoing.
We also noted the issue of the prospectus being published, the business being wound up, and so on.
So, the court deals with all of these concerns by providing answers and establishing a plausible nexus, thereby bringing clarity and understanding to the situation.
References
https://www.lawyersclubindia.com/articles/landmark-judgments-of-corporate-law-13988.asp
[1] UKHL 1, AC 22 [2] 6 E&B 327 [3] 2017 SCC OnLine NCLAT 261 [4] 2017 SCC Online SC 272 [5] (2003) 5 SCC 163 [6] 1964 AIR 250 [7] 1968 AIR 772 [8] AIR 1965 SC 1535 [9] 2021 SCC OnLine NCLAT 123 [10] Company Appeal (AT) No. 25 of 2018 [11] Civil Appeal No. 9340 of 2019 [12] Company Appeal (AT) 389 of 2018 [13] Company Appeal (AT) 190 of 2019