Joint ventures or investments with shareholders having equal shareholding are difficult to navigate. With most business and operational decisions being taken by the board of directors or requiring the shareholders to pass resolutions as required under the Companies Act, 2013, failure to agree on the way forward or operational direction, can result in an impasse, with the potential of bringing the company operations to a halt. There is a need for ensuring a mechanism for the fair resolution of such impasses, or shareholder deadlocks. In its recent order in Hormouz Phiroze Aderianwalla v Del. Seatek India Private Limited, NCLT Mumbai has reaffirmed that share buyouts may be ordered for the resolution of deadlocks in the day-to-day management of a company having an equal shareholding pattern and / or equal director representation amongst its shareholders.
In this case, the NCLT had been presented with a dispute arising under Sections 241 and 242 of the Companies Act, 2013, where opposing groups of shareholders with equal shareholding in the respondent company - Del. Seatek India Private Limited ("Respondent Company") - had alleged oppression and mismanagement on part of one another.
In this case, petitioners 1 and 2 (collectively the "petitioners") represented one half of the shareholding of the respondent company, while respondents 1 and 2 (collectively the "respondents") represented the other. The petitioners submitted before the NCLT that the respondents had abstained from participating in the affairs of the respondent company for more than 6 (six) years, but - to the prejudice of the respondent company - continued to draw disproportionate remuneration, perquisites, allowances, dividends, profit share and other benefits from the respondent corporation.
The petitioners alleged that while the respondent corporation had been managed solely by them during this period, the respondents kept presenting hurdles in the management of the respondent corporation by (i) preventing it from securing an unsecured loan from a creditor ("creditor") during its time of financial distress, (ii) unilaterally overtaking the operational and financial matters of the respondent corporation, (iii) unilaterally authorizing payments to be made to themselves as remuneration, (iv) manufacturing fraudulent board meeting minutes, and (v) fraudulently altering the signatories and the mode of operation of the respondent corporation's current bank account.
On the other hand, the respondents submitted similar allegations of actions prejudicial to the respondent company taken by the petitioners. The respondents submitted that the understanding between the parties was that the petitioners would take care of the day-to-day operations of the respondent company, while the respondents would oversee the finances and business development. The respondents added that the petitioners had further agreed that the respondent company would only have 4 (four) directors to ensure transparency and concurrence in the decision making, an understanding that was later violated by the petitioner's alleged addition of the creditor to the board. The respondents further submitted that the petitioners had (i) refused to provide them the financial data of the respondent company, (ii) skipped the board meeting of the respondent company, the minutes of which were circulated, and (iii) siphoned off its funds to entities set-up by the petitioners abroad.
The NCLT noted that both groups of shareholders had made allegations of oppression and mismanagement against each other resulting in a complete deadlock of the day-to-day management and operations of the respondent company to the point of non-filing of the statutory compliances. Such instances of complete deadlock of a company resulting from disagreements between warring factions of equal shareholders may be resolved by allowing a buy-out of the shares of one party by the other.
The NCLT further observed that, "both the parties have also not undertaken to follow through any other mode of resolution or settlement and the only way out is the buy-out/sell-out preposition based on the valuation report shared by the petitioners."
Thus, the NCLT made it clear that such buy-out of shares may be ordered where other means of resolution of the deadlock are not possible.
The NCLT directed the petitioners to buyout the shares of the respondents in the respondent company within 6 (six) months and thereby ensured the exit of the respondents from the respondent company. It is noteworthy that the direction of the NCLT was not passed based on an assessment of the allegations levelled by the petitioners and the respondents, but on the assessment of the best interests of the respondent company.
"The said direction of buying out the shareholding of the R2 and R3 [Respondents] is passed keeping in view the deadlock in the company and considering the fact that the warring factions before us can no longer do business together. Needless to say, the direction is passed in the interest of the respondent company alone without delving into the allegations of Oppression levied by both sides," the NCLT clarified.
The decision of the NCLT in Hormouz Phiroze Aderianwalla v. Del Seatek India Private Limited reaffirms its authority to resolve corporate deadlocks through share buyouts when other remedies are unavailable. The objective of the NCLT's buyout solution is to simply ensure the exit of one of the parties to break the impasse. The NCLT's decision indicates that the buyout offer should be floated by the party, which, in the tribunal's opinion, would better ensure the continued viability of the company and its future. Further, the buyout offer would be made for all the shares held by the other party, at the price per share valuation accepted as fair by the tribunal, and within a prescribed time period.
By prioritizing the buyout, the tribunal underscored that in cases where the internal governance of a company collapses due to a deadlock, the best interests of the company must prevail over the individual grievances of the parties involved. The NCLT, rather than assessing the competing allegations of oppression and mismanagement, focused on breaking the deadlock for the continued viability of the business. While this decision serves as a precedent for future cases, emphasizing that in situations of deep-seated shareholder disputes, buyouts can serve as an effective legal remedy to safeguard the company’s operations and future. The buyout solution of the NCLT also highlights the need for parties to ensure that JV or shareholders' agreements are clearly drafted with deadlock and exit options as well as the price at which such buyout or exit will take place, being well defined.
About the authors: Ashima Obhan is a Senior Partner & Head of Corporate Law, M&A, and TMT Practice at Obhan & Associates. Pratyush Singh is an Associate at the firm.
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