In Drharors Aesthetics Private Limited v Debdulal Banerjee, Delhi High Court set aside a commercial court’s interim injunction under section 9 of the Arbitration and Conciliation Act, 1996 (ACA). The injunction restrained the appellant company from convening meetings and acting on an agenda to consider the respondent’s removal from his directorship. The court held that the commercial court’s order unjustifiably interfered with the company’s internal governance and granted final relief without determining the existence of a prima facie case, the balance of convenience and whether irreparable harm was caused.
Ambar Bhushan
Partner
Bharucha & Partners
The appellant company restricted the respondent’s email access and withheld his salary, ultimately issuing notices to convene board meetings to consider the respondent’s removal. The respondent invoked arbitration under his employment contract and shareholders’ agreement and applied to the commercial court for a stay of the meeting and agenda. In the alternative, the respondent asked that any decision taken at such board meetings should not take effect.
The respondent argued that the meetings breached sections 169 and 173(3) of the Companies Act, 2013 (2013 act), because they were convened without giving him a reasonable opportunity to be heard and gave less than the minimum seven days’ statutory notice. The appellant argued that the short notice was necessary because the respondent was obstructing corporate processes, was involved in financial irregularities and was paralysing the appellant’s operations. The commercial court enjoined the appellant from convening the board meetings scheduled or acting on the agenda to remove the respondent from directorship.
On appeal, the high court set aside the interim order. It held that the powers under section 9 of the ACA must not be used to obstruct corporate governance in circumstances where the 2013 act provides “appropriate remedial mechanisms”. The court applied the principles laid down in the context of civil suits by the Supreme Court in Life Insurance Corporation of India v Escorts Limited, Delhi High Court in Jai Kumar Arya v Chhaya Devi and Ravinder Sabharwal v XAD Incorporated and the Bombay High Court in Invesco Developing Markets Fund v Zee Entertainment Enterprises Limited.
The judgment rightly set aside the interim relief granted. However, an important issue appears not to have been considered: The exclusive jurisdiction of the National Company Law Tribunal (NCLT) in matters concerning the removal of directors under sections 169 and 430 of the 2013 act, read with rule 79 of the National Company Law Tribunal Rules, 2016 (2016 rules).
Section 430 of the 2013 act bars civil courts from accepting any case or proceedings in respect of any matter that the NCLT or the National Company Law Appellate Tribunal is empowered to determine under the 2013 act. As held in Invesco, if an application is to be heard by the NCLT under the 2016 rules, and such rule explicitly mentions a provision of the 2013 Act, the civil courts’ jurisdiction is ousted.
Rule 79 of the 2016 rules provides a specific statutory remedy for a company or director aggrieved under section 169 of the 2013 Act. Therefore, the respondent’s primary grievance under section 169 of the 2013 Act should only have been heard by the NCLT.
Although Delhi High Court correctly applied general principles of judicial restraint in corporate governance matters, by not ruling on this jurisdictional bar at the outset, it missed an opportunity to reinforce the legislative intent behind codification and the use of tribunals.
These reforms were intended to ensure clarity, put disputes before specialised forums and reduce the backlog of civil courts. Greater awareness of the 2013 act and the 2016 rules at the lower courts is essential to stop disputes related to corporate governance from being unnecessarily litigated in the civil courts.
Courts of record can serve the objectives of efficiency and certainty by addressing, and requiring subordinate courts to address, jurisdictional ousters at the threshold of a suit or application, rather than adjudicating corporate governance disputes on merit. A recognition of the jurisdictional ouster would have furthered certainty, efficiency and institutional coherence; the objectives of India’s company law reforms.
Ambar Bhushan is a partner and Aaryan Goyal is an associate with Bharucha & Partners.
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