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Invesco v Zee Judgement: Upholding the Pillars of Corporate Democracy

Govinda Asawa and Yuman Islam are second-year students at Gujarat National Law University, Gandhinagar.

Background

The recent judgement by a Division Bench of the Bombay High Court in the case of Invesco Developing Markets Fund (“Invesco”) v. ZEE Entertainment Enterprises Limited (“ZEE”) clarified the position of law with respect to the right of the shareholders to call an Extraordinary General Meeting (“EGM”). The issue dates back to September 2021 when Invesco, which is the largest shareholder of ZEE, requisitioned an EGM under Section 100 of the Companies Act, 2013 (“the Act”). The requisition notice had proposed a total of nine resolutions that included the removal of Punit Goenka as MD of ZEE and the appointment of six new independent directors to the Board of ZEE (“the Board”). As the Board failed to announce a date for holding the EGM, Invesco filed a petition in the National Company Law Tribunal (“NCLT”) under Section 98 of the Act. Later, the requisition notice was rejected by the Board stating that the proposals introduced in the requisition notice were invalid. In response to the NCLT petition, ZEE approached the Bombay High Court wherein the Ld. Single Judge ruled in favour of ZEE. It was in appeal to this ruling of the Single Judge that the recent Judgement was pronounced by the Division Bench that corrected the previous ruling and will go a long way in reasserting the rights of activist shareholders.

Critical Analysis

Interpretation of Section 100:

Valid Requisition -

Section 100(4) of the Act gives the power to the shareholders to requisition an EGM if within twenty-one days of a ‘valid requisition’ the Board doesn’t call a meeting. According to the Ld. Single Judge the term ‘valid requisition’ meant that the objectives proposed in the requisition notice by the shareholders was supposed to be legal in nature. In support of this contention reliance was placed on Section 303(5) of the Companies Act, 2006 in England (“the English Act”) which states that such a resolution would not be moved that “if passed, be ineffective”. According to the Ld. Single Judge, though Section 100 of the Act never talked about the legality of the proposed resolutions but unlike Section 303 of the English Act, it was implicit under Section 100 though not expressly mentioned. The judgement by the Division Bench corrected this erroneous interpretation of Section 100 by the Ld. Single Judge & held that the term ‘valid requisition’ only referred to the numerical and procedural requirements mentioned under Section 100(2)(a) of the Act according to which a shareholder having at least one-tenth of the paid-up share capital of the company can requisition an EGM. Since Invesco was holding 17.88% of ZEE’s equity, it fulfilled the numerical conditions under Section 100 of the Act and was well within its right to call an EGM.

Reliance on LIC v. Escorts -

The judgement of LIC v. Escorts (“LIC”) is a landmark ruling of the Supreme Court when it comes to power of the shareholders to requisition an EGM. In that case it was held by the Hon’ble Supreme Court of India that the notice of requisitioning an EGM by LIC couldn’t be questioned on the ground of which it was called. The lawyers of Invesco had cited the case of LIC before the Ld. Single Judge but the Judge didn’t consider the ratio laid down in LIC stating that facts in LIC didn’t apply to the present case as it dealt with mala fides and not the legality of a requisition notice. The Ld. Single Judge went with the reasoning given by the Bombay High Court in the case of Centron Industrial Alliance Ltd. v. Pravin Kantilal Vakil and Anr. according to which courts could consider the legality of the resolutions proposed. Here, the Ld. Single Judge failed to consider the fact that the judgement of LIC was pronounced by a constitutional bench of the Apex Court & was binding on the high court. The Division Bench corrected this view & held that the decision in LIC “applies squarely to the facts of the present case”. Moreover, the recent judgement also negated the reliance by the Ld. Single Judge on cases from foreign jurisdictions stating that the judgement of LIC by the Hon’ble Supreme Court will prevail as a judicial precedent over the foreign cases. The authors agree with the view taken by the division bench as the Indian position of law is different from that of England, which is evident by the fact that Section 100 doesn’t talk about the legality of the resolutions like Section 303 (5) of the English Act.

Bar on the Jurisdiction of the High Court:

Section 430 of the Act bars any civil court from taking cognizance of any matter that can be tried by the tribunal (NCLT) or the appellate tribunal (NCLAT). Subsequently, Section 98 of the Act, gives the right to the tribunal to call an EGM if it becomes “impracticable” for any reason to call such an EGM. However, the Ld. Single Judge relying on the National Company Law Tribunal Rules, 2016 (“NCLT Rules”) stated that the “NCLT Rules that set out the list of provisions over which the NCLT/NCLAT have jurisdiction does not include Sections 100, 149, 150 or 168”. The Division Bench overruled this interpretation and held that NCLT Rules couldn’t override the express bar on the jurisdiction of the High Court under Section 430 of the Act. It is also to be noted that the NCLT rules are a delegated legislation and it’s a general rule of statutory interpretation that the delegated legislation has to be read in consonance with the parent legislation. Therefore, even if NCLT Rules didn’t expressly mention that NCLT has jurisdiction under Section 100 of the Act, it doesn’t mean that the bar under Section 430 of the Act wouldn’t apply to Section 100 of the Act. Moreover, the Eradi Committee Report on the recommendations of which the NCLT and NCLAT was established had emphasized the need for adjudicating all company law matters under a single national tribunal so as to decongest the High Courts. In the case of Union of India v. R Gandhi, President, Madras Bar Association (R Gandhi), the Apex Court held that the complete transfer of the company law matters from the High Courts to the Tribunals was not unconstitutional & was in-fact an inevitable consequence of the creation of the Tribunal. Therefore, as rightly laid down by the recent judgement, the Ld. Single Judge exceeded its jurisdiction by undertaking the dispute for consideration in the first place. It is to be noted that had the decision of the Ld. Single Judge been upheld, it would have resulted in a parallel jurisdiction of the High Court along with the NCLT to try company law matters and would have gone against the law laid down in R Gandhi case and the intent behind the creation of the specialized tribunals (NCLT & NCLAT).

Strengthening the Corporate Regime:

Soon after winning the appeal in its favour, Invesco withdrew its requisition notice to call an EGM. The ZEE-Invesco dispute seems to have settled down for now but nonetheless, it brought forth some glaring inconsistencies in the Indian Corporate regime. Considering that the present judgement’s applicability will only have persuasive value for other state jurisdictions, there is a need for an amendment in the Act dealing with scenarios when the objective behind calling an EGM is invalid and whether the board can sit on the validity of such a requisition notice. An amendment clarifying the Indian position of law in cases when the legality of the resolutions proposed in the requisition notice is in question will be a step in the right direction. Secondly, it may be prudent to introduce a clear demarcation in the NCLT rules to the effect that matters relating to calling an EGM are the exclusive domain of being tried by a tribunal and hence no civil court can have jurisdiction over the same. This will bring the NCLT Rules in sync with section 430 of the Act and the supremacy of Section 430 of the Act will be strengthened.

Conclusion

India has been recently witnessing a growing trend in shareholders demanding their rights to be acknowledged and the pillars of corporate democracy to be protected. Apart from Invesco going into an open altercation with the promoters of ZEE, we also saw DISH TV finding itself in a similar situation with its differences related to YES Bank. In light of the government wanting to promote the image of India as an investor-friendly nation, the recent judgement will go a long way in upholding shareholder rights. Requisitioning an EGM is a basic mechanism for aggrieved shareholders to voice their concerns. In a situation where ZEE would have been allowed to decide on the validity of the requisition and get an injunction by a civil court, it would have set a bad precedent in law. Whenever a shareholder would have called an EGM, the Board of Directors of the company would have deemed it illegal and gained an injunction on the EGM from the relevant court. This would have led to various frivolous proceedings being initiated before Civil Courts in case of leading corporate battles thereby negating the very purpose of the enactment of Section 430 of the Act of having a specialized adjudicating forum. The Hon’ble Division Bench by restating the law related to the basic right of the shareholders to call an EGM has successfully preserved the pillars of corporate democracy in the country. The judgement will also lead to a boost in shareholder sentiments which will culminate in the form of more investments in India.

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