NCLAT: Procedure Adopted in 2018-2019 Election of FHRAI President is Clearly an Act of Oppression and Mismanagement

NCLAT: Procedure Adopted in 2018-2019 Election of FHRAI President is Clearly an Act of Oppression and Mismanagement

The National Company Law Appellate Tribunal (NCLAT) while adjudicating the appeal filed in the matter of Hotel & Restaurant Association of Western India (HRAWI) and Hotel & Restaurant Association of Northern India (HRANI), upheld order passed by the National Company Law Tribunal (NCLT) order and held that the procedure adopted in the election of the President of FHRAI for the year 2018-19 as interpreted by the siting President- Mr. Garish Oberoi was clearly an act of oppression and mismanagement, which if not checked at nascent stage right in the beginning, can result in further oppression of Federation of Hotel & Restaurant Associations of India (FHRAI) members and mismanagement of the affairs of the company to the detriment of the functioning of the company FHRAI and against the legitimate interests of its members.

The two-member bench of Justice Rakesh Kumar Jain (Judicial Member) and Dr. Alok Srivastava (Technical Member) opined that the intent of Sections 241-242 of the Companies Act, 2013 is to protect the company's members from acts of oppression and mis-management and to also protect and preserve the interest of the company, and in that light in the present case, the acts clearly constituted acts of 'oppression and mismanagement.'

The brief facts of the case are that two appeals have been filed under section 421 of the Companies Act, 2013 by the respective Appellants- Hotel and Restaurant Association of (Western India) & Anr. and (HRAWI) Hotel and Restaurant Association of Northern India & Anr (HRANI) against the respondent- Hotel and Restaurant Federation Association of Eastern India & Ors. and Hotel and Restaurant Association of Eastern India & Ors (HRAEI) assailing the order dated 30.8.2022 passed by the National Company Law Tribunal, New Delhi (in short "NCLT").

This company petition alleged oppression and mis-management on the part of FHRAI regarding the appointment of the nominee of Respondent No. 1 as the President of FHRAI. The Appellants stated that the appointment of President of FHRAI was done in accordance with Article 52 of Articles of Association (in short 'AoA') of FHRAI, according to which the President of FHRAI shall be elected by the members of the Executive Committee region wise by rotation, for one term in the order of Eastern Region, Western Region, Southern Region and Northern Region, and in the year 2018-19 it was the turn of Hotel & Restaurant Association of Eastern India (in short 'HRAEI') to get its candidate elected as the President of FHRAI.

The Appellants further stated that the election of the President is carried out by members of the Executive Committee of FHRAI and the Executive Committee comprises of six members each from each of the four regional associations. They stated that the regional associations elect six members each to represent them in the Executive Committee of FHRAI, and thus, 24 members who constitute the Executive Committee elect the President of FHRAI for a term of one year from the date of election of the President.

The three issues that arose for consideration in the instant appeals are as follows:

(i) Whether petitioners in the original Company Petition of 2018 (CP) were entitled to maintain the said Company Petition under sections 241-242 of the Companies Act and whether the waiver granted to them under section 244 to prefer such a petition is correct?

(ii) Whether the alleged acts of oppression and mis-management as claimed by the petitioners in original CP actually amount to oppression and mis-management as claimed by the petitioners in original company petition and as are required for a section 241-242 petition; and

(iii) Whether the AoA regarding election of President of FHRAI have been followed properly in letter and spirit in the election of President of FHRAI for the year 2018-19, as was required by law?

The NCLAT was of the view that the first issue of whether the 'waiver' granted by NCLT to the petitioners if CP is correct as per law and in the facts of the case. The NCLAT noted that the original CP 2018 was preferred by eleven petitioners, with HRAEI being petitioner No. 1 and petitioners Nos. 2 to 11 are members of FHRAI. The company petition specifically noted that HRAEI, which is petitioner No. 1, has around 450 hotel members, 266 restaurant members and around 58 associate members, all located in the states of Eastern India. It further noted that HRAEI is an Organization Member of FHRAI having membership no. 50001 and petitioner nos. 2 to 11 are also members of FHRAI.

Thus, while petitioner no. 1 is one single member of FHRAI, it actually represents at least 774 members from the Eastern Region and other petitioners are also members of FHRAI. FHRAI is a company, which does not have share capital and as per Section 244(1) (b), not less than 1/5th of total members of FHRAI have the right to maintain a petition under sections 241-242 of Companies Act. The proviso to section 244 (1) provides that NCLT may waive all or any of the requirements specified in clauses (a) and (b) of section 244 (1) so as to enable members to apply under section 241.

The NCLAT while noting the facts and circumstances pleaded by the Respondent HRAEI, was of the view that the acts of oppression and mis-management have continued in one form or the other right, and therefore, in the interest of corporate democracy and to ensure proper functioning of FHRAI in accordance with the AoA and to examine the alleged acts of oppression and mismanagement, the NCLAT was of the view that it is a case whether exceptional circumstances demand grant of waiver under section 244 of the Companies Act to enable the petitioners of CP 2018 to raise their grievances which could then be adjudicated upon. The NCLAT thus held that the Impugned Order was correct on this account.

On the second issue whether the actions of the sitting President- Mr. Garish Oberoi and other Executive Committee members, mainly from the Western and Northern Regions, could be labelled as acts of oppression and mis-management.

The NCLAT found that there was certainly an under-current of feeling against the Eastern Region members, and Mr. Sudesh Kumar Poddar among the Western and Northern Regions was fully qualified to contest for the post of President, FHRAI, and that the Eastern Region Executive Committee members decided to put forward his name as the sole candidate for the post of President of FHRAI, the members of Executive Committee from Northern and Western Regions were insistent on accepting any other member as President except Mr. Sudesh Kumar Poddar, which is a stand that did not have any legal or rational basis.

"Thus, this act of the Western and Northern Region members in EC is definitely an act of oppression and mis-management and when seen in conjunction with the earlier incident where members of Western and Northern Region were bent upon amending the AoA to increase the number of terms of membership in the Executive committee, it is clear that those members, who either stood to benefit from such an amendment or who were supporting it would be peeved or unhappy with the stand taken by Mr. Sudesh Kumar Poddar," the NCLAT stated in its order.

The bench while referring the judgment of Supreme Court in the matter of Chatterjee Petrochem (India) Private Limited held that the conduct of the majority shareholders should be considered not in isolation, but as part of consecutive story in order to maintain a case of oppression of the minority member. In the present case it was seen that from the time certain members of the Executive Committee initiated attempt to amend clause IV (b) and (c) of Appendix A of AoA, which was resolutely opposed by some other members of the Executive Committee.

On the third issue, which was related to the procedure adopted in this election of President of FHRAI for the term 2018- 2019. The bench on perusal of the minutes of the Executive Committee meeting dated 30.10.2018, clearly found that the members of the Western and Northern regions in the Executive Committee had formed a clique and were relentlessly pursuing their iniquitous, perverse and flagrant design to block the appointment of Sudesh Kumar Poddar as President of FHRAI as preferred candidate of the Eastern Region. Such acts of Executive Committee members, mainly by the above stated members of the Northern and Western regions, were clearly acts of oppression of members of the Eastern region and that the outgoing President-Mr. Garish Oberoi was clearly an active party in perpetuating such illegal acts.

The bench asserted that, these acts constituted acts leading to mismanagement of the affairs of the company, which would be covered under sections 241-242 and which are not merely 'directorial complaints.'

The NCLAT after referring to various judgments and the provision from The Representation of the People Act, 1951, observed that, "even when there is a single candidate in fray, she will be elected unopposed provided she is eligible to contest, and such election is proper and legitimate election in the eyes of law. Thus, the act of the Appellants not to let Mr. Sudesh Kumar Poddar's name be proposed as a 'nominated' candidate of the Eastern Region when no other candidate opposing him was in the fray, was certainly not in accordance with the principle of corporate democracy and corporate governance and also not in consonance with the requirement of Article 52 of the AoA of FHRAI."

While holding this view the bench was conscious of the fact that even for the years 2014-15, 2015-16, 2016-17 and 2017-18, there was a single candidate every year, who was elected unopposed as President of the FHRAI in the respective years and at that time nobody raised an issue about the nomination of a single candidate from the particular region.

The NCLAT was of the view that the directions laid by the NCLT order was 'just and fair' and upheld the order.