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FACTS OF THE CASE
The plaintiff in this case is Rajeev Saumitra and the defendant of this case is Neetu Singh, both were husband and wife as well as the directors of a Private Limited Company which named as “Paramount Coaching Centre Pvt. Ltd.”. The plaintiff Rajeev Saumitra filed this suit in the Court for, inter alia, declaration, rendition of account, damages, permanent and mandatory injunctions against three defendants:-
- Ms. Neetu Singh
- M/s K.D. Campus Pvt. Ltd.
- Paramount Coaching Centre Pvt. Ltd.
The defendant no. 3 was a private limited company incorporated under Companies Act, 1956. In this company, the plaintiff and his wife who is defendant no.1 were holding 50% share each. This company was involved in imparting education, training and preparation for various national competitive examinations. The dispute between the plaintiff and the defendant No. 1 was as to who adopted the mark “Paramount” prior in times. The said mark became the property of the defendant No.3 on its incorporation. While the defendant no. 1 continued being the shareholder as well as the director in the joint control of the said company, she also got incorporated with two other companies which were carrying out the business competing to the Paramount Coaching Centre and as per the plaintiff, she allegedly lured away the students, who were the customers of the company, Paramount Coaching Centre to her new ventures. Therefore, the main dispute which came in this case by the plaintiff that through the set up of this competing business while being the director of the defendant no.3, the defendant no.1 breached her duties of the director of the company “Paramount”. The plaintiff brought this claim in the court by way of the derivative suit, the reason given that the Paramount would not be able to bring the suit in its name as the defendant no. 1 was a 50% shareholder of that company and also having joint control over it.
The defendant no.2, which is also a company got incorporated by defendant No.1 in February 2015 for the purposes of competing with and diverting the business, staffs, students as well as money of defendant No.3. The defendant No.2 also involved in imparting the education, training and preparation for various national examinations.
ISSUES IN THE CASE
The two issues in the case of the Company law came in this case before the Hon’ble Court:-
- Whether the defendant no.1 after incorporating herself in the competing businesses as of Paramount committed the breach of duties of the directors;
- Whether the derivative action as a shareholder remedy is sustainable?
CONTENTION OF THE PARTIES IN THE CASE
Contention of the plaintiff in the case:-
The plaintiff in this case stated that he began this business of imparting education under the name or banner “Paramount Coaching Centre” in January 2005 as a sole proprietor of this Company. The plaintiff has also pointed out a few documents to show that the plaintiff opened a bank account as a sole proprietor of the defendant No. 3 with the Bank of Maharashtra before the incorporation of the company in 2005. The plaintiff also contended that the defendant no.1 after marrying him in 2006 inducted her sisters and family members in the Coaching centre of the plaintiff nd due to her insistence, Paramount Coaching Centre was converted into a Private Limited Company. Thereafter, she inducted herself as the director of the Company and both of them had shareholding of 50:50 in the company. As per the plaintiff, the defendant No.1 also been indulged in causing wrongful loss to the defendant no. 3 and making wrongful gain for herself by incorporating a one-person company named M/s Paramount Reader Publication OPC Pvt. Ltd. by the advantage of using the name Paramount on her books, Journals and other study materials under her one-person company as the defendant No.3 has been printing, publishing, selling and providing the books, Journals and other study materials in its name.Through this usage of name, Defendant No.1 is creating a confusion and deception in the minds of the people to believe that KD Campus is a part of the Paramount Coaching Centre or it is doing business with the consent of the plaintiff.
The plaintiff also contended that the defendant no.1 after incorporating defendant no.2 also made all efforts to capitalize on the goodwill of the defendant No.3. The defendant no.1 has and is continuing to use her position as Director to usurp the business of the defendant No.3.
Contention of the defendant no.1:-
The defendant No.1 in support of her claim for the ownership of the name “Paramount” relied upon a document which showed the use of the name “Paramount” prior to 2005, in her reply to the injunction application of the plaintiff.
The plaintiff for this submitted that the said document, which was being relied upon by the defendant No.1 is purporting to be a self-serving advertisement. The plaintiff further submitted that the said document is also neither dated nor demonstrating as to where this advertisement appeared and this document also does not prove that the defendant No.1 is the owner of that mark “Paramount”.
The defendant no.1 even objected the maintainability of the derivative suit filed by the petitioner on various grounds, one of them was that the plaintiff in the given circumstance should had approached to the Company Law Board for the oppression and mismanagement.
GROUNDS TAKEN
This case was one of the first cases to deal with the Section 166 of the Companies Act,2013, which codifies the duties of the directors and also prescribes the penalities related to it. So, we will deal with this particular section here, trying to get what it says and will also see which other sections were referred in this case:-
- Section 166[4] of the Companies Act,2013:-
Duties of directors
(1) Subject to the provisions of this Act, a director of a company shall act in
accordance with the articles of the company.
(2) A director of a company shall act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company,its employees, the shareholders, the community and for the protection of environment.
(3) A director of a company shall exercise his duties with due and reasonable care, skill and diligence and shall exercise independent judgment.
(4) A director of a company shall not involve in a situation in which he may have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company.
(5) A director of a company shall not achieve or attempt to achieve any undue gain or advantage either to himself or to his relatives, partners, or associates and if such director is found guilty of making any undue gain, he shall be liable to pay an amount equal to that gain to the company.
(6) A director of a company shall not assign his office and any assignment so made shall be void.
(7) If a director of the company contravenes the provisions of this section such director shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees.
- The plaintiff also brought up Section 16 of the Partnership Act, 1932, which deals with the profits arising out by a partner when he/she is engaged in a competing business.
Section 16[5] of the Partnership Act, 1932:-
Personal profits earned by partners.
Subject to contract between the partners,—
- if a partner derives any profit for himself from any transaction of the firm, or from the use of the property or business connection of the firm or the firm name, he shall account for that profit and pay it to the firm;
- if a partner carries on any business of the same nature as and competing with that of the firm, he shall account for and pay to the firm all profits made by him in that business.
- The plaintiff also relied upon the violation of the Section 88 of the Trusts Act, 1882.
Section 88[6] of the Trusts Act, 1882:-
Advantage gained by fiduciary.
Where a trustee, executor, partner, agent, director of a company, legal adviser, or other person bound in a fiduciary character to protect the interests of another person, by availing himself of his character, gains for himself any pecuniary advantage, or where any person so bound enters into any dealings under circumstances in which his own interests are, or may be, adverse to those of such other person, and thereby gains for himself a pecuniary advantage, he must hold for the benefit of such other person the advantage so gained.
DECISION
The Court in this case took into consideration different sections and the case laws relevant to it and relied on the judgement of the case Starlite Real Estate (ASCOT) Mauritius Ltd. & Ors. V. Jagriti Trade Services Pvt. Ltd.[7]. In this case, the Court stated that:-
“In a derivative action, the company would be the only party entitled to sue for redressal of any wrong done to it. However, since a company is an artificial person, it must act through its directors. Where the wrong is being done to the company by the directors in control, the company obviously cannot take action on its own behalf. It is in these circumstances that the derivative action by some shareholders (even if they are in a minority) becomes necessary to protect the interest of the company. The minority shareholders sue on behalf of themselves and all other shareholders except those who are defendants, and may join the company as a defendant.”
The Hon’ble Delhi High Court in this case also stated while giving the decision that:-
“The directors of a company are the only persons who can conduct litigation in the name of the company, but when they are themselves the wrongdoers against the company and have acted malafide or beyond their powers, and their personal interest is in conflict with their duty in such a way that they cannot or will not take steps to seek redress for the wrong done to the company, the majority of the share-holders must in such a case be entitled to take steps to redress the wrong.”
The Court also took into consideration the decision of the Delhi High Court only in the case of Norma(India) Ltd v. Sameer Khandelwal and Ors.[8]. In that case, the Court stated that:-
“It is settled law that jurisdiction of the company law board under the Companies Act, 2013 in relation to Section 397[9] of the said Act is a concurrent jurisdiction which may be exercised by civil courts where allegations pertaining to oppression and mismanagement partake the character of a civil dispute.”
Thus,the Court after taking this statement of the Court into consideration stated that it was the duty of the plaintiff to have made averments in the plaint or in the injunction application, giving material particulars of the dispute pending before the company law board.
The Court in this case also noted that a director was not permitted to retain secret profits which were made by the director using the information, property or the opportunities related to the company. In that case, a company could seek accounts for the secret profits which were made, damages for fraud committed or the recission of a transaction that enabled the director to make the secret profits.
The Court stated that when a director places himself in a position when his personal interests are in conflict with his duties as a director to the company, without the consent of the company, the director would be liable to “pay over to the company which the director has betrayed by disloyalty”.
The Court while giving its decision stated that the defendant no.1 had acted here in the contravention of Section 166(5)[10] of the Companies Act, 2013 by seeking to usurp the goodwill and the Intellectual Properties of the company means the defendant no.3. Therefore, the Court in its order stated that any undue gain made by the defendant no.1 would be paid to the defendant no.3.
The Court gave the following directions to the parties and with these directions, the interim application is disposed of:-
- Subject to the condition and by filing of an affidavit of undertaking that:
- the defendants No.1 and 2 shall not use the mark PARAMOUNT, its goodwill in any manner in its Company – defendant No.2 and shall not poach teachers, students or staff members of defendant No.3 and within two weeks shall remove the word PARAMOUNT from all hoardings, advertisements, brochures and other materials and shall not open any new centre within the range of 100 meters where the centre of defendant No.3 already exists;
- she shall furnish the true account from February, 2015 till December, 2015 and every quarterly till the decision of the suit; the first statement would be filed by 15th February, 2016; (iii) she will not create any hurdle in smoothly going of defendant No.3 and she shall perform her fiduciary duties under the Act and sign all the requisite papers of the defendant No.3 and shall not create any hindrance of running business of defendant No.3 directly or indirectly.
ANALYSIS OF THE CASE
This was one of the cases which dealt with the duties of the directors under Section 166 of the Companies Act,2013. The derivation suit being filed by the shareholder rather than the company itself was also done in this case and Court even found that correct when the directors themselves are working against the company. The duties of the directors were not exhaustive in the Indian laws earlier, but the Companies Act, 2013 came up with that and gave the opportunity to the Court as well the genuine people who are facing the problems due to the mismanagement and the actions of the directors, to come to the Court and make the directors pay the penalities for the wrong they committed. The decision of the Court also indicated that even a nominee director may be made liable in case of any breach of its duties he or she has committed under Section 166 of the Companies Act, 2013. This case dealing with the duties of the directors and the derivative suit really brought many new facets before the people and opened way for the people to knock the door of the Court, if any wrong committed.
Coming to the derivative suits, these are the important element of the corporate governance as well as a strong remedy available before a shareholder to asset his or her rights. Though, there was still the lack of clarity related to these in Indian laws, but this case tried to give a new dimension to this as well.
CONCLUSION
In this case, several issues related to the Companies law came into light. The provisions of the Companies Act, 2013 also provided the way to the decision as well in this case. While taking into consideration, all the facts and circumstances and decisions of this case, the clarity we get on many of the topics related to this case and this case in whole set up as a landmark judgement in the Companies law.
[1] Rajeev Saumitra v. Neetu Singh, 27th January 2016
[2] Companies Act, 2013, s. 166.
[3] Companies Act, 2013.
[4] Companies Act, 2013, s. 166.
[5] Partnership Act, 1932, s. 16.
[6] Trusts Act, 1882, s. 88.
[7] Starlite Real Estate (ASCOT) Mauritius Ltd. & Ors. v. Jagriti Trade Services Pvt. Ltd., 14th May 2015.
[8] Norma(India) Ltd. v. Sameer Khandelwal & Ors., 2007 137 CompCas 259 Delhi, 2007 78 SCL 211 Delhi.
[9] Companies Act, 2013, s. 397.
[10] Companies Act, 2013, s. 166(5).
