McDonald’s Case: NCLT Decision on Oppression

[Guest post by Enakshi Jha, who is a graduate from NALSAR University of Law and is currently working at a corporate law firm in Mumbai]

McDonalds India has recently been in the news for shutting down 43 of its 55 Delhi outlets.  The bone of contention leading to this event is the ongoing dispute between Mr. Vikram Bakshi  and McDonalds India Private Limited (“MIPL”). This case has clarified that the National Company Law Tribunal (“NCLT”) can establish its jurisdiction to hear disputes regarding oppression and mismanagement, even with the existence of a Joint Venture Agreement (“JVA”). The NCLT confirmed that the mere existence of a JVA and arbitration clause would not impede the NCLT from establishing its jurisdiction, as the jurisprudence around oppression enables the tribunal to keep the best interest of the company, its shareholders and, in this case, also the general public’s best interests in mind.

Mr Bakshi was the Managing Director of Connaught Plaza Restaurants Private Limited (“CPRL”). CPRL was incorporated in furtherance of a Joint Venture Agreement (“JVA”) between Mr. Bakshi  and MIPL in 1995; and both parties have a 50:50 share in the said company. The JVA was entered into for setting up franchises of McDonalds in North India and getting all the prerequisite approvals and running the business in North India. In due course, a dispute arose out of the JVA, and Mr. Bakshi approached the NCLT alleging acts of oppression and mismanagement against him by MIPL. The NCLT decision dated 13 July 2017 granted clarity on such allegations by confirming oppression, reinstating Mr. Bakshi as the Managing Director and appointing Justice G.S. Singhvi to act as an Administrator in the company, with the right to vote in Board Meetings.

Facts

CPRL was to be governed by the terms and conditions set out in its Memorandum of Association (“MoA”) and its Articles of Association(“AoA”). It was also clearly understood by the parties that in the 25-year period of this JVA, profits would only begin to flow in the last 10 years as the fast food chain was new to the Indian market. The JVA also clearly specified that the Board would comprise of four Directors, two nominated by Mr. Bakshi (who has been referred to as “Partner” in the JVA) and two by McDonalds.

The bone of contention in this dispute lies in Clause 7(e) of the JVA, which states that the Board shall nominate and elect the “Partner” as the sole Managing Director every two years.  However, such re-election is subject to him residing in the NCR, owning 50 % of the shares of the Joint Venture Company, discharging his duties faithfully and not breaching any of the terms of the JVA. 

Clause 32 of this JVA provided that if Mr. Bakshi’s services are terminated or he is no longer the Managing Director of CPRL, MIPL would have the option to purchase his shares. In his petition, Mr. Bakshi stated that in 2007-08, when profits began trickling in, MIPL tried to arm twist him into selling his shares at USD 5 Million and Mr. Bakshi  responded by saying that Clause 26 (refers to fair market valuation of shares) should be followed and that he should be paid USD 100 Million instead. The MIPL rejected this offer without providing any substantial reason. A similar attempt was followed in 2011, when the West and South franchise partners attempted to buy Mr. Bakshi’s shares.

Thereafter, in 2013, the board of MIPL decided to terminate Mr. Bakshi as the Managing Director of CPRL and passed a resolution stating they were open to any litigation contingent to this decision. In August 2013, Mr. Bakshi was given a Note stating reasons for not reappointing him as the Managing Director during a CPRL Board Meeting. This included allegations of diversion of funds, mismanagement and creation of pledge on his shares. Mr. Bakshi was not given an opportunity to respond and approached the Company Law Board (“CLB”). MIPL argued that the CLB would not have jurisdiction, as a private contract with an arbitration clause existed. However, in 2014 the CLB rejected the same by stating this was an “ambush operation”, to merely usurp Mr. Bakshi’s shares without following fair market valuation. Later in 2013, MIPL tried exercising their call option again to purchase Mr. Bakshi’s shares.

Arguments

Mr. Bakshi argued that such attempts of arm twisting him into selling his shares are oppressive and violations of Section 397, 398 and 402 of the Companies Act,1956. Further, MIPL argued that the NCLT or the National Company Law Appellate Tribunal (“NCLAT”) would not have jurisdiction to hear this case as it was a contractual dispute and not one arising from a violation of the Companies Act; and that only the arbitration clause of the JVA would apply. They also argued that the JVA was not incorporated into the AoA and hence the enforcement of a contractual right could would not fall within the ambit of Section 397[1] of the Companies Act, 1956. MIPL also submitted that Mr. Bakshi approaching the CLB for passing orders for his continuation as the Managing Director would lead to creation of fresh terms of the Agreement and that no Court/Tribunal can grant such specific performance of private contracts.

NCLT’s Decision

The NCLT held in favour of Mr. Bakshi . In summary:–

1. JVA had been incorporated into the AoA, as the AoA included all supplementary agreements and modifications made to the JVA and also directly refers the JVA (For example in cases of appointment of the Managing Director under Article 35 of the AoA).
2. While Clause 7(e) of the JVA specified the conditions that needed to be met for the reappointment of the Director, the NCLT found that despite the Note stating reasons to not re-appoint Mr. Bakshi he was financially awarded and appreciated by MIPL, showing that the conditions of Clause 7(e) were redundant in the present dispute. Further, the NCLT relied on the Audit Reports of the CPRL and found the allegations of diversion of funds and debts false. The NCLT held that such actions in culmination are indicative of oppression under Section 397,398 and 402 of the Companies Act, 1956 and are based on extraneous consideration, to acquire Mr. Bakshi’s shares.
3. The NCLT also specified that such allegations were made solely to remove Mr. Bakshi as the Managing Director and exercise a call option to purchase his shares. Hence, the NCLT reinstated Mr. Bakshi as the Managing Director and also appointed Justice Sighvi as an Administrator with a right to vote in Board meetings by specifying that under Section 402 of the Companies Act, 1956, the Tribunal can pass orders for the regulation of the company’s conduct of affairs.

Analysis

While the decision of the NCLT in this case delves into the facts of the issue, there is a need to elucidate the establishment of jurisdiction of the Tribunal in cases of oppression arising from the scope of a personal contract (in this case, the JVA). The question arising from the facts is whether private agreements lie beyond the scope of Section 397 of the Companies Act, 1956. The NCLT’s decision confirmed that oppression under Section 397 establishes the jurisdiction of the CLB (now the NCLT) under Section 402 of the Companies Act, 1956.

In the present case, the NCLT held that since the provisions of the JVA had for all practical purposes been incorporated into the AoA, any malafide action or act of oppression would be considered an act of oppression against the shareholder (in this case, Mr. Bakshi ). Further, such acts of oppression are also against the best interests of the company, thereby granting the NCLT the right to pass an order, even though the dispute was stemming from a private contract. In this case, the NCLT also spoke about the interests of the public, especially the employees who would lose their jobs due to the ongoing dispute. Hence, this elevation of a private contractual agreement to a company law dispute is effectuated keeping the interests of the shareholders and the company in mind.[2]

The incorporation of the JVA into the AoA also illuminates the common intentions of the parties, their fiduciary duties towards each other and is an evidentiary document of their shared good faith. It is in this context that the NCLT has held that while the JVA is a private contract, MIPL’s actions amount to oppression under the Companies Act, 1956 due to the incorporation of the same into the AoA. Further, both parties have referred to the AoA in the past (such as Article 35 – Board to appoint a Director in furtherance of Clause 7 of the JVA) and it would be unfair to now adopt a contrary interpretation. Hence the NCLT held that Clause 7 of the JVA that states that the “Partner” (Mr. Bakshi) must be reappointed every two years is incorporated into Article 35 of the AoA and any acts of oppression to undermine the same will attract the jurisdiction of this Tribunal.

The main takeaway from this NCLT decision is rooted in the understanding that Section 398,398 and 402 of the Companies Act, 1956 form a self-sufficient code for the regulation of the management of the company to ensure there is no harm to the interests of the company or any of its shareholders. This manifests in the broad powers given to the CLB (now the NCLT), leading to the establishment of its jurisdiction, even when a separate JVA (with an arbitration clause) exits .

– Enakshi Jha

[1] Application to the CLB for relief in cases of oppression

[2] Under Section 402, the Tribunal can issue orders for the future conduct of the company along with providing just and equitable relief to the applicant.