Case: Yes Bank Limited Vs. Madhu Ashok Kapur &amp; Others

1. This is an appeal against the order and judgment of the learned single Judge answering the preliminary issues raised by the appellant under section 9A of the Code of Civil Procedure, 1908, holding that the suit filed by respondent Nos.1 to 4 is maintainable and that this Court has jurisdiction to entertain and try the suit.2. The appellant is defendant No.6. Respondent Nos.1 to 4 are the plaintiffs. Respondent No.5Rana Kapur is defendant No.1. Respondent No.6Ms. Bindu Rana Kapur is defendant No.2. Respondent No.7 Ms. Radha Kapur is defendant No.3. Respondent Nos.8 and 9Yes Capital (India) Private Limited and Morgan Credits Private Limited are defendant Nos.4 and 5. Respondent Nos.10 to 15 are individuals and are defendants Nos.7 to 12. It is convenient to refer to the parties as they are arrayed in the suit.3. Two questions arise for consideration. The first is whether the judgment of a Civil Court to consider the validity of the appointment of directors is barred in view of the provisions of the Companies Act, 1956. The second is whether in view of section10A of The Banking Regulation Act,1949, which came into effect from 1st February, 1969, the question of validity of appointment of directors can only be raised before and decided by the Reserve Bank of India and not by any other Court, Tribunal or authority. We have upheld the decision of the learned Judge who answered this question in the negative.4. For the purpose of this appeal, it is sufficient to note the facts only briefly. Plaintiff Nos.1, 2 and 3 are the widow, daughter and son of one Ashok Kapur who passed away on 26th November, 2008. Plaintiff No.4Mags Finvest Private Limited, together with the other plaintiffs, formed a part of the Ashok Kapur group. The plaintiffs and the deceased Ashok Kapur formed the Ashok Kapur group. Defendant Nos.1 to 5 formed the Rana Kapur group. On or about 30th April, 2003, the deceased Ashok Kapur, defendant No.1Rana Kapur and Rabo Bank entered into a Share Subscription Agreement wherein Ashok Kapur and defendant No.1 were collectively referred to as the "Indian partners". Rabo Bank had agreed to subscribe to 49% of the equity shares of defendant No.6. In the Share Purchase Agreement, Ashok Kapur and defendant No.1 were defined to include their successors, legal representative and permitted assignees. The relevant provisions of the Articles of Association of defendant No.6 reads asKapur means Mr. Ashok Kapur an Indian National and resident of 11, Silver Arch, Napean Sea Road, Mumbai400006 and unless it be repugnant to the context shall mean and includes his successors, legal representatives and assigns. Indian Partners Ashok Kapur and Rana Kapoor, are collectively referred to as the "Indian Partners" and each of Ashok Kapur and Rana Kapoor is individually referred to as the "Indian Partner". Rana Kapur means Mr. Rana Kapoor, an Indian National and resident of Grant Paradi Apartments, Rowhouse # 1, Mumbai400036 and unless it be repugnant to the context, shall mean and includes his successors, legal representatives and assigns.... ... ... ...DIRECTORS110 a). Until otherwise determined by a General Meeting the number of directors shall not be less than 3 (three) and no more than 15 (fifteen).b) So long as the Indian Partners hold along with any of their Affiliates directly or indirectly at least 10% of the paid up share capital of the company, the Indian Partner shall have the right to recommend the appointment of three directors collectively referred to as the "IP Representative Directors". So long as Rabo holds along with any of its Affiliates directly or indirectly at least 10% of the issue and paid up share capital of the company, Rabo shall have the right to recommend the appointment of one director referred to as the "Rabo Representative Director."c) Apart from the IP Representative Directors and the Rabo Representative Director, the other director shall be independent ("Independent Directors"). The Indian Partner shall propose the name of the first three Independent Directors, who upon approval by Rabo, shall be appointed as such by the Board. Rabo and the Indian Partners may, recommend the names of the remaining Independent Directors in the nominations Committee of the Company.... ... ... ...127.Aa) Subject to the provisions of the said Acts and these presents, the Board shall subject to a recommendation made by the Promoters, also include such Whole time Director/s as may be appointed in terms of these Articles.b) The Board may, subject to its obtaining approval from the Reserve Bank and also subject to such approval as maybe necessary under the Act, and subject to the other provisions of these Articles, appoint and/or reappoint from time to time one or more of its member(s) to be designated and to act as Whole time Director/s of the Company, not in any case exceeding one third of the total number of the Directors of the Company for the time being."5. Ashok Kapur and defendant No.1 werers of defendant No.6 along with Rabo Bank. Ashok Kapur was also the first Chairman of defendant No.6. The plaintiff and defendant Nos.1 to 5 were also the original subscribers to the Articles of Association. Defendant No.1 was the first Chief Executive Officer and Managing Director of defendant No.6 and continues as such. Some time after the tragic death of Ashok Kapur on 26th November, 2008, there were differences between the plaintiffs on the one hand and defendant Nos.1 to 5 on the other, which are not relevant for the purpose of this appeal. The appeal is limited to the question of maintainability of the suit insofar as it challenges the appointment of defendants Nos.7 to 12. The merits of the challenge are not, therefore, relevant. It is sufficient to note that the plaintiffs contend that even after the death of Ashok Kapur, they have the right to recommend the appointment of directors in accordance with Article 110.6. The plaintiffs filed the above suit on 6th June, 2013, for a declaration that the resolutions proposed to be passed, as stated in a notice dated 17th April, 2013, convening an AGM of defendant No.6 on 8th June, 2013, relating to the appointment of defendant Nos.7 to 9 as directors of defendant No.6Yes Bank Limited are illegal and contrary to the Articles of Association and for a permanent injunction restraining the defendants from holding a meeting to consider the said resolutions. In the alternative, the plaintiffs seek an order restraining the defendants by a permanent order and injunction from passing resolutions relating to the appointment of defendant Nos.7 to 9 as directors at the Annual General Meeting which was scheduled to be held on 8th June, 2013. The plaintiffs have also sought a permanent order and injunction restraining the defendants from nominating or recommending any appointment of the directors under the Articles of Association without consulting the plaintiffs and without their consent. A decree for the payment of damages of Rs.5 crores is also sought.By an amendment, the plaintiffs sought a declaration that rights exercisable by the Indian partners under the Articles of Association of defendant No.6 can be exercised by defendant No.1 only jointly with the plaintiffs and with their express concurrence. Consequential reliefs in this regard are also sought.7. By an order dated 7th June, 2013, the learned vacation Judge declined the plaintiffs application forreliefs in respect of the AGM scheduled for 8th June, 2013. The order, however, provided that the appointments made in the AGM would be subject to further directions of the Court upon the matter being taken up before the regular Court. Accordingly, the AGM was held whereat defendant Nos.7 to 9 were appointed as directors. Thereafter, at a meeting held on 27th June, 2013, the Board of directors of defendant No.6 appointed defendant Nos.10 to 12 asdirectors.8. In view thereof, the plaint was amended to challenge the appointments of defendant Nos.7 to 9 at the AGM held on 8th June, 2013 and of defendant Nos.10 to 12 at the meeting of the Board of directors held on 27th June, 2013, as being null and void and sought an injunction restraining them from acting as directors of defendant No.6.9. By the said notice dated 17th April, 2013, the 9th AGM of defendant No.6 was convened on 8th June, 2013, to transact the business, inter alia, relating to the appointment of defendant Nos.7, 8 and 9. The proposed resolutions in respect of each of them were identical. They stated that defendant No.6 had received notices in writing along with the deposit from some members proposing them as candidates for the office of a director under the provisions of section 257 of the Companies Act, 1956, and that they are eligible for appointment to the office of director and are appointed as directors of the bank. The explanatory notes pursuant to section 173(2) of the Companies Act in respect of each of the resolutions was also identical. They stated that defendant Nos.7, 8 and 9 had been appointed as additional directors and hold office upto the next AGM, they being eligible for appointment in terms of section 257 of the Companies Act. Defendant No.6 had received instructions in writing signifying the intentions to propose their candidature for the office of the director. The explanatory statement stated that the directors of defendant No.6 recommended the resolution for the approval of the shareholders. At the said meeting held on 27th June, 2013, the Board of directors of defendant No.6 elevated three of its top management executives viz. defendant Nos.10, 11 and 12, by appointing them asdirectors on the board of defendant No.6.

Court's reasoning:
Mr. Cooper firstly submitted that civil courts have no jurisdiction to entertain a challenge to the appointment of directors of companies incorporated under the provisions of the Companies Act, 1956.The submission is not well founded. It is not necessary to deal with the submission in any detail as it is answered against the appellant by a judgment of a Division Bench of th is Court in SantoshPoddarAnr. v. Kamalkumar Poddar (1992) 3 Bom.C.R. 310.In the present case although the irregularities in holding meetings or the holding or cessation of the office of a Director may have to be decided with reference to the Companies Act, that Act has not prescribed a forum where such a relief can be sought. In the absence of such prescription, the ordinary Civil Courts are competent to deal with such disputes. Hence the present suits were correctly filed originally in the City Civil Court.23. The learned Single Judge, while deciding the appeals from orders however, placed reliance on a judgment of this Court in the case of Vithalrao Narayanrao Patil v. Maharashtra State Seeds Corporation Ltd., and anr., reported in 68 Company Cases 608 . In that case the learned Single Judge of this Court (at Nagpur) held that in view of section 10 of the Companies Act only the High Court can entertain any dispute in respect of the affairs of the Company. We do not agree with this interpretation of the learned Single Judge for reasons set out earlier.Mr. Cooper, however, relied upon the judgment of a learned single Judge in the case of KhetanIndustries Pvt. Ltd.. v. Manju Ravindraprasad Khetan AIR 1995 Bom. 43  .We are, in any event, in agreement with the learned single Judge that the bar of jurisdiction of civil court is not to be readily inferred and that a Court would normally lean in favour of a construction which would uphold the retention of the jurisdiction of a civil court. In this view of the matter, it is not necessary to refer to the other judgments which have been referred to by the learned single Judge. The contention that the jurisdiction of this Court to entertain a challenge to the appointment of defendant Nos.7 to 12 as directors in view of the provisions of the Companies Act, 1956, is rejected.We will restrict ourselves to the point that falls for consideration. We will presume that with the appointment of defendant Nos.7 to 12 the "composition" of the Board of directors of defendant No.6 was in compliance with the provisions of(2) of section 10A.Defendant Nos.7 to 12 were, however, not appointed under(3), (4) or (5) of section 10A. We are unable to agree with Mr. Coopers submission that the jurisdiction of civil courts to entertain a suit challenging the appointment of a director made even otherwise than under(3), (4) and (5) of section 10A is barred in view of(6) of section 10A.21. The appointments of defendant Nos.7 to 12 were not under(3) of section 10A. It is not the appellants case that the appointments were made on account of the requirements as laid down in(2) not having been fulfilled at any time. There was no question, therefore, of the Board of directors of the appellant reconstituting the Board so as to ensure that the requirements of(2) were fulfilled. In other words, the appointments of defendant Nos.7 to 12 were not in the course of reconstituting the Board of directors of the appellant. The appointments were made keeping in mind and in conformity with the provisions of section 10A. The appointments were not under(3) of section 10A.22. There was no question in the present case of reconstituting the Board by retiring any director or directors. This is not even the appellants case.(4) of section 10A, therefore, is not relevant to this case.23. It is not the appellants case that defendant Nos.7 to 12 were appointed under(5) of section 10A. No action was taken by the Reserve Bank of India. The Reserve Bank has not even come into the picture. The question of the Reserve Bank forming an opinion as contemplated under(5) that the composition of the Board of directors of the appellant did not fulfill the requirements of(2) did not arise. Defendant Nos.7 to 12 were, therefore, not appointed pursuant to any opportunity being given by the Reserve Bank to the appellant to reconstitute its Board so as to ensure that the requirements of sectionare fulfilled. Nor were the appointments of defendant Nos.7 to 12 made by the Reserve Bank under(5).24. The learned Judge rightly held that the appointments of defendant Nos.7 to 12 were not under(3) or (4) of section 10A. The resolutions appointing them have been referred to earlier. None of them indicate that the appointments were made under(3) or (4). The parties led evidence even in respect of the preliminary issues. The learned Judges attention was not invited to any evidence, oral or documentary, to indicate that the appointments were under(3) or (4). Nor was our attention invited to any evidence, oral or documentary, in this regard. Even the minutes of the meeting at which the appointments were made do not suggest that the appointments were made pursuant to or in accordance withThese minutes do not make the appointments at the AGM under(3), (4) or (5) of section 10A.The committees only acted in an advisory capacity to defendant No.6. The views expressed in the minutes do not militate against our finding that the appointments were not made under(3), (4) or (5) of section 10A.They merely state that their appointment would not violate the provisions of sectionThe constitution of a Board of directors of a banking company must comply with the provisions of section 10A(2). When a Board of directors complies with the provisions of section 10A(2) the appointments of the directors are not made under section 10A but in compliance or in conformity with the provisions of(2) of Section 10A. What(6) bars is the calling into question in any court an appointment, removal or reconstitution duly made and every election duly held "under this section" and not appointments, removal or reconstitution or election in accordance or in conformity with the section.28. The contention that this view would render the term "election" in(6) otiose is incorrect. It is based on the erroneous presumption that a director cannot be elected where the provisions of(3), (4) and (5) apply. In a case under(5), there can be an election. Under(5), where the Reserve Bank of India is of the opinion that the composition of the Board of directors of a banking company does not fulfill the requirements of(2), it may direct the banking company to so reconstitute its Board of directors as to ensure that the requirements of(2) are fulfilled. The direction, therefore to reconstitute the Board to make it compliant with the provisions of(2) is to the banking company and not to the Board of directors. The banking company, like any other company, can make appointments at a general meeting. At the general meeting, a director would be elected. Furthermore, under(5), if the banking company does not comply with the direction of the Reserve Bank, then, in that event, the Reserve Bank may, after determining, by lots drawn in such manner as may be prescribed, remove such person from the office of the director of the banking company and with a view to comply with the provisions of section 10A(2), appoint a suitable person as a member of the Board of Directors in the place of the person so removed. In such an event, the person so appointed shall be deemed to have been duly elected by the banking company as its director. Therefore, elections and deemed elections are contemplated under(5) itself. The view that we take, therefore, does not render the term "election" inMr. Cooper furnished the same illustration as he did before the learned single Judge in support of his contention that a view, contrary to the one submitted by him would lead to an anomalous situation. For example, he said, assuming a bank is required to appoint only one director under, but appoints five directors who meet the qualifications in the same meeting, it would be difficult to say which of these directors comes within the "protected appointment" under(3)."32. The illustration does not substantiate his submission regarding the interpretation of section 10A. There is no anomaly. The company can always pass separate resolutions thereby indicating which of the directors is appointed to ensure compliance with(3). Assuming that a director is entitled to protection, it would be that director then who would be entitled to the same. As the learned Judge rightly held, when a banking company elects its Board as a whole in compliance with section 10A (2), the appointments are not under section 10A and there is no question of any of the directors having a protected status under(6) thereof. As and when the provisions of(3), (4) and/or (5) come into play, the appointments can always be identified.as, however, curtailed the jurisdiction of the civil courts, but only to a limited extent. As we mentioned earlier, we will restrict this judgment by deciding only the question that arises in this case. We, therefore, have not dealt with the entire extent to which(6) applies. For the purpose of this case, it is necessary only to decide whether the jurisdiction of civil courts to decide a challenge to the appointment of directors made other than pursuant to or under(3), (4) or (5) of section 10Ais ousted. The words "under this section" in(6) make it clear that the Legislature never intended to curtail the jurisdiction of civil courts at least to the extent suggested on behalf of the appellant. Had it been so, section 10A and in particular,(6) thereof would have been worded entirely differently.Mr. Cooper initially agreed that the appointment of a director must be not only in accordance with law, but even in accordance with the Articles of Association of the company and in accordance with all contractual terms and conditions between the shareholders or any other relevant parties. He, however, submitted that the question whether the requirements were met can only be decided by the Reserve Bank of India and not by the civil court. In the written submissions, however, it is contended that the provisions of section 10A are aimed at stopping a challenge to the appointment of directors at the threshold and that if the directors are appointed such that the constitution of the Board complies with(2), all the directors are insulated from any challenge.Mr.Cooper also submitted that the words "duly held" would only require the due procedure for the appointment of directors to have been followed and cannot mean anything beyond following the due process and procedure as laid down by the law i.e. the Companies Act. He submitted that the words "duly held" cannot mean anything falling beyond the due process and procedure as laid down by the CompaniesOnce the procedure is followed, the appointment of a director cannot be challenged on any other ground whatsoever, including that it was contrary to any provision of law or contract. So long as the appointment is legally valid, following the legal procedure mandated under the Companies Act and in compliance with section10A of The Banking Regulation Act,a court cannot assume jurisdiction to consider the validity of such appointment / election. To do otherwise would enable a court in every case to ignore the bar of jurisdiction under section 10A since all challenges would necessarily be made on the basis of an allegation that an appointment/election has not been duly made or duly held.37. Although we are sceptical about the correctness of these submissions, we refrain from dealing with them as it is not necessary to do so having held that the bar in(6) does not operate in respect of appointments made in compliance with the requirements under(2) and not under(3), (4) and (5).