Shareholding Alone Does Not Authorise Shareholders To Represent Company in Court: NCLT Bengaluru

The National Company Law Tribunal (NCLT) at Bengaluru on 9 October held that shareholders cannot represent a company or prosecute legal proceedings on its behalf merely by virtue of holding shares.

A Bench of Judicial Member Sunil Kumar Aggarwal and Technical Member Radhakrishna Sreepada dismissed an application filed by five shareholders of Shree Basaveshwara Sugars Limited seeking permission to represent the company in proceedings before the Karnataka High Court challenging an arbitral award that imposed a liability of approximately Rs. 52.71 crore on the company. The Tribunal held:

“Merely by virtue of being shareholders of Respondent No.1 Company, the Applicants cannot claim an automatic right or authority to represent the Company or to prosecute proceedings on its behalf before another forum.”

Five applicants collectively held approximately 22% of the company's paid-up share capital. They sought permission to represent the company in proceedings challenging an arbitral award dated 7 August 2023 and an order dated 4 November 2024. They had also filed a petition alleging oppression and mismanagement in the company's affairs.

They contended that the award imposed a liability of approximately Rs. 52.71 crore on the company, along with interest at 12% and costs of Rs. 30 lakh, despite the company being merely a formal party to the dispute.

Further, they alleged that the Board of Directors had failed to effectively challenge the award and that the company did not appeal after the dismissal of its challenge under Section 34 of the Arbitration and Conciliation Act, 1996.

Subsequently, the applicants filed an appeal before the Karnataka High Court under Section 37 of the Arbitration Act in their capacity as shareholders. Although the High Court stayed the award and the order insofar as they affected the company, the applicants claimed that the company remained unrepresented. They therefore sought permission to represent the company and pursue the challenge.

The Tribunal observed that the applicants were not members of the company's Board of Directors and had no authorisation from the company to represent it. It further noted that their petition alleging oppression and mismanagement remained pending, with no finding establishing mismanagement warranting its intervention. The mere pendency of that petition could not confer authority on the applicants to represent the company. It held:

“We are also of the view that permitting the Applicants to represent Respondent No.1 Company in the proceedings before the Hon'ble High Court would amount to superceding the present board of Directors and creating a separate set of shareholders clothed with authority, even though a limited one, to represent the Company. The Company Act has no provision for resorting to such an action.”

Accordingly, the NCLT dismissed the application.

For Applicants: Senior Advocate Dhyan Chinappa