NCLT Ahmedabad Holds Removal Of Nominee Director Without Vested Rights Not Oppressive Conduct

The Ahmedabad bench of the National Company Law Tribunal (NCLT) has recently held that the removal of a nominee director from the board, without any vested rights in the company, did not amount to oppressive or prejudicial conduct. The tribunal dismissed connected petitions filed by the director against Security Ops India Pvt. Ltd.

A bench of Judicial Member Shammi Khan and Technical Member Sanjeev Sharma held that the applicant was merely a nominee shareholder appointed by the company's holding company.

It observed that she had made no financial contribution towards the shareholding and had failed to establish any genuine and documented grievance warranting the exercise of the tribunal's discretionary jurisdiction.

“She is a nominee shareholder and appointed as a director by the Respondents. There is no financial contribution to create a vested rights in favour of the applicant. The Applicant has not provided any information that who made her a nominee shareholder and who appointed her a director and who has power to remove from the d.irectorship and how long can she remain as a nominee shareholder. The removal from the directorship cannot be held to be an oppressive or prejudicial conduct.", the tribunal ruled.

Dhartiben Mukeshbhai Bhoraniya held one share in the company as a nominee shareholder and also served as a director of its Indian subsidiary. She sought a declaration that she satisfied the eligibility requirements to maintain a petition alleging oppression and mismanagement. Alternatively, she sought a waiver of those requirements.

According to her, the Companies Act prescribes two independent eligibility tests, namely the numerical member test and the shareholding test. Since the company had only two members, she argued that she satisfied the numerical member test despite holding only 0.01% of its share capital.

The company and the other respondents, however, opposed the petitions. They contended that Bhoraniya held the share only as a nominee of the UK-based holding company and had no beneficial interest or independent right to maintain proceedings alleging oppression and mismanagement.

They further argued that waiver of the statutory eligibility requirements is discretionary and should be granted only in exceptional cases.

After hearing both the parties, the tribunal noted that the applicant's sole share had been subscribed entirely by the holding company. It also noted that she was recorded as a nominee shareholder to satisfy the incorporation requirements.

In the light of the facts, the tribunal held that she had no absolute or independent rights in respect of the share and could not claim any vested rights in the company.

It further held that the applicant had failed to establish any exceptional circumstance or a prima facie case of oppression warranting the exercise of its discretion to waive the statutory eligibility requirements.

“This Tribunal is also of the considered view that the proviso to Section 244(1) cannot be construed in a manner that renders the eligibility conditions prescribed by the Legislature redundant. Acceptance of the Applicant's contention solely on the basis that the Company consists of two members, without examining the nature of her legal interest and the surrounding circumstances, would amount to treating the proviso as an alternative statutory route in every case involving a small private company.”, the tribunal ruled.

Accordingly, the tribunal dismissed both petitions. It held that the applicant had not made out a case for the exercise of its discretionary jurisdiction under the proviso to Section 244(1).