NCLT Cannot Order Share Buyout Without Finding Oppression, Mismanagement: NCLAT New Delhi

On 14 October, the National Company Law Appellate Tribunal (NCLAT), New Delhi held that the National Company Law Tribunal (NCLT) cannot order a share buyout under Section 242(2)(b) of the Companies Act, 2013, without first recording a finding of oppression and mismanagement under Section 241 and satisfying the conditions under Section 242(1).

A Bench of Judicial Member Sharad Kumar Sharma with Technical Members Arun Baroka and Indevar Pandey set aside the NCLT Mumbai's order directing a buyout of shares in Sanjit Instruments Pvt. Ltd. and remitted the matter for fresh consideration. It observed:

“Thus, if we take into consideration the provision of Section 242(2) itself, the same cannot be directly attracted to be made applicable in the absence of their being any prior opinion drawn qua the actions falling within the ambit of Section 241 of the Act, and recording its satisfaction and drawing of opinion by the Ld. Tribunal, under sub-section (1) of Section 242 of the act.”

Sanjit Instruments manufactures electrical and electronic instruments. The appellants, Sunil Bagul and Megha Bagul, held 33.39% and 29.64% of the company's shares, respectively, while respondent Arvind Bagul held 31.79%.

The dispute arose from allegations that Arvind and his son, Purvesh Bagul, diverted customers and company resources to a competing entity, Aasua Engineering Solutions Pvt. Ltd., causing losses to Sanjit Instruments.

The appellants removed Arvind from his executive directorship in 2017, following which he filed a petition under Sections 241 and 242 of the Companies Act, alleging oppression and mismanagement. He sought reinstatement as a director, restitution of allegedly siphoned funds, division of the business and compensation. The appellants opposed the petition, alleging that Arvind had diverted customers, misused company resources and attempted to split the business.

During the proceedings, Arvind expressed his willingness to exit the company subject to a fair valuation of his shares. On 16 September 2019, the NCLT appointed V.S. Nagulapati Rao as the valuer. In a report dated 16 June 2021, the valuer assessed the company's value at Rs. 3.82 crore as of 31 March 2018. The appellants did not file objections to the report.

In December 2025, the NCLT directed the majority shareholders to buy Arvind's shares at the valuation determined by the valuer. It invoked Section 242(2)(b), reasoning that proceedings under Sections 241 and 242 are preventive and remedial in nature and that the parties' participation in the valuation process indicated a breakdown of trust.

Challenging the order, the appellants argued that the NCLT had not recorded any finding of oppression or mismanagement under Section 241, which they contended was a prerequisite for granting relief under Section 242. They also challenged the reliance on the 2018 valuation, arguing that the share price should reflect the company's financial position at the time of judgment.

The respondents countered that the appellants had acquiesced in the valuation by sharing its costs and failing to challenge the report. They argued that the appellants were estopped from disputing the valuation and that their participation in the process justified equitable relief under Section 242.

The NCLAT rejected the NCLT's reasoning that equitable relief could be granted under Section 242 without first recording the requisite finding under Section 241. It held that the remedies under Section 242(2) were not independent powers but could be exercised only after the Tribunal reached the requisite satisfaction under Section 241 and Section 242(1). It observed:

“before the Tribunal barges upon to attract adoption of Section 242, it will have to arrive at a conclusive finding about the act to be brought to be falling within the ambit of Section 241 first and its after that conclusion and findings recorded under 'that Sub-Section' i.e. Section 241(1) only, and its upon the satisfaction being recorded about the act complained of to be falling under Section 241, then only Section 242 could be attracted thus the finding under Section 241(1) would be the basis and attract 242(1) of the act.”

Further, the Bench held that the NCLT could not direct a buyout based on a valuation reflecting the company's financial position as of 2018. It observed that the valuation must be contemporaneous with the judgment or, at the very least, reasonably proximate to the date of determination.

Accordingly, the NCLAT set aside the NCLT's order and remitted the matter for fresh consideration, directing the NCLT Mumbai to obtain a fresh valuation report and decide the dispute on merits in accordance with Sections 241 and 242 of the Companies Act, 2013.