Denying Director Access To Records, Forcing Undervalued Sale Of Shares Is Oppression: NCLT Kolkata

The National Company Law Tribunal (NCLT), Kolkata, has held that denying a director and shareholder access to a company's financial records, forcing her to part with her shares at an undervalued price and withholding her remuneration amounted to oppression under Section 241 of the Companies Act, 2013.

A Bench comprising Judicial Member Bidisha Banerjee and Technical Member Rekha Kantilal Shah held that the conduct of Nex Fitzap Private Limited towards Nivedita Tiwari, a director and 10% shareholder, amounted to oppression. The Tribunal observed:

“Restraining the access of a director and shareholder to the Company's financial records; forcing her to relinquish her shares at an unjustifiably low price after years of service to the Company as employee, shareholder, and director; terminating her notwithstanding an undertaking to continue her in service pending settlement; and thereafter depriving her of remuneration on the strength of that same disputed termination, taken together, this conduct amounts to oppression within the meaning of Section 241.”

Tiwari was appointed as a director of Nex Fitzap Private Limited on 27 August 2023 and held 1,030 shares, constituting 10% of the company's equity share capital. She was also a co-inventor and primary developer of an oral screening bot patented in the company's name.

She claimed that she was entitled to a royalty of not less than 25% of the revenue generated from the patented invention. She contended that the company denied her access to its financial records, failed to compensate her for her contribution to the invention and compelled her to part with her shares for Rs. 4 lakh despite their higher value.

The respondents contended that Tiwari had voluntarily resigned from her employment and was therefore not entitled to directorial remuneration. They argued that the proceedings were essentially aimed at recovering money and that, in the absence of a written agreement providing for compensation or royalty, her monetary claim arising from the patent was legally vague.

The Tribunal noted that Tiwari was a BDS graduate with doctoral training in dental sciences and had served as an Entrepreneur-in-Residence under the Department of Science and Technology's Nidhi Prayas scheme. It also noted that she had developed what was described as India's first oral screening bot.

It observed that the patent was primarily medical in nature and required the specialised qualifications possessed by Tiwari, unlike the technical and management qualifications of the other persons involved. It therefore found that her contribution to the patent was substantial.

The Bench held that Tiwari, being one of the four beneficiaries of the patent, was entitled to royalty of not less than 25% of the revenue derived from it. On access to the company's financial records, it noted that Tiwari had sought the records through emails dated 30 June 2024, 4 July 2024 and 6 July 2024, while she was still a director and shareholder. The requests were not answered. It observed:

“...the Petitioner exercising her rights as a director and shareholder to protect the Company's affairs and her own entitlements following what she characterizes as a wrongful termination. Protective action of this kind does not, without more, establish mala fide.”

The Tribunal also considered a valuation report showing that the value of Tiwari's shareholding was materially higher than the Rs. 4 lakh for which she ultimately parted with her shares. As the respondents failed to sufficiently explain the disparity, the Bench accepted her contention that she had been compelled to sell the shares at an undervalued price.

It also found her removal and the suspension communicated by email to be illegal and directed payment of remuneration withheld from July 2024. The Bench further directed an independent forensic audit of the company and ordered the respondents to give effect to Tiwari's 25% royalty entitlement from the patent. It also restrained the respondents from forcing Tiwari to transfer her shares or altering the composition of the company's Board.

Accordingly, the NCLT allowed the petition and held that the respondents' cumulative conduct amounted to oppression under Section 241 of the Companies Act, 2013.