NCLT Ruling in McDonalds – Triumph of Indian Visionaries Over Blue Blooded Investors
Suhas Tuljapurkar (Managing Partner, Legasis Partners)
Apurv Sardeshmukh (Partner)
In an interesting development, the National Company Law Tribunal (‘NCLT’) reinstated Vikram Bakshi as the managing director of Connaught Plaza Restaurants Ltd., the joint venture which operates the McDonald’s restaurant chain in north and east India, on July 14, 2017.
The order of the NCLT is significant because it virtually and correctly places statutory audit reports way above the so-called due diligences, recognizes that 50-50 Joint Ventures in true sense are quasi partnerships, treats Joint Ventures differently from shareholders’ arrangements and conclusively affirms rights of the Indian Visionaries.
It must be remembered that The Connaught Plaza Company (‘Company’) was formed as a Joint Venture (“JV”) Company in 1995 wherein Mr. Vikram Bakshi and his company on one hand and Mc Donald India Pvt. Ltd. (‘McDonald India’) on the other hand held 50% equity shares. Mr. Vikram Bakshi was further elected as the Managing Director (“MD”) to handle all affairs of the Company. As per Clause 7(e) of the JV agreement, Mr. Bakshi was entitled to be re-elected as MD of the Company as long as: a) he held 50% shares in the Company, b) he devoted substantial time to the company business, c) resided in NCR region and d) discharged his responsibilities as an MD in a faithful and competent manner.
However in a meeting held on August 5, 2013, Mr. Vikram Bakshi was ousted by the resolution passed by McDonald India by the vote of their Nominee Directors. It was alleged Mr. Vikram Bakshi was not able to spend all of his business time in the performance of his obligations towards the Company and he failed to discharge his duties in a faithful and competent manner and further had breached material terms of his contractual agreements. Mr. Vikram Bakshi preferred a petition alleging oppression and mismanagement with the Company Law Board under Section 397/399/402/403 and 403 of the Companies Act, 1956 and further prayed to be reinstated as the MD.
Acknowledgement of Role of Indian Directors
In its order the NCLT observed that through his "sincere efforts", Mr. Bakshi had built up Connaught Plaza into a chain of 154 restaurants and single handedly established 'McDonald' brand in the assigned territories of North & East India. It has brought into perspective the role that India partners of foreign multinationals have played in the development of the brand of the multinationals. It has been observed that Indian Visionaries (‘IVs’) who build brands, businesses and ecosystems; who sacrifice their careers, friends and families; who don’t bother about pecuniary loss; monthly pay packages and financial security are in true sense business building platforms that give sustainability to the business ventures. A typical IV, pledges everything that he has (time, efforts, his network, his family, his money and every breathing moment of his life) to build an enterprise, breaks the glass ceilings, charters on tougher paths, accepts challenges, travels unchartered territories and discharges his obligations. In doing so, by various means the JV Partner or the Investor restricts limits and prohibits IV’s freedom to operate through machinations of “Affirmative Vote Items” or “Restrictive Covenants” in the shareholders’ agreement. Notwithstanding the restrictions, limitations and prohibitions the IV builds enterprise value, builds brands, builds teams and creates sustainable platform for the business, for the JV Partner or the Investors. In Indian business environment, this is very difficult. After considerable enterprise value is created, brand gets recognition, business becomes sustainable, one fine day the JV Partner or the Investor raises some flimsy issue about the IV’s so called bad conduct, alleged misdemeanor or impropriety. Based on the wild allegations the IV is considered rouge, short changed, denied his rightful place and made to look like a decorative piece of no value. The so called blue blooded Investors or blue blooded JV Partners use all their muscle power to crush legitimate expectations of the IVs. It is in this context, the NCLT Judgment charters untraveled path and probably for the first time recognizes the worth of such visionaries.
Analysis of the order- whether petition for oppression and mismanagement was justified
The NCLT observed that McDonald India had not lodged any grievance in the past 16 years against Mr. Vikram Bakshi rather there existed enough proof wherein the company had appreciated his sincere efforts. NCLT further observed that McDonald India had previously approached Mr. Vikram Bakshi to sell his share to them which he had out rightly refused. NCLT on the basis of the above fact held that ousting of Mr. Vikram Bakshi was an acute act of oppression since as per the JV agreement ousting Mr. Vikram Bakshi would give McDonald India the right to purchase his shares at a throw away price.
It appears that NCLT vide its order prima facie served the purpose of justice but the question which arises is that whether the same was served via the right medium. What also needs to be considered is the effect that the NCLTs order will have on the functioning of the Company. The purpose of Section 397-402 of the Companies At, 1956 and Section 241-245 of Companies Act, 2013 is to provide just and equitable relief in case of a tussle between the majority and the minority. The management of a Company is based on the majority rule but considering that the interest of the minority should not be overlooked, the provisions related to oppression and mismanagement were incorporated. However, in the current scenario, given that Mr. Vikram Bakshi and McDonald India held 50% share each and were governed by the Joint Venture Agreement entered into in 1995, the relief exercised should have been under the provisions of Specific Relief Act, 1963 and not the provisions related to oppression and mismanagement. Previously, in Classic Motors Ltd. Vs. Maruti Udyog Ltd[i] and Indian Oil Corporation vs. Amritsar Gas Services and Ors,[ii] similar questions regarding provisions of joint venture agreements were addressed under the Specific Relief Act, 1963. It is to be noted even though certain clauses of the JV agreement were incorporated in the Articles of Association, the sole point of reference of the arguments advanced in this case were based on the provisions of the JV Agreement which essentially is considered as a quasi-partnership and by deciding the case under the provisions of oppression and mismanagement the NCLT has further broadened the applicability of provisions relating to oppression and mismanagement..
Contradictory to the order, it is to be noted that previously it has been held in several cases that private agreement go beyond the scope of Section 398-402 of the 1956 Act. Further, it appears that there were grounds other than oppression and mismanagement on which Mr. Bakshi could have challenged his removal. The directors involved in the voting of the ouster of Mr. Bakshi, seemed to gain financially on his ouster. It also appears that procedure as prescribed under the Companies Act 2013 and as prescribed under the Joint Venture Agreement was not followed to pass the resolution leading to the ouster of Mr. Bakshi.
NCLT appointed former Supreme Court (“SC”) Judge, Honorable Mr. Justice G S Singhvi to act as an administrator in the company with a power to vote. Generally, an administrator is appointed by the SC or the tribunals in cases where in the company suffers due to mismanagement. One of the earliest case where an administrator was appointed was decided by the SC under the Indian Companies Act, 1913 in 1956 i.e. Rajmudary Electric Corporation Vs. Nageshwara Roa[iii] and the recent most case of Binani Cement, where in Kolkata Bench of NCLT appointed an administrator was to ensure that there exists no mismanagement, financial or otherwise, in the company. Where mismanagement is considered, the facts of the case and the statistics in relation to the growth of the company did not indicate mismanagement in any way but the question here was whether Mr. Bakshi was rightly ousted by the nominee directors. Further, even though appointment of the administrator is a common scenario it has generally been opted for by the courts and tribunals in case a group, generally minority, pursues the court to do so to ensure that the management is not adverse to that of the interest of the group or the company as a whole. The whole rationale behind the provisions is that the interest of the company should be given fundamental and paramount importance. However, in the current scenario the appointment of the administrator would in turn assure that no resolution is passed to oust the managing director of the company which can prove to be oppressive in certain ways to the other shareholders. Further, the NCLT has even gone a step ahead and observed and stated in its order that as per the JV agreement, the Directors are “obligated” to re-elect Mr. Bakshi as the MD subject to the conditions related to his performance.
Another fundamental point which the NCLT has failed to comment on is the validity of a provision which provides for continuous re-election of a MD on the fulfillment of subjective terms. Further deliberation was also required over certain clauses of the JV Agreement which was the cause behind the alleged oppression. The clause wherein Mr. Bakshi would be required to give away his share in case of his ouster was the real cause of the ouster and the same has not been discussed by the NCLT.