NCLT Erred in Ignoring Family Settlement Agreement, Wrongly Relegated Parties to Civil Court Despite Bar u/s 430 of Companies Act: NCLAT [Read Order]

The Principal Bench of National Company Law Appellate Tribunal (NCLAT) at New Delhi, has set aside the orders of the National Company Law Tribunal (NCLT), Bengaluru Bench, passed in a long-standing dispute over the control and management of a jewellery business.

The appeals were filed by C. Valli Narayan, wife of Late C.V. Narayan, and her son C. Ganesh Narayan, challenged the NCLT’s orders dated January 24, 2019, and August 24, 2023 respectively. Both petitions arose from allegations of oppression and mismanagement under Sections 397, 398, and 402 of the Companies Act, 1956, and later under Sections 241 and 242 of the Companies Act, 2013.

The dispute stems from internal differences between the two family factions, the Narayan Group (CVN Group) and the Hayagriv Group (CVH Group), each holding 50% shareholding in CKC & Sons, a family-run private limited company that succeeded the century-old partnership firm, C. Krishniah Chetty & Sons, in 1980.

The appellant, Valli Narayan, alleged that despite being an equal shareholder and long-standing director, her group was systematically excluded from the company’s management and that the opposing faction had diverted the company’s business to another group entity, C. Krishniah Chetty Jewellers Pvt. Ltd., controlled by the Hayagrivs.

To resolve the internal rift, both family branches had entered into a Family Settlement Agreement (FSA) on 9 January 2014, which envisaged a division of the family’s business and assets into two equal parts, allowing each group to operate independently through separate entities: the Narayans through CKC Deepali Pvt. Ltd. and the Hayagrivs through C. Krishniah Chetty Jewellers Pvt. Ltd.

However, the Narayan group alleged that the Hayagrivs reneged on the settlement after six months, continuing to control the main company and denying implementation of the agreed demerger.

The appellants contended that the NCLT erred in holding that the FSA was unexecuted and in treating it as an “escrow” arrangement. As per them, the NCLT further erred by relegating the parties to civil court, despite the exclusive jurisdiction of the Tribunal under Section 430 of the Companies Act, 2013.

They relied on recent NCLAT precedent in Venus Petrochemicals (Bombay) Pvt. Ltd. v. Sunil M. Thakkar (Company Appeal (AT) No. 65 of 2022), wherein the Tribunal applied the principle of quasi-partnership to family-held companies with equal shareholding, granting equal representation on the board and joint operation of bank accounts.

The Bench comprising Arun Baroka (Technical Member) observed that the company was run as a family enterprise and that both sides had mutually admitted a complete breakdown of trust. The Tribunal held that such disputes, especially where there is equal shareholding and management deadlock, attract the equitable jurisdiction of the NCLT and NCLAT under Sections 241 and 242 of the Act.

The NCLAT found that the NCLT had failed to properly examine the Family Settlement Agreement, the extent of oppression, and the alleged diversion of business. It further observed that civil court jurisdiction in such matters is expressly barred under Section 430 and that the NCLT had committed a jurisdictional error by suggesting that the Appellants approach a civil court.

The Appellate Tribunal set aside the impugned orders of the NCLT and remanded the matter to the NCLT, Bengaluru, for fresh adjudication on the following aspects:

• The validity and enforceability of the Family Settlement Agreement dated 09.01.2014,
• The alleged acts of oppression and mismanagement, including exclusion from management and diversion of business, and
• Appropriate reliefs to resolve the shareholder deadlock and safeguard the interests of both family groups.

The Bench also directed that, pending such adjudication, both groups refrain from unilateral actions affecting the company’s business and cooperate in exploring an amicable business separation in line with the spirit of the 2014 settlement.

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