NCLT Hyderabad Lays Out Structured Buy-Out Mechanism To Resolve Deadlock Between Shareholders
Pranav B Prem
In a significant ruling, the National Company Law Tribunal (NCLT), Hyderabad Bench-I, comprising Dr. Venkata Ramakrishna Badarinath Nandula (Judicial Member) and Sh. Charan Singh (Technical Member), delivered a common order in CP No. 45/241/HDB/2023 and CP No. 44/241/HDB/2023 under Sections 241 and 242 of the Companies Act, 2013. The tribunal found that the actions of the Deccan Group amounted to "grave acts of oppression" and laid down a structured buy-out mechanism to resolve the deadlock between shareholders in Escientia Advanced Sciences Private Limited (EASPL) and Escientia Biopharma Private Limited (EBPL).
Background
The Escientia Group, founded in 2008 by Dr. Yadagiri Pendri and Mr. Kiran Pendri, operates as a life sciences company providing manufacturing and R&D services to major pharmaceutical firms globally. In 2020, the Deccan Group, an agrochemical CDMO, acquired a majority stake from an outgoing investor. Initially promising to remain a passive investor, the Deccan Group allegedly took active control of corporate affairs, prompting the founding members to file a petition under Sections 241 and 242 of the Companies Act, alleging oppression and mismanagement.
Allegations by the Petitioners
The petitioners asserted that despite Deccan Group's commitment to passive investment, it gradually took active control over EASPL and EBPL. Their allegations included unauthorized appointments, such as the unilateral appointment of Dr. MSM Mujeebur Rahuman as Chief Operating Officer (COO) without board consensus. They also alleged financial mismanagement, specifically the granting of inter-company loans on preferential terms to Primopus AG, a competing business controlled by Deccan Group. Moreover, the petitioners claimed that key contracts from pharmaceutical giants such as Eli Lilly and GlaxoSmithKline were unfairly diverted to Primopus AG. Additionally, the Deccan Group was accused of breaching corporate governance norms by violating the Articles of Association (AoA) and the Shareholders' Agreement, thereby disregarding the special rights of the original promoters.
Defense by the Respondents
In their defense, the respondents argued that the appointment of a COO was a strategic necessity for business growth. They claimed that Primopus AG operated independently and that no conflict of interest existed. Citing legal precedents like Yashovardhan Saboo v. Groz-Beckert Saboo Ltd. (1995) and Synchron Machine Tools (P) Ltd. v. U.M. Suresh Rao (1994), they maintained that as majority shareholders, they should have the first right of purchase.
Tribunal's Findings and Observations
The NCLT, after thoroughly examining the evidence, ruled in favor of the petitioners. It found that the Deccan Group had effectively taken control of EASPL and EBPL, thereby breaching their initial commitment to a passive role. This act violated the agreed governance framework and amounted to oppression of minority shareholders. The tribunal also noted that business opportunities from major clients were diverted to Primopus AG, creating confusion in the minds of customers and violating corporate governance norms. The tribunal further observed that inter-company loans to Primopus AG were extended at exceptionally low interest rates (1.69%), while EASPL borrowed at significantly higher rates (approximately 11%). This disparity, the tribunal remarked, clearly indicated financial impropriety.
The appointment of Dr. MSM Mujeebur Rahuman was declared unilateral and in violation of the AoA. The tribunal emphasized that the company had been performing well without such a role and found the justification for the appointment to be unsubstantiated. Additionally, the tribunal held that the Deccan Group had disregarded the special rights conferred upon the original promoters under Articles 69 and 72 of the AoA. It ruled that these provisions were valid and enforceable, emphasizing that their breach eroded shareholder confidence and amounted to a violation of corporate governance principles.
The tribunal observed that the relationship between the founding members and the Deccan Group had irretrievably broken down. It remarked, "Despite resolving unanimously to work together, both groups started blaming each other with serious allegations. The lack of trust between the Pendris and Deccan Group has irretrievably broken down. In such a scenario, the only solution is severing of the relationship through a buy-out of shares."
Tribunal's Decision and Relief Granted
To resolve the deadlock, the tribunal laid down a structured buy-out mechanism. It ordered a buy-out granting the original promoters the first right to purchase Deccan Group's shares. It also quashed the appointment of Dr. MSM Mujeebur Rahuman as COO, holding that it was contrary to corporate governance principles. Furthermore, the tribunal restrained the Deccan Group from diverting business to Primopus AG or engaging in any financial misconduct. To provide the respondents an opportunity to challenge the decision, the tribunal deferred the enforcement of the buy-out order until March 18, 2025.
Appearance
The minority shareholders were represented by: Mr K. Vivek Reddy, Mr D.V. Seetharam Murthy, P.Sri Raghuram and Mr Gyanendra Kumar, Senior Advocates, instructed by Mr Soumya Dasgupta (Principal Associate), Mr Dwijesh Kapila (Senior Associate), and Mr Aviral Singhal (Associate) of Cyril Amarchand Mangaldas.
The majority shareholders were represented by: Mr Arvindh P.H. Pandian and Mr S. Niranjan Reddy, Senior Advocates, instructed by Mr Tarun G. Reddy and Dua Associates.
Cause Title: Escientia Life Sciences & ors Versus Escientia Advanced Sciences Pvt Ltd & Others
Case No: CP No. 45/241/HDB/ 2023 AND Contempt (CA) 05/2024, IA (CA) No. 295 & 296/2024
Coram: Dr. Venkata Ramakrishna Badarinath Nandula [Member (Judicial)], Charan Singh [Member (Technical)]
[Read/Download order]
