Pranav B Prem

The National Company Law Appellate Tribunal (NCLAT) at Chennai has ruled that only existing members of a company can seek relief for oppression and mismanagement under Section 244 of the Companies Act, 2013, even in exceptional circumstances. Setting aside an order of the National Company Law Tribunal (NCLT), Chennai, which had permitted two former members of the Madras Race Club to pursue such a claim, the NCLAT held that membership is a legal prerequisite to seek a waiver under Section 244(1)(b).

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A Bench comprising Justice Sharad Kumar Sharma (Judicial Member) and Mr. Jatindranath Swain (Technical Member) observed that “even for the purposes of seeking waiver under Section 244, a person who is applying to be granted with the waiver has had to necessarily establish that he happens to be the member of the Company, even though he may not be holding the prescribed share capital or constituting not less than one-tenth or one-fifth of the total number of members as the case may be.”

Background of the Case

The dispute arose out of long-standing membership controversies at the Madras Race Club, a company registered under Section 8 of the Companies Act and functioning as a non-profit entity with no share capital. The controversy began when irregularities in the club’s membership records were discovered in 2017. A special audit conducted by M/s Brahmayya & Co., Chartered Accountants revealed that out of 924 members admitted between 2000 and 2015, only 53 were fully compliant with the Articles of Association, while 635 members—including the respondents, R.D. Ramasamy and M. Magesh Kumar—had not fulfilled the mandatory requirements for membership, such as payment of the prescribed entrance fees.

Following a judicial inquiry led by Justice K.P. Sivasubramaniam (Retd.), the NCLT, by its order dated 24 September 2019, directed removal of the 635 non-compliant members from the club’s register. This order was affirmed by the NCLAT in May 2020, with a minor modification allowing the club’s Annual General Meeting to “additionally consider” whether such individuals could regularize their membership by paying the requisite entrance fee with interest. The club’s AGM subsequently rejected the proposal.

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In 2022, the two removed members—Ramasamy and Magesh Kumar—filed a fresh petition before the NCLT under Sections 241, 242, and 59 of the Companies Act, alleging oppression and mismanagement. Since they were no longer members, they sought a waiver under Section 244(1)(b). The NCLT granted the waiver, citing “exceptional circumstances,” allowing them to proceed. The Madras Race Club appealed this decision before the NCLAT.

Contentions Before the NCLAT

The Madras Race Club (Appellant) contended that the respondents had ceased to be members pursuant to the NCLT’s 2019 order and the subsequent NCLAT confirmation in 2020. Since their names had been lawfully removed from the Register of Members, they were no longer entitled to maintain a petition under Section 241, nor could they seek a waiver under Section 244(1)(b). The appellant argued that permitting non-members to invoke these provisions would contravene the Companies Act and result in procedural abuse.

Conversely, the respondents (erstwhile members) submitted that they had been members for over two decades and had participated in club activities throughout that period. They asserted that the nature of their long-standing association and the social purpose of the club justified the grant of waiver, even if their names had been removed from the membership register. They claimed that denying them access to remedy would leave them without recourse against acts of mismanagement.

Findings and Observations

The Appellate Tribunal, after a detailed review of the records and legal provisions, disagreed with the NCLT’s interpretation. Referring to Section 2(55) of the Companies Act, the Bench emphasized that the term “member” strictly includes only those whose names appear in the register of members. Accordingly, to invoke Section 244 or seek a waiver thereunder, the applicant must be an existing member.

The NCLAT noted that the respondents’ status as non-members was conclusively determined in earlier proceedings, and that their removal from the membership register had been judicially affirmed. The observation in the 2020 NCLAT order allowing the AGM to “consider” their case for readmission was described as a “gratuitous direction” and not a substantive right. The Tribunal observed that “rights under law cannot be determined based on a gratuitous direction unless it is based upon the satisfaction required under law.”  Further, the Bench relied on the precedent of Cyrus Investments Pvt. Ltd. & Anr. v. Tata Sons Ltd. & Ors., wherein it was held that the Tribunal must first ascertain whether the applicant is a member before considering any waiver under Section 244. It reiterated that if the applicant is not a member, “the application is to be rejected outright.”

The Tribunal observed that the NCLT had erred by granting a waiver based on hypothetical “exceptional circumstances” without defining or substantiating them. It stressed that equitable considerations or the social character of the club could not override statutory requirements. “The social objective of the club cannot be adopted to act as a substitute to treat the respondents as members of the club,” it held. Importantly, the NCLAT cautioned that extending the scope of Section 244 to non-members would lead to procedural disorder, stating: “If the field of filing of applications under Section 244 of Companies Act is left open even to non-members, it would create procedural chaos, enabling all and sundry who are not even a member of the Company, to raise allegations of oppression and mismanagement.”

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Holding that the respondents were not members of the club at the time of filing the petition and had made no effort to reinstate their membership, the NCLAT concluded that they lacked the legal standing to seek a waiver or to maintain proceedings under Sections 241 and 242 of the Act. The Tribunal observed:  “In no way, any previous right which respondents enjoyed being the member of the appellant company in the past prior to their removal, will grant them a right to initiate proceedings under Section 244 of the Companies Act, merely because of the fact that they had been a member and enjoyed the status for the last 20 years.” Accordingly, the NCLAT quashed the NCLT’s order dated 9 January 2024 and allowed the appeal filed by the Madras Race Club, thereby rejecting the waiver granted to the former members.

Appearance

For Appellant: Advocates Preeti Mohan and M Nandita Krishnan

For Respondents: D.Sreenivasan and V Jai Hari Sudhan (Advocates for R1) Senior Advocate A Thiyagarajan and Advocate NR Rajagopalan

Cause Title: Madras Race Club V. R.D. Ramasamy and Anr.

Case No: Company Appeal (AT) (CH) No. 17 / 2024

Coram: Justice Sharad Kumar Sharma (Judicial Member), Mr. Jatindranath Swain (Technical Member)