NCLAT upholds Central government’s takeover of Delhi Gymkhana Club; directs conduct of elections for management restoration

National Company Law Appellate Tribunal, New Delhi: In an appeal challenging the NCLT order dated 01-04-2022 allowed the Union of India’s takeover of the prestigious Delhi Gymkhana Club and the directed to nominate 15 persons as Directors to manage the affairs of the Delhi Gymkhana Club, a Division Bench of Ashok Bhushan,* J., (Chairperson) and Arun Baroka (Technical Member), upheld the Central government’s takeover of the Delhi Gymkhana Club. The NCLAT held that —

1. The proceedings initiated under Sections 241 and 242 is valid and the NCLT properly exercised its jurisdiction.

2. The existing Committee is mandated to expedite remedial actions, ensuring a resolution of the complaints within a specified timeframe.

3. Elections must be conducted within three months after the completion of the remedial actions, culminating in the installation of a duly elected General Council.

Factual Matrix

In the instant matter, an inspection of Delhi Gymkhana Club (the Company) was carried out and then a detailed report was submitted to the Government. The Government of India after looking at numerous violations filed a petition under Section 241–242 of the Companies Act, 2013 (the Companies Act), citing governance and financial irregularities within the Delhi Gymkhana Club. On 26-06-2020, after going through the preliminary objections and reply of the Union of India, the NCLT directed the Union of India to appoint two members to monitor the Company along with other General Council Members and ordered to inquire into the affairs of the Company. The NCLAT dismissed the appeal against NCLT’s order and in further appeal before the Supreme Court, the Supreme court directed the NCLT to expedite the matter and decide the matter in four months. Following the directions of the Supreme Court, the NCLT, vide order dated 01-04-2022, allowed the petition filed by the Union of India. The NCLT passed the order along with the directions of nominating 15 persons as Directors to manage the affairs of the company and file a report with the Tribunal once every three months or as required including the financial report. Aggrieved by the impugned order dated 01-04-2022 passed by NCLT, the appellants preferred the present appeal before the NCLAT, challenging the same.

Appellants’ Contentions

The appellants contended that the NCLT has erred in passing the impugned order as the conditions under Section 241(2) of the Companies Act were not satisfied. It was stated that the Central Government did not form an opinion that the company’s affairs were conducted in a manner which is prejudicial to the public interest. It was contended that the letters dated 18-03-2020 and 04-03-2020 do not constitute a valid opinion because the formation of an opinion is not a mere formality and must be based on specific grounds and reasons as required by the Act. The appellant relied on K.R. Lakshmanan v. State of T.N., (1996) 2 SCC 226, to support the argument that the Company is a private club with no impact on community resources or the State’s economy. The appellants also stated that the allegations so raised must provide some ground for interference and demonstrate urgency for the Court to act, which is not there in the case of Delhi Gymkhana Club.

Respondents’ Contentions

The respondents contended that the actions of Central Government were based on an inquiry that unearthed significant mismanagement and financial irregularities within the company. It was contended that the infractions highlighted in the report are substantiated by records and admissions from the members of General Council during inspections. It was also argued that the practice of the company treating the registration fees as income and the engagement in financial arbitrage are contrary to the Articles of Association and in conclusion detrimental to public interest. It was stated by respondent 18 that there were allegations of fraud and corruption against the Ex-Members of the General Council against them and a FIR has been already registered. The respondents also highlighted the issue of Witness protection of the persons who helped in bringing out the fraud.

Moot Points

1. What is the requisite conditions precedent for invoking provisions of Section 241(2) of the Companies Act?

2. Whether the requisite conditions precedent within the meaning of Section 241(2) of the Companies Act in the application filed by the Union of India under Sections 241and 242 are met i.e. (i) formation of opinion by the Central Government under Section 241(2); and (ii) that the affairs of the Company are being conducted in a manner prejudicial to the public interest?

3. Whether there were sufficient materials on the record for formation of requisite opinion under Section 241(2) by the Central Government?

4. Whether affairs of the Company (Delhi Gymkhana Club) were being conducted in a manner prejudicial to the public interest so as to enable the Central Government to file an application under Section 241(2) of the Companies Act?

5. Whether the impugned order dated 01-04-2022 passed by the NCLT is in nature of interim order under Section 242(4) and not a final order?

6. Whether the impugned order does not record any finding for exercising jurisdiction under Section 242 of the Companies Act?

7. Whether the NCLT vide its impugned judgment has delegated its jurisdiction to the 15 members committee which was to be nominated by the Central Government in pursuance of the impugned order?

8. Whether the supersession of the management of the Company by 15 members committee to be nominated by the Central Government without providing for any time period or course of action with a view to bringing to an end the matters complained of requires interference by the Appellate Tribunal?

9. To what relief, if any, are the appellants entitled in the present appeals?

10. What will be the Course of Action with a view to bringing to an end the matters complained of?

NCLAT’s Analysis and Decision

The NCLAT noted that the Union of India filed an application under Sections 241–242 of the Companies Act. These sections are part of Chapter XVI of the Act, titled “Prevention of Oppression and Mismanagement.” Section 241(1) allows a member of a company to apply to the Tribunal, while Section 241(2) empowers the Central Government to apply to the Tribunal if the company’s affairs are conducted in a manner prejudicial to the public interest and Section 242 outlines the nature of orders the Tribunal may issue in such cases.

Question 1: Requisite Conditions for invoking Section 241(2) of Companies Act

The NCLAT noted that the application by the government, under Section 241(2) of Companies Act, is permissible when two conditions are satisfied —

1. Subjective Satisfaction — The Central Government must form an opinion regarding the conduct of the company’s affairs.

2. Public Interest — The company’s affairs must be conducted in a manner prejudicial to the public interest.

The NCLAT referred to Tata Consultancy Services Ltd. v. Cyrus Investments (P) Ltd., 2021(9) SCC 449, where Supreme Court interpreted that the expression “in the opinion of” reflects the subjective satisfaction of the Central Government, which must be based on facts indicating harm to the public interest. The NCLAT relied upon 63 Moons Technologies Ltd. v. Union of India, 2019 (18) SCC 401 and stated that the expression “public interest” is to be seen from the context in which it is used as the expression carries a wide amplitude.

The NCLAT held that for the Central Government to apply for relief under Section 241(2) of the Companies Act the following conditions precedent must be satisfied —

1. The Central Government must be of the opinion that the company’s affairs are being conducted in a manner prejudicial to the public interest.

2. The opinion must be based on facts gathered by the government, establishing the necessary grounds for the application.

The NCLAT observed that these conditions provide a safeguard to ensure that the government’s intervention is warranted and justified under the Companies Act and upon satisfying these prerequisites, the Central Government may proceed with an application under Section 241(2).

Question 2, 3 and 4: Delhi Gymkhana Club’s affair & Government’s opinion under Section 241(2)

The NCLAT noted that the Central Government had indeed formed the requisite opinion based on the inspection reports, supplementary reports, and other materials, including the Delhi Gymkhana Club’s financial position, violation of its Articles of Association, and the Company’s failure to pursue its main objects. The NCLAT further noted that the communication dated 18-03-2020 from the Ministry of Corporate Affairs was a valid opinion under Section 241(2), supported by necessary approvals and thorough consideration of evidence.

The NCLAT held that there were sufficient materials for the Central Government to form the opinion that the affairs of the Delhi Gymkhana Club are being conducted prejudicially to the public interest. The NCLAT noted that the reports highlighted that only 3% of the company’s expenditure was directed toward sports, which was supposed to be its main object.

The Court rejected the argument that the affairs of the Delhi Gymkhana Club were not prejudicial to the public interest and stated that since the Club was incorporated to promote public objectives such as sports and charitable activities, its mismanagement and failure to uphold these objects negatively impacted public interest, warranting government intervention. The NCLAT ruled in favor of the Union of India and held that —

1. The conditions under Section 241(2) of the Companies Act were met.

2. There were sufficient materials for the Central Government to form an opinion.

3. The affairs of the Delhi Gymkhana Club were being conducted in a manner prejudicial to public interest, justifying the Government’s application under Section 241(2).

Question 5, 6 and 7: Validity of NCLT’s order dated 01-04-2022

The NCLAT deemed the NCLT’s order dated 01-04-2022, as a final order, following a previous Supreme Court directive dated 30-09-2021, that called for a conclusive decision on the matter. The NCLAT stated that the Supreme Court had directed the NCLT to reach a conclusive decision, which the NCLT did in compliance with that mandate.

The NCLAT determined that the NCLT had ample basis for exercising jurisdiction under Section 242 of the Companies Act. The NCLAT stated that the NCLT’s detailed findings, with regards to the inspection and supplementary inspection reports identifying governance failures and financial irregularities, including mismanagement in membership and a failure to fulfill the Company’s primary sports objectives, justified NCLT’s intervention.

The NCLAT held that the NCLT had not delegated its jurisdiction to the 15-member committee but tasked the committee to implement specific corrective actions as per the NCLT’s direction. The NCLAT deemed the committee a remedial body under NCLT’s direct supervision, thereby, empowered to address the Company’s regulatory and governance issues based on the NCLT’s findings. The NCLAT affirmed the NCLT’s order as a final, reasoned decision that did not improperly delegate jurisdiction to the 15-member committee

Question 8: Legality of Indefinite supersession of Delhi Gymkhana Club’s management

The NCLAT reviewed the purpose of Sections 241 and 242 of the Companies Act and emphasised that remedial action by the NCLT should aim to “bring to an end the matters complained of.” Referring to Tata Consultancy Services Ltd. (Supra), the NCLAT noted that relief under these sections must be targeted at resolving the grievances presented, rather than indefinite management.

The NCLAT asserted that since the NCLT had not specified a timeline for the committee’s operations, therefore, the same had led to extended control of committee without steps for returning governance to the company.

The NCLAT found merit in the appellants’ concern over the indefinite nature of the committee’s control and need for a conclusive end to the issues. The NCLAT referred to precedents where the Supreme Court directed for a timely election process to restore an elected body if the NCLT could not resolve the matter within a designated period.

The NCLAT held that the committee must complete all remedial actions and organize elections by 31-03-2025 as per the company’s Articles of Association, thus ensuring alignment with the purpose of Sections 241 and 242, aiming to end the matters complained of and restore a duly elected management body.

The NCLAT also acknowledged unrelated contentions raised by Col. Ashish Khanna, including allegations of corruption and requests for witness protection, however, noted that the same are beyond the scope of the present appeal and directed to pursue these contentions in separate proceedings.

Question 9 and 10: Relief

The NCLAT upheld the NCLT’s impugned order regarding the appointment of the 15-members Committee, directed the existing Committee to complete remedial actions by 31-03-2025 and conduct elections for the President and Members of the General Council in accordance with the Delhi Gymkhana Club’s Articles of Association.

NCLAT’s Decision

The NCLAT disposed of the appeal with specific directives aimed at restoring proper management to the Delhi Gymkhana Club while ensuring accountability and adherence to corporate governance standards as outlined in the Companies Act, 2013.

[Major Atul Dev v. Union of India, 2024 SCC OnLine NCLAT 1193, Decided on 21-10-2024]

*Judgment by Justice Ashok Bhushan

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Advocates who appeared in this case :

Mr. Krishnendu Datta, Sr. Advocate with Mr. Gaurav M. Libehran, Mr. Arun Singh Rawat, Mr. Angad Mehta, Mr. Akhil Nene, Mr. Arsh, Mr. Rahul Divedi, Mr. Komal Gupta, Ms. Akariti, Counsel for the Appellants

Raunak Dhillon, Ms. Isha Malik, Mr. Jeezan Pakliwal, Mr. Sanjay Shorey and Mr. Vinod Sharma, Counsel for the Respondent No. 1/Union of India

Mr. Prateek Kumar, Ms. Raveena Rai and Ms. Moha Paranjpe, Counsel for the Delhi Gymkhana Club

Col. A Khanna (Retd.), SM, Counsel for the Respondent No. 18

Ms. Niji Sapra, Counsel for the SFIO Complainant