The Bombay High Court recently pronounced its judgment in Madhu Ashok Kapur and Ors.v. Rana Kapoor and Ors., providing some relief in the two-year long battle between Yes Bank and Madhu Kapur, the widow of co-founder Ashok Kapur. Ashok Kapur and the other co-founder, Rana Kapoor, enjoyed certain privileges in the running and management of Yes Bank. The dispute began when Madhu Kapur and the other Plaintiffs, following Ashok Kapur’s demise, were denied some of these rights.

The Court first considered whether the said rights were hereditary. The Court agreed with the Plaintiffs that, since shares include proprietary rights, the participatory rights given in the articles which the founders enjoyed are in the nature of moveable property. Moreover, the articles contained express provisions pursuant to which any rights that Ashok Kapur had would pass on to his heirs and legal representatives. Hence, the Court held that the rights were not personal but were heritable and assignable.

In relation to appointment of directors to the board of Yes Bank, the Court construed the right to recommend directors, as given in the articles, to mean a right to nominate, not just a right to suggest. The Court explained that had it been a mere right to suggest, it would not have been specifically provided for in the articles as all members of a company have the very same right under the Companies Act, 2013. Further, the Court observed that the articles indicated that Ashok Kapur and Rana Kapoor were to act together. Hence, any outcome of a non-joint exercise of the rights would stand vitiated. The Court held that neither the Plaintiffs nor Rana Kapoor’s group had the right to make a unilateral nomination to the exclusion of the other. Based on these findings, the Court found the past appointment of seven individual directors to be invalid, and further rejected the unilateral nomination of Ashok Kapur’s daughter.

Further, the Plaintiffs had contended that Rana Kapoor’s appointment as the Managing Director was a related party transaction that required a special resolution as per the Companies Act, 2013. This contention was rejected by the Court on the basis that Rana Kapoor’s appointment was in the ordinary course of Yes Bank’s business and was an arms-length transaction.
This decision comes at a time when corporate governance is being given significant prominence and companies must stay clear of deviations from the provisions within their articles. If not, courts may go to the extent of invalidating the appointment of directors even if it may hamper the operations of the company.

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Date:September 28, 2015