The NCLAT dismissed an appeal challenging an NCLT order directing a Swiss Challenge mechanism for share valuation in a family company dispute. The Tribunal held that where irreconcilable differences exist between shareholder factions in a quasi-partnership company, competitive bidding under court supervision constitutes just and equitable relief under Sections 241-242 of the Companies Act, 2013, particularly when a prior settlement agreement for exit remained unimplemented.
Background & Facts
The Dispute
The appellants, Mr. Nayan Shah (Appellant No.1) and Ms. Jigna Nayan Shah (Appellant No.2), challenged the NCLT Mumbai Bench-I order dated 16.03.2026 in C.P. No.216/2025 filed by Respondent No.2, Mr. Hitesh Chunilal Shah. Respondent No.2 alleged oppression and mismanagement by the appellants in Cheers Interactive (India) Private Limited (Respondent No.1), a closely held family company in the nature of a quasi-partnership. The company was incorporated on 14.07.2000 with Respondent No.2, Respondent No.3 (Mr. Chunilal Meghji Shah, the patriarch) and Appellant No.2 each holding 100 shares.
Shareholding Evolution
- 14.07.2000: Company incorporated; Respondent No.2, Respondent No.3 and Appellant No.2 each held 100 shares (100% total)
- 31.03.2001: Respondent No.1 (Cheers Interactive) and Respondent No.3 held 99.99% shares; Appellant No.2 held 0.01% shares
- 2001: Appellant No.1 inducted as CEO-Director (his saree business was not doing well)
- 2005: Respondent No.3 gifted portion of shareholding to Appellant No.2, bringing her shareholding to 50%; Respondent No.3 continued remuneration/pay outs in lieu of life interest in gifted shares
- 2005-2020: Further shares transferred by Respondent No.2 and Respondent No.3 to Appellant No.2 → Appellant No.2 held 53.67%, Respondent No.2 held 40.19%, Respondent No.3 held 0.44%; no shares held by Appellant No.1
- 22.07.2020: Respondent No.3 transferred 67,150 shares to Appellant No.2 as gift → Appellant No.2 held 53.67%, Respondent No.2 held 40.19%, Respondent No.3 held 0.44%
Settlement Agreement and Breach
- 13.10.2022: Settlement agreement signed by both sides; Respondent No.2 to exit Respondent No.1 company on receipt of Rs.60 crores as full and final payment to be made by 27.01.2023
- 17.10.2022: Appellant No.2 paid part-sum of Rs.1.01 crore to Respondent No.2
- 09.02.2023: Respondent No.2 communicated extension of payment date to 26.02.2023 (in spirit of settlement) and alternatively offered to purchase Appellant No.2's shareholding at same terms with 10% premium, payable within 60 days of signing contract
- 28.02.2023: Appellants acknowledged irreconcilable differences but stated settlement was not for company alone but full & final family settlement involving transfer of jointly held family lands
- Much after 27.01.2023: Appellants first raised issues regarding family land in letter dated 28.02.2023, attempting to expand scope beyond settlement agreement
Procedural History
- 27.03.2025: Company filed criminal complaint with Deputy Commissioner of Police, Crime Branch, Cyber Mumbai against Futurescalex and its ex-employees
- 01.04.2025: Respondent No.2 described himself as Whole-Time Director in letter, alleging exclusion from management
- Filed before NCLT: Respondent No.2 filed C.P. No.216/2025 alleging oppression/mismanagement
- 16.03.2026: NCLT Mumbai Bench-I passed impugned order appointing Observer and directing Swiss Challenge mechanism
- Present appeal: Company Appeal (AT) No.122 of 2026 filed before NCLAT challenging NCLT order
Relief Sought
Appellants sought to set aside the NCLT order dated 16.03.2026, allow the present appeal, and follow the exit mechanism provided in the Articles of Association whereby appellants would pay out respondents to protect company interests and end disputes.
The Legal Issue
The central question was whether, in a family company dispute where shareholders have entered into a settlement agreement for exit that remains unimplemented due to non-payment, the NCLT can properly direct a Swiss Challenge mechanism for share valuation under Sections 241-242 of the Companies Act, 2013, despite allegations of breach of fiduciary duty under Section 166 and non-attendance at board meetings under Section 167.
Arguments Presented
For the Appellants/Petitioners
The appellants contended that the NCLT order suffered from four fundamental errors: (a) it ignored the admitted breach of fiduciary obligation by Respondent No.2 under Section 166 via starting a competing business (Futurescalex Insights Private Limited) and poaching employees/clients; (b) it ignored the statutory vacation of office under Section 167 due to Respondent No.2's repeated failure to attend Board Meetings; (c) it conferred a casting vote upon Respondent No.3, jeopardizing the company's governance; and (d) it ignored Articles 11 and 12 of the Articles of Association, which confer pre-emptive rights on existing shareholders to purchase shares of exiting shareholders. They relied on the Bombay High Court judgment in Rajeev Kapur & Ors. v. Grentex [(2013) Comp Cas 28] to argue the petition was non-maintainable due to Respondent No.2's dishonest conduct aided by Respondent No.3. Furthermore, they cited Supreme Court precedents including M.S.D.C. Radharamanan v. M.S.D. Chandrasekara Raja [(2008) 6 SCC 750], Yashovardhan Saboo v. Groz-Beckert Saboo Ltd. [1992 SCC OnLine CLB 10] and G. Govindraj v. Venture Graphics P Ltd. [2004 SCC OnLine CLB 61] to submit that in cases of irreconcilable differences, the party in management should have the right to buy out the other, and that majority shareholders should not be forced to sell shares to minority shareholders.
For the Respondents
The respondents countered that the settlement agreement dated 13.10.2022 expressly provided for no non-compete clause, thereby permitting Respondent No.2 to establish a competing business, which negated any claim of breach of fiduciary duty under Section 166. They demonstrated that no valid notices were served on Respondent No.2 for Board Meetings, and mere cohabitation with Respondent No.3 (whose signatures were obtained on minutes) could not substitute for proven service of notices, thus defeating reliance on Section 167(1)(b) as per Raj Singh Chopra and others v. Jagat Singh Chopra [(2018) 206 Comp Cas 440]. They confirmed that the settlement terms complied with Articles 11 and 12, as Respondent No.2 had agreed to sell his shares to Respondent No.1 for Rs.60 crores. Emphasizing Respondent No.2's status as a substantial shareholder holding over 40% of shares, they argued his exclusion from management and cessation of remuneration (from 2022-23 for Respondent No.2 and January 2025 for Respondent No.3) without due process or justification constituted oppression under Sections 241-242. They further submitted that the Swiss Challenge method, as a form of cross-bidding by warring groups, constitutes fair, transparent just-and-equitable relief under Section 242(2)(b), citing precedent where such methods were held non-violative of Article 14 of the Constitution.
The Court's Analysis
The NCLAT began by noting that both sides were ad idem on the company being a closely held family company in the nature of a quasi-partnership, with a clear irretrievable breakdown in mutual trust and confidence. The Tribunal found that the absence of evidence regarding service of board meeting notices on Respondent No.2 was fatal to the appellants' Section 167(1)(b) argument. It relied on the observations in Raj Singh Chopra and others v. Jagat Singh Chopra, wherein it was held that for vacation of office under Section 167(1)(b), notices of the meeting which the director is alleged to have not attended must be proven, and vacation on the ground of failing to attend three consecutive meetings is invalid if the meetings were not validly held due to lack of notice. The Tribunal further noted that the returns filed by Respondent No.1 company with the MCA continued to show Respondent No.2 as a director, undermining the disqualification claim.
Regarding the allegation of breach of fiduciary duty under Section 166, the Tribunal held that the settlement agreement dated 13.10.2022 expressly permitted competing business (stating "no other Monetary or other New Points should be brought up" and that "the outgoing party shall be at liberty to do a competing business"). Consequently, Respondent No.2's actions in establishing Futurescalex and poaching employees/clients could not constitute a breach of fiduciary duty, as they were expressly authorized by the settlement agreement. The Tribunal also found no evidence to support the appellants' claims of misuse of confidential data by Respondent No.2, noting that he had given his laptop to the company to erase all data immediately after the settlement agreement, and that details of clients and large companies are available in public domain.
On the issue of Articles 11 and 12 of the Articles of Association, the Tribunal acknowledged that the settlement agreement complied with these provisions, as Respondent No.2 had agreed to sell his shares to Respondent No.1 for Rs.60 crores. However, it held that the pre-emptive rights mechanism under Articles 11 and 12 applies only to unilateral sales or transfers by one group of shareholders and is inapplicable when both groups are at loggerheads and seeking to oust each other, as was the case here. The Tribunal emphasized that the appellants had failed to make the agreed payment under the settlement agreement, and Respondent No.2 had subsequently offered to purchase the appellants' shareholding at the same terms with a 10% premium.
The Tribunal then focused on Respondent No.2's position as a substantial shareholder holding more than 40% of shares. It held that where a substantial shareholder of a family-owned company in the nature of a quasi-partnership is kept away from management and denied access to the fruits of profit (including cessation of remuneration) without due process or justification, the allegations of oppression by the majority stand confirmed. The Tribunal noted that important financial decisions, including borrowings and grant of interest-free loans to the appellants, were taken in Respondent No.2's absence, ignoring his legitimate expectation to participate in management.
Finally, the Tribunal endorsed the Swiss Challenge mechanism as the most appropriate remedy. It found authority for such an order in Section 242(2)(b) of the Companies Act, 2013, which permits the NCLT to order the purchase of shares by other members. The Tribunal cited precedent including Ravi Development v. Shree Krishna Prathisthan [(2009) 7 SCC 462], Sri Devi Karumariamman Educatinal Trust v. Central Bank of India [(2020 SCC OnLine Mad. 21516)] and Reji Abraham v. Punjab National Bank [(W.P. No. 22088 of 2026)], wherein the use of the Swiss Challenge Method for determination of fair price was held to be fair, transparent and "not violative of Article 14 of the Constitution of India". The Tribunal concluded that, given the willingness of both sides to buy out the other, their competence to run the company, and the unimplemented settlement agreement for exit, the NCLT's order directing a Swiss Challenge mechanism under supervision of an independent observer was well-reasoned and deserved no interference.
The Verdict
The appeal was dismissed. The NCLAT upheld the NCLT's order dated 16.03.2026 appointing Mr. Chandra Bhan Singh as Observer to supervise a Swiss Challenge bidding process for share valuation based on audited financials as of 31.03.2025, with initial bids due within 30 days, successful bidder to acquire shares within 3 months of bidding closure, 10% bid value deposited in escrow upon bidding completion, exiting group to transfer shares within 7 days of escrow deposit, Observer entitled to attend Board meetings at Rs.50,000/- per meeting plus consolidated remuneration of Rs.5,00,000/- plus GST, and CIPL to file Observer-certified compliance report. No costs were awarded.
What This Means For Similar Cases
Swiss Challenge as Default Remedy for Shareholder Deadlocks
When irreconcilable differences paralyze family companies, NCLT/NCLAT will favor court-supervised competitive bidding over unilateral buyout orders, particularly where settlement agreements exist but remain unimplemented. Practitioners should anticipate that the Tribunal will scrutinize whether a settlement agreement for exit was genuinely attempted and failed due to non-payment, rather than allegations of post-settlement conduct.
Settlement Terms Govern Fiduciary Duty Allegations
Express contractual permissions in settlement agreements (such as no non-compete clauses) defeat claims of breach of fiduciary duty under Section 166 of the Companies Act, 2013. Parties cannot be held liable for actions expressly permitted by their own agreement, and allegations of oppression or mismanagement must be evaluated strictly against the terms of any settlement that governed the parties' relationship at the relevant time.
Notice Requirements Are Strict for Director Disqualification
To successfully invoke Section 167(1)(b) for vacation of office, parties must prove valid service of board meeting notices; mere cohabitation or presumed knowledge cannot substitute for documented notice delivery. The burden of proof lies squarely on the party alleging disqualification to demonstrate that statutory notices were issued, and failure to do so will defeat the claim regardless of actual attendance patterns.
Pre-emptive Rights Are Context-Specific
The pre-emptive rights mechanism under Articles 11 and 12 of the Articles of Association applies only to unilateral share transfers between shareholder factions and does not resolve deadlocks where both sides seek to oust each other. In such scenarios, courts will look beyond constitutional provisions to remedies like competitive bidding that address the core breakdown of trust and mutual confidence.
