Jurisdiction: Territorial jurisdiction – Territorial jurisdiction of High Court to entertain the suit – Plaintiffs-resident nationals of Dubai, have share holding in defendant No. 2 Company, incorporated in Dubai – Plaintiffs holding 34% of shares and defendant Nos. 3,4 and 7 holding 66% shares in the defendant No.
2 Company – Defendant Nos. 3-7 also subscribers to 6.16% share capital of defendant No. 1/Indian Company – Plaintiffs filed suit for declaration in the High Court of Madras, as a derivative action on behalf of defendant No. 2, purportedly to protect and declare the beneficial interest in the shares available with defendant no. 1 standing in the name of defendant Nos. 3-7 – Single Judge of the High Court held that the High Court had the jurisdiction to entertain the suit, however, the Division Bench held that the suit in the High Court of Madras was not maintainable – On appeal, held: When a dispute is between the shareholder and the company with respect to the shares held in another, the mere existence of registered office of the subsequent company is not a factor to clothe jurisdiction – In reality, the dispute is between the plaintiffs and defendant nos. 3-7, all residents of Dubai – Even defendant No. 2 whose beneficial interest is claimed was incorporated in Dubai – Merely, because the dispute is about those shares issued by Indian Company, would not lead to the conclusion that cause of action has arisen in India – Defendant No. 1 has nothing to do with the dispute – Relief of declaration sought is that defendant Nos. 3-7 are not the real owners of such shares and its beneficial owner is defendant No. 2 – Such a dispute would not bring jurisdiction of Chennai courts simply because defendant No. 1 has its registered office in Chennai – While AND ALLIED INSUR. COMPANY LTD.
considering the territorial jurisdiction over a suit initiated to protect the beneficial interest, the issue qua the existence of such an interest can only be decided on the condition that the same is amenable to such a jurisdiction – Defendant no. 2 is not amenable to the jurisdiction of the Madras High Court – Furthermore, the court in Dubai would be more convenient forum to decide the dispute between the parties who are residents of Dubai and which revolves around defendant no. 2, Company registered in Dubai – Suit – Cause of action.
Dismissing the appeals, the Court
HELD: 1.1 The High Court rightly held that when a dispute arose against the company, which issued the shares, then the situs would be its registered office, however, when the dispute is between the shareholder and the company with respect to the shares held in another, the mere existence of registered office of the subsequent company is not a factor to clothe jurisdiction. [Para 56][699-G]
1.2 On going through the real dispute between the parties, which emerges out of the plaintiff as well, it would become manifest that the dispute between the plaintiffs on the one hand and Defendant Nos. 3 to 7 on the other hand pertains to the affairs of the Defendant no. 2 Company and in respect of which cause of action has not arisen in Chennai and such a dispute has to be sorted out by the parties between themselves by filing appropriate proceedings in Dubai, UAE only. [Para 46][698-E-F]
1.3 While making the averments qua the cause of action and territorial jurisdiction, it becomes apparent that the plaintiffs got aggrieved by the draft Consolidated Financial Statement of Defendant No. 11 (which is again a Dubai company and a parent company) and this statement records deconsolidation of its account with those of Defendant No. 2. The real dispute, thus, is whether Defendant Nos. 3 to 7 in whose name shares to the extent of 6.16% of Indian Company stand, are the real owners or it is Defendant no. 2 Company which has the beneficial interest in the said shares. Though, the plaintiffs claim beneficial interest of Defendant No. 2, Defendant Nos. 3 to 7 deny the same. Interestingly, even Defendant No. 2 Company, whose beneficial interest in these shares is claimed by the plaintiffs, refutes such a claim of the plaintiffs. Thus, in reality, it is the dispute between the plaintiffs and Defendant nos. 3 to 7 who are all residents of Dubai. Even Defendant No. 2 whose beneficial interest is claimed by the plaintiffs is a Company incorporated in Dubai, UAE. Merely, because the dispute is about those shares which are issued by Indian Company would not lead to the conclusion that cause of action has arisen in India. It is obvious that insofar as Defendant No. 1 is concerned it has nothing to do with the dispute. The relief of declaration which is sought is that Defendant Nos. 3 to 7 are not the real owners of such shares and its actual/beneficial owner is Defendant No. 2. Such a dispute would not bring jurisdiction of Chennai courts simply because Defendant No. 1/Indian Company has its registered office in Chennai. Even if it is presumed that the plaintiffs ultimately succeed in their action, when brought in a competent court in Dubai, and a declaration of the said nature is given by the said court, Defendant No. 1 can always act thereupon. [Para 47][696-F-H; 697-A-D]
1.4 As per sub-section (1) of Section 89 of the Companies Act, 2013 a person whose name is entered in the register of Members of the Company as the holders of shares in that Company but does not hold beneficial interest in such shares, he shall make declaration within the prescribed time to the Company specifying the name and address of the person who hold the beneficial interest. Sub-section (8) provides that if such a declaration is not made right in this behalf cannot be enforced by other person claiming through the beneficial owner. Prima facie, it appears that court in India on the application of the said provision would not be in a position to give any relief to the plaintiffs in the instant suit. The High Court has discussed the nature of derivative action as well as the meaning that is to be ascribed to the term ‘beneficial interest’. The suit for derivative action is an exception to the general principle of locus. It can be claimed only in a particular situation. Such a situation has to be seen contextually from the point of view of the entity, on whose behalf the suit is filed. Incidentally, the inter se relationship between the plaintiffs and the beneficial owner, which may be a company is also of relevance. It may involve a case of deceit, AND ALLIED INSUR. COMPANY LTD.
fraud, inability or incapacity. However, the fundamental factor to be considered is the relationship between the plaintiff and the party, which the plaintiff seeks to represent. [Para 48][698-D-H; 699-A]
1.5 The term ‘Beneficial interest’ is defined under Section
3 of the Trust Act, 1882. As it can be discerned from the definition of ‘Beneficial interest’; there are two parties involved in an issue governing beneficial interest. One is a beneficiary named as ‘beneficial owner’ and the other is the owner named as ‘registered owner’ being the trustee of the property or the asset in question. Thus, one can deduce the underlining principle that the ownership is nonetheless legal over the trust property, which vests on him but he also acts as a trustee of the beneficiary. A beneficial owner may include a person who stands behind the registered owner when he acts like a trustee, legal representative or an agent. [Paras 49, 50][699-A-D]
1.6 The High Court is right in its observation that for applying the principles governing a derivative action one fundamental test has to be passed, viz., such an action will necessary have the sanction of law and this shall have no obligation to a foreign entity having beneficial interest which can be enforced in India especially when there are provisions dealing with such a situation. While considering the territorial jurisdiction over a suit initiated to protect the beneficial interest, the issue qua the existence of such an interest can only be decided on the condition that the same is amenable to such a jurisdiction. Defendant no. 2 is admittedly not amenable to the jurisdiction of the Madras High Court. [Para 52-53][698-G-H; 699-A-B]
1.7 The High Court in the impugned judgment discussed in detail the meaning and scope of ‘cause of action’. It also considered the scope of Clause 12 of the Letters Patent which is peculiar to Madras High Court, where a leave is required to be obtained when part of cause of action arises within the territorial jurisdiction of the said court. In such a situation, the principles of forum convenience would become applicable. The court in Dubai would be more convenient forum to decide the dispute between the parties who are residents of Dubai and which revolves around Defendant no. 2, again a Company registered and situate in Dubai. The High Court also appears to be right in holding that the relief sought for against Indian Company, at best, is a consequential one and cannot give a cause of action. Even Defendant no. 2 cannot seek such a relief without resolving its dispute as against Defendant nos. 3 to 7. Such a dispute can only be dealt with by competent forum in Dubai as per the law prevailing in Dubai, UAE. [Paras 54, 55][699-B-F]
Vodafone International Holdings BV v. Union of India and Another (2012) 6 SCC 613 : [2012] 1 SCR 573; Starlight Real Estate (Ascot) Mauritius Ltd. and Another v. Jagrati Trade Services P. Ltd. and Others (2016) 195 Comp Cas 434 (Cal); Nirad Amilal Mehta v. Genelec Limited & Others (2008) 6 Bom CR 499; Kusum Ingots and Alloys Ltd. v. Union of India and Another (2004) 6 SCC 254 : [2004] 1 Suppl. SCR 841 – referred to.
Mount Royal/Walsh Inc. v. Jensen Star, the Ship (1990)
1 FC 199 – referred to.
As published in the Supreme Court Reports, Supreme Court of India. Text from the Indian Supreme Court Judgments open data set (Dattam Labs), CC BY 4.0.
This page is for informational and research purposes only and does not constitute legal advice. Consult a qualified advocate for advice specific to your situation.