The Supreme Court of India in the case of, Chalasani Udaya Shankar v. Lexus Technologies Private Limited, (2024 INSC 671), has held that if an open-and-shut case of fraud is made out in favour of the person seeking rectification of the register of members of a company, the National Company Law Tribunal ("NCLT") would be entitled to exercise its power to direct such rectification, under Section 59 of the Companies Act, 2013 ("Act"). Section 59 of the Act read with Rule 70(5) of the National Company Law Tribunal Rules, 2016, deals with rectification of register of members. The analogous provision in the Companies Act, 1956 was Section 155, which has been interpreted in various decisions, some of which were referred to in this Supreme Court judgement.
Brief Facts
The appellants had filed an application in the National Company Law Tribunal, Hyderabad/ Amravati bench for (a) rectification of the register of members of Lexus Technologies Private Limited (the "Company") under Section 59 read with Section 88 of the Act, and (b) oppression and mismanagement and criminal proceedings under Section 447 and 448 of the Act (i.e. for fraud), against Mantena Narasa Raju ("Respondent 1"), Appa Rao Mukkamala ("Respondent 2") and Suresh Anne ("Respondent 3"), the directors of the Company (collectively the "Respondents").
The appellants had collectively acquired 10,51,933 (ten lakhs fifty-one thousand nine hundred and thirty three) equity shares of the Company from Respondent 1 for a consideration of Rs. 14,67,41,557 (Rupees fourteen crores sixty seven lakhs forty one thousand five hundred and fifty seven) representing 94.8% of the share capital of the Company by executing share transfer deeds in Form SH-4 and were also issued share certificates signed by Respondent 2 and Respondent 3.
The appellants claimed that they had a cordial relationship with the Respondents and despite becoming the majority shareholders, left the managerial control with them. In light of the failure to conduct annual general meetings for the financial years 2014-15, 2015-16 and 2016-17, the name of the Company was struck-off by the Registrar of Companies. The appellants contented that upon a public search of the annual returns and financial statements subsequently filed by the Company, it was noted that their shareholding in the Company was not accounted for, and the Respondents had thereby committed acts of oppression and mismanagement.
Contentions of the Company and the Respondents
In counter-reply, the Company contended that the appellants had no locus-standi to maintain the petitions, as they were not members of the Company. Further, as a period of 3 (three) years had lapsed since the shares were claimed to be acquired by the appellants, the issue of limitation was also raised, and it was alleged that the NCLT did not have jurisdiction. Respondent 1 further claimed that he had arranged for a loan of Rs. 14.66 crores from an individual named L. Ramesh, who arranged for deposit of such amounts through bank channels of certain known persons, which led to the appellants depositing a sum of Rs. 14.66 crores in his account. Out of the said amount, a total of Rs. 9 crores was returned. It was contended that L. Ramesh had forcibly taken his signatures of certain documents which would have been forged and handed over to the appellants. It was also contended that the share transfer deeds put forth by the appellants projected a total consideration of Rs. 14,67,41,557 (Rupees fourteen crores sixty-seven lakhs forty-one thousand five hundred and fifty-seven), but only a sum of Rs. 14,66,39,400 (Indian rupees fourteen crores sixty-seven thirty-nine one thousand and four hundred) had been remitted by the appellants. The format of the share certificates was not that of the Company and the folio numbers therein were different, indicating that they had been fabricated.
Interim Order by NCLT
NCLT through its member, passed an interim order on June 27, 2019, and noted that Respondent 1 had addressed a letter to the Board of Directors of the Company expressing his intention to sell the shares, and failing to find a buyer, it was left open to him to make his own arrangements. By an email dated April 20, 2015, Respondent 2 had sought approval of the other shareholders for sale of shares in favour of the appellants. A meeting was held on April 27, 2015, and share certificates were issued. While Respondent 1 disputed on the discrepancies in the share certificates, he did not dispute the receipt of the consideration. The NCLT went on to observe that Form SH-4 was a printed form, as were the share certificates, and were not fabricated or on signed blank papers. Thereafter, NCLT granted an interim relief, restricting the Company and the Respondents from either disposing of or creating encumbrances over the assets of the Company.
Final Order by Acting President, NCLT
A final order was passed by the Acting President of NCTL, dated August 21, 2021, without making any reference to the interim order above. The president stated that there was not a single document between the parties to show that there was a transfer of shares and to show that the existing shareholders were given an opportunity to buy the shares. It was opined that the appearance of the share certificates was dubious, and the numbers therein were completely different and concluded that the share certificates were not genuine and were fabricated. Accordingly, the case was disposed, and costs were imposed. The Supreme Court noted that this approach of the Acting President, NCLT was 'cryptic' and not in keeping with the observations in the interim order.
Appeal to National Company Law Appellate Tribunal ("NCLAT")
Upon an appeal filed by the appellants, the NCLAT concluded that L. Ramesh had remitted through certain 'known persons' the sum of Rs. 14.66 crores into the bank account of Respondent 1 and the remittance and refund of Rs. 9 crores prima-facie does not seem to be a clear transaction of payment of money towards acquisition of shares and consequently allotment of shares in favour of the appellants is not established. The appeal was thus disposed-off and aggrieved by the same, appellants had approached the Supreme Court.
Observations by the Supreme Court
- The Supreme Court referred to its decision in Ammonia
Supplies Corporation Private Limited v. Modern Plastic Containers
Private Limited [(1998) 7 SCC 105], wherein the apex court
observed that "the very word 'rectification' in
Section 155 of the Companies Act, 1956, connotes something that
ought to have been done but by error was not done or ought not to
have been done but was done, requiring correction .... the Court
has discretion to find out whether the dispute raised is really for
rectification or is of such a nature that, unless decided first, it
would not come within the purview of rectification .... if it is
truly a case of rectification, all matters raised in that
connection should be decided under Section 155, but if it finds
adjudication of any matter not falling under it, the Court may
direct a party to get his right adjudicated by a civil
court.
...
There could be no doubt any question raised within the peripheral field of rectification, it is the court under Section 155 alone which would have exclusive jurisdiction. ... In case any claim is based on some seriously disputed civil rights or title, denial of any transaction or any other basic facts which may be the foundation to claim a right to be a member and if the court feels such claim does not constitute to be a rectification but instead seeking adjudication of basic pillar some such facts falling outside the rectification, its discretion to send a party to seek his relief before the civil court first for the adjudication of such facts, it cannot be said such right of the court to have been taken away merely on account of the deletion of the aforesaid proviso. Otherwise under the garb of rectification one may lay claim of many such contentious issues for adjudication not falling under it. Thus, in other words, the court ... has discretion to find whether the dispute raised is really for rectification or is of such a nature that unless decided first it would not come within the purview of rectification. The word "rectification" itself connotes some error which has crept in requiring correction. Error would only mean everything as required under the law has been done yet by some mistake the name is either omitted or wrongly recorded in the Register of the company..." - The Supreme Court noted that the above principle was also reaffirmed in Standard Chartered Bank v. Andhra Bank Financial Services Limited, [2006 (6) SCC 94] and Adesh Kumar v. Eicher Motors Limited, [(2018) 7 SCC 709].
- The Supreme Court also referred to its decision in IFB Agro Industries Limited v. SICGIL India Limited, [(2023) 4 SCC 209], where it was held that ".... transactions falling within the jurisdiction of Regulatory bodies created under a statute must necessarily be subjected to their ex-ante scrutiny, enquiry and adjudication. We have, therefore, rejected the contention that the National Company Law Tribunal under Section 59 exercises a parallel jurisdiction with Securities and Exchange Board of India for addressing violations of the Regulations framed under the SEBI Act...It was, therefore, held that the purpose of these regulations could not be short-circuited by making an application to the Company Court under Section 111-A of the Act of 1956, on the ground that the provision bestowed jurisdiction parallel to the SEBI.."
Decision of the Supreme Court
The Supreme Court held that the exercise of power under Section 59 of the Act is to be undertaken in right earnest by examining the material, evidence, and the facts on record. To this end, as highlighted above, it referred to various decisions of the Supreme Court where NCLT's jurisdiction was either upheld or rejected after such examination.
In the instant case, the Supreme Court held that the NCLT failed to discharge this mandate of law and exercise its power under Section 59 of the Act. The Acting President of the NCLT failed to consider the material already placed on record and without further evidence being adduced, chose to summarily dispose the case. The NCLT failed to consider Section 46 of the Act, whereby signatures of 2 (two) directors were sufficient in the eyes of law upon production of the original share certificates by the appellants. The Supreme Court, therefore, allowed the present appeals and restored it to the NCLT to freshly examine the merits of the case and to dispose of the petition expeditiously, on the ground that if, on facts, an open-and-shut case of fraud is made out in favour of the person seeking rectification, the NCLT would be entitled to exercise such power under Section 59 of the Act.
Conclusion and Author's view
The Supreme Court has referred to its various earlier decisions and has carefully and clearly set out the principles to be applied in while deciding which forum would have jurisdiction. The general principle which the Supreme Court has laid down is that the jurisdiction of a civil court or any other forum (such as SEBI), would be barred only when the subject matter of the dispute squarely falls within the domain/ realm and jurisdiction of the court/ forum (i.e. the tribunal) constituted under the Companies Act, 1956/ Act and where the Act does not confer such exclusive jurisdiction or the dispute falls outside the realm of that particular provision, the jurisdiction of the civil courts/ other forums will not be completely barred. However, in a specific situation, such as an open-and-shut case of fraud being made under Section 59 of the Act, the NCLT will have jurisdiction, subject to proper verification of the materials on record.
The Supreme Court has delicately balanced the issue of jurisdiction between forums. It has prompted the NCLT to act on a matter before it, if it evidently relates to issues arising out of the provisions of the Act. However, if it appears to relate to a more complicated issue for which a court or forum, such as SEBI, has been created, such jurisdiction should apply.
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