2022 (12) TMI 1248 - HC - Companies Law

High Court Rules NCLT Lacks Jurisdiction over Fraud Allegations, Suit Proceeds in Civil Court

MUKESH JAISWAL Versus PHOOL CHAND GUPTA & ORS.

The High Court held that the National Company Law Tribunal (NCLT) lacked jurisdiction to adjudicate the specific fraud allegations raised by the plaintiff ... Maintainability of suit - exclusive jurisdiction of the National Company Law Tribunal - fraudulent transactions - seeking declaration that the recordings of the names of the defendant as holders of shares of and in the defendant no. 4 respectively in the books and the register of the defendant no. 4 are illegal - decree for delivery up and cancellation of the share certificates issued in favour of the defendant - perpetual injunction restraining the defendant and each one of them by themselves or through their respective servants, agents or assigns from exercising any ownership right in respect of the said shares - perpetual injunction restraining the defendant and each one of them either by themselves or through their respective servants, agents or assigns from exercising any voting right in respect of the said shares. HELD THAT:- The plaintiff has categorically pointed out the fraudulent act of the defendants in paragraph 28 of the plaint and the said fraudulent act is not committed while initiating proceeding before the NCLT. The plaintiff has also prayed for other relief with regard to perpetual injunction relates to the title of share of the plaintiff. Section 58 and 59 of the companies Act, 2013 deals with refusal by company to transfer of shares but in this case before transfer of share it is to be declared that the recording of share in the name of the defendants have been made fraudulently. The specific case of the plaintiff is fraud and the said fraud is to be adjudicated upon adducing evidence by both the parties before the Civil Court only. Section 65 of the Insolvency and Bankruptcy Code, 2016 has no manner of application in the instant case as the challenge is against issuance of shares by the auditor of a company in derogation of his fiduciary with the company and whether the said act of the auditor is in contravention of the provisions of Company Act, 2013 is on act of fraud or not is to be decided by the Civil Court. This Court finds that NCLT is not competent to enquire into the allegation of fraud specifically when the plaintiff has prayed for declaration of recording the names of defendant no. 2 and 3 as share holders in the books and the register of defendant no. 4 fraudulently and also prayed for perpetual injunction against the defendant nos.1 to 3. Accordingly, the suit filed by the plaintiff is maintainable. Application dismissed. Issues Involved:1. Jurisdiction of the High Court vs. National Company Law Tribunal (NCLT).2. Applicability of Sections 56(4), 58(3), 59, 430, 447, and 449 of the Companies Act, 2013.3. Applicability of Rule 70(5)(a) of the National Company Law Tribunal Rules, 2016.4. Applicability of Section 65 of the Insolvency and Bankruptcy Code, 2016.5. Specific allegations of fraud by the plaintiff.Issue-wise Detailed Analysis:1. Jurisdiction of the High Court vs. National Company Law Tribunal (NCLT):The primary issue raised by the defendant is whether the dispute falls within the exclusive jurisdiction of the NCLT, thereby rendering the suit in the High Court non-maintainable. The defendant argued that under Section 430 of the Companies Act, 2013, the civil court lacks jurisdiction over matters that the NCLT is empowered to determine. The plaintiff countered that the NCLT cannot decide on matters of fraud, which is central to their case.2. Applicability of Sections 56(4), 58(3), 59, 430, 447, and 449 of the Companies Act, 2013:The defendant cited Sections 56(4), 58(3), and 59, arguing that the NCLT has jurisdiction over the issues of share transfer and rectification of the register. They also referenced Sections 447 and 449, which deal with fraud and false evidence, asserting that the NCLT can adjudicate fraud claims. The plaintiff disagreed, stating that these sections are not applicable as their claim is based on fraud, which requires a detailed examination of evidence that only a civil court can provide.3. Applicability of Rule 70(5)(a) of the National Company Law Tribunal Rules, 2016:The defendant argued that Rule 70(5)(a) supports their claim that the NCLT has jurisdiction. The plaintiff, however, maintained that the rule first requires a declaration of title, which involves adjudicating fraud'a matter beyond the NCLT's summary procedures.4. Applicability of Section 65 of the Insolvency and Bankruptcy Code, 2016:The plaintiff argued that Section 65, which deals with fraudulent initiation of insolvency proceedings, does not apply to their case. They emphasized that their claim pertains to the fraudulent issuance of shares by an auditor, not the initiation of insolvency proceedings.5. Specific Allegations of Fraud by the Plaintiff:The plaintiff detailed the fraudulent actions in paragraph 28 of the plaint, alleging that the defendant, acting as an auditor, caused shares to be issued fraudulently to companies he controlled. The plaintiff argued that this fraud must be adjudicated by a civil court, as it involves detailed evidence and the determination of title to shares.Judgments Cited:- Adesh Kaur vs. Eicher Motors Limited: The Supreme Court held that the NCLT can adjudicate fraud in share transfer cases, but the specific facts of the case justified the High Court's jurisdiction.- Shashi Prakash Khemka vs. NEPC Micon Ltd.: The Supreme Court emphasized that civil courts lack jurisdiction over matters the NCLT can decide, but allowed for NCLT adjudication due to the specifics of the case.- N. Ramji vs. Ashwath Narayan Ramji: The Madras High Court held that issues of share title and fraud must be decided by a civil court.- Embassy Property Developments Private Limited vs. State of Karnataka: The Supreme Court ruled that the NCLT can inquire into fraud but not adjudicate disputes under other statutory frameworks.Conclusion:The High Court concluded that the NCLT is not competent to inquire into the specific allegations of fraud in this case, particularly when the plaintiff seeks a declaration that shares were fraudulently recorded. The High Court found the suit maintainable and dismissed the defendant's application, affirming its jurisdiction over the matter.