2023 (8) TMI 1680 - HC - Companies Law

Fraudulent share transfer disputes lie in civil commercial suits, not NCLT's s.59 summary jurisdiction; Order VII objections dismissed

HC held that the suit, alleging fraudulent transfer of shares and disputing title, concerns individual rights of a shareholder and is therefore ... Maintainability of the present suit as a commercial suit under the Commercial Courts Act, 2015 - family dispute - Seeking rejection of plaint - Order VII Rule 10 and 11 CPC read with Section 151 CPC - fraudulent transfer of the Transferred Shares - HELD THAT:- As per section 59 (1) of the Companies Act, 2013, in the event a company, (a) enters the name of a person in the register of its members, without sufficient cause; (b) omits the name of a person in the register of its members, without sufficient cause (c) delays in entering name of a person in its register of members, the aggrieved person may, in this connection, file an appeal before the learned National Company Law Tribunal. As per Section 59 (2), the learned NCLT may direct the company to rectify its register of members or to register the transfer of shares. As can be seen from the provisions of Section 59 (1) of the Companies Act, 2013, only the company’s action (and not individual actions), of which a person is aggrieved, in relation to (a) an incorrect entry; (b) omission to make entry; or (c) delay in making the entry, of the person’s name, in its register of members can be challenged before learned NCLT, and the action of an individual shareholder / member (in the present case, the Defendant No. 1) cannot be challenged. Similarly, in terms of Section 59(2), the learned NCLT can only direct the company to rectify its register of members or to register the transfer of shares. In the present case, prior to rectification of the register of members, inter alia, (a) the fraudulent execution of the share transfer forms would be required to set aside and declared void ab initio; and (b) the question of title of the Plaintiff in relation to the Transferred Shares would be required to be adjudicated; (c) the question whether Plaintiff was paid the consideration for the so called transfer shares be required to be examined; and (d) the Plaintiff would be required to be declared as the owner of the Transferred Shares. In case of individual rights of a member of a company, such as in the present case, there is no remedy under the Companies Act, 2013, the said right can be enforced in the civil court. In Naresh Dayal & Ors vs The Delhi Gymkhana Club Ltd . & Ors. [2021 (1) TMI 869 - DELHI HIGH COURT] the Court held Individual members of a company can sue in a civil court to protect their individual rights. Ld. NCLT has no jurisdiction to decide cause of action over which it has no power under Companies Act. In the present case, the specific averments in the Plaint point towards fraud committed by the Defendants No. 1 and 2. The allegations of fraud are to be adjudicated upon only by the civil court through the detailed and meticulous process of trial before it. In Mukesh Jaiswal v. Phool Chand Gupta & Ors. [2022 (12) TMI 1248 - CALCUTTA HIGH COURT] the Court held the Ld. NCLT cannot decide the question of fraud as the Plaintiff has taken specific ground of fraud. In the present matter, the question relates to disputed title and fraudulent transfer of the Transferred Shares. Therefore, learned NCLT, being a summary jurisdiction, is not empowered to decide such questions and said questions can only be decided by a civil courts i.e. this Hon’ble Court. Accordingly, the jurisdiction of this Hon’ble Court is not barred. In Sita Chaudhry vs Verinder Singh and Ors., [2022 (7) TMI 1612 - DELHI HIGH COURT] the Court held rectification of register would only be a subsequent step after the question of title and ownership of share is decided. The exclusive jurisdiction vested with the erstwhile Company Law Board/NCLT is only in respect of rectification of the register. However, the right, title and interest in shares can only be determined in a civil suit. The application under Order VII Rule 10 CPC read with Section 151 CPC is dismissed. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether the civil suit for declaration, mandatory and permanent injunction in respect of allegedly fraudulently transferred shares is barred by Section 59 read with Section 430 of the Companies Act, 2013, on the ground that exclusive jurisdiction vests in the National Company Law Tribunal for rectification of register of members. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Bar of civil court jurisdiction under Sections 59 and 430 of the Companies Act, 2013, and competence of NCLT to adjudicate the present dispute Legal framework (as discussed by the Court) 2.1 The Court considered Sections 59, 424 and 430 of the Companies Act, 2013, which confer on the Tribunal power to deal with rectification of register of members, regulate its own procedure (with powers akin to a civil court), and bar civil court jurisdiction in respect of matters which the Tribunal is empowered to determine. 2.2 Rule 70 of the National Company Law Tribunal Rules, 2016, empowering the Tribunal on a petition under Section 59 to decide questions relating to title of parties to have their names entered in, or omitted from, the register of members, and to decide any question necessary or expedient in connection with rectification, was noticed. 2.3 The Court referred to precedents clarifying: (i) the scope of Section 59 and Section 430 and the rectification jurisdiction (including Standard Chartered Bank v. Andhra Bank Financial Services, Ammonia Supplies Corporation v. Modern Plastic Containers, Jai Mahal Hotels Pvt. Ltd. v. Devraj Singh); (ii) the limits of NCLT jurisdiction over disputes involving complex questions of title and fraud (Naresh Dayal v. Delhi Gymkhana Club, Mukesh Jaiswal v. Phool Chand Gupta, N. Ramji v. Ashwath Narayan Ramji, Bakshi Faiz Ahmad v. Bakshi Farooq Ahmad, Sita Chaudhry v. Verinder Singh); and (iii) the context of Shashi Prakash Khemka v. NEPC Micon and SAS Hospitality Pvt. Ltd. v. Surya Constructions Pvt. Ltd. Interpretation and reasoning 2.4 The Court distinguished between two categories of membership rights in a company: (i) individual membership/ownership rights of a shareholder to maintain himself/herself in full membership with all rights and privileges; and (ii) corporate membership rights concerning internal affairs of the company. Individual membership rights can be enforced by a civil suit. 2.5 On the pleadings, the Court found the plaintiff asserts individual rights of ownership and title in 4556 'Transferred Shares' allegedly belonging to her, alleging that these were fraudulently and illegally transferred/reduced by defendant no.1 from 5002 to 547 shares, and seeks declaratory and injunctive reliefs to establish her title and undo the alleged fraudulent transfers. 2.6 Analysing Section 59(1), the Court held that the provision is confined to grievances against acts/omissions of the company in relation to its register of members, namely: (a) wrongful entry of a person's name; (b) wrongful omission of a person's name; or (c) delay in making such entries. The section addresses company actions, not individual actions of shareholders; thus, wrongful or fraudulent acts of an individual shareholder (defendant no.1) cannot, as such, be the subject of a Section 59 petition. 2.7 The Court held that under Section 59(2), the NCLT may direct rectification of the register or registration of transfer, but its jurisdiction is limited to ordering such rectification; it does not extend to adjudicating complex, seriously disputed questions of title or granting broad declaratory and injunctive reliefs relating to individual rights, which require a full civil trial. 2.8 The Court emphasised that in the present case, prior to any rectification of the register of members, several substantive issues must be adjudicated: (a) whether the share transfer forms were fraudulently executed and liable to be set aside and declared void ab initio; (b) the disputed title of the plaintiff to the Transferred Shares; (c) whether any lawful consideration was paid for such transfer; and (d) whether the plaintiff should be declared owner of the Transferred Shares. These questions go beyond the limited rectification jurisdiction envisaged under Section 59. 2.9 Relying on the nature of NCLT proceedings as essentially summary, the Court reasoned that NCLT, even aided by Rule 70, can only 'superficially' examine title for purposes of rectification on the basis of record, and is not competent to undertake detailed trial on serious disputed questions of title and fraud or to grant the declaratory and injunctive reliefs sought, which predominately concern individual rights. 2.10 The Court held that Section 59 of the Companies Act, 2013 does not envisage adjudication of fraud by the NCLT, whether fraud by the company or by individuals. Specific allegations of fraud made in the plaint against defendants no.1 and 2 require a 'detailed and meticulous process of trial' before a civil court, not summary proceedings before the Tribunal. 2.11 Interpreting Section 430, the Court held that the bar on civil court jurisdiction is only to the extent that the NCLT has been correspondingly empowered under the Companies Act. The extent of ouster is directly proportionate to the conferment of jurisdiction on the Tribunal; exclusion of civil court jurisdiction is not to be readily inferred and must be explicitly expressed or clearly implied. 2.12 The Court drew a distinction between: (i) cases that 'truly pertain to rectification of register of members', where NCLT's rectification jurisdiction is exclusive; and (ii) cases where the issue is alien to rectification, such as seriously disputed questions of title and allegations of fraud in transfer of shares inter se individual members, which fall outside the exclusive jurisdiction of NCLT and remain within the competence of civil courts. 2.13 The Court characterised the present suit as one challenging fraudulent transfer of shares and seeking declaratory and injunctive relief concerning the plaintiff's disputed title and individual rights, with rectification of the register being only a consequential and subsequent step that may follow once title and ownership are adjudicated. Hence, the subject matter is not a mere rectification proceeding. 2.14 On this basis, the Court held that NCLT, being a forum of summary jurisdiction for rectification of the register and related matters, is not empowered to decide the present controversy involving disputed title and allegations of fraud; such issues can only be determined by a civil court. 2.15 The Court distinguished the authorities relied upon by the defendants: * In the decision concerning Shashi Prakash Khemka, the Supreme Court's observations regarding exclusive NCLT jurisdiction were made in the context of a dispute purely between company and shareholder concerning rectification of the register, without issues of disputed title among shareholders or allegations of individual fraud; the ratio was therefore not applicable. * In SAS Hospitality, the challenge related to allotment of shares by the company and the internal affairs/management of the company, again not a dispute inter se shareholders on individual title to shares. The present suit, being founded on allegations of individual fraud and contested title, falls outside that ratio, as also clarified in Sita Chaudhry, which distinguished SAS Hospitality in the context of title disputes in shares. Conclusions 2.16 The Court concluded that the plaintiff's claim is based on individual membership/ownership rights and disputed title in the Transferred Shares, coupled with specific allegations of fraud, and is not a pure rectification matter under Section 59. 2.17 The NCLT, exercising a summary rectification jurisdiction under Section 59 read with Rule 70, is not empowered to adjudicate complex questions of seriously disputed title, fraud, consideration, and ownership of shares, nor to grant the comprehensive declaratory and injunctive reliefs sought. 2.18 As Section 430 ousts civil court jurisdiction only to the extent that NCLT is specifically empowered, and since NCLT lacks jurisdiction over the core issues in the present case, the bar under Section 430 is not attracted; the civil court's jurisdiction is not excluded. 2.19 Rectification of the register of members, if at all required, would be a merely consequential step following adjudication of title and fraud by the civil court and does not alter the characterization of the suit as one for enforcement of individual rights. 2.20 Consequently, the application under Order VII Rules 10 and 11 CPC read with Section 151 CPC seeking rejection/return of the plaint for want of jurisdiction was dismissed, and the civil suit was held maintainable before the Court.