Companies Act | When Can Courts Exercise Power Of Rectification Of Register Of Members? Supreme Court Explains

The bench of Justices Sanjiv Khanna and Sanjay Kumar also explained the concept of 'rectification' and held that company courts should carefully consider the facts, arguments and evidence placed on record when deciding the issue of rectification under S.59 of the Companies Act 2013 (previously S.155 of the 1956 Act)

The bench relied upon the decision of Adesh Kaur v. Eicher Motors Limited and Ors to observe “This Court observed that if, on facts, an open-and-shut case of fraud is made out and the person seeking rectification was the victim, the National Company Law Tribunal would be entitled to exercise such power under Section 59 of the Act of 2013.”

In examining the case, the Court noted that the NCLT and NCLAT failed to discharge its mandate by not appreciating evidence and summarily dismissing the case of the appellants.

The Respondent company was involved in software development business in Andhra Pradesh. In 2004, Respondent no.2 acquired 94.8% of the company's shares. Subsequently, Respondent no.2,3 and 4 were also appointed as directors of the company.

In 2015, appellants no.1, 2 and 3 bought the shares of Respondent no.2 by executing Securities Transfer Deeds (31.72% by appellant no.1 and 31.54% by appellant no.2 and 3) and became majority shareholders. Share certificates were issued to them, signed and authenticated by respondents Nos.3 and 4. The Appellants had cordial and fiduciary relations with the respondents and claimed to have left the managerial control to the respondents despite being majority shareholders.

The main cause of action arose when the respondents failed to conduct the Annual General Meetings during the financial years 2014-15, 2015-16 and 2016-17. The Registrar of Companies struck off the name of M/s. Lexus Technologies Pvt. Ltd. (respondent company) from the Register of Companies on 21.07.2017, in exercise of power under Section 248 of the Act of 2013. The appellants discovered their shareholding had been erased from company records.

Subsequently, the appellants filed a petition with the National Company Law Tribunal (NCLT) in Hyderabad, seeking: (1) Rectification of the company's Register of Members; (2) Action against the respondents for oppression and mismanagement and (3) initiating criminal proceedings under S.447 and 448 of the 2013 Act for committing fraud . While interim relief was granted by NCLT, Both NCLT's final order and NCLAT dismissed the case of the appellants.

Interim Order Of NCLT

While granting interim relief to the appellants by preventing the company and Respondents 2-4 from disposing of or creating encumbrances on company assets, the NCLT considered three main aspects - (1) the appellants claimed that despite the purchase of shares, their names were not entered in the company's register of members; (2) Respondent 2 claimed the share certificates were fabricated and that he had not sold his shares; (3) issue of whether the nature of payment made to the respondent no.2 by appellants was for share purchase or loans

The NCLT order passed by the judicial member noted that Respondent 2 did not dispute receiving money from the appellants, and neither did he dispute his signatures appearing on the share certificates. However, respondent no.2 claimed that one L Ramesh had obtained blank papers from him which were then misused.

The interim order also stated that the issues of the nature of payments given to respondent no.2 and whether he was duped to sign blank papers were to be examined in a full inquiry. It also observed that respondent no.2 being a doctor, could not possibly have signed blank papers which were fabricated later on. Opining that limitation was a mixed question of fact and law, the NCLT stated that it needed to be examined at the final hearing stage, after the parties filed all their documents. The NCLT also rejected the contention of the respondents that it had no jurisdiction to try the petition as it involved issues of fraud, etc.

Final Order Of NCLT & What The Top Court Remarked

The final order passed on August 21, 2021 was by the Acting President of the NCLT which dismissed the petition of the appellants.

The order made the following observations (1) On the issue of limitation, the Acting President had simply stated that the petition was filed after the three-year limitation period, calling it an afterthought. However, this approach was deemed by the Top Court as too brief and did not align with the earlier observation made by the NCLT Member (Judicial) that limitation is a complex issue requiring thorough examination;

(2) On the issue of deciding the validity of the transfer of shares as per the Companies Act, the Top Court noted that the Acting President had dismissed the appellants' case without properly examining the evidence presented. This included share transfer forms, share certificates, and relevant correspondence. The Acting President's statement that no documents existed to prove share transfer was found to be contrary to the available evidence; (3) Similarly, on the issue of veracity of transfer of share purchase money, the Acting President held that there existed no substantial communication to establish that shares were purchased from respondent no.2. Here again the Top Court observed lack of examination of the claims of the respondent no.2 who blamed one L Ramesh;

(4) On the issue of the authenticity of the share certificate, the Supreme Court noted that the Acting President held the certificate to be dubious and possibly fabricated, which according to the top court was done without investigation especially when the appellants had produced original certificates and requested access to company records for verification.

Lastly, the Top Court noted that NCLT's order dismissed the case of appellants, concluding that it was a fraudulent petition without factual and legal basis. The appellants then appealed before the NCLAT.

Supreme Court's Observation On NCLAT Dismissal Of Appeal

Refering to the decision of th NCLT, the NCLAT too rejected the case of the appellants. However the Top Court noted that while the NCLAT said that L. Ramesh sent money through "known persons" to respondent No. 2's bank account, it also curiously observed that the allotment of share and payment to respondent no.2 isnt proven as L Ramesh gave ₹14,67,41,557 and took back ₹9 Crores from the respondents- which didn't look like a clear payment for shares.

However, a table which NCLAT referred to shows that the 'known persons' who paid the money were actually appellant 2 and 3 and the joint account holder of appellant no.1. Thus NCLAT's conclusion that appellants did not transfer any money was factually wrong.

Understanding Role Of Court In Rectification Proceedings Under Companies Act

The Bench observed that 'rectification' under S. 59 of the Companies Act 2013 (priorly S.155 of the Act of 1956) means fixing mistakes that were made or adding things that should have been done but were not.

“The expression 'rectification', as already pointed out, connotes something that ought to have been done but, by error, was not done, or what ought not to have been done but was done, requiring correction.”

The bench relied upon the decision in Ammonia Supplies Corporation (P) Ltd v. M/S Modern Plastic Container which held that if the company court believes that the issues raised are not related to rectification or its peripheral issues , the power of rectification under S.155 of the Companies Act 1956 (Now S.59 Act of 2013) cannot be exercised.

Thus the bench held that the company court or the NCLAT in the present instance must carefully examine each case. It should look beyond just the paperwork and understand what the real issue is. It further held that the phrase 'sufficient cause' under S.59 means that the Court has to test the cause for erasion of the name from registers as per the standard laid down in the Act of 2013 or its Rules

“The phrase 'sufficient cause' in Section 59 of the Act of 2013 is to be tested in relation to the statutory mandate thereof, i.e., anything done or omitted to be done in contravention of the Act of 2013 or the Rules framed thereunder.”

Notably, S. 59 provides the procedure to be followed when the name of a person in the register of members of a company is omitted without any 'sufficient cause'.

Relying on the decision of the Top Court in Dhulabhai vs. State of Madhya Pradesh and another, the Court further clarified that the civil court are not expressly barred of jurisdiction when dealing with rectification proceedings.

Powers Under S.59 Can Be Exercised By Company Courts In An 'Open-Shut' Case Of Fraud

The Court held that when examining the issue of rectification, if the company court find that there is an open-and-shut case of fraud, making the present applicant a victim, powers to rectify can be exercised by the Court.

The bench relied upon the decision of Adesh Kaur v. Eicher Motors Limited and Ors where the Court dismissed the arguments that NCLT should not intervene in a rectification proceeding when criminal proceedings are going on with regards the company members. It stated that the presence of a serious dispute does not prevent the NCLT from using its powers under Section 59.

Court Has To Do Proper Verification Of Factual Material Evidence In Deciding Rectification Cases

Applying the above ratios to the present case, the Court held that “The Acting President of the NCLT, by failing to carry out the said exercise, failed to discharge the mandate of law”.

The bench emphasized that the Court should carefully exercise the powers under S.59 by first conducting a detailed examination of the available materials, evidence, and facts. The Supreme Court found that the NCLAT did not do this properly.

Perhaps, it observed that the NCLAT took a narorw view and errored in not verifying the stance of respondent no.2 who claimed that no share purchase money was transferred.

The court while referring to the decision in High Court of Judicature at Bombay through its Registrar vs. Udaysingh and others, also reminded that in such cases, decisions should be based on what is most likely to be true. This means weighing all the evidence and considering what a reasonable person with knowledge in this area would conclude.

“Exercise of power under Section 59 of the Act of 2013 is to be undertaken in right earnest by examining the material, evidence, and the facts on record. This has not been done. Rather, a narrow view was taken without calling upon respondent No. 2 to prove the veracity of the contrary story put forth by him, despite receiving monies from the appellants. The facts, material, and evidence had to be examined in the context of the underlying facts, which would have included the receipt of monies, the signatures on the transfer deeds, etc. Needless to state, questions of fact must be decided on the principle of preponderance of probabilities, giving due weight to the specific facts, as found, so as to draw the conclusion that a reasonable person, acquainted with the relevant field, would draw on the basis of the same facts.”

It similarly held NCLT liable in failing to discharge its mandate by not doing adequate verification of the evidences and arguments raised by the parties.

“Another crucial fact that needs to be noted is that the interim order passed on 27.06.2019 by the Member (Judicial) of the NCLT had indicated, in clear terms, the issues that arose for consideration and the inquiry required to determine the same. However, ignoring the said interim order, the Acting President of the NCLT chose to summarily dismiss the petition, without considering the material already placed on record and without further evidence being adduced.”

The bench therefore allowed the appeals and restored the original company petition of the appellants before the NCLT, Amaravati Bench for fresh consideration on merits and directed for expeditious disposal of the same.

Case Details : Chalasani Udaya Shankar and others v. M/s. Lexus Technologies Pvt. Ltd. and others Civil Appeal Nos. 5735-5736 of 2023

Citation : 2024 LiveLaw (SC) 681

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