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The New Law On Rectification Of Register Of Members Of Companies – A Need To Reconsider The SC Judgement In Shashi Prakash Khemka V. NEPC

Goutham Shivshankar
23 Feb 2020 6:35 AM GMT
The New Law On Rectification Of Register Of Members Of Companies – A Need To Reconsider The SC  Judgement In Shashi Prakash Khemka  V. NEPC
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A short judgment of the Supreme Court in Shashi Prakash Khemka v. NEPC Micon (2019) SCC OnLine SC 223 ("Khemka") has become particularly significant in the Indian law governing actions for rectification of the registers of members of a company. Such actions are usually preferred by persons who claim to be members of a company and whose membership (such as name, extent of shareholding held, etc.) is not correctly reflected in the register of members that is statutorily required to be maintained by all companies. Since membership carries with it several important rights such as voting, right to receive dividend, etc., actions for rectification are usually hotly contested and seriously pursued by claimants. Under the Companies Act, 1956 (the "1956 Act"), prior to 1991, such applications for rectification were initially filed under Section 155 before the "Court" as defined under Section 2(11) r/w. Section 10 (the "Company Court"). Section 155 was repealed by the Companies (Amendment) Act, 1988 w.e.f. 31.05.1991) and after 1991, such applications in respect of private companies and deemed public companies were filed under Section 111 before the Company Law Board (the "CLB"). In 1997, Section 111A was introduced with regard to rectification of registers in public companies as well. Section 59 of the Companies Act, 2013 (the "2013 Act") now confers the power of rectification of the members register on the National Company Law Tribunal ("NCLT").

The Khemka judgment has been followed by the National Company Law Appellate Tribunal ("NCLAT") in several decisions and has been relied upon to substantially widen the nature and scope of the NCLT's jurisdiction in rectification actions than what was previously allowed to the Company Court / CLB under the rule established by the Supreme Court in Ammonia Supplies Corporation (P) Ltd. v. Modern Plastic Containers (1998) 7 SCC 105 ("Ammonia Supplies"). By virtue of Khemka, the NCLTs now have exclusive jurisdiction for rectification under Section 59, even over claims which raise complicated issues of fact, fraud, serious disputes as to title over shares, etc. In contrast, the position under the 1956 Act was that the rectification court could re-route the parties to a civil court, in case it found that the claims gave rise complicated issues arose.

I submit that the principle laid down in Khemka is based on an incorrect reading of the 2013 Act, and urgently requires reconsideration. Khemka has wrongly made much of Section 430 of the 2013 Act which provides for ouster of civil court's jurisdiction in matters where the NCLTs have been conferred jurisdiction under that Act. Although Section 430 is indeed a new provision in the 2013 Act that did not have a parallel in the Companies Act, 1956, I submit that it is not analytically relevant for the issue of the scope of jurisdiction of a specialized tribunal vested with the power to adjudicate claims for rectification. This is especially so, since the settled position, even under the 1956 Act, was that there was an "implied bar" on the jurisdiction of civil courts in respect of "proper" claim for rectification (I explain what I mean by a "proper" claim in the paragraphs below). Section 430 of the 2013 Act, at least in the context of rectification actions, does nothing more than stipulate expressly what was previously held to be implied under the 1956 Act. The judgment in Khemka fails to appreciate that the underlying factors that led to the evolution of the rule in Ammonia Supplies still subsist today, even under the 2013 Act. Further, Khemka has also failed to consider the effect of certain important omissions in Section 59 the 2013 Act, of some powers that were expressly conferred on the CLB under Section 111(7) and 111A(7) of the 1956 Act. In my opinion, the effect of these omissions further entrenches the logic of the rule laid down in Ammonia Supplies and makes it applicable with greater force to rectification actions under Section 59 of the 2013 Act.

The Principle Laid Down in Ammonia Supplies

The governing precedent for the nature and scope of rectification claims under the 1956 Act was the Supreme Court's judgment in Ammonia Supplies. In Ammonia Supplies, the Supreme Court was considering a pre-1991 case under Section 155 before the Company Court, but the principles laid down there largely held the field even with regard to post-1991 actions before the Company Law Board under Sections 111 and 111A. The Court held that actions for rectification under Section 155 were proceedings of a summary nature, and that the Company Court which was statutorily conferred with jurisdiction to decide such actions would have exclusive jurisdiction to do so, and also to decide "any question raised within the peripheral field of rectification." There was held to be an "implied bar" on the plenary jurisdiction of civil courts to adjudicate rectification claims. However, where an action for rectification was "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", the Company Court would have the "discretion" to send the party seek his relief before a "civil court first for adjudication of such facts." In other words, Ammonia Supplies held that:

"the court under it has discretion to find whether the dispute raised are really for rectification or is of such a nature, 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 committed or wrongly recorded in the register of the Company."

As per Ammonia Supplies, the Company Court considering a rectification claim should examine the materials:

"to see whether even prima facie what is said is complicated question or not. Even dispute of fraud, if by bare perusal of the document or what is apparent on the face of it on comparison of any disputed signature with that of the admitted signature the Court is able to conclude no fraud, then it should proceed to decide the matter and not reject it only because fraud is stated."

The Rationale of the Ammonia Supplies Principle

The Ammonia Supplies principle appears to categorise claims as either those that are "really for rectification" (let us call these "proper" claims for rectification) and claims "of such a nature, unless decided first it would not come within the purview of rectification" (let us call these as "improper" claims for rectification). This is of some significance, as I will explain below.

In Ammonia Supplies, the Court essentially held that in "proper" claims for rectification, there was an implied bar on the jurisdiction of civil courts and the jurisdiction of the courts conferred under Section 155/111 of the 1956 Act was exclusive. However, in "improper" claims for rectification, the rectification court had the discretion to reroute the claimant to the civil courts.

The rationale for allowing the rectification court to send claimants to civil courts in cases of "improper" claims of rectification (i.e., where there serious disputes of title or civil rights, denial of transactions or basic facts, etc.) was two-fold: (i) the "summary nature" of the proceedings in rectification actions meant that it was unsuitable for deciding complicated questions that required detailed leading of evidence ; and (ii) the limited meaning of the word "rectification" as explained above. Complicated claims required adjudication of something more than "rectification" in which case, they would fall outside the scope of the rectification court's jurisdiction limited statutorily conferred jurisdiction.

The Khemka Judgment

In Khemka, the Supreme Court was considering an SLP that arose from proceedings under Section 111A of the 1956 Act. A claimant had approached the CLB seeking rectification. The CLB had rejected a preliminary plea of limitation and decided to hear the matter on merits. The CLB's order was challenged before the Madras High Court. The High Court allowed the challenge, reversed the decision of the CLB, and in effect, relegated the parties to a civil suit. This was challenged before the Supreme Court. It appears that the matter was not properly contested in the Supreme Court since the judgment records that no counsel appeared for the Respondent. The Supreme Court, in Khemka, reversed the High Court's order, and in a brief, cryptic judgment, held as follows:

"Learned Counsel for the Appellants has drawn our attention to the view expressed in Ammonia Supplies Corporation P. Ltd. v. Modern Plastic Containers P. Ltd. MANU/SC/0585/1998 : (1998) 7 SCC 1053, to canvass the proposition that while examining the scope of Section 155 (the predecessor to Section 111), a view was taken that the power was fairly wide, but in case of a serious dispute as to title, the matter could be relegated to a civil suit. The submission of learned Counsel is that the subsequent legal developments to the impugned order have a direct effect on the present case as the Companies Act, 2013 has been amended which provides for the power of rectification of the register Under Section 59 of the said Act. Learned Counsel has also drawn our attention to Section 430 of the Act, which reads as under:

….

5. The effect of the aforesaid provision is that in matters in respect of which power has been conferred on the National Company Law Tribunal, the jurisdiction of the civil court is completely barred.

6. It is not in dispute that were a dispute to arise today, the civil suit remedy would be completely barred and the power would be vested with the National Company Law Tribunal Under Section 59 of the said Act. We are conscious of the fact that in the present case, the cause of action has arisen at a stage prior to this enactment. However, we are of the view that relegating the parties to civil suit now would not be the appropriate remedy, especially considering the manner in which Section 430 of the Act is widely worded…."

Thus, in Khemka, the Court has assumed that merely because: (i) Section 59 empowers the NCLT to decide a claim for rectification; and (ii) because Section 430 excludes the jurisdiction of civil courts to the extent that the NCLTs have been conferred jurisdiction, it follows that "relegating the parties to civil suit now would not be the appropriate remedy, especially considering the manner in which Section 430 of the Act is widely worded. " The judgment in Khemka fails to engage with the underlying rationale of Ammonia Supplies and did not carry out any comparative reading of the applicable provisions of the 1956 Act and the 2013 Act. Had this been done, the Court would have likely reiterated the Ammonia Supplies principle of rerouting the parties to a civil court in cases where complicated issues of title, fraud, etc. arise.

The Errors in Khemka

In its heavy reliance on Section 430 of the 2013 Act, the Khemka judgment puts the cart before the horse. Section 430 expressly bars the jurisdiction of civil courts "in respect of any matter which the Tribunal or the Appellate Tribunal is empowered to determine by or under this Act or any other law for the time being in force." A plain reading makes it manifestly clear that the civil court's jurisdiction is diminished only to the extent that the NCLT has been correspondingly "empowered". The extent of civil court ouster is directly proportional to extent of conferment of jurisdiction on the NCLT. Thus, the starting point of inquiry in Khemka ought to have been: does the 2013 Act confer any wider jurisdiction on the NCLTs than what was previously conferred under the 1956 Act? The short and simple answer to this question is: "No, it does not. In fact, the 2013 Act confers less jurisdiction on the NCLT than what was conferred on the CLB under the 1956 Act." This is made amply clear from the comparative chart of the provisions below.

Section 111(4) - (5) of the 1956 Act and Section 111A(3) were the basic provisions of the 1956 Act that enabled a person to move the Company Law Board for rectification of the member of registers. Section 111 deals with private companies and deemed public companies. Section 111A deals essentially with public companies. The corresponding provisions are Sections 59(1), (4) of the Companies Act, 2013. These provisions read as follows: (NOTE:– all references to "Tribunal" in the 1956 Act are actually references to "Company Law Board" since the 2003 amendment substituting "CLB" for "Tribunal: was never brought into force)

Section 111(4) - (5) of Companies Act, 1956

(4) If-

(a) the name of any person -

(i) is, without sufficient cause, entered in the register of members of a company, or

(ii) after having been entered in the register, is, without sufficient cause, omitted therefrom; or

(b) default is made, or unnecessary delay takes place, in entering in the register the fact of any person having become, or ceased to be a member including a refusal under sub-section (1),

the person aggrieved, or any member of the company, or the company, may apply to the Tribunal for rectification of the register.


(5) The Tribunal, while dealing with an appeal preferred under sub­section (2) or an application made under sub-section (4) may, after hearing the parties, either dismiss the appeal or reject the application, or by order –

(a) direct that the transfer or transmission shall be registered by the company and the company shall comply with such order within ten days of the receipt of the order; or

(b) direct rectification of the register and also direct the company to pay damages, if any, sustained by any party aggrieved.

Section 111A(3)

(3) The Tribunal may, on an application made by a depository, company, participant or investor or the Securities and Exchange Board of India, if the transfer of shares or debentures is in contravention of any of the provisions of the Securities and Exchange Board of India Act, 1992 (15 of 1992) or regulations made thereunder or the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986) or any other law for the time being in force, within two months from the date of transfer of any shares or debentures held by a depository or from the date on which the instrument of transfer or intimation of the transmission was delivered to the company, as the case may be, after such inquiry as it thinks fit, direct any depository or company to rectify its register or records.

Section 59(1) & (2) of Companies Act, 2013 – Rectification of Register of Members

(1) If the name of any person is, without sufficient cause, entered in the register of members of a company, or after having been entered in the register, is, without sufficient cause, omitted therefrom, or if a default is made, or unnecessary delay takes place in entering in the register, the fact of any person having become or ceased to be a member, the person aggrieved, or any member of the company, or the company may appeal in such form as may be prescribed, to the Tribunal, or to a competent court outside India, specified by the Central Government by notification, in respect of foreign members or debenture holders residing outside India, for rectification of the register.


(2) The Tribunal may, after hearing the parties to the appeal under sub-section (1) by order, either dismiss the appeal or direct that the transfer or transmission shall be registered by the company within a period of ten days of the receipt of the order or direct rectification of the records of the depository or the register and in the latter case, direct the company to pay damages, if any, sustained by the party aggrieved.

Section 59(4)

(4) Where the transfer of securities is in contravention of any of the provisions of the Securities Contracts (Regulation) Act, 1956 (42 of 1956), the Securities and Exchange Board of India Act, 1992 (15 of 1992) or this Act or any other law for the time being in force, the Tribunal may, on an application made by the depository, company, depository participant, the holder of the securities or the Securities and Exchange Board, direct any company or a depository to set right the contravention and rectify its register or records concerned.

A reading of the above provisions makes it clear that, the extent of the NCLT's jurisdiction under the 2013 Act qua rectification claims is substantially the same as what was previously conferred under the 1956 Act to the CLB. Under both enactments, what is conferred is only the power of "rectification". This means that the corresponding ouster of civil court's jurisdiction will also be of identical scope. The only difference is that under the 1956 Act, the ouster was an implied one as held in Ammonia Supplies whilst under the 2013 Act, the ouster was an express one. The express or implied nature of a bar on jurisdiction cannot really affect the width of such bar. Section 430 is thus analytically irrelevant since it does nothing new other than convert an implied bar on civil court jurisdiction into an express one.

As I explained above, the Ammonia Supplies principle of rerouting parties to a civil court in complicated claims was two-fold: (i) the "summary nature" of the proceedings in rectification actions; and (ii) the limited meaning of the word "rectification". The Supreme Court, in Khemka, has not explained how either of these considerations have changed under the 2013 Act. Under Section 59 of the 2013 Act, the NCLTs have been empowered to decide only claims for "rectification", just like it was in the 1956 Act. "Rectification" has a special restricted meaning as noted in Ammonia Supplies. At the cost of repetition, the limited meaning of "rectification" was explained in Ammonia Supplies as follows:

"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 committed or wrongly recorded in the register of the Company"

It is this restrictive meaning of "rectification" that led the court in Ammonia Supplies to distinguish between that are "really for rectification" (what I call "proper" claims for rectification) and claims "of such a nature, unless decided first it would not come within the purview of rectification" (what I call "improper" claims for rectification). It is only "improper" claims for rectification that could be re-routed to a civil court. There is nothing to suggest in the wording of Section 59 that the meaning of "rectification" would be any different under the 2013 Act. There is also nothing to suggest that the proceedings before the NCLT in Section 59 proceedings would be anything but summary in nature. The Khemka judgment simply fails to address these questions.

A final, but crucial error in Khemka, is that it failure to notice Section 111(7) and 111A(7) of the 1956 Act. Section 111(7) of the 1956 Act, specifically empowered the Company Law Board to decide "questions of title" and "any question which it is necessary or expedient to do so in connection with the application for rectification." Despite the existence of such an enabling provision, it was held under the 1956 Act that "improper" claims for rectification could be re-directed to civil courts. In contrast, Section 59 of the 2013 Act completely omits the enabling provision of Section 111(7) of the 1956 Act. The only inference that can be drawn from this omission is that the NCLTs are now not empowered in rectification actions to determine "questions of title" or "any question which it is necessary or expedient to do so in connection with the application for rectification." Therefore, it further fortifies the Ammonia Supplies principle that where an action for rectification was "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", the parties could be referred to civil courts for adjudication. The NCLAT, in several judgments, has followed Khemka and rejected the Ammonia Supplies principle. This, I submit, is against the legislative intent of the 2013. It is for these reasons that I submit that the Khemka requires urgent reconsideration by a larger bench of the Supreme Court.

Goutham Shivshankar is an  Advocate at Supreme Court of India.


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