Determination Of Share Title Is Within Civil Court's Domain, Not With NCLT/NCLAT: Telangana High Court

Section 430 of the Companies Act, 2013, restricts the jurisdiction of civil courts in matters that fall under the purview of the National Company Law Tribunal or the National Company Law Appellate Tribunal. It ensures that civil courts do not interfere with issues that these specialized tribunals are empowered to handle.

Brief Facts:

Cherukuri Ramakrishna (“Appellant”), a major shareholder in M/s. Sunbeam Hospitality Private Limited, along with other shareholders, entered into an MOU, Share Purchase Agreement, and Takeover Agreement with Sandhya Hotels Private Limited and others (“Respondents”) to transfer their shares. The agreement stipulated that the Respondents would pay Rs.20,04,50,700/- to the Appellant. However, the Respondents only paid Rs.19,37,50,700/-, leaving Rs.67,00,000/- unpaid.

The Appellant claimed that the Respondents fraudulently transferred the Appellant's shares to themselves without paying the remaining amount and removed the Appellant as Director before assuming control of the company. Consequently, the Appellant filed a complaint in the City Civil Court at Hyderabad for a mandatory injunction and re-transfer of 10,197 shares in M/s. Sandhya Hospitality Private Limited. The Trial Court's order rejected the plaint. Feeling aggrieved, the Appellant approached the High Court. It argued that Sections 430, 58, and 59 of the Companies Act, 2013, do not apply to the case.

He argued that the request for the re-transfer of shares from the Respondents to the Appellant fell under the jurisdiction of a Civil Court, not the NCLT or NCLAT. It referred to specific pleadings in the plaint to emphasize that the issues raised do not fall within the jurisdiction of the NCLT or NCLAT.

The Respondents argued that Sections 430, 58, and 59 of the Companies Act, 2013, strictly prohibit Civil Courts from handling disputes under the purview of the NCLT or NCLAT. It argued that the case cannot be referred to arbitration as per Clause 8 of the 2015 Share Purchase Agreement, since the Appellant was only one of the multiple 'Transferors' in the agreement.

Observations by the High Court:

The High Court referred to Clause 8 of the Share Purchase Agreement (SPA) which stipulated that any disputes arising between the Transferors and Transferees regarding the agreement should be submitted to arbitration in Hyderabad under the Arbitration and Conciliation Ordinance, 1996. The lower court's decision to reject the plaint hinged on this arbitration clause that the dispute fell outside the Civil Court's jurisdiction and should be resolved through arbitration.

The High Court disagreed with this view. It acknowledged that the arbitration clause allows for disputes related to the SPA to be arbitrated. However, the High Court noted that the Appellant could file an application for the appointment of an arbitrator under Section 11 of the Arbitration and Conciliation Act, 1996. The High Court found that the Respondent's objection—that the Appellant could not unilaterally apply for arbitration without the other parties to the SPA—was premature and could only be addressed when such an application is actually made.

The High Court also considered the applicability of Section 430, read with Sections 58 and 59 of the Companies Act, 2013, to the suit filed by the Appellant. It noted that Section 430 bars Civil Courts from entertaining suits or proceedings that fall within the jurisdiction of the NCLT or the NCLAT. The lower court relied on this section to hold that it lacked jurisdiction over the matter and directed the parties to arbitration instead.

The High Court refuted this interpretation. It explained that Section 430 aims to prevent Civil Courts from interfering in matters specifically designated to the NCLT or NCLAT. Sections 58 and 59 deal with the refusal of companies to register the transfer of securities and provide for rectification of the register of members. The High Court noted that these sections become relevant only after the title to the shares is decided, a matter that falls within the Civil Court's domain.

The High Court held that the determination of the title to the shares is within the exclusive jurisdiction of the Civil Court. This interpretation is supported by the proviso to Section 58(2), which states that any contract concerning the transfer of securities is enforceable as a contract. The High Court also noted that the Respondents previously contested the eligibility of other shareholders to file petitions under Sections 241 and 242 read with Section 59 of the Companies Act which was an inconsistent stance regarding the NCLT's jurisdiction.

The High Court held that the Appellant's plaint detailed wrongful acts by the Respondents, including failure to pay the full consideration for the shares and wrongful transfer of shares without full payment. Although the plant did not explicitly mention fraud, it outlined significant illegalities committed by the Respondents. The High Court held that such allegations fall outside the NCLT's purview and are appropriate for a Civil Court to adjudicate.

Therefore, the High Court held that the issues raised in the plaint—concerning individual rights and the title to shares—must be decided by a Civil Court. It held that the NCLT is not a suitable forum for these matters. Consequently, the High Court held that Section 430, and Sections 58 and 59 of the Companies Act, 2013, do not bar the Appellant's suit.

Therefore, the impugned order of the Civil Court was set aside by the High Court.

Case Title: Cherukuri Ramakrishna vs Sandhya Hotels Private Limited

Case Number: C.C.C.A. No.57 OF 2023

Citation : 2024 LiveLaw (TS) 95

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