Companies Act, 2013 | Civil Court Has Jurisdiction To Determine Title Of Shares Issued 'Fraudulently': Calcutta High Court

The cause of action of the instant proceedings arose with the issuance of fresh shares to the defendant nos. 2 and 3 by the auditor of the defendant no. 3 company in an allegedly fraudulent manner. Challenging such fraudulent issuance of shares, the present suit was filed by the plaintiff praying for a declaration for recording the names of the defendant nos. 2 and 3 in the shareholders registry of the defendant no. 4 as being fraudulent as also praying for perpetual injunction in respect of the title of the said fraudulently issued shares.

Counsels for the defendants contended that by virtue of Section 9 of CPC, the Court had no jurisdiction to hear the suit as it was barred by Section 430 of the Companies Act. They referred to Sections 447 and 449 of the Act to contend that the Tribunal had jurisdiction to decide claims of fraud. Further, reliance was placed upon Supreme Court's decision in Shashi Prakash Khemka & Ors. v. NEPC Micon Ltd. & Ors. where it was held that civil court jurisdiction is completely barred in matters in respect of which power has been conferred on NCLT.

Counsels for the plaintiff placed reliance on Section 65 of the Insolvency and Bankruptcy Code, 2016 to argue that while the said provision empowered the Adjudicating Authority to impose penalty for initiation of insolvency resolution of liquidation proceedings fraudulently, no authority was conferred such authority for deciding fraud committed by recording of names of shareholders. They further argued that the determination of the existence of fraud by the Court was a condition precedent, subsequent to which the plaintiff could approach the Tribunal for issuance of shares. It was also argued that in terms of Section 447 of the Act, first finding is to be arrived with respect to the existence of fraud and that the Tribunal in holding summary procedure, could not decide on such fraud. Reliance was placed on the decision of the Madras High Court in N. Ramji v. Ashwath Narayan Ramji & Ors., reported in (2017) 203 Com Cases 574 (Mad) and the decision of the Supreme Court in Embassy Property Developments Private Limited v. State of Karnataka & Ors., where it clarified when its writ jurisdiction can be invoked bypassing a statutory alternative remedy provided by a special statute.

Upon hearing the rival contentions of parties, the Single Judge Bench of Justice Krishna Rao clarified that where companies have refused to transfer and/or record shares in the name of a shareholder in terms of Sections 58 and 59 of the Act on account of the fraudulent acquisition of such shares, the adjudication as to existence of such fraud will be decided by the Civil Court. The Court further clarified that Section 65 of IBC had no application in this case where the auditor, in breach of his fiduciary responsibilities, acted in contravention of the Companies Act in a purportedly fraudulent manner. The Court held:

"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."

Accordingly, the Court deemed the instant suit maintainable and ruled that the NCLT was not competent to enquire into the allegations of fraud when the plaintiff had specifically prayed for a declaration for recording the names of the defendant nos. 2 and 3 in the shareholders registry of the defendant no. 4 as being fraudulent as also praying for perpetually restraining the defendant nos. 1 to 3 from exercising any ownership right in respect of the said shares.

Case: Mukesh Jaiswal v. Phool Chand Gupta & Ors, CS 211 of 2019

Date: 05.11.2022

Citation: 2022 LiveLaw (Cal) 354

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