Supreme Court overturns NCLAT decision on share transfer: Chalasani Udaya Shankar vs. Lexus Technologies (2024)

Date of the Judgment: September 9, 2024
Citation: 2024 INSC 671
Judges: Justice Sanjiv Khanna and Justice Sanjay Kumar
Can a company tribunal dismiss a claim of share ownership without a thorough examination of the evidence? The Supreme Court of India recently addressed this question in a case involving a dispute over the ownership of shares in a private company. This judgment clarifies the responsibilities of the National Company Law Tribunal (NCLT) when dealing with share rectification cases, emphasizing the need for a detailed review of all evidence. The bench consisted of Justice Sanjiv Khanna and Justice Sanjay Kumar, with the judgment authored by Justice Sanjay Kumar.

Case Background

The case revolves around a dispute over the ownership of shares in M/s. Lexus Technologies Pvt. Ltd. The appellants, Chalasani Udaya Shankar, Sripathi Sreevana Reddy, and Yalamanchilli Manjusha, claimed they had purchased shares from Mantena Narasa Raju, the second respondent, in 2015. They asserted that they had paid ₹14,67,41,557 for these shares and were issued share certificates signed by the company’s directors. However, the company and Mantena Narasa Raju denied the transfer, alleging that the share certificates were forged and that the money transfer was part of a loan arrangement involving a third party, L. Ramesh. The appellants approached the NCLT seeking rectification of the company’s register of members to reflect their ownership and to initiate action against the respondents for oppression and mismanagement.

Timeline

Course of Proceedings

The appellants initially filed a company petition before the NCLT, seeking rectification of the register of members and action against the respondents for oppression and mismanagement. The NCLT initially passed an interim order on 27.06.2019, directing a status quo on the company’s assets, noting that the second respondent did not dispute the receipt of monies from the appellants. However, the NCLT, through its Acting President, later dismissed the company petition on 21.08.2021, without any reference to the earlier interim order, stating that the appellants failed to prove their case. The NCLAT upheld this dismissal on 10.04.2023, agreeing that the appellants had not established their claim of share ownership and were barred by limitation, leading to the appeal before the Supreme Court.

Legal Framework

The case primarily involves the interpretation of Section 59 of the Companies Act, 2013, which deals with the power of the NCLT to rectify the register of members of a company. Section 88 of the Companies Act, 2013, mandates that every company must maintain a register of its members. Rule 70(5) of the National Company Law Tribunal Rules, 2016, which is in pari materia with Section 111(7) of the Companies Act, 1956, outlines the procedure for rectification. The Supreme Court also discussed the interplay between the jurisdiction of the NCLT and civil courts, referencing past judgments on the issue of rectification of company registers. The court emphasized that the NCLT’s jurisdiction is exclusive for matters of rectification but not for adjudication of seriously disputed civil rights or titles.

The relevant provisions are:

• Section 59 of the Companies Act, 2013: “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 from the register, 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 apply to the Tribunal for rectification of the register.”
• Section 88 of the Companies Act, 2013: “Every company shall keep and maintain the register of members, register of debenture-holders and any other register, and the index of such registers, at its registered office.”

Arguments

Appellants’ Arguments:

• The appellants argued that they had purchased 10,51,933 equity shares from Mantena Narasa Raju on 18.04.2015, paying ₹14,67,41,557.
• They produced share transfer deeds and share certificates signed by the company’s directors, Appa Rao Mukkamala and Suresh Anne.
• They claimed that they had a cordial relationship with the directors and left the managerial control with them.
• They asserted that they discovered their names were not in the company’s records after the company was struck off and then restored.
• They stated that they had a fiduciary relationship with the directors and trusted them.
• They argued that the NCLT should have considered the documentary evidence they provided, including the share certificates and transfer deeds.

Respondents’ Arguments:

• The respondents, including Mantena Narasa Raju, denied selling the shares to the appellants.
• They claimed that the money transfer was part of a loan arrangement involving L. Ramesh, where the appellants deposited money in Mantena Narasa Raju’s account and he returned a portion of it to others.
• Mantena Narasa Raju alleged that he had signed blank papers that were misused by the appellants to create forged documents.
• They argued that the share certificates were not genuine and were fabricated.
• They contended that the NCLT lacked jurisdiction to adjudicate issues of fraud.
• They raised the issue of limitation, arguing that the petition was filed after three years from the date of the alleged share purchase.

The innovativeness of the arguments lies in the respondents’ attempt to portray the share purchase as a loan transaction involving a third party and the allegation that the share transfer documents were fabricated using signed blank papers. This was a novel way to deny the share transfer.

Issues Framed by the Supreme Court

The NCLT framed the following issues for consideration:

1. Whether the Petition filed is well within the time.
2. Whether purported transfer of shares is in accordance with the provisions of the Companies Act and in accordance with clauses of the Articles of Association.
3. Whether the amount purportedly paid should be treated as consideration to the shareholders of the Company, by the Petitioners.
4. Whether the share certificates purportedly issued to the Petitioners are genuine.
5. Whether any relief can be granted to the Petitioners or whether the petition is maintainable.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues:

Authorities

The Supreme Court considered the following authorities:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The Court relied on Ammonia Supplies Corporation (P) Ltd. vs. Modern Plastic Containers Pvt. Ltd. and others [CITATION] to emphasize that the NCLT should not exercise its power of rectification if the issues raised are outside the purview of rectification.
• The Court followed Adesh Kaur vs. Eicher Motors Limited and others [CITATION], stating that if, on facts, an open-and-shut case of fraud is made out in favour of the person seeking rectification, the NCLT would be entitled to exercise such power.
• The Court referred to Shashi Prakash Khemka (Dead) through legal representatives and another vs. NEPC MICON (Now NEPC India Limited) and others [CITATION] to highlight that Section 430 of the Companies Act, 2013, bars the jurisdiction of civil courts in matters where the NCLT has been conferred with power.

What weighed in the mind of the Court?

The Supreme Court was primarily concerned with the failure of the NCLT and NCLAT to properly examine the evidence and facts presented by the appellants. The Court emphasized that the NCLT should not have summarily dismissed the petition without a thorough inquiry, especially given the conflicting claims and the documentary evidence provided by the appellants. The Court found that the NCLT and NCLAT had wrongly accepted the respondents’ version without requiring sufficient proof and had failed to consider the receipt of monies by respondent No.2 from the appellants. The Court also noted that the NCLT had ignored its own interim order, which had highlighted the need for further inquiry.

The Court’s decision was heavily influenced by the factual errors and lack of proper examination by the lower tribunals. The ratio of fact to law indicates that the Court was more concerned with the factual missteps of the NCLT and NCLAT than with intricate legal interpretations.

Key Takeaways

• The NCLT must conduct a thorough examination of all material evidence before dismissing a petition for rectification of the register of members.
• The NCLT should not summarily reject claims without giving due consideration to the documentary evidence and other supporting material.
• The NCLT must consider its own interim orders and the findings therein when making a final decision.
• The NCLAT should not make factual errors or overlook evidence when reviewing NCLT orders.
• The principle of preponderance of probabilities must be applied when deciding on questions of fact.
• The jurisdiction of the NCLT is exclusive for rectification matters but not for adjudication of seriously disputed civil rights or titles.

Directions

The Supreme Court directed the National Company Law Tribunal, Amaravati Bench, to reconsider the company petition on merits and in accordance with law, giving it priority and endeavoring to dispose it of as expeditiously as possible.

Development of Law

The ratio decidendi of this case is that the National Company Law Tribunal (NCLT) must conduct a thorough examination of all material evidence before dismissing a petition for rectification of the register of members, and that the NCLT must not summarily reject claims without proper consideration of documentary evidence and other supporting material. This judgment reinforces the principle that the NCLT’s jurisdiction is exclusive for rectification matters but not for adjudication of seriously disputed civil rights or titles. It also emphasizes the importance of considering interim orders and the principle of preponderance of probabilities. This judgment does not change the position of law but clarifies the procedure to be followed by the NCLT in rectification cases.

Conclusion

The Supreme Court allowed the appeals, setting aside the judgments of the NCLT and NCLAT. The Court restored the company petition to the file of the NCLT for fresh consideration on merits, emphasizing the need for a thorough examination of evidence and adherence to legal principles. This judgment underscores the importance of due process and careful consideration of evidence in company law matters.