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

The Supreme Court in a recent judgment held that Company Law Tribunals can exercise powers of rectification of the register of members under Companies Act 2013 if the applicant was a victim of an 'open-and-shut' case of fraud by his opponents.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 RemarkedThe 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...

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

Anmol Kaur Bawa

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Anmol Kaur Bawa

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

Anmol Kaur Bawa

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Anmol Kaur Bawa

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