Introduction
The appearance of an individual’s name within the register of members results in the presumption of his/her shareholding statuseven if, in fact, he is not so. Conversely, the absence of one’s name from said register ostensibly negates his/her shareholding status, although he may have done everything to entitle him to become one.Injustice may, therefore, result if a company’s register of members is notmaintained according to law.
The corporate entity thus must maintain an up-to-date register, ensuring the perpetual accuracy and correctness of shareholding particulars.In the event of a company’s failure to meet its duty under Section 59 of the Companies Act 2013 (the 2013 Act),the aggrieved person may seek rectification of the members. This blogscrutinisesthe jurisdictional purview of NCLTpertaining to section 59 of the2013 Act. It delves into two relatedspheres of jurisdiction,aiming to elucidate resolution for the concomitant issues present in the respective spheres.
NCLT Jurisdiction Over SEBI-Related Issues
Section 59 (4) of the act states where the transfer of securities is in contravention of any of the provisions of the Securities Contracts (Regulation) Act, the SEBI Act 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.This provision engenders a query regarding the precise interpretation of the phrase “direct any company or a depository to set right the contravention.”
In the landmark case of Ammonia Supplies Corporation Ltd. v. Modern Plastic Containers Pvt Ltd.(Ammonia Supplies), the Supreme Court (SC)examined the nature of jurisdiction exercised by the company court under the erstwhile Section 155 (now Section 59).The apex court characterised this jurisdiction as a summary in nature. Further, the court clarified that if there are serious issues that need to be dealt with under the garb of rectification, the civil court will have jurisdiction. It is also to be noted that the judgment did not address issues about the SEBI, as the then-extant Section 155 lacked provisions to this effect.Notwithstandingitslimitations,this judicial pronouncement laid the foundation for delineating the scope of authority wielded by company courts in rectification proceedings.As a result of the Sachar Committee Report’s modifications, Section 155 was removed and Section 111A was added.
This legislative amendment brought a radical departure, bringing violations of SEBI regulations under the garb of rectification proceedings. This brought new jurisprudential challenges as exemplified in the case of Zandu Pharmaceutical Works Ltd. v. Devkumarvaidya. While adjudicating this case, the court addressed allegations of insider trading and violations of the takeover code.The tribunal propounded that the erstwhile Company Law Board is precluded from deciding matters until there is a preliminary determination by SEBI regarding the existence of a violation.So, the ruling circumscribed the CLB’s authority to pronounce anyjudgment on the legality of the alleged violation.
The jurisprudential evolution culminated inIfb Agro Industries Limited vs Sicgil India Limited. The court reestablished the principles enunciated in the Ammonia Supplies case. The question in the case centered on the respondent’s acquisition of additional shares in the appellant’s company, which resulted in an individual shareholding exceeding 5% of the appellant’s total share capital. Due to this, the appellant sought rectification of its register, petitioning for the deletion of the respondent’s name as owner of the share above 5% under the erstwhile Section 111A(predecessor of Section 59) before the NCLT.The NCLT ruled in favour of the company’s petition for rectification of the Members Register. It directed the appellant company to repurchase its shares held by the respondent company, thereby addressing the contravention of shareholding limits.
The SC,dealing with the provision’s historical evolution, posited that its fundamental constituents have remained largely unaltered. The court reaffirmed that the power conferred is inherently summary in nature, designed to effectuate corrections or rectifications in the register of members. It held that such rectifications must be circumscribed to and predicated upon patently evident facts, avoiding extensive inquiry.Further, the Court held that the company’s petition under Section 111-A of the 1956 Act for a declaration that the acquisition of shares by the respondents was null and void was misconceived. It opined that the Tribunal should have directed the appellant company to pursue such a declaratory relief before an appropriate adjudicatory forum.
The legislative environment has been characterised by uncertainty, notably regarding the Tribunal’s jurisdiction in cases involving violations of specialised law such as the SEBI (SEBI) Act. Section 111(3) of the 1956 Act, which enabled the Tribunal to investigate and rule on rectification in instances involving breaches of such special enactments, caused significant confusion. This uncertainty continued in Section 59(4) of the 2013 Act, which allowed the Tribunal to order firms to correct violations.
These statutory provisions have inadvertentlyconferred jurisdiction upon NCLT or CLB, a jurisdiction that overlaps with SEBI’s regulatory authority. This was the main issue highlighted by the SC in Ifb Agro Industries Limited vs Sicgil India Limited. To address this jurisdictional issue, Section 59(4) must be amended. The proposed amendment should state that in cases where any contravention of SEBI regulation is present, the tribunal should either direct the petitioner to approach SEBI or refer the matter to SEBI or another appropriate forum.
This proposed modification in the statute would be beneficial to delineate more clearly the overlapping jurisdiction of the NCLT and SEBI, therefore resolving the potential for conflict in adjudication. It will also ensure that the specialised regulatory matters are addressed by the appropriate authority. Such an amendment would increase regulatory efficacy by channelling the disputes to the forum best suited for them.
NCLT Jurisdiction Over Title Issues
Whether NCLT possesses the authority to adjudicate title issues during rectification is a matter that has been under consideration because of jurisprudential evolution and legislative amendments. The Ammonia Supplies casehad set the position that company courts were not empowered to deliberate upon the title issues, relegating such matters to the purview of the civil court’s determination of title could the company court go ahead with rectification deliberation.
However, the legislative landscape did not remain constant; a significant change came with the 1988 amendment in the Companies Act, which introduced Section 111A addressing the matter. Section 111(7) was made applicable to cases falling under Section 111A. This provided the tribunal with the authority to adjudicate the questions related to the title of any party to the application seeking entry into or omission from the register. Besides this, it conferred a general jurisdiction to decide any question deemed necessary or expedient in relationtoa rectification application. This raised considerable ambiguity regarding the tribunal’s jurisdiction over title disputes.
The case of Standard Chartered Bank vs Andhra Bank Financial Services Ltd.brought the scope of Section 111(7) into focus, and the court held that, since the jurisdiction was summary in nature, a seriously disputed question of the title should be decided by the civil court. The court considered the nuanced position created by Section 111(7), which ostensibly vested the Tribunal with the authority to adjudicate title-related questions for parties to the application. In its ruling, the court reaffirmed the principle established by Ammonia Supplies’ judgment and emphasized that in cases where a title dispute is serious in nature, the company court should direct the parties to civil court, which was the more appropriate remedy for the investigation and adjudication of such a seriously disputed question of title.
The advent of the 2013 Act reignited the controversy regarding the title dispute, primarily due to the introduction of Section 430. This provision has a striking resemblance to Section 10 GB of the Companies Act, 1956, which, though inserted by the Companies (Second Amendment) Act, 2002, never came into force. Apart from this,the NCLT Rules 2016,i.e.,Rule 70 (4) and (5),adopted rulesanalogous to Section 111(7) of the 1956 Act. These changes created two different views of the courts dealing with title issues.
Firstly,the case of Jai Mahal Hotels Pvt. Ltd v. Rajkumar Devraj(Jai Mahal Hotels case) followed established precedent elucidating the distinction in delineating the jurisdictional ambit of the Company Court/Company Law Board.On the other side,the SC’s judgment in Shashi Prakash Khemka v. NEPC Micon Ltd.(Khemka case) presented a markedly different perspective.
The court ruled that the civil court remedies are entirely precluded, emphasising that Section 59 of the 2013 Act vested comprehensive power in the Tribunal. The court,stressing the expansive language used in Section 430 of the act, held it appropriate to direct the appellant to file a fresh suit before the tribunal. It is pertinent to note that this case did not engage with the principle of summary jurisdiction, a concept that was pivotal in the precedents. Besides this, the court refrained from inquiring whether the 2013 Act conferred any broader jurisdiction on the NCLTs compared to the powers previously vested under the 1956 Act. It also failed to focus on how the summary nature of the proceedingsand the interpretation of the term “rectification” may have evolved under Section 59 of theAct.
Due to these reasons, the later judgments of the high court have distinguished the Khemka case and held the authority of Jai Mahal Hotelsand the Ammonia case. For instance,Ms. Shazia Rehman vs Mr. Anwar Elahi & Ors. discussed every aspect including Sections 59, 430 and Rules 70 and Ammona Supplies and Khemaka caseand came to the conclusion that the NCLT is only empowered to superficially examine the title of person aggrieved, in respect of the shares of which he/she is seeking rectification (based on the documents on record), but not to decide the complex question of a seriously disputed title.
Therefore,like the amendment suggested for the SEBI-related regulation falling under the purview of Section 59,similarly,an amendment is required stating that if the NCLT believes that there is a case involving a question of title of shares and other such complicated questionsrequiring the intervention of a Civil court,the NCLT should refer the case to a civil court. Besides that,NCLT Rules 70(4) and (5) should also be omitted to avoid confusion.
Conclusion
The NCLT’s authority under Section 59 of the 2013 Act, in particular with regard to SEBI-related matters and title disputes, has been the topic of continuous controversy. While the NCLT has summary powers to correct the register of members, it should not overstep its authority by dealing with complicated situations that need further investigation. The SC has consistently ruled that matters involving SEBI violations and complex title disputes should be referred to SEBI or civil courts, respectively. However, the language of Section 59(4) and related provisions continues to confuse, leading to inconsistent judgments.To address these issues, the paper has suggested relevant amendments to the Companies Act.
Author Name- Sushant Jaiswal– 4th year, Institutional Affiliation: NLSIU, Bengaluru
Shivani Sharma– 3rd year, Institutional Affiliation: ILNU, Ahmedabad
