Home > Recent Judgements > Supreme Court Clarifies Grounds For Rectifying Company Member Registers
Sept 12, 2024
SUPREME COURT CLARIFIES GROUNDS FOR RECTIFYING COMPANY MEMBER REGISTERS
In a recent Judgment 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.
BACKGROUND OF THE CASE
The respondent company was involved in software development, in Andhra Pradesh. In 2004, Respondent no.2 acquired 94.8% of the company’s shares and was later joined by Respondents no.3 and no.4 as directors. In 2015, appellants no.1, 2, and 3 bought shares from Respondent no.2, becoming majority shareholders. Share certificates were issued and authenticated by Respondents no.3 and no.4. Despite this, their names were not updated in the company’s register. The company was struck off the register on 21.07.2017 for failing to hold Annual General Meetings for several years, leading to the removal of the appellants’ names from the register. Appellants filed a petition with the NCLT for rectification of the register, action against the respondents for oppression and mismanagement, and initiation of criminal proceedings for fraud.
ISSUES
- Whether the appellants’ names were properly entered into the company’s register despite their share purchase
- Respondent no.2’s claim that the share certificates were fabricated and that he had not sold his shares.
- The nature of the payments made by the appellants to Respondent no.2, questioning if they were for share purchases or loans.
FINAL ORDER OF NCLT AND SUPREME COURT REMARKS ON IT
- The Acting President of the NCLT dismissed the petition on the grounds that it was filed after the three-year limitation period, labeling it as an afterthought. However, the Supreme Court found this approach too brief and inadequate. The Court noted that the NCLT Member (Judicial) had previously acknowledged that the issue of limitation was complex and required a detailed examination, which the Acting President’s summary dismissal failed to address.
- The Supreme Court criticized the Acting President of the NCLT for dismissing the appellants’ case without properly examining key evidence, such as share transfer forms, certificates, and relevant correspondence. The Acting President’s assertion that no documents proved the share transfer was found to be inconsistent with the available evidence. Additionally, the Acting President’s claim that there was no substantial communication to confirm the share purchase from Respondent no.2 was noted to be unexamined. The Supreme Court emphasized that the Acting President failed to adequately investigate these crucial aspects of the case.
- On the issue of the authenticity of the share certificate, the Supreme Court noted that the Acting President held the certificate to be doubted and possibly fabricated, which according to the Supreme Court was done without investigation especially when the appellants had produced original certificates and requested access to company records for verification.
Therefore, NCLT’s order dismissed the Appellant’s case, then the Appellant appealed before NCLAT.
SUPREME COURT’S OBSERVATION ON NCLAT DISMISSAL OF APPEAL
The NCLAT rejected the appellants’ case, but the Supreme Court found an issue with NCLAT’s findings. Although the NCLAT noted that Appellant used “known persons” to transfer money to respondent No. 2’s account, it also questioned whether the payment was for shares due to a ₹9 Crore repayment. However, the NCLAT’s conclusion that the appellants did not transfer any money was incorrect. The table referenced by NCLAT showed that the ‘known persons’ were actually appellant 2 and 3, and a joint account holder of appellant 1, Thus NCLAT’s conclude that appellants did not transfer any money was factually wrong.
ROLE OF COURT UNDER SECTION 59 OF COMPANIES ACT,2013
In rectification proceedings under Section 59 of the Companies Act 2013, the court’s role is to correct errors or omissions in company records. The term ‘rectification’ refers to fixing mistakes that were made or addressing actions that were incorrectly taken.
The Bench highlighted in the case of Ammonia Supplies Corporation (P) Ltd v. M/S Modern Plastic Container, that rectification should only be used to correct genuine mistakes or omissions,. It was emphasized that if the issues raised are not directly related to rectification, the court’s power under Section 59 cannot be applied.
The court must examine each case thoroughly, looking beyond the paperwork to understand the real issue. The term ‘sufficient cause’ in Section 59 refers to evaluating whether actions or omissions contravene the statutory requirements of the Companies Act 2013 or its rules.
The process for addressing situations where a person’s name is omitted from the company register without sufficient cause. Additionally, relying on Dhulabhai vs. State of Madhya Pradesh, it was clarified that civil courts are not explicitly barred from jurisdiction in rectification proceedings.
FINAL ANALYSIS
The Supreme Court concluded that under section 59 of the companies act 2013 both the NCLT and NCLAT had errored in their judgments by not conducting a thorough examination of the evidence and by dismissing the appellants’ claims summarily. Consequently, the Court directed that the case be remanded to the NCLT, Amaravati Bench, for fresh consideration on merits and for an expeditious disposal. This decision underscores the need for detailed examination and proper verification of evidence in rectification cases under the Companies Act.
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