Grounds for Appeal at NCLT relating to Shares

Introduction

It has been six years since the constitution of NCLT (National Company Law Tribunal) and it has proved its efficiency to work better as a tribunal in different ways possible. According to Salil Panchal, “with the coming of bad banks and the persisting problem of bad loans, the need for NCLT cannot be denied”.[1] He even says that NCLT is the most effective mechanism compared to other channels to recover bad loans.[2] Even though there have been many difficulties in the proceeding of the Tribunal due to Covid-19 and other related matters, it has made its place in the instrument of Justice, by providing justice to companies and adhering with the natural law principle.

Brief History

In 2002, the government of India based on the recommendations of Justice Balakrishna Eradi committee[3] brought the idea of a special quasi-judicial body, which was to adjudicate matters regarding corporate justice. The goal and the idea behind this were mostly due to the pendency of cases before High Courts and the government wanted to form a single body that could adjudicate matters regarding companies by dissolving the then Company Law Board(CLB), Board for Industrial and Financial Reconstruction(BIFR) and Appellate Authority of Industrial and Financial Reconstruction(AAIFR). When the government, in 2002 brought the proposal of establishment of NCLT, the then Madras(now Chennai) Bar Council in 2004 filed a writ petition challenging the constitutional validity of NCLT and NCLAT, it was then decided in the Supreme Court of India in Union of India v. R. Gandhi, President, Madras Bar Association[4] and then in Madras Bar Association v. Union of India[5] regarding the constitutional validity of NCLT and NCLAT and this also led in the establishment of a new Companies Act of 2013 and repealing of Companies Act of 1956.[6]

The Ministry of Corporate Affairs on 1st June 2016 established National Company Law Tribunal under Section 408 of the Companies Act of 2013. From then on NCLT and NCLAT have replaced high courts and old governmental bodies that used to handle corporate justice. NCLT has the powers and jurisdiction of a high court only on corporate issues. NCLT and NCLAT both are not bound by the Code of Civil Procedure, 1908 and it has the power to regulate its own procedure based on principles of natural justice. 

Share according to the Companies Act 2013

A share means mutual funds, limited partnerships, and real estate investment trusts. Share capital refers to all of the shares of an enterprise. According to sub-section 84 of section 2 of the companies act, 2013, share means, “a share which also includes stock, is a share capital of a company”.[7] Securities are also mentioned in the sub-section 81 of section 2 of the companies act, 2013[8] which directs towards the security and contracts (regulation) act of 1956, and as per this act, securities means, “shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate, units or any other instrument issued by any collective investment scheme to the investors, derivatives, central government declaring securities, units in under mutual funds scheme, government securities, etc”.[9]

Personation of Acquisition of Shares

According to section 38 of the Companies Act of 2013, any person who makes or abets, fictional name, applies for multiple applications, induces directly or indirectly any company for having its shares is liable for action under Section 447.[10] Section 447 talks about punishment for fraudulent activities relating to shares, and even describes what is fraudulent activity, wrongful gain, and wrongful loss.[11]

Penalty for Fraudulently inducing Investment

According to section 36 of the Companies Act of 2013, any person who gives a false promise makes rash statements, misleads or conceals material facts, is deceptive, to enter into, any agreement with a view of acquiring, subscribing, to secure a profit, with any view of getting credit facilities, etc, are liable for action under section 447 of the companies act, 2013.[12]

Transfer of Shares and Contravention

Section 56 of the Companies Act of 2013 states about transfer and transmission of securities, the transfer of shares of the company and other securities of the company will be registered only when a proper instrument for transfer of shares is filed as prescribed in Form No. SH 4. One needs to send Form SH 4 to the company by the transferor or the transferee of the shares within 60 days from the date of execution, of the share transfer agreement. Along with the share transfer certificate or certificate relating to securities. If there is no such share transfer certificate, then one must send the application for transfer of shares along with the letter of allotment of securities. One must also obtain a ‘No Objection Letter’ from the buyer within two weeks from the date of receipt of a notice.[13] The duration to submit the share transfer certificates is within one month from the date of receipt of the share transfer agreement or the certificate by the company. According to the companies act, one has to stamp the share transfer form properly or it might get rejected in accordance with section 12 of the Indian Stamps Act, and the share transfer form has to be sent to the board of directors. Special adhesive stamps having the word “share transfer” have to be used in accordance with the stamping.[14]

Restrictions are placed to private company’s articles and should avoid the transfer of the company’s shares. Section 56 to 59 of the Companies Act, 2013 talks about the procedures established regarding the transfer of the company. Transfer of shares is only passed after a board resolution, one has to use the share transfer form, i.e, SH 4 to execute the share transfer both by the transferor and transferee of the shares. Share transfer deeds should properly be stamped following the Indian Stamp Act and one has to pay the stamp duty to the respective state. Witness signatures are important in the transfer of shares. Share transfer deed to the company has to be submitted within 60 days from the date of execution of the deed. If the documents regarding the transfer of shares are in order then it would be passed and the shares will be registered only after passing a board resolution.[15] Transfer of shares under a depository system is given in section 56(4) of the Companies Act, 2013. According to this section, one should provide the details of shares or securities to the depository immediately while a company is doing a share or security transfer.[16]  

Condonation Delay in Filing Appeal

Section 460 talks about, “condonation of delay in certain cases”. According to this, the companies have to file an annual return and financial statement documents to the ministry of corporate affairs electronic registry within a prescribed duration. These documents are considered an important element to keep an updated registry, and many companies don’t file their documents which makes them liable for penalties and prosecutions regarding non-compliance. The Companies Act, 2013 has stricter penalties and has raised fees if found defaulting the said terms. If defaults are repeatedly caused then they have to pay a heavier fine and this has been included in the Companies Act of 2013.[17]    

Unfair Trade Practices in the Securities Market

The securities market is subjected to many fraudulent activities and scams, be it in India or foreign nations. Financial intra-day or be it long-term trading is done by many Indian investors every single day, and this becomes an essential base to check and prevent illicit activities in these markets, to safeguard the investors. In India, the Securities and Exchange Board of India (SEBI), regulates the securities market. SEBI protects the interests, regulates the operations of the security markets and the insider trading in a company, and promotes and develops these security markets. In the case of Securities and Exchange Board of India (SEBI) V. Sahara India Real Estate Corporation Ltd[18], Sahara India issued the Optional Fully Convertible Debentures (OFCDs) to its investors without the approval or considerations from SEBI and collected a sum of over Rs. 17,400 crore.  Interests of the investors at risk SEBI ordered Sahara India to return the collected amount to the investors with a 15% interest rate.

According to SEBI, “fraud includes any act, omission, expression or concealment committed deceitfully while dealing in matters relating to securities to induce another person or his agent to deal in securities, concerning wrongful gain or avoidance of any loss”.[19] In the case of, Shri. N. Narayanan and Shri. V. Natarajan in the matter of Pyramid Saimira Theatre Limited[20], both Narayanan and Natarajan during the financial year 2007-2008 published fake accounts with increased figures in their financial report which led SEBI to investigate this act of fraud, as this was done to lure investors.

Restrictions on extend of Shareholding and Forgery in Transfer of Shares

Private companies can restrict their articles furthermore, restricting the rights of their shareholders in transferring the shares. These reasonable restrictions regarding articles might not be seen in public companies. The public company’s matters relating to the transfer of shares on certain grounds and the scope of refusing of registration of transfer or acceptance of shares are considered limited, yet private companies can do so. As before it was easy to fabricate documents by companies to get away with some fraudulent activities, but now with the introduction of e-filings, it has become very difficult to commit fraud as the companies now have to explain before their respective competent forum about their non-compliance. The ministry of corporate affairs scheme based on e-filings has made things much easier, but still, many companies do not strictly follow the provisions of the act.

There are different cases, where it is said that shares are transferred without the knowledge of the shareholders, and many times, signatures of the shareholders are forged and documents are also fabricated without the shareholder’s knowledge. In the case, Vikram Jairath and Ors V. Middleton Hotels Private Limited[21], a fraud happened in the transfer of shares where the appellants alleged that in contravention of an agreement between the parties while getting the appellants to agree on part payment within six months. board meetings were held without the appellant’s knowledge and this was illegal and has been wrongly held as per the appellant.

Misrepresentation as to the Value of Shares

Sudipto Dey in his article says, “any misrepresentation in the prospectus is treated as fraud”.[22] The Companies Act of 2013 does not specify or define misrepresentation, but the way it is described is, “any statement which is false or misleading in any form or context in which it is included or where any inclusion or omission of any matter is likely to mislead”.[23] Misleading in general terms in my opinion means any statement, which is constructed in view of falsely implicating the material facts. If the promoters of misrepresentation are found guilty then civil and criminal liabilities can follow, and criminal liability for misstatement has been given in section 34 of the Companies Act of 2013 and for fraud under section 447 of the Act. Section 35 of the Companies Act provides civil liabilities for misstatement. According to section 36, the directors of the company, the promoters, and all persons who sustained loss or damage have to compensate and are liable to pay and according to section 37, those who are seeking compensations have to file a lawsuit to claim their compensation. In the case, Jindal Saw Limited V. Aperam Stainless Services,[24] Aperam stainless alleged that Jindal and IUP had failed to co-operate, for carrying out fresh valuations and that there had been a misrepresentation in the valuation of share of IUP, and wanted to terminate the settlement agreement. But, the ruling was passed in favor of Jindal and against Aperam Stainless, directing Aperam to pay the liabilities and was directed to perform its settlement agreement obligation by the honorable High Court of Delhi.   

Conclusion

From above we can conclude by saying that the markets must be free from frauds, misrepresentation, forgery, etc, and all these are stoutly maintained by NCLT for having consideration for the principle of natural justice and this mechanism is also taking off the burden of courts like high courts by giving speedy justice in special matters relating to corporate affairs. All the case laws,  discussed above relating to the appeal of shares and the countermeasures done by NCLT concerning fraud, misrepresentation, etc shows us that even with a specialized tribunal for corporate matters, justice is sometimes delayed and debates still go on regarding the jurisdiction and the powers of NCLT, regarding companies act and insolvency and bankruptcy code, has made NCLT and NCLAT a powerful body of adjudication. Even though we have achieved the separation of duties from the High Court and other bodies to NCLT and NCLAT regarding companies, India still has to go a long way when it comes to dispensation of justice promptly.

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References:

[1] Salil Panchal,  Five Years Of NCLT: The Bad Loan Recovery Tool Is Painfully Slow, But Still India’s Best Bet, Forbes India (July. 17, 2021, 06:18 PM), https://www.forbesindia.com/article/take-one-big-story-of-the-day/five-years-of-nclt-the-bad-loan-recovery-tool-is-painfully-slow-but-still-indias-best-bet/69075/1.

[2] Ibid.

[3] Shri Justice V. Balakrishna Eradi, Report of High-level Committee on Law Relating to Insolvency and Winding up of Companies, 2000, p.47.

[4] Union of India v. R. Gandhi, President, Madras Bar Association, (2010) 11 SCC 1 (India).

[5] Madras Bar Association v. Union of India ,2015 SCC Online SC 1094 (India).

[6] Kewal Garg, Companies Act 1956 stands repealed from 30 January 2019: MCA notification, ca club (July. 17, 2021, 07:08 PM), https://www.caclub.in/companies-act-1956-stands-repealed-from-30-january-2019-mca-notification/.

[7] The Companies Act, S.2(84) (2013).

[8] The Companies Act, S.2 (81) (2013).

[9] Securities Contracts (Regulation) Act, S. 2(h) (1956).

[10] The Companies Act, S. 38 (2013).

[11] The Companies Act, S. 447 (2013).

[12] The Companies Act, S. 36 (2013).

[13] Swapnil L. Shinde, Transfer of shares under companies act 2013, Taxguru (July. 17, 2021, 08:15 PM), https://taxguru.in/company-law/transfer-shares-companies-act 2013.html#:~:text=Section%2056%20of%20Companies%20Act%202013%20provides%20that%20the%20transfer,SH%204.

[14] Ibid.

[15] Swapnil, Loc. cit.

[16] Ibid.

[17] Section 460 of Companies Act, 2013-Condonation of delay in certain cases, Corporate law report, (July. 17, 2021, 09:18 PM), http://corporatelawreporter.com/companies_act/section-460-of-companies-act-2013-condonation-of-delay-in-certain-cases/#:~:text=Business%20Law-,Section%20460%20of%20Companies%20Act%2C%202013%20%E2%80%93%20Condonation,of%20delay%20in%20certain%20cases&text=(b)%20where%20any%20document%20required,in%20writing%2C%20condone%20the%20delay.

[18]  Securities and Exchange Board of India (SEBI) v. Sahara India Real Estate Corporation Ltd., (2013) 1 SCC 1.

[19] Securities and Exchange Board Of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, S.2(c) 2003.

[20] Adjudication Order in respect of Shri. N. Narayanan and Shri. V. Natarajan in the matter of Pyramid Saimira Theatre Ltd., SEBI, (July. 18, 12:00 AM), https://www.sebi.gov.in/enforcement/orders/jul-2011/adjudication-order-in-respect-of-shri-n-narayanan-and-shri-v-natarajan-in-the-matter-of-pyramid-saimira-theatre-ltd_20298.html

[21] Vikram Jairath and Ors V. Middleton Hotels Private Limited, (2019) Indian Kanoon (India).

[22] Sudipto Dey, Any misrepresentation in prospectus is treated as fraud, Business Standard, (July. 18, 2021,  03:00 AM), https://www.business-standard.com/article/opinion/any-misrepresentation-in-prospectus-is-treated-as-fraud-114101900724_1.html

[23] Ibid.

[24] Jindal Saw Limited V. Aperam Stainless Services, (2019) Indian Kanoon (India).