Source: Supreme Court 

Why in News? 

Recently, the Supreme Court in the matter of Chalasani Udaya Shankar and others v. M/s. Lexus Technologies Pvt. Ltd. and others has held that Company Law Tribunals have the power to order rectification under Section 59 of the Companies Act, 2013 when the case prima facie indicates a party victim of fraud. 

What was the Background of Chalasani Udaya Shankar and others v. M/s. Lexus Technologies Pvt. Ltd. and others Case? 

• In the present case, the respondent company (M/s. Lexus Technologies Pvt. Ltd.) was incorporated in Andhra Pradesh. 
• Respondent No. 2 and 3 and 4 after acquiring shares in the company became its director. 
• It was alleged that Appellant No. 1,2, and 3 had the majority shares in the company in spite of that the control and management was left by them to be conducted by the respondents. 
• It was argued by the respondent that the share certificate obtained by the appellants were fabricated. 
• It was also argued by the respondent that the signs taken on blank papers was misused by the appellants. 
• The appellant alleged that the respondents did not conduct the Annual General meetings (AGM) for the financial years 2014-15, 2015-16 and 2016-17, due to which the Registrar of Companies struck off the name of the company from the Register of Companies as per Section 248 of the Companies Act, 2013.  
• Later while browsing on the company’s portal, it was discovered by the appellants that the respondents have filed false financial statements and annual reports for the defaulting financial years. 
• It was also alleged that the respondents removed the name of the appellants shareholding from the records of the company. 
• It was further alleged that the respondents have many times committed various acts of oppression with the intention of grabbing the company property. 
• It was sought by the appellants before the National Company Law Tribunal (NCLT): 
  • For rectification of the Register of Members of the company, by entering their names. 
  • To initiate appropriate action against respondents under Section 447 and Section 448 of Companies Act, 2013 
  • To charge the respondents for oppression and mismanagement. 
• NCLT dismissed the application filed by the appellant followed by an appeal to National Company Law Appellate Tribunal (NCLAT). 
• NCLAT also dismissed the appeal aggrieved by which the appellate file the present civil appeal before the Supreme Court. 

What were the Court’s Observations? 

• The Supreme Court observed the decision of the NCLAT that: 
  • The transfer of payment and allotment of shares by the ‘known persons’ was not clearly appreciated by the NCLAT. 
  • After a thorough examination it was obtained that the ‘known persons’ who paid the money were Appellants only. 
  • Therefore, the conclusion made by the NCLAT that appellants did not transfer any money to the respondent was held factually wrong. 
• The Supreme court widely observed the provisions of Section 59 of the Companies Act as: 
  • The court noted that the purpose of Section 59 is to fix mistakes, adding names that should be done but not done. 
  • It was added by the court that the phrase ‘sufficient cause’ under the provisions must be closely examined by the courts on case-to-case basis. 
  • The phrase must be examined in a such a way that it complies with the rules of CA and the test for cause of erasion of name in the register must be examined accordingly. 
  • The Supreme Court further added that the observation of NCLAT that the present case is prima facie a case of fraud and the appellants are the victims then the rectification could have been ordered by the NCLAT. 
• The Supreme Court also criticized the observations made by NCLT and NCLAT as: 
  • The Supreme Court stated that the NCLT has failed to operate mandatory law by not exercising its power for rectification. 
  • The Supreme Court also added that the appreciation of available documents must be done thoroughly by the tribunals before coming to any conclusion and NCLAT failed to do so. 
  • The Supreme Court also noted that the NCLT also failed in examining the contentions made by the parties and did not perform adequate verification of the evidences produced. 
• The Supreme Court allowed the present appeals and restored it to the NCLT to freshly examine the merits of the case and to dispose of the petition expediously. 

What are the Cases Referred in the Case of Chalasani Udaya Shankar and others v. M/s. Lexus Technologies Pvt. Ltd. and others? 

• Adesh Kaur v. Eicher Motors Limited and Ors (2018):  
  • In this case the Supreme Court held that 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 CA. 
  • It was also held that exercising power under Section 59 will not be barred only because serious proceedings are going on against the defaulters (in this case criminal proceedings were going on against the company members). 
• Ammonia Supplies Corporation (P) Ltd v. M/S Modern Plastic Container (1998): 
  • In this case it was held that the power under Section 155 of CA, 1956 (now Section 59 of CA) cannot be exercised when the issue raised does not fall within the scope of rectification. 

What is Section 59 of the CA? 

• Section 59 of CA was earlier covered under Section 155 of CA, 1956. 
• Provisions related to the register of members are given under Section 88 of CA. 
• This section states the Rectification of register of members as: 

1. Rectification of Register of Members—

• If the name of any person is, without sufficient cause: 
  • Entered in the register of members of a company, or 
  • After being entered in the register, is, without sufficient cause, omitted therefrom, or 
  • If a default is made, or unnecessary delay occurs in entering in the register the fact of any person having become or ceased to be a member, 
• The person aggrieved, any member of the company, or the company may appeal to: 
  • The Tribunal (as prescribed), or 
  • A competent court outside India (specified by the Central Government by notification) in respect of foreign members or debenture holders residing outside India for rectification of the register. 

2. Tribunal's Powers in Appeals—

• The Tribunal may, after hearing the parties to the appeal under sub-section (1), by order: 
  • Either dismiss the appeal or 
  • Direct that the transfer or transmission shall be registered by the company within ten days of the receipt of the order, or 
  • Direct rectification of the records of the depository or the register, and in such a case, direct the company to pay damages, if any, sustained by the aggrieved party. 

3. Right to Transfer Securities—

• The provisions of this section shall not restrict the right of a holder of securities to transfer such securities, and any person acquiring such securities shall be entitled to voting rights unless the voting rights have been suspended by an order of the Tribunal.

4. Rectification for Contraventions—

• Where the transfer of securities is in contravention of any provisions of: 
  • The Securities Contracts (Regulation) Act, 1956, 
  • The Securities and Exchange Board of India Act, 1992, 
  • This Act, or 
  • Any other law in force, 
• The Tribunal may, on an application made by the depository, company, depository participant, holder of the securities, or the Securities and Exchange Board, direct any company or depository to rectify its register or concerned records and correct the contravention.