Does Civil Court have jurisdiction to determine title of shares issued ‘fraudulently’? Calcutta High Court examines

Calcutta High Court | Krishna Rao, J., held that under Companies Act, 2013, Civil Courts have jurisdiction to enquire into allegations of fraud pertaining to the title of issued shares, but they would not have jurisdiction to adjudicate the allegation of fraud under S. 447 of the Companies Act, 2013 as such fraud is to be adjudicated upon adducing evidence before the Civil Court only.

Facts:

In the instant matter fresh shares of defendant no. 3 Company were issued to the defendant nos. 2 and 3 by the auditor in an allegedly fraudulent manner. The plaintiff filed present suit challenging the fraudulently issuance of the shares. The plaintiff prayed to declare that the names of the defendant nos. 2 and 3 in the defendant no. 4’s shareholders registry as fraudulent. The plaintiff also prayed for perpetual injunction in respect of the title of the said fraudulently issued shares.

Defendant’s Contentions:

The counsel of defendants contended that this Court has no jurisdiction in terms of S. 9 CPC as it is barred by S. 430 of the Companies Act, 2013. Relying on Ss. 56(4), 58(3) and 59 read with R. 70(5)(a) of the National Company Law Tribunal Rule, 2016, the Counsel of defendants contended that plaintiff’s prayer (a) and (b) of the plaint is illegal, fraudulent, null and void. The counsel for the defendant also relied on Ss. 447 and 449 of the Companies Act, 2013 and submitted that Tribunal had jurisdiction to decide the fraud as claimed by the plaintiff.

The counsel of defendants relied on Shashi Prakash Khemka v. NEPC Micon Ltd., (2019) 18 SCC 569, where it was held that the civil suit remedy would be completely barred, and the power would be vested with the National Company Law Tribunal (NCLT) under Section 59 of the said Act.

Plaintiff’s Contentions:

The counsel for the plaintiff submitted that as per Section 65 of the Insolvency and Bankruptcy Code, 2016, if any person fraudulently initiates insolvency resolution process/liquidation proceedings, the Adjudicating Authority may impose penalty upon such person but cannot decide the fraud committed by the person for recording the names of shareholder. The counsel for the plaintiff further stated that only after this Court held that the defendants have committed fraud, then the plaintiff can approach the Tribunal for transfer of shares.

Relying on S. 447 of the Companies Act, 2013, the counsel for the plaintiff contended that first finding is to be arrived at with regard to the fraud and the Tribunal is holding summary procedure, cannot decide the fraud.

The counsel for the plaintiff relied on Embassy Property Developments (P) Ltd. v. State of Karnataka, (2020) 13 SCC 308, where it was observed that parties can invoke High Court’s jurisdiction under Art. 226 without taking recourse to the statutory alternative remedy as provided by any special statute.

Court’s Observation and Decision:

The Court observed that the plaintiff’s case is about fraud, and it is the Civil Court only which can decide the said fraud by adducing evidence by both the parties. The Court stated that

“Section 65 of the Insolvency and Bankruptcy Code, 2016 has no manner of application in the instant case as the challenge is against issuance of shares by the auditor of a company in derogation of his fiduciary with the company and whether the said act of the auditor is in contravention of the provisions of Company Act, 2013 is on act of fraud or not is to be decided by the Civil Court.”

The Court held that the NCLT is not competent to enquire into such allegations of fraud made in respect of refusal to transfer and/or record the names of shareholders in the shareholder’s registry in terms of Ss. 58 and 59 of the Act.

“NCLT is not competent to enquire into the allegation of fraud specifically when the plaintiff has prayed for declaration of recording the names of defendant no. 2 and 3 as shareholders in the books and the register of defendant no. 4 fraudulently and also prayed for perpetual injunction against the defendant nos.1 to 3.”

[Mukesh Jaiswal v. Phool Chand Gupta, 2022 SCC OnLine Cal 3957, decided on 05-12-2022]

Advocates who appeared in this case:

Mr. Swatarup Banerjee, Mr. Sourav Sengupta and Mr. Aman Baid, Counsel for the Plaintiff;

Mr. Reegobroto Kr. Mitra and Mr. Sayantak Das, Counsel for the Defendant no. 1.

*Ritu Singh, Editorial Assistant has put this report together.