Forum for Adjudicating Disputes Regarding Allotment of Shares

The issue of whether a civil court or the National Company Law Tribunal (NCLT) has jurisdiction over disputes regarding allotment of shares in a company came up for consideration before the Delhi High Court in SAS Hospitality Pvt Ltd v Surya Constructions Pvt Ltd. In its order dated 16 October 2018, the Court found that the NCLT has exclusive jurisdiction over such a dispute.

The plaintiff, SAS Hospitality, filed a suit seeking a declaration that the allotment of shares by Surya Constructions in favour of five investors is null and void. SAS Hospitality argued that the company’s management surreptitiously allotted the shares by using monies belonging to the company. As a result of the transaction, SAS Hospitality’s shareholding in Surya Constructions reduced from 99.96% to 21.44%. The defendants in the suit challenged the jurisdiction of the civil court in adjudicating the matter and instead argued that the NCLT was the appropriate forum.

The Court began by examining the scheme of the Companies Act, 2013, and how the “NCLT has been vested with powers that are far reaching in respect of management and administration of companies”. It noted that the NCLT has “exclusive jurisdiction in the conduct of affairs of a company and its power can be contrasted with that of the [Company Law Board (CLB)] under the unamended Companies Act, 1956”. The Court further took cognisance of the fact that the NCLT, unlike the CLB, even had powers to punish for contempt. Such a wide nature of the NCLT’s jurisdiction seems to have weighed heavily on the Court’s analysis of its specific powers.

Moreover, section 430 of the 2013 Act provides for an ouster of the civil court’s jurisdiction on any matter that NCLT is empowered to determine under the section. This leads to the question whether an allotment of shares is an issue that the NCLT is “empowered to determine”. The Court analysed sections 59 and 62 of the 2013 Act. While section 59 provides for rectification of the register of members of a company, section 62 deals with the further issue and allotment of shares. The Court observed:

13. The effect of the increase in the share capital and allotment of the same to any person has an automatic effect, i.e., it results in the alteration of the register of members under Section 59 of the 2013 Act. Thus, while the power to issue share capital vests in the company, the said power, without the section implementing the said issuance, is of no effect, and has no consequence. Any dispute in respect of rectification of the register of members under Section 59, can be raised by any person aggrieved to the Tribunal, i.e., the NCLT.

The analysis proceeds on the basis that any dispute relating to the allotment of shares would naturally involve a rectification of the register of members, thereby attracting the NCLT’s jurisdiction under section 59. With respect, such an approach is not free from doubt. The Court sidesteps an important question of whether the question of rectification of members under section 59 arises only in case of transfer and transmission of shares, or whether it also covers an allotment of shares. This is important because section 59 is part of a line of statutory provisions that deal with transfer or transmission (and not allotment) of shares, which begin with section 56. Moreover, section 59, which the Court relies heavily to pinpoint to the NCLT’s jurisdiction, states in sub-section (2) that the NCLT may “direct that the transfer or transmission shall be registered by the company”. Note that the jurisdiction is circumscribed to dealing with transfer and transmission and nowhere is the question of allotment mentioned. Hence, unless the NCLT is “empowered to determine” a question under the Companies Act the civil court’s jurisdiction cannot be ousted. Here, the Court has conflated sections 59 and 62 without discerning the much-needed distinction between transfer or transmission of shares on the one hand (i.e. secondary transaction) and an allotment of new shares (i.e. primary transaction).

The Court also draws inspiration from sections 241 and 242 of the 2013 Act that deal with oppression and mismanagement. It finds:

16. The allegations in the present case relate to non-compliance of the stipulations in Section 62 of the 2013 Act. The non-compliance of any conditions contained in Section 62 of the 2013 Act also constitutes mismanagement of the company, inasmuch as under Section 241 of the 2013 Act, the conduct of affairs of the company “in a manner prejudicial” to any member or “in a manner prejudicial to the interest of the company”, would be governed by the same. The jurisdiction to go into these allegations, vests with the Tribunal under Section 242 of the 2013 Act. Under Section 242(2), the NCLT has the power to pass “such order as it thinks fit”, including providing for “regulation of conduct of affairs of the company in future”. These powers are extremely broad and are more than what a Civil Court can do. Even if in the present case, the Court grants the reliefs sought for by the Plaintiff, after a full trial, the effective orders in respect of regulating the company, and administering the affairs of the company, cannot be passed in these proceedings. Such order can only be passed by the NCLT, which has exclusive jurisdiction to deal with the affairs of the company.

17. Moreover, the powers of the NCLT being broader and wider than what can be exercised by this Court in exercise of civil jurisdiction under Section 9 CPC. The NCLT is a specialised Tribunal constituted for the purpose of speedier and effective regulation of the affairs of the companies. …

Such an approach raises concerns. First, not every case involving a challenge regarding an allotment of shares could amount to oppression or mismanagement. There is an altogether different set of principles governing oppression and mismanagement, and unless they are invoked and discussed, the mere possibility of mismanagement cannot thereby confer jurisdiction under the NCLT under sections 241 and 242 of the 2013 Act. Second, it is not clear if the plaintiff in the present case even raised a plea of oppression and mismanagement. At least, the reliefs sought as outlined by the Court do not indicate the presence of such a plea. In these circumstances, reliance upon the jurisdiction of the NCLT under oppression and mismanagement seems to be misplaced given that those matters were never raised in the first place.

Finally, the mere availability of extensive jurisdiction to the NCLT under the 2013 Act (as compared with the CLB under the 1956 Act) is not a justification to oust the civil court’s jurisdiction. The scheme of the 2013 Act does not confer exclusive jurisdiction on all aspects of the legislation to the NCLT. For example, a claim for a breach of directors’ duties will still have to be determined by a civil court. Hence, the question that needs a clearer answer is whether an issue of allotment of shares per se is within the domain of the NCLT or not. It appears that the Delhi High Court’s ruling does not provide a satisfactory solution.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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