Supreme Court Reiterates Rectificatory Jurisdiction Under Companies Act: A Conundrum Involving NCLT and SEBI

[Anshita Dave and Abhyudaya Yadav are 5th year B.A., LL.B. (Hons.) students at Dharmashastra National Law University, Jabalpur]

Recently, the Supreme Court in IFB Agro Industries Limited v. SICGIL India Limited held that the National Company Law Tribunal (“NCLT”) cannot exercise its rectificatory jurisdiction under section 59 of the Companies Act, 2013 (“the Act”) to correct disputed errors which fall under the adjudicatory realm of the Securities and Exchange Board of India (“SEBI”). Prima facie, there exists a jurisdictional overlap between the NCLT and SEBI. However, relying on its earlier precedents, the Court clearly demonstrated the scope of NCLT’s jurisdiction under section 59 of the Act. This post delves into the reasoning adopted by the Supreme Court while analyzing the scope of preliminary inquiry and extent of adjudicatory powers of NCLT in a  petition under section 59 of the Act. Further, it analyzes the role of SEBI and sectoral regulators in this regard and attempts to streamline the procedure where SEBI and sectoral regulators play pivotal roles.

Factual Matrix

IFB Agro Industries Ltd. (“IFB Agro”) and SICGIL India Ltd. (“SICGIL”) are listed entities engaged in the business of liquid chemicals. IFB Agro alleged that the Managing Director (“MD”) of SICGILL had approached IFB Agro to enter into a business tie-up in August 2003, but IFB Agro rejected the offer. Thereafter, the MD of SICGILL, along with his wife and SICGILL started buying shares of IFB Agro from the open market. As a result, the collective shareholding of SICGILL, MD of SICGILL, his wife, and other connected persons (collectively referred to as “SICGILL”) exceeded 5%, thereby triggering regulation 7(1) of the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997 (“SAST Regulations”). Pursuant to its obligations under the SAST Regulations, SICGILL made the required disclosure; however, the same was alleged not to be in the prescribed format.

Four months later, SICGILL acquired additional shares of IFB Agro and consequently increased the individual shareholding of MD of SICGILL beyond 5%. As a result, disclosure obligations under SAST Regulations and SEBI (Prohibition of Insider Trading) Regulations, 1992 (“PIT Regulations”) were triggered again. The MD of SICGILL admitted that he inadvertently failed to make the required disclosures. Furthermore, IFB Agro submitted that it came to know about the shareholding when it conducted an internal inquiry into the same. Thus, a petition was filed before the Company Law Board (“CLB”) to rectify the register for deleting the name of SICGILL as shareholders under section 111A of the Companies Act, 1956. As a result of the petition, SICGILL reduced its shareholding in IFB Agro below 5%, which was again contested by IFB Agro as SICGILL had never really reduced its shareholding.

During the pendency of the petition, the 2013 Act came into being, and the matter was transferred to the NCLT for adjudication. The NCLT held that there had been a violation of the SEBI regulations, and allowed IFB Agro to delete the name of SICGILL from its register to undo the mischief. It further ordered IFB Agro to buy back the shares held by SICGILL. The matter went on appeal before the National Company Law Appellate Tribunal (“NCLAT”), which then overturned the NCLT’s decision without giving adequate reasoning. Thus, the present appeal was preferred by IFB Agro in the Supreme Court

Issue and Ruling

This part analyses the scope of section 111A of the Companies Act, 1956, which was replaced by section 59 of the 2013 Act.

Ambit of Section 59 of the Companies Act, 2013

One of the principal contentions raised by the counsel for IFB Agro was that the scope of section 56 of the 2013 Act is wider than section 111A and section 155 of the 1956 Act. However, while rejecting the argument, the Court held that the rectificatory power of the tribunal is summary in nature. The rectification of the register must be founded on evident facts. The essential ingredients of such powers have been the same in each successive provision.

The Supreme Court relied on Ammonia Supplies Corporation v. Modern Plastic Containers. In this case, the Court had ruled that when the claim is based on some seriously disputed rights or title or any fact which may form the foundation of such claim, the Court shall refer such applicant to the appropriate forum if it believes that such claims do not constitute rectification but instead adjudication of some other disputed fact which is not under the rectificatory powers of the courts.

Subsequent rulings such as Standard Chartered Bank v. Andhra Bank Financial Services Ltd. and Jai Mahal Hotels (P) Ltd. v. Devraj Singh reaffirmed the ratio of the abovementioned case. The Court, in subsequent cases, observed that despite the enlarged scope of section 111A as compared to section 155 of the 1956 Act, the rectificatory powers of the courts remained summary in nature. Therefore, in cases of seriously disputed facts, the courts should relegate the matter to the most appropriate forum for investigating and adjudicating such facts.

The present case involved the interference of NCLT in the investigation and adjudication of matters involving a violation of SEBI regulations. The Court, in this regard, referred to Kesha Appliances (P) Ltd v. Royal Holding Services, wherein the Bombay High Court observed that the matters arising of violation of SEBI Regulation fall within the exclusive domain of SEBI and recourse to any court of law is barred by express prohibition contained under section 15Y and 20A of the SEBI Act, 1992. Despite the fact that it is the common law right of shareholders to apply for rectification of the register, if the same flows from the breach of takeover regulation, then undoubtedly, the matter falls within the exclusive domain of SEBI.

Therefore, in the present case, the Court noted the limited scope of rectificatory jurisdiction of the Court and jurisdiction of SEBI regarding the adjudication of matters relating to violation of SAST Regulations and PIT Regulations. Accordingly, it held that the NCLAT was right in setting aside the appeal and further opined that the tribunal should have directed IFB Agro to approach SEBI for adjudication of existing disputed facts.

Analysis & Way Forward

The Court did not delve into the question of the scope of preliminary inquiry and residual adjudicatory realm while deciding the matter under section 59 of the Act. In deciding rectification petitions, the NCLT is at least expected to decide the validity of the transfer of shares. It cannot pass a rectification order when the transfer of shares itself is void. Similarly, when a plea of mala fide, capricious and corrupt actions of management of the company is raised due to which entries in the register are not as per the law and legitimate claims of other shareholders, the burden of proof lies on the petitioner who has to discharge the burden by producing the relevant evidence. Hence, when evidence is placed before NCLT, it needs to apply its judicial mind to determine the issues involved.

Although rectificatory powers under section 59 of the Act empower the NCLT to determine the title of any person on shares, it is applicable only in non-controversial matters. It does not extend to the settlement of disputes requiring a detailed and meticulous examination of complicated questions of law and fact. Moreover, it cannot act as an investigating authority. Despite proceedings under section 59 of the Act being summary proceedings and rectificatory powers provided being limited, there exists some residual adjudicatory powers in the hands of the NCLT. In this residual adjudicatory realm, the NCLT applies its judicial mind to adjudicate rectification petitions.

Therefore, in this regard, the observation of the court in the present case that the rectification must relate to and be confined to the facts that are ‘evident and require no serious enquiry’ is ambiguous. To the extent the requirement of ’no serious enquiry’ persists, there seems to be no ambiguity, but on reading it with the term ‘evident’, it significantly reduces the scope of adjudicatory powers of NCLT under section 59 of the Act.

– Anshita Dave and Abhyudaya Yadav