Manipulation Of Statutory Records, Bogus Book Entries To Usurp 100% Shareholding Amount to Oppression: NCLAT

The National Company Law Appellate Tribunal (NCLAT) in Delhi has recently held that manipulating statutory records to usurp shareholding and stripping a company's assets through bogus book entries amount to continuing acts of oppression and mismanagement under the Companies Act, 2013.

A bench of Judicial Member Justice Yogesh Khanna and Technical Member Ajai Das Mehrotra observed that such acts "strike at the root of the corporate structure and ownership" of the company.

Dismissing an appeal filed by Vivid Solutions Pvt. Ltd. and its associated directors, the bench upheld the Mumbai bench of the National Company Law Tribunal's (NCLT) order declaring the purported transfer of the respondents' shares and the company's immovable property illegal, null and void.

The bench observed, "The manipulation of statutory records to usurp 100% shareholding, and the stripping of the Company's sole asset by way of a bogus book entry without registered conveyance, without stamp duty, and while continuing to collect rent on the very asset claimed to have been transferred strike at the root of the corporate structure and ownership of Appellant No.1 Company, and constitute continuing acts of oppression and mismanagement of the gravest kind..."

The appellants, led by Rajendra Tulsidas Katore, claimed they had acquired 100% shareholding and management control of Vivid Solutions Pvt. Ltd. from Mukesh Jain, Sushil Jain and Sonu Jain under a Memorandum of Understanding (MoU) dated December 21, 2012.

They claimed to have paid Rs 3 crores towards the agreed consideration and another Rs 1 lakh towards the face value of the shares. They relied on board resolutions, Registrar of Companies (ROC) filings and financial statements to contend that they had become the company's directors and shareholders.

According to the appellants, the respondents resigned as directors in 2014. They also handed over share transfer forms, share certificates and other company records. The appellants said the subsequent statutory filings reflected them as the company's directors and shareholders.

The respondents disputed the claim. They argued that no valid transfer of shares had taken place because the mandatory procedure under Section 56 of the Companies Act had never been followed.

The tribunal agreed. It noted that no share transfer deed in Form SH-4 had ever been executed. It also found that no share certificates were endorsed or delivered. The mandatory requirements governing the transfer of shares were therefore not complied with.

The bench also relied on contemporaneous ROC records from 2014 to 2017. Those records consistently showed the respondents as the company's 100% shareholders. Referring to inconsistencies in the appellants' own records, the bench observed, "This internal inconsistency, on the Appellants' own record, exposes the alleged transfer of both the shareholding and the Property as an afterthought engineered years later, and not a transaction that ever actually took place."

The appellants also claimed that the company's sole immovable property had been transferred to Ukay Metal Industries Pvt. Ltd. against a loan of Rs 3 crores. The tribunal rejected the contention. It noted that Ukay Metal was not a party to the MoU and could not derive any rights under it. It further found that the amount was consistently reflected in Ukay Metal's books as an unsecured, interest-free loan, and never as consideration for the purchase of shares or the property.

The bench held that the alleged transfers did not satisfy the mandatory legal requirements for transferring either shares or immovable property. There was no valid share transfer under Section 56 of the Companies Act.

There was also no registered conveyance as required under Section 17 of the Registration Act, 1908 read with Section 54 of the Transfer of Property Act, 1882.

Rejecting the appellants' challenge to the NCLT's jurisdiction, the bench observed, "It is a case where the Appellants seek to find title on documents that are void ab initio for non-compliance with the mandatory procedure prescribed under Section 56 of the Companies Act (for shares) and under Section 17 of the Registration Act, 1908 read with Section 54 of the Transfer of Property Act, 1882 (for the Property), and which were, in any event, created and filed belatedly as a counterblast to criminal proceedings already initiated against the Appellants. The Ld. NCLT was, therefore, fully within its jurisdiction to adjudicate the issue."