NCLAT Delhi Rejects Plea To Restore 1.35 Lakh Sintex Shares, Says Sec.59 Companies Act Can't Revive Equity

The New Delhi Bench of the National Company Law Appellate Tribunal (NCLAT) on 21 August dismissed an appeal filed by Titus Babu challenging the cancellation of his 1,35,000 equity shares in Sintex Industries Limited (SIL), observing that an approved Resolution Plan extinguishes pre-existing equity shareholding and binds shareholders and members

A Bench of Judicial Member Justice Mohd Faiz Alam Khan and Technical Member Naresh Salecha held that Section 59 of the Companies Act, 2013, which provides for rectification of a company's register of members, cannot be used to revive shareholding extinguished under an approved Resolution Plan or to seek substantive compensation. It held:

“We note that Section 59(2) of the Companies Act 2013 confines the power of the Tribunal, on an appeal for rectification, to dismissing the appeal, directing registration of a transfer or transmission, or directing rectification together with damages "sustained by the party aggrieved" that is, damages flowing from the wrongful entry or omission itself, such as loss occasioned by delay in recording a valid transfer.

The jurisdiction under Section 59 of the Companies Act 2013, though it may extend to questions incidental and peripheral to rectification, remains anchored to rectification and does not become a vehicle for adjudicating substantive monetary claims of the magnitude sought here.”

Babu had purchased 1,35,000 shares of SIL between October 2017 and January 2023. The National Company Law Tribunal (NCLT), Ahmedabad approved the Resolution Plan on 10 February 2023, following which the entire equity share capital of SIL was cancelled without consideration. SIL was subsequently delisted from the stock exchanges in March 2023.

Aggrieved by the cancellation, Babu approached several authorities, including the National Securities Depository Limited (NSDL), National Stock Exchange (NSE), Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI) and grievance redressal platforms. He was advised to seek relief before the Tribunal.

He then filed a Company Appeal before the NCLT, Ahmedabad under Section 59 of the Companies Act, seeking recognition of his membership rights. The NCLT dismissed the petition as not maintainable, leading to the present appeal before the NCLAT.

Babu contended that he had been a “Member” of SIL since 2017 and that membership rights were distinct from shareholding. He argued that the Resolution Plan recognised members and therefore had to be implemented in a manner that protected and recognised his rights.

He further claimed that only promoter-group shareholders were assigned NIL liquidation value, while public members such as himself should have been compensated. He submitted that payments under the Resolution Plan were made to employees, creditors, guarantors and other stakeholders, but no payment was made to the members or shareholders of SIL despite members being specifically recognised under the approved Resolution Plan.

SIL countered that the Resolution Plan uniformly cancelled all pre-Corporate Insolvency Resolution Process (CIRP) equity capital, leaving no surviving rights. It contended that Babu could not seek restoration of shares, rectification of records, compensation or any consequential relief after the shares had been extinguished.

The company further submitted that membership and shareholding are synonymous in a company limited by shares and that membership ceases once the corresponding shares are extinguished. It argued that the proceedings were an indirect attempt to challenge the Resolution Plan and the approval order dated 10 February 2023 after both had attained finality.

The NCLAT noted that the cancellation of shares was a direct consequence of the Resolution Plan approved under Section 31 of the Insolvency and Bankruptcy Code (IBC) and therefore was not “without sufficient cause”. It further held that “member” and “shareholder” are synonymous in companies limited by shares. It observed:

“Read together, these provisions cover every person who held equity shares of SIL prior to implementation of the Resolution Plan, including the Appellant and do not carve out a residual class of "Members" whose shareholding survives extinguishment while only "promoter-group Shareholders" are affected.”

The Tribunal noted that Sections 2(55) and 88 of the Companies Act are definitional and administrative provisions, while Sections 378B and 378ZB apply only to Producer Companies and therefore had no relevance to SIL. It further held that Rule 5(3) was procedural and did not create any substantive rights.

It held that Section 59 does not empower the Tribunal to award substantive compensation, direct issuance of fresh shares or grant damages of the nature claimed by Babu. It observed:

“It does not contemplate a free-standing claim for compensation computed as a proportion of funds infused by a resolution applicant into the corporate debtor, nor a direction for issuance of fresh equity share capital, nor damages for mental suffering.”

Further, the Bench held that Section 238 of the IBC gives the Code overriding effect over inconsistent provisions of other laws and that Section 32A reinforces the principle that an approved Resolution Plan gives the corporate debtor a fresh start free from pre-existing claims. It concluded that Babu had no surviving membership or enforceable rights in SIL independent of his extinguished shareholding.

Accordingly, the NCLAT dismissed the appeal.

For Appellant: Advocate George Mathai

For Respondent: Advocates Raheel Patel, Himanshu Satija, Anshul Rao and Suryash