Civil Courts Cannot Decide Shareholder Disputes Requiring Rectification Of Register: Bombay High Court

On 6 April, the Bombay High Court held that only the NCLT can decide disputes over shareholding or rectification of the register of members, and civil courts have no jurisdiction under Section 430 of the Companies Act, 2013.

A Bench of Justice R.I. Chagla heard Notices of Motion in a suit filed by the son and ex-wife of a deceased shareholder of Panache Securities Pvt Ltd, who alleged that individuals claiming to act on behalf of the company fraudulently transferred shares, removed a director, and illegally sold its only asset, the Harileela Property in Mumbai.

The Court held:

“In matters where the NCLT enjoys exclusive jurisdiction, civil courts cannot entertain suits seeking reliefs that effectively require rectification of the register of members, even if the plaintiffs claim other ancillary remedies,” the Court observed.

The plaintiffs, the son and ex-wife of the deceased Rajiv Samani, claimed that they originally held 50% shareholding each in Panache and served as its directors. They noted that Panache's principal asset was the Harileela Property. Following the deceased's death in 2013, disputes arose over control of the company and its assets.

They further alleged that the defendants fraudulently transferred shares, altered the company's management, and wrongfully removed the ex-wife (2nd plaintiff) as director. They also claimed that the defendants used a fabricated board resolution to authorize the sale of the Harileela Property.

Despite objections and legal notices, the defendants sold the property to the 4th defendant and subsequently mortgaged it. Aggrieved, the plaintiffs instituted the suit seeking protection of the property.

The defendants raised a preliminary objection, arguing that Section 430 of the Companies Act, 2013 bars civil courts from exercising jurisdiction over matters within the exclusive domain of the NCLT, rendering the suit non-maintainable.

The plaintiffs countered that the suit, seeking declaration and injunction, remains maintainable before a civil court. They contended that rectification of the register of members is only a consequential relief and that disputes involving serious allegations of fraud and disputed ownership require full adjudication by a civil court, beyond the limited jurisdiction of the NCLT.

The defendants argued that the relief sought essentially involves rectifying the register of members to reflect the plaintiffs as Panache shareholders, which falls exclusively under the NCLT's jurisdiction. Relying on Section 430 of the Companies Act, 2013, they maintained that civil courts have no jurisdiction in matters the Tribunal can determine.

On the issue of jurisdiction, the Court examined rival contentions regarding the bar under Section 430. Referring to the Supreme Court's judgment in Shashi Prakash Khemka (Dead) v. NEPC Micon, the Bench observed:

“It has been held by the Supreme Court in Shashi Prakash Khemka (Supra) that the effect of the aforesaid provision is that in matters in respect of which the power has been conferred on the NCLT, the jurisdiction of the Civil Court is completely barred. Further, the Supreme Court has held in the said judgment that relegating the parties to a Civil Suit would not be the appropriate remedy, especially considering the manner in which Section 430 of 2013 Act is widely worded. In that case, in view of subsequent developments, the Supreme Court adopted the appropriate course of action viz. to relegate the Appellants to seek remedy before the NCLT under the 2013 Act.”

The Court further held that seeking a declaration as a shareholder, despite the company's records, effectively seeks rectification of the register, which falls within the NCLT's exclusive jurisdiction and cannot be adjudicated by a civil court.

On merits, the Court noted that the plaintiffs sought a declaration claiming a share in the Harileela Property through their alleged Panache shareholding. However, it observed that the property stood in Panache's name, and the plaintiffs had not sought a declaration establishing ownership of the property in the deceased's name. It observed:

“Further, the Plaint filed by the Plaintiffs is replete with inconsistencies as it is pleaded therein that by virtue of being a shareholder, Plaintiff No.2 is entitled to a share in the assets of Panache including the Harileela Property.”

Regarding the appointment of a court receiver, the Court held:

“Apart from these contentions, requiring to be examined by the Tribunal in view of the bar under Section 430 of the 2013 Act, there is prima facie no merit in these contentions which would warrant the appointment of a Court Receiver.”

The Court concluded:

“In the present case, considering the reliefs sought for and which include rectification of the register and the removal of Defendant No.3 as a Director, these cannot be granted by a Civil Court in view of the bar under Section 430 of the 2013 Act and such bar is not excluded in the present case where the Plaintiffs have pleaded fraud and forgery and which according to them is an open and shut case of fraud.”

Accordingly, the Court dismissed the notices of motion.

For Plaintiffs: Advocates Archit Jaykar, Hetal Jobanputra and Dhwani Parekh

For Defendants: Advocates Shanay Shah, Hamza Lakhani, Aseem Naphade, Nausher Kohli, Aditya Raut, Shyamdhar Upadhyay and Divyang Shukla