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3/8/10

Shares transfer - allegations of fraud etc. - remedy?

Share transfers:

We all know the settled law that the Private Company can have restrictions in its Articles restricting the right of its shareholders in transferring the shares. There can not be any such restriction in the articles of Public Companies as it is expressly prohibited under law. The Private Company can refuse to register the transfer or transmission of shares on certain grounds and the scope of refusal of registration of transfer or acceptance of transfer are very limited in Public Companies as everybody knows.

Share transfers – allegations of fraud, forgery and fabrication of documents etc.:

But, what happens if the majority in a Company or the Company fabricates certain documents and shows as if certain shares are transferred illegally. The scope for fabrication of documents and committal of fraud has become very less with the introduction of e-filing as it will be very difficult for the companies to explain before the competent forum as to why it could not comply with the stipulation contained in the Act as to the filing of forms with the authorities like Registrar of Companies (ROC). Before introduction of MCA scheme or e-filing mechanism, the issue of non-filing of required forms with the Registrar of Companies has not been considered so serious practically. The listed Public Companies are supposed to adhere to the conditions of listing agreement and plethora of SEBI regulations and as such it is very rare to see violation of the provisions of the Act or the corporate regulations in listed Public Companies.

Despite making many things easier with the MCA scheme or e-filing mechanism, still, many Private Limited Companies or the closed held Public Companies are not strictly adhering to the provisions of the Act and it is very difficult to conclude that an act has not happened just because the respective e-form is not filed with the Registrar of Companies (ROC). Many contend that the filing of e-forms or the required forms with the authorities like the Registrar of Companies (ROC) is a procedural exercise and not a violation of substantial law. Despite having the provisions and regulations very clear, still, we have not reached a stage where a particular action of the Company can be set-aside or declared illegal on the sole ground that the respective form or e-form is not filed with the Registrar of Companies (ROC). Many companies still do not bother about filing the forms with the Registrar of Companies (ROC) as required and I have seen many such cases practically. There can be justification in not filing the required forms with the Registrar of Companies when the company is literally closed its transactions though not wound-up or chosen to go for voluntary winding-up or getting the name struck-of as provided. But, it is interesting to note that even the companies and especially private and closely held Public Companies do neglect the compliance of the provisions of the Act and we are seeing all these cases.

The remedy under Companies Act, 1956:

Many Private Limited Companies or the closely held Public Companies are still function as proprietorship concerns normally and the entire shareholding rests with the family members. Again, there tend to be lot of groupism in the Private Companies or the closely held Public Companies. With the groupism and the issue of one dominating other, there will be many hostile actions and counter-actions between the groups or among the shareholders. There are cases where it is clearly alleged that the shares are transferred without the knowledge of the shareholders and at times, shareholders allege that their signatures are forged and documents are fabricated in order to show that the shares are transferred. These actions by the majority or the controlling people in the company result in filing of an application under section 397/398 of the Companies Act, 1956 alleging oppression and mismanagement and also the petitioner before the Board specifically pray that the registrar of members maintained by the Company is to be rectified. Then, the Company Law Board may have to decide on the issue of forgery and fabrication of documents and a decision will come only when the petition under section 397/398 is finally disposed of. It is also true that an application under section 111 or section 111A can be filed without any reference to section 397/398, but, I have referred section 397/398 with my experience of looking at the things practically.

There exist a complicated proposition that the Company Law Board can not look into the disputed facts and can not decide the issues like fraud and forgery. Whether such a proposition is sustainable and what are the implications of the proposition, is a different issue altogether. Some of the precedents on the issue of Board’s jurisdiction to look into the issues of forgery and frauds in connection with the transfer of shares are referred to hereunder.

Few Precedents on the Board’s power to decide on the issue of forgery and fabrication of documents with respect to transfer of shares:

The Company Law Board, in Tarsen Kansil Vs. Dev Spinners Limited, (2001) 103 Comp Cas 835, observed that “on the facts, that there were serious allegations of forgery, fraud, collusion, manipulation and misrepresentation. The petitioner was claiming that the original share certificates were in his possession and could not have been delivered to the respondent-company along with the transfer deeds whereas the case of the respondents was that the originals were placed before the share transfer committee and had subsequently been removed from the records of the company by the petitioner as they were kept at his residence which was the registered office of the company at the relevant time. Similarly the meeting of the board of directors at which the said resolution was approved was said to have been attended by the petitioner and his signature obtained therein whereas the petitioner’s case was that his presence had been fraudulently shown. The petitioner had further alleged that his signature on the resignation letter resigning from the post of director of the respondent-company had also been forged. The petitioner alleged that share transfer deeds which were used for the purpose of showing that the petitioner had transferred the shares in question were not meant for transfer of the said shares but were meant for transfer of shares of some other listed companies and respondent No.3 had fraudulently used the said blank and signed transfer deed for getting the shares transferred and also managed to get the petitioner’s signature attested on the said transfer deed by the bank manager and witnessed by B by misrepresentation. With regard to consideration paid for the said shares the petitioner’s case was that respondent No.3 fraudulently got an amount of Rs.1,50,000 deposited in the bank account of the petitioner by means of two cheques and being the authorised signatory of the said account withdrew the said amount on the very next day, and therefore, the shares having a face value of Rs.10 per share were alleged to have been sold for Rs.1 per share and even the said consideration was not received by the petitioner. Such matters could not be decided by the Company Law Board in summary jurisdiction and if the petitioner was so advised he could approach the civil court”. Further, the Company Law Board, in Dr.Mahesh Batra and others. Vs. Gujaraj Beverages (P) Ltd. and other, (2004) 5 Comp LJ 550 (CLB), observed that “section 114 (4) of the Companies Act, 1956, under which provisions the instant company petitions have been filed, does not lay down any limitation. However, it is well settled that the same must be filed within a reasonable time and must not suffer from laches. The question whether any fraud was played and whether the petitioner had the knowledge of the transfer can not be decided without going into the merits of the case and perusing the material on record. Therefore, the petition can not be thrown out at the threshold on the ground of limitation”. In the same judgment, the court went on observing that “having regard to the nature of the allegations made by the parties in this case and the disputed question raised on the facts, such disputed questions can not be decided by the Company Law Board in the summary jurisdiction under section 111 of the Companies Act, 1956. Such questions, which are involved in the present case, can be decided before the civil court on the basis of the oral and documentary evidence adduced by the parties in support of their respective case. In view of the same it is not necessary to go into the respective allegations or the other arguments raised and noticed in the present proceedings”. There are many judgments which support the proposition that the disputed facts can not be decided by the Company Law Board. The Company Law Board, in Bipin K.Jain and others Vs. Savik Vijay Engineering Private Limited and others (1998) 91 Comp Cases 835, was pleased to observe “that, if the company had entered the petitioners’ names on the basis of the transfers effected and later removed their names without sufficient cause, then the contradicting stand taken by the petitioners on the one hand and the respondents on the other, relating to various documents relied on by the petitioners, raised complicated questions of fact. If complicated questions of law or facts arise in a section 111 petition which can not be adjudicated on the basis of documents made available, but could be decided only on trial by evidence, the Company Law Board would relegate the matter to a suit. This was a fit case in which to do so”. Further, the Company Law Board in, Bharat K.Gajjar and another Vs. Castrol India Limited and others, (2003) 115 Comp Case396, observed that “proceedings under section 111A of the Act are in the nature of summary proceedings, serious questions of dispute pertaining to title could not and ought not to be tried in summary manner and a suit would only be the proper remedy”. Further, the Company Law Board in, Gopalkrishna Sengupata Vs. Hindustan Construction Company,(2002) 112 Comp Cases 166, observed that “that the Board could not act as an investigating authority to investigate whether the signature of the transferor and the transferee on the transfer deed were forged or fabricated, and the same could not be determined in the summary proceedings before the Company Law Board”.

What is the remedy?

When we accept the proposition that the Company Law Board can not decide the disputed facts and the Company Law Board follows summary procedure having its own limitations, then, obviously, the aggrieved can only approach the traditional Civil Court. But, the Civil Court obviously lacks specialization in dealing with the Company disputes and I am always of the opinion that specialization is required to deal with company disputes in view of the stakes involved, the complications and other issues.

What will be position if the proposed Bill becomes an Act?

The proposed Companies Bill contains a specific bar on the jurisdiction of the Civil Court though there is no much difference in wording between the powers of the Board as provided under the Companies Act, 1956 and the powers of the Tribunal in the proposed Companies Bill. Its true that MCA scheme or the e-filing mechanism has reduced many difficulties in corporate functioning and also administration, but, still there tend to be problems with the Private Companies or the Public Limited Companies as many are least bothered to comply with the provisions of the Act or the corporate regulations in letter and spirit.

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