The Telangana High Court (“Telangana HC”), vide its judgment dated April 24, 2024, in the case of Cherukuri Ramakrishna v. Sandhya Hotels Private Limited and Others [C.C.C.A. No. 57 of 2023], upheld the jurisdiction of civil courts in matters pertaining to determination of title of shares under the Companies Act, 2013 (“Companies Act”).

Facts

Cherukuri Ramakrishna (“Appellant”) was a shareholder in M/s. Sunbeam Hospitality Private Limited (“SHPL”). The Appellant, along with other shareholders of SHPL, entered into a memorandum of understanding, Share Purchase Agreement (“SPA”) and a takeover agreement with Sandhya Hotels Private Limited and two others (collectively referred to as “Respondents”) for transfer of their shares in favour of the Respondents. The parties agreed that the Respondents would pay INR 20,04,50,700 to the Appellant. Admittedly, the Respondents paid only a part of this amount and the balance remained outstanding.

Resultantly, the Appellant filed a plaint in the City Civil Court at Hyderabad for mandatory injunction and for re-transfer of 10,197 shares. The Respondents thereafter filed an application for rejection of the plaint. The City Civil Court observed that Clause 8 of the SPA provided for arbitration as a dispute resolution mechanism and thus operates as a bar on the court from entertaining the suit and stated that the parties must be relegated to arbitration. Thus, the City Civil Court allowed the application of the Respondents and directed for return of the plaint for filing before a proper forum (“Impugned Order”).

The present appeal was filed by the Appellant challenging the said Impugned Order.

Issue

Whether the National Company Law Tribunal (“NCLT”) or the City Civil Court had jurisdiction over the dispute regarding the transfer and title of shares.

Arguments

Contentions of the Appellant:

The Appellant argued that Section 430 (Civil court not to have jurisdiction) of Companies Act read along with Sections 58 (Refusal of registration and appeal against refusal) and 59 (Rectification of register of members) of Companies Act, would have no application to the facts of the instant case, contrary to what was held by the City Civil Court. The prayer for re-transfer of the shares from the Respondents to the Appellant is a matter which is entirely within the domain of a civil court.

The Appellant had also proposed to file an appropriate application for appointment of arbitrator under Section 11 (Appointment of Arbitrators) of the Arbitration and Conciliation Act, 1996.

Contentions of the Respondent:

The Respondent submitted that the dispute could not be referred to arbitration in terms of Clause 8 of the SPA executed between the parties since the Appellant was only one of the several ‘transferors’ in the SPA.

The Respondent mentioned that Section 58 of Companies Act deals with refusal of registration by private and public companies to register the transfer of securities and provides for appeal by a transferee to NCLT against such refusal by a private and a public company. Further, Section 59 of Companies Act provides for rectification of the register of members of a company where the name of a person has been entered without sufficient cause or where rectification is required for omissions or delay. Therefore, there is a complete bar in the Companies Act against civil courts from entertaining any suit which is within the domain of the NCLT/National Company Law Appellate Tribunal (“NCLAT”).

Observations of the Telangana HC

The Telangana HC noted that Clause 8 of the SPA indicated that the parties agreed to refer any dispute arising from the SPA with regard to transfer of shares from the Appellant to the Respondents to arbitration. It was hence open to the City Civil Court to take the point of arbitrability of the dispute and pass necessary orders consequent to such finding. The Telangana HC did not go into the merits of the arbitration application and observed that the appropriate court would decide the fate of such application.

The Telangana HC noted that Section 430 of Companies Act constitutes a bar on a civil court from entertaining any suit, the subject matter of which is within the determination of NCLT/NCLAT. The object of Section 430 of Companies Act was to demarcate the zones of adjudication of NCLTs/NCLATs. The Telangana HC observed that Section 430 of Companies Act was enacted to discourage courts from passing injunctions or interfering with actions/orders taken or passed by the NCLT/NCLAT.

Denying the Respondents’ argument, the Telangana HC noted that the sections relied upon by the Respondents are not applicable to the facts of the present case. The Telangana HC observed that Sections 58 and 59 of Companies Act deals with refusal of registration of the transfer or transmission of shares/securities and appeal against refusal and rectification of register of companies pursuant to certain defaults. It is evident that these provisions would only become relevant once the title to the shares/securities has been decided.

The Telangana HC observed that the decision-making with regard to the title of shares is within the domain of the civil court and not the NCLT/NCLAT. This would also be clear from the proviso to Section 58(2) of Companies Act, which reads that any contract or arrangement between two or more persons in respect of transfer of securities shall be enforceable as a contract. Moreover, Section 58(5) (a) and (b) defines the powers of the NCLT by delineating the orders which may be passed by the NCLT in respect of directing registration of transfer/transmission by the company or rectification of the register or even directing the company to pay damages to the aggrieved party.

The Telangana HC also took note of the wrongful and illegal acts of the Respondents in terms of failing to pay the total consideration for the transfer of shares and unjustly enriching themselves in the process which were described by the Appellant in its plaint.

Decision of the Telangana HC

The Telangana HC, while setting aside the Impugned Order and allowing the instant appeal, held that Sections 430, 58 and 59 of Companies Act have no application to the statements in the plaint and the relief sought for therein and will not operate as a bar to the suit filed by the Appellant in any manner.

VA View:

In this judgment, the Telangana HC has rightly upheld the jurisdiction of civil courts
to determine the matters pertaining to transfer and title of shares under the Companies Act. The Telangana HC observed that NCLT/NCLAT is not the forum to decide on the acts of omission or commission on the part of the Respondents and more importantly on the issue of re-transfer of the shares in favour of the Appellant or even the title of the shares pending or on completion of the transfer.

The Telangana HC also correctly noted that the facts of the present case were concerned with individual rights of the Appellant and the Respondents. The Telangana HC held that only a civil court is empowered to decide disputes of this nature.

For any query, please write to Mr. Bomi Daruwala at [email protected]

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