The Supreme Court set aside NCLT and NCLAT rulings in a share transfer case, emphasizing the need for proper scrutiny of evidence and application of the preponderance of probabilities standard when deciding rectification petitions under the Companies Act.

In the case of Chalasani Udaya Shankar and others VS Ms Lexus Technologies Pvt. Ltd. and others, the Supreme Court overturned the National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT) decisions, finding that they failed to adequately examine the evidence in a share transfer dispute. The Court underscored the importance of a thorough inquiry in rectification proceedings under Section 59 of The Companies Act of 2013 and remanded the case back to the NCLT for reconsideration.

Brief of the Case:
The appellants (Chalasani Udaya Shankar and others) claimed to have purchased a majority stake in Lexus Technologies Pvt. Ltd. from the second respondent (Mantena Narasa Raju). They alleged that despite executing share transfer deeds and receiving share certificates, their names were omitted from the company's register of members. They filed a petition seeking rectification of the register under Section 59 of the Companies Act of 2013.

The NCLT and NCLAT Proceedings:
The NCLT initially granted an interim order in favor of the appellants based on the evidence they presented, including email correspondence and share transfer documents. The NCLT's interim order acknowledged discrepancies in the respondents' versions of events and stressed the need for a thorough inquiry. However, the final order issued by the NCLT dismissed the appellants' petition, seemingly disregarding its own interim findings and accepting the respondents' claims without requiring substantial proof. The NCLAT upheld the NCLT's decision, concluding that the appellants had failed to prove their case.

Supreme Court's Analysis and Decision:
The Supreme Court, in its judgment, emphasized the crucial role of evidence examination in rectification proceedings under Section 59 of the Companies Act of 2013. The Court found that both the NCLT and NCLAT erred in their handling of the case. The NCLT, instead of adhering to its initial interim observations that highlighted inconsistencies in the respondents’ claims, proceeded to dismiss the appellants’ petition without compelling the respondents to substantiate their version of events. The NCLAT also failed to recognize the discrepancies and accepted the respondents’ version of the loan transaction without proper scrutiny.

Scope of Section 59 and Rectification Proceedings: The Supreme Court clarified the scope of Section 59, emphasizing that it allows for rectification when there is an error or omission in the company's register of members. The Court highlighted that the NCLT's role is to determine whether "sufficient cause" exists to warrant rectification, which necessitates a thorough examination of the evidence presented.

The Court criticized both the NCLT and NCLAT for failing to properly assess the evidence. The NCLT relied heavily on the second respondent's version of events without requiring him to substantiate his claims of a loan transaction. It also failed to adequately consider the documentary evidence presented by the appellants, including share transfer deeds, share certificates, and email correspondence.

"Moonshine" Disputes: The Court referred to its previous judgment in Ammonia Supplies Corporation (P) Ltd. vs. Modern Plastic Containers Pvt. Ltd. and others, which established that if a dispute raised in a rectification application is found to be frivolous or "moonshine," the court should not hesitate to exercise its power under Section 59 of the Act of 2013.

Preponderance of Probabilities: The Court emphasized the need to apply the principle of preponderance of probabilities when evaluating evidence in such cases. It stated that conclusions should be drawn based on what a reasonable person would infer from the available facts. The Court found that neither the NCLT nor the NCLAT applied this principle effectively.

The Apex Court held that "Thus, if the application for rectification, in effect, includes projected claims which do not come within the purview of rectification and the Company Court feels that the civil court/regulatory body would be the more appropriate forum, jurisdiction under Section 155 of the Act of 1965 would not be exercised." The Supreme Court ultimately allowed the appellants’ appeals, setting aside the judgments of both the NCLT and NCLAT. The Court remanded the case back to the NCLT for a fresh examination on merits, urging a time-bound resolution given the significant delay since the petition was first filed.

Coram: Justice Sanjay Khanna and Justice Sanjay Kumar.
Between: Chalasani Udaya Shankar and others VS Ms Lexus Technologies Pvt.
Date of Judgment: 09-09-2024