1. Fraudulent issuance of duplicate share certificates and subsequent transfer to a third party following procedural lapses in address change and verification. (Para 2 , 3 )
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2018 Supreme(SC) 931
SUPREME COURT OF INDIA
ROHINTON FALI NARIMAN, INDU MALHOTRA, JJ.
Adesh Kaur - Appellant
Versus
Eicher Motors Limited & Ors. - Respondents
Civil Appeal Nos. 19426-19427 of 2017
Decided On : 03-07-2018
Important Points
The main legal point established is that the company is liable for the acts of their agents and must adhere to procedural requirements for issuance of shares, and victims of fraud should not be unfairly relegated to civil suits.
Subject
Civil Law - Company Law
Act Referred
Headnote
Fraud - Company Law - Companies Act, Section 59, RTI Circular No. 1 dated 09.05.2001 - The court discussed the provisions of the Companies Act, Section 59, and the RTI Circular No. 1 dated 09.05.2001, highlighting the liability of the company for the acts of their agents and the procedural requirements for issuance of duplicate shares.
Fact of the Case:
The appellant, a resident of Punjab, had acquired 903 equity shares in a company in 1994-95. Another individual impersonated the appellant, changed the address, and obtained duplicate share certificates through forgery. The appellant discovered the fraud in 2014 and filed a Company Petition before the National Company Law Tribunal (NCLT). The NCLT acknowledged the procedural lapses and granted relief to the appellant. However, the decision was set aside by the Appellate Tribunal, which directed the appellant to pursue a civil suit.
Finding of the Court:
The court found that the appellant was a victim of fraud and the company had not followed due procedure in issuing duplicate shares. The Appellate Tribunal's decision to relegate the appellant to a civil suit was set aside, and the company was directed to rectify its register and demat records.
Issues: The main issues were the fraudulent acquisition of duplicate share certificates, the liability of the company for procedural lapses, and the appropriate remedy for the appellant.
Ratio Decidendi: The court held that the company was liable for the acts of their agents and that the procedural requirements for issuance of duplicate shares under the Companies Act and RTI Circular No. 1 dated 09.05.2001 were not followed. The court also emphasized that the appellant should not be relegated to a civil suit in such clear cases of fraud.
Final Decision: The appeals were allowed, the Appellate Tribunal's decision was set aside, and the company was directed to rectify its register and demat records to restore the appellant's position.
Legal Category Hierarchy
Advocates:
Advocate Appeared:
For the Appellant : Mr. K.V. Viswanathan, Mr. K.V. Balakrishnan, Mr. S.M. Sundram, Mr. Ravi Raghunath, Mr. K.V. Mohan
For the Respondents: Mr. Shyam Divan, Mr. Anoop Dawar, Mr. Rajesh Ranjan, Mr. Sumit Teterrwal, Mr. Pratap Venugopal, Ms. Surekha Raman, Ms. Niharika, Ms. Kanika Kalaiyarasan, M/s. K.J. John And Co, Mr. Tushar Mehta, Mr. Bharat Singh, Mr. Arvind Kumar Sharma, Ms. Swati Ghildiyal, Mr. Mukesh Kumar Maroria
Advocate Appeared:
For the Appellant : Mr. K.V. Viswanathan, Mr. K.V. Balakrishnan, Mr. S.M. Sundram, Mr. Ravi Raghunath, Mr. K.V. Mohan
For the Respondents: Mr. Shyam Divan, Mr. Anoop Dawar, Mr. Rajesh Ranjan, Mr. Sumit Teterrwal, Mr. Pratap Venugopal, Ms. Surekha Raman, Ms. Niharika, Ms. Kanika Kalaiyarasan, M/s. K.J. John And Co, Mr. Tushar Mehta, Mr. Bharat Singh, Mr. Arvind Kumar Sharma, Ms. Swati Ghildiyal, Mr. Mukesh Kumar Maroria
Table of Contents
2. Whether the appellant must pursue a civil suit due to pending criminal investigations or if the register should be rectified immediately. (Para 4 , 5 , 6 , 7 )
3. The matter is a clear case of fraud where mandatory procedural safeguards for issuing duplicate shares were ignored, rendering the subsequent transfer void. (Para 8 , 9 )
4. Transfers of shares based on fraudulently obtained duplicate certificates, issued in violation of mandatory procedural guidelines, are void in law. (Para 10 )
5. Appellate Tribunal order set aside; NCLT order reinstated; Company and depository directed to rectify share register and demat records. (Para 10 , 11 , 12 )
6. What is the legal effect of issuing duplicate share certificates in violation of mandatory procedural guidelines?
If mandatory procedures—such as notifying stock exchanges and publishing newspaper advertisements—are not followed, the issuance is improper, and any subsequent transfer of those shares to a third party is void in law. (Para 9 , 10 )
7. Can the rectification of a share register be deferred pending the outcome of criminal proceedings in cases of fraud?
No. In clear cases of fraud where the rightful owner's entitlement is not denied, the owner should not be deprived of their assets while awaiting the outcome of criminal investigations. (Para 3 , 8 )
8. How should rectification be handled when shares have been dematerialized?
The company must rectify its register regarding physical certificates, and the concerned depository must rectify the demat records to restore the rightful owner's position. (Para 11 )
JUDGMENT :
R.F. Nariman, J.
The present case discloses a very sordid state of facts.
2. The appellant before us is a resident of Punjab, and had acquired in all 903 equity shares in the respondent No. 1 Company. This acquisition took place way back in the year 1994-95.
3. It appears that sometime in 2012, another Ms. Adesh Kaur, who is a resident of Mumbai impersonated the appellant and requested respondent No. 2 to change the address from Punjab to Mumbai. It is not disputed before us that the standard procedure to be followed was not followed by respondent No. 2, and the aforesaid change of address was despite the requirements of Circular No. 1 dated 09.05.2001. The impersonator then went on to execute an indemnity bond by forging the appellant’s signature for issue of duplicate share certificates of the 903 equity shares mentioned above. This being done, on 28.09.2012, Respondent No. 2 issued duplicate certificates in favour of the impersonator who, in turn, on 10.12.2012, transferred the said shares to one Vikas Tara Singh, respondent No. 8, resident of Malad, Mumbai by using the forged signature of the appellant. At this stage, it is important to note that respondent No. 8, though served in the present proceedings, has not appeared either before the Tribunal or before the Appellate Tribunal and has not appeared before us. The appellant, sometime in 2014, came to know through the Company Secretary of Respondent No.1 that duplicate share certificates had been given to somebody else who had subsequently transferred them to a third party. As soon as she became aware of the fraud that was perpetrated on her, the appellant requested the Company to issue revalidated fresh share certificates for the said 903 equity shares on 17.09.2014. Since this was not done, despite repeated reminders for the same, a Company Petition was filed on 31.07.2015 before the Company Law Board, which was then taken up under the Amended Act by the National Company Law Tribunal. In a significant order that was passed by the NCLT on 09.11.2016, the NCLT recorded that it was acknowledged, both by the Company as well as by the SEBI, that procedural aspects and due care were not adhered to in the process of issuance of duplicate shares, as otherwise such fraud would easily have been unearthed. In the order passed by the NCLT, the NCLT adverted to the aforesaid facts and afforded relief to the appellant in the following terms:
“The objection of Respondent No. 1 that the case in hand cannot be adjudicated by the Tribunal is a frivolous attempt to escape any liability and or grant relief to the petitioner. This Bench fails to understand why the petitioner should resort to a civil court in order to prove her title. Apart from her oral testimony and her original share certificates, there is little else to be adduced in evidence even in a Civil Suit. She has her original certificates in hand. The respondents are aware of the fraudulent acts perpetuated on her and have even initiated criminal proceedings. There is no reason for the petitioner to be deprived of her assets for the outcome of the criminal investigation or wait for the criminal to be brought to book. Her documents and her entitlement are not denied to by the respondents. Under such circumstances, vague denial to escape any liability and to suggest that the petitioner initiates a Civil Suit is viewed as an attempt not to redress the grievance which has primarily arisen out of the fraud played by the employees of the Respondent Company or their Agents. Apart from guidelines of Respondent No. 3 that unequivocally make the Respondent Company liable for the acts of their Register cum Share Transfer Agents, the law on the point is clear that the Principals are liable for the acts of their agents.”
4. The NCLT then went on to state that the original share certificates, which were still in physical form with the appellant, could get demated after due confirmation from the register which would be carried out pursuan
