NCLT Chennai Rectifies Share Register, Declares 2012 Transfer Fraudulent: Upholds Shareholder Rights Under Section 59 Companies Act - 2025-03-10

Laws, Courts & Judgments.

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NCLT Chennai Rectifies Share Register, Declares 2012 Transfer Fraudulent

Chennai, India - In a significant ruling for shareholder rights, the National Company Law Tribunal (NCLT), Division Bench – II, Chennai, has declared a 2012 share transfer as fraudulent and directed Kovai Purani Finance Private Limited to rectify its Register of Members. The order, pronounced on February 18, 2025, by a bench comprising Judicial Member Jyoti Kumar Tripathi and Technical Member Ravichandran Ramasamy , comes in a case filed under Section 59 of the Companies Act, 2013.

Case Overview: Battle for 100 Shares

The case, CP (CA)/ 120 (CHE)/ 2023, was initiated by S. Narayanaswamy (Petitioner) against Kovai Purani Finance Private Limited (Respondent 1) and several individuals including Dr. Nalla Palaniswami (Respondent 5). Narayanaswamy claimed that 100 shares rightfully belonging to him, since the company's incorporation in 1990, were fraudulently transferred to Respondent 5 in 2012. He sought a declaration that the transfer was illegal, rectification of the company's register to reflect his ownership, and issuance of share certificates.

Arguments Presented: Petitioner Claims Fraud, Company Cites Valid Transfer

Petitioner’s Stance:

Represented by Sarah Abraham, Advocate and M/s. A.K. Mylsamy & Associates LLP, the Petitioner argued that:

• He subscribed to 100 shares in 1997 but never received share certificates, which the company allegedly misused for a fraudulent transfer.
• Until 2011, annual returns acknowledged his shareholding. He discovered the fraudulent transfer to Respondent 5, a relative of other respondents, in 2020.
• He never signed any transfer deed and received no consideration for the shares.
• The company failed to produce the share transfer deed, claiming it was destroyed due to efflux of time, which the petitioner argued was a lame excuse.
• The alleged transfer violated the company's Articles of Association (AoA), which mandates pre-emptive rights for existing shareholders.

Respondent’s Defense:

Represented by Dr. K. S. Ravichandran, PCS, the Respondents contended:

• The share transfer to Respondent 5 was valid, approved in a 2012 board meeting, and consideration was paid.
• The Petitioner, a professionally qualified individual and former employee of a group company, should have been aware of the transfer and his removal from the shareholder list for a long time.
• Share transfer deeds were indeed destroyed due to efflux of time as per company record preservation rules.
• The petitioner's sudden request for share certificates in 2019, after 22 years, was suspicious and lacked merit.

Tribunal's Reasoning: Upholding AoA and Onus of Proof

The NCLT bench meticulously examined the submissions and legal provisions, referencing the Companies Act of 1956 and 2013, the company’s AoA, and relevant rules. Crucially, the Tribunal addressed the issue of limitation, concluding that the petition was filed within the permissible timeframe, considering the petitioner's engagement with the Registrar of Companies (RoC) and the COVID-19 lockdown period.

The Tribunal emphasized the significance of the company's Articles of Association in regulating share transfers. Citing the Supreme Court's judgment in V.B Rangaraj V. V.B. Gopalakrishnan and Ors. , the NCLT highlighted that share transfers in private companies must strictly adhere to the AoA. In this case, the AoA provided pre-emptive rights to existing shareholders, a procedure the company seemingly bypassed in the alleged transfer.

> “It is a settled law that any share transfer has to be in accordance with the AoA of the Company and acts which were not done as per AoA of the Company would be null and void.”

The burden of proof, the Tribunal asserted, lay with the company to demonstrate a genuine share transfer, especially when allegations of fraud are raised. Referring to the NCLAT, New Delhi’s ruling in Company Appeal (AT) No. 51 of 2017 , the bench underscored that the onus is on the respondents to substantiate a valid transfer with necessary documents like share transfer forms and deeds.

> “The onus of proving that the shares have been indeed transferred by the petitioner for valuable consideration is on the respondents.”

The Tribunal found the company’s explanation of ‘destroyed transfer deeds due to efflux of time’ unconvincing and insufficient to discharge their burden of proof. The bench noted the absence of key documents such as share transfer forms, stamped transfer deeds, proof of consideration payment, and receipts from the petitioner. The annual returns presented by the company were deemed unreliable due to inconsistencies and lack of supporting evidence.

Decision and Implications: Victory for Shareholder Transparency

Ultimately, the NCLT concluded that Kovai Purani Finance Private Limited failed to prove a valid and legal transfer of the Petitioner's shares. The Tribunal declared the 2012 transfer of 100 shares to Respondent 5 as null and void.

The order mandates:

• Declaration of the 2012 share transfer as fraudulent, illegal, null, and void.
• Rectification of the Register of Members of Kovai Purani Finance Private Limited to reinstate the Petitioner as the owner of 100 shares.
• Issuance of share certificates to the Petitioner for the said shares.

This judgment serves as a reminder of the critical importance of adhering to Articles of Association in share transfers and the evidentiary burden companies bear when facing allegations of fraudulent transfers. It reinforces shareholder rights and the necessity for companies to maintain proper records and demonstrate the legitimacy of share transactions. The case underscores the recourse available to shareholders under Section 59 of the Companies Act, 2013, when they believe their shareholding rights have been violated through fraudulent means. ```