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by Anirudh Krishnan
The provisions granting the Company Law Board (“CLB”) the power to rectify a share register have undergone a metamorphosis over the years and the amendments, as observed by the Bombay High Court, have not been happily worded. As a result, there exist contradictory decisions that deal with the scope of these powers.
Prior to 1991, there were two provisions that granted the power of rectification of share register:
a) Section 155 – Section 155, as it read then, entitled a person aggrieved or any member of a company or a company to apply to the court for rectification of the company’s register of members if the name of any person was, without sufficient cause, entered in it or, after having been entered in it, was, without sufficient cause, omitted therefrom. The court was, in such circumstances, entitled to order rectification of the register.
b) Section 111- The Central Government had the power to order rectification in favour of aggrieved investors as regards the transfer of shares or debentures of a public or a private company. This was in the nature of an appeal from the decision of the Board of Directors.
Subsequently, pursuant to the recommendation of the Sachar Committee, Section 155 was omitted and its contents were incorporated into Section 111 (as substituted by the Companies (Amendment) Act, 1998 with effect from 31/05/1991). Consequently, the power to order rectification was solely vested in the Company Law Board (“CLB”) and this power was applicable vis a vis both private and public companies.
In 1996, along with the enactment of the Depositories Act, 1996 (with effect from 20/09/ 1995), the Parliament sought to introduce an exclusive regime to govern public companies. Consequently, sub-section 14 was added to Section 111 of the Act, which defined a company, under Section 111 to mean a private company including a private company declared to be a public company by virtue of Section 43A of the Act.
By the same Amendment made pursuant to the Depositories Act, Section 111A was inserted to the Companies Act. Section 111A was made applicable to companies other than those referred to in Section 111(14), in other words it was made applicable to public companies.
Section 111A(3), initially provided that the CLB was empowered to order rectification of register of members in the case of transfers made in violation of the provisions of the Securities and Exchange Board of India Act, 1992 or Sick Industrial Companies (Special Provisions) Act, 1985. Subsequently all other statutory violations were also brought in as grounds for ordering rectification vide the Depositories Related Laws (Amendment) Act , 1997 with effect from 15/01/1997.
However, it is noteworthy that an application under Section 111A can be made under more limited circumstances than an application under Section 111. Illustratively, under Section 111(4), the right to file an application is provided to any “aggrieved person” whereas Section 111A(3) provides such a right only to a “depository, company, participant or an investor”. Similarly, the remedy provided under Section 111A(2) (i.e. rectification in case of unjustified refusal by the Board to modify the register of shares) is limited to cases of transfer of shares and does not extend to transmission of shares whereas the equivalent remedy under Section 111, i.e. under Section 111(2) extends to transmission as well. It therefore appears that the right to seek the remedy of rectification before the CLB is narrower if the Company is a public Company to which Section 111A applies.
Yet, Section 28 of the Depositories Act, which was enacted at the same time as the 1996 Amendment that introduced Section 111A(3) states that the Depositories Act is not intended to derogate any existing rights. On this basis, the Single Judge of the Bombay High Court in Finolex Industries v. Anil Ramchand Chhabria (“Finolex”) held that Sections 111 and 111A(3) must be read conjunctively and consequently whatever rights are available with regard to a private company must also be available with regard to a public company. The Bombay High Court observed:
“From a close scrutiny of the provisions of the Depositories Act, 1996, it becomes clear that the legislature intended to rectify the defects in the old system of ownership and transfer of shares. It also becomes manifest that the Depositories Related Laws are to be in addition to the laws which are in existence. Thus the intention of the Legislature was to preserve all the remedies which existed for the shares held in Public Companies….A perusal of this section(i.e. Section 28 of the Depositories Act) clearly shows that the provisions of the Depositories Act are in addition to and not in derogation of any other law for the time being in force relating to the holding and transfer of securities….By enactment of this sub-section (i.e. Section 111(14)) the remedy of appeal and rectification provided to the shares held in Public Companies under section 111(2) and 111(4) has been omitted. Therefore, provision for the continuance of the remedies under section 111(2) and (4) had to be made in the Depositories Act, 1996….These remedies were sought to be provided by adding section 111(A) to the Companies Act, 1956. But mistakes seem to have crept in at every stage of drafting the necessary provisions…..A perusal of section 111A(1) together with section 114 makes it clear that section 111 is now limited in its operation to Private Limited Companies. But at the same time a perusal of section 111A(2) shows that no remedy of appeal has been provided to any kind of shares held in Public Companies…Thus these provisions instead of providing additional benefits, have actually taken away, either completely or partly, the rights and remedies already available. Clearly, therefore, section 111A(2) and (3) are not in addition to the laws for the time being in force but are in derogation thereof. This is not the intention of the Parliament as expressed in section 28 of the Depositories Act… The interpretation would have to be such that section 111A provides additional benefit to the shareholders in Public Companies which they already enjoyed and continue to enjoy under section 111 of the Act.…The interpretation cannot be such as to deny the right of appeal to shareholders of a Public Company on the basis of the mode of transfer or transmission.”
However, there also exist contradictory judgments. For instance, a Single Judge of the Bombay High Court in Gopal Krishna Baliga v. Poonal Industrial Limited (“Gopal Krishna Baliga”), held that it was clear “from the provisions of sub-section (14) of section 111 of the Companies Act that…the application of section 111 is restricted only to private companies”.
Finolex v. Gopal Krishna Baliga
In my view, Gopal Krishna Baliga reflects the correct position of law for the following reasons:
a. The decision of the Single Judge of the Bombay High Court in Finolex completely ignores the prior decision of the Single Judge of the Bombay High Court in Gopal Krishna Baliga and is hence per incurium.
b. Later observations of the Division Bench of the Bombay High Court in Shirish Finance & Investments Ltd v. M. Sreenivasulu Reddy to the contrary impliedly overrule the law as laid down in Finolex.
c. When the Legislature, which is aware of the existing position under Section 111, makes a conscious departure and omits the words “transmission” from Section 111A(2), the purpose of such omission is defeated if it is held that the two Sections must be construed conjunctively and hence “transfer” includes “transmission” (the same rationale would apply to all other remedies available under Section 111 that have not been incorporated into Section 111A).
(i) An argument that the omission of “transmission” from Section 111A leaves a party remediless is not true as there still exists a remedy before the civil court. Courts have explicitly held that Sections 111 and 111A do not exclude the jurisdiction of the civil court (as held in Sreenivasulu Reddy v. Kishore R Chhabria, Sahara Fabrics v. Kailash).
d. The High Court, in Finolex, erred in interpreting Section 28 of the Depositories Act, which states that “The provisions of this Act shall be in addition to, and not in derogation of, any other law for the time being in force relating to the holding and transfer of securities.”
This provision only means that the enactment of the Depositories Act does not override the provisions of any other enactment and that the Depositories Act must be read harmoniously with existing legislation. However, the Bombay High Court in Finolex wrongly construed this provision to mean that all rights available to a party (under Section 111 of the Companies Act) prior to the enactment of the Depositories Act ought to be available to them even after the enactment of the Depositories Act, notwithstanding any amendment to Section 111 itself.
Furthermore, the Bombay High Court failed to note that the enactment and wording of Section 111A did not in any way limit the rights of any party. Parties continue to have a right of rectification, with respect to both private companies and public companies, before the civil Courts (as held in Sreenivasulu Reddy v. Kishore R Chhabria, Sahara Fabrics v. Kailash). By making the wording of Section 111A narrower than that of Section 111, the right to rectification is not being narrowed down or derogated in any way. It is only the forum before which certain aspects of this right can be adjudicated that is being modified. It is trite that there exists a distinction between a substantive right and procedural remedy and that the existence of a forum for enforcement of one’s right is not a substantive right in itself (See Yadav Motor Transport Co. v. Jagdish Prasad Bhimgani Ward, Kota).
While Finolex has found favour with numerous CLB’s in the country, the Finolex v. Gopal Krishna Baliga debate has yet again arisen and is before a Division bench of the Kerala High Court. The Kerala High Court decision, would, hopefully put the debate to rest.
Anirudh Krishnan is a graduate of NALSAR and completed his BCL at the University of Oxford. He is a qualified solicitor, England and Wales and is currently an advocate in the Madras High Court. He is also Chief Editor,Justice R.S. Bachawat’s Law of Arbitration and Conciliation. He can be contacted at mail [dot] anirudhkrishnan [at] gmail [dot] com.