Companies Act Case Law Ram Parshotam Mittal Appellants Vs M/s Hillcrest Realty

Companies Act Case Law

Ram Parshotam Mittal Appellants Vs M/s Hillcrest Realty

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

SPECIAL LEAVE PETITION (CIVIL)NOS.1069-1071 OF 2009

 

Ram Parshotam Mittal & Anr. … Appellants

Vs.

M/s Hillcrest Realty Sdn.Bhd.
& Ors. Etc. … Respondents
WITH

SPECIAL LEAVE PETITION (CIVIL) NOS.9212-9214 of 2009
J U D G M E N T

 

ALTAMAS KABIR, J.
1. These Special Leave Petitions have been taken

up for final disposal at the admission stage

itself. SLP(C)Nos.1069-1071 of 2009 have been

filed by Ram Parshotam Mittal and Mrs. Sarla

Mittal, who were the Respondent Nos.2 and 3 in
2
FAO(OS)No.282 of 2005 and Appellant Nos.2 and 3 in

FAO(OS)Nos.426 and 440 of 2008, against the common

judgment dated 14th January, 2009 passed by the

Division Bench of the Delhi High Court in the

above-mentioned appeals. SLP(C)Nos.9212-9214 of

2009 have been filed by M/s. Hillcrest Realty Sdn.

Bhd., which was the appellant in FAO(OS)No.282 of

2005 and the Respondent No.1 in FAO(OS)Nos.426 and

440 of 2008, against the same judgment.
2. Although, the Special Leave Petitions mainly

involve the interpretation and application of

Section 87(2)(b) and Section 90(2) and other

connected provisions of the Companies Act, 1956, to

the facts of this case, it is necessary to briefly

set out the said facts to appreciate the background

in which the said questions have arisen.
3. M/s. Hotel Queen Road Pvt. Ltd, which is the

proforma Respondent No.3 in all these Special Leave

Petitions, was incorporated as a Special Purpose
3
Vehicle from 23rd August, 2001 for taking over the

assets of Hotel Ashok Yatri Niwas, which was a unit

of the India Tourism Development Corporation

(hereinafter referred to as `ITDC’), and to manage

the same as part of the disinvestment process

initiated by the Government of India. After the

transfer of assets was completed through a Scheme

of Arrangement of Demerger between the ITDC and

Hotel Queen Road Pvt. Ltd., which was sanctioned by

the Government of India on 5th July, 2002, the

Government of India invited bids for the purchase

of 99.97% of the total voting equity share capital

of Hotel Queen Road Pvt. Ltd. The requisite shares

in the said Company were sold to the successful

bidder, Moral Trading and Investment Ltd., by two

share purchase agreements dated 8th October, 2002,

entered into between the President of India, Moral

Trading and Investment Ltd. and Hotel Queen Road

Pvt. Ltd. On the same date an agreement was

entered into between the President of India and
4
Hotel Queen Road Pvt. Ltd., whereby the land on

which Hotel Ashok Yatri Niwas was erected, was

leased out to the Company for 99 years.

Simultaneously, a meeting of the Board of Directors

of the Company was convened in which Mr. Ram

Parshotam Mittal, Mr. Ashok Mittal, Mrs. Sarla

Mittal and Mr. C.S. Paintal were appointed as

Additional Directors and in December, 2002, their

appointment was approved at a meeting of the

Company. A further resolution was passed to

increase the share capital of the Company from

Rs.90 lakhs to Rs.33 crores. The additional

capital was divided into 71 lakh equity shares of

Rs.10/- each and 25 lakh preference shares of

Rs.100/- each. The Articles of Association of

Hotel Queen Road Pvt. Ltd. were amended to exclude

preference shareholders from having any voting

rights.
4. Subsequently, M/s. Hillcrest Realty (a

Malaysian company) purchased 23,65,000 redeemable
5
preference shares from Hotel Queen Road Pvt. Ltd.

bearing interest at the rate of 8.5% per annum.

The Board of Directors of the Company approved the

allotment in favour of Hillcrest Realty on 5th May,

2003, subject to the condition that the allotment

would not carry any voting rights. In July, 2003,

Hillcrest Realty purchased another 4,64,290

preference shares on similar terms.
5. For a period of 2 years from the date of

purchase of the preference shares by Hillcrest

Realty, no dividend was declared or paid by the

Company. In June, 2005, Hillcrest Realty served a

notice on Hotel Queen Road Pvt. Ltd. asking the

Company to convene an Extraordinary General Meeting

(EGM) to remove Mr. Ram Parshotam Mittal and Mrs.

Sarla Mittal as Directors of Hotel Queen Road Pvt.

Ltd. and to appoint the nominees of Hillcrest

Realty in their place. Inasmuch as, Hotel Queen

Road Pvt. Ltd. declined to hold such a meeting,

Hillcrest Realty issued another notice for holding
6
an EGM on 4th August, 2005 for the same purpose.

Hotel Queen Road Pvt. Ltd. thereupon filed Suit

No.992 of 2005 before the Delhi High Court in its

original jurisdiction for an injunction to restrain

Hillcrest Realty from going ahead with the proposed

meeting and from exercising voting rights therein.

Holding that the requisition for an EGM by

Hillcrest Realty was illegal, the learned Single

Judge, by his order dated 12th August, 2005, further

held that any Resolution passed in the said meeting

was ineffective and that Hotel Queen Road being a

private company, Hillcrest Realty had no voting

rights which it could have exercised in the EGM.
6. In August, 2008, Hillcrest Realty filed Suit

No.1832 of 2008 in the Delhi High Court for a

declaration that by virtue of certain resolutions

passed by Hotel Queen Road Pvt. Ltd. on 30th

September, 2002, the Company had converted itself

from a private company to a public company. On an

interim application, being I.A. No.12164 of 2008,
7
filed in the Suit by Hillcrest Realty, the learned

Single Judge, upon holding that Hotel Queen Road

Pvt. Ltd. had fraudulently concealed the fact that

it had acquired the status of a public company in

the year 2002 and had obtained order of injunction

on 12th August, 2005 by virtue of such concealment,

allowed the application and permitted Hillcrest

Realty to vote in the meeting which was scheduled

to be held on 16th October, 2008.
7. Apart from the above, Hillcrest Realty also

filed an application, being I.A. No.12638 of 2008,

in Suit No.992 of 2005 filed by Hotel Queen Road

Pvt. Ltd., inter alia, for a declaration that Hotel

Queen Road was a Public Company and for vacation of

the order of injunction passed on 12th August, 2005.

By his order dated 20th October, 2008, the Single

Judge vacated the interim order dated 12th August,

2005, on the ground that it was a natural

consequence of the earlier order passed on 15th

October, 2008, whereby Hotel Queen Road Pvt. Ltd.
8
was held to have become a Public Company on account

of the resolutions dated 30th September, 2002.
8. Being aggrieved by the said two orders passed

by the learned Single Judge in Suit No.1832 of 2008

filed by Hillcrest Realty and Suit No.992 of 2008

filed by Hotel Queen Road Pvt. Ltd., Hotel Queen

Road Pvt. Ltd., through Mr. Ram Parshotam Mittal

and others, filed FAO(OS)Nos.426 and 440 of 2008

before the Division Bench of the Delhi High Court.

Hillcrest Realty Sdn. Bhd. had earlier filed

FAO(OS)No.282 of 2005 against the order dated 12th

August, 2005, which had been passed by the learned

Single Judge in Suit No.992 of 2005 filed by Hotel

Queen Road Pvt. Ltd.
9. All the three appeals were taken up together

for hearing and disposal by the Division Bench of

the Delhi High Court and were disposed of by a

common judgment on 14th January, 2009. Although,

the status of Hotel Queen Road, after the
9
resolutions were passed on 30th September, 2002,

which included filing of a Statement in lieu of

Prospectus and the filing of Form No.23 with the

Registrar of Companies on 8th October, 2002, along

with the text of the two special resolutions passed

by the shareholders of Hotel Queen Road Pvt. Ltd.

on 30th September, 2002, was the core issue, the

Division Bench of the High Court decided not to go

into the aforesaid question since the very same

issue was the subject matter of Suit No.1832 of

2002 filed by Hillcrest Realty Sdn. Bhd.. The

Division Bench set aside the order dated 12th

August, 2005, passed by the learned Single Judge in

I.A.No.5505 of 2005 and dismissed the same, while

holding further that the Suit itself could not be

dismissed outright on such score. Having held as

above, the Division Bench kept the question of

conversion of Hotel Queen Road Pvt. Ltd. into a

public company and acquisition of voting rights by

Hillcrest Realty in the Company, for decision in
10
the two other appeals.
10. On the question of denial of natural justice to

the appellants in the two remaining appeals, the

Division Bench held that such denial was curable

even at the appellate stage and that instead of

remanding the said appeals to the learned Single

Judge for fresh consideration, the appeals could be

taken up for decision by the Division Bench itself.

In that context, the Division Bench held that as a

cumulative preference shareholder in Hotel Queen

Road Pvt. Ltd., Hillcrest Realty was entitled to

vote at any EGM of its shareholders. The Division

Bench took into consideration the statements made

on behalf of Hillcrest Realty that since it had not

been paid dividend on its preference shares for

over two years, it became entitled to exercise

voting rights on every resolution placed before the

Company at any meeting, in accordance with the

provisions of Section 87(2) of the Companies Act

and discarding the submissions made on behalf of
11
Hotel Queen Road that by virtue of Section 90(2) of

the aforesaid Act, the provisions of Section 87(2)

thereof were not applicable to a private company,

unless it was a subsidiary of a public company, the

Division Bench decided the question on the

assumption that Hotel Queen Road Pvt. Ltd. was a

public company. The latter part of the decision of

the Division Bench was, therefore, based on the

supposition that Hotel Queen Road Pvt. Ltd. had

become a public company which entitled Hillcrest

Realty to vote at the EGM held on 4th August, 2005,

as well as the EGM scheduled for 16th October, 2008.

The Division Bench, however, appeared to be

undecided as to the course of action to be taken

and without deciding the question as to whether

Hotel Queen Road was a private company or a public

company, proceeded on the assumption that the

company was a public company and directed that

Hillcrest Realty would thenceforth be permitted to

exercise voting rights in all meetings of Hotel
12
Queen Road, subject to the decision at the trial

stage regarding the status of the company. While

disposing of the appeals, the Division Bench

awarded costs of Rs.19,76,000/- in favour of

Hillcrest Realty Sdn. Bhd. and Rs.5,94,000/- in

favour of Mr. Ashok Mittal, as per statements

submitted by them, which was to be paid within a

period of four weeks from the date of the order.
11. As mentioned hereinbefore, two different sets

of Special Leave Petitions have been filed, one set

by Ram Parshotam Mittal and Mrs. Sarla Mittal and

the other set by M/s. Hillcrest Realty Sdn. Bhd.
12. Appearing for the petitioners in SLP(C)

Nos.1069-1071 of 2009, Mr. Soli J. Sorabjee

submitted that the core issue in these petitions

was with regard to the application of Section

87(2)(b) of the Companies Act to the facts of the

case having regard to the bar imposed under Section

90(2) thereof. Mr. Sorabjee submitted that the
13
main plank of the case made out by Hillcrest Realty

rested on the two resolutions which had been passed

by Hotel Queen Road Pvt. Ltd. on 30th September,

2002, in the following terms :

“Resolved that the company be converted
into Public Limited Company and that such
consequential amendments as may be
necessary, in such a manner that no longer
the provisions of Section 3(1)(iii) of the
Companies Act, 1956 are required to be
included in the Memorandum and Articles of
Association of the Company.

Further the Board of Directors of the
Company be and is hereby authorised to do
such acts, deeds, things that may
necessary to effect the above resolutions.

Resolved that the authorised share capital
of the company be and is hereby increased
from Rs.1,00,000/- divided into 10,000
equity shares of Rs.10/- each, to
Rs.90,00,000/- divided into 9,00,000
equity shares of Rs.10/-.

Resolved further that the Memorandum and
Articles of Association of the Company be
and is hereby altered to reflect the above
increased authorised share capital of the
company.

Further resolved that the Board of
Directors of the Company be and is hereby
authorised to do such acts, deeds, things
that may necessary to effect the above
resolution.”
14
13. Mr. Sorabjee urged that the difference between

the first resolution and the other resolutions

would be clear from the very language used in

respect of the said resolutions. Mr. Sorabjee

submitted that while the first resolution was

merely an enabling resolution for the conversion of

the Company into a Public Limited Company, the

other resolutions became effective immediately. As

a result, the authorised share capital of the

Company was increased from Rs.1,00,000/- divided

into 10,000 equity shares of Rs.10/- each to

Rs.90,00,000/- divided into 9,00,000 equity shares

of Rs.10/- each and a further resolution was also

adopted whereby the Memorandum and Articles of

Association of the Company were altered to reflect

the increased authorised share capital of the

Company. Mr. Sorabjee urged that while the other

resolutions took effect instantaneously, the first

resolution was merely to enable the Company to take
15
steps for its conversion from a private company to

a public company and did not alter the nature and

character of the Company eo instanti. It was

submitted that in the absence of a positive

resolution changing the nature and character of the

Company to a Public Company, the Division Bench of

the High Court committed a serious error in

proceeding on assumptions in order to give voting

rights to Hillcrest Realty without determining the

issue and leaving the same for determination to the

learned Single Judge. Mr. Sorabjee urged that this

was a classic example of putting the cart before

the horse, which has had the effect of taking away

the management of the Company from the equity

shareholders and handing over the same to the

preference shareholders who were not entitled to

the management.
14. Mr. Sorabjee urged that the equity

shareholders had been wrongly deprived of the

management of the company based on the order passed
16
by the learned Single Judge on 15th October, 2008,

which had been passed on the supposition that Hotel

Queen Road Pvt. Ltd. had suppressed the fact that

it had acquired the status of a Public Limited

Company on the basis of the resolutions dated 30th

September, 2002. Mr. Sorabjee urged that the

question of suppression of the said resolutions did

not arise since Hillcrest Realty was fully aware of

the `conversion’ resolution of 30th September, 2002,

which was part of the Directors’ Report for the

year ended 31.3.2004, wherein it had been clearly

mentioned that the Company’s application for

conversion into a public company was pending with

the Registrar of Companies and had not attained

finality. Accordingly, with the passing of the

resolutions on 30th September, 2002, Hotel Queen

Road Pvt. Ltd. did not automatically become a

public company and the Division Bench had erred in

assuming it to be so in giving voting rights to

Hillcrest Realty which was only a preference
17
shareholder without voting rights, particularly

when the Company was ready and willing to pay the

dividend for the two years in question to Hillcrest

Realty out of funds arranged by it for such

purpose. Learned counsel also urged that along with

Form No.23, copies of the resolutions adopted on

30th September, 2002, had also been forwarded to the

Registrar of Companies and certified copies thereof

could have been obtained by Hillcrest Realty from

the office of the Registrar of Companies. Mr.

Sorabjee urged that the very basis on which the

Division Bench vacated the injunction order dated

12th August, 2005, passed by the learned Single

Judge, was non-est, as no fraud had been

perpetrated by Hotel Queen Road Pvt. Ltd. since the

conversion resolution of 30th September, 2002, was

not a final decision which would have had the

effect of converting Hotel Queen Road Pvt. Ltd.

into a public limited company with immediate

effect.
18

 

15. Mr. Sorabjee submitted that the approach of

the Division Bench of the High Court treating Hotel

Queen Road Pvt. Ltd. to be a public company was

wholly erroneous leading to the peculiar situation

which had been created in the management of the

company by giving Hillcrest Realty, a preference

share holder, the right to vote at the meetings of

the company. Mr. Sorabjee urged that since the

very basis of the order passed by the Division

Bench was fallacious, the same was liable to be set

aside and the management of Hotel Queen Road Pvt.

Ltd was liable to be restored to the equity share

holder Directors.
16. The submissions of Mr. Sorabjee were strongly

opposed by Mr. Jayant Bhushan, learned Senior

Advocate appearing for M/s. Hillcrest Realty Sdn.

Bhd. Learned counsel submitted that the crucial

question in the case was whether Hotel Queen Road

Pvt. Ltd was a private company or a public company.
19
If it was a private company and not a subsidiary of

any public company, Hillcrest Realty would not have

any voting rights. Mr. Bhushan submitted that the

resolutions adopted by Hotel Queen Road Pvt. Ltd on

30th September, 2002 were, therefore, of great

relevance in deciding the said question. Mr.

Bhushan contended that the suppression of the said

resolutions had a definite effect on the decision-

making process of the learned Single Judge while

passing an interim order on 12th August, 2005.

Learned counsel submitted that the first of the

three resolutions passed on 30.9.2002, was not of

an enabling nature as had been contended by Mr.

Sorabjee. It was submitted that the two following

resolutions could not have been passed

simultaneously with the first resolution unless a

final decision had been taken to convert Hotel

Queen Road Pvt. Ltd from a private company to a

public company. Mr. Jayant Bhushan urged that the

same would be even more evident from the fact that
20
Hotel Queen Road Pvt. Ltd also filed a “statement

in lieu of prospectus”, which is required to be

filed only when a private company converts itself

into a public company, as contemplated under

Section 44(1)(b) of the Companies Act, 1956.
17. It was urged that even if the above-mentioned

resolutions were available with the Registrar of

Companies, by not mentioning the same in its

application for injunction, Hotel Queen Road had

perpetrated a fraud by misleading the Court into

believing that Hotel Queen Road was a private

limited company, which disentitled Hillcrest Realty

from having voting rights at the company’s

meetings.
18. In addition to the above, learned counsel

submitted that the reference made in the Directors’

Report regarding the pendency of the application

for conversion of the company from a private

limited company into a public limited company, was
21
a complete misnomer, since the conversion of a

company from a private company to a public company

did not require the sanction or permission of the

Registrar of Companies. Such a conversion can only

be made upon a decision being taken by the

shareholders and only an intimation of such

decision is required to be given to the Registrar

of Companies who is required to act thereupon for

alteration of the records of the company maintained

in his office.
19. Mr. Jayant Bhushan also pointed out that the

Form 23 which had been submitted to the Registrar

of Companies makes reference to Section 31 of the

aforesaid Act which relates to the alteration of

the Articles of the Company, which lent strength to

the submission that a positive decision had been

taken to convert the company into a public limited

company and that the said resolution was not an

enabling provision as was contended by Mr.

Sorabjee. Learned counsel submitted that the same
22
would be borne out from the two subsequent

resolutions which with immediate effect increased

the share capital and the number of members beyond

50, which simultaneously took the company out of

the definition of “private company” as defined in

Section 3(1)(iii) of the Companies Act, 1956. The

Memorandum and Articles of Association were also

altered with immediate effect to reflect the

increased authorised share capital of the company

which made it abundantly clear that the first

resolution was, in fact, a definitive decision to

convert Hotel Queen Road Pvt. Ltd into a public

limited company. It was urged that once a decision

was taken to convert the company into a public

limited company, the provisions of Section 87 of

the Companies Act became operative, as far as the

company was concerned, as the bar of Section 90(2)

of the said Act was no longer applicable to the

company. Mr. Jayant Bhushan also referred to the

certificate issued by the Company Secretary on 20th
23
September, 2003, indicating that Hotel Queen Road

Pvt. Ltd. had altered its Articles of Association

in the financial year 2002-2003.
20. In support of his aforesaid submission, Mr.

Jayant Bhushan firstly referred to and relied on

the decision of the Chancery Division in Cane vs.

Jones and others, reported in 1981 (1) All ER 533,

wherein the question as to whether the Articles of

Association of a company could be altered, other

than by way of a special resolution passed at a

General Meeting, fell for decision. Upon

consideration of the provisions of Section 10(1) of

the Companies Act, 1948 (English Act), it was held

that all the Corporators of the company acting

together could do anything which was intra vires

the Company and that Section 10(1) of the Act did

not undermine that principle but merely laid down

the procedure whereby some only of the shareholders

of a company could validly alter the articles. In

the facts of that case, it was further held that an
24
agreement arrived at between the then shareholders,

though not drafted as a resolution and though not

signed by the signatories in each other’s presence,

represented a meeting of all the shareholders’

minds which was the essence of a general meeting

and the passing of a resolution on the said

agreement was effective. Drawing a parallel, Mr.

Jayant Bhushan submitted that the first resolution

adopted by Hotel Queen Road Pvt. Ltd. at its

meeting held on 30th September, 2002, was a clear

meeting of minds of the Directors of the Company

and would have effect eo instanti whereupon the

provisions of Section 44(1)(b) simultaneously came

into play. Learned counsel submitted that

simultaneously with the passing of the conversion

resolution Hotel Queen Road Pvt. Ltd. ceased to be

a private limited company and was converted into a

public company by operation of law.

21. Regarding non-disclosure of the resolutions

passed on 30th September, 2002, Mr. Jayant Bhushan
25
urged that even if the said resolutions were

available with the Registrar of Companies, it did

not absolve Hotel Queen Road from disclosing the

same before the learned Single Judge. It was

submitted that it was all the more so because it

was the case of Hotel Queen Road that the said

company was a private company and that as a result,

the provisions of Section 87(2)(b) of the Companies

Act were not applicable to the company, being

barred under Section 90(2) thereof. It was

submitted that having come to a finding that a

fraud had been perpetrated by Hotel Queen Road in

obtaining an order of injunction by suppression of

material facts, the Division Bench erred in not

dismissing the suit filed by Hotel Queen Road and

only vacating the interim order passed on 12th

August, 2005.
22. Learned counsel submitted that the Division

Bench of the High Court ought not to have left the

decision as to the company’s status as a public
26
company or a private company to the learned Single

Judge. Instead, it should have decided the same

and should have dismissed the suit. Referring to

the oft-repeated observation of Lord Denning in

Lazarus Estates Ltd. vs. Beasley [1956 (1) All E.R.

341], Mr. Jayant Bhushan submitted that no judgment

of a Court could be allowed to stand if it had been

obtained by fraud as fraud unravels everything.

Reliance was also placed on the decision of this

Court in A.V. Papayya Sastry vs. Govt of Andhra

Pradesh [(2007) 4 SCC 221], wherein also it was

observed that fraud vitiates all judicial acts

whether in rem or in personam and the judgment,

decree or order has to be treated as non-est and a

nullity, whether the same was passed by the Court

of first instance or by the final Court. It could

be challenged in any Court, at any time, in appeal,

revision, writ or even in collateral proceedings

and was an exception to the doctrine of merger and

also the provisions of Article 141 of the
27
Constitution.
23. Mr. Jayant Bhushan also referred to the

decisions of this Court in (i) S.P. Chengalvaraya

Naidu vs. Jagannath [(1994) 1 SCC 1]; (ii)

Gowrishankar vs. Joshi Amba Shankar Family Trust

[(1996) 3 SCC 310], where the view taken in

Chengalvaraya Naidu’s case was upheld; and (iii)

State of Andhra Pradesh vs. T. Suryachandra Rao

[(2005) 4 SCC 149], which reiterated the principle

that suppression of a material document in order to

gain advantage over the other side, would also

amount to a fraud on the Court.
24. Mr. Jayant Bhushan submitted that having

regard to the views expressed in the aforesaid

decisions and its own findings, the Division Bench

of the High Court ought to have dismissed the suit

itself.
25. As an off-shoot of his aforesaid submissions,

Mr. Jayant Bhushan submitted that since Hotel Queen
28
Road had not paid dividend for more than two

consecutive years, under Section 87(2)(b)(i) of the

Companies Act, Hillcrest Realty as a preference

shareholder became entitled after 5th May, 2005, to

vote on every resolution placed before the Company

at any meeting, as provided under Section 87(2)(b)

of the said Act. It was submitted that even if the

Company had not made profits and no dividend had

been declared for more than two years, dividend

would be deemed to be due for the purpose of

Section 87(2)(b), as indicated in the Explanation

thereof, which reads as follows :

“Explanation : For the purposes of this
clause, dividend shall be deemed to be due
on preference shares in respect of any
period, whether a dividend has been
declared by the company on such shares for
such period or not. – ……”
It was urged that the aforesaid Explanation

created a legal fiction that dividend would be

deemed to be due for the purpose of Clause (b) of

Section 87(2) of the Companies Act, whether a

dividend is declared by the Company on such shares
29
or not. It was submitted that the rationale for

the legal fiction was that if the company is

managed in such a manner that no profits are being

made and no dividend is, therefore, declared or

paid to preference shareholders, such preference

shareholders would then be entitled to have voting

rights on every resolution for the selecting a

better management. Learned counsel referred to and

relied on a decision of the Chancery Division in

Bradford Investments Ltd. [(1991) BCLC 224], where

a similar question arose regarding the right of

preference shareholders to vote at a General

Meeting of the Company on account of non-

declaration of dividend. On a consideration of the

relevant provisions of the Companies Act, 1985

(English Act), it was held that the deeming

provisions contained in Article 3(b)(3) regarding

“dividend deemed to be payable” meant that the

dividend was deemed payable whether or not there

were profits out of which it could be paid.
30
Consequently, as the dividend on the preference

shares was in arrears, the preference shareholders

were entitled to vote.
26. Regarding the offer made on behalf of the Hotel

Queen Road to pay the dividend to the preference

shareholders, Mr. Jayant Bhushan contended that

such offer to make payment of dividend not having

been made by the Company out of its profits, as

required under Section 205 of the Companies Act,

the same could not be accepted for the purpose of

depriving the shareholders of their right to vote

which had already accrued to them on account of

non-payment of dividend. In fact, according to

learned counsel, such an offer was itself bad on

account of the statutory bar imposed under Section

205 which makes it very clear that dividend could

be declared or paid only out of profits made by the

company.
31
27. Mr. Jayant Bhushan then referred to the

provisions of Section 43 of the Companies Act

dealing with the consequences of default in

complying with the conditions by which a company

was constituted as a private company. Learned

counsel submitted that consequent upon the

resolutions adopted on 30th September, 2002, it was

incumbent upon Hotel Queen Road to take immediate

steps for amendment of its Articles of Association

by changing its status as a private company and

having failed to do so, it attracted the

consequences indicated in Section 43 to the extent

that the provisions of the Act would apply to the

company as if it was not a private company.

Responding to Mr. Sorabjee’s objection that the

said point had not been urged either before the

learned Single Judge or the Division Bench of the

High Court, learned counsel submitted that not only

had the aforesaid point been pleaded, but the same
32
had also been argued before the Division Bench, as

would be evident from the impugned judgment itself.
28. It was lastly submitted by Mr. Bhushan that the

company ought not to have been saddled with the

costs directed to be paid by the Division Bench of

the High Court since all decisions to commence and

pursue the litigation on behalf of the company had

been taken almost single-handedly by Shri R.P.

Mittal, particularly, when the management of the

company had changed hands. Mr. Bhushan urged that

while the Special Leave Petitions filed by Ram

Parshotam Mittal were liable to be dismissed, those

filed by Hillcrest Realty should be allowed.
29. Mr. Shyam Diwan, learned Senior Counsel and Mr.

P.S. Patwalia, learned Senior Counsel, appearing

for the Respondent Nos.2 and 3, adopted Mr. Jayant

Bhushan’s submissions. In addition, Mr. Shyam

Diwan submitted that the discretionary and

equitable exercise of jurisdiction by the High
33
Court was not liable to be disturbed in a

proceeding under Article 136 of the Constitution.

He urged that the suppression resorted to by Hotel

Queen Road was sufficient for the Division Bench of

the High Court to vacate the interim order passed

earlier and even to dismiss the suit.
30. In reply to Mr. Jayant Bhushan’s submissions,

Mr. Sorabjee, while reiterating his earlier

submissions, joined issue on the question of

payment of dividend due by private arrangement

other than from out of the profits of the company,

as envisaged under Section 205 of the Companies

Act. Mr. Sorabjee contended that in Bradford

Investments Ltd.’s case (supra) no occasion had

arisen to consider a statutory provision similar to

Section 205 of the Companies Act, 1956 (Indian Act)

and reliance was placed only on one of the Articles

in the Articles of Association and was, therefore,

clearly distinguishable from the facts of this

case. Referring to the decision of the Chancery
34
Division in re Walters’ Deed of Guarantee in

Walters’ “Palm” Toffee, Limited vs. Walters [1932

W. 3978], Mr. Sorabjee submitted that in the said

decision it had been held that dividend guaranteed

to preference shareholders could also be paid by

the guarantor, who would then be subrogated to the

rights of a preference shareholder. In other words,

payment of dividend on the preference shares did

not necessarily have to be made from out of the

company’s profits, but could also be paid from

other sources.
31. In deciding the two separate sets of Special

Leave Petitions, it has to be kept in mind that

they arise out of two separate suits, one filed by

Hotel Queen Road and the other filed by Hillcrest

Realty. While Suit No.992 of 2005 was filed by

Hotel Queen Road Pvt. Ltd. for an injunction to

restrain Hillcrest Realty from proceeding with the

proposed EGM on 4th August, 2005, and from

exercising voting rights therein, Suit No.1832 of
35
2008 was filed by Hillcrest Realty for a

declaration that Hotel Queen Road had become a

public company by virtue of the resolutions passed

on 30th September, 2002. While in the suit filed by

Hillcrest Realty, the learned Single Judge

permitted the Plaintiff to vote in the meeting of

Hotel Queen Road to be held on 16th October, 2008,

in the suit filed by Hotel Queen Road, the learned

Single Judge also passed an interim order

prohibiting any effect being given to the

resolutions passed in the EGM on 4th August, 2005,

upon holding that Hotel Queen Road being a private

company, Hillcrest Realty could not have exercised

voting rights in the EGM.
32. As will be evident from the pleadings in both

the suits, the reliefs sought for in the two suits

are dependent on the question as to whether by the

resolutions adopted on 30th September, 2002, Hotel

Queen Road had lost its private character and had

been converted into a Public Company. While the
36
issues are the same in the two suits, the interim

orders passed therein operate in contradictory

fields. On the one hand, the learned Single Judge

has passed an order on the basis that Hotel Queen

Road was a Private Limited Company in which

Hillcrest Realty, as a preference shareholder, had

no voting rights and, on the other, an interim

order has been passed on the basis that the said

company was, a Public Company and by operation of

Section of 87(2)(b) of the Companies Act, 1956,

Hillcrest Realty, as a preference shareholder, was

entitled to vote at all the meetings of the

company. In an attempt to reconcile the two

contradictory positions, the Division Bench of the

High Court, without deciding the core issue,

proceeded to dispose of the appeals before it by

treating Hotel Queen Road to be a Public Company,

and based upon such presumption proceeded further

to hold that on account of non-payment of dividend

on its cumulative preference shares for two years,
37
Hillcrest Realty became entitled to vote at the

meeting of the company under the provisions of

Section 87(2)(b) of the Companies Act, 1956.
33. Although, as pointed out by Mr. Sorabjee, the

language of the first resolution was different from

the language of the two following resolutions, and

at first glance appears to militate against each

other, on a closer look at the three resolutions

taken one after the other, it is not difficult to

discern that they were all part of the same

thinking process or meeting of minds of the

shareholders. Without the first resolution being

accepted as a final decision taken by the company

to convert itself from a private company into a

public company, there could be no occasion for the

subsequent two resolutions to have been passed.
34. We are unable to appreciate the methodology

adopted by the Division Bench of the High Court,

but we are in agreement with the end result by
38
which the Division Bench had set aside the interim

order dated 12th August, 2005, passed in Suit No.992

of 2005. In our view, apart from endorsing the

view of the learned Single Judge that the interim

order of 12th August, 2005, had been obtained by

suppression of material facts, in order to decide

the appeals, the Division Bench had to arrive at a

prima facie finding as to whether by virtue of the

resolutions adopted on 30th September, 2002, Hotel

Queen Road had shed its private character and had

been converted into a public company with all its

consequences.
35. From the materials on record, we are prima

facie of the view that by the said resolutions, a

final decision had been taken by Hotel Queen Road

to convert itself into a public company with

immediate effect without having to wait for any

decision to be rendered by the Registrar of

Companies who, in any event, had no authority to

make any decision in that regard. The very fact
39
that Form 23 was filed along with the resolutions

dated 30th September, 2002, coupled with the fact

that a Statement in lieu of Prospectus, which is

required to be filed by a private company when it

converts itself into a public company, was filed on

behalf of Hotel Queen Road, is sufficient for the

purpose of arriving at a prima facie conclusion

that Hotel Queen Road had altered its status and

had become a public company even though the

necessary alterations had not been effected in the

records of the Registrar of Companies. We are

unable to agree with the contention canvassed on

behalf of Hotel Queen Road that till such time as

the records of the Registrar of Companies were not

altered to show that Hotel Queen Road had become a

public company, it could not be treated as such. It

is not the records of the Registrar of Companies

which determines the status of a company but

whether it falls within the definition of a

“private company” or “public company” as defined in
40
Section 3(1)(iii) and 3(1)(iv) of the Companies

Act. On the other hand, the records of the

Registrar of Companies reflect the status of the

Company as per the information received from the

company in accordance with the provisions of the

aforesaid Act. Having regard to the definition of

“private company” in Section 3(1)(iii), as soon as

the number of its members exceeds 50, it loses its

character as a private company. Since in the

instant case shares were said to have been allotted

to 134 persons on 30th September, 2002, on which

date the resolutions were passed by Hotel Queen

Road Pvt. Ltd., the company lost its private

character requiring the subsequent resolutions to

be passed regarding alteration of the share

capital.

36. Whichever way we look at the three resolutions

passed one after the other on 30th September, 2002,

it appears to have been the intention of the

company to convert itself from a private company to
41
a public company and that the same was effected by

the three resolutions passed on 30th September,

2002.
37. Then again, the offer to pay dividends from a

private source and not out of the company’s

profits, is not contemplated under Section 205 of

the Companies Act. The decision referred to by Mr.

Sorabjee in the Walters’ Deed of Guarantee in

Walters’ “Palm” Tofee, Limited’s case (supra) had

not been required to take into consideration a

provision similar to Section 205 of the Companies

Act, 1956. The said decision is, therefore, of no

help to the petitioners’ case, particularly when

the language of the Section is clear and

unambiguous. The moment the resolutions were

passed by the company on 30th September, 2002, the

provisions of the Companies Act became applicable

and by operation of law, Hotel Queen Road

simultaneously ceased to be a private limited

company and under the conditions prescribed in the
42
Act, Hillcrest Realty acquired voting rights in the

meetings of the company by operation of Section

87(2)(b) and Section 44 of the said Act. The right

of a preference shareholder to acquire voting

rights is also indicated in clear and unambiguous

terms in the Explanation to Section 87(2)(b).
38. Since the question as to whether Hotel Queen

Road ceased to be a private company upon the

resolutions being passed on 30th September, 2002, is

the crucial issue for decision in both the two

suits referred to hereinabove, it would not be

proper for this Court to delve into the question

further. However, for the purpose of disposing of

these Special Leave Petitions, we are prima facie

of the view that by virtue of the resolutions dated

30th September, 2002, Hotel Queen Road had become a

public company thereby attracting the provisions of

Section 87(2)(b) of the Companies Act, 1956, upon

the bar under Section 90(2) thereof having been

lifted. A natural consequence is that in the event
43
dividend had not been declared or paid for a period

of two years as far as Hillcrest is concerned, the

Explanation to Section 87(2)(b) would come into

play thereby giving Hillcrest Realty, as a

cumulative preference shareholder, the right to

vote on every resolution placed before the Company,

at any meeting, in keeping with Clause (i) of

Section 87(2)(b) of the aforesaid Act.
39. In keeping with the aforesaid principle, while

dismissing the Special Leave Petitions filed by

Hotel Queen Road and Hillcrest Realty, we make it

clear that the observations made in this judgment

are of a prima facie nature only for disposal of

the Special Leave Petitions and should not

influence the final decision in the suits, where

the question relating to the status of Hotel Queen

Road has been left open for decision. We, however,

request the High Court, functioning as the Trial

Court, to dispose of the suits at an early date so
44
that the management and affairs of Hotel Queen Road

are not left in a state of uncertainty.
40. The Special Leave Petitions are, accordingly,

dismissed, but there will be no order as to costs.
________________J.
(ALTAMAS KABIR)

 

________________J.
(CYRIAC JOSEPH)
New Delhi
Dated:20.07.2009

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