TMI Blog2009 (8) TMI 710X X X X Extracts X X X X X X X X Extracts X X X X ..... company, or (4) the provision for the premium payable on the redemption of any redeemable preference securities or any debentures of the company. In the circumstances, the court is of opinion that the plaintiff would have to approach and seek approval under sections 100 and 101 of the Act. As a result of the above discussion, it is held that though the application is maintainable, the defendant cannot be granted the relief of injunction, as sought. However, in view of section 78, the plaintiff is directed to seek approval, in accordance with law, in respect of the expenditure proposed by it, for the purposes which do not fall within section 78(2). The plaintiff shall file an undertaking, and also cause an undertaking to be filed by the company (which is a party to the present suit, and of which the plaintiffs are in control at present), to comply with these directions, in the form of affidavits, within one week. - IN CS (OS) NO. 1832 OF 2008 AND I.A. NO. 9920 OF 2009 - - - Dated:- 18-8-2009 - S. RAVINDRA BHAT, J. Dr. A.M. Singhvi, U.K. Chaudhury, Raju Ramachandran, Sandeep Mittal, R.P. Mittal, Ms. Sarla Mittal, Deepak Singh, Parvinder Singh, Rudreshwar Singh and Pra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany) purchased 23,65,000 redeemable preference shares from HQRL bearing interest at 8.5 per cent per annum. The board of directors of HQRL approved the allotment on 5-5-2003 subject to the condition that the allotment did not carry any voting rights. This was followed (in July 2003) by a further purchase of 4,64,290 preference shares by Hill Crest Realty on similar terms. 5. In June, 2005 Hill Crest Realty served a notice on HQRL to hold an Extraordinary General Meeting ( EGM ) to remove Mr. Ram Parshotam Mittal and Mrs. Sarla Mittal as directors of HQRL and instead to appoint the nominees of Hill Crest Realty. In response, HQRL declined to hold the EGM, inter alia , on the ground that the notice was illegal. This led Hill Crest Realty to issue another notice to HQRL purporting to hold an EGM on 4-8-2005 for the same purpose as above. The notice sent by Hill Crest Realty led HQRL to file Suit No. 992 of 2005 on the file of this court, for injunction to restrain Hill Crest Realty from going ahead with the proposed meeting and exercising voting rights in the proposed meeting. By an order dated 12-8-2005 a learned Single Judge of the court held that the requisition for an EGM ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ame date, vacated the interim order dated 12-8-2005 on the ground, inter alia, that it was a natural consequence of the earlier order dated 15-10-2008. That decision was appealed against before the Division Bench, being FAO (OS) No. 440 of 2008. 9. The Division Bench disposed of all the three appeals, by its judgments dated 14-1-2009. It, inter alia , observed as follows, in the operative portion of the order : "84. The position as it stands today is that there is a subsisting special resolution of 30-9-2002 intending to "convert" Hotel Queen Road (P.) Ltd. into a public company. This special resolution has not been withdrawn ; it has simply been lying dormant for the last several years. To an extent, it has been acted upon by Hotel Queen Road since Form 23 was filled up and submitted to the Registrar of Companies on 8th October, 2002 and the statement in lieu of prospectus was also filed with the said Registrar on 12th December, 2003. It was the duty and responsibility of the management of Hotel Queen Road either to give full effect to the special resolution or to completely abandon it. It has chosen to manage a halfway house without any apparent advantage to itself and c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eral years, it gains nothing and may continue to lose if the present situation continues. The balance deserves to be set right and this is possible only if Hill Crest Realty is now permitted a say in the affairs of Hotel Queen Road." 10. The above judgment was carried in appeal, by special leave, to the Supreme Court, which dismissed it, and affirmed the judgment of the Division Bench. The Supreme Court gave detailed reasons, for its conclusions, in the judgment and order in Ram Parshottam Mittal v. Hill Crest Realty Sdn. Bhd. SLP Nos. 1069-70/2009, dated 20-7-2009. The court observed that : "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 Act, Hill Crest 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 qu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore at such short notice, thus, establishing that the plaintiff s real motive is that the third defendant should become the single largest equity shareholder, in the company. Left undisturbed, the resulting equity shareholding would change the picture, irrevocably, whereby the applicants holding along with associates, would be to the tune of Rs. 9 crore, and that of the plaintiff, would be pushed up to Rs. 15.30 crore. The applicants say that this would prejudice them, at the trial in the suit, to decide whether the company is a public limited company or a private company is yet to take place. It is claimed that the actual equity base enhancement through the impugned rights issue is only to the tune of Rs. 15 crore, and the balance Rs. 45 crore is the premium, which would not benefit the subscribers, in any manner. Learned counsel for the applicant also submits that the situations where the premia can be used by the company, do not exist; consequently, the fresh infusion is unnecessary, and would lead to changes of a fundamental character, in the functioning of the company, which should not be permitted by this court. 12. The applicants claim that this court should impose rest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lication, is entirely alien to the plaintiffs object for seeking reliefs in the suit, and the application in essence seeks substantial reliefs based subsequent developments that occurred after the suit was filed, which may arguably constitute independent causes of action. 16. It is argued that the plaintiff was consciously put into management by the Division Bench, due to the prima facie findings about the company having become a public limited company, and also in view of the operation of law. It is submitted that the company has an exposure of over Rs. 30 crore which have to be repaid to the banks, in discharge of its debts, and that it needs fresh capital to upgrade its systems and operationalise the hotel. It is submitted that the plaintiff was a substantial investor, having put in over Rs. 30 crore, at the time when the Moral group placed its bid for taking over HQRL. In these circumstances, the defendant, who had frittered away precious resources, and did nothing to improve the hotel or the property when the previous management was in-charge, cannot seek to obstruct in the smooth functioning of the management under the pretext that irreversible alterations in the compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 00. Special resolution for reduction of share capital. (1) Subject to confirmation by the court, a company limited by shares or a company limited by guarantee and having a share capital, may if so authorised by its articles by special resolution, reduce its share capital in any way ; and in particular and without prejudice to the generality of the foregoing power, may ( a )extinguish or reduce the liability on any of its shares in respect of share capital not paid-up ; ( b )either with or without extinguishing, or reducing liability on any of its shares, cancel any paid-up share capital which is lost, or is unrepresented by available assets ; or ( c )either with or without extinguishing or reducing liability on any of its shares, pay off any paid-up share capital which is in excess of the wants of the company ; and may, if and so far as it necessary, alter its memorandum by reducing the amount of its share capital and of its shares accordingly. (2) A special resolution under this section is in this Act referred to as a resolution for reducing share capital. 101. Application to court for confirming order, objections by creditors, and of list of objecting creditors. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... creditors." 19. A detailed recapitulation of the facts is unnecessary for a decision on the present application. The controversy which had to be considered in interlocutory proceedings, pertinently for the purpose of deciding this application, hinged in effect, albeit on a purely prima facie consideration, of the resolutions of 30-9-2002, along with the effect of section 87(2) of the Act. On a detailed discussion, of the soundness of the relative position of the parties (herein) the Division Bench, in its judgment, held that the company was deemed a public company. This is evident from a discussion in paras 63 and 71 to 77 of the judgment ; the Division Bench also examined the effect of the articles of association of the company, on Hill Crest s entitlement to vote, in paras 78-79 of its judgment. These constituted the backdrop for the relief granted, in paras 84-86 of the judgment. As a result, today, the plaintiff is in effect, controlling HQRL. 20. The first question which the court has to address is whether the present application for ad interim injunction, at the behest of the defendant, as it were is maintainable. The earliest decision of a High Court in India ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s application for temporary injunction was allowed, upon a finding that the true relationship between the parties was that of agent and principal, and not those between a sub-tenant and tenant. The Division Bench, after noticing various decisions of English and Indian courts, held that : It will be noticed, therefore, that a defendant can move for an injunction against the plaintiff without filing a counter-claim or suit or cross-action provided such a claim to relief arises out of the plaintiff s cause of action or is incidental to it. Halsbury s Laws of England, vol. 24, 4th edn. para 1048 refers to these cases. It is, as already stated, significant that the principle was applied by the English courts in the main suit itself for they say that relief can be claimed in the suit by the defendant by filing an application and without a counter-claim or cross-action or by issuing a writ. The condition is that it should arise out of the plaintiff s cause of action or is incidental to it. In fact, in Collison v. Warrell [1910] 1 Ch.D 812, both plaintiff and defendant relied upon the same agreement, and it was held that defendant was entitled to apply for an injunction against th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... include a declaration that certain Board resolutions are contrary to law, and are void, and further, that the company should be permanently restrained from commencing business operations, till issue of ownership is undecided. The interlocutory determinations, flowing from the Division Bench s judgment, as affirmed by the Supreme Court s judgment, has resulted in the plaintiffs wresting control, albeit as an interim arrangement. The defendants anxieties, in a sense (whatever be the merits of the case, finally) are understandable. The reliefs they seek are closely twined with the nature of injunction that the plaintiff seeks. Therefore, the court clearly discerns the temporary injunctions sought by the defendant, through the present application, as incidental to, or part and parcel of the plaintiff s cause of action, for its reliefs. In these circumstances, the court is of the view that the present application for temporary injunction, is maintainable, at the behest of the defendant. 24. In its opposition to the application, the plaintiff contends that the defendant-company has left considerable liabilities, which have to be discharged. It relies on averments, showing that even ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est that the contemporaneous market value at least as on 11-8-2009, was Rs. 143 ; the defendants rely on a valuer s assessment. The court cannot, in the absence of any contrary material, arrive at a different conclusion, or hold that such valuation is either exaggerated or artificial. The plaintiffs position also is that after the allotment of the rights issue, and infusion of new shares, the value of each share would be Rs. 78. In these circumstances, the court discerns no infirmity in the plaintiff s proposal of a rights offer, with the premium suggested. In respective of the final outcome of the suit, the amounts would enrich the company; the applicant-defendants being significant shareholders, would also benefit. It is ultimately their choice of either exercising whatever their rights are, in that issue. If the court eventually agrees with them and holds the company to be a private company, the applicant s position as dominant shareholders would continue. If on the other hand, they choose not to exercise the full extent of their rights, in the proposed offer, and ultimately succeed, the consequences of their not exercising the choice at this stage, (though in a sense irreversi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany need not seek the approval/confirmation of the company court. It is only in case the company desires to apply share premium account for any other purpose, it has to approach the company court for confirmation. The learned Company Judge had also rightly observed that there could be myriad situation where the company may have to use share premium account or reserve or reserve fund provided such use is authorised by the articles of association and must be within the four corners of law." The judgment Ushacomm India (P.) Ltd., In re. [2006] 2 CHN 473 held that: "9. Section 78 provides for a separate account known as securities premium account for premium collected on issue of securities. The securities premium account is not share capital of the company. Share capital as defined in section 86 of the said Act provides for only two kinds of share capital, namely, equity share capital and preference share capital. By reason, however, of section 78(1) of the said Act, the provisions of the said Act with regard to reduction of share capital are applicable to the securities premium Account. 10. Notwithstanding anything in section 78(1) of the said Act the securities premium ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cumstances of the case, it thinks proper so to do direct that the provisions of section 100(2) shall not apply as regards any class or any classes of creditors. In the instant case, the proposed reduction does not involve any diminution of liability or payment to any shareholder." 29. The above observations emphasise the concern for shareholders rights, and ensuring that the liability of the company, towards the value of their share, is not diminished. The procedure envisioned under the Act apparently has safeguards : one, a special resolution, and two, approval for the proposed reduction of capital (outside of the permitted situations under section 78) by the court. Here, prima facie, the proposed expenditure indicated in the plaintiff s reply, may fall within section 78 only to a limited extent. However, the proposals for upgrading the business, and purchase of various equipment, renovations, etc., may not fall within the description of section 78(2), i.e., (1) unissued securities, to be issued to its members as fully paid bonus shares ; (2) writing off its (the company s) preliminary expenses ; (3) writing off the expenses of or the commission paid or discount allowed o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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