TMI Blog2013 (9) TMI 941X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Supreme Court that HQR is not a private but a public limited company, the Court finds that the impugned order dated 31st January 2006 of the CLB cannot be sustained in law. Pursuant to the orders of the DB as confirmed by the Supreme Court, the management of HQR is presently with the appellants in Co. Appeal (SB) No. 4 of 2006. They are also presently the majority shareholders. In light of the changed circumstances, the Court directs that status quo will be maintained as regards the BoD as well as the shareholding of HQR till such time the suits concerning the status of HQR as a private or public limited company are finally decided. The parties are, however, at liberty to seek any variation or modification of this direction from the court in which the suits are pending. - CO.A (SB) Nos.4, 5 & 10 of 2006 - - - Dated:- 31-5-2013 - S. Muralidhar, J. For the Appellant : Jayant Bhushan and Mohit Chaudhary. For the Respondent : Harsh Sharma, Arun Kathpalia, Jayant K. Mehta, Ms.Pragya Singh, Ashok Mittal, Ms. Tanu Priya Gupta, Aman Lekhi, Atul Sharma, Nitesh Jain, V. Kanagaraj, Gautam Dhamija, Ms. Nidhi Mehrotra, Mayank Bansal, Deepak Sudan and Vivek Dixit. JUDG ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e consisting of Rs.80 lakh share of Rs.8 each and 28 lakh, 8.5% Cumulative Redeemable Preference Shares ('CRPS') of Rs.100 each (Rs.25 lakh). On 28th June 2003, the authorised capital was again altered by increasing the CRPS to Rs.30 crore. 7. Hillcrest Realty SdnBhd ('Hillcrest'), the company registered in Malaysia was allotted 28,29,290 CRPS in HQR in two spells i.e. on 5th May, 2003 and 19th July, 2003 against a total investment of Rs. 28.29 crore. To fund the redevelopment of the hotel, a term loan of Rs. 40 crores was raised from Indian Overseas Bank ('IOB'). The loan was secured by the joint personal guarantees of Mr. R.P. Mittal, Mrs. Sarla Mittal and Mr. Ashok Mittal, the collateral security of personal assets of Mr. R.P. Mittal and Mrs. Sarla Mittal and the corporate guarantee of Moral. 8. The subject matter of the disputes between the parties concerns the following allotments of equity shares. On 27th July, 2004, 23,90,000 equity shares of HQR were allotted to Moral. On 7th January, 2005, a further 41,51,648 shares were allotted to Moral. On the same day 1,10,000 shares were allotted to Mr. R.P. Mittal and 4,50,000 shares to Mrs. Sarla Mittal. On 10th May, 2005, a fur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... petition in the CLB 12. Hillcrest and Mr. Ashok Mittal filed Co. Pet. No. 64 of 2005 on 22nd August, 2005 against HQR, Mr. R.P. Mittal and Mrs. Sarla Mittal in the CLB challenging the allotment/transfer of shares effected on 27th July, 2004, 7th January, 2005 and 10th May, 2005. Hillcrest and Mr. Ashok Mittal contended before the CLB that there had been financial mismanagement of HQR by Mr. R.P. Mittal and Mrs. Sarla Mittal. Secondly, it was contended that Hillcrest had invested in CRPS on the understanding that HQR would remain a subsidiary of Moral and that in the event of HQR failing to pay any dividend for two years, Hillcrest would be entitled to exercise its voting rights on all resolutions. Thirdly, the allotments made on 27th July, 2004, 7th January, 2005 and 10th May, 2005 were challenged on the ground that there was no notice under Section 286 of the Act to Mr. Ashok Mittal, who was a Director of HQR. Fourthly, the allotments were done by the remaining Directors without disclosing their obvious interest and this was in violation of Section 300 of the Act. Fifthly, the allotments were done without any valuation of the equity shares of HQR. Sixthly, no money was paid for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emoving of Mr. R.P. Mittal and Mrs. Sarla Mittal as Directors. Thus Mr. Ashok Mittal being a minority shareholder was trying to oppress the majority and any action "taken legally to prevent such occurrence by the majority cannot be considered to be oppressive". (vii) Article 8 of the Articles of Association ('AOA') of HQR which mandated notice to the Board of Directors (BoD) for any proposed sale of share by any member with a right of first purchase by any other member had to be reconciled with Article 11 which stated that no transfer of shares shall be made or registered without the previous sanction of the Board "except when the transaction is made by any Member of the company to another Member or to Members (spouse, child or children or heirs) or the Board may decline to give such sanction without assigning any reasons." By adopting such harmonious construction it had to be held that "Article 8 would apply only to a transfer to an outsider and not in the case of a transfer from one Member to another Member." Since in the present case the transfer was from Moral, a member, to Mr. R.P. Mittal another member, Article 8 was not applicable and as such the transfer was not inva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) The allotment of shares made on 27th July, 2004 and 7th July, 2005 were predominantly in favour of Moral which was the largest shareholder of HQR and, therefore, the said allotments could not be said to be fraudulent or with an ulterior motive. There was nothing to show that the minutes and communicated records of the Board meetings held on 10th May, 2005 were fabricated after the EGM notice was issued on 1st June, 2005 by Hillcrest. Further, Mr. Ashok Mittal was party to confirmation of the minutes of the Board meeting held on 12th May, 2005. There was confirmation of the minutes and the allotments and transfers were done lawfully to protect the interest of the investors. Consequently, the Respondents could not be held guilty of any fraud. (xii) The appointment of Additional Directors could not be stated to be prejudicial to the interests of the Petitioners or to HQR. The contention of the Respondent that the petition was filed for the sole purpose of taking over HQR and not for redressing the grievance of oppression was justified. The provisions of Section 397 of the Act could not be invoked for achieving an ulterior motive. (xiii) The stand of Mr. Ashok Mittal th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... him to Moral. Mr. Ashok Mittal has filed Co. A.(SB) No. 10 of 2006 contending that 50% of the equity in HQR should be transferred to him. 15. Co. A.(SB) No. 4 of 2006 was first listed on 7th February, 2006 and, thereafter on 8th February, 2006 when the Respondents therein were permitted to place on record documents necessary for disposal of the appeal. Co. A. (SB) No. 5 of 2006 was listed on 13th February, 2006 when it was noted that the other appeal was listed for hearing on 7th February, 2006. While directing notice in Co. A. (SB) No. 5 of 2006, the Court in its order dated 13th February, 2006 noted the submission of counsel appearing for HQR, Mr. R.P. Mittal and Mrs. Sarla Mittal that no shares would be transferred to any third party. In that view of the matter, the directions issued by CLB in para 15 of its order were directed to be stayed till varied or modified. Co. A. (SB) No. 10 of 2006 was listed on 18th April, 2006 when it was directed to be listed along with FAO (OS) No. 282 of 2005. 16. At the hearing of the present appeals along with FAO No. 282 of 2005 on 14th November, 2008, the Division Bench passed an order holding that FAO No. 282 of 2005 could be decided inde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th September, 2002 proposing to convert itself a public limited company. While it filed Form-23 with the ROC on 8th October, 2002 and a statement in lieu of prospectus on 12th December, 2003, it gave effect to another resolution passed on the same day for increase in the authorised share capital of HQR. The Division Bench was of the view that instead of a retired judge act as Administrator, it was appropriate to have the democratic process of managing the affairs of HQR continued subject to the decision in the trial whether HQR was a private or a public limited company. Consequently, it was directed that Hillcrest will be permitted hence forth to exercise voting rights in all meetings of HQR subject to the decision on whether HQR is a private or a public limited company. It was held that the decision taken by the EGM held on 4th October, 2005 should be given effect to and that the meeting proposed for 16th October, 2008 as requested for by Hillcrest should be held as soon as possible. The Division Bench rejected the third alternative of maintaining status quo, since that would mean that "despite Hillcrest succeeding in all counts, and having been deprived of its legitimate rights f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch company lost its character as a private limited company. On 30th September, 2002, on the same day when the above resolutions were passed, shares were allotted to 134 persons and, therefore, HQR lost is private character. This explained the alteration of its authorised share capital. In para 75 (SCC) the Supreme Court concluded that "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 a public company and that the same was effected by the three resolutions passed on 30th September, 2002". 21. Reacting to the submissions made on behalf of Hillcrest that it could not have accepted the offer of HQR to pay dividend since it was not from the profits of HQR as required under Section 205 of the Act, the Supreme Court in para 76 observed "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." It distinguished the decisions in Bradford Investments Ltd. In Re 1991 BCLC 224 and Walters' Palm Toffee Ltd.In Re All ER Repo 430 on facts and held t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to Mr. R.P. Mittal and Moral being ousted from the management of HQR and yet the reality was that they were the largest shareholders. In response, it was contended by Hillcrest that after it took over the management it came to know that owed the banks over Rs.30 crore and, therefore, there was need for further funds. Hillcrest submitted that it had invested Rs.30 crore to enable Moral take over HQR. The present market value of the share was Rs.145 and after the rights issue it would be around Rs. 78. 23. The learned Single Judge by a judgement dated 18th August, 2009 in Hillcrest RealtySdn. Bhd. v. Ram Parshotam Mittal [2010] 103 SCL 80 (Delhi) negatived the objection of Hillcrest to the maintainability of the application by Mr. R.P. Mittal. It was further held that there was nothing illegal or reprehensible in the rights issue being offered at a premium on the shares of HQR. As regards the objections raised by Mr. R.P. Mittal based on Section 78 of the Act that the amount raised by way of rights issue had to be only kept in the share capital account and could not be utilised for repaying the liabilities of the HQR, the learned Single Judge directed Hillcrest as well as HQR to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the EGM on 30th September, 2002, both in relation to the conversion of HQR into a public limited company as well as increase in its authorized share capital. The Explanatory statement pursuant to Section 173(2) of the Act enclosed with the agenda for the EGM states that the hotel property of ITDC was demerged with HQR and that in accordance with the Scheme of Arrangement ('Scheme') as sanctioned by the Department of Company Affairs HQR was required to allot equity shares to the shareholders of ITDC as per the ratio envisaged in the Scheme. It is stated that since the company is a private limited company and has restricted the total number of shareholders to fifty, the present authorized share capital is insufficient to allot all equity shares. 29. A copy of the plaint in the civil suit [CS(OS) No. 1832 of 2008] filed by Hillcrest for declaration that HQR is an independent public limited company and that the provisions of Sections 85 to 90 of the Act relating to the rights of preferential shareholders pledged to HQR have also been placed on record. In the said suit, the other prayers are for declaration of the illegality of the resolution passed by the Board of Directors ('BoD ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CRPS holder had the "right to vote on every resolution placed before the company, at any meeting, in keeping with Section 87(2)(b)(i)"of the Act. 32. The aforementioned facts were admittedly not before the CLB when the impugned judgment dated 31st January, 2006 was passed. In the said judgment, CLB has proceeded on the basis that HQR is a private limited company. In para 26 of the impugned order dated 31st January 2006, CLB dealt with the preliminary objection raised by HQR, Mr. R.P. Mittal and Mrs. Sarla Mittal that since Mr. Ashok Mittal held only 1 share, he could not maintain the petition under Sections 397 and 398 of the Act. The CLB pointed out that in terms of Section 399, members holding 1/10th of the issued capital are entitled to file a petition and issued capital includes not only equity shares but also preference shares. Thereupon, the objection "was no pressed". CLB also noted that it would not give any finding on the issue relating to voting rights on the preference shares. 33. The decision of the Supreme Court changes the situation inasmuch as based on its prima facie finding regarding the status of HQR being no longer a private company, the voting rights of Hill ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of which two shares were transferred to Mr. R.P. Mittal, three to Mrs. Sarla Mittal and one to Mr. Ashok Mittal. The increase in the shareholding took place only subsequently at the meeting of 27th July, 2004. Seen in this light, the holding of one share by Mr. Ashok Mittal cannot be said to be a very small percentage. Further the other petitioner before the CLB was Hillcrest which had a substantial percentage of CRPS. The CLB itself recognised the right of Hillcrest to complain about oppression under Section 397 of the Act. Therefore the relatively lesser holding of shares by the petitioners could not have made a difference to the question of validity of the Board resolutions. 36. Having found that the mandatory provision of notice to the Director Mr. Ashok Mittal in terms of Section 286 was not complied, the CLB adopted a strange reasoning that by the same yardstick the allotment of shares to Mr. Ashok Mittal and CRPS to Hillcrest would also beinvalid. The apparent invalidity of the Board resolutions approving allotments to Mr. R.P. Mittal, Mrs. Sarla Mittal and Pondy, and the inter se transfers cannot be overcome by the invalidity attaching to decisions taken at meetings wher ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y Board v. Hindustan Construction Co. Ltd. [2009] 91 SCL 183 (SC). It cannot be therefore said that by signing the minutes of the meeting held on 4th July, 2005, Mr. Ashok Mittal had accepted the validity of the decisions taken at the Board meeting held on 10th May, 2005. 38. As far as Hillcrest is concerned, it was entitled to presume that the acts of the company as well as its BoD have been done in a valid manner and consequently not affecting the validity of the allotment of the CRPS in its favour. The doctrine of indoor management first explained in Royal British Bank v. Turquand [1856] 6 E B 27 was further explicated by our Supreme Court in MRF Ltd. v. Manohar Parrikar [2010] 11 SCC 374 (SCC, p.419) as under: "111. The Doctrine of indoor management is in direct contrast to the doctrine of rule of constructive notice, which is essentially a presumption operating in favour of the company against the outsider. It prevents the outsider from alleging that he did not know that the constitution of the company rendered a particular act or a particular delegation or authority ultra vires. The doctrine of indoor management is an exception to the rule of constructive notice. Acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Act. Section 108 of the Act mandates that share certificates must actually be tendered along with the share transfer forms duly executed by the transferor in favour of the transferee at the time of the Board approving the transfer of shares. The case of Hillcrest and Mr. Ashok Mittal is that when the transfer of shares from Moral to Mr. R.P. Mittal was approved by the BoD on 10th May, 2005 the share certificates held by Moral were still with the Indian Overseas Bank ('IOB') with whom they had been pledged. Although during the arguments and in the written submissions it has been urged by Mr. R.P. Mittal that this ground was not taken before the CLB, the fact remains that the occasion to urge such a ground has arisen only because of the subsequent developments. 41. Hillcrest and Mr. Ashok Mittal contended that after they took over the management of HQR, pursuant to the judgment dated 23rd January, 2009 of the DB they found that the share certificates had been pledged with IOB by Moral on 17th October, 2002as security for the loan availed by it to finance the investment in HQR had been released by IOB to Mr. R.P. Mittal only on 23rd June, 2006. This was confirmed by IOB by let ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d February, 2013 IOB stated that they had received the said share certificates "for pledge in our favour on 17.10.2002 and the same were delivered to you on 23.06.2003 " 5. In response to the said letter written by HQRPL, the Assistant General Manager ('AGM') of IOB, Parliament Street Branch has, on 1st March, 2013, written a further letter to Mr. Ashok Mittal, Director, HQRPL, stating that after checking the records "it appears that the date mentioned in para 1 (of the letter dated 22 .02.2013) reading '23.06.2003' is incorrect, as the correct date is 23.06.2005." It has been reaffirmed that "the date has been rightly mentioned in our earlier letter dated 09.02.2009." According to IOB, "the date of 23.06.2005 is also borne out from the signatures appended upon the photocopies of share certificates." The AGM, IOB, Parliament Street, New Delhi has regretted the inconvenience caused and states that they "strictly stand by their letter dated 09.02.2009." 6. The above contradictory stand of IOB is a cause for concern particularly since one of the main planks of the submissions of the Appellants Hillcrest and Ashok Mittal before the Court turns on the question whether the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Registrar General is requested to enquire why the order dated 5th March, 2013 was not complied with by the Registry and submit a report before the next date of hearing. Mr. Vivek Dixit has produced in Court the original of the letter dated 17th October, 2002 written by Mr. R.P. Mittal, Director on behalf of Moral Trading Investment Limited to the Chief Manager, IOB, Janpath, New Delhi. The said letter dated 17th October, 2002 be placed in a sealed cover by the Deputy Registrar and produced before the Court on the next date. Mr. Vivek Dixit admits his signature on the letter dated 22nd February 2013. He states that Mr. Deepak Sudan, AGM is the signatory of the letter dated 1st March, 2013. Both Mr. Dixit and Mr. Sudan will file their individual affidavits explaining the circumstances under which the aforementioned letters were issued. These affidavits will also explain the procedure followed by IOB as regards the receipt and return of share certificates. The Court finds that on the original letter produced today there is no stamp of receipt of the said documents by the IOB. The affidavits will also explain whether any register is maintained by the IOB as rega ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... luded. 5. List on 17th April, 2013". 45. Following the above order, further affidavits have been filed by both Mr. Vivek Dixit and Mr. Deepak Sudan on 15th April, 2013 and a response thereto has been filed by Mr. R.P. Mittal. Written submissions have been filed by both the parties. 46. The order dated 5th March, 2013 records in para 3 that "Learned counsel for Mr. R.P. Mittal, on instructions from Mr. R.P. Mittal, confirms that the shares of HQR pledged by MTL were in fact delivered back to Mr. R.P. Mittal on 23rd June, 2003." It was at that stage that learned Senior counsel for Hillcrest produced an additional affidavit of Mr. Girish Makhija representing HQR which encloses another letter from IOB issued on 1st March, 2013 again confirming that the date mentioned in IOB's letter dated 9th February, 2009 was correct and that the share certificates were in fact delivered to Mr. R.P. Mittal on 23rd June, 2005. The above contradictory stands of the IOB have been explained by the authors of those letters and both of them have now stated that the share certificates were delivered to Mr. R.P. Mittal on 23rd June, 2005. Mr. R.P. Mittal has filed an affidavit in response to the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d decision of the CLB upholding the validity of the Board resolutions dated 27th July, 2004, 7th January, 2005 and 10th May, 2005 cannot be sustained in law. To that extent Co. Appeal (SB) No.4 of 2006 is allowed. 49. The next question concerns the validity of the directions issued by the CLB in para 50 of the impugned order regarding allotment of shares to Mr. Ashok Mittal. Since the transfer of shares to Mr. R.P. Mittal by Moral is ab initio invalid, the question of allotting shares on the same basis to Mr. Ashok Mittal obviously cannot arise. Consequently there is no need to examine the further question whether Mr. Ashok Mittal in fact contributed Rs.5.5.crores for the acquisition of HQR shares by Moral. The directions in para 50 of the impugned order of the CLB are also accordingly set aside. Co. Appeal (SB) No. 5 of 2006 is allowed and Co. Appeal (SB) No. 10 of 2006 is dismissed. 50. Thus independent of the prima facie finding of the Supreme Court that HQR is not a private but a public limited company, the Court finds that the impugned order dated 31st January 2006 of the CLB cannot be sustained in law. 51. The question next is of consequential relief. Pursuant to the or ..... X X X X Extracts X X X X X X X X Extracts X X X X
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