Supreme Court of India
RAM PARSHOTAM MITTAL & ORS.versusHOTEL QUEEN ROAD PVT. LTD. & ORS.
- Citation
- 2019 INSC 678
- Decided
- 10 May 2019
- Disposal
- Disposed off
- Bench
- ARUN MISHRA
Holding
The Supreme Court held that the three board resolutions are void for violation of Sections 286, 300 and 108, and the direction to prosecute RPM under Section 340 Cr.P.C. is set aside, while leaving the private‑public status of HQRL to be decided in the pending suits.
Summary
The Government of India disinvested its stake in ITDC, creating Hotel Queen Road Ltd (HQRL) as a special purpose vehicle. After Moral Trading & Investment Ltd acquired 99.97% of HQRL, the directors (the Mittals) passed three board resolutions in 2004‑2005 allotting and transferring shares to themselves without giving notice to Director Ashok Mittal, violating Sections 286, 300 and 108 of the Companies Act, 1956. Hillcrest Realty, a cumulative preference shareholder, challenged the resolutions and claimed voting rights under Section 87(2)(b). The Supreme Court held that the resolutions were invalid for the statutory violations and set aside the direction to prosecute RPM, while noting that the question of whether HQRL had become a public company remains for the pending suits. The Court emphasized that lack of notice alone can invalidate a meeting and that oppression must be shown by prejudice, not merely illegality. Consequently, the appeals were dismissed and the parties were each to bear their own costs.
Issues considered
- Whether HQRL ceased to be a private limited company and became a public limited company under the resolution of 30 September 2002.
- Whether the board resolutions of 27 July 2004, 7 January 2005 and 10 May 2005 are valid in view of non‑compliance with Section 286 (notice to directors).
- Whether the resolutions violate Section 300 (interested director participation) and Section 108 (share transfer formalities).
- Whether Hillcrest, as a cumulative preference shareholder, is entitled to voting rights under Section 87(2)(b) of the Companies Act, 1956.
- Whether the alleged conduct amounts to oppression and mis‑management under Sections 397 and 398 of the Companies Act, 1956.
Legislation cited
- Code of Criminal Procedure, 1973s. 340
- Companies Act, 1956s. 108, s. 169(4), s. 19(2), s. 205, s. 208, s. 286, s. 300, s. 397, s. 398, s. 81(1A), s. 85, s. 87(2)(b)
Subjects
company lawoppressionmismanagementshare allotmentnotice requirementprivate companypublic companyvoting rightspreference sharesSection 286Section 300Section 108Section 87Section 397Section 398
Judgment
976 [2019]
SUPREME COURT 7 S.C.R. 976
REPORTS [2019] 7 S.C.R.
A RAM PARSHOTAM MITTAL & ORS.
v.
HOTEL QUEEN ROAD PVT. LTD. & ORS.
(Civil Appeal No. 3934 of 2017)
B MAY 10, 2019
[ARUN MISHRA AND INDIRA BANERJEE, JJ.]
Companies Act, 1956 – ss. 286, 300 and 108 & ss.19(2), 85,
87(2)(b),169(4), 397 and 398 – Government of India took policy
decision on 5.7.02 to disinvest its shares in the Indian Tourism
C
Development Corporation (ITDC) which owns various hotel
properties; one of them being Indraprastha Hotel – In terms of an
approved scheme of Arrangement of Demerger the said hotel was
transferred to the Respondent No.1-HQRL, created as a Special
Purpose Vehicle to enable disinvestment – Government of India
D invited bids for sale of shares in HQRL – Appellant No.3-Moral
Trading & Investment Ltd. was the successful bidder – Appellant
No.1-‘RPM’, his wife-appellant no.2 who held the controlling interest
in Moral, and the Respondent No.3-‘AM’, younger brother of the
Appellant No.1 were appointed regular Directors of HQRL – HQRL
approved the issuance of 23,65,000 redeemable preference shares
E
to the Respondent No.2-Hillcrest – HQRL filed civil suit being CS
(OS) 992 of 2005 before the High Court inter alia seeking injunction
against Hillcrest from proceeding with proposed resolutions of
EOGM – Three resolutions dtd. 27.7.04, 7.1.05 and 10.5.05 passed
allotting/transferring shares in favour of ‘RPM’, his wife and Moral
F – Challenged by Hillcrest and ‘AM’ before the Company Law Board
(CLB) u/ss.397, 398 alleging oppression and mis-management of
HQRL by the RPM Group inter alia on the ground that no notice was
issued to ‘AM’ who was, at the material time, a Director – Petition
dismissed – Hillcrest filed suit being CS (OS) No.1832/08 in High
Court for declaration that it had voting rights in HQRL in view of
G
the Resolution dtd. 30.09.02– High Court allowed CoA (SB) 4/2006
of Hillcrest and cancelled the allotment and transfers made by three
resolution on the grounds that Hillcrest had voting rights and there
was breach of ss.286, 300 and 108 and set aside the order of the
CLB – High Court also recorded suo motu proceedings u/s.340,
H
976
RAM PARSHOTAM MITTAL & ORS. v. HOTEL QUEEN ROAD 977
PVT. LTD. & ORS.
Cr.PC against ‘RPM’ – On appeal, held: Two civil suits are pending A
consideration; one being OS No.992/2005 filed by HQRL; other
Suit No.1832/2008 seeking declaration that HQRL had become a
limited company by virtue of the resolution passed on 30.9.02 –
Matter travelled to Supreme Court in the matter of grant of injunction
which was decided in Ram Parshottam Mittal v. Hillcrest Realty –
B
Supreme Court without meaning to decide the issue finally prima
facie observed that HQRL had altered its status and had become a
public company – It was also observed significantly as this issue
has to be decided in the two pending suits, it would not be proper
for Supreme Court to dwell into the question further – It has not
been disputed that no notice u/s.286 was given to ‘AM’, the Director C
when impugned resolutions were passed – Impugned resolutions
are unfair to ‘AM’ – Even otherwise the absence of the notice is
enough to invalidate the same as mandated by s.286 – It was
improper for the Directors to allot shares to themselves and to the
exclusion of ‘AM’ and that too without issuance of notice to him –
D
s.108 operates independently of s.286 or s.300 – Invalidation of
meeting is dependent under the provisions of s.108 – There was
violation of s.108 – HQRL did not file share certificate along with
the duly executed share transfer form as on 10.5.05, the date of
Board resolution – Plea of ‘RPM’ was disbelieved that share
certificates were returned on 23.6.03 – High Court ordered the E
proceedings u/s.340 Cr.P.C. against ‘RPM’ for filing an affidavit to
the contrary – In the fact and circumstances of the case, taking into
consideration the overall scenario, impugned order not interfered
with – However, direction to prosecute appellant no.1, ‘RPM’ in the
facts of the case, set aside.
F
Disposing of the appeals, the Court
HELD: 1.1 It is a common ground that two civil suits are
pending consideration; one being OS No.992/2005 filed by HQRL
for injunction to restrain Hillcrest Realty from proceeding with
the proposed resolutions of EOGM and from exercising voting G
rights therein; the other Suit No.1832/2008 seeking declaration
that HQRL had become a limited company by virtue of the
resolution passed on 30.9.2002. The matter travelled to Supreme
Court in the matter of grant of injunction which was decided in
Ram Parshottam Mittal v. Hillcrest Realty. Supreme Court
H
978 SUPREME COURT REPORTS [2019] 7 S.C.R.
A observed that the decision on the aforesaid question would be
dependent upon the decision of the issue whether by resolution
adopted on 30.9.2002, HQRL had lost its private character and
had been converted into a public limited company. While the issues
are the same in the two suits, this Court observed that the interim
order dated 12.8.2005 had been obtained by suppression of
B
material facts and prima facie finding recorded by the Division
Bench of the High Court was that by resolution adopted on
30.9.2002, HQRL had shed its private character and had been
converted into a public limited company. Supreme Court without
meaning to decide the issue finally prima facie observed that an
C application was filed before the Registrar in Form 23 along with
resolution dated 30.9.2002 is sufficient to arrive at a prima facie
conclusion that HQRL had altered its status and had become a
public company. It was further observed by Supreme Court that
since the number of members exceeded 50 as the shares were
said to have been allotted to 134 persons on 30.9.2002, prima
D
facie HQRL lost its private character. However, Supreme Court
also observed significantly as this issue has to be decided in the
two pending suits, it would not be proper for this Court to dwell
into the question further. Supreme Court held that considering
the explanation to section 87(2)(b) of the Companies Act, 1956
E gives Hillcrest as a cumulative preference shareholder the right
to vote on every resolution. It was also made clear that the
observations were prima facie in the nature of limited only for
disposal of special leave petition and should not influence the
final decision in the suits. The question relating to HQRL whether
it is a private or public company has been left open for decision
F
in the suits. [Para 62] [998-C-H; 999-A-B]
1.2 The order in Ram Purshottam Mittal is not final and is
only a prima facie view in the matter of injunction. The
observations in interim order cannot be taken as binding even
for the purpose of deciding this matter. [Para 65] [999-E-F]
G
1.3 Section 286 of the Companies Act, 1956 deals with
requirement of notice to Director. It has not been disputed that
no notice under section 286 had been given to Mr. AM, the
Director when impugned resolutions were passed. In Needle
H
RAM PARSHOTAM MITTAL & ORS. v. HOTEL QUEEN ROAD 979
PVT. LTD. & ORS.
Industries, it has been observed by Supreme Court that the A
resolution passed by the Director may be perfectly legal and yet
oppressive and conversely a resolution which is in contravention
of the law may be in the interest of the shareholders of the
company. Every illegality will not make it oppressive. Prejudice
has to be shown. No complaint of oppression could be entertained
B
merely on the ground of failure to attach notice of Board meeting
was an act of illegality. It has to be shown that the action was
unfair to the person to whom notice has not been given and causes
prejudice to him in the exercise of legal and proprietary rights as
shareholders. The impugned resolutions are unfair to Mr. AM in
the facts and circumstances of the case even otherwise the C
absence of the notice is enough to invalidate the same as
mandated by section 286. [Paras 74-76] [1009-H; 1010-C-F]
1.4 It was improper for the Directors to allot shares to
themselves and to the exclusion of Mr. AM in the facts and
circumstances of the case and that too without issuance of notice D
to him. [Para 81] [1021-D]
1.5 Section 19(2) of the Companies Act provides that
nothing in sections 85 to 89 shall apply to a private company
unless it is a subsidiary of a public company and this question has
to be finally decided whether it is a private or public limited E
company in the pending civil suit which have been stated to be
transferred to NCLT for decision in accordance with law.
Otherwise, section 87 provides that notice has to be issued to
preference shareholders also for the meeting and they have a
right to participate in the meeting. It appears prima facie even if
dividend has not been declared. In that case also, preference F
shareholders shall have a right to vote in the meeting. Reliance
has also been placed on the provisions of section 169(4) of the
Companies Act regarding calling of EOGM on requisition. The
resolution with respect to EOGM is not in issue in the present
case. As such need not be dilated upon the provisions of section G
169(4) and the submissions. [Paras 83, 84] [1028-A-D]
1.6 Section 108 operates independently of section 286 or
section 300. The invalidation of meeting is dependent under the
provisions of section 108. There was violation of section 108 of
H
980 SUPREME COURT REPORTS [2019] 7 S.C.R.
A the Companies Act. HQRL did not file share certificate along
with the duly executed share transfer form as on 10.5.2005, the
date of Board resolution. The plea of Mr. RPM has been
disbelieved that share certificates were returned on 23.6.2003.
The High Court has also ordered the proceedings under Section
340 Cr.P.C. against Mr. RPM for filing an affidavit to the contrary.
B
The High Court has relied on the affidavit of the concerned officials
of the Indian Overseas Bank. The High Court has found that the
share certificates were delivered to Mr. RPM not on 23.6.2003
but on 23.6.2005. There was violation of the provisions of section.
In the fact and circumstances of the case, taking into
C consideration the overall scenario, the impugned order calls for
no interference. However, direction to prosecute appellant RPM
in the facts of the case is set aside. [Paras 87, 89] [1033-H;
1034-A-C; 1035-A]
State of Assam v. Barak Upatyaka D.U. Karamchari
D Sanstha (2009) 5 SCC 694 ; Needle Industries (India)
Ltd. & Ors. v. Needle Industries Newey (India) Holding
Ltd. & Ors. (1981) 3 SCC 333 : [1981] 3 SCR 698 ;
Sangramsinh P. Gaekwad & Ors. v. Shantadevi P.
Gaekwad (Dead) through LRs. & Ors. (2005) 11 SCC
314 : [2005] 1 SCR 624 ; Mannalal Khetan & Ors. v.
E Kedar Nath Khetan & Ors. (1977) 2 SCC 424 : [1977]
2 SCR 190 – relied on.
V.S. Krishnan & Ors. etc. v. Westfort Hi-tech Hospital
Ltd. & Ors. (2008) 3 SCC 363 : [2008] 3 SCR 184 ;
CDS Financial Services (Mauritius) Ltd. v. BPL
F Communications Ltd. & Ors. (2004) 121 Comp Case
374 ; National Textile Workers’ Union & Ors. v.
P.R.Ramakrishnan & Ors. (1983) 1 SCC 228 : [1983]
1 SCR 922 ; Ram Parshotam Mittal & Anr. v. Hillcrest
Realty SDN. BHD. & Ors. (2009) 8 SCC 709 : [2009]
G 10 SCR 1121 ; Sri Parmeshwari Prasad Gupta v. The
Union of India (1973) 2 SCC 543 : [1974] 1 SCR
304 ; Dale & Carrington Invt. (P) Ltd. & Anr. v. P.K.
Prathapan & Ors. (2005) 1 SCC 212 : [2004] 4 Suppl.
SCR 334 ; Firestone Tyre and Rubber Co. v. Synthetics
and Chemicals Ltd. & Ors. (1971) 41 Co. Cases 377 ;
H
RAM PARSHOTAM MITTAL & ORS. v. HOTEL QUEEN ROAD 981
PVT. LTD. & ORS.
Madras Tube Co. Ltd. & Ors. v. Hari Kishon Somani & A
Ors. (1985) 1 Comp Law Journal 195 (Mad). ; M.S.
Madhusoodhanan v. Kerala Kaumudi (P) Ltd. (2004) 9
SCC 204 : [2003] 2 Suppl. SCR 107 ; Mrs.Bacha F.
Guzdar, Bombay v. Commissioner of Income Tax,
Bombay AIR 1955 SC 74 : [1955] SCR 876 ; Union
B
of India v. Allied International Products Ltd. & Anr.
(1970) 3 SCC 594 : [1971] 2 SCR 661 ; National Textile
Workers Union & Ors. v. P. R. Ramakrishna & Ors.
(1983) 1 SCC 228 : [1983] 1 SCR 922 ; M/s. Kothari
Textiles Ltd., Madras & Ors. v. Commissioner of Wealth
Tax, Madras AIR 1963 Mad. 274 ; Trojan Equity Ltd. C
v. CMI Ltd. [2009] QSC (Supreme Court of
Queensland) 114 ; Indore Development Authority v.
Shailendra (Dead) through LRs. & Ors. (2018) 3 SCC
412 : [2018] 2 SCR 1 ; M.S.D.C. Radha Ramanan v.
M.S.D. Chandrasekara Raja & Anr. (2008) 6 SCC
D
750 : [2008] 5 SCR 182 – referred to.
Halsbury’s Laws of England, Volume 6 (3rd Ed.), page
234 – referred to.
Case Law Reference
(2009) 5 SCC 694 relied on Para 41 E
[1981] 3 SCR 698 relied on Para 42
[2005] 1 SCR 624 relied on Para 42
[2008] 3 SCR 184 referred to Para 42
F
(2004) 121 Comp Case 374 referred to Para 45
[1983] 1 SCR 922 referred to Para 49
[2009] 10 SCR 1121 referred to Para 51
[1974] 1 SCR 304 referred to Para 53
G
[2004] 4 Suppl. SCR 334 referred to Para 54
[2003] 2 Suppl. SCR 107 referred to Para 60
[1955] SCR 876 referred to Para 71
[1971] 2 SCR 661 referred to Para 73
H
982 SUPREME COURT REPORTS [2019] 7 S.C.R.
A [1983] 1 SCR 922 referred to Para 82 (b)
AIR 1963 Mad. 274 referred to Para 82 (d)
[2018] 2 SCR 1 referred to Para 82 (f)
[1977] 2 SCR 190 relied on Para 86
B [2008] 5 SCR 182 referred to Para 88
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 3934
of 2017.
From the Judgment and Order dated 31.05.2013 of the High
Court of Delhi at New Delhi in CO.A. (SB) No. 4 of 2006.
C
With
Civil Appeal No. 3935 of 2017.
Pinaki Misra, Sr. Adv., S. Udaya Kumar Sagar, Ms. Bina
Madhavan, Suryanarayan Singh, Nitesh Jain, Piyush Dwivedi,
D Ms. Shreyali Kunwar, Ms. Elizabeth Anthony, M/S. Lawyer S Knit &
Co., Advs. for the Appellants.
Rakesh Dwivedi, Shyam Diwan, Jaideep Gupta, Vikas Singh, Sr.
Advs., Ardhendumauli Kumar Prasad, Kumar Mihir, Jayant Mehta,
Saurabh Kalia, Sameer Choudhary, Ms. Drishti Harpalani, Ms. Anindita
E Misra, Kunal Verma, Yugandhara Pawar Jha, Gopal Jha, Advs. for the
Respondents.
The Judgment of the Court was delivered by
ARUN MISHRA, J.
F 1. The appeal arises out of the judgment dated 31.5.2013 passed
by the High Court of Delhi, setting aside an order dated 31.1.2006 passed
by the Company Law Board in Company Petition No.64/2005.
2. The backdrop facts indicate that the Government of India took
a policy decision on 5.7.2002 to disinvest its shares in the Indian Tourism
G Development Corporation (in short, ‘the ITDC’) which owns various
hotel properties; one of them being Indraprastha Hotel, formerly known
as Hotel Ashok Yatri Niwas, (hereinafter referred to as “the hotel”).
3. In terms of an approved scheme of Arrangement of Demerger
the hotel was transferred to the Respondent No.1 - Hotel Queen Road
H Pvt. Ltd. (in short, ‘HQRL’) which was created as a Special Purpose
RAM PARSHOTAM MITTAL & ORS. v. HOTEL QUEEN ROAD 983
PVT. LTD. & ORS. [ARUN MISHRA, J.]
Vehicle to enable disinvestment. The paid up capital of HQRL was Rs.90 A
lakhs comprising 9 lakh equity shares of Rs.10 each, of which the
Government of India held 89.97% shares. Indian Hotels Co. Ltd. (IHCL)
held 10% shares and the balance shares were held by the employees of
hotels of ITDC under a Voluntary Retirement Scheme.
4. Pursuant to its decision to disinvest, the Government invited B
bids for sale of shares in HQRL. The appellant No.3 - Moral Trading &
Investment Ltd., in short hereinafter referred to as ‘Moral’, a public
limited company, was declared the successful bidder.
5. By a share purchase agreement dated 8.10.2002 Moral acquired
the shares of Government of India and IHCL in HQRL for a sum of C
Rs.45 crores. Out of this, Rs.33.37 crores was obtained by way of loans
from banks. 99.97% shares of HQRL being held by Moral, HQRL became
Moral’s subsidiary.
6. Appellant No.1, Mr. R.P. Mittal, and the appellant No.2, Mrs.
Sarla Mittal, who held the controlling interest in Moral, and the Respondent D
No.3, Mr. Ashok Mittal, younger brother of the Appellant No.1, Mr. R.P.
Mittal were appointed as Additional Directors of HQRL on 8.10.2002,
and later, regular Directors at the Annual General Meeting of HQRL
held on 28.12.2002.
7. On 30.9.2002 HQRL passed a resolution in its Extra Ordinary E
General Meeting (EOGM) to change its status from ‘private limited’ to
‘limited’ company. The said resolution was rejected by the Registrar of
Companies on the ground of late filing and according to the appellants,
HQRL had not filed it again with the Registrar of Companies nor had
removed the defects.
F
8. On 21.12.2002 a Board meeting of HQRL was held. Moral
transferred 13 equity shares valued at Rs.10 per equity share of HQRL
to 7 persons, i.e. 2 shares to the appellant No.1, Mr. R.P. Mittal, 3 shares
to the appellant No.2, Mrs. Sarla Mittal, one share to the respondent
No.3, Mr. Ashok Mittal and 7 shares to 4 daughters of the appellant
Nos.1 and 2, R.P. Mittal’s family thus held 99.97% equity shares, as G
against one equity share held by his brother, Mr. Ashok Mittal.
9. On 28.12.2002 Annual General Meeting (AGM) of HQRL was
held in which authorised capital was increased from Rs.90 lakhs to Rs.33
crores. The AGM was attended by Mr. Ashok Mittal. There was an
increase of 71 lakh equity shares of Rs.10 each and 25 lakh preference H
984 SUPREME COURT REPORTS [2019] 7 S.C.R.
A shares of Rs.100 per share and a Special Business Resolution No.10
was passed under section 81(1A) of the Companies Act, 1956 (hereinafter
referred to as ‘the Companies Act’). The appointment of Mr. R.P. Mittal,
Mrs. Sarla Mittal and Mr. Ashok Mittal to the Board of Directors was
approved by the majority of the shareholders of Moral. Mr. R.P. Mittal
and Mrs. Sarla Mittal were appointed as whole time Directors. The
B
Memorandum of Association of HQRL was also amended. Article IV
(4) of Articles of Association was amended to state that the preference
shares would not carry any voting rights.
10. On 19.3.2003, Mr. R.P. Mittal, Chairman of HQRL issued
letter to the Respondent No.2 - Hillcrest Realty SDN BHD Malaysia
C (for short, ‘Hillcrest’) inviting subscription in 8.5% cumulative redeemable
preference shares of Rs.100 each up to Rs.30 crores. On 3.4.2003, the
hotel was closed for renovation and upgradation. On 30.4.2003, Hillcrest
accepted and applied for subscription requesting for allotment of 23,65,000,
8.5% redeemable preference shares in the company. On 5.5.03 HQRL
D approved the issuance of 23,65,000 redeemable preference shares to
Hillcrest.
11. On 25.6.2003 in order to facilitate issue of preference shares,
HQRL increased authorised capital by Rs.5 crore comprising 5 lakh
preference shares of Rs.100 each. On 19.7.2003 HQRL approved the
E issuance of 4,64,290 redeemable preference shares to Hillcrest respondent
No.2. In or about August-September, 2003, to fund the redevelopment of
the hotel, a term loan of Rs.40 crores was raised from Indian Overseas
Bank. According to the appellants the loan was secured by the joint
personal guarantees of Mr. R.P. Mittal, Mrs. Sarla Mittal and Mr. Ashok
Mittal, the corporate guarantee of Moral and the collateral security of
F personal assets of Mr. R.P. Mittal and Mrs. Sarla Mittal.
12. On 27.7.2004, HQRL in compliance of resolution dated
28.12.2002 passed under section 81(1A) of the Act, issued 23.90 lacs
equity shares at par to Moral, the single shareholder holding 99.97% of
equity. On 7.1.2005 HQRL in compliance of resolution dated 28.12.2002
G passed under section 81(1A) of the Act issued 41.51 lakh equity shares
to Moral, 1.10 lakh equity shares to Mr. R.P. Mittal and 4.5 lakh equity
shares to Mrs. Sarla Mittal.
13. On 14.1.2005 an Extra Ordinary General Meeting (EOGM)
was held wherein a shareholder’s resolution was adopted pursuant to
H which HQRL increased its authorised capital from existing Rs.38 crores
RAM PARSHOTAM MITTAL & ORS. v. HOTEL QUEEN ROAD 985
PVT. LTD. & ORS. [ARUN MISHRA, J.]
to Rs.40 crores, with an increase of 2 lakh equity shares of Rs.10 each. A
On 10.5.2005 HQRL allotted 10 lakh equity shares to the respondent
No.4 Pondy Metals and Rolling Mills Pvt. Ltd., hereinafter referred to in
short as Pondy Metals. Further, HQRL registered transfer by Moral of
32,88,181 equity shares in favour of Mr. R.P. Mittal.
14. On 26.5.2005, M/s. Ashok Mittal & Co. issued a notice to B
Moral for repayment of Rs.4,91,58,762/- along with interest claiming that
the same was due since 2000 from running account for share trading for
the years prior to 2000. It is the case of the appellants that Mr. Ashok
Mittal, on realizing the bright prospects of development of the hotel,
because of its location, in the heart of capital of India, turned dishonest to
the R.P. Mittal group and hatched a conspiracy with preference C
shareholder Hillcrest to control the management of HQRL, It is alleged
by the appellants that, in contravention of the provisions of the Companies
Act and terms of issue of preference shares as prescribed in Articles of
Company and correspondence exchanged, Mr. Ashok Mittal caused
Hillcrest to issue notice under section 169(4) of the Act for EOGM to D
oust the duly elected board of HQRL and to appoint their nominee on the
ground of non-payment of dividend on the redeemable preference shares
as provided under section 87(2)(b) of the Companies Act. Section 87 of
the Companies Act is extracted below:
“Sec 87 - Voting rights E
(1) Subject to the provisions of section 89 and sub-section (2) of
section 92 :
(a) every member of a company limited by shares and holding
any equity share capital therein shall have a right to vote, in
respect of such capital, on every resolution placed before the F
company ; and
(b) his voting right on a poll shall be in proportion to his share
of the paid-up equity capital of the company.
(2)
G
(a) Subject as aforesaid and save as provided in clause (b) of
this sub-section, every member of a company limited by shares
and holding any preference share capital therein shall, in respect
of such capital, have a right to vote only on resolutions placed
before the company which directly affect the rights attached
to his preference shares. H
986 SUPREME COURT REPORTS [2019] 7 S.C.R.
A Explanation.: Any resolution for winding up the company or
for the repayment or reduction of its share capital shall be deemed
directly to affect the rights attached to preference shares within
the meaning of this clause.
(b) Subject as aforesaid, every member of a company limited
B by shares and holding any preference share capital therein
shall, in respect of such capital, be entitled to vote on every
resolution placed before the company at any meeting, if the
dividend due on such capital or any part of such dividend has
remained unpaid:
C (i) in the case of cumulative preference shares, in respect
of an aggregate period of not less than two years preceding
the date of commencement of the meeting; and
(ii) in the case of non-cumulative preference shares, either
in respect of a period of not less than two years ending
D with the expiry of the financial year immediately preceding
the commencement of the meeting or in respect of an
aggregate period of not less than three years comprised in
the six years ending with the expiry of the financial year
aforesaid.
E 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,
(a) on the last day specified for the payment of such dividend
F for such period, in the articles or other instrument executed
by the company in that behalf; or
(b) in case no day is so specified, on the day immediately
following such period.
(c) where the holder of any preference share has a right to
G vote on any resolution in accordance with the provisions of
this sub-section, his voting right on a poll, as the holder of
such share, shall, subject to the provisions of section 89 and
sub-section (2) of section 92, be in the same proportion as
the capital paid up in respect of the preference share bears
to the total paid-up equity capital of the company.”
H
RAM PARSHOTAM MITTAL & ORS. v. HOTEL QUEEN ROAD 987
PVT. LTD. & ORS. [ARUN MISHRA, J.]
15. A Board meeting of HQRL was conducted on 4.7.2005 which A
was attended by Mr. R.P. Mittal, Mrs. Sarla Mittal and Mr. Ashok Mittal.
Mr. Ashok Mittal attended the meeting for the first time. The Respondent
No.6 Mr. N.P. Gupta and the Respondent No.5, Mr. Suman Jain were
appointed as Additional Directors. On 8.7.2005 Hillcrest issued notice
under section 169(6) of the Companies Act to call for EOGM on 4.8.2005.
B
16. HQRL filed a civil suit being CS (OS) 992 of 2005 before the
High Court of Delhi for declaration, cancellation and mandatory injunction
against the requisition under section 169 of the Companies Act.
17. On 4.8.2005 Hillcrest proceeded to convene EOGM and passed
a resolution inter alia removing Mr. R.P. Mittal and Mrs. Sarla Mittal
from the Board of HQRL. On 12th August, 2005, Delhi High Court passed C
an order in an interlocutory application being IA 5505 in the said suit
being CS (OS) No.992 of 2005 restraining Hillcrest from giving effect
to the resolution passed in the EOGM held on 12.8.2005. Delhi High
Court restrained Hillcrest from giving effect to the resolution passed in
the EOGM. D
18. On 22nd August, 2005 Hillcrest and Ashok Mittal filed a petition
bearing No.64/2005 in the Principal Bench of the Company Law Board
at Delhi and under Sections 397 and 398 of the Companies Act alleging
oppression and mis-management of HQRL by the R.P. Mittal Group.
The Resolution passed in Board meetings regarding allotment/ transfer E
of shares was also challenged amongst others on the ground that no
notice had been issued to Ashok Mittal who was, at the material time, a
Director.
19. The present case arises out of the said petition filed by Hillcrest
and Mr. Ashok Mittal against the appellants in the Company Law Board
in September, 2005 under Sections 397/398 of the Act, challenging the F
allotment/transfer of shares effected on 27.7.2004, 7.1.2005 and
10.5.2005 on inter alia grounds of (i) financial mismanagement of HQRL
by Mr. R.P.Mittal and Mrs. Sarla Mittal; (ii) Invested in Cumulative
Redeemable Preference Share (CRPS) on the understanding that HQRL
would remain a subsidiary of Moral and that in the event of HQRL G
failing to pay any dividend for two years, Hillcrest would be entitled to
exercise its voting rights in all resolutions; (iii) illegality of allotments
made on 27.7.2004, 7.1.2005 and 10.5.2005. In the absence of notice
under Section 286 of the Companies Act to Mr. Ashok Mittal, who was
a Director of HQRL; (iv) the allotments having been made by the
remaining Directors without disclosing their obvious interest in violation H
988 SUPREME COURT REPORTS [2019] 7 S.C.R.
A of section 300 of the Companies Act; (v) the allotments being made
without any valuation of equity shares of HQRL; (vi) no money being
paid for transfer of shares and (vii) the eventuality of the transfer bringing
about a situation where HQRL would no longer remain a subsidiary of
Moral and thus deprive Hillcrest of any voting right under section 87(2)(b)
of the Act.
B
20. It is alleged by the appellants that, in spite of various hurdles
created by Hilcrest and Mr. Ashok Mittal by sending notices to various
Government departments asking them not to grant licenses, the hotel
had become operational, with the sole efforts of Mr. R.P. Mittal and had
been granted all the requisite licenses.
C 21. On 31.1.2006, C.P. No.64/2005 was dismissed, inter alia, on
the ground that it was a mala fide petition by Hillcrest and Mr. Ashok
Mittal to take over the company. In 2006 three cross appeals were filed
against the order dated 31.1.2006 passed by the Company Law Board.
22. In August, 2006 Hilcrest filed a suit being CS (OS) No.1832/
D 2008 in Delhi High Court for a declaration that Hilcrest had voting rights
in HQRL in view of the Resolution dated 30th September, 2002 passed
by HQRL whereby HQRL had been converted from a private company
limited by shares to a public company limited by shares. Hilcrest filed an
application being IA No.12164/ 2008 in the said suit being CS (OS)
E No.1832/ 2008 contending that HQRL had obtained an order of injunction
on 12th August, 2005 by fraudulently and concealing the fact that it had
acquired the status of a public company in 2002. Hilcrest also made an
application in suit being C.S. No.992/2005 for vacating of the interim
order dated 12th August whereby Hilcrest had been restrained from
giving effect to the Resolution passed at the meeting of HQRL on 4th
F August, 2005.
23. Being aggrieved by the order dated 12th August, 2005 in C.S.
(OS) No.992/ 2005 Hilcrest filed an appeal therefrom being FAO (OS)
No.282/2005 before the Division Bench of Delhi High Court.
24. On or about 1st October, 2008, Hilcrest filed an application
G being IA No.12164/ 2008 in C.S. (OS) No.1832/ 2008 inter alia praying
that Hilcrest be allowed to participate in the Extraordinary General
Meeting of HQRL to be held on 16th October, 2008 and further praying
for appointment of an Administrator to look after the affairs of the
company.
H
RAM PARSHOTAM MITTAL & ORS. v. HOTEL QUEEN ROAD 989
PVT. LTD. & ORS. [ARUN MISHRA, J.]
25. On 15th October, 2008 the Delhi High Court passed an interim A
order in the said IA No.12164 of 2008 in C.S. (OS) 1382 of 2008 allowing
Hilcrest to vote in the Extraordinary General Meeting to be held on 16th
October, 2008 and also appoint Administrator to look after the day to
day affairs of HQRL.
26. On 16th October, 2008, Mr. R.P. Mittal, Mrs Sarla Mittal and B
HQRL filed an appeal against the orders dated 15th October, 2008 and
24th October, 2008 passed by the Delhi High Court in IA No.12164/
2008 in C.S. (OS) 1832 of 2008 before the Division Bench.
27. The appellants state that on or about 21st October, 2008, Mr.
R.P. Mittal filed an application under the Right to Information Act
whereupon the Registrar of Companies, by letter dated 21st October, C
2008 informed the appellant that the status of HQRL had not been
changed from private company limited by shares to public company
limited by shares for the technical reasons specified in the said letter.
28. On 24th October, 2008 the interim order passed by the Delhi
High Court on 5th October, 2008 in IA No.12164/ 2008 in C.S. (OS) D
No.1832 of 2008 was made absolute.
29. On 14th January, 2009, the Division Bench of Delhi High Court
by a common order disposed of FAO (OS) No.282/2005, FAO (OS)
426 of 2008 and 440 of 2008 upholding the right of Hilcrest to vote in the
meetings of HQRL. The question of whether HQRL was a private E
company limited by shares of public limited company was left open for
adjudication in the suit. On 14th January, 2009, Hilcrest took over the
management of HQRL from R.P. Mittal Group through Ashok Mittal.
30. Appellant Nos.1 and 2 filed a special leave petition in this
Court being SLP (C) No.1069 of 2009 under Article 136 of the
F
Constitution. By a judgment and order dated 20th July, 2009, a Division
Bench of the High Court upheld the right of Hilcrest to vote on the
ground that HQRL was prima facie a public limited company.
31. On 30th July, 2009, Hilcrest and Ashok Mittal sent notice to
the existing shareholders of HQRL under Section 81 (21) of the
Companies Act to allot further equity shares. G
32. On 14th August, 2009 the appellants filed an interim application
being IA No.9920/ 2009 in C.S. (OS) 1832 of 2008 seeking injunction
against Hilcrest and Mr. Ashok Mittal from going ahead with the rights
issue.
H
990 SUPREME COURT REPORTS [2019] 7 S.C.R.
A 33. By a judgment and order dated 18th August, 2009 a Single
Bench of Delhi High Court declined to interfere with the right issue and
the application No.9920/2009 in C.S. (OS) 1832/2009 was dismissed.
34. On 20th August, 2009, the appellant appealed against the order
dated 18th August, 2009 referred to above. The Division Bench, however,
B declined to restrain the rights issue but only directed issuance of notice
to HQRL and Ashok Mittal.
35. On 31.5.2013, the High Court by the impugned order allowed
CoA (SB) 4/2006 of Hillcrest and cancelled the allotment and transfers
made on 27.7.2004, 7.1.2005 and 10.5.2005 on the grounds that Hillcrest
had voting rights and there was breach of sections 286, 300 and 108 of
C the Companies Act.
36. HQRL has contended that the claim of the appellants that
they have funded HQRL at the time of acquisition of the hotel is incorrect.
Rs.33.25 crores was obtained by way of bank loans, loan of Rs.5.5
crores was advanced by Mr. Ashok Mittal, loan of Rs.6.23 crores was
D advanced by Mr. R.P. Mittal. When the hotel was bought it required
extensive renovation and thus further funds were required. Hillcrest
contributed Rs.28.29 crores in preference share capital, Rs.40 crores
bank loan from IOB on personal guarantee of Mr. Ashok Mittal, Mr.
R.P. Mittal and Mrs. Sarla Mittal. HQRL has claimed that the net worth
E of Mr. Ashok Mittal was much higher than others.
37. HQRL has further contended that the management changed
hands from R.P. Mittal group on 15.1.2009 vide order of Delhi High
Court. Prior to leaving the management of HQRL, Mr. R.P. Mittal and
Mrs. Sarla Mittal with the help of their accomplices, removed and did
away with the books of account and statutory records of HQRL.
F Thereafter, a number of third parties, all related to Mr. R.P. Mittal started
claiming to have lent monies to HQRL. Most of these demands were
based on ‘oral agreements’ with Mr. R.P. Mittal. When the new
management assumed charge of HQRL, the financial position of HQRL
was weak, there being only Rs.2.82 lacs in the bank account of HQRL;
G the immediate liabilities including government dues, taxes and salaries
of staff were Rs.98,62,563; HQRL had defaulted on payment of interest
to the bank amounting to Rs.4,73,98,446 along with total bank liability of
about Rs.30 crores; and its account was on the verge of becoming Non
Performing Asset (NPA), due to defaults in repayment of interest and
principal and it was already in litigation with the bank.
H
RAM PARSHOTAM MITTAL & ORS. v. HOTEL QUEEN ROAD 991
PVT. LTD. & ORS. [ARUN MISHRA, J.]
38. In these circumstances, funds were brought in by Mr. Ashok A
Mittal. A sum of Rs.5 crore was brought as loan by Mr. Ashok Mittal
before 31.3.2009; Rs.4.5 crore further loan by Mr. Ashok Mittal before
31.3.2009; and Rs.40 crore by Mr. Ashok Mittal through Rights Issue.
Offer was given to the appellants who refused to subscribe to rights
issue but litigated against the company. Prayer for grant of injunction
B
was refused by Delhi High Court on the Rights Issue in 2009.
39. According to the respondents, it is crystal clear from the above
facts, that the entire funding was on the basis of investment either by
Hillcrest or on the basis of creditworthiness of Mr. Ashok Mittal or
investment made by him. The R.P. Mittal Group’s argument that they
funded the project is incorrect. They have not been able to show how C
such funds have been brought in the company. Said group had neither
funds nor creditworthiness to buy the hotel of HQRL.
40. It was urged by Mr. Pinaki Misra, learned senior counsel on
behalf of the appellants that the claim of Mr. Ashok Mittal that he had
funded Rs.5.5 crores to Moral out of Rs.12.03 crores for acquisition of D
HQRL was false and an afterthought. In order to mislead this Court, he
had made a false statement. The claim of Mr. Ashok Mittal that loan of
Rs.33 crores to Moral was only on his personal guarantee was also
wrong. The action of Mr. Ashok Mittal and Hillcrest was detrimental to
the interest of HQRL.
E
41. Mr. Misra argued that the High Court has erred in relying on
decisions of this Court in interim injunction matters which did not decide
finally the rights of parties. Suit is still pending. He urged that it is well
settled by this Court in State of Assam v. Barak Upatyaka D.U.
Karamchari Sanstha (2009) 5 SCC 694 that any interim order which
does not finally and conclusively decide an issue cannot be a precedent. F
42. It was urged that admittedly, there was no financial
mismanagement in the affairs of HQRL by appellants or R.P. Mittal
group. The High Court while passing the impugned judgment has acted
as a Civil Court and not as Company Court under section 10F of the
Companies Act, 1956. The test as to whether an action is oppressive or G
not is not based on whether it is legally permissible or not since even if
legally permissible, if the action is otherwise against probity, good conduct
or is burdensome, harsh or wrong or is malafide or for collateral purpose,
it would amount to oppression under section 397. Reliance has also been
placed on Needle Industries (India) Ltd. & Ors. v. Needle Industries
H
992 SUPREME COURT REPORTS [2019] 7 S.C.R.
A Newey (India) Holding Ltd. & Ors. (1981) 3 SCC 333; Sangramsinh
P. Gaekwad & Ors. v. Shantadevi P. Gaekwad (Dead) through LRs.
& Ors. (2005) 11 SCC 314; and V.S. Krishnan & Ors. etc. v. Westfort
Hi-tech Hospital Ltd. & Ors. (2008) 3 SCC 363.
43. Shri Misra, learned senior counsel further urged that no
B oppression was caused to Mr. Ashok Mittal by allotment of shares on
27.7.2004, 7.1.2005 and allotment/transfer of shares on 10.5.2005 to
majority shareholders having 99.97% equity. It was further submitted
that there could not be any oppression caused to Mr. Ashok Mittal by
inter se transfer of shares from Moral to Mr. R.P. Mittal as the said
transaction was between Moral and Mr. R.P. Mittal, whereby HQRL
C only records the transfer. The argument on behalf of Mr. Ashok Mittal
and Hillcrest that the allotment was done at undervalue was also not
correct. The transfer of shares from Moral to Mr. R.P. Mittal on
10.5.2005 was between two separate legal entities i.e. Moral and Mr.
R.P. Mittal, whereby HQRL only had the authority to record transfer.
D HQRL could not have raised any objection and also Hillcrest would
have no locus to challenge the same. The only issue qua Hillcrest is
when it was entitled to vote on every resolution placed before the
company in terms of Section 87(2)(b) of the Companies Act. It was
submitted that the first allotment made to Hillcrest was on 5.5.2003
hence as per the submissions of Hillcrest, two years period in terms of
E Section 87(2)(b) of the Companies Act, came to an end on 5.5.2005 and
as per Hillcrest, if the dividend was not paid for 2 years, whether there
is profit or not, Hillcrest were entitled to vote on resolution dated
10.5.2005 effecting transfer is not correct proposition of law. Section
205 of the Companies Act provides that no dividend shall be declared or
F paid by a company for any financial year except out of the profits of the
company for that year arrived at after providing for depreciation in
accordance with the provisions of sub-section.
44. It was urged that the position of shareholders in a company is
of analogous to that of partners inter se. Partnership is merely an
association of persons for carrying on the business of partnership and in
G law the firm name is a compendious method of describing the partners.
Such is, however, not the case of a company which stands as a separate
juristic entity distinct from the shareholders.
45. It was submitted on behalf of appellant that on 10.5.2005
Hillcrest had no voting right under section 87(2)(b) of the Companies
H Act, as there was no profit and no dividend due. Accordingly, no
RAM PARSHOTAM MITTAL & ORS. v. HOTEL QUEEN ROAD 993
PVT. LTD. & ORS. [ARUN MISHRA, J.]
oppression can be said to have been caused to Hillcrest by inter se A
transfer of shares by resolution dated 10.5.2005. Moreover, Hillcrest
had no right to requisition an EOGM under section 169(4) of the
Companies Act. Thus, action of not calling of EOGM does not amount
to oppression. Hillcrest’s contention that preference shareholders had
acquired voting rights under section 87(2)(b) to requisition a meeting
B
under section 169(4) is misconceived, in that section 98(2)(b) only
provides that preference shareholders would only be entitled to vote on
every resolution placed before the company at any meeting. Even
otherwise, the ground of HQRL not remaining subsidiary of Moral (a
public company) has itself been diluted by Hillcrest, as can be seen from
the note with the heading “Shareholding pattern of R1 (HQRL)”. It is C
relevant to mention here that it was held by the High Court of Bombay
in CDS Financial Services (Mauritius) Ltd. v. BPL Communications
Ltd. & Ors. (2004) 121 Comp Case 374, that RBI’s special permission
under the special laws of FEMA will prevail over the provisions of the
Companies Act, 1956. If the analogy of the High Court in impugned
D
order is applied then all earlier meetings of HQRL deserve to be declared
void as violative of sections 286 and 300.
46. It was also urged by Mr. Misra, learned senior counsel, that
the finding of the High Court as to provision under section 108 of the
Companies Act, 1956 and thereafter initiating the proceedings under
section 340 Cr.P.C. against Mr. R.P. Mittal was also erroneous, as the E
High Court had itself recorded that there was no record available with
the bank to ascertain when the certificates were released to the Mr.
R.P. Mittal. The Rights Issue in 2009 was illegal and was only brought in
to give the majority to Mr. Ashok Mittal, even though the issue was not
part of these proceedings. F
47. In the wake of aforesaid submissions, the appellants prayed
that the impugned order of the High Court passed in Co.A. (SB) No.4/
2006 be set aside. The appellants have also sought a declaration that
Hillcrest as preference shareholder, is not entitled to vote under section
87(2)(b) of the Companies Act, 1956, nor can requisition a meeting under
section 169(4)(A) of the said Act. Mr. Misra submitted that the appellants G
be sent back into the management of HQRL.
48. It was submitted by Mr. Jaideep Gupta, learned senior counsel
for HQRL that the interest of the company must be uppermost in the
mind of the Court while granting relief in a petition under Section 397 of
the Companies Act. H
994 SUPREME COURT REPORTS [2019] 7 S.C.R.
A 49. It was argued that it is well settled that the company does not
merely represent the interest of the shareholders but also a much wider
group of entities which would include employees, creditors and public in
general. Reliance was also placed on National Textile Workers’ Union
& Ors. v. P.R.Ramakrishnan & Ors. (1983) 1 SCC 228.
B 50. Mr. Gupta further submitted that HQRL runs a prime hotel in
New Delhi. It is desirable that the interest of business of the hotel be
protected by this Court while giving relief under section 397/398 of the
Companies Act. At the time of purchase of undertaking in 2002-03 the
entire investment was made through Moral. The amount involved was
about Rs.45 crores. Moral financed this sum through a bank loan of
C about Rs.33.25 crores obtained on the credit worthiness of Mr. Ashok
Mittal and against personal guarantee of Mr. R.P. Mittal and Mr. Ashok
Mittal. Mr. Ashok Mittal has substantial interest in the company, he only
held one share in the company and was on the Board of Directors of the
Company.
D 51. Mr. Jaideep Gupta, also argued that with a view to
operationalise the hotel further funds to the tune of Rs.68 crores were
raised including investment of Rs.28.29 crores made by Hillcrest. Hillcrest
was persuaded to make this investment at the behest of Mr. Ashok
Mittal as is evident from the record. Balance sum of Rs.40 crores was
raised by way of bank loans against personal guarantee of Mr. R.P.
E Mittal and Mr. Ashok Mittal. In or about 2004-05 the R.P. Mittal group
through the three impugned resolutions sought to increase its shareholding
in the company. Pursuant to an Extra Ordinary General Meeting Mr.
Ashok Mittal and Hillcrest took over the management of the company.
The actual change in management, hence, took place on or about
F 15.1.2009. After takeover of management by Mr. Ashok Mittal further
investment amounting to Rs.49.5 crore was made by him out of which
Rs.9.5 crores was directly invested by Mr. Ashok Mittal to pay out bank
dues and other pressing creditors. In addition, on or about 30.7.2009
another Rs.40 crores were raised through a rights issue. R.P. Mittal
group was offered shares in proportion to the shareholding in the company
G but declined to take any share or make any investment in the company.
Hence, the entire amount was brought in by Mr. Ashok Mittal. As of
now Mr. Ashok Mittal holds 92% of equity shares of HQRL whereas
Moral and Mr. R.P. Mittal own about 8% shares of HQRL. The main
disputes between the parties pertain to (i) allotment and transfer of shares
H to R.P. Mittal Group and Moral in 2005; (ii) takeover of management by
RAM PARSHOTAM MITTAL & ORS. v. HOTEL QUEEN ROAD 995
PVT. LTD. & ORS. [ARUN MISHRA, J.]
Ashok Mittal and Hillcrest in 2009 and (iii) rights issue which took place A
on or about July, 2009. With reference to (ii) above, it was stated that
there is an interim arrangement which is binding on both the parties and
which has been affirmed all the way up to this Court by a judgment and
order dated 20.7.2009 in Ram Parshotam Mittal & Anr. v. Hillcrest
Realty SDN. BHD. & Ors. (2009) 8 SCC 709. It was also submitted
B
that the said interim arrangement cannot be gone into or modified at this
stage.
52. Mr. Gupta further contended that the only question in the
present proceedings is validity of allotment and transfer which took place
in 2004 and 2005 made by company in favour of Mr. R.P. Mittal, his
wife Mrs. Sarla Mittal and Moral. These transactions are contained in C
three resolutions dated 27.7.2004, 7.1.2005 and 10.5.2005.
53. It has been submitted on behalf of Mr. Ashok Mittal that the
aforesaid transactions which were conducted in the meetings of the
Board of Directors of which no notice had been given to him, though he
was then a Director of HQRL, are illegal, null and void and oppressive. D
In Sri Parmeshwari Prasad Gupta v. The Union of India (1973) 2
SCC 543, this Court held Section 286 of the Companies Act to be
mandatory and violation thereof has been held to render the resolution
passed in such meeting void.
54. He submitted that Resolutions passed in aforesaid meetings E
are also violative of section 300 of the Companies Act as in all of them
arrangements and contracts in favour of two Directors namely Mr. R.P.
Mittal and Mrs. Sarla Mittal have been discussed and voted upon by
said two persons themselves. It is well settled that Directors act as
fiduciaries when they conduct a Board meeting and as fiduciaries they
cannot participate in decisions in their own favour. It is not only an F
established principle of law of equity relating to fiduciaries but is expressly
forbidden by section 300 of the Companies Act. Reliance has been placed
upon Dale & Carrington Invt. (P) Ltd. & Anr. v. P.K. Prathapan &
Ors. (2005) 1 SCC 212; Firestone Tyre and Rubber Co. v. Synthetics
and Chemicals Ltd. & Ors. (1971) 41 Co. Cases 377 and Madras
G
Tube Co. Ltd. & Ors. v. Hari Kishon Somani & Ors. (1985) 1 Comp
Law Journal 195 (Mad).
55. He further submitted that the decision to transfer shares from
Moral to Mr. R.P. Mittal on 10.5.2005 is in violation of section 108 of the
Companies Act because it has been found as a fact by the High Court
that physical share certificate was not in possession of Moral on the H
996 SUPREME COURT REPORTS [2019] 7 S.C.R.
A relevant date. In proceedings under section 397 filed by Hillcrest and
Mr. Ashok Mittal, the Company Law Board found that the resolution
had been passed illegally but it declined to set aside the allotment and
transfer on unsustainable grounds. It is well settled that in a petition
under section 397 of the Companies Act it is normally desirable unless
any special circumstances exist, to pass an order which to all intents and
B
purposes would be beneficial to the company itself and the majority of
its members.
56. It was finally contended that the High Court order be upheld
without upsetting the existing position in relation to management of
company.
C 57. It was submitted by Mr. Mihir Kumar, learned counsel for
Hillcrest that the appellants have filed two appeals namely C.A. No.
3934/2017 and C.A. No.3935/2017. The sole legal question arising in
the instant matters is whether the 3 meetings of the Board of Directors
of HQRL held on 27.7.2004, 7.1.2005 and 10.5.2005 were legal and
D valid. The following issues were not germane to the question:
(1) whether HQRL is a public limited company or a private limited
company?
(2) whether Hillcrest, a preference shareholder had any voting
rights in terms of section 87 of Companies Act, 1956?
E 58. Learned counsel would contend that the aforesaid three Board
meetings before the Company Law Board were gravely vitiated and
invalid for the reasons that they were in violation of Sections 286 and
300 of the Companies Act which operate independently. The resolutions
passed in the impugned meetings were basically for allotment of shares
by the appellants to themselves and one of the meetings held on 10.5.2005
F
also concerned with purported transfer of shares from Moral to Mr.
R.P. Mittal. These meetings constituted continuous acts calculated to
prejudice and oppress Hillcrest and Mr. Ashok Mittal. The appellants
had limited financial investment in HQRL and Hillcrest and Mr. Ashok
Mittal have substantially invested in HQRL. Moral transferred the bank
G loan to HQRL, and the latter repaid it.
59. Learned counsel further contended that the appellants’
argument that the High Court had reached its conclusions on the basis
of this Court’s prima facie view in the matter of grant of interim injunction,
was incorrect and erroneous. The findings in the impugned judgment
H are based entirely on the settled legal propositions. It was submitted that
RAM PARSHOTAM MITTAL & ORS. v. HOTEL QUEEN ROAD 997
PVT. LTD. & ORS. [ARUN MISHRA, J.]
the appellants’ reliance on FEMA is erroneous. It was further submitted A
that the appellants had on 30.8.2018 sought to file certain documents
which were neither placed on record before the Company Law Board
or the High Court; neither pleaded nor relied upon before courts below
and not even pleaded before this Court. Finally, it was prayed that the
appeals be dismissed.
B
60. It was also submitted by learned counsel for Mr. Ashok Mittal
that the appeals were decided by the High Court under section 10F of
the Companies Act, 1956 and confined to questions of law. Reliance
was placed on Sri Parmeshwari Prasad Gupta v. Union of India
(supra). On the anvil of decision in M.S. Madhusoodhanan v. Kerala
Kaumudi (P) Ltd. (2004) 9 SCC 204, the aforesaid 3 Board meetings C
were vitiated and invalid on account of being in violation of sections 286,
300 and 108 of the Companies Act, 1956. Strong reliance was also placed
on Firestone Tyre & Rubber Co. v. Synthetics & Chemicals Ltd. &
Ors. (supra).
61. It was also contended by learned counsel for Mr. Ashok Mittal D
that he had seriously been oppressed as he admittedly had substantial
interest in HQRL; allotment of shares by appellants allotted shares to
themselves without providing any opportunity of representation to Mr.
Ashok Mittal and also without providing any opportunity to Mr. Ashok
Mittal to participate in the offer; said allotment was at gross undervaluation
and in breach of the fiduciary position of Mr. R.P. Mittal and Mrs. Sarla E
Mittal as Directors of HQRL; the 3 meetings violated Section 286 thereby
ipso facto invalidating the meetings. Mr. Ashok Mittal had a right to
participate in the offer of shares to any extent irrespective of his existing
equity shareholding of 1 share; and that transfer of shares by Moral to
Mr. R.P. Mittal was against loan. Even Mr. Ashok Mittal had granted F
loan to Moral but against that Moral did not transfer any shares.
Appellants’ reliance on section 81(1A) is unmerited. It was further
contended that the appellants’ argument of Mr. Ashok Mittal holding
only one share is manifestly erroneous. The Company Law Board
concluded that inasmuch as Mr. Ashok Mittal was substantially interested
and invested in HQRL, the shares ought to be allotted (as well as G
transferred by Moral) to him as well. As against Hillcrest’s investment
of Rs.28,29,29,000/-, the appellants had invested only Rs.90 lakhs in the
share capital of HQRL. The said 3 meetings had a direct bearing on
shareholding of Hillcrest. The parent-subsidiary relationship between
Moral and HQRL was independent of the status of HQRL as a public H
998 SUPREME COURT REPORTS [2019] 7 S.C.R.
A company limited by shares and as a consequence of the shareholders’
resolution dated 30.9.2002. The appellants sought to negate not only the
rights of Mr. Ashok Mittal but also voting rights of Hillcrest. That the
appellants had limited financial investment in HQRL. Factually, there
was no substantial investment by Moral out of its own funds in HQRL;
whereas Hillcrest and Mr. Ashok Mittal had substantially invested in
B
HQRL. That the appellants’ reliance on FEMA is erroneous.
62. Before dilating on the issue of validity of aforesaid three
impugned resolutions, it is a common ground and it was stated by learned
counsel appearing for the parties that two civil suits are pending
consideration; one being OS No.992/2005 filed by HQRL for injunction
C to restrain Hillcrest Realty from proceeding with the proposed resolutions
of EOGM and from exercising voting rights therein; the other Suit
No.1832/2008 seeking declaration that HQRL had become a limited
company by virtue of the resolution passed on 30.9.2002. The matter
travelled to this Court in the matter of grant of injunction which has been
D decided in Ram Parshottam Mittal v. Hillcrest Realty (supra). Rival
contentions were raised before this Court as to whether HQRL is a
private limited or public limited company. This Court has observed that
the decision on the aforesaid question would be dependent upon the
decision of the issue whether by resolution adopted on 30.9.2002, HQRL
had lost its private character and had been converted into a public limited
E company. While the issues are the same in the two suits, this Court has
observed that the interim order dated 12.8.2005 had been obtained by
suppression of material facts and prima facie finding recorded by the
Division Bench of the High Court was that by resolution adopted on
30.9.2002, HQRL had shed its private character and had been converted
F into a public limited company. This Court without meaning to decide the
issue finally prima facie observed that an application was filed before
the Registrar in Form 23 along with resolution dated 30.9.2002 is sufficient
to arrive at a prima facie conclusion that HQRL had altered its status
and had become a public company. It was further observed by this Court
that since the number of members exceeded 50 as the shares were said
G to have been allotted to 134 persons on 30.9.2002, prima facie HQRL
lost its private character. However, this Court also observed significantly
as this issue has to be decided in the two pending suits, it would not be
proper for this Court to dwell into the question further. This Court held
that considering the explanation to section 87(2)(b) gives Hillcrest as a
cumulative preference shareholder the right to vote on every resolution.
H
RAM PARSHOTAM MITTAL & ORS. v. HOTEL QUEEN ROAD 999
PVT. LTD. & ORS. [ARUN MISHRA, J.]
This Court also made it clear that the observations were prima facie in A
the nature of limited only for disposal of special leave petition and should
not influence the final decision in the suits. The question relating to HQRL
whether it is a private or public company has been left open for decision
in the suits. This Court in Ram Parshotam Mittal & Anr. V. Hillcrest
(supra) has made the following observations:
B
“66. 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 issues are the same
in the two suits, the interim orders passed therein operate in C
contradictory fields.
70. 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 which the Division Bench had set aside the
interim order dated 12th August, 2005, passed in Suit No. 992 of D
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 E
September, 2002, Hotel Queen Road had shed its private character
and had been converted into a public company with all its
consequences.
71. From the materials on record, we are prima facie of the view
that by the said resolutions, a final decision had been taken by F
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.
72. The very fact that Form 23 was filed along with the resolutions G
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
H
1000 SUPREME COURT REPORTS [2019] 7 S.C.R.
A 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.
74. Having regard to the definition of “private company” in Section
3(1)(iii), as soon as the number of its members exceeds 50, it
B 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.
C
77. 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, Hillcrest Realty acquired voting
D 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).
78. Since the question as to whether Hotel Queen Road ceased
E 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.
79. However, for the purpose of disposing of these Special Leave
F 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
G is that in the event 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
H Act.
RAM PARSHOTAM MITTAL & ORS. v. HOTEL QUEEN ROAD 1001
PVT. LTD. & ORS. [ARUN MISHRA, J.]
80. In keeping with the aforesaid principle, while dismissing the A
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
B
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 that the management and affairs of Hotel Queen
Road are not left in a state of uncertainty.”
63. It was jointly prayed by learned counsel appearing for the
parties that the issues involved in the said two civil suits need not be C
dilated upon and decided in this matter as that may prejudice the outcome
of the pending civil suits.
64. This Court in the aforesaid decision has itself observed that it
was deciding only interim injunction matter and the findings recorded in
the order were prima facie not binding at the time of decision of civil suit D
and the question to be decided whether HQRL has lost its private
character and has become a public limited company by virtue of resolution
dated 30.9.2002.
65. In view of the observations made by this Court, the order in
Ram Purshottam Mittal (supra) is not final and is only a prima facie E
view in the matter of injunction. We find force in the submission of
learned counsel appearing for the appellants that the observations in
interim order cannot be taken as binding even for the purpose of deciding
this matter as held in the State of Assam v. Barak Upatyaka D.U.
Karamchari Sanstha (2009) 5 SCC 694: F
“21. A precedent is a judicial decision containing a principle, which
forms an authoritative element termed as ratio decidendi. An
interim order which does not finally and conclusively decide an
issue cannot be a precedent. Any reasons assigned in support of
such non-final interim order containing prima facie findings, are G
only tentative. Any interim directions issued on the basis of such
prima facie findings are temporary arrangements to preserve the
status quo till the matter is finally decided, to ensure that the matter
does not become either infructuous or a fait accompli, before the
final hearing.”
H
1002 SUPREME COURT REPORTS [2019] 7 S.C.R.
A 66. The Company Law Board as well as the High Court have
found that the provision of notice under Section 286 of the Companies
Act was not complied with. The High Court has observed that the
interested Directors have participated in the meeting. Mr. R.P. Mittal
and Mrs. Sarla Mittal were in a fiduciary capacity they could not
participate in the decision where shares were transferred to their own
B
group/company. Even if HQRL were a private limited company, the
compliance with the provisions of section 300 of the Act was mandatory.
The High Court has also observed that there was undervaluation of
HQRL shares. The allotment of shares at par to Moral in the meeting on
10.5.2005 and on the same very date, shares of Moral were transferred
C to Mr. R.P. Mittal @ Rs.20 per share. Thus, the High Court has opined
that these acts in overall factual matrix of the case, were sufficient to
conclude that ground under section 397 had been made out.
67. The High Court has also found that HQRL did not have the
share certificates along with duly executed share transfer forms when a
D decision was taken at the Board meeting held on 10.5.2005 to transfer
shares from Moral to Mr. R.P. Mittal. The decision has been held to be
invalid for violation of provisions contained in Section 108 of the Act of
1956 for the aforesaid reason also. The Court has recorded suo motu
proceedings under section 340 Cr. PC against Mr. R.P. Mittal. The Court
has invalidated the impugned resolutions dated 27.7.2004, 7.1.2005 and
E 10.5.2005 and the decision of the Company Law Board has been set
aside.
68. Coming to the submission as to oppression whether the Act
was oppressive or not within the purview of section 397 on behalf of the
appellant, it was submitted that Mr. Ashok Mittal did not fund Rs.5.5
F crores to Moral out of Rs.12.03 crores for acquisition of HQRL, as
claimed. His claim that a loan of Rs.13 crores was obtained on basis of
his personal guarantee was wrong. It was also urged that there was no
financial mismanagement by the appellants. The test whether action
was oppressive or not, is based on whether it is legally permissible or
G not. Reliance has been placed on Needle Industries (supra) in which
this Court has observed:
“49. The question sometimes arises as to whether an action in
contravention of law is per se oppressive. It is said, as was done
by one of us, Bhagwati, J., in a decision of the Gujarat High Court
H in Seth Mohanlal Ganpatram v. Sayaji Jubilee Cotton & Jute
RAM PARSHOTAM MITTAL & ORS. v. HOTEL QUEEN ROAD 1003
PVT. LTD. & ORS. [ARUN MISHRA, J.]
Mills Co. Ltd. [1964] 34 Company Cases 777 that “a resolution A
passed by the directors may be perfectly legal and yet oppressive,
and conversely a resolution which is in contravention of the law
may be in the interests of the shareholders and the company”. On
this question, Lord President Cooper observed in Elder v. Elder
[1952] S.C. 49:
B
The decisions indicate that conduct which is technically legal
and correct may nevertheless be such as to justify the
application of the ‘just and equitable” jurisdiction, and,
conversely, that conduct involving illegality and contravention
of the Act may not suffice to warrant the remedy of winding
up, especially where alternative remedies are available. Where C
the ‘just and equitable’ jurisdiction has been applied in cases of
this type, the circumstances have always, I think, been such as
to warrant the inference that there has been, at least, an unfair
abuse of powers and an impairment of confidence in the probity
with which the company’s affairs are being conducted, as D
distinguished from mere resentment on the part of a minority
at being outvoted on some issue of domestic policy.
Neither the judgment of Bhagwati J. nor the observations in Elder
(supra) are capable of the construction that every illegality is per
se oppressive or that the illegality of an action does not bear upon E
its oppressiveness. In Elder a complaint was made that Elder had
not received the notice of the Board meeting. It was held that
since it was not shown that any prejudice was occasioned thereby
or that Elder could have bought the shares had he been present,
no complaint of oppression could be entertained merely on the
ground that the failure to give notice of the Board meeting was an F
act of illegality. The true position is that an isolated act, which is
contrary to law, may not necessarily and by itself support the
inference that the law was violated with a mala fide intention or
that such violation was burdensome, harsh and wrongful. But a
series of illegal acts following upon one another can, in the context, G
lead justifiably to the conclusion that they are a part of the same
transaction, of which the object is to cause or commit the
oppression of persons against whom those acts are directed. This
may usefully be illustrated by reference to a familiar jurisdiction
in which a litigant asks for the transfer of his case from one Judge
H
1004 SUPREME COURT REPORTS [2019] 7 S.C.R.
A to another. An isolated order passed by a Judge which is contrary
to law will not normally support the inference that he is biased;
but a series of wrong or illegal orders to the prejudice of a party
are generally accepted as supporting the inference of a reasonable
apprehension that the Judge is biased and that the party
complaining of the orders will not get justice at his hands.
B
52. It is clear from these various decisions that on a true
construction of Section 397, an unwise, inefficient or careless
conduct of a Director in the performance of his duties cannot
give rise to a claim for relief under that section. The person
complaining of oppression must show that he has been constrained
C to submit to a conduct which lacks in probity, conduct which is
unfair to him and which causes prejudice to him in the exercise of
his legal and proprietary rights as shareholder. It may be mentioned
that the Jenkins Committee on Company Law Reform had
suggested the substitution of the word ‘Oppression’ in Section
D 210 of the English Act by the words ‘unfairly prejudicial’ in order
to make it clear that it is not necessary to show that the act
complained of is illegal or that it constitutes an invasion of legal
rights (see Gower’s Company Law, 4th edn., page 668). But that
recommendation was not accepted and the English Law remains
the same as in Meyer and in Re H.R. Harmer Ltd., [1959] WLR
E 62 as modified in Re Jermyn St. Turkish Baths (supra). We have
not adopted that modification in India.
111. Whether one looks at the matter from the point of view
expressed by this Court in Nanalal Zaver (AIR 1950 SC 172) or
from the point of view expressed by the Privy Council in Howard
F Smith, (1974 AC 821, 831) the test is the same, namely, whether
the issue of shares is simply or solely for the benefit of the
Directors. If the shares are issued in the larger interest of the
Company, the decision to issue shares cannot be struck down on
the ground that it has incidentally benefited the Directors in their
G capacity as shareholders. We must, therefore, reject Shri Seervai’s
argument that in the instant case, the Board of Directors abused
its fiduciary power in deciding upon the issue of rights shares.”
(emphasis supplied).
H
RAM PARSHOTAM MITTAL & ORS. v. HOTEL QUEEN ROAD 1005
PVT. LTD. & ORS. [ARUN MISHRA, J.]
69. Reliance has also been placed on a decision of this Court in A
Sangramsinh (supra) in which this Court has observed:
“196. The Court in an application under Sections 397 and 398
may also look to the conduct of the parties. While enunciating the
doctrine of prejudice and unfairness borne in Section 459 of the
English Companies Act, the Court stressed the existence of B
prejudice to the minority which is unfair and not just prejudice per
se.
197. The Court may also refuse to grant relief where the petitioner
does not come to court with clean hands which may lead to a
conclusion that the harm inflicted upon him was not unfair and C
that the relief granted should be restricted. (See London School
of Electronics, Re [1986] Ch. 211).
198. Furthermore, when the petitioners have consented to and
even benefited from the company being run in a way which would
normally be regarded as unfairly prejudicial to their interests or D
they might have shown no interest in pursuing their legitimate
interest in being involved in the company. (See RA Noble & Sons
(Clothing) Ltd., Re [1983] BCLC 273).”
(emphasis supplied).
70. Reliance has also been placed on V.S. Krishnan (supra) in E
which this Court has observed:
“14. In a number of judgments, this Court considered in extenso
the scope of Sections 397 and 398. The following judgments could
be usefully referred to:
F
(a) Needle Industries (India) Ltd. and Ors. v. Needle
Industries Newey (India) Holding Ltd. and Ors. [1981] 3 SCC
333.
(b) M.S. Madhusoodhanan and Anr. v. Kerala Kaumudi
(P) Ltd. (2004) 9 SCC 204.
G
(c) Dale and Carrington Investment (P) Ltd. v. P.K.
Prathapan (2005) 1 SCC 212.
(d) Sangramsinh P. Gaekwad v. Shantadevi P. Gaekwad
2005 (11) SCC 314
H
1006 SUPREME COURT REPORTS [2019] 7 S.C.R.
A (e) Kamal Kumar Dutta v. Ruby General Hospital Ltd.
2006 (7) SCC 613.
From the above decisions, it is clear that oppression would be
made out:
(a) Where the conduct is harsh, burdensome and wrong.
B
(b) Where the conduct is mala fide and is for a collateral purpose
where although the ultimate objective may be in the interest of
the company, the immediate purpose would result in an advantage
for some shareholders vis-a-vis the others.
C (c) The action is against probity and good conduct.
(d) The oppressive act complained of may be fully permissible
under law but may yet be oppressive and, therefore, the test as
to whether an action is oppressive or not is not based on whether
it is legally permissible or not since even if legally permissible, if
D the action is otherwise against probity, good conduct or is
burdensome, harsh or wrong or is mala fide or for a collateral
purpose, it would amount to oppression under Sections 397 and
398.
(e) Once conduct is found to be oppressive under Sections
397 and 398, the discretionary power given to the Company Law
E
Board under Section 402 to set right, remedy or put an end to
such oppression is very wide.
(f) As to what are facts which would give rise to or constitute
oppression is basically a question of fact and, therefore, whether
an act is oppressive or not is fundamentally/basically a question
F
of fact.”
71. It was also urged that by inter se transfer between Moral and
Mr. R.P. Mittal, no oppression could be caused to Mr. Ashok Mittal. The
finding as to undervaluation is also not correct. HQRL could not have
raised any objection regarding the aforesaid transaction between Moral
G and Mr. R.P. Mittal. The claim made by Hillcrest that they were entitled
to vote on resolution dated 10.5.2005 is not correct proposition of law. In
this regard reliance has been placed upon section 205 of the Companies
Act. Learned counsel has also urged that position of shareholders in a
company is analogous to that of partners inter se, is wholly inaccurate.
H Company is a separate juristic entity from shareholders. For this purpose,
RAM PARSHOTAM MITTAL & ORS. v. HOTEL QUEEN ROAD 1007
PVT. LTD. & ORS. [ARUN MISHRA, J.]
he has relied upon a decision of this Court in Mrs.Bacha F. Guzdar, A
Bombay v. Commissioner of Income Tax, Bombay AIR 1955 SC 74.
72. It was contended on behalf of respondents that out of Rs.45
crores that Moral financed the amount raised through Bank loans
approximately Rs.33.25 crores which was obtained on the credit
worthiness of Mr. Ashok Mittal and against personal guarantees of Mr. B
R.P. Mittal, and Mr. Ashok Mittal. Mr. R.P. Mittal contributed
approximately Rs.6.23 crores to Moral and Mr. Ashok Mittal
approximately Rs.5.5 crores. Thus they had substantial interest in the
company. Though he held only one share in the company. Mr. Ashok
Mittal was one of the Directors of the company. Investment of Rs.28.29
crores was made by Hillcrest and remaining amount of Rs.40 crores C
was raised by way of bank loans against the personal guarantees of Mr.
R.P. Mittal and Mr. Ashok Mittal. The EOGM was held on 4.10.2005.
The resolution taken at the EOGM has prima facie been upheld by the
court. After taking over, Mr. Ashok Mittal has invested Rs.49.5 crores
which consists of Rs.9.5 crores directly invested by Mr. Ashok Mittal to D
pay out bank dues and other personal creditors and on 13.7.2005 another
Rs.40 crores was raised through rights issue. R.P. Mittal group was
offered shares in proportion to the shareholding but they declined to take
any shares. Mr. Ashok Mittal is the major investor in the company. He
holds 92% of the equity shares and Mr. R.P. Mittal owns approximately
8% of the shares. The matter as to taking over of management by Mr. E
Ashok Mittal in 2009 and rights issue in July, 2009 are the subject
matter of separate proceedings and are not required to be gone into in
the present matter. The interim arrangement ordered by this Court in
Ram Purshottam Mittal v. Hillcrest (supra) is binding. No notice was
given to Mr. Ashok Mittal, the then Director of the company. Accordingly, F
all the three meetings convened under Section 286 of the Companies
Act. For this purpose, reliance has been placed on Sri Parmeshwari
Prasad Gupta v. Union of India (1973) 2 SCC 543. The resolutions
are also violative of section 300 of the Companies Act of 1956. There
was repeated violation. The action taken as per the impugned resolutions
were oppressive as they involved repeated violation of the mandatory G
provisions of the Companies Act of 1956 and was done surreptitiously
without giving any notice to Mr. Ashok Mittal or Hillcrest. The attempt
to convert the statutory status of HQRL vis-à-vis public company, Moral
by transferring the shares of Moral in HQRL was against the interest of
the preference shareholders of Hillcrest, therefore, it is oppressive. H
1008 SUPREME COURT REPORTS [2019] 7 S.C.R.
A Hillcrest and Mr. Ashok Mittal have also supported the aforesaid
submissions.
73. Mr. Jaideep Gupta, learned senior counsel to carry home the
aforesaid submission has placed reliance on following paragraph of
Sangramsinh P. Gaekwad (supra) thus:
B “181. The jurisdiction of the Court to grant appropriate relief under
Section 397 of the Companies Act indisputably is of wide amplitude.
It is also beyond any controversy that the court while exercising
its discretion is not bound by the terms contained in Section 402 of
the Companies Act if in a particular fact situation, a further relief
C or reliefs, as the court may seem fit and proper, is warranted.
(See Bennet Coleman & Co. v. Union of India [(1977) 47 Comp
Cases 92 (Bom)] and Syed Mahomed Ali v. R. Sundaramoorthy;
1958 2 MLJ 259). But the same would not mean that Section 397
provides for a remedy for every act of omission or commission on
the part of the Board of Directors. Reliefs must be granted having
D regard to the exigencies of the situation and the court must arrive
at a conclusion upon analyzing the materials brought on records
that the affairs of the company were such that it would be just
and equitable to order winding up thereof and that the majority
acting through the Board of Directors by reason of abusing their
E dominant position had oppressed the minority shareholders. The
conduct, thus, complained of must be such so as to oppress a
minority of the members including the petitioners vis-à-vis the
shareholders which a fortiori must be an act of the majority.
Furthermore, the fact situation obtaining in the case must enable
the court to invoke just and equitable rules even if a case has
F been made out for winding up for passing an order of winding of
the company but such winding up order would be unfair to the
minority members. The interest of the company vis-à-vis the
shareholders must be uppermost in the mind of the court while
granting a relief under the aforementioned provisions of the
G Companies Act, 1956.”
He has also relied upon the decision in Parameswari Prasad
Gupta v. Union of India (supra), the Court observed:
“10. Now, it cannot be disputed that notice to all the Directors of
meeting of the Board of Directors was essential for the validity of
H
RAM PARSHOTAM MITTAL & ORS. v. HOTEL QUEEN ROAD 1009
PVT. LTD. & ORS. [ARUN MISHRA, J.]
any resolution passed at the meeting and that as, admittedly, no A
notice was given to Mr. Khaitan, one of the Directors of the
Company, the resolution passed terminating the services of the
appellant was invalid.”
Reliance has also been placed on M.S. Madhusoodhanan v.
Kerala Kaumudi (P) Ltd. (supra) thus: B
“125. In the circumstances, we hold that Madhusoodhanan and
his group were not served with the notice dated 1.8.1986. It is,
therefore, unnecessary to decide whether the period prescribed
in the notice to apply for the shares was too short or contrary to
the Articles of Association of Kerala Kaumudi. C
126. Once we have held that Madhusoodhanan and his group,
all of whom held shares in Kerala Kaumudi, were not given notice
to apply for allotment of the additional shares, it must be held that
the subsequent allotment of the shares to Ravi and Srinivasan at
the meeting held on 8-8-1986 and the affirmation of such allotment D
at the meeting allegedly held on 16-8-1986 were vitiated thereby
and invalid.”
Reliance has also been placed on Union of India v. Allied
International Products Ltd. & Anr. (1970) 3 SCC 594:
“15. The application for allotment of shares and acceptance thereof E
constitute a contract between the Company and the applicant.
Section 73(1) of the Companies Act imposes a penalty whereby
the allotment of shares becomes void on the happening of the
contingency specified therein. The imposition of penalty depends
upon the violation of the Exchange and when imposed operates to F
invalidate all contracts resulting from allotment of shares between
the applicants for shares and the Company. Such a provision must
be strictly construed. Unless the statute in clear terms so provides,
when the Exchange intimates its desire to consider the application
further, an inference that the Exchange has still rejected the
application, cannot be made.” G
(Emphasis supplied)
74. Section 286 of the Act of 1956 dealing with requirement of
notice to Director, is as under:
H
1010 SUPREME COURT REPORTS [2019] 7 S.C.R.
A “Sec 286 - Notice of meetings.
(1) Notice of every meeting of the Board of directors of a
company shall be given in writing to every director for the time
being in India, and at his usual address in India to every other
director.
B (2) Every officer of the company whose duty it is to give notice
as aforesaid and who fails to do so shall be punishable with
fine which may extend to one thousand rupees.”
It has not been disputed that no notice under section 286 had been
given to Mr. Ashok Mittal, the Director when impugned resolutions were
C passed.
75. In Needle Industries (supra), it has been observed by this
Court that the resolution passed by the Director may be perfectly legal
and yet oppressive and conversely a resolution which is in contravention
of the law may be in the interest of the shareholders of the company.
D Every illegality will not make it oppressive. Prejudice has to be shown.
No complaint of oppression could be entertained merely on the ground
of failure to attach notice of Board meeting was an act of illegality. It
has to be shown that the action was unfair to the person to whom notice
has not been given and causes prejudice to him in the exercise of legal
E and proprietary rights as shareholders.
76. In Sangramsinh P. Gaekwad (supra), it has been observed
that their conduct is harsh, burdensome, wrong, mala fide or and is for a
collateral purpose against probity and good conduct. The impugned
resolutions are unfair to Mr. Ashok Mittal in the facts and circumstances
F of the case even otherwise the absence of the notice is enough to
invalidate the same as mandated by section 286.
77. The provisions of section 300 of the Companies Act has also
been pressed into service which provides that interested Director is not
to participate or vote in the Board’s proceedings. Section 300 is extracted
hereunder:
G
“Sec 300 - Interested director not to participate or vote in
Board’s proceedings.
(1) No director of a company shall, as a director, take any part in
the discussion of, or vote on, any contract or arrangement entered
H into, or to be entered into, by or on behalf of the company, if he is
RAM PARSHOTAM MITTAL & ORS. v. HOTEL QUEEN ROAD 1011
PVT. LTD. & ORS. [ARUN MISHRA, J.]
in any way, whether directly or indirectly, concerned or interested A
in the contract or arrangement; nor shall his presence count for
the purpose of forming a quorum at the time of any such discussion
or vote; and if he does not, his vote shall be void.
(2) Sub-section (1) shall not apply to
(a) a private company which is neither a subsidiary nor a holding B
company of a public company;
(b) a private company which is a subsidiary of a public company,
in respect of any contract or arrangement entered into, or to
be entered into, by the private company with the holding
company thereof; C
(c) any contract of indemnity against any loss which the
directors, or any one or more of them, may suffer by reason of
becoming or being sureties or a surety for the company;
(d) any contract or arrangement entered into or to be entered D
into with a public company, or a private company which is a
subsidiary of a public company, in which the interest of the
director aforesaid consists solely
(i) in his being a director of such company and the holder of
not more than shares of such number or value therein as is
E
requisite to qualify him for appointment as a director thereof,
he having been nominated as such director by the company
referred to in sub-section (1), or
(ii) in his being a member holding not more than two per
cent of its paid-up share capital;
F
(e) a public company, or a private company which is a subsidiary
of a public company, in respect of which a notification is issued
under sub-section (3), to the extent specified in the notification.
(3) In the case of a public company or a private company which
is a subsidiary of a public company, if the Central Government is G
of opinion that having regard to the desirability of establishing or
promoting any industry, business or trade, it would not be in the
public interest to apply all or any of the prohibitions contained in
sub-section (1) to the company, the Central Government may, by
notification in the Official Gazette, direct that that sub-section
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1012 SUPREME COURT REPORTS [2019] 7 S.C.R.
A shall not apply to such company, or shall apply thereto subject to
such exceptions, modifications and conditions as may be specified
in the notification.
(4) Every director who knowingly contravenes the provisions of
this section shall be punishable with fine which may extend to
B fifty thousand rupees.”
78. It was urged on behalf of the respondents that the decisions
were taken in the impugned resolution in favour of two Directors namely,
Mr.R.P. Mittal and Mrs. Sarla Mittal. They have been discussed and
voted upon by said two persons themselves. As the Directors act as
C fiduciaries when they conduct Board meeting, they cannot participate in
decisions in their own favour. For this purpose, reliance has been placed
upon Dale & Carrington Invt. (P) Ltd. & Anr. V. P.K. Prathapan &
Ors. (supra), this Court observed:
“13. On the role of Directors, the law is well settled. The position
D has been the subject matter of various decisions. Some of them
are:
In Regal (Hastings) Ltd. v. Gulliver 1942 (1) All ER 378 (HL)
Lord Russell of Killowen observed as under (All ER p. 387 G):
“Directors of a limited company are the creatures of statute
E and occupy a position peculiar to themselves. In some respects,
they resemble trustees, in others they do not. In some respects,
they resemble agents, in others they do not. In some respects,
they resemble managing partners in others they do not.”
The said judgment quotes from Principles of Equity by Lord Kames.
F In one sentence the entire concept is conveyed. The sentence
runs: (All ER p. 391 H)
“Equity prohibits a trustee from making any profit by his
management, directly or indirectly.”
Ultimately the issue in each case will depend upon the facts of
G that case.
14. Lindley, M.R. observed in Alexander v. Automatic Telephone
Co. (1900) 2 Ch. 56:
“The Court of Chancery has always exacted from Directors
H the observance of good faith towards their shareholders and
RAM PARSHOTAM MITTAL & ORS. v. HOTEL QUEEN ROAD 1013
PVT. LTD. & ORS. [ARUN MISHRA, J.]
towards those who take shares from the company and become A
co-adventurers with themselves and others who may join them.
The maxim “caveat emptor” has no application to such cases,
and Directors who so use their powers as to obtain benefits for
themselves at the expense of the shareholders, without informing
them of the fact, cannot retain those benefits and must account
B
for them to the company, so that all the shareholders may
participate in them.”
16. In Needle Industries case (supra) the Board of Directors had
resolved to issue 16,000 equity shares of Rs. 100/- each to be
offered as rights shares to the existing shareholders in proportion
to the shares held by them. The offer was to be made by a notice C
specifying the number of shares to which each shareholder was
entitled to. The notice further said, in case the offer was not
accepted within 16 days from the date on which it was made, it
was to be deemed to have been declined by the shareholder
concerned. The holding company held 18,990 shares and it was D
entitled to 9495 rights shares. The holding company could not
avail its right to exercise the option for purchase of rights shares
offered to it. As a result, the whole of the rights issue consisting
of 16,000 shares was allotted to the Indian shareholders. The
holding company filed a petition under Sections 397 and 398 of
the Companies Act, 1956 in the High Court. The Single Judge E
held in favour of the holding company that it had suffered a loss in
view of the fact that the market value of the rights share was Rs.
190/- whereas the shares were allotted at par i.e. at Rs. 100/-.
The grievance of the holding company was that on account of
postal delays it failed to receive the notice containing the offer of F
rights shares in time, and therefore, it could not exercise its option
to buy the share. On appeal the Division Bench held that the
affairs of Needle Industries (India) Ltd. (supra) were being
conducted in a manner oppressive to the holding company. The
Division Bench ordered winding up of the company. A further
appeal to the Court was allowed mainly on the ground that there G
was no oppression. However, a direction was issued that the Indian
shareholders pay an amount equivalent to that by which they were
unjustifiably enriched, namely Rs. 90 x 9495 which comes to Rs.
8,54,550/- to the holding company.
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1014 SUPREME COURT REPORTS [2019] 7 S.C.R.
A 17. In Needle Industries case (supra) this Court referred to some
old English decisions with approval. Punt v. Symons (1903) 2 Ch.
506 was quoted (at SCC p. 394, para 105) in which it was held:
“Where shares had been issued by the Directors, not for
the general benefit of the company, but for the purpose of
B controlling the holder of the greater number of shares by
obtaining a majority of voting power, they ought to be restrained
from holding the meeting at which the votes of the new
shareholders were to have been used.”
18. Piercy v. S. Mills & Co. Ltd. (1920) 1 Ch.77 applied the
C same principle while holding: (All ER p. 316 D-E)
“The basis of both cases is, as I understand, that Directors
are not entitled to use their powers of issuing shares merely
for the purpose of maintaining their control or the control of
themselves and their friends over the affairs of the company,
D or merely for the purpose of defeating the wishes of the existing
majority of shareholders.”
19. In Hogg v. Cramphorn Ltd. (1967) 1 Ch 254, Buckley, J.
reiterated the principle in Punt (supra) and in Piercy (supra). It
was held that if the power to issue shares was exercised for an
E improper motive the issue was liable to be set aside and it was
immaterial that the issue was made in a bona fide belief that it
was in the interests of the company.
20. The principle deduced from these cases is that when powers
are used merely for an extraneous purpose like maintenance or
F acquisition of control over the affairs of the company, the same
cannot be upheld.
21. Courts in the Commonwealth countries including England and
Australia have emphasized that the duty of the Directors does not
stop at “to act bona fide” requirement. They have evolved a
doctrine called the ‘proper purpose doctrine’ regarding the duties
G
of company directors. In Hogg v. Cramphorn (supra), explicit
recognition was given to the proper purpose test over and above
the traditional bonafide test. In this case the Director had allotted
shares with special voting rights to the trustees of a scheme set
up for the benefit of company employees with the primary purpose
H of avoiding a takeover bid. Buckley, J. found as a fact that the
RAM PARSHOTAM MITTAL & ORS. v. HOTEL QUEEN ROAD 1015
PVT. LTD. & ORS. [ARUN MISHRA, J.]
Directors had acted in subjective good faith. They had indeed A
honestly believed that their actions were in the best interests of
the company. Despite this it was observed: (All ER p. 427 E)
“An essential element of the scheme, and indeed its primary
purpose, was to ensure control of the company by the Directors
and those whom they could confidently regard as their B
supporters.”
22. As such, he concluded that the allotment was liable to be set
aside as a consequence of the exercise of the power for an
improper motive. He also held that the power to issue shares was
fiduciary in nature. In Howard Smith Ltd. v. Ampol Petroleum C
Limited 1974 AC 821, the Privy Council confirmed the above
view expressed by Buckley, J. which shows a preference for the
proper-purpose doctrine. The Privy Council felt that the bona fide
test was not sufficient to meet the challenge because it failed to
encompass the obligation of directors to be fair. The Directors’
acts should not only satisfy the test of bona fides, they should also D
be done with a proper motive. Any lingering doubts over the status
of the proper purpose doctrine as a separate and independent
head of Directors duty within the common law jurisdiction have
been laid to rest by two decisions of the Court of Appeal in England
in Rolled Steel Products (Holdings) Limited v. British Steel E
Corporations 1986 Ch 246 and Bishopsgate Investment
Management Ltd. (in liquidation) v. Maxwell (No. 2) (1994) 1 All
ER 261 (CA). It was held by the Court of Appeal in Bishopsgate
(supra) that the bona fides of the Directors alone would not be
determinative of the propriety of their actions. In a parallel
development in Australia the proper purpose doctrine has been F
approved in a decision of the High Court in Whitehouse v. Carlto
Hotel Pty. Ltd. (1987) 162 CLR 285.
23. Tea Brokers (P) Ltd. v. Hemendra Prosad Barooah (1998) 5
Comp LJ 463 was also a case of a minority shareholder who on
becoming Managing Director of the company, issued further share G
capital in his favour in order to gain control of management of the
company. Barooah and his friends and relations were majority
shareholders of the respondent company having 67% of the total
issued capital of the company. Barooah personally held 300 equity
shares out of 1155 shares issued by the company. He was at all H
1016 SUPREME COURT REPORTS [2019] 7 S.C.R.
A material times a Director of the company. His case was that he
was wrongfully and illegally ousted from the management of the
company. One Khaund, who initially started as an employee of
the company had 110 shares in the company and belonged to the
minority group. Khaund was appointed as the Managing Director
of the company. Barooah’s grievance was that Khaund took
B
advantage of his position as Managing Director and acted in a
manner detrimental and prejudicial to the interests of the company
and in a manner conducive to his own interest. Khaund had hatched
a plan with other Directors, to convert petitioner Barooah into a
minority and to obtain full and exclusive control and management
C of the affairs of the company. In a petition filed under Sections
397 and 398 of the Companies Act, 1956, acts of Khaund were
found to be by way of ‘oppression and mismanagement’ within
the meaning of Sections 397 and 398 of the Companies Act.
Allotment of 100 equity shares by the company to Khaund at a
meeting of the Board of Directors said to have been held on 14
D
January, 1971 was held to be illegal. The Board of Directors of
the company was superseded and a special officer was appointed
to carry on management of the company with the advice of
Barooah, Khaund and a representative of the labour union. There
were several other directions issued by the Court which are not
E necessary to be mentioned here. The Division Bench considered
in detail the relevant legal position. Without using the phrase ‘proper
purpose doctrine’ the principle enunciated therein, was applied.
The following observations of Justice A.N. Sen are reproduced:
“It is well settled that the Directors may exercise their powers
F bona fide and in the interest of the company. If the Directors
exercise their powers of allotment of shares bona fide and in
the interest of the company, the said exercise of powers must
be held to be proper and valid and the said exercise of powers
may not be questioned and will not be invalidated merely
because they have any subsidiary additional motive, even
G though this be to promote their advantage. An exercise of
power by the Directors in the matter of allotment of shares, if
made mala fide and in their own interest and not in the interest
of the company, will be invalid even though the allotment may
result incidentally in some benefit to the company.”
H
RAM PARSHOTAM MITTAL & ORS. v. HOTEL QUEEN ROAD 1017
PVT. LTD. & ORS. [ARUN MISHRA, J.]
27. Reference has been made to the case of Piercy v. S. Mills & A
Co. Ltd. [1920 1 Ch 77] where Directors, who controlled merely
a minority of the voting power in the company allotted shares to
themselves and their friends not for the general benefit of the
company, but merely with the intention of thereby acquiring a
majority of the voting power and of thus being able to defeat the
B
wishes of the existing minority of shareholders. It was held that,
even assuming that the directors were right in considering that
the majority’s wishes were not in the best interests of the company,
the allotments were invalid and ought to be declared void. It follows
from this case that the exercise by Directors of fiduciary powers
for purposes other than those for which they were conferred is C
invalid. It may be said that although the power of issuing shares is
given to Directors primarily for the purpose of enabling them to
raise capital when required for the purpose of the company, this
was not the object of the Directors in this case.
28. It will be seen from the judgments in Needle Industries (supra) D
and Tea Brokers (supra) that the courts in India have applied the
same tests while testing exercise of powers by Directors of
companies as in other Commonwealth countries.
29. In the present case we are concerned with the propriety of
issue of additional share capital by the Managing Director in his E
own favour. The facts of the case do not pose any difficulty
particularly for the reason that the Managing Director has neither
placed on record anything to justify issue of further share capital
nor has it been shown that proper procedure was followed in
allotting the additional share capital. Conclusion is inevitable that
neither was the allotment of additional shares in favour of F
Ramanujam bona fide nor was it in the interest of the company
nor was a proper and legal procedure followed to make the
allotment. The motive for the allotment was mala fide, the only
motive being to gain control of the company. Therefore, in our
view, the entire allotment of shares to Ramanujam has to be set G
aside.”
(emphasis supplied)
79. In Firestone Tyre and Rubber Co. v. Synthetics and
Chemicals Ltd. & Ors. (supra), it was observed:
H
1018 SUPREME COURT REPORTS [2019] 7 S.C.R.
A . “Section 300 of the Companies Act, 1956, embodies, just as
section 91B of the Indian Companies Act, 1913, did, the general
rule of equity (see Pratt (T.R.) (Bombay) Ltd. v. M.T. Ltd. [1938]
8 Comp. Cas. 137. The clearest exposition of this rule is to be
found in Aberdeen Rly. Co. v. Blaikie. [1854] 1 Macq. 461-471-
72 (H.L.). In that case, Lord Cranworth said:
B
“A corporate body can only act by agents and it is course the
duty of those agents so to act as best to promote the interests
of the corporation whose affairs they are conducting. Such
agents have duties to discharge of a fiduciary nature towards
their principle. And it is a rule of universal application, that no
C one, having such duties to discharge, shall be allowed to enter
into engagements in which he has, or can have, a personal
interest conflicting, or which possibly may conflict, with the
interest of those whom he is bound to protect. So strictly is this
principle adhered to, that no question is allowed to be raised as
D to the fairness or unfairness of a contract so entered into. It
obviously is, or may be, impossible to demonstrate how far in
any particular case the terms of such a contract have been the
best for the interest of cestui que trust, which it was possible
to obtain. It may sometimes happen that the terms on which a
trustee has dealt or attempted to deal with the estate or interests
E of those for whom he is a trustee, have been as good as could
have been obtained from any other person, - they may even at
the time have been better. But still so inflexible is the rule that
no inquiry on that subject is permitted.”
Though this was a case from Scotland, the rule of English law is
F the same, for, as observed by Swinfen Eady. L.J., in Transvaal
Lands Company v. New Belgium (Transvaal) Land and
Development Company, [1914] 2 Ch. 488, 502 (C.A.), the doctrine
rests on such obvious principles good sense that it is difficult to
suppose that there could be any system of law in which it would
G not be found, In Transvaal Land Company’s case it was held at
page 503 that:
“Where a director of a company has an interest as shareholder in
another company or is in a fiduciary position towards, and owes a
duty to, another company which is proposing to enter into
H engagements with the company of which he is a director, he is in
RAM PARSHOTAM MITTAL & ORS. v. HOTEL QUEEN ROAD 1019
PVT. LTD. & ORS. [ARUN MISHRA, J.]
our opinion within this rule. He has a personal interest within this A
rule or owes a duty which conflicts with his duty to the company
of which he is a director. It is immaterial whether this conflicting
interest belongs to him beneficially or as trustee for others.”
This rule was characterised by Lord Cairns L.C. in Parker v.
McKenna [1874] LR 10 Ch. App. 96, 118, as not a technical or B
arbitrary rule but a rule founded upon the highest and truest principle
of morality. Thus, this rule applies not only where there in a conflict
of interest or conflict of interest and duty but also where there is
a conflict to two duties. It is immaterial whether the interest is a
personal interest or arises out of a fiduciary capacity or whether
the duty which is owed is in a fiduciary capacity. Actual conflict is C
also not necessary. A possibility of conflict is enough to bring the
case within the ambit of this rule nor does the application of this
rule depend upon the extent of the adverse interest. Directors
stand towards the company in a fiduciary position In India this
fiduciary character has received statutory recognition in section D
88 of the Indian Trusts Act, 1882. The reason underlying this rule
is that the company has a right to the unbiased voice, advice and
collective wisdom of its directors. (See Benson v. Heathorn; [1842]
1 Y. & C. Ch. Cas. 326, 341-42; Imperial Mercantile Credit
Association v. Coleman and Victors Ltd. v. Lingard [1927] 1 Ch
323, 330).” E
(emphasis supplied)
80. In Madras Tube Co. Ltd. & Ors. v. Hari Kishon Somani &
Ors. (supra), it was observed:
“I do not think the pattern of section 91(a) and 91(B) should be F
superimposed on the enactment of the present group of sections
299, 300 and 301. Section 301, in terms, refers to a register being
kept of contracts and arrangements to which section 297 or section
299 applies. It does not refer, in terms, to section 300. This is
because the purpose of a register of contracts is to put the G
shareholder upon notice of the contract and arrangements in which
the directors are interested and which they have disclosed whereas
the function of section 300 is quite different which is to render
invalid any resolution of a Board Meeting in which an interested
director participates or votes.
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1020 SUPREME COURT REPORTS [2019] 7 S.C.R.
A The result of this discussion is that the appointment of an additional
director by a resolution of the Board in terms of the power given
to the Board under the company’s articles must be regarded as
an arrangement rendered by or on behalf of the company if in
that appointment a director who is interested in the appointee
participates or votes, then two consequences flow. One is that he
B
could not form the quorum; the other is that the resolution itself is
void. In this case H M Periwal being the brother of P C Periwal
must be regarded as interested in the appointment of his brother
in the board of directors in the real sense of that expression. As
the Supreme Court had occasion to point out in the Firestone case
C (1970) 2 Company Law Journal p 200), the expressions ‘interested
or concerned’ are fairly wide in their connotation and they include
not merely a financial concern or interest, but include any interest
arising out of the closeness of relationship as between father and
son, father and daughter, husband and wife, brother and sister
and the like. I am therefore satisfied that in this case the first
D
resolution was wanting in quorum because H M Periwal was not
entitled to participate in the voting and the resolution itself was
not valid because H M Periwal has voted that resolution. It follows
that P C Periwal was not validly appointed as Additional Director.
xxxxx
E
As I earlier remarked the fundamental principle of equity which
runs right through like a golden thread in all the decisions of courts
is that no director can participate or vote in a Board meeting where
he is aware that his duties and interests conflict or are likely to be
in competition. This rule attaches to the very office of a director
F which is of a fiduciary character. Corporate enterprises, in which
the ultimate properties are the shareholders, are entrusted
completely in the hands of the Board of Directors. The only basis
for the Board being given the management and administration of
the corporate enterprise is the trust and confidence reposed by
G the shareholders in the directors. It is, therefore, of prime
importance that in any transaction in which the directors participate
as directors of the company they should not only declare their
personal interests therein, buy they must desist from participation
in any decision-making. The theory is that the Board acts as a
body. How the act of the Board as a body is shaped is a matter
H
RAM PARSHOTAM MITTAL & ORS. v. HOTEL QUEEN ROAD 1021
PVT. LTD. & ORS. [ARUN MISHRA, J.]
left to the inter-play of the minds of the directors, and the respective A
strength or weakness of each to carry the others along with him.
If, therefore, a director who could sway the decision of the Board,
one way or the other is a person interested in the subject matter
of the deliberations and nevertheless participates in the meeting,
and the interests of the director are not identical with those of the
B
company, the ultimate damage to the company and the shareholders
could well be imagined. This principle that where a director has a
personal interest, he ought not to participate in the Board’s
deliberation is so sacred that no further inquiry is necessary to set
at naught decisions brought about in violation of the principles.
No harm might result to the company by allowing participation of C
an interested director, and yet the participation, per se, is vicious.”
(emphasis supplied)
81. In the light of the aforesaid decisions it was improper for the
Directors to allot shares to themselves and to the exclusion of Mr. Ashok
Mittal in the facts and circumstances of the case and that too without D
issuance of notice to him.
82. It was also submitted that Hillcrest would have no right to
vote as no dividend was declared in view of the provisions contained in
section 87 of the Companies Act of 1956. Reliance has been placed on
following decisions: E
(a) In Mrs. Bacha F. Guzdar, Bombay (supra), the Court observed:
“9. It was argued that the position of shareholders in a company
is analogous to that of partners ‘inter se’. This analogy is wholly
inaccurate. Partnership is merely an association of persons for F
carrying on the business of partnership and in law the firm name
is a compendious method of describing the partners. Such is,
however, not the case of a company which stands as a separate
juristic entity distinct from the shareholders. In Halsbury’s Laws
of England, Volume 6 (3rd Ed.), page 234, the law regarding the
attributes of shares is thus stated: G
“A share is a right to a specified amount of the share capital
of a company carrying with it certain rights and liabilities while
the company is a going concern and in its winding up. The shares
or other interest of any member in a company are personal estate
H
1022 SUPREME COURT REPORTS [2019] 7 S.C.R.
A transferable in the manner provided by its articles, and are not of
the nature of real estate.”
(b) This Court in National Textile Workers Union & Ors. v. P.
R. Ramakrishna & Ors. (1983) 1 SCC 228 has observed:
“9. Considerable reliance was however placed on behalf of
B respondent Nos. 6 to 9 on the statement of the law on this point
contained in the leading text books on company law. Respondent
Nos. 6 to 9 drew our attention to Palmer Company Precedents
(17th Edn.) volume 2 at page 77 where it is stated that any creditor
or shareholders may appear to support or oppose the petition but
C no one else can do so even if he has an indirect interest in the
continued existence of the company. So also in Buckley on the
Companies Act (14th Edn.) at page 546 the law has been stated
in the following terms, namely, “the only persons entitled to be
heard are the company, its creditors and contributories...the court
may in its discretion hear other persons who have an interest in
D order to learn what public grounds there are in favour of, or in
opposition to, the winding up but such persons can be heard only
as amicus curiae and cannot appeal” Our attention was also invited
to Halsbury’s Laws of England 4th Ed. Vol. 7 where a similar
statement of the taw is to be found at page 614 paragraph 1028.
E Now it is undoubtedly true that according to the statement of the
law contained in these three leading text books, it is only the
company, the creditors and the contributories who are entitled to
appear on the winding up petition and no other persons have a
right to be heard, but this statement of the law is based on the old
decision in Re. Bradford Navigation Company which was carried
F in appeal and decided as Re. Bradford Navigation Company. This
decision given by the English Courts over a hundred years ago
when a company was regarded merely as a legal device brought
into being as a result of a contractual arrangement between the
shareholders for the purpose of carrying on trade or business and
G the workers were looked upon as no more than employees of the
company working under a master and servant relationship and
the interest of the public as consumers or otherwise was a totally
irrelevant consideration and it can have no validity in the present
times when the entire concept of a company has changed and it
has been transformed into a dynamic socio-economic institution
H
RAM PARSHOTAM MITTAL & ORS. v. HOTEL QUEEN ROAD 1023
PVT. LTD. & ORS. [ARUN MISHRA, J.]
in which capital and labour are both equal partners, possibly with A
heavy weightage in favour of labour and the interest of the public
as consumers as also the general welfare and common good of
the community constitute a vital consideration. We cannot allow
the dead hand of the past to stifle the growth of the living present.
Law cannot stand still; it must change with the changing social
B
concepts and values. If the bark that protects the tree fails to
grow and expand along with the tree, it will either choke the tree
or if it is a living, tree, it will shed that bark and grow a new living
bark for itself. Similarly, if the law fails to respond to the needs of
changing society, then either it will stifle the growth of the society
and choke its progress or if the society is vigorous enough, it will C
cast away the law which stands in the way of its growth. Law
must therefore constantly be on the move adopting itself to the
fast changing society and not lag behind. It must shake off the
inhibiting legacy of its colonial past and assume a dynamic role in
the process of social transformation. We cannot therefore
D
mechanically accept as valid a legal rule which found favour with
the English courts in the last century when the doctrine of laissez
faire prevailed. It may be that even today in England the courts
may be following the same legal rule which was laid down almost
a hundred years ago, but that can be no reason why we in India
should continue to do likewise. It is possible that this legal rule E
might still be finding a place in the English text books because no
case like the present one has arisen in England in the last 30 years
and the English courts might not have had any occasion to consider
the acceptability of this legal rule in the present times. But whatever
be the reason why this legal rule continues to remain in the English
F
text books, we cannot be persuaded to adopt it in our country,
merely on the ground that it has been accepted as a valid rule in
England. We have to build our own jurisprudence and though we
may receive light from whatever source it comes, we cannot
surrender our judgment and accept as valid in our country whatever
has been decided in England. The rule enunciated in re: Bradford G
Navigation Company case (supra) does not commend itself to us
and though it has been followed by a single Judge of the Bombay
High Court in re Edward Textiles Limited (supra), we do not think
it represents correct law.
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1024 SUPREME COURT REPORTS [2019] 7 S.C.R.
A (c) He has also referred to Halsbury’s Laws of England, Volume
6 (3rd Ed.), page 234, the law regarding the attributes of shares is thus
stated:
“A share is a right to specified amount of the share capital of a
company carrying with it certain rights and liabilities while the
B company is a going concern and in its winding up. The shares or
other interest of any member in a company are personal estate
transferable in the manner provided by its articles, and are not of
the nature of real estate.”
(d) Reliance has also been placed on M/s. Kothari Textiles Ltd.,
C Madras & Ors. v. Commissioner of Wealth Tax, Madras; AIR 1963
Mad. 274 in which the High Court observed as under:
“25. Article 147 also provides that no dividend shall be payable
except out of the profits of the year or any other undistributed
profits except as provided by Sections 205 and 208. It is obvious
D that the dividend payable to holders of preference shares must
necessarily depend upon there being distributable profits and in
terms of the relevant article, what the preference shareholders
get is only a priority to payment over the equity shareholders.
That they are entitled to certain special rights on the winding up
of the company does not make any difference. Whether or not
E there are distributable profits is for the general body to decide and
only if the general body declares a dividend will the preference
shareholders be entitled to be paid.”
(e) In Trojan Equity Ltd. v. CMI Ltd. [2009] QSC (Supreme
Court of Queensland) 114 with respect to rights of shareholders, it was
F observed:
“16. The argument that the commercial purpose of the rules is
supported by construing “in arrears” as applying to the situation
where dividends have not been paid, rather than only where they
have been declared and not paid, was developed by reference to
G ASX listing rule 6.3 which provides that the holder of a preference
share must be entitled to a right to vote during a period in which a
dividend or part of a dividend is in arrears. That seems to me,
however, simply to beg the question. The argument was that the
purpose of the rules, where no dividends could be paid because
there were no profits, was enhanced by adopting the interpretation
H
RAM PARSHOTAM MITTAL & ORS. v. HOTEL QUEEN ROAD 1025
PVT. LTD. & ORS. [ARUN MISHRA, J.]
that would permit Class A shareholders to vote when dividends A
had not been paid, regardless of whether there had been a
declaration by the directors. The submission was that those rules
have the function of setting requirements for the organisations
whose securities are to be publicly traded. The commercial purpose
of both the restriction on voting of preference shares and the
B
exceptions from that restriction, as set out in the listing rules, was
said to be to leave the voting control of the company in the hands
of ordinary shareholders, except when the situations identified in
the listing rule arose, when the additional right and protection of
being entitled to vote was conferred on the preference shareholder.
Mr Jackson QC submitted that nothing about that purpose dictated C
or suggested that it would be better served by restricting the
operation of r. 30.16(c) to dividends declared but not paid.
18. Mr McKenna’s response was that the proper focus was the
meaning of the words in the constitution and what they revealed
about the balance struck between the preference shareholders’ D
understandable wish to vote at every possible occasion when their
shares were at risk, and the general regime which is that they did
not have the right to vote at all. He submitted that a particular
balance had been struck between the differing groups of
shareholders which created a strong incentive for the company to
declare dividends because when dividends were not paid to the E
preference shareholders the ordinary shareholders were not paid
either and for a longer period. In drawing attention to the
constitution’s use of language he concluded that dividends could
not be in arrears in any ordinary use of English if they had never
been payable and never would be payable.” F
(emphasis supplied)
(f) Reliance was also placed by Shri Misra on Indore
Development Authority v. Shailendra (Dead) through LRs. & Ors.
(2018) 3 SCC 412 thus:
“40. In J. Dalmia v. CIT, AIR 1964 SC 1866, this Court has G
observed that the expression “paid” does not contemplate actual
receipt of the dividend by the member. The dividend may be said
to be paid within the meaning of Section 16(2) when the company
discharges its liability and makes amount unconditionally available
the members entitled thereto: (AIR p. 1869, para 10) H
1026 SUPREME COURT REPORTS [2019] 7 S.C.R.
A “10. …The expression “paid” in Section 16(2) it is true
does not contemplate actual receipt of the dividend by the
member. In general, dividend may be said to be paid within
the meaning of Section 16(2) when the company discharges
its liability and makes the amount of dividend
unconditionally available to the member entitled thereto.”
B
(emphasis supplied)”
(g) In CDS Financial Services (supra) it was observed:
“48. Regarding plaintiff’s right to vote on preference shares:
C Now the only question that remains to be considered is whether
the plaintiff is entitled to exercise voting rights on preference shares
held by it. The case of the plaintiff in short is that the dividend has
not been paid in respect of the preference shares for financial
year ending March 3l, l998, l999, and 2000 and, therefore, by virtue
of section 87(2)(b)(ii), the plaintiff is entitled to vote on the said
D preference shares. The company has not disputed that the dividend
in respect of the preference shares has remained unpaid and,
therefore, the plaintiff as shareholder has acquired voting rights.
However, it is the case of the company that exercising of voting
right would violate conditions imposed by Reserve Bank of India.
E It is the submission of the company that plaintiff cannot vote
beyond the limit of 49%. In order to appreciate this issue, it would
be necessary to state few admitted facts. When the plaintiff
purchased preference shares, it had applied and obtained
permission from the Reserve Bank of India under section 29(l)(b)
of the Foreign Exchange Regulations Act, l973 (“FERA”). While
F granting such permission under section 29(l)(b) of the FERA, the
Reserve Bank of India vide letter dated l2.l.l998 imposed several
conditions. Two conditions which are relevant for our purpose
are as follows:
(l) that no shares be acquired by CDC without the prior permission
G of the Reserve Bank of India;
(2) that the conditions contained in the letter dated 6.l.l998 shall
be complied with.
The letter dated 6.l.l998 stipulates that foreign equity shall not
exceed 49% as is permissible under the policy for investing in
H
RAM PARSHOTAM MITTAL & ORS. v. HOTEL QUEEN ROAD 1027
PVT. LTD. & ORS. [ARUN MISHRA, J.]
companies. Further the licence granted by the DOT when amended A
by letter dated 29.l.200l stipulated that certain conditions shall
always be complied with and shall not be violated, including inter
alia that there shall be a cap of 49% of foreign equity and the
management control of the company shall remain with the Indian
shareholders.
B
50. According to Mr. Chidambaram the conditions contained in
the special permission of the Reserve Bank of India will prevail
over the provisions of the Companies Act in view of section 29(l)
of FERA which contains a non-obstante clause. He pointed out
that FERA has been replaced by Foreign Exchange Management
Act, l999 (“FEMA”) and by virtue of section 49 of FEMA, the C
special permission is saved and now deemed to have been granted
under the corresponding provisions of sections 6 of FEMA read
with Regulation 5 of the Foreign Exchange Management (Transfer
or Issue of Security by a Person Resident Outside India),
Regulations, 2000 and Schedule I thereto read with Annexure B D
to the said Schedule. Mr. Chidambaram’s contention is that the
special permission is a statutory order passed by a statutory
authority viz. Reserve Bank of India on which power to grant
such permission was conferred by Parliament under section 29 of
FERA and the special permission will prevail over the provisions
of the Companies Act. E
56. Mr. Chagla also submitted that the stage to consider whether
there would be violation of conditions of Reserve Bank of India
would arise only when the plaintiff actually exercise voting rights
and its rights cannot be pre-empted prematurely merely on the
basis of the apprehension that it would result in violation of the F
conditions laid down by the Reserve Bank of India. We cannot
accept the submission of Mr. Chagla for the simple reason that
granting such voting rights would necessarily have the effect of
breach of the condition viz. cap of 49% equity and will result in
virtually transferring the management to the non-Indian G
shareholders. Moreover, if the relief claimed by the plaintiff is
granted, it would virtually amount to passing a decree at the interim
stage. Therefore, the prayer of the plaintiff for permitting it to
exercise voting rights in respect of the preference share cannot
be accepted.”
H
1028 SUPREME COURT REPORTS [2019] 7 S.C.R.
A 83. Section 19(2) of the Companies Act provides that nothing in
sections 85 to 89 shall apply to a private company unless it is a subsidiary
of a public company and this question has to be finally decided whether
it is a private or public limited company in the pending civil suit which
have been stated to be transferred to NCLT for decision in accordance
with law. Otherwise, section 87 provides that notice has to be issued to
B
preference shareholders also for the meeting and they have a right to
participate in the meeting. It appears prima facie even if dividend has
not been declared. In that case also, preference shareholders shall have
a right to vote in the meeting.
84. Reliance has also been placed on the provisions of section
C 169(4) of the Companies Act regarding calling of EOGM on requisition.
The resolution with respect to EOGM is not in issue in the present case.
As such we need not dilate upon the provisions of section 169(4) and the
submissions.
85. Coming to the submissions based upon the provisions of section
D 108 of the Act of 1956. Section 108 is extracted hereunder:
“Sec 108 - Transfer not to be registered except on production
of instrument of transfer.
(1) A company shall not register a transfer of shares in, or
E debentures of, the company, unless a proper instrument of transfer
duly stamped and executed by or on behalf of the transferor and
by or on behalf of the transferee and specifying the name, address
and occupation, if any, of the transferee, has been delivered to the
company along with the certificate relating to the shares or
debentures, or if no such certificate is in existence, along with the
F letter of allotment of the shares or debentures :
Provided that where, on an application in writing made to the
company by the transferee and bearing the stamp required for an
instrument of transfer, it is proved to the satisfaction of the Board
of directors that the instrument of transfer signed by or on behalf
G of the transferor and by or on behalf of the transferee has been
lost, the company may register the transfer on such terms as to
indemnity as the Board may think fit :
Provided further that nothing in this section shall prejudice any
power of the company to register as shareholder or debenture-
H
RAM PARSHOTAM MITTAL & ORS. v. HOTEL QUEEN ROAD 1029
PVT. LTD. & ORS. [ARUN MISHRA, J.]
holder any person to whom the right to any shares in, or debentures A
of, the company has been transmitted by operation of law.
(1A) Every instrument of transfer of shares shall be in such form
as may be prescribed, and:
(a) every such form shall, before it is signed by or on behalf of
the transferor and before any entry is made therein, be presented B
to the prescribed authority, being a person already in the service
of the Government, who shall stamp or otherwise endorse
thereon the date on which it is so presented, and
(b) every instrument of transfer in the prescribed form with
the date of such presentation stamped or otherwise endorsed C
thereon shall, after it is executed by or on behalf of the transferor
and the transferee and completed in all other respects, be
delivered to the company,
(i) in the case of shares dealt in or quoted on a recognized
stock exchange, at any time before the date on which the D
register of members is closed, in accordance with law, for
the first time after the date of the presentation of the
prescribed form to the prescribed authority under clause
(a) or within twelve months from the date of such
presentation, whichever is later; E
(ii) in any other case, within two months from the date of
such presentation.
(1B) Notwithstanding anything contained in sub-section (1A), an
instrument of transfer of shares, executed before the
commencement of section 13 of the Companies (Amendment) F
Act, 1965 (31 of 1965) or executed after such commencement in
a form other than the prescribed form, shall be accepted by a
company,
(a) in the case of shares dealt in or quoted on a recognized
stock exchange, at any time not later than the expiry of six G
months from such commencement or the date on which the
register of members is closed, in accordance with law, for the
first time after such commencement, whichever is later;
(b) in any other case, at any time not later than the expiry of
six months from such commencement. H
1030 SUPREME COURT REPORTS [2019] 7 S.C.R.
A (1C) Nothing contained in sub-sections (1A) and (1B) shall apply
to:
(A) Any share : (i) which is held by a company in any other
body corporate in the name of a director or nominee in
pursuance of sub-section (2), or as the case may be, sub-
B section(3), of section 49, or (ii) which is held by a corporation,
owned or controlled by the Central Government or a State
Government, in any other body corporate in the name of a
director or nominee, or (iii) in respect of which a declaration
has been made to the Public Trustee under section 153B, if :
(1) the company or corporation, as the case may be, stamps or
C otherwise endorses, on the form of transfer in respect of such
share, the date on which it decides that such share shall not be
held in the name of the said director or nominee or, as the case
may be, in the case of any share in respect of which any such
declaration has been made to the Public Trustee, the Public
D Trustee stamps or otherwise endorses, on the form of transfer
in respect of such share under his seal, the date on which the
form is presented to him, and (2) the instrument of transfer in
such form, duly completed in all respects, is delivered to the :
(a) body corporate in whose share such company or corporation
has made investment in the name of its director or nominee, or
E (b) company in which such share is held in trust, within two
months of the date so stamped or otherwise endorsed ; or
(B) any share deposited by any person with : (i) the State
Bank of India, or (ii) any scheduled bank, or (iii) any banking
company (other than a scheduled bank) or financial institution
F approved by the Central Government by notification in the
Official Gazette (and any such approval may be accorded so
as to be retrospective to any date not earlier than the 1st day
of April, 1966), or (iv) the Central Government or a State
Government or any corporation owned or controlled by the
G Central Government or a State Government, by way of security
for the repayment of any loan or advance to, or for the
performance of any obligation undertaken by, such person, if :
(1) the bank, institution, Government or corporation, as the case
may be, stamps or otherwise endorses on the form of transfer
of such share : (a) the date on which such share is returned by
H
RAM PARSHOTAM MITTAL & ORS. v. HOTEL QUEEN ROAD 1031
PVT. LTD. & ORS. [ARUN MISHRA, J.]
it to the depositor, or (b) in the case of failure on the part of the A
depositor to repay the loan or advance or to perform the
obligation, the date on which such share is released for sale by
such bank, institution, Government or corporation, as the case
may be, or (c) where the bank, institution, Government or
corporation, as the case may be, intends to get such share
B
registered in its own name, the date on which the instrument
of transfer relating to such share is executed by it ; and (2) the
instrument of transfer of such form, duly completed in all
respects, is delivered to the company within two months from
the date so stamped or endorsed.
Explanation. : Where any investment by a company or a C
corporation in the name of its director or nominee referred to in
clause (A)(i) or clause (A)(ii), or any declaration referred to in
clause (A)(iii), or any deposit referred to in clause (B), of this
sub-section is made after the expiry of the period or date mentioned
in clause (a) of sub-section (1B) or after the expiry of the period D
mentioned in clause (b) of that sub-section, as the case may be,
the form of transfer, in respect of the share which is the subject
of such investment, declaration or deposit, means the prescribed
form ;
or E
(C) any share which is held in any company by the Central
Government or a State Government in the name of its nominee,
except that every instrument of transfer which is executed on
or after the 1st day of October, 1966, in respect of any such
share shall be in the prescribed form. F
(1D) Notwithstanding anything in sub-section (1A) or sub-section
(1B) or sub-section (1C) where in the opinion of the Central
Government it is necessary so to do to avoid hardship in any case,
that Government may on an application made to it in that behalf,
extend the periods mentioned in those sub-sections by such further G
time as it may deem fit whether such application is made before
or after the expiry of the periods aforesaid ; and the number of
extensions granted hereunder and the period of each such extension
shall be shown in the annual report laid before the Houses of
Parliament under section 638.
H
1032 SUPREME COURT REPORTS [2019] 7 S.C.R.
A (2) In the case of a company having no share capital, sub-section
(1) shall apply as if the references therein to shares were
references instead of the interest of the member in the company.
(3) Nothing contained in this section shall apply to transfer of
security effected by the transferor and the transferee both of
B whom are entered as beneficial owners in the records of a
depository.”
86. It was also submitted that there is violation of section 108 of
the Companies Act of 1956. It was submitted on behalf of Hillcrest that
the Board meeting was held on 10.5.2005 in which 32,88,181 shares of
C HQRL were purportedly transferred by Moral to Mr. R.P. Mittal. Out of
32,88,181 shares, 8,98,166 shares were lying with the Overseas Bank
and were available before the Board of HQRL for recording of transfer.
Shares can be transferred only in accordance with section 108 of the
Companies Act which provides for filing of the share certificate which
was a mandatory requirement as observed in Mannalal Khetan & Ors.
D v. Kedar Nath Khetan & Ors. (1977) 2 SCC 424 thus:
“16. The provision contained in Section 108 of the Act states that
a company shall not register a transfer of shares...unless a proper
instrument of transfer duly stamped and executed by or on behalf
of the transferor and by or on behalf of the transferee …. has
E been delivered to the company along with the certificate relating
to the shares or debentures … or if no such certificate is in
existence along with the letter of allotment of the shares.
There are two provisos to section 108 of the Act. We are not
concerned with the first proviso in these appeals. The second
F proviso states that nothing in this section shall prejudice any power
of the company to register as shareholder or debenture holder
any person to whom the right to any shares in, or debentures of,
the company has been transmitted by operation of law. The words
shall not register” are mandatory in character. The mandatory
G character is strengthened by the negative form of the language.
The prohibition against transfer without complying with the
provisions of the Act is emphasised by the negative language.
Negative language is worded to emphasise the insistence of
compliance with the provisions of the Act. (See State of Bihar v.
Maharajadhiraja Sir Kameshwar Singh of Darbhanga [1952] SCR
H 889; K. Pentiah v. Muddala Veeramallappa [1961] 2 SCR 295
RAM PARSHOTAM MITTAL & ORS. v. HOTEL QUEEN ROAD 1033
PVT. LTD. & ORS. [ARUN MISHRA, J.]
and unreported decision dated April 28, 1976 in Criminal Appeal A
279 of 1975 and Additional District Magistrate, Jabalpur v.
Shivakant Shukla (1976) 2 SCC 521.) Negative words are clearly
prohibitory and are ordinarily used as a legislative device to make
a statutory provision imperative.
17. In Raza Buland Sugar Co. Ltd. v. Municipal Board, Rampur. B
(1965) 1 SCR 970 this Court referred to various tests for finding
out when a provision is mandatory or directory. The purpose for
which the provision has been made, its nature, the intention of the
legislature in making the provision, the general inconvenience or
injustice which may result to the person from reading the provision
one way or the other, the relation of the particular provision to C
other provisions dealing with the same subject and the language
of the provision are all to be considered. Prohibition and negative
words can rarely be directory. It has been aptly stated that there
is one way to obey the command and that is completely to refrain
from doing the forbidden act. Therefore, negative, prohibitory and D
exclusive words are indicative of the legislative intent when the
statute is mandatory. (See Maxwell on Interpretation of Statutes
11th Ed. p. 362 seq.; Crawford: Statutory Construction,
Interpretation of Laws p. 523 and Seth Bikhraj Jaipuria v.
Union of India [1962] 2 SCR 880.
E
18. The High Court said that the provisions contained in Section
108 of the Act are directory because non-compliance with section
108 of the Act is not declared an offence. The reason given by
the High Court is that when the law does not prescribe the
consequences or does not lay down penalty for noncompliance
with the provision contained in Section 108 of the Act the provision F
is to be considered as directory. The High Court failed to consider
the provision contained in Section 629(A) of the Act. Section 629(A)
of the Act prescribes the penalty where no specific penalty is
provided elsewhere in the Act. It is a question of construction in
each case whether the legislature intended to prohibit the doing of G
the act altogether, or merely to make the person who did it liable
to pay the penalty.”
87. Section 108 operates independently of section 286 or section
300. The invalidation of meeting is dependent under the provisions of
section 108. There was violation of section 108 of the Companies Act. H
1034 SUPREME COURT REPORTS [2019] 7 S.C.R.
A HQRL did not file share certificate along with the duly executed share
transfer form as on 10.5.2005, the date of Board resolution. The plea of
Mr. R.P. Mittal has been disbelieved that share certificates were returned
on 23.6.2003. The High Court has also ordered the proceedings under
section 340 Cr.P.C. against Mr. R.P. Mittal for filing an affidavit to the
contrary. The High Court has relied on the affidavit of Mr. Vivek Dixit
B
and Mr. Deepak Sudan, the concerned officials of the Indian Overseas
Bank. The High Court has found that the share certificates were delivered
to Mr. R.P. Mittal not on 23.6.2003 but on 23.6.2005. No doubt about it
that there was violation of the provisions of section.
88. With respect to the appropriate order to be passed under section
C 397 of the Companies Act of 1956, reliance has been placed upon
M.S.D.C. Radha Ramanan v. M.S.D. Chandrasekara Raja & Anr.
(2008) 6 SCC 750 thus:
“23. Sections 397 and 398 of the Act empower the Company
Law Board to remove oppression and mismanagement. If the
D consequences of refusal to exercise jurisdiction would lead to a
total chaos or mismanagement of the company, would still the
Company Law Board be powerless to pass appropriate orders is
the question. If a literal interpretation to the provisions of Section
397 or 398 is taken recourse to, may be that would be the
E consequence. But jurisdiction of the Company Law Board having
been couched in wide terms and as diverse reliefs can be granted
by it to keep the company functioning; is it not desirable to pass
an order which for all intent and purport would be beneficial to
the company itself and the majority of the members? A court of
law can hardly satisfy all the litigants before it. This, however, by
F itself would not mean that the Company Law Board would refuse
to exercise its jurisdiction, although the statute confers such a
power on it.
24. It is now a well settled principle of law that the Courts should
lean in favour of such construction of statute whereby its
G jurisdiction is retained enabling it to mould the relief, subject of
course, to the applicability of law in the fact situation obtaining in
each case.”
There can be no dispute with the aforesaid proposition.
H
RAM PARSHOTAM MITTAL & ORS. v. HOTEL QUEEN ROAD 1035
PVT. LTD. & ORS. [ARUN MISHRA, J.]
89. In the fact and circumstances of the case, taking into A
consideration the overall scenario, the impugned order calls for no
interference. However, direction to prosecute appellant Ram Parshotam
Mittal in the facts of the case is set aside.
90. The appeals are accordingly disposed of. The parties to bear
their own costs. B
Divya Pandey Appeals disposed of.
C
D
E
F
G
H
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