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 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 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 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 – 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 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, Cr.PC against ‘RPM’ – On appeal, held: Two civil suits are pending 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 – 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 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 – 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 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.
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 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 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 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 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 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 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 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]
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 Industries, it has been observed by Supreme 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. 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 and proprietary rights as shareholders. The impugned resolutions are unfair to Mr. AM in the facts and circumstances of the case even otherwise the 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 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 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 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 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 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. 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 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 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. 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 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]
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 ; Madras Tube Co. Ltd. & Ors. v. Hari Kishon Somani & 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 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. 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
750 : [2008] 5 SCR 182 – referred to.
Halsbury’s Laws of England, Volume 6 (3rd Ed.), page
234 – referred to.
As published in the Supreme Court Reports, Supreme Court of India. Text from the Indian Supreme Court Judgments open data set (Dattam Labs), CC BY 4.0.
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