:1: IN THE HIGH COURT OF JUDICATURE AT BOMBAY IN THE HIGH COURT OF JUDICATURE AT BOMBAY IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION ORDINARY ORIGINAL CIVIL JURISDICTION ORDINARY ORIGINAL CIVIL JURISDICTION NOTICE OF MOTION NO.1327 OF 2006 NOTICE OF MOTION NO.1327 OF 2006 NOTICE OF MOTION NO.1327 OF 2006 IN IN IN APPEAL NO.334 OF 2005 APPEAL NO.334 OF 2005 APPEAL NO.334 OF 2005 IN IN IN NOTICE OF MOTION NO.3185 OF 2004 NOTICE OF MOTION NO.3185 OF 2004 NOTICE OF MOTION NO.3185 OF 2004 IN IN IN SUIT NO.3121 OF 2004 SUIT NO.3121 OF 2004 SUIT NO.3121 OF 2004 Gopal L. Raheja & Anr. ..Appellants/ Orig. Plaintiffs. Vs. Vijay B. Raheja & Ors. ..Respondents/ Orig. Defendants. Mr.Aspi Chinoy, Senior Advocate with Mr.Janak Dwarkadas, Senior Advocate with Mr.P.K.Samdhani, Senior Advocate with Mr.P.K.Shroff with Mr.Subodh Joshi with Ms.Radhika Pinzara with Ms.Prachi Khandge i/b.M/s.Parimal K. Shroff & Co. for the Appellants. Mr.N.H. Seervai, Senior Advocate i/b. M/s.J.Sagar Associates, for Respondent Nos. 1 to 4. Mr.I.M.Chagla, Senior Advocate with Mr.Levy Pareira with Mr.S.V.Doijode & Ms.Minakshi Iyer i/b.M/s.Doijode Associates for Respondent Nos.5 to 7. Mr.D.J.Khambata, Senior Advocate i/b.M/s.Raval Shah & Co. for Respondent No.8. Mr.M.S.Doctor i/b.M/s.S.R.Rawell & Co. for Respondent No.9. CORAM : DR.S.RADHAKRISHNAN AND S.J.VAZIFDAR, JJ. DATE OF RESERVING THE JUDGMENT : 7TH AUGUST, 2006. DATE OF PRONOUNCING THE JUDGMENT : 15TH NOVEMBER, 2006. :2: ORAL JUDGMENT : (Per S.J. Vazifdar, J.) The Appellants are the original Plaintiffs and the Respondents are the original Defendants in the same order. The Appellants have taken out this Notice of Motion in the above Appeal for an order striking out the defences of the Respondents under Order XXXIX, Rule 11 of the Code of Civil Procedure 1908, attaching the property of the Respondents and for the detention of Respondent Nos.1 to 3 and 6 and 7 in civil prison under Order XXXIX, Rule 2A of the Code of Civil Procedure, 1908. The Appellants have also sought an order setting aside and/or declaring as null and void the resolutions passed by Respondent Nos.5 to 9 dated 27.3.2006 and 31.3.2006 increasing the authorised share capital of Respondent No.5 on the ground that the same were in wilful breach of the injunction/restraint orders of this Court dated 22.3.2005 and 25.10.2005. 2. In a nut shell, the Appellants case is that by virtue of the orders dated 22.3.2005 and 25.10.2005 the Respondents were restrained inter-alia from exercising any rights or receiving any benefits in respect of the shares held by them in Respondent :3: No.5. Contrary to the orders, by the said resolutions dated 27.3.2006 and 31.3.2006 the authorised capital of Respondent No.5 was increased from Rs.40 crores to Rs.210 crores and the new shares were allotted to Respondent Nos.1 to 3, 8 and 9. Admittedly, the impugned resolutions were passed by the shareholders exercising their rights in respect of the shares covered by the injunction. The resolutions required the exercise of voting rights as while under section 94(1) of the Companies Act, a company may increase its share capital by issuing new shares, under section 94(2) such powers are to be exercised by the company in general meeting. 3. The resolutions were clearly in violation of the said orders which restrained the shareholders of Respondent no.5 from exercising any rights in respect of their shares. As we shall demonstrate, the Respondents in their affidavits did not deny that the plain language of the order prohibited such an act. Mr.I.M. Chagla, for Respondent Nos.5, 6 and 7 and Mr.D.J. Khambata and Mr.M.S. Doctor for Respondent Nos.8 and 9 respectively, fairly agreed that this was so. :4: 4. Had the Respondents apologised and offered to purge the contempt, we may have let the matter rest there. Having accepted that the resolutions were passed in breach of the said orders all they had to do to establish their bona-fides was to agree to the resolutions being revoked, and the issue of the shares pursuant thereto being cancelled. They could then have made an appropriate application for achieving their alleged purpose of raising funds for Defendant No.5. 5. They however refused to do so. The refusal to purge the contempt and the extensive defences taken and justification pleaded by the Respondents, especially Respondent Nos.1, 2 and 3, of their conduct, has complicated an otherwise simple issue, burdened this judgment and aggregated the contempt. As we shall demonstrate, the nature of defences raised especially by Respondent Nos.1 to 4 has further aggravated the contempt. 6. The Respondents supported each other generally. Their approach before us, during the hearing, differed in the degree of defiance. While Mr.Seervai on behalf of Respondent Nos.1, 2 and 3 contended that there was no contempt at all and :5: stated that Respondent Nos.1 to 4intended "taking the Notice of Motion head-on", the other Respondents did not go that far though, they too sought to justify their conduct with considerable vehemence. The parties : 7. The Plaintiffs and Respondent Nos.1 to 3 are in control and/or management of and/or concerned with various hotels together with each other and/or individually. Plaintiff No.1 is the father of Plaintiff No.2. Respondent Nos.1 and 2 are the sons of the paternal uncle of Plaintiff No.1. Respondent No.3 is the son of Respondent No.2. Respondent No.4 Mont Blanc Hotels Pvt. Ltd., is a company registered under the Companies Act, 1956 in which Respondent Nos.1 and 3 are directors and Respondent Nos.1 and 2 and/or their family members hold the entire or the majority shares. Gstaad Hotels Pvt. Ltd., is Respondent No.5 and Respondent Nos.6 and 7 are the directors of Respondent No.5. Respondent Nos.8 and 9 are shareholders alongwith Respondent Nos.6 and 7 in Respondent No.5. Reliefs claimed in the suit : :6: 8. The Appellants filed the suit for a declaration that Respondent Nos.1, 2 and/or 6 to 9 hold 50% of the shares and 50% of the directorship of Respondent No.5 through which Respondent Nos.1 and 2 acquired the suit property in March, 2004 in trust for and for the account and benefit of the Plaintiffs and/or their nominee and for a decree ordering the Respondents to transfer 50% of the issued share capital of Respondent No.5 to the Plaintiffs and to appoint the Plaintiffs and/or their nominees as 50% of the directors on the board of Respondent No.5 against payment of 50% of the total cost of the property. The Appellants also sought a permanent injunction restraining the Respondents from dealing with, developing, alienating or encumbering the suit property, and constructing thereon unless the Respondents first transferred to the Plaintiffs 50% of the shares of Respondent No.5 and appointed the Plaintiffs and/or their nominees as 50% of their directors on the board of Respondent No.5. Disputes between the parties on merits : 9. For the purpose of this Notice of Motion, it is necessary to set out the facts pertaining to the main dispute only briefly and only with a view to :7: furnish the necessary background before dealing with the interim orders passed by this Court and which, according to the Appellants, have been violated by the Respondents. The merits thereof are not relevant for the decision on this Notice of Motion. 10(a). The Plaintiffs were interested in starting a hotel in Bangalore and were negotiating with United Breweries (Holdings) Ltd. (hereinafter referred to as UB) for acquisition from them of a three acre plot situated in a prime locality in Bangalore. Respondent Nos.1 and 2 agreed with the Plaintiffs that they would, with a nominee company, bid for and acquire from UB the said plot of land and would give the Plaintiffs equal shares and directorships in the acquiring company and that a five star hotel would be constructed and operated on the property by the Plaintiffs on the one hand and Respondent Nos.1 to 3 on the other as partners, with participation by M/s.Marriott International. This agreement, according to the Appellants, is embodied in and evidenced by various documents and, in particular, a writing dated 27.9.2003 which reads as under : "Sub: UB City Property of 3 acres bearing Khatta No.24 situate at the corner of Kasturba Gandhi :8: Marg and Vithal Mallya Road, Bangalore. We confirm that we are buying the above property in a company called Mont Blanc Hotels Pvt. Ltd. (Respondent No.4) and to make you a partner, we are giving you equal shares on the same terms and conditions & equal directorship in Mont Blanc Hotels Pvt. Ltd. as our group holds. Both our groups confirm that Marriott shall have equity stake in the company. We shall carry out the amendments to the Memorandum of Article, in 30 days and shall then give the equity to you." The document is signed by the Appellants and Respondent Nos.1 and 2. (b). According to the Appellants, the entire documentation in respect of the transaction was to be undertaken by Respondent Nos.1 and 2 in the name of Respondent No.4 and that the Appellants would remain in the background, pending finalisation of the acquisition of the property to minimise the risk of other parties giving higher offers for the said property if it became known in the market that reputed hoteliers such as the parties herein, were interested in the said property and to avoid any sabotage of the said transaction by one Chandru L. Raheja, the brother of Plaintiff No.1, between whom relations were strained. Upon acquisition of the :9: property from UB, the hotel project would be owned and developed by Respondent No.4 in equal partnership as aforesaid. The transaction between the Appellants and Respondent Nos.1 to 3 was to be given effect to by allotment of shares, appointment of Directors, modification of the articles of Respondent No.4 and payment within 30 days. (c). In view of the aforesaid agreement, the Appellants did not make a separate bid for the purchase of the property. (d). An agreement for sale was entered into between UB and Respondent No.4 by which Respondent No.4 agreed to purchase the properties at the price of Rs.40.50 Crores of which Rs.11.50 Crores was to be paid as an advance. UB executed a power of attorney in favour of Respondent No.4 to enable it to apply for and obtain permissions necessary for the hotel project. The Appellants paid Respondent No.2 a sum of Rs.1 Crore in cash towards 50% of their consideration of the Rs.2 Crores paid in cash by Respondent Nos.1 and 2 to UB in relation to the advance consideration of Rs.11.50 Crores. :10: (e). The implementation of the aforesaid understanding was delayed allegedly due to Respondent Nos.1 and 2 not finalising the same. Ultimately, it was agreed that the same would be given effect to in early March, 2004. Respondent Nos.1 and 2 thereafter failed to proceed as agreed and to fulfil their part of the obligations and by their letters dated 12.4.2004 and 20.5.2004 contended that the agreement dated 29.9.2003 between Respondent No.4 and UB had been cancelled and neither Respondent No.1 nor Respondent No.2 were any longer involved in the property. (f). The Appellants contended that, in fact, on 26.3.2004 Respondent Nos.1 and 2 acting through Respondent No.5, completed the purchase of the property from UB and that contrary to their contention that they were no longer involved with the property they were and, they had in fact been fully involved in applying for and obtaining necessary permissions for construction of the hotel through Respondent No.5. Apparently, several draft agreements were exchanged between the Appellants and Respondent Nos.1 to 3. In support of their contention that Respondent No.5 was, in fact, :11: controlled by Respondent Nos.1 to 3, the Appellants have relied upon various documents addressed to various authorities by Respondent Nos.1 to 3 purportedly on behalf of Respondent No.5. The Appellants have also relied upon the transcript of tape-recording of certain meetings. It is not necessary to deal with the extensive evidence relied upon by the Appellants in support of this contention. The same would be relevant to the merits of the case and not for the purpose of the present Notice of Motion. 11(a). Respondent Nos.1 to 3 denied the aforesaid contentions. According to them, one of the reasons for terminating the agreement between Respondent No.4 and UB was that the Appellants had not fulfilled their financial obligations in respect of the acquisition of the said property. According to the Respondents, on 19.1.2004 the agreement between Respondent No.4 and UB stood cancelled and on the same day an agreement was entered into between UB and Respondent No.5 at the same price and on the same terms and conditions as the original agreement between Respondent No.4 and UB and for the same purpose viz. constructing and operating a deluxe hotel on the property. The property had thereafter :12: been purportedly acquired by Respondent No.5. Thereafter Respondent Nos.1 to 3 ceased to have any interest in or connection with the said property and the transaction between Respondent No.4 and UB stood finally terminated. They contend that they have nothing to do with the remaining Respondents. (b). By a letter dated 12.4.2004 Respondent No.1 stated that it had become impossible to meet the time schedule set by UB and Marriott Hotels in the absence of funds from the Plaintiffs and that as a result thereof Respondent No.1 had withdrawn from the project. Respondent No.1 further stated that the agreement between Respondent No.4 and UB had been terminated by mutual consent. 12. To sum up, the Appellant’s case is that Respondent Nos.1 and 2 have purported to complete the purchase of the property through Respondent No.5 and have taken the conveyance of the property from UB through Respondent No.5 on 26.3.2004; that although Respondent Nos.1 and 2 are ostensibly neither shareholders nor directors of Respondent No.5, and, although the ostensible shareholders and directors of Respondent No.5 are Respondent Nos.6 to 9, the sequence of events and the documents on :13: record establish that Respondent Nos.1 and 2 are acting through Respondent No.5 which is the nominee of and controlled by Respondent Nos.1 and 2. The above stratagem, according to the Appellants, was a device with a view to depriving the Plaintiffs of the benefit of the said agreement viz. 50% share in the property. Respondent Nos.6 to 9 are only nominees, acting at the instance of Respondent Nos.1 and 2 and that the entire design was in breach of the fiduciary capacity and duty of Respondent Nos.1 and 2. The Appellants accordingly contend that the Respondents hold 50% of the shares of Respondent No.5 in trust and for the benefit and on account of the Appellants and/or their nominees and are bound in law to transfer 50% of the share of Respondent No.5 to them and appoint their nominees as 50% of the directors of Respondent No.5. Status-quo as on the date of the orders dated 22.3.2005 and 25.10.2005 of which the Respondents are alleged to have committed a breach : 13. Before referring to the orders, it is necessary to set out the status-quo between the parties on the date of the orders. These facts are admitted by and, in fact, constitute the Respondent’s case. :14: 14. The authorised and subscribed capital of Respondent No.5 prior to the impugned resolutions was Rs.40 crores divided into 4 crore equity shares of Rs.10/- each. The issued, subscribed and paid up capital of Respondent No.5 was Rs.19,01,00,000 divided into 1,90,10,000 equity shares. Respondent Nos.6 and 7 held 5000 equity shares each. Respondent Nos.8 and 9 held 1,65,00,000 and 25,00,000 equity shares each respectively. The proceedings leading to the orders dated 22.3.2005 and 25.10.2005 : 15. The suit was filed on 25.10.2004. 16(a). The Appellants took out Notice of Motion No.3185 of 2004 for various interim reliefs. A learned Single Judge passed ad-interim orders dated 15.12.2004 and 23.12.2004. (b). The Respondents preferred Appeals against the said order. Respondent Nos.1 and 2 filed Appeal No.10 of 2005, Respondents Nos.5, 6 and 7 filed Appeal (L) No.24 of 2005. Respondent No.8 filed Appeal No.45 of 2005 and Respondent No.9 filed :15: Appeal (L) No.40 of 2005. (c). By an order dated 17.1.2005 the Division Bench, to which one of us (S.J. Vazifdar, J.) was a party, admitted and disposed of the Appeals by a common order passed with the consent of all the parties. The learned Single Judge was requested to hear the Notice of Motion expeditiously. 17(a). The learned Single Judge finally disposed of the Appellant’s said Notice of Motion No.3185 of 2004 by an order dated 14.3.2005. (b). The above Appeal before us is from that order. It was admitted on 22.3.2005. The Division Bench, to which one of us (S.J.Vazifdar, J.) was a party, passed an ad-interim order dated 22.3.2005, in terms of the said order dated 17.1.2005. (c). The Appellants took out Notice of Motion No.853 of 2005 in the above Appeal for interim orders. This Notice of Motion was finally disposed of by the Appeal Court by an order dated 25.10.2005 passed by the Division Bench, to which one of us (Dr.S. Radhakrishnan, J.) was a party. The order dated 25.10.2005 expressly continued, pending the :16: hearing and final disposal of the Appeal, the ad-interim order dated 22.3.2005. 18. In other words, by virtue of the order dated 25.10.2005 and with effect from that date there existed in operation an order in terms of the order dated 17.1.2005. The only difference is that, whereas, the order dated 17.1.2005 was passed with the consent of the parties, the order dated 25.10.2005 was an order of this Court and not by consent of the parties. 19. The order dated 17.1.2005 reads as under : "1. All appeals are admitted and disposal of by consent. 2. By consent the order of the learned single Judge is substituted with the following order :- i) There shall be an ad-interim order in terms of prayer clauses (b)(ii) and (iii), except bracketed, portion in clause (b), which read as follows :- "(b)(ii) : The Defendants, their servants and agents be restrained by an order and injunction of this Hon’ble Court from encumbering, alienating or parting with possession of the said property more particularly described in Exh. "A" to plaint and the construction :17: thereon and/or the rights or interest therein. (iii) The Defendants, their servants and agents be restrained by an order and injunction of this Hon’ble Court from alienating or encumbering the shares of Defendant No.5 Company or from exercising any rights or receiving any benefits in respect thereof." (emphasis supplied) ii) The Plaintiffs will deposit in this court Rs.12.00 Crores within four weeks from today. If the amount is not deposited within the said period, Motion to stand dismissed. iii) Any further development on the suit property shall be subject to the result of Notice of Motion and the counsel of the Appellants agree not to claim any equity on account of the said development. 20. The effect therefore of the aforesaid orders is that the parties were bound and liable by the last operative order dated 25.10.2005. . Mr.Chinoy submitted that they were also bound by the orders and directions of the learned Single Judge which is the subject matter of the Appeal as the same was neither challenged by the Respondents nor stayed by the Appeal Court. Considering the view that we have taken it is not necessary to decide this point. :18: Resolutions dated 27.3.2006 and 31.3.2006 alleged to be in contempt of the order dated 25.10.2005 : 21. The Appeal reached final hearing before us on 7.3.2006 but was adjourned. The alleged act of contempt took place thereafter i.e. after 7.3.2005 when an adjournment was sought and granted. Before the Appeal reached hearing on the adjourned date, Respondent No.5 filed an affidavit dated 5.4.2006 disclosing the two resolutions which the Appellants contend, are in contempt of the orders of this Court. It sets out extensively the reasons why the Respondents were allegedly constrained to do so. We will come to that aspect when we deal with the justification pleaded by all counsel appearing on behalf of the Respondents. At this juncture, it is necessary to examine the resolutions themselves. 22(a). An Extra Ordinary General Meeting of the shareholders of Respondent No.5 was held on 27.3.2006. Respondent Nos.6 and 7 attended the meeting as directors and members. Respondent No.6 was the chairman of the meeting. It was resolved to increase the authorised share capital of the company from Rs.40 Crores, divided into 4 Crores Equity :19: Shares of Rs.10/- each, to Rs.110 Crores, divided into 11 Crores Equity Shares of Rs.10/- each ranking pari passu with the existing shares and consequential resolutions amending the Articles of Association, altering the authorised capital and authorising Respondent No.6 to file the necessary documents in the matter. (b). The resolution was proposed by Respondent No.6, seconded by Respondent No.7 and adopted unanimously. 23. It is important to note that the resolution opens by stating that the same is pursuant to section 94 of the Companies Act, 1956. There is no dispute about the fact that under section 94 of the Companies Act the resolution can only be passed by the company/its members. This is done by the members exercising their rights in respect of the shares held by them. Section 94 in so far as it is relevant, reads as under : "94. Power of limited company 94. Power of limited company 94. Power of limited company to alter its share capital.- to alter its share capital.- to alter its share capital.-(1) A limited company having a share capital, may, if so authorised by its articles, alter the conditions of its memorandum as follows, that is to say, it may- :20: (a) increase its share capital by such amount as it thinks expedient by issuing new shares; (2) The powers conferred by this section shall be exercised by the company in general meeting and shall not require to be confirmed by the Court. 24(a). On 31.3.2005 another Extra Ordinary General Meeting of Respondent No.5 was held, which was attended by Respondent Nos.1, 2, 6 and one Ms.Avni Raheja, the daughter of Respondent No.1. This meeting was also chaired by Respondent No.6. Respondent No.6 proposed a resolution this time to increase the authorised share capital of the company from Rs.110 Crores to Rs.210 Crores, divided into 21 Crore equity shares of Rs.10/- each. Consequential resolutions regarding the amendment to the Memorandum of Association and authorising Respondent No.6 to file necessary documents in the matter were also passed. (b). The resolution was proposed by Respondent No.6 and seconded by Respondent No.1 and was adopted unanimously. Allotment of shares pursuant to the Resolutions and :21: the consequent alteration in the status-quo as existing on the date of the order : 25A. Pursuant to the resolutions the fresh issue was allotted as follows : . An aggregate of 7,45,00,000 shares were allotted to three companies owned, managed and controlled by Respondent Nos.1, 2 and/or 3. 35,00,000 and 30,00,000 shares were allotted to two companies owned, managed and controlled by Respondent Nos.8 and 9 respectively. 25B. Thus the status quo which existed on the date of the order i.e. 25.10.2005 was drastically altered by the resolutions and the allotment of shares pursuant thereto in two significant respects. Firstly, the authorised capital of Respondent No.5 was increased from Rs.40 Crores to Rs.210 Crores. Secondly, Respondent Nos.1 to 4/their group companies became shareholders to the extent of about 74% of the paid up capital of Respondent No.5. Respondent’s stand in their Affidavits 26. It is pertinent to note that this entire scheme :22: of increase of the authorised share capital was negotiated between the Respondents inter-se. We will let the first Respondent’s affidavit narrate the alleged reasons for the scheme and the scheme itself. The same is in paragraphs 4 and 5 of the first Respondent’s affidavit dated 5.4.2006 in the Appeal. These paragraphs assume importance for more than one reason. It would be convenient to set them out at this stage. They read as under