Case: Ram Parshottam Mittal  Vs. M/S Hillcrest Realty Sdn.Bhd.&amp; Ors.Etc

3. M/s. Hotel Queen Road Pvt. Ltd, which is the proforma Respondent No.3 in all these Special Leave Petitions, was incorporated as a Special Purpose Vehicle from 23rd August, 2001 for taking over the assets of Hotel Ashok Yatri Niwas, which was a unit of the India Tourism Development Corporation (hereinafter referred to as `ITDC), and to manage the same as part of the disinvestment process initiated by the Government of India. After the transfer of assets was completed through a Scheme of Arrangement of Demerger between the ITDC and Hotel Queen Road Pvt. Ltd., which was sanctioned by the Government of India on 5th July, 2002, the Government of India invited bids for the purchase of 99.97% of the total voting equity share capital of Hotel Queen Road Pvt. Ltd. The requisite shares in the said Company were sold to the successful bidder, Moral Trading and Investment Ltd., by two share purchase agreements dated 8th October, 2002, entered into between the President of India, Moral Trading and Investment Ltd. and Hotel Queen Road Pvt. Ltd. On the same date an agreement was entered into between the President of India and Hotel Queen Road Pvt. Ltd., whereby the land on which Hotel Ashok Yatri Niwas was erected, was leased out to the Company for 99 years. Simultaneously, a meeting of the Board of Directors of the Company was convened in which Mr. Ram Parshotam Mittal, Mr. Ashok Mittal, Mrs. Sarla Mittal and Mr. C.S. Paintal were appointed as Additional Directors and in December, 2002, their appointment was approved at a meeting of the Company. A further resolution was passed to increase the share capital of the Company from Rs.90 lakhs to Rs.33 crores. The additional capital was divided into 71 lakh equity shares of Rs.10/- each and 25 lakh preference shares of Rs.100/- each. The Articles of Association of Hotel Queen Road Pvt. Ltd. were amended to exclude preference shareholders from having any voting rights.4. Subsequently, M/s. Hillcrest Realty (a Malaysian company) purchased 23,65,000 redeemable preference shares from Hotel Queen Road Pvt. Ltd. bearing interest at the rate of 8.5% per annum. The Board of Directors of the Company approved the allotment in favour of Hillcrest Realty on 5th May, 2003, subject to the condition that the allotment would not carry any voting rights. In July, 2003, Hillcrest Realty purchased another 4,64,290 preference shares on similar terms.5. For a period of 2 years from the date of purchase of the preference shares by Hillcrest Realty, no dividend was declared or paid by the Company. In June, 2005, Hillcrest Realty served a notice on Hotel Queen Road Pvt. Ltd. asking the Company to convene an Extraordinary General Meeting (EGM) to remove Mr. Ram Parshotam Mittal and Mrs. Sarla Mittal as Directors of Hotel Queen Road Pvt. Ltd. and to appoint the nominees of Hillcrest Realty in their place. Inasmuch as, Hotel Queen Road Pvt. Ltd. declined to hold such a meeting, Hillcrest Realty issued another notice for holding an EGM on 4th August, 2005 for the same purpose. Hotel Queen Road Pvt. Ltd. thereupon filed Suit No.992 of 2005 before the Delhi High Court in its original jurisdiction for an injunction to restrain Hillcrest Realty from going ahead with the proposed meeting and from exercising voting rights therein. Holding that the requisition for an EGM by Hillcrest Realty was illegal, the learned Single Judge, by his order dated 12th August, 2005, further held that any Resolution passed in the said meeting was ineffective and that Hotel Queen Road being a private company, Hillcrest Realty had no voting rights which it could have exercised in the EGM.6. In August, 2008, Hillcrest Realty filed Suit No.1832 of 2008 in the Delhi High Court for a declaration that by virtue of certain resolutions passed by Hotel Queen Road Pvt. Ltd. on 30th September, 2002, the Company had converted itself from a private company to a public company. On an interim application, being I.A. No.12164 of 2008, filed in the Suit by Hillcrest Realty, the learned Single Judge, upon holding that Hotel Queen Road Pvt. Ltd. had fraudulently concealed the fact that it had acquired the status of a public company in the year 2002 and had obtained order of injunction on 12th August, 2005 by virtue of such concealment, allowed the application and permitted Hillcrest Realty to vote in the meeting which was scheduled to be held on 16th October, 2008.7. Apart from the above, Hillcrest Realty also filed an application, being I.A. No.12638 of 2008, in Suit No.992 of 2005 filed by Hotel Queen Road Pvt. Ltd., inter alia, for a declaration that Hotel Queen Road was a Public Company and for vacation of the order of injunction passed on 12th August, 2005. By his order dated 20th October, 2008, the Single Judge vacated the interim order dated 12th August, 2005, on the ground that it was a natural consequence of the earlier order passed on 15th October, 2008, whereby Hotel Queen Road Pvt. Ltd. was held to have become a Public Company on account of the resolutions dated 30th September, 2002.8. Being aggrieved by the said two orders passed by the learned Single Judge in Suit No.1832 of 2008 filed by Hillcrest Realty and Suit No.992 of 2008 filed by Hotel Queen Road Pvt. Ltd., Hotel Queen Road Pvt. Ltd., through Mr. Ram Parshotam Mittal and others, filed FAO(OS)Nos.426 and 440 of 2008 before the Division Bench of the Delhi High Court. Hillcrest Realty Sdn. Bhd. had earlier filed FAO(OS)No.282 of 2005 against the order dated 12th August, 2005, which had been passed by the learned Single Judge in Suit No.992 of 2005 filed by Hotel Queen Road Pvt. Ltd.9. All the three appeals were taken up together for hearing and disposal by the Division Bench of the Delhi High Court and were disposed of by a common judgment on 14th January, 2009. Although, the status of Hotel Queen Road, after the resolutions were passed on 30th September, 2002, which included filing of a Statement in lieu of Prospectus and the filing of Form No.23 with the Registrar of Companies on 8th October, 2002, along with the text of the two special resolutions passed by the shareholders of Hotel Queen Road Pvt. Ltd. on 30th September, 2002, was the core issue, the Division Bench of the High Court decided not to go into the aforesaid question since the very same issue was the subject matter of Suit No.1832 of 2002 filed by Hillcrest Realty Sdn. Bhd.. The Division Bench set aside the order dated 12th August, 2005, passed by the learned Single Judge in I.A.No.5505 of 2005 and dismissed the same, while holding further that the Suit itself could not be dismissed outright on such score. Having held as above, the Division Bench kept the question of conversion of Hotel Queen Road Pvt. Ltd. into a public company and acquisition of voting rights by Hillcrest Realty in the Company, for decision in the two other appeals.10. On the question of denial of natural justice to the appellants in the two remaining appeals, the Division Bench held that such denial was curable even at the appellate stage and that instead of remanding the said appeals to the learned Single Judge for fresh consideration, the appeals could be taken up for decision by the Division Bench itself. In that context, the Division Bench held that as a cumulative preference shareholder in Hotel Queen Road Pvt. Ltd., Hillcrest Realty was entitled to vote at any EGM of its shareholders. The Division Bench took into consideration the statements made on behalf of Hillcrest Realty that since it had not been paid dividend on its preference shares for over two years, it became entitled to exercise voting rights on every resolution placed before the Company at any meeting, in accordance with the provisions of Section 87(2) of the Companies Act and discarding the submissions made on behalf of Hotel Queen Road that by virtue of Section 90(2) of the aforesaid Act, the provisions of Section 87(2) thereof were not applicable to a private company, unless it was a subsidiary of a public company, the Division Bench decided the question on the assumption that Hotel Queen Road Pvt. Ltd. was a public company. The latter part of the decision of the Division Bench was, therefore, based on the supposition that Hotel Queen Road Pvt. Ltd. had become a public company which entitled Hillcrest Realty to vote at the EGM held on 4th August, 2005, as well as the EGM scheduled for 16th October, 2008. The Division Bench, however, appeared to be undecided as to the course of action to be taken and without deciding the question as to whether Hotel Queen Road was a private company or a public company, proceeded on the assumption that the company was a public company and directed that Hillcrest Realty would thenceforth be permitted to exercise voting rights in all meetings of Hotel Queen Road, subject to the decision at the trial stage regarding the status of the company. While disposing of the appeals, the Division Bench awarded costs of Rs.19,76,000/- in favour of Hillcrest Realty Sdn. Bhd. and Rs.5,94,000/- in favour of Mr. Ashok Mittal, as per statements submitted by them, which was to be paid within a period of four weeks from the date of the order.11. As mentioned hereinbefore, two different sets of Special Leave Petitions have been filed, one set by Ram Parshotam Mittal and Mrs. Sarla Mittal and the other set by M/s. Hillcrest Realty Sdn.

Reasoning:
31. In deciding the two separate sets of Special Leave Petitions, it has to be kept in mind that they arise out of two separate suits, one filed by Hotel Queen Road and the other filed by Hillcrest Realty. While Suit No.992 of 2005 was filed by Hotel Queen Road Pvt. Ltd. for an injunction to restrain Hillcrest Realty from proceeding with the proposed EGM on 4th August, 2005, and from exercising voting rights therein, Suit No.1832 of 2008 was filed by Hillcrest Realty for a declaration that Hotel Queen Road had become a public company by virtue of the resolutions passed on 30th September, 2002. While in the suit filed by Hillcrest Realty, the learned Single Judge permitted the Plaintiff to vote in the meeting of Hotel Queen Road to be held on 16th October, 2008, in the suit filed by Hotel Queen Road, the learned Single Judge also passed an interim order prohibiting any effect being given to the resolutions passed in the EGM on 4th August, 2005, upon holding that Hotel Queen Road being a private company, Hillcrest Realty could not have exercised voting rights in the EGM.32. 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 contradictory fields. On the one hand, the learned Single Judge has passed an order on the basis that Hotel Queen Road was a Private Limited Company in which Hillcrest Realty, as a preference shareholder, had no voting rights and, on the other, an interim order has been passed on the basis that the said company was, a Public Company and by operation of Section of 87(2)(b) of the Companies Act, 1956, Hillcrest Realty, as a preference shareholder, was entitled to vote at all the meetings of the company. In an attempt to reconcile the two contradictory positions, the Division Bench of the High Court, without deciding the core issue, proceeded to dispose of the appeals before it by treating Hotel Queen Road to be a Public Company, and based upon such presumption proceeded further to hold that on account ofof dividend on its cumulative preference shares for two years, Hillcrest Realty became entitled to vote at the meeting of the company under the provisions of Section 87(2)(b) of the Companies Act, 1956.33. Although, as pointed out by Mr. Sorabjee, the language of the first resolution was different from the language of the two following resolutions, and at first glance appears to militate against each other, on a closer look at the three resolutions taken one after the other, it is not difficult to discern that they were all part of the same thinking process or meeting of minds of the shareholders. Without the first resolution being accepted as a final decision taken by the company to convert itself from a private company into a public company, there could be no occasion for the subsequent two resolutions to have been passed.34. 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 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 September, 2002, Hotel Queen Road had shed its private character and had been converted into a public company with all its consequences.35. From the materials on record, we are prima facie of the view that by the said resolutions, a final decision had been taken by 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. The very fact that Form 23 was filed along with the resolutions 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 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. We are unable to agree with the contention canvassed on behalf of Hotel Queen Road that till such time as the records of the Registrar of Companies were not altered to show that Hotel Queen Road had become a public company, it could not be treated as such. It is not the records of the Registrar of Companies which determines the status of a company but whether it falls within the definition of a "private company" or "public company" as defined in Section 3(1)(iii) and 3(1)(iv) of the Companies Act. On the other hand, the records of the Registrar of Companies reflect the status of the Company as per the information received from the company in accordance with the provisions of the aforesaid Act. Having regard to the definition of "private company" in Section 3(1)(iii), as soon as the number of its members exceeds 50, it 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.36. Whichever way we look at the three resolutions passed one after the other on 30th September, 2002, it appears to have been the intention of the company to convert itself from a private company to a public company and that the same was effected by the three resolutions passed on 30th September, 2002.37. Then again, the offer to pay dividends from a private source and not out of the companys profits, is not contemplated under Section 205 of the Companies Act. The decision referred to by Mr. Sorabjee in the Walters Deed of Guarantee in Walters "Palm" Tofee, Limiteds case (supra) had not been required to take into consideration a provision similar to Section 205 of the Companies Act, 1956. The said decision is, therefore, of no help to the petitioners case, particularly when the language of the Section is clear and unambiguous. 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 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).Since the question as to whether Hotel Queen Road ceased 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.However, for the purpose of disposing of these Special Leave 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 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 Act.