Case details

Court: Supreme Court of India
Decided: 10 May 2019
Bench: Arun Mishra
Citations: 2019 INSC 678[2019] 7 S.C.R. 976
Type: Judgment (Disposed off)

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Supreme Court of India

RAM PARSHOTAM MITTAL & ORS. versus HOTEL QUEEN ROAD PVT. LTD. & ORS. on 10 May 2019

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SUPREME COURT REPORTS

[2019] 7 S.C.R.

RAM PARSHOTAM MITTAL & ORS.

HOTEL QUEEN ROAD PVT. LTD. & ORS.

(Civil Appeal No. 3934 of 2017)

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 policydecision on 5.7.02 to disinvest its shares in the Indian TourismCDevelopment Corporation (ITDC) which owns various hotelproperties; one of them being Indraprastha Hotel – In terms of anapproved scheme of Arrangement of Demerger the said hotel wastransferred to the Respondent No.1-HQRL, created as a SpecialPurpose Vehicle to enable disinvestment – Government of IndiaDinvited bids for sale of shares in HQRL – Appellant No.3-MoralTrading & Investment Ltd. was the successful bidder – AppellantNo.1-‘RPM’, his wife-appellant no.2 who held the controlling interestin Moral, and the Respondent No.3-‘AM’, younger brother of theAppellant No.1 were appointed regular Directors of HQRL – HQRLapproved the issuance of 23,65,000 redeemable preference sharesEto the Respondent No.2-Hillcrest – HQRL filed civil suit being CS(OS) 992 of 2005 before the High Court inter alia seeking injunctionagainst Hillcrest from proceeding with proposed resolutions ofEOGM – Three resolutions dtd. 27.7.04, 7.1.05 and 10.5.05 passedallotting/transferring shares in favour of ‘RPM’, his wife and MoralF– Challenged by Hillcrest and ‘AM’ before the Company Law Board(CLB) u/ss.397, 398 alleging oppression and mis-management ofHQRL by the RPM Group inter alia on the ground that no notice wasissued to ‘AM’ who was, at the material time, a Director – Petitiondismissed – Hillcrest filed suit being CS (OS) No.1832/08 in HighCourt for declaration that it had voting rights in HQRL in view ofGthe Resolution dtd. 30.09.02– High Court allowed CoA (SB) 4/2006of Hillcrest and cancelled the allotment and transfers made by threeresolution on the grounds that Hillcrest had voting rights and therewas breach of ss.286, 300 and 108 and set aside the order of theCLB – High Court also recorded suo motu proceedings u/s.340,H

Cr.PC against ‘RPM’ – On appeal, held: Two civil suits are pendingconsideration; one being OS No.992/2005 filed by HQRL; otherSuit No.1832/2008 seeking declaration that HQRL had become alimited company by virtue of the resolution passed on 30.9.02 –Matter travelled to Supreme Court in the matter of grant of injunctionwhich was decided in Ram Parshottam Mittal v. Hillcrest Realty –Supreme Court without meaning to decide the issue finally primafacie observed that HQRL had altered its status and had become apublic company – It was also observed significantly as this issuehas to be decided in the two pending suits, it would not be properfor Supreme Court to dwell into the question further – It has notbeen disputed that no notice u/s.286 was given to ‘AM’, the Directorwhen impugned resolutions were passed – Impugned resolutionsare unfair to ‘AM’ – Even otherwise the absence of the notice isenough to invalidate the same as mandated by s.286 – It wasimproper for the Directors to allot shares to themselves and to theexclusion of ‘AM’ and that too without issuance of notice to him –s.108 operates independently of s.286 or s.300 – Invalidation ofmeeting is dependent under the provisions of s.108 – There wasviolation of s.108 – HQRL did not file share certificate along withthe duly executed share transfer form as on 10.5.05, the date ofBoard resolution – Plea of ‘RPM’ was disbelieved that sharecertificates were returned on 23.6.03 – High Court ordered theproceedings u/s.340 Cr.P.C. against ‘RPM’ for filing an affidavit tothe contrary – In the fact and circumstances of the case, taking intoconsideration the overall scenario, impugned order not interferedwith – However, direction to prosecute appellant no.1, ‘RPM’ in thefacts of the case, set aside.

Disposing of the appeals, the Court

Conclusion

Disposing of the appeals, the Court

HELD: 1.1 It is a common ground that two civil suits arepending consideration; one being OS No.992/2005 filed by HQRLfor injunction to restrain Hillcrest Realty from proceeding withthe proposed resolutions of EOGM and from exercising votingrights therein; the other Suit No.1832/2008 seeking declarationthat HQRL had become a limited company by virtue of theresolution passed on 30.9.2002. The matter travelled to SupremeCourt in the matter of grant of injunction which was decided inRam Parshottam Mittal v. Hillcrest Realty. Supreme Court AB

CDE

Aobserved that the decision on the aforesaid question would bedependent upon the decision of the issue whether by resolutionadopted on 30.9.2002, HQRL had lost its private character andhad been converted into a public limited company. While the issuesare the same in the two suits, this Court observed that the interimorder dated 12.8.2005 had been obtained by suppression ofBmaterial facts and prima facie finding recorded by the DivisionBench of the High Court was that by resolution adopted on30.9.2002, HQRL had shed its private character and had beenconverted into a public limited company. Supreme Court withoutmeaning to decide the issue finally prima facie observed that anCapplication was filed before the Registrar in Form 23 along withresolution dated 30.9.2002 is sufficient to arrive at a prima facieconclusion that HQRL had altered its status and had become apublic company. It was further observed by Supreme Court thatsince the number of members exceeded 50 as the shares were said to have been allotted to 134 persons on 30.9.2002, primaDfacie HQRL lost its private character. However, Supreme Courtalso observed significantly as this issue has to be decided in thetwo pending suits, it would not be proper for this Court to dwellinto the question further. Supreme Court held that consideringthe explanation to section 87(2)(b) of the Companies Act, 1956Egives Hillcrest as a cumulative preference shareholder the rightto vote on every resolution. It was also made clear that theobservations were prima facie in the nature of limited only fordisposal of special leave petition and should not influence thefinal decision in the suits. The question relating to HQRL whetherit is a private or public company has been left open for decisionFin the suits. [Para 62] [998-C-H; 999-A-B]

1.2 The order in Ram Purshottam Mittal is not final and isonly a prima facie view in the matter of injunction. Theobservations in interim order cannot be taken as binding evenfor the purpose of deciding this matter. [Para 65] [999-E-F]G

1.3 Section 286 of the Companies Act, 1956 deals withrequirement of notice to Director. It has not been disputed thatno notice under section 286 had been given to Mr. AM, theDirector when impugned resolutions were passed. In Needle RAM PARSHOTAM MITTAL & ORS. v. HOTEL QUEEN ROADPVT. LTD. & ORS.

Industries, it has been observed by Supreme Court that theresolution passed by the Director may be perfectly legal and yetoppressive and conversely a resolution which is in contraventionof the law may be in the interest of the shareholders of thecompany. Every illegality will not make it oppressive. Prejudicehas to be shown. No complaint of oppression could be entertainedmerely on the ground of failure to attach notice of Board meetingwas an act of illegality. It has to be shown that the action wasunfair to the person to whom notice has not been given and causesprejudice to him in the exercise of legal and proprietary rights asshareholders. The impugned resolutions are unfair to Mr. AM inthe facts and circumstances of the case even otherwise theabsence of the notice is enough to invalidate the same asmandated by section 286. [Paras 74-76] [1009-H; 1010-C-F]

1.4 It was improper for the Directors to allot shares tothemselves and to the exclusion of Mr. AM in the facts andcircumstances of the case and that too without issuance of noticeto him. [Para 81] [1021-D]

1.5 Section 19(2) of the Companies Act provides thatnothing in sections 85 to 89 shall apply to a private companyunless it is a subsidiary of a public company and this question hasto be finally decided whether it is a private or public limitedcompany in the pending civil suit which have been stated to betransferred to NCLT for decision in accordance with law.Otherwise, section 87 provides that notice has to be issued topreference shareholders also for the meeting and they have aright to participate in the meeting. It appears prima facie even ifdividend has not been declared. In that case also, preferenceshareholders shall have a right to vote in the meeting. Reliancehas also been placed on the provisions of section 169(4) of theCompanies Act regarding calling of EOGM on requisition. Theresolution with respect to EOGM is not in issue in the presentcase. As such need not be dilated upon the provisions of section169(4) and the submissions. [Paras 83, 84] [1028-A-D]

1.6 Section 108 operates independently of section 286 orsection 300. The invalidation of meeting is dependent under theprovisions of section 108. There was violation of section 108 of AB

980SUPREME COURT REPORTS

[2019] 7 S.C.R.

Athe Companies Act. HQRL did not file share certificate alongwith the duly executed share transfer form as on 10.5.2005, thedate of Board resolution. The plea of Mr. RPM has beendisbelieved that share certificates were returned on 23.6.2003.The High Court has also ordered the proceedings under Section340 Cr.P.C. against Mr. RPM for filing an affidavit to the contrary.BThe High Court has relied on the affidavit of the concerned officialsof the Indian Overseas Bank. The High Court has found that theshare certificates were delivered to Mr. RPM not on 23.6.2003but on 23.6.2005. There was violation of the provisions of section.In the fact and circumstances of the case, taking intoCconsideration the overall scenario, the impugned order calls forno interference. However, direction to prosecute appellant RPMin 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. KaramchariDSanstha (2009) 5 SCC 694 ; Needle Industries (India)Ltd. & Ors. v. Needle Industries Newey (India) HoldingLtd. & Ors. (1981) 3 SCC 333 : [1981] 3 SCR 698 ;Sangramsinh P. Gaekwad & Ors. v. Shantadevi P.Gaekwad (Dead) through LRs. & Ors. (2005) 11 SCC314 : [2005] 1 SCR 624 ; Mannalal Khetan & Ors. v.EKedar Nath Khetan & Ors. (1977) 2 SCC 424 : [1977]2 SCR 190 – relied on.

V.S. Krishnan & Ors. etc. v. Westfort Hi-tech HospitalLtd. & Ors. (2008) 3 SCC 363 : [2008] 3 SCR 184 ;CDS Financial Services (Mauritius) Ltd. v. BPLFCommunications Ltd. & Ors. (2004) 121 Comp Case374 ; National Textile Workers’ Union & Ors. v.P.R.Ramakrishnan & Ors. (1983) 1 SCC 228 : [1983]1 SCR 922 ; Ram Parshotam Mittal & Anr. v. HillcrestRealty SDN. BHD. & Ors. (2009) 8 SCC 709 : [2009]G10 SCR 1121 ; Sri Parmeshwari Prasad Gupta v. TheUnion 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. Syntheticsand Chemicals Ltd. & Ors. (1971) 41 Co. Cases 377 ; H

RAM PARSHOTAM MITTAL & ORS. v. HOTEL QUEEN ROADPVT. LTD. & ORS.

Madras Tube Co. Ltd. & Ors. v. Hari Kishon Somani &AOrs. (1985) 1 Comp Law Journal 195 (Mad). ; M.S.Madhusoodhanan v. Kerala Kaumudi (P) Ltd. (2004) 9SCC 204 : [2003] 2 Suppl. SCR 107 ; Mrs.Bacha F.Guzdar, Bombay v. Commissioner of Income Tax,Bombay AIR 1955 SC 74 : [1955] SCR 876 ; UnionBof India v. Allied International Products Ltd. & Anr.(1970) 3 SCC 594 : [1971] 2 SCR 661 ; National TextileWorkers Union & Ors. v. P. R. Ramakrishna & Ors.(1983) 1 SCC 228 : [1983] 1 SCR 922 ; M/s. KothariTextiles Ltd., Madras & Ors. v. Commissioner of WealthTax, Madras AIR 1963 Mad. 274 ; Trojan Equity Ltd.Cv. CMI Ltd. [2009] QSC (Supreme Court ofQueensland) 114 ; Indore Development Authority v.Shailendra (Dead) through LRs. & Ors. (2018) 3 SCC412 : [2018] 2 SCR 1 ; M.S.D.C. Radha Ramanan v.M.S.D. Chandrasekara Raja & Anr. (2008) 6 SCCD750 : [2008] 5 SCR 182 – referred to.

Halsbury’s Laws of England, Volume 6 (3rd Ed.), page234 – referred to.

Case Law Reference

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 3934of 2017.

From the Judgment and Order dated 31.05.2013 of the HighCourt 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. BinaMadhavan, Suryanarayan Singh, Nitesh Jain, Piyush Dwivedi,DMs. 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. AninditaEMisra, Kunal Verma, Yugandhara Pawar Jha, Gopal Jha, Advs. for theRespondents.

The Judgment of the Court was delivered by ARUN MISHRA, J.

F1. The appeal arises out of the judgment dated 31.5.2013 passedby the High Court of Delhi, setting aside an order dated 31.1.2006 passedby the Company Law Board in Company Petition No.64/2005.

2. The backdrop facts indicate that the Government of India tooka policy decision on 5.7.2002 to disinvest its shares in the Indian TourismGDevelopment Corporation (in short, ‘the ITDC’) which owns varioushotel properties; one of them being Indraprastha Hotel, formerly knownas Hotel Ashok Yatri Niwas, (hereinafter referred to as “the hotel”).

3. In terms of an approved scheme of Arrangement of Demergerthe hotel was transferred to the Respondent No.1 - Hotel Queen RoadHPvt. Ltd. (in short, ‘HQRL’) which was created as a Special Purpose

Vehicle to enable disinvestment. The paid up capital of HQRL was Rs.90lakhs comprising 9 lakh equity shares of Rs.10 each, of which theGovernment of India held 89.97% shares. Indian Hotels Co. Ltd. (IHCL)held 10% shares and the balance shares were held by the employees ofhotels of ITDC under a Voluntary Retirement Scheme.

4. Pursuant to its decision to disinvest, the Government invitedbids for sale of shares in HQRL. The appellant No.3 - Moral Trading &Investment Ltd., in short hereinafter referred to as ‘Moral’, a publiclimited company, was declared the successful bidder.

5. By a share purchase agreement dated 8.10.2002 Moral acquiredthe shares of Government of India and IHCL in HQRL for a sum ofRs.45 crores. Out of this, Rs.33.37 crores was obtained by way of loansfrom banks. 99.97% shares of HQRL being held by Moral, HQRL becameMoral’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 RespondentNo.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 HQRLheld on 28.12.2002.

7. On 30.9.2002 HQRL passed a resolution in its Extra OrdinaryGeneral Meeting (EOGM) to change its status from ‘private limited’ to‘limited’ company. The said resolution was rejected by the Registrar ofCompanies on the ground of late filing and according to the appellants,HQRL had not filed it again with the Registrar of Companies nor hadremoved the defects.

8. On 21.12.2002 a Board meeting of HQRL was held. Moraltransferred 13 equity shares valued at Rs.10 per equity share of HQRLto 7 persons, i.e. 2 shares to the appellant No.1, Mr. R.P. Mittal, 3 sharesto the appellant No.2, Mrs. Sarla Mittal, one share to the respondentNo.3, Mr. Ashok Mittal and 7 shares to 4 daughters of the appellantNos.1 and 2, R.P. Mittal’s family thus held 99.97% equity shares, asagainst one equity share held by his brother, Mr. Ashok Mittal.

9. On 28.12.2002 Annual General Meeting (AGM) of HQRL washeld in which authorised capital was increased from Rs.90 lakhs to Rs.33crores. The AGM was attended by Mr. Ashok Mittal. There was anincrease of 71 lakh equity shares of Rs.10 each and 25 lakh preference

Ashares of Rs.100 per share and a Special Business Resolution No.10was passed under section 81(1A) of the Companies Act, 1956 (hereinafterreferred to as ‘the Companies Act’). The appointment of Mr. R.P. Mittal,Mrs. Sarla Mittal and Mr. Ashok Mittal to the Board of Directors wasapproved by the majority of the shareholders of Moral. Mr. R.P. Mittaland Mrs. Sarla Mittal were appointed as whole time Directors. TheBMemorandum of Association of HQRL was also amended. Article IV(4) of Articles of Association was amended to state that the preferenceshares would not carry any voting rights.

10. On 19.3.2003, Mr. R.P. Mittal, Chairman of HQRL issuedletter to the Respondent No.2 - Hillcrest Realty SDN BHD MalaysiaC(for short, ‘Hillcrest’) inviting subscription in 8.5% cumulative redeemablepreference shares of Rs.100 each up to Rs.30 crores. On 3.4.2003, thehotel was closed for renovation and upgradation. On 30.4.2003, Hillcrestaccepted and applied for subscription requesting for allotment of 23,65,000,8.5% redeemable preference shares in the company. On 5.5.03 HQRLDapproved the issuance of 23,65,000 redeemable preference shares toHillcrest.

11. On 25.6.2003 in order to facilitate issue of preference shares,HQRL increased authorised capital by Rs.5 crore comprising 5 lakhpreference shares of Rs.100 each. On 19.7.2003 HQRL approved theEissuance of 4,64,290 redeemable preference shares to Hillcrest respondentNo.2. In or about August-September, 2003, to fund the redevelopment ofthe hotel, a term loan of Rs.40 crores was raised from Indian OverseasBank. According to the appellants the loan was secured by the jointpersonal guarantees of Mr. R.P. Mittal, Mrs. Sarla Mittal and Mr. AshokMittal, the corporate guarantee of Moral and the collateral security ofFpersonal assets of Mr. R.P. Mittal and Mrs. Sarla Mittal.

12. On 27.7.2004, HQRL in compliance of resolution dated28.12.2002 passed under section 81(1A) of the Act, issued 23.90 lacsequity shares at par to Moral, the single shareholder holding 99.97% ofequity. On 7.1.2005 HQRL in compliance of resolution dated 28.12.2002Gpassed under section 81(1A) of the Act issued 41.51 lakh equity sharesto Moral, 1.10 lakh equity shares to Mr. R.P. Mittal and 4.5 lakh equityshares 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 toHwhich HQRL increased its authorised capital from existing Rs.38 crores

to Rs.40 crores, with an increase of 2 lakh equity shares of Rs.10 each.On 10.5.2005 HQRL allotted 10 lakh equity shares to the respondentNo.4 Pondy Metals and Rolling Mills Pvt. Ltd., hereinafter referred to inshort as Pondy Metals. Further, HQRL registered transfer by Moral of32,88,181 equity shares in favour of Mr. R.P. Mittal.

14. On 26.5.2005, M/s. Ashok Mittal & Co. issued a notice toMoral for repayment of Rs.4,91,58,762/- along with interest claiming thatthe same was due since 2000 from running account for share trading forthe years prior to 2000. It is the case of the appellants that Mr. AshokMittal, on realizing the bright prospects of development of the hotel,because of its location, in the heart of capital of India, turned dishonest tothe R.P. Mittal group and hatched a conspiracy with preferenceshareholder Hillcrest to control the management of HQRL, It is allegedby the appellants that, in contravention of the provisions of the CompaniesAct and terms of issue of preference shares as prescribed in Articles ofCompany and correspondence exchanged, Mr. Ashok Mittal causedHillcrest to issue notice under section 169(4) of the Act for EOGM tooust the duly elected board of HQRL and to appoint their nominee on theground of non-payment of dividend on the redeemable preference sharesas provided under section 87(2)(b) of the Companies Act. Section 87 ofthe Companies Act is extracted below:

“Sec 87 - Voting rights

(1) Subject to the provisions of section 89 and sub-section (2) ofsection 92 :

(a) every member of a company limited by shares and holdingany equity share capital therein shall have a right to vote, inrespect of such capital, on every resolution placed before thecompany ; and (b) his voting right on a poll shall be in proportion to his shareof the paid-up equity capital of the company.

(a) Subject as aforesaid and save as provided in clause (b) ofthis sub-section, every member of a company limited by sharesand holding any preference share capital therein shall, in respectof such capital, have a right to vote only on resolutions placedbefore the company which directly affect the rights attachedto his preference shares.

Explanation.: Any resolution for winding up the company orfor the repayment or reduction of its share capital shall be deemeddirectly to affect the rights attached to preference shares withinthe meaning of this clause.

(b) Subject as aforesaid, every member of a company limitedby shares and holding any preference share capital thereinshall, in respect of such capital, be entitled to vote on everyresolution placed before the company at any meeting, if thedividend due on such capital or any part of such dividend hasremained unpaid:

(i) in the case of cumulative preference shares, in respectof an aggregate period of not less than two years precedingthe date of commencement of the meeting; and

(ii) in the case of non-cumulative preference shares, eitherin respect of a period of not less than two years endingwith the expiry of the financial year immediately precedingthe commencement of the meeting or in respect of anaggregate period of not less than three years comprised inthe six years ending with the expiry of the financial yearaforesaid.

Explanation.: For the purposes of this clause, dividend shallbe deemed to be due on preference shares in respect of anyperiod, whether a dividend has been declared by the companyon such shares for such period or not, (a) on the last day specified for the payment of such dividendfor such period, in the articles or other instrument executedby the company in that behalf; or (b) in case no day is so specified, on the day immediatelyfollowing such period.

(c) where the holder of any preference share has a right tovote on any resolution in accordance with the provisions ofthis sub-section, his voting right on a poll, as the holder ofsuch share, shall, subject to the provisions of section 89 andsub-section (2) of section 92, be in the same proportion asthe capital paid up in respect of the preference share bearsto the total paid-up equity capital of the company.”

15. A Board meeting of HQRL was conducted on 4.7.2005 whichwas attended by Mr. R.P. Mittal, Mrs. Sarla Mittal and Mr. Ashok Mittal.Mr. Ashok Mittal attended the meeting for the first time. The RespondentNo.6 Mr. N.P. Gupta and the Respondent No.5, Mr. Suman Jain wereappointed as Additional Directors. On 8.7.2005 Hillcrest issued noticeunder section 169(6) of the Companies Act to call for EOGM on 4.8.2005.

16. HQRL filed a civil suit being CS (OS) 992 of 2005 before theHigh Court of Delhi for declaration, cancellation and mandatory injunctionagainst the requisition under section 169 of the Companies Act.

17. On 4.8.2005 Hillcrest proceeded to convene EOGM and passeda resolution inter alia removing Mr. R.P. Mittal and Mrs. Sarla Mittalfrom the Board of HQRL. On 12[th] August, 2005, Delhi High Court passedan order in an interlocutory application being IA 5505 in the said suitbeing CS (OS) No.992 of 2005 restraining Hillcrest from giving effectto the resolution passed in the EOGM held on 12.8.2005. Delhi HighCourt restrained Hillcrest from giving effect to the resolution passed inthe EOGM.

18. On 22nd August, 2005 Hillcrest and Ashok Mittal filed a petitionbearing No.64/2005 in the Principal Bench of the Company Law Boardat Delhi and under Sections 397 and 398 of the Companies Act allegingoppression and mis-management of HQRL by the R.P. Mittal Group.The Resolution passed in Board meetings regarding allotment/ transferof shares was also challenged amongst others on the ground that nonotice had been issued to Ashok Mittal who was, at the material time, aDirector.

19. The present case arises out of the said petition filed by Hillcrestand Mr. Ashok Mittal against the appellants in the Company Law Boardin September, 2005 under Sections 397/398 of the Act, challenging theallotment/transfer of shares effected on 27.7.2004, 7.1.2005 and10.5.2005 on inter alia grounds of (i) financial mismanagement of HQRLby Mr. R.P.Mittal and Mrs. Sarla Mittal; (ii) Invested in CumulativeRedeemable Preference Share (CRPS) on the understanding that HQRLwould remain a subsidiary of Moral and that in the event of HQRLfailing to pay any dividend for two years, Hillcrest would be entitled toexercise its voting rights in all resolutions; (iii) illegality of allotmentsmade on 27.7.2004, 7.1.2005 and 10.5.2005. In the absence of noticeunder Section 286 of the Companies Act to Mr. Ashok Mittal, who wasa Director of HQRL; (iv) the allotments having been made by theremaining Directors without disclosing their obvious interest in violation A

Aof section 300 of the Companies Act; (v) the allotments being madewithout any valuation of equity shares of HQRL; (vi) no money beingpaid for transfer of shares and (vii) the eventuality of the transfer bringingabout a situation where HQRL would no longer remain a subsidiary ofMoral 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 hurdlescreated by Hilcrest and Mr. Ashok Mittal by sending notices to variousGovernment departments asking them not to grant licenses, the hotelhad become operational, with the sole efforts of Mr. R.P. Mittal and hadbeen granted all the requisite licenses.

21. On 31.1.2006, C.P. No.64/2005 was dismissed, inter alia, onthe ground that it was a mala fide petition by Hillcrest and Mr. AshokMittal to take over the company. In 2006 three cross appeals were filedagainst 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/D2008 in Delhi High Court for a declaration that Hilcrest had voting rightsin HQRL in view of the Resolution dated 30[th] September, 2002 passedby HQRL whereby HQRL had been converted from a private companylimited by shares to a public company limited by shares. Hilcrest filed anapplication being IA No.12164/ 2008 in the said suit being CS (OS)ENo.1832/ 2008 contending that HQRL had obtained an order of injunctionon 12[th] August, 2005 by fraudulently and concealing the fact that it hadacquired the status of a public company in 2002. Hilcrest also made anapplication in suit being C.S. No.992/2005 for vacating of the interimorder dated 12[th] August whereby Hilcrest had been restrained fromgiving effect to the Resolution passed at the meeting of HQRL on 4[th]FAugust, 2005.

23. Being aggrieved by the order dated 12[th] 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 1[st] October, 2008, Hilcrest filed an applicationGbeing IA No.12164/ 2008 in C.S. (OS) No.1832/ 2008 inter alia prayingthat Hilcrest be allowed to participate in the Extraordinary GeneralMeeting of HQRL to be held on 16[th] October, 2008 and further prayingfor appointment of an Administrator to look after the affairs of thecompany.

25. On 15[th] October, 2008 the Delhi High Court passed an interimorder in the said IA No.12164 of 2008 in C.S. (OS) 1382 of 2008 allowingHilcrest to vote in the Extraordinary General Meeting to be held on 16[th]October, 2008 and also appoint Administrator to look after the day today affairs of HQRL.

26. On 16[th] October, 2008, Mr. R.P. Mittal, Mrs Sarla Mittal andHQRL filed an appeal against the orders dated 15[th] October, 2008 and24[th] 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 21[st] October, 2008, Mr.R.P. Mittal filed an application under the Right to Information Actwhereupon the Registrar of Companies, by letter dated 21[st] October,2008 informed the appellant that the status of HQRL had not beenchanged from private company limited by shares to public companylimited by shares for the technical reasons specified in the said letter.

28. On 24[th] October, 2008 the interim order passed by the DelhiHigh Court on 5[th] October, 2008 in IA No.12164/ 2008 in C.S. (OS)No.1832 of 2008 was made absolute.

29. On 14[th] January, 2009, the Division Bench of Delhi High Courtby 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 themeetings of HQRL. The question of whether HQRL was a privatecompany limited by shares of public limited company was left open foradjudication in the suit. On 14[th] January, 2009, Hilcrest took over themanagement of HQRL from R.P. Mittal Group through Ashok Mittal.

30. Appellant Nos.1 and 2 filed a special leave petition in thisCourt being SLP (C) No.1069 of 2009 under Article 136 of theConstitution. By a judgment and order dated 20[th] July, 2009, a DivisionBench of the High Court upheld the right of Hilcrest to vote on theground that HQRL was prima facie a public limited company.

31. On 30[th] July, 2009, Hilcrest and Ashok Mittal sent notice tothe existing shareholders of HQRL under Section 81 (21) of theCompanies Act to allot further equity shares.

32. On 14[th] August, 2009 the appellants filed an interim applicationbeing IA No.9920/ 2009 in C.S. (OS) 1832 of 2008 seeking injunctionagainst Hilcrest and Mr. Ashok Mittal from going ahead with the rightsissue.

A33. By a judgment and order dated 18[th] August, 2009 a SingleBench of Delhi High Court declined to interfere with the right issue andthe application No.9920/2009 in C.S. (OS) 1832/2009 was dismissed.

34. On 20[th] August, 2009, the appellant appealed against the orderdated 18[th] August, 2009 referred to above. The Division Bench, however,Bdeclined to restrain the rights issue but only directed issuance of noticeto HQRL and Ashok Mittal.

35. On 31.5.2013, the High Court by the impugned order allowedCoA (SB) 4/2006 of Hillcrest and cancelled the allotment and transfersmade on 27.7.2004, 7.1.2005 and 10.5.2005 on the grounds that Hillcresthad voting rights and there was breach of sections 286, 300 and 108 ofCthe Companies Act.

36. HQRL has contended that the claim of the appellants thatthey 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.5.5crores was advanced by Mr. Ashok Mittal, loan of Rs.6.23 crores wasDadvanced by Mr. R.P. Mittal. When the hotel was bought it requiredextensive renovation and thus further funds were required. Hillcrestcontributed Rs.28.29 crores in preference share capital, Rs.40 croresbank loan from IOB on personal guarantee of Mr. Ashok Mittal, Mr.R.P. Mittal and Mrs. Sarla Mittal. HQRL has claimed that the net worthEof Mr. Ashok Mittal was much higher than others.

37. HQRL has further contended that the management changedhands from R.P. Mittal group on 15.1.2009 vide order of Delhi HighCourt. Prior to leaving the management of HQRL, Mr. R.P. Mittal andMrs. Sarla Mittal with the help of their accomplices, removed and didaway with the books of account and statutory records of HQRL.FThereafter, a number of third parties, all related to Mr. R.P. Mittal startedclaiming to have lent monies to HQRL. Most of these demands werebased on ‘oral agreements’ with Mr. R.P. Mittal. When the newmanagement assumed charge of HQRL, the financial position of HQRLwas weak, there being only Rs.2.82 lacs in the bank account of HQRL;Gthe immediate liabilities including government dues, taxes and salariesof staff were Rs.98,62,563; HQRL had defaulted on payment of interestto the bank amounting to Rs.4,73,98,446 along with total bank liability ofabout Rs.30 crores; and its account was on the verge of becoming NonPerforming Asset (NPA), due to defaults in repayment of interest andprincipal and it was already in litigation with the bank.H

38. In these circumstances, funds were brought in by Mr. AshokMittal. A sum of Rs.5 crore was brought as loan by Mr. Ashok Mittalbefore 31.3.2009; Rs.4.5 crore further loan by Mr. Ashok Mittal before31.3.2009; and Rs.40 crore by Mr. Ashok Mittal through Rights Issue.Offer was given to the appellants who refused to subscribe to rightsissue but litigated against the company. Prayer for grant of injunctionwas refused by Delhi High Court on the Rights Issue in 2009.

39. According to the respondents, it is crystal clear from the abovefacts, that the entire funding was on the basis of investment either byHillcrest or on the basis of creditworthiness of Mr. Ashok Mittal orinvestment made by him. The R.P. Mittal Group’s argument that theyfunded the project is incorrect. They have not been able to show howsuch funds have been brought in the company. Said group had neitherfunds nor creditworthiness to buy the hotel of HQRL.

40. It was urged by Mr. Pinaki Misra, learned senior counsel onbehalf of the appellants that the claim of Mr. Ashok Mittal that he hadfunded Rs.5.5 crores to Moral out of Rs.12.03 crores for acquisition ofHQRL was false and an afterthought. In order to mislead this Court, hehad made a false statement. The claim of Mr. Ashok Mittal that loan ofRs.33 crores to Moral was only on his personal guarantee was alsowrong. The action of Mr. Ashok Mittal and Hillcrest was detrimental tothe interest of HQRL.

41. Mr. Misra argued that the High Court has erred in relying ondecisions of this Court in interim injunction matters which did not decidefinally the rights of parties. Suit is still pending. He urged that it is wellsettled by this Court in State of Assam v. Barak Upatyaka D.U.Karamchari Sanstha (2009) 5 SCC 694 that any interim order whichdoes not finally and conclusively decide an issue cannot be a precedent.

42. It was urged that admittedly, there was no financialmismanagement in the affairs of HQRL by appellants or R.P. Mittalgroup. The High Court while passing the impugned judgment has actedas a Civil Court and not as Company Court under section 10F of theCompanies Act, 1956. The test as to whether an action is oppressive ornot is not based on whether it is legally permissible or not since even iflegally permissible, if the action is otherwise against probity, good conductor is burdensome, harsh or wrong or is malafide or for collateral purpose,it would amount to oppression under section 397. Reliance has also beenplaced on Needle Industries (India) Ltd. & Ors. v. Needle Industries A

ANewey (India) Holding Ltd. & Ors. (1981) 3 SCC 333; SangramsinhP. Gaekwad & Ors. v. Shantadevi P. Gaekwad (Dead) through LRs.& Ors. (2005) 11 SCC 314; and V.S. Krishnan & Ors. etc. v. WestfortHi-tech Hospital Ltd. & Ors. (2008) 3 SCC 363.

43. Shri Misra, learned senior counsel further urged that noBoppression was caused to Mr. Ashok Mittal by allotment of shares on27.7.2004, 7.1.2005 and allotment/transfer of shares on 10.5.2005 tomajority shareholders having 99.97% equity. It was further submittedthat there could not be any oppression caused to Mr. Ashok Mittal byinter se transfer of shares from Moral to Mr. R.P. Mittal as the saidtransaction was between Moral and Mr. R.P. Mittal, whereby HQRLConly records the transfer. The argument on behalf of Mr. Ashok Mittaland Hillcrest that the allotment was done at undervalue was also notcorrect. The transfer of shares from Moral to Mr. R.P. Mittal on10.5.2005 was between two separate legal entities i.e. Moral and Mr.R.P. Mittal, whereby HQRL only had the authority to record transfer.

DHQRL could not have raised any objection and also Hillcrest wouldhave no locus to challenge the same. The only issue qua Hillcrest iswhen it was entitled to vote on every resolution placed before thecompany in terms of Section 87(2)(b) of the Companies Act. It wassubmitted that the first allotment made to Hillcrest was on 5.5.2003

hence as per the submissions of Hillcrest, two years period in terms ofESection 87(2)(b) of the Companies Act, came to an end on 5.5.2005 andas per Hillcrest, if the dividend was not paid for 2 years, whether thereis profit or not, Hillcrest were entitled to vote on resolution dated10.5.2005 effecting transfer is not correct proposition of law. Section205 of the Companies Act provides that no dividend shall be declared or Fpaid by a company for any financial year except out of the profits of thecompany for that year arrived at after providing for depreciation inaccordance with the provisions of sub-section.

44. It was urged that the position of shareholders in a company isof analogous to that of partners inter se. Partnership is merely anassociation of persons for carrying on the business of partnership and inGlaw the firm name is a compendious method of describing the partners.Such is, however, not the case of a company which stands as a separatejuristic entity distinct from the shareholders.45. It was submitted on behalf of appellant that on 10.5.2005Hillcrest had no voting right under section 87(2)(b) of the CompaniesHAct, as there was no profit and no dividend due. Accordingly, no oppression can be said to have been caused to Hillcrest by inter setransfer of shares by resolution dated 10.5.2005. Moreover, Hillcresthad no right to requisition an EOGM under section 169(4) of theCompanies Act. Thus, action of not calling of EOGM does not amountto oppression. Hillcrest’s contention that preference shareholders hadacquired voting rights under section 87(2)(b) to requisition a meetingunder section 169(4) is misconceived, in that section 98(2)(b) onlyprovides that preference shareholders would only be entitled to vote onevery resolution placed before the company at any meeting. Evenotherwise, the ground of HQRL not remaining subsidiary of Moral (apublic company) has itself been diluted by Hillcrest, as can be seen fromthe note with the heading “Shareholding pattern of R1 (HQRL)”. It isrelevant to mention here that it was held by the High Court of Bombayin CDS Financial Services (Mauritius) Ltd. v. BPL CommunicationsLtd. & Ors. (2004) 121 Comp Case 374, that RBI’s special permissionunder the special laws of FEMA will prevail over the provisions of theCompanies Act, 1956. If the analogy of the High Court in impugnedorder is applied then all earlier meetings of HQRL deserve to be declaredvoid as violative of sections 286 and 300.

46. It was also urged by Mr. Misra, learned senior counsel, thatthe finding of the High Court as to provision under section 108 of theCompanies Act, 1956 and thereafter initiating the proceedings undersection 340 Cr.P.C. against Mr. R.P. Mittal was also erroneous, as theHigh Court had itself recorded that there was no record available withthe 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 into give the majority to Mr. Ashok Mittal, even though the issue was notpart of these proceedings.

47. In the wake of aforesaid submissions, the appellants prayedthat 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 thatHillcrest as preference shareholder, is not entitled to vote under section87(2)(b) of the Companies Act, 1956, nor can requisition a meeting undersection 169(4)(A) of the said Act. Mr. Misra submitted that the appellantsbe sent back into the management of HQRL.

48. It was submitted by Mr. Jaideep Gupta, learned senior counselfor HQRL that the interest of the company must be uppermost in themind of the Court while granting relief in a petition under Section 397 ofthe Companies Act.

A49. It was argued that it is well settled that the company does notmerely represent the interest of the shareholders but also a much widergroup of entities which would include employees, creditors and public ingeneral. Reliance was also placed on National Textile Workers’ Union& Ors. v. P.R.Ramakrishnan & Ors. (1983) 1 SCC 228.B50. Mr. Gupta further submitted that HQRL runs a prime hotel in B50. Mr. Gupta further submitted that HQRL runs a prime hotel inNew Delhi. It is desirable that the interest of business of the hotel beprotected by this Court while giving relief under section 397/398 of theCompanies Act. At the time of purchase of undertaking in 2002-03 theentire investment was made through Moral. The amount involved wasabout Rs.45 crores. Moral financed this sum through a bank loan ofCabout Rs.33.25 crores obtained on the credit worthiness of Mr. AshokMittal and against personal guarantee of Mr. R.P. Mittal and Mr. AshokMittal. Mr. Ashok Mittal has substantial interest in the company, he onlyheld one share in the company and was on the Board of Directors of theCompany.

D51. Mr. Jaideep Gupta, also argued that with a view tooperationalise the hotel further funds to the tune of Rs.68 crores wereraised including investment of Rs.28.29 crores made by Hillcrest. Hillcrestwas persuaded to make this investment at the behest of Mr. AshokMittal as is evident from the record. Balance sum of Rs.40 crores wasraised by way of bank loans against personal guarantee of Mr. R.P.EMittal and Mr. Ashok Mittal. In or about 2004-05 the R.P. Mittal groupthrough the three impugned resolutions sought to increase its shareholdingin 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 aboutF15.1.2009. After takeover of management by Mr. Ashok Mittal furtherinvestment amounting to Rs.49.5 crore was made by him out of whichRs.9.5 crores was directly invested by Mr. Ashok Mittal to pay out bankdues and other pressing creditors. In addition, on or about 30.7.2009another Rs.40 crores were raised through a rights issue. R.P. Mittal group was offered shares in proportion to the shareholding in the companyGbut declined to take any share or make any investment in the company.Hence, the entire amount was brought in by Mr. Ashok Mittal. As ofnow Mr. Ashok Mittal holds 92% of equity shares of HQRL whereasMoral and Mr. R.P. Mittal own about 8% shares of HQRL. The maindisputes between the parties pertain to (i) allotment and transfer of sharesHto R.P. Mittal Group and Moral in 2005; (ii) takeover of management by Ashok Mittal and Hillcrest in 2009 and (iii) rights issue which took placeon or about July, 2009. With reference to (ii) above, it was stated thatthere is an interim arrangement which is binding on both the parties andwhich has been affirmed all the way up to this Court by a judgment andorder dated 20.7.2009 in Ram Parshotam Mittal & Anr. v. HillcrestRealty SDN. BHD. & Ors. (2009) 8 SCC 709. It was also submittedthat the said interim arrangement cannot be gone into or modified at thisstage.

52. Mr. Gupta further contended that the only question in thepresent proceedings is validity of allotment and transfer which took placein 2004 and 2005 made by company in favour of Mr. R.P. Mittal, hiswife Mrs. Sarla Mittal and Moral. These transactions are contained inthree resolutions dated 27.7.2004, 7.1.2005 and 10.5.2005.

53. It has been submitted on behalf of Mr. Ashok Mittal that theaforesaid transactions which were conducted in the meetings of theBoard of Directors of which no notice had been given to him, though hewas then a Director of HQRL, are illegal, null and void and oppressive.In Sri Parmeshwari Prasad Gupta v. The Union of India (1973) 2SCC 543, this Court held Section 286 of the Companies Act to bemandatory and violation thereof has been held to render the resolutionpassed in such meeting void.

54. He submitted that Resolutions passed in aforesaid meetingsare also violative of section 300 of the Companies Act as in all of themarrangements and contracts in favour of two Directors namely Mr. R.P.Mittal and Mrs. Sarla Mittal have been discussed and voted upon bysaid two persons themselves. It is well settled that Directors act asfiduciaries when they conduct a Board meeting and as fiduciaries theycannot participate in decisions in their own favour. It is not only anestablished principle of law of equity relating to fiduciaries but is expresslyforbidden by section 300 of the Companies Act. Reliance has been placedupon Dale & Carrington Invt. (P) Ltd. & Anr. v. P.K. Prathapan &Ors. (2005) 1 SCC 212; Firestone Tyre and Rubber Co. v. Syntheticsand Chemicals Ltd. & Ors. (1971) 41 Co. Cases 377 and MadrasTube Co. Ltd. & Ors. v. Hari Kishon Somani & Ors. (1985) 1 CompLaw Journal 195 (Mad).

55. He further submitted that the decision to transfer shares fromMoral to Mr. R.P. Mittal on 10.5.2005 is in violation of section 108 of theCompanies Act because it has been found as a fact by the High Courtthat physical share certificate was not in possession of Moral on the

Arelevant date. In proceedings under section 397 filed by Hillcrest andMr. Ashok Mittal, the Company Law Board found that the resolutionhad been passed illegally but it declined to set aside the allotment andtransfer on unsustainable grounds. It is well settled that in a petitionunder section 397 of the Companies Act it is normally desirable unlessany special circumstances exist, to pass an order which to all intents andBpurposes would be beneficial to the company itself and the majority ofits members.

56. It was finally contended that the High Court order be upheldwithout upsetting the existing position in relation to management ofcompany.C

57. It was submitted by Mr. Mihir Kumar, learned counsel forHillcrest that the appellants have filed two appeals namely C.A. No.3934/2017 and C.A. No.3935/2017. The sole legal question arising inthe instant matters is whether the 3 meetings of the Board of Directorsof HQRL held on 27.7.2004, 7.1.2005 and 10.5.2005 were legal andDvalid. The following issues were not germane to the question:(1) whether HQRL is a public limited company or a private limitedcompany?

(2) whether Hillcrest, a preference shareholder had any votingrights in terms of section 87 of Companies Act, 1956?E58. Learned counsel would contend that the aforesaid three Board

E58. Learned counsel would contend that the aforesaid three Boardmeetings before the Company Law Board were gravely vitiated andinvalid for the reasons that they were in violation of Sections 286 and300 of the Companies Act which operate independently. The resolutionspassed in the impugned meetings were basically for allotment of sharesby the appellants to themselves and one of the meetings held on 10.5.2005Falso concerned with purported transfer of shares from Moral to Mr.R.P. Mittal. These meetings constituted continuous acts calculated toprejudice and oppress Hillcrest and Mr. Ashok Mittal. The appellantshad limited financial investment in HQRL and Hillcrest and Mr. AshokMittal have substantially invested in HQRL. Moral transferred the bankGloan 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 basisof this Court’s prima facie view in the matter of grant of interim injunction,was incorrect and erroneous. The findings in the impugned judgmentHare based entirely on the settled legal propositions. It was submitted that the appellants’ reliance on FEMA is erroneous. It was further submittedthat the appellants had on 30.8.2018 sought to file certain documentswhich were neither placed on record before the Company Law Boardor the High Court; neither pleaded nor relied upon before courts belowand not even pleaded before this Court. Finally, it was prayed that theappeals be dismissed.

60. It was also submitted by learned counsel for Mr. Ashok Mittalthat the appeals were decided by the High Court under section 10F ofthe Companies Act, 1956 and confined to questions of law. Reliancewas placed on Sri Parmeshwari Prasad Gupta v. Union of India(supra). On the anvil of decision in M.S. Madhusoodhanan v. KeralaKaumudi (P) Ltd. (2004) 9 SCC 204, the aforesaid 3 Board meetingswere vitiated and invalid on account of being in violation of sections 286,300 and 108 of the Companies Act, 1956. Strong reliance was also placedon Firestone Tyre & Rubber Co. v. Synthetics & Chemicals Ltd. &Ors. (supra).

61. It was also contended by learned counsel for Mr. Ashok Mittalthat he had seriously been oppressed as he admittedly had substantialinterest in HQRL; allotment of shares by appellants allotted shares tothemselves without providing any opportunity of representation to Mr.Ashok Mittal and also without providing any opportunity to Mr. AshokMittal to participate in the offer; said allotment was at gross undervaluationand in breach of the fiduciary position of Mr. R.P. Mittal and Mrs. SarlaMittal as Directors of HQRL; the 3 meetings violated Section 286 therebyipso facto invalidating the meetings. Mr. Ashok Mittal had a right toparticipate in the offer of shares to any extent irrespective of his existingequity shareholding of 1 share; and that transfer of shares by Moral toMr. R.P. Mittal was against loan. Even Mr. Ashok Mittal had grantedloan to Moral but against that Moral did not transfer any shares.Appellants’ reliance on section 81(1A) is unmerited. It was furthercontended that the appellants’ argument of Mr. Ashok Mittal holdingonly one share is manifestly erroneous. The Company Law Boardconcluded that inasmuch as Mr. Ashok Mittal was substantially interestedand invested in HQRL, the shares ought to be allotted (as well astransferred by Moral) to him as well. As against Hillcrest’s investmentof Rs.28,29,29,000/-, the appellants had invested only Rs.90 lakhs in theshare capital of HQRL. The said 3 meetings had a direct bearing onshareholding of Hillcrest. The parent-subsidiary relationship betweenMoral and HQRL was independent of the status of HQRL as a public A

Acompany limited by shares and as a consequence of the shareholders’resolution dated 30.9.2002. The appellants sought to negate not only therights of Mr. Ashok Mittal but also voting rights of Hillcrest. That theappellants had limited financial investment in HQRL. Factually, therewas no substantial investment by Moral out of its own funds in HQRL;whereas Hillcrest and Mr. Ashok Mittal had substantially invested inBHQRL. That the appellants’ reliance on FEMA is erroneous.

62. Before dilating on the issue of validity of aforesaid threeimpugned resolutions, it is a common ground and it was stated by learnedcounsel appearing for the parties that two civil suits are pendingconsideration; one being OS No.992/2005 filed by HQRL for injunctionCto restrain Hillcrest Realty from proceeding with the proposed resolutionsof EOGM and from exercising voting rights therein; the other SuitNo.1832/2008 seeking declaration that HQRL had become a limitedcompany by virtue of the resolution passed on 30.9.2002. The mattertravelled to this Court in the matter of grant of injunction which has beenDdecided in Ram Parshottam Mittal v. Hillcrest Realty (supra). Rivalcontentions were raised before this Court as to whether HQRL is aprivate limited or public limited company. This Court has observed thatthe decision on the aforesaid question would be dependent upon thedecision of the issue whether by resolution adopted on 30.9.2002, HQRLhad lost its private character and had been converted into a public limitedEcompany. While the issues are the same in the two suits, this Court hasobserved that the interim order dated 12.8.2005 had been obtained bysuppression of material facts and prima facie finding recorded by theDivision Bench of the High Court was that by resolution adopted on30.9.2002, HQRL had shed its private character and had been convertedFinto a public limited company. This Court without meaning to decide theissue finally prima facie observed that an application was filed beforethe Registrar in Form 23 along with resolution dated 30.9.2002 is sufficientto arrive at a prima facie conclusion that HQRL had altered its statusand had become a public company. It was further observed by this Courtthat since the number of members exceeded 50 as the shares were saidGto have been allotted to 134 persons on 30.9.2002, prima facie HQRLlost its private character. However, this Court also observed significantlyas this issue has to be decided in the two pending suits, it would not beproper for this Court to dwell into the question further. This Court heldthat considering the explanation to section 87(2)(b) gives Hillcrest as acumulative preference shareholder the right to vote on every resolution.H

This Court also made it clear that the observations were prima facie inthe nature of limited only for disposal of special leave petition and shouldnot influence the final decision in the suits. The question relating to HQRLwhether it is a private or public company has been left open for decisionin the suits. This Court in Ram Parshotam Mittal & Anr. V. Hillcrest(supra) has made the following observations:

“66. As will be evident from the pleadings in both the suits, thereliefs sought for in the two suits are dependent on the questionas to whether by the resolutions adopted on 30th September, 2002,Hotel Queen Road had lost its private character and had beenconverted into a Public Company. While the issues are the samein the two suits, the interim orders passed therein operate incontradictory fields.

70. We are unable to appreciate the methodology adopted by theDivision Bench of the High Court, but we are in agreement withthe end result by which the Division Bench had set aside theinterim order dated 12th August, 2005, passed in Suit No. 992 of2005. In our view, apart from endorsing the view of the learnedSingle Judge that the interim order of 12th August, 2005, had beenobtained by suppression of material facts, in order to decide theappeals, the Division Bench had to arrive at a prima facie findingas to whether by virtue of the resolutions adopted on 30thSeptember, 2002, Hotel Queen Road had shed its private characterand had been converted into a public company with all itsconsequences.

71. From the materials on record, we are prima facie of the viewthat by the said resolutions, a final decision had been taken byHotel Queen Road to convert itself into a public company withimmediate effect without having to wait for any decision to berendered by the Registrar of Companies who, in any event, hadno authority to make any decision in that regard.

72. The very fact that Form 23 was filed along with the resolutionsdated 30th September, 2002, coupled with the fact that a Statementin lieu of Prospectus, which is required to be filed by a privatecompany when it converts itself into a public company, was filedon behalf of Hotel Queen Road, is sufficient for the purpose ofarriving at a prima facie conclusion that Hotel Queen Road had

altered its status and had become a public company even thoughthe necessary alterations had not been effected in the records ofthe Registrar of Companies.

74. Having regard to the definition of “private company” in Section3(1)(iii), as soon as the number of its members exceeds 50, itloses its character as a private company. Since in the instant caseshares were said to have been allotted to 134 persons on 30thSeptember, 2002, on which date the resolutions were passed byHotel Queen Road Pvt. Ltd., the company lost its private characterrequiring the subsequent resolutions to be passed regardingalteration of the share capital.

77. The moment the resolutions were passed by the company on30th September, 2002, the provisions of the Companies Act becameapplicable and by operation of law, Hotel Queen Roadsimultaneously ceased to be a private limited company and underthe conditions prescribed in the Act, Hillcrest Realty acquired votingrights in the meetings of the company by operation of Section87(2)(b) and Section 44 of the said Act. The right of a preferenceshareholder to acquire voting rights is also indicated in clear andunambiguous terms in the Explanation to Section 87(2)(b).

78. Since the question as to whether Hotel Queen Road ceasedto be a private company upon the resolutions being passed on30th September, 2002, is the crucial issue for decision in both thetwo suits referred to hereinabove, it would not be proper for thisCourt to delve into the question further.

79. However, for the purpose of disposing of these Special LeavePetitions, we are prima facie of the view that by virtue of theresolutions dated 30th September, 2002, Hotel Queen Road hadbecome a public company thereby attracting the provisions ofSection 87(2)(b) of the Companies Act, 1956, upon the bar underSection 90(2) thereof having been lifted. A natural consequenceis that in the event dividend had not been declared or paid for aperiod of two years as far as Hillcrest is concerned, the Explanationto Section 87(2)(b) would come into play thereby giving HillcrestRealty, as a cumulative preference shareholder, the right to voteon every resolution placed before the Company, at any meeting,in keeping with Clause (i) of Section 87(2)(b) of the aforesaidAct.

80. In keeping with the aforesaid principle, while dismissing theSpecial Leave Petitions filed by Hotel Queen Road and HillcrestRealty, we make it clear that the observations made in this judgmentare of a prima facie nature only for disposal of the Special LeavePetitions and should not influence the final decision in the suits,where the question relating to the status of Hotel Queen Roadhas been left open for decision. We, however, request the HighCourt, functioning as the Trial Court, to dispose of the suits at anearly date so that the management and affairs of Hotel QueenRoad are not left in a state of uncertainty.”

63. It was jointly prayed by learned counsel appearing for theparties that the issues involved in the said two civil suits need not bedilated upon and decided in this matter as that may prejudice the outcomeof the pending civil suits.

64. This Court in the aforesaid decision has itself observed that itwas deciding only interim injunction matter and the findings recorded inthe order were prima facie not binding at the time of decision of civil suitand the question to be decided whether HQRL has lost its privatecharacter and has become a public limited company by virtue of resolutiondated 30.9.2002.

65. In view of the observations made by this Court, the order inRam Purshottam Mittal (supra) is not final and is only a prima facieview in the matter of injunction. We find force in the submission oflearned counsel appearing for the appellants that the observations ininterim order cannot be taken as binding even for the purpose of decidingthis matter as held in the State of Assam v. Barak Upatyaka D.U.Karamchari Sanstha (2009) 5 SCC 694:

“21. A precedent is a judicial decision containing a principle, whichforms an authoritative element termed as ratio decidendi. Aninterim order which does not finally and conclusively decide anissue cannot be a precedent. Any reasons assigned in support ofsuch non-final interim order containing prima facie findings, areonly tentative. Any interim directions issued on the basis of suchprima facie findings are temporary arrangements to preserve thestatus quo till the matter is finally decided, to ensure that the matterdoes not become either infructuous or a fait accompli, before thefinal hearing.”

A66. The Company Law Board as well as the High Court havefound that the provision of notice under Section 286 of the CompaniesAct was not complied with. The High Court has observed that theinterested Directors have participated in the meeting. Mr. R.P. Mittaland Mrs. Sarla Mittal were in a fiduciary capacity they could notparticipate in the decision where shares were transferred to their ownBgroup/company. Even if HQRL were a private limited company, thecompliance with the provisions of section 300 of the Act was mandatory.The High Court has also observed that there was undervaluation ofHQRL shares. The allotment of shares at par to Moral in the meeting on10.5.2005 and on the same very date, shares of Moral were transferredCto Mr. R.P. Mittal @ Rs.20 per share. Thus, the High Court has opinedthat these acts in overall factual matrix of the case, were sufficient toconclude that ground under section 397 had been made out.

67. The High Court has also found that HQRL did not have theshare certificates along with duly executed share transfer forms when aDdecision was taken at the Board meeting held on 10.5.2005 to transfershares from Moral to Mr. R.P. Mittal. The decision has been held to beinvalid for violation of provisions contained in Section 108 of the Act of1956 for the aforesaid reason also. The Court has recorded suo motuproceedings under section 340 Cr. PC against Mr. R.P. Mittal. The Courthas invalidated the impugned resolutions dated 27.7.2004, 7.1.2005 andE10.5.2005 and the decision of the Company Law Board has been setaside.

68. Coming to the submission as to oppression whether the Actwas oppressive or not within the purview of section 397 on behalf of theappellant, it was submitted that Mr. Ashok Mittal did not fund Rs.5.5Fcrores to Moral out of Rs.12.03 crores for acquisition of HQRL, asclaimed. His claim that a loan of Rs.13 crores was obtained on basis ofhis personal guarantee was wrong. It was also urged that there was nofinancial mismanagement by the appellants. The test whether actionwas oppressive or not, is based on whether it is legally permissible orGnot. Reliance has been placed on Needle Industries (supra) in whichthis Court has observed:

“49. The question sometimes arises as to whether an action incontravention of law is per se oppressive. It is said, as was doneby one of us, Bhagwati, J., in a decision of the Gujarat High CourtHin Seth Mohanlal Ganpatram v. Sayaji Jubilee Cotton & Jute Mills Co. Ltd. [1964] 34 Company Cases 777 that “a resolutionpassed by the directors may be perfectly legal and yet oppressive,and conversely a resolution which is in contravention of the lawmay be in the interests of the shareholders and the company”. Onthis question, Lord President Cooper observed in Elder v. Elder[1952] S.C. 49:

The decisions indicate that conduct which is technically legaland correct may nevertheless be such as to justify theapplication of the ‘just and equitable” jurisdiction, and,conversely, that conduct involving illegality and contraventionof the Act may not suffice to warrant the remedy of windingup, especially where alternative remedies are available. Wherethe ‘just and equitable’ jurisdiction has been applied in cases ofthis type, the circumstances have always, I think, been such asto warrant the inference that there has been, at least, an unfairabuse of powers and an impairment of confidence in the probitywith which the company’s affairs are being conducted, asdistinguished from mere resentment on the part of a minorityat 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 perse oppressive or that the illegality of an action does not bear uponits oppressiveness. In Elder a complaint was made that Elder hadnot received the notice of the Board meeting. It was held thatsince it was not shown that any prejudice was occasionedtherebyor that Elder could have bought the shares had he been present,no complaint of oppression could be entertained merely on theground that the failure to give notice of the Board meeting was anact of illegality. The true position is that an isolated act, which iscontrary to law, may not necessarily and by itself support theinference that the law was violated with a mala fide intention orthat such violation was burdensome, harsh and wrongful. But aseries of illegal acts following upon one another can, in the context,lead justifiably to the conclusion that they are a part of the sametransaction, of which the object is to cause or commit theoppression of persons against whom those acts are directed. Thismay usefully be illustrated by reference to a familiar jurisdictionin which a litigant asks for the transfer of his case from one Judge

to another. An isolated order passed by a Judge which is contraryto law will not normally support the inference that he is biased;but a series of wrong or illegal orders to the prejudice of a partyare generally accepted as supporting the inference of a reasonableapprehension that the Judge is biased and that the partycomplaining of the orders will not get justice at his hands.

52. It is clear from these various decisions that on a trueconstruction of Section 397, an unwise, inefficient or carelessconduct of a Director in the performance of his duties cannotgive rise to a claim for relief under that section. The personcomplaining of oppression must show that he has been constrainedto submit to a conduct which lacks in probity, conduct which isunfair to him and which causes prejudice to him in the exercise ofhis legal and proprietary rights as shareholder. It may be mentionedthat the Jenkins Committee on Company Law Reform hadsuggested the substitution of the word ‘Oppression’ in Section210 of the English Act by the words ‘unfairly prejudicial’ in orderto make it clear that it is not necessary to show that the actcomplained of is illegal or that it constitutes an invasion of legalrights (see Gower’s Company Law, 4th edn., page 668). But thatrecommendation was not accepted and the English Law remainsthe same as in Meyer and in Re H.R. Harmer Ltd., [1959] WLR62 as modified in Re Jermyn St. Turkish Baths (supra). We havenot adopted that modification in India.

111. Whether one looks at the matter from the point of viewexpressed by this Court in Nanalal Zaver (AIR 1950 SC 172) orfrom the point of view expressed by the Privy Council in HowardSmith, (1974 AC 821, 831) the test is the same, namely, whetherthe issue of shares is simply or solely for the benefit of theDirectors. If the shares are issued in the larger interest of theCompany, the decision to issue shares cannot be struck down onthe ground that it has incidentally benefited the Directors in theircapacity as shareholders. We must, therefore, reject Shri Seervai’sargument that in the instant case, the Board of Directors abusedits fiduciary power in deciding upon the issue of rights shares.”

(emphasis supplied).

69. Reliance has also been placed on a decision of this Court inSangramsinh (supra) in which this Court has observed:

“196. The Court in an application under Sections 397 and 398may also look to the conduct of the parties. While enunciating thedoctrine of prejudice and unfairness borne in Section 459 of theEnglish Companies Act, the Court stressed the existence ofprejudice to the minority which is unfair and not just prejudice perse.

197. The Court may also refuse to grant relief where the petitionerdoes not come to court with clean hands which may lead to aconclusion that the harm inflicted upon him was not unfair andthat the relief granted should be restricted. (See London Schoolof Electronics, Re [1986] Ch. 211).

198. Furthermore, when the petitioners have consented to andeven benefited from the company being run in a way which wouldnormally be regarded as unfairly prejudicial to their interests orthey might have shown no interest in pursuing their legitimateinterest 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) inwhich this Court has observed:

“14. In a number of judgments, this Court considered in extensothe scope of Sections 397 and 398. The following judgments couldbe usefully referred to:

(a) Needle Industries (India) Ltd. and Ors. v. NeedleIndustries Newey (India) Holding Ltd. and Ors. [1981] 3 SCC333.

(b) M.S. Madhusoodhanan and Anr. v. Kerala Kaumudi(P) Ltd. (2004) 9 SCC 204.

(d) Sangramsinh P. Gaekwad v. Shantadevi P. Gaekwad2005 (11) SCC 314

(e) Kamal Kumar Dutta v. Ruby General Hospital Ltd.2006 (7) SCC 613.

From the above decisions, it is clear that oppression would bemade out:

(a) Where the conduct is harsh, burdensome and wrong.

(b) Where the conduct is mala fide and is for a collateral purposewhere although the ultimate objective may be in the interest ofthe company, the immediate purpose would result in an advantagefor some shareholders vis-a-vis the others.

(d) The oppressive act complained of may be fully permissibleunder law but may yet be oppressive and, therefore, the test asto whether an action is oppressive or not is not based on whetherit is legally permissible or not since even if legally permissible, ifthe action is otherwise against probity, good conduct or isburdensome, harsh or wrong or is mala fide or for a collateralpurpose, it would amount to oppression under Sections 397 and398.

(e) Once conduct is found to be oppressive under Sections397 and 398, the discretionary power given to the Company LawEBoard under Section 402 to set right, remedy or put an end tosuch oppression is very wide.

(f) As to what are facts which would give rise to or constituteoppression is basically a question of fact and, therefore, whetheran act is oppressive or not is fundamentally/basically a questionFof fact.”

71. It was also urged that by inter se transfer between Moral andMr. R.P. Mittal, no oppression could be caused to Mr. Ashok Mittal. Thefinding as to undervaluation is also not correct. HQRL could not haveraised any objection regarding the aforesaid transaction between MoralGand Mr. R.P. Mittal. The claim made by Hillcrest that they were entitledto vote on resolution dated 10.5.2005 is not correct proposition of law. Inthis regard reliance has been placed upon section 205 of the CompaniesAct. Learned counsel has also urged that position of shareholders in acompany is analogous to that of partners inter se, is wholly inaccurate.HCompany is a separate juristic entity from shareholders. For this purpose, he has relied upon a decision of this Court in Mrs.Bacha F. Guzdar,Bombay v. Commissioner of Income Tax, Bombay AIR 1955 SC 74.

72. It was contended on behalf of respondents that out of Rs.45crores that Moral financed the amount raised through Bank loansapproximately Rs.33.25 crores which was obtained on the creditworthiness of Mr. Ashok Mittal and against personal guarantees of Mr.R.P. Mittal, and Mr. Ashok Mittal. Mr. R.P. Mittal contributedapproximately Rs.6.23 crores to Moral and Mr. Ashok Mittalapproximately Rs.5.5 crores. Thus they had substantial interest in thecompany. Though he held only one share in the company. Mr. AshokMittal was one of the Directors of the company. Investment of Rs.28.29crores was made by Hillcrest and remaining amount of Rs.40 croreswas 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 thecourt. After taking over, Mr. Ashok Mittal has invested Rs.49.5 croreswhich consists of Rs.9.5 crores directly invested by Mr. Ashok Mittal topay out bank dues and other personal creditors and on 13.7.2005 anotherRs.40 crores was raised through rights issue. R.P. Mittal group wasoffered shares in proportion to the shareholding but they declined to takeany shares. Mr. Ashok Mittal is the major investor in the company. Heholds 92% of the equity shares and Mr. R.P. Mittal owns approximately8% of the shares. The matter as to taking over of management by Mr.Ashok Mittal in 2009 and rights issue in July, 2009 are the subjectmatter of separate proceedings and are not required to be gone into inthe present matter. The interim arrangement ordered by this Court inRam Purshottam Mittal v. Hillcrest (supra) is binding. No notice wasgiven to Mr. Ashok Mittal, the then Director of the company. Accordingly,all the three meetings convened under Section 286 of the CompaniesAct. For this purpose, reliance has been placed on Sri ParmeshwariPrasad Gupta v. Union of India (1973) 2 SCC 543. The resolutionsare also violative of section 300 of the Companies Act of 1956. Therewas repeated violation. The action taken as per the impugned resolutionswere oppressive as they involved repeated violation of the mandatoryprovisions of the Companies Act of 1956 and was done surreptitiouslywithout giving any notice to Mr. Ashok Mittal or Hillcrest. The attemptto convert the statutory status of HQRL vis-à-vis public company, Moralby transferring the shares of Moral in HQRL was against the interest ofthe preference shareholders of Hillcrest, therefore, it is oppressive.

AHillcrest and Mr. Ashok Mittal have also supported the aforesaidsubmissions.

73. Mr. Jaideep Gupta, learned senior counsel to carry home theaforesaid submission has placed reliance on following paragraph ofSangramsinh P. Gaekwad (supra) thus:

“181. The jurisdiction of the Court to grant appropriate relief underSection 397 of the Companies Act indisputably is of wide amplitude.It is also beyond any controversy that the court while exercisingits discretion is not bound by the terms contained in Section 402 ofthe Companies Act if in a particular fact situation, a further reliefor reliefs, as the court may seem fit and proper, is warranted.(See Bennet Coleman & Co. v. Union of India [(1977) 47 CompCases 92 (Bom)] and Syed Mahomed Ali v. R. Sundaramoorthy;1958 2 MLJ 259). But the same would not mean that Section 397provides for a remedy for every act of omission or commission onthe part of the Board of Directors. Reliefs must be granted havingregard to the exigencies of the situation and the court must arriveat a conclusion upon analyzing the materials brought on recordsthat the affairs of the company were such that it would be justand equitable to order winding up thereof and that the majorityacting through the Board of Directors by reason of abusing theirdominant position had oppressed the minority shareholders. Theconduct, thus, complained of must be such so as to oppress aminority of the members including the petitioners vis-à-vis theshareholders which a fortiori must be an act of the majority.Furthermore, the fact situation obtaining in the case must enablethe court to invoke just and equitable rules even if a case hasbeen made out for winding up for passing an order of winding ofthe company but such winding up order would be unfair to theminority members. The interest of the company vis-à-vis theshareholders must be uppermost in the mind of the court whilegranting a relief under the aforementioned provisions of theCompanies Act, 1956.”

He has also relied upon the decision in Parameswari PrasadGupta v. Union of India (supra), the Court observed:

“10. Now, it cannot be disputed that notice to all the Directors ofmeeting of the Board of Directors was essential for the validity of H

any resolution passed at the meeting and that as, admittedly, nonotice was given to Mr. Khaitan, one of the Directors of theCompany, the resolution passed terminating the services of theappellant was invalid.”

Reliance has also been placed on M.S. Madhusoodhanan v.Kerala Kaumudi (P) Ltd. (supra) thus:

“125. In the circumstances, we hold that Madhusoodhanan andhis group were not served with the notice dated 1.8.1986. It is,therefore, unnecessary to decide whether the period prescribedin the notice to apply for the shares was too short or contrary tothe Articles of Association of Kerala Kaumudi.

126. Once we have held that Madhusoodhanan and his group,all of whom held shares in Kerala Kaumudi, were not given noticeto apply for allotment of the additional shares, it must be held thatthe subsequent allotment of the shares to Ravi and Srinivasan atthe meeting held on 8-8-1986 and the affirmation of such allotmentat the meeting allegedly held on 16-8-1986 were vitiated therebyand invalid.”

Reliance has also been placed on Union of India v. AlliedInternational Products Ltd. & Anr. (1970) 3 SCC 594:

“15. The application for allotment of shares and acceptance thereofconstitute a contract between the Company and the applicant.Section 73(1) of the Companies Act imposes a penalty wherebythe allotment of shares becomes void on the happening of thecontingency specified therein. The imposition of penalty dependsupon the violation of the Exchange and when imposed operates toinvalidate all contracts resulting from allotment of shares betweenthe applicants for shares and the Company. Such a provision mustbe strictly construed. Unless the statute in clear terms so provides,when the Exchange intimates its desire to consider the applicationfurther, an inference that the Exchange has still rejected theapplication, cannot be made.”

(Emphasis supplied)

74. Section 286 of the Act of 1956 dealing with requirement ofnotice to Director, is as under:

A“Sec 286 - Notice of meetings.

(1) Notice of every meeting of the Board of directors of acompany shall be given in writing to every director for the timebeing in India, and at his usual address in India to every otherdirector.

(2) Every officer of the company whose duty it is to give noticeas aforesaid and who fails to do so shall be punishable withfine which may extend to one thousand rupees.”

It has not been disputed that no notice under section 286 had beengiven to Mr. Ashok Mittal, the Director when impugned resolutions wereCpassed.

75. In Needle Industries (supra), it has been observed by thisCourt that the resolution passed by the Director may be perfectly legaland yet oppressive and conversely a resolution which is in contraventionof the law may be in the interest of the shareholders of the company.DEvery illegality will not make it oppressive. Prejudice has to be shown.No complaint of oppression could be entertained merely on the groundof failure to attach notice of Board meeting was an act of illegality. Ithas to be shown that the action was unfair to the person to whom noticehas not been given and causes prejudice to him in the exercise of legalEand proprietary rights as shareholders.

76. In Sangramsinh P. Gaekwad (supra), it has been observedthat their conduct is harsh, burdensome, wrong, mala fide or and is for acollateral purpose against probity and good conduct. The impugnedresolutions are unfair to Mr. Ashok Mittal in the facts and circumstancesof the case even otherwise the absence of the notice is enough toFinvalidate the same as mandated by section 286.

77. The provisions of section 300 of the Companies Act has alsobeen pressed into service which provides that interested Director is notto participate or vote in the Board’s proceedings. Section 300 is extractedhereunder:G

“Sec 300 - Interested director not to participate or vote inBoard’s proceedings.

(1) No director of a company shall, as a director, take any part inthe discussion of, or vote on, any contract or arrangement enteredinto, or to be entered into, by or on behalf of the company, if he is H

in any way, whether directly or indirectly, concerned or interestedin the contract or arrangement; nor shall his presence count forthe purpose of forming a quorum at the time of any such discussionor 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 holdingcompany 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 tobe entered into, by the private company with the holdingcompany thereof;

(c) any contract of indemnity against any loss which thedirectors, or any one or more of them, may suffer by reason ofbecoming or being sureties or a surety for the company; (d) any contract or arrangement entered into or to be enteredinto with a public company, or a private company which is asubsidiary of a public company, in which the interest of thedirector aforesaid consists solely

(i) in his being a director of such company and the holder ofnot more than shares of such number or value therein as isrequisite to qualify him for appointment as a director thereof,he having been nominated as such director by the companyreferred to in sub-section (1), or

(ii) in his being a member holding not more than two percent of its paid-up share capital; (e) a public company, or a private company which is a subsidiaryof a public company, in respect of which a notification is issuedunder sub-section (3), to the extent specified in the notification.

(3) In the case of a public company or a private company whichis a subsidiary of a public company, if the Central Government isof opinion that having regard to the desirability of establishing orpromoting any industry, business or trade, it would not be in thepublic interest to apply all or any of the prohibitions contained insub-section (1) to the company, the Central Government may, bynotification in the Official Gazette, direct that that sub-section A

1012SUPREME COURT REPORTS

[2019] 7 S.C.R.

Ashall not apply to such company, or shall apply thereto subject tosuch exceptions, modifications and conditions as may be specifiedin the notification.

(4) Every director who knowingly contravenes the provisions ofthis section shall be punishable with fine which may extend toBfifty thousand rupees.”

78. It was urged on behalf of the respondents that the decisionswere taken in the impugned resolution in favour of two Directors namely,Mr.R.P. Mittal and Mrs. Sarla Mittal. They have been discussed andvoted upon by said two persons themselves. As the Directors act asCfiduciaries when they conduct Board meeting, they cannot participate indecisions in their own favour. For this purpose, reliance has been placedupon 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 positionDhas been the subject matter of various decisions. Some of themare:

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 statuteEand 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.FIn one sentence the entire concept is conveyed. The sentenceruns: (All ER p. 391 H)

“Equity prohibits a trustee from making any profit by hismanagement, directly or indirectly.”

Ultimately the issue in each case will depend upon the facts ofGthat case.

14. Lindley, M.R. observed in Alexander v. Automatic TelephoneCo. (1900) 2 Ch. 56:

“The Court of Chancery has always exacted from DirectorsHthe observance of good faith towards their shareholders and

towards those who take shares from the company and becomeco-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 forthemselves at the expense of the shareholders, without informingthem of the fact, cannot retain those benefits and must accountfor them to the company, so that all the shareholders mayparticipate in them.”

16. In Needle Industries case (supra) the Board of Directors hadresolved to issue 16,000 equity shares of Rs. 100/- each to beoffered as rights shares to the existing shareholders in proportionto the shares held by them. The offer was to be made by a noticespecifying the number of shares to which each shareholder wasentitled to. The notice further said, in case the offer was notaccepted within 16 days from the date on which it was made, itwas to be deemed to have been declined by the shareholderconcerned. The holding company held 18,990 shares and it wasentitled to 9495 rights shares. The holding company could notavail its right to exercise the option for purchase of rights sharesoffered to it. As a result, the whole of the rights issue consistingof 16,000 shares was allotted to the Indian shareholders. Theholding company filed a petition under Sections 397 and 398 ofthe Companies Act, 1956 in the High Court. The Single Judgeheld in favour of the holding company that it had suffered a loss inview 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 ofpostal delays it failed to receive the notice containing the offer ofrights shares in time, and therefore, it could not exercise its optionto buy the share. On appeal the Division Bench held that theaffairs of Needle Industries (India) Ltd. (supra) were beingconducted in a manner oppressive to the holding company. TheDivision Bench ordered winding up of the company. A furtherappeal to the Court was allowed mainly on the ground that therewas no oppression. However, a direction was issued that the Indianshareholders pay an amount equivalent to that by which they wereunjustifiably enriched, namely Rs. 90 x 9495 which comes to Rs.8,54,550/- to the holding company.

17. In Needle Industries case (supra) this Court referred to someold 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 forthe general benefit of the company, but for the purpose ofcontrolling the holder of the greater number of shares byobtaining a majority of voting power, they ought to be restrainedfrom holding the meeting at which the votes of the newshareholders were to have been used.”

18. Piercy v. S. Mills & Co. Ltd. (1920) 1 Ch.77 applied thesame principle while holding: (All ER p. 316 D-E)

“The basis of both cases is, as I understand, that Directorsare not entitled to use their powers of issuing shares merelyfor the purpose of maintaining their control or the control ofthemselves and their friends over the affairs of the company,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). Itwas held that if the power to issue shares was exercised for animproper motive the issue was liable to be set aside and it wasimmaterial that the issue was made in a bona fide belief that itwas in the interests of the company.

20. The principle deduced from these cases is that when powersare used merely for an extraneous purpose like maintenance oracquisition of control over the affairs of the company, the samecannot be upheld.

21. Courts in the Commonwealth countries including England andAustralia have emphasized that the duty of the Directors does notstop at “to act bona fide” requirement. They have evolved adoctrine called the ‘proper purpose doctrine’ regarding the dutiesof company directors. In Hogg v. Cramphorn (supra), explicitrecognition was given to the proper purpose test over and abovethe traditional bonafide test. In this case the Director had allottedshares with special voting rights to the trustees of a scheme setup for the benefit of company employees with the primary purposeof avoiding a takeover bid. Buckley, J. found as a fact that the RAM PARSHOTAM MITTAL & ORS. v. HOTEL QUEEN ROAD1015PVT. LTD. & ORS. [ARUN MISHRA, J.]

Directors had acted in subjective good faith. They had indeedhonestly believed that their actions were in the best interests ofthe company. Despite this it was observed: (All ER p. 427 E)

“An essential element of the scheme, and indeed its primarypurpose, was to ensure control of the company by the Directorsand those whom they could confidently regard as theirsupporters.”

22. As such, he concluded that the allotment was liable to be setaside as a consequence of the exercise of the power for animproper motive. He also held that the power to issue shares wasfiduciary in nature. In Howard Smith Ltd. v. Ampol PetroleumLimited 1974 AC 821, the Privy Council confirmed the aboveview expressed by Buckley, J. which shows a preference for theproper-purpose doctrine. The Privy Council felt that the bona fidetest was not sufficient to meet the challenge because it failed toencompass the obligation of directors to be fair. The Directors’acts should not only satisfy the test of bona fides, they should alsobe done with a proper motive. Any lingering doubts over the statusof the proper purpose doctrine as a separate and independenthead of Directors duty within the common law jurisdiction havebeen laid to rest by two decisions of the Court of Appeal in Englandin Rolled Steel Products (Holdings) Limited v. British SteelCorporations 1986 Ch 246 and Bishopsgate InvestmentManagement Ltd. (in liquidation) v. Maxwell (No. 2) (1994) 1 AllER 261 (CA). It was held by the Court of Appeal in Bishopsgate(supra) that the bona fides of the Directors alone would not bedeterminative of the propriety of their actions. In a paralleldevelopment in Australia the proper purpose doctrine has beenapproved in a decision of the High Court in Whitehouse v. CarltoHotel Pty. Ltd. (1987) 162 CLR 285.

23. Tea Brokers (P) Ltd. v. Hemendra Prosad Barooah (1998) 5Comp LJ 463 was also a case of a minority shareholder who onbecoming Managing Director of the company, issued further sharecapital in his favour in order to gain control of management of thecompany. Barooah and his friends and relations were majorityshareholders of the respondent company having 67% of the totalissued capital of the company. Barooah personally held 300 equityshares out of 1155 shares issued by the company. He was at all A

material times a Director of the company. His case was that hewas wrongfully and illegally ousted from the management of thecompany. One Khaund, who initially started as an employee ofthe company had 110 shares in the company and belonged to theminority group. Khaund was appointed as the Managing Directorof the company. Barooah’s grievance was that Khaund tookadvantage of his position as Managing Director and acted in amanner detrimental and prejudicial to the interests of the companyand in a manner conducive to his own interest. Khaund had hatcheda plan with other Directors, to convert petitioner Barooah into aminority and to obtain full and exclusive control and managementof the affairs of the company. In a petition filed under Sections397 and 398 of the Companies Act, 1956, acts of Khaund werefound to be by way of ‘oppression and mismanagement’ withinthe meaning of Sections 397 and 398 of the Companies Act.Allotment of 100 equity shares by the company to Khaund at ameeting of the Board of Directors said to have been held on 14January, 1971 was held to be illegal. The Board of Directors ofthe company was superseded and a special officer was appointedto carry on management of the company with the advice ofBarooah, Khaund and a representative of the labour union. Therewere several other directions issued by the Court which are notnecessary to be mentioned here. The Division Bench consideredin detail the relevant legal position. Without using the phrase ‘properpurpose 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 powersbona fide and in the interest of the company. If the Directorsexercise their powers of allotment of shares bona fide and inthe interest of the company, the said exercise of powers mustbe held to be proper and valid and the said exercise of powersmay not be questioned and will not be invalidated merelybecause they have any subsidiary additional motive, eventhough this be to promote their advantage. An exercise ofpower by the Directors in the matter of allotment of shares, ifmade mala fide and in their own interest and not in the interestof the company, will be invalid even though the allotment may”result incidentally in some benefit to the company.

27. Reference has been made to the case of Piercy v. S. Mills &Co. Ltd. [1920 1 Ch 77] where Directors, who controlled merelya minority of the voting power in the company allotted shares tothemselves and their friends not for the general benefit of thecompany, but merely with the intention of thereby acquiring amajority of the voting power and of thus being able to defeat thewishes of the existing minority of shareholders. It was held that,even assuming that the directors were right in considering thatthe majority’s wishes were not in the best interests of the company,the allotments were invalid and ought to be declared void. It followsfrom this case that the exercise by Directors of fiduciary powersfor purposes other than those for which they were conferred isinvalid. It may be said that although the power of issuing shares isgiven to Directors primarily for the purpose of enabling them toraise capital when required for the purpose of the company, thiswas not the object of the Directors in this case.

28. It will be seen from the judgments in Needle Industries (supra)and Tea Brokers (supra) that the courts in India have applied thesame tests while testing exercise of powers by Directors ofcompanies as in other Commonwealth countries.

29. In the present case we are concerned with the propriety ofissue of additional share capital by the Managing Director in hisown favour. The facts of the case do not pose any difficultyparticularly for the reason that the Managing Director has neitherplaced on record anything to justify issue of further share capitalnor has it been shown that proper procedure was followed inallotting the additional share capital. Conclusion is inevitable thatneither was the allotment of additional shares in favour ofRamanujam bona fide nor was it in the interest of the companynor was a proper and legal procedure followed to make theallotment. The motive for the allotment was mala fide, the onlymotive being to gain control of the company. Therefore, in ourview, the entire allotment of shares to Ramanujam has to be setaside.”

(emphasis supplied)

79. In Firestone Tyre and Rubber Co. v. Synthetics andChemicals Ltd. & Ors. (supra), it was observed:

. “Section 300 of the Companies Act, 1956, embodies, just assection 91B of the Indian Companies Act, 1913, did, the generalrule 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 befound in Aberdeen Rly. Co. v. Blaikie. [1854] 1 Macq. 461-471-72 (H.L.). In that case, Lord Cranworth said:

“A corporate body can only act by agents and it is course theduty of those agents so to act as best to promote the interestsof the corporation whose affairs they are conducting. Suchagents have duties to discharge of a fiduciary nature towardstheir principle. And it is a rule of universal application, that noone, having such duties to discharge, shall be allowed to enterinto engagements in which he has, or can have, a personalinterest conflicting, or which possibly may conflict, with theinterest of those whom he is bound to protect.So strictly is thisprinciple adhered to, that no question is allowed to be raised asto the fairness or unfairness of a contract so entered into. Itobviously is, or may be, impossible to demonstrate how far inany particular case the terms of such a contract have been thebest for the interest of cestui que trust, which it was possibleto obtain. It may sometimes happen that the terms on which atrustee has dealt or attempted to deal with the estate or interestsof those for whom he is a trustee, have been as good as couldhave been obtained from any other person, - they may even atthe time have been better. But still so inflexible is the rule thatno inquiry on that subject is permitted.”

Though this was a case from Scotland, the rule of English law isFthe same, for, as observed by Swinfen Eady. L.J., in TransvaalLands Company v. New Belgium (Transvaal) Land andDevelopment Company, [1914] 2 Ch. 488, 502 (C.A.), the doctrinerests on such obvious principles good sense that it is difficult tosuppose that there could be any system of law in which it wouldGnot be found, In Transvaal Land Company’s case it was held atpage 503 that:

“Where a director of a company has an interest as shareholder inanother company or is in a fiduciary position towards, and owes aduty to, another company which is proposing to enter intoengagements with the company of which he is a director, he is in H

our opinion within this rule. He has a personal interest within thisrule or owes a duty which conflicts with his duty to the companyof which he is a director. It is immaterial whether this conflictinginterest 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 orarbitrary rule but a rule founded upon the highest and truest principleof morality.Thus, this rule applies not only where there in a conflictof interest or conflict of interest and duty but also where there isa conflict to two duties. It is immaterial whether the interest is apersonal interest or arises out of a fiduciary capacity or whetherthe duty which is owed is in a fiduciary capacity. Actual conflict isalso not necessary.A possibility of conflict is enough to bring thecase within the ambit of this rule nor does the application of thisrule depend upon the extent of the adverse interest. Directorsstand towards the company in a fiduciary position In India thisfiduciary character has received statutory recognition in section88 of the Indian Trusts Act, 1882. The reason underlying this ruleis that the company has a right to the unbiased voice, advice andcollective wisdom of its directors. (See Benson v. Heathorn; [1842]1 Y. & C. Ch. Cas. 326, 341-42; Imperial Mercantile CreditAssociation v. Coleman and Victors Ltd. v. Lingard [1927] 1 Ch323, 330).”

(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 besuperimposed on the enactment of the present group of sections299, 300 and 301. Section 301, in terms, refers to a register beingkept of contracts and arrangements to which section 297 or section299 applies. It does not refer, in terms, to section 300. This isbecause the purpose of a register of contracts is to put theshareholder upon notice of the contract and arrangements in whichthe directors are interested and which they have disclosed whereasthe function of section 300 is quite different which is to renderinvalid any resolution of a Board Meeting in which an interesteddirector participates or votes.

The result of this discussion is that the appointment of an additionaldirector by a resolution of the Board in terms of the power givento the Board under the company’s articles must be regarded asan arrangement rendered by or on behalf of the company if inthat appointment a director who is interested in the appointeeparticipates or votes, then two consequences flow. One is that hecould not form the quorum; the other is that the resolution itself isvoid. In this case H M Periwal being the brother of P C Periwalmust be regarded as interested in the appointment of his brotherin the board of directors in the real sense of that expression. Asthe Supreme Court had occasion to point out in the Firestone case(1970) 2 Company Law Journal p 200), the expressions ‘interestedor concerned’ are fairly wide in their connotation and they includenot merely a financial concern or interest, but include any interestarising out of the closeness of relationship as between father andson, father and daughter, husband and wife, brother and sisterand the like. I am therefore satisfied that in this case the firstresolution was wanting in quorum because H M Periwal was notentitled to participate in the voting and the resolution itself wasnot valid because H M Periwal has voted that resolution. It followsthat P C Periwal was not validly appointed as Additional Director.

x x x x x

As I earlier remarked the fundamental principle of equity whichruns right through like a golden thread in all the decisions of courtsis that no director can participate or vote in a Board meeting wherehe is aware that his duties and interests conflict or are likely to bein competition. This rule attaches to the very office of a directorwhich is of a fiduciary character. Corporate enterprises, in whichthe ultimate properties are the shareholders, are entrustedcompletely in the hands of the Board of Directors. The only basisfor the Board being given the management and administration ofthe corporate enterprise is the trust and confidence reposed bythe shareholders in the directors. It is, therefore, of primeimportance that in any transaction in which the directors participateas directors of the company they should not only declare theirpersonal interests therein, buy they must desist from participationin any decision-making. The theory is that the Board acts as abody. How the act of the Board as a body is shaped is a matter left to the inter-play of the minds of the directors, and the respectivestrength 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 matterof the deliberations and nevertheless participates in the meeting,and the interests of the director are not identical with those of thecompany, the ultimate damage to the company and the shareholderscould well be imagined. This principle that where a director has apersonal interest, he ought not to participate in the Board’sdeliberation is so sacred that no further inquiry is necessary to setat naught decisions brought about in violation of the principles.No harm might result to the company by allowing participation ofan interested director, and yet the participation, per se, is vicious.”

(emphasis supplied)

81. In the light of the aforesaid decisions it was improper for theDirectors to allot shares to themselves and to the exclusion of Mr. AshokMittal in the facts and circumstances of the case and that too withoutissuance of notice to him.

82. It was also submitted that Hillcrest would have no right tovote as no dividend was declared in view of the provisions contained insection 87 of the Companies Act of 1956. Reliance has been placed onfollowing decisions:

(a) In Mrs. Bacha F. Guzdar, Bombay (supra), the Court observed:

“9. It was argued that the position of shareholders in a companyis analogous to that of partners ‘inter se’. This analogy is whollyinaccurate. Partnership is merely an association of persons forcarrying on the business of partnership and in law the firm nameis a compendious method of describing the partners. Such is,however, not the case of a company which stands as a separatejuristic entity distinct from the shareholders. In Halsbury’s Lawsof England, Volume 6 (3rd Ed.), page 234, the law regarding theattributes of shares is thus stated:

“A share is a right to a specified amount of the share capitalof a company carrying with it certain rights and liabilities whilethe company is a going concern and in its winding up. The sharesor other interest of any member in a company are personal estate

[2019] 7 S.C.R.

Atransferable in the manner provided by its articles, and are not ofthe 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 ofrespondent Nos. 6 to 9 on the statement of the law on this pointcontained in the leading text books on company law. RespondentNos. 6 to 9 drew our attention to Palmer Company Precedents(17th Edn.) volume 2 at page 77 where it is stated that any creditoror shareholders may appear to support or oppose the petition butno one else can do so even if he has an indirect interest in thecontinued existence of the company. So also in Buckley on theCompanies Act (14th Edn.) at page 546 the law has been statedin the following terms, namely, “the only persons entitled to beheard are the company, its creditors and contributories...the courtmay in its discretion hear other persons who have an interest inorder to learn what public grounds there are in favour of, or inopposition to, the winding up but such persons can be heard onlyas amicus curiae and cannot appeal” Our attention was also invitedto Halsbury’s Laws of England 4th Ed. Vol. 7 where a similarstatement of the taw is to be found at page 614 paragraph 1028.Now it is undoubtedly true that according to the statement of thelaw contained in these three leading text books, it is only thecompany, the creditors and the contributories who are entitled toappear on the winding up petition and no other persons have aright to be heard, but this statement of the law is based on the olddecision in Re. Bradford Navigation Company which was carriedin appeal and decided as Re. Bradford Navigation Company. Thisdecision given by the English Courts over a hundred years agowhen a company was regarded merely as a legal device broughtinto being as a result of a contractual arrangement between theshareholders for the purpose of carrying on trade or business andthe workers were looked upon as no more than employees of thecompany working under a master and servant relationship andthe interest of the public as consumers or otherwise was a totallyirrelevant consideration and it can have no validity in the presenttimes when the entire concept of a company has changed and ithas been transformed into a dynamic socio-economic institution B

in which capital and labour are both equal partners, possibly withheavy weightage in favour of labour and the interest of the publicas consumers as also the general welfare and common good ofthe community constitute a vital consideration. We cannot allowthe dead hand of the past to stifle the growth of the living present.Law cannot stand still; it must change with the changing socialconcepts and values. If the bark that protects the tree fails togrow and expand along with the tree, it will either choke the treeor if it is a living, tree, it will shed that bark and grow a new livingbark for itself. Similarly, if the law fails to respond to the needs ofchanging society, then either it will stifle the growth of the societyand choke its progress or if the society is vigorous enough, it willcast away the law which stands in the way of its growth. Lawmust therefore constantly be on the move adopting itself to thefast changing society and not lag behind. It must shake off theinhibiting legacy of its colonial past and assume a dynamic role inthe process of social transformation. We cannot thereforemechanically accept as valid a legal rule which found favour withthe English courts in the last century when the doctrine of laissezfaire prevailed. It may be that even today in England the courtsmay be following the same legal rule which was laid down almosta hundred years ago, but that can be no reason why we in Indiashould continue to do likewise. It is possible that this legal rulemight still be finding a place in the English text books because nocase like the present one has arisen in England in the last 30 yearsand the English courts might not have had any occasion to considerthe acceptability of this legal rule in the present times. But whateverbe the reason why this legal rule continues to remain in the Englishtext books, we cannot be persuaded to adopt it in our country,merely on the ground that it has been accepted as a valid rule inEngland. We have to build our own jurisprudence and though wemay receive light from whatever source it comes, we cannotsurrender our judgment and accept as valid in our country whateverhas been decided in England. The rule enunciated in re: BradfordNavigation Company case (supra) does not commend itself to usand though it has been followed by a single Judge of the BombayHigh Court in re Edward Textiles Limited (supra), we do not thinkit represents correct law.

ABCDE

1024SUPREME COURT REPORTS

[2019] 7 S.C.R.

A(c) He has also referred to Halsbury’s Laws of England, Volume6 (3rd Ed.), page 234, the law regarding the attributes of shares is thusstated:

“A share is a right to specified amount of the share capital of acompany carrying with it certain rights and liabilities while theBcompany is a going concern and in its winding up. The shares orother interest of any member in a company are personal estatetransferable in the manner provided by its articles, and are not ofthe nature of real estate.”

(d) Reliance has also been placed on M/s. Kothari Textiles Ltd.,CMadras & Ors. v. Commissioner of Wealth Tax, Madras; AIR 1963Mad. 274 in which the High Court observed as under:

“25. Article 147 also provides that no dividend shall be payableexcept out of the profits of the year or any other undistributedprofits except as provided by Sections 205 and 208. It is obviousDthat the dividend payable to holders of preference shares mustnecessarily depend upon there being distributable profitsand interms of the relevant article, what the preference shareholdersget is only a priority to payment over the equity shareholders.That they are entitled to certain special rights on the winding upof the company does not make any difference. Whether or notEthere are distributable profits is for the general body to decide andonly if the general body declares a dividend will the preferenceshareholders be entitled to be paid.”

(e) In Trojan Equity Ltd. v. CMI Ltd. [2009] QSC (SupremeCourt of Queensland) 114 with respect to rights of shareholders, it wasFobserved:

“16. The argument that the commercial purpose of the rules issupported by construing “in arrears” as applying to the situationwhere dividends have not been paid, rather than only where theyhave been declared and not paid, was developed by reference toGASX listing rule 6.3 which provides that the holder of a preferenceshare must be entitled to a right to vote during a period in which adividend or part of a dividend is in arrears. That seems to me,however, simply to beg the question. The argument was that thepurpose of the rules, where no dividends could be paid becausethere were no profits, was enhanced by adopting the interpretationH

that would permit Class A shareholders to vote when dividendshad not been paid, regardless of whether there had been adeclaration by the directors. The submission was that those ruleshave the function of setting requirements for the organisationswhose securities are to be publicly traded. The commercial purposeof both the restriction on voting of preference shares and theexceptions from that restriction, as set out in the listing rules, wassaid to be to leave the voting control of the company in the handsof ordinary shareholders, except when the situations identified inthe listing rule arose, when the additional right and protection ofbeing entitled to vote was conferred on the preference shareholder.Mr Jackson QC submitted that nothing about that purpose dictatedor suggested that it would be better served by restricting theoperation of r. 30.16(c) to dividends declared but not paid.

18. Mr McKenna’s response was that the proper focus was themeaning of the words in the constitution and what they revealedabout the balance struck between the preference shareholders’understandable wish to vote at every possible occasion when theirshares were at risk, and the general regime which is that they didnot have the right to vote at all. He submitted that a particularbalance had been struck between the differing groups ofshareholders which created a strong incentive for the company todeclare dividends because when dividends were not paid to thepreference shareholders the ordinary shareholders were not paideither and for a longer period. In drawing attention to theconstitution’s use of language he concluded that dividends couldnot be in arrears in any ordinary use of English if they had neverbeen payable and never would be payable.”(emphasis supplied)

(f) Reliance was also placed by Shri Misra on IndoreDevelopment Authority v. Shailendra (Dead) through LRs. & Ors.(2018) 3 SCC 412 thus:

“40. In J. Dalmia v. CIT, AIR 1964 SC 1866, this Court hasobserved that the expression “paid” does not contemplate actualreceipt of the dividend by the member. The dividend may be saidto be paid within the meaning of Section 16(2) when the companydischarges its liability and makes amount unconditionally availablethe members entitled thereto: (AIR p. 1869, para 10)

“10. …The expression “paid” in Section 16(2) it is truedoes not contemplate actual receipt of the dividend by themember. In general, dividend may be said to be paid withinthe meaning of Section 16(2) when the company dischargesits liability and makes the amount of dividendunconditionally available to the member entitled thereto.”

(emphasis supplied)”

(g) In CDS Financial Services (supra) it was observed:

“48. Regarding plaintiff’s right to vote on preference shares:

Now the only question that remains to be considered is whetherthe plaintiff is entitled to exercise voting rights on preference sharesheld by it. The case of the plaintiff in short is that the dividend hasnot been paid in respect of the preference shares for financialyear ending March 3l, l998, l999, and 2000 and, therefore, by virtueof section 87(2)(b)(ii), the plaintiff is entitled to vote on the saidpreference shares. The company has not disputed that the dividendin 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 votingright would violate conditions imposed by Reserve Bank of India.It is the submission of the company that plaintiff cannot votebeyond the limit of 49%. In order to appreciate this issue, it wouldbe necessary to state few admitted facts. When the plaintiffpurchased preference shares, it had applied and obtainedpermission from the Reserve Bank of India under section 29(l)(b)of the Foreign Exchange Regulations Act, l973 (“FERA”). Whilegranting such permission under section 29(l)(b) of the FERA, theReserve Bank of India vide letter dated l2.l.l998 imposed severalconditions. Two conditions which are relevant for our purposeare as follows:

(l) that no shares be acquired by CDC without the prior permissionof the Reserve Bank of India;

(2) that the conditions contained in the letter dated 6.l.l998 shallbe complied with.

The letter dated 6.l.l998 stipulates that foreign equity shall notexceed 49% as is permissible under the policy for investing in companies. Further the licence granted by the DOT when amendedby letter dated 29.l.200l stipulated that certain conditions shallalways be complied with and shall not be violated, including interalia that there shall be a cap of 49% of foreign equity and themanagement control of the company shall remain with the Indianshareholders.

50. According to Mr. Chidambaram the conditions contained inthe special permission of the Reserve Bank of India will prevailover the provisions of the Companies Act in view of section 29(l)of FERA which contains a non-obstante clause. He pointed outthat FERA has been replaced by Foreign Exchange ManagementAct, l999 (“FEMA”) and by virtue of section 49 of FEMA, thespecial permission is saved and now deemed to have been grantedunder the corresponding provisions of sections 6 of FEMA readwith Regulation 5 of the Foreign Exchange Management (Transferor Issue of Security by a Person Resident Outside India),Regulations, 2000 and Schedule I thereto read with Annexure Bto the said Schedule. Mr. Chidambaram’s contention is that thespecial permission is a statutory order passed by a statutoryauthority viz. Reserve Bank of India on which power to grantsuch permission was conferred by Parliament under section 29 ofFERA and the special permission will prevail over the provisionsof the Companies Act.

56. Mr. Chagla also submitted that the stage to consider whetherthere would be violation of conditions of Reserve Bank of Indiawould arise only when the plaintiff actually exercise voting rightsand its rights cannot be pre-empted prematurely merely on thebasis of the apprehension that it would result in violation of theconditions laid down by the Reserve Bank of India. We cannotaccept the submission of Mr. Chagla for the simple reason thatgranting such voting rights would necessarily have the effect ofbreach of the condition viz. cap of 49% equity and will result invirtually transferring the management to the non-Indianshareholders. Moreover, if the relief claimed by the plaintiff isgranted, it would virtually amount to passing a decree at the interimstage. Therefore, the prayer of the plaintiff for permitting it toexercise voting rights in respect of the preference share cannotbe accepted.”

A83. Section 19(2) of the Companies Act provides that nothing insections 85 to 89 shall apply to a private company unless it is a subsidiaryof a public company and this question has to be finally decided whetherit is a private or public limited company in the pending civil suit whichhave been stated to be transferred to NCLT for decision in accordancewith law. Otherwise, section 87 provides that notice has to be issued toBpreference shareholders also for the meeting and they have a right toparticipate in the meeting. It appears prima facie even if dividend hasnot been declared. In that case also, preference shareholders shall havea right to vote in the meeting.

84. Reliance has also been placed on the provisions of sectionC169(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 thesubmissions.

85. Coming to the submissions based upon the provisions of sectionD108 of the Act of 1956. Section 108 is extracted hereunder:

“Sec 108 - Transfer not to be registered except on productionof instrument of transfer.

(1) A company shall not register a transfer of shares in, orEdebentures of, the company, unless a proper instrument of transferduly stamped and executed by or on behalf of the transferor andby or on behalf of the transferee and specifying the name, addressand occupation, if any, of the transferee, has been delivered to thecompany along with the certificate relating to the shares ordebentures, or if no such certificate is in existence, along with theFletter of allotment of the shares or debentures :

Provided that where, on an application in writing made to thecompany by the transferee and bearing the stamp required for aninstrument of transfer, it is proved to the satisfaction of the Boardof directors that the instrument of transfer signed by or on behalfGof the transferor and by or on behalf of the transferee has beenlost, the company may register the transfer on such terms as toindemnity as the Board may think fit :

Provided further that nothing in this section shall prejudice anypower of the company to register as shareholder or debenture- H

holder any person to whom the right to any shares in, or debenturesof, the company has been transmitted by operation of law.

(1A) Every instrument of transfer of shares shall be in such formas may be prescribed, and:

(a) every such form shall, before it is signed by or on behalf ofthe transferor and before any entry is made therein, be presentedto the prescribed authority, being a person already in the serviceof the Government, who shall stamp or otherwise endorsethereon the date on which it is so presented, and (b) every instrument of transfer in the prescribed form withthe date of such presentation stamped or otherwise endorsedthereon shall, after it is executed by or on behalf of the transferorand the transferee and completed in all other respects, bedelivered to the company,

(i) in the case of shares dealt in or quoted on a recognizedstock exchange, at any time before the date on which theregister of members is closed, in accordance with law, forthe first time after the date of the presentation of theprescribed form to the prescribed authority under clause(a) or within twelve months from the date of suchpresentation, whichever is later;

(ii) in any other case, within two months from the date ofsuch presentation.

(1B) Notwithstanding anything contained in sub-section (1A), aninstrument of transfer of shares, executed before thecommencement of section 13 of the Companies (Amendment)Act, 1965 (31 of 1965) or executed after such commencement ina form other than the prescribed form, shall be accepted by acompany, (a) in the case of shares dealt in or quoted on a recognizedstock exchange, at any time not later than the expiry of sixmonths from such commencement or the date on which theregister of members is closed, in accordance with law, for thefirst time after such commencement, whichever is later; (b) in any other case, at any time not later than the expiry ofsix months from such commencement.

(1C) Nothing contained in sub-sections (1A) and (1B) shall apply to:

(A) Any share : (i) which is held by a company in any otherbody corporate in the name of a director or nominee inpursuance of sub-section (2), or as the case may be, sub-section(3), of section 49, or (ii) which is held by a corporation,owned or controlled by the Central Government or a StateGovernment, in any other body corporate in the name of adirector or nominee, or (iii) in respect of which a declarationhas been made to the Public Trustee under section 153B, if :(1) the company or corporation, as the case may be, stamps orotherwise endorses, on the form of transfer in respect of suchshare, the date on which it decides that such share shall not beheld in the name of the said director or nominee or, as the casemay be, in the case of any share in respect of which any suchdeclaration has been made to the Public Trustee, the PublicTrustee stamps or otherwise endorses, on the form of transferin respect of such share under his seal, the date on which theform is presented to him, and (2) the instrument of transfer insuch form, duly completed in all respects, is delivered to the :(a) body corporate in whose share such company or corporationhas made investment in the name of its director or nominee, or (b) company in which such share is held in trust, within twomonths of the date so stamped or otherwise endorsed ; or (B) any share deposited by any person with : (i) the StateBank of India, or (ii) any scheduled bank, or (iii) any bankingcompany (other than a scheduled bank) or financial institutionapproved by the Central Government by notification in theOfficial Gazette (and any such approval may be accorded soas to be retrospective to any date not earlier than the 1st dayof April, 1966), or (iv) the Central Government or a StateGovernment or any corporation owned or controlled by theCentral Government or a State Government, by way of securityfor the repayment of any loan or advance to, or for theperformance of any obligation undertaken by, such person, if : (1) the bank, institution, Government or corporation, as the casemay be, stamps or otherwise endorses on the form of transferof such share : (a) the date on which such share is returned by

it to the depositor, or (b) in the case of failure on the part of thedepositor to repay the loan or advance or to perform theobligation, the date on which such share is released for sale bysuch bank, institution, Government or corporation, as the casemay be, or (c) where the bank, institution, Government orcorporation, as the case may be, intends to get such shareregistered in its own name, the date on which the instrumentof transfer relating to such share is executed by it ; and (2) theinstrument of transfer of such form, duly completed in allrespects, is delivered to the company within two months fromthe date so stamped or endorsed.

Explanation. : Where any investment by a company or acorporation in the name of its director or nominee referred to inclause (A)(i) or clause (A)(ii), or any declaration referred to inclause (A)(iii), or any deposit referred to in clause (B), of thissub-section is made after the expiry of the period or date mentionedin clause (a) of sub-section (1B) or after the expiry of the periodmentioned in clause (b) of that sub-section, as the case may be,the form of transfer, in respect of the share which is the subjectof such investment, declaration or deposit, means the prescribedform ; or

(C) any share which is held in any company by the CentralGovernment or a State Government in the name of its nominee,except that every instrument of transfer which is executed onor after the 1st day of October, 1966, in respect of any suchshare shall be in the prescribed form.

(1D) Notwithstanding anything in sub-section (1A) or sub-section(1B) or sub-section (1C) where in the opinion of the CentralGovernment 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 furthertime as it may deem fit whether such application is made beforeor after the expiry of the periods aforesaid ; and the number ofextensions granted hereunder and the period of each such extensionshall be shown in the annual report laid before the Houses ofParliament under section 638.

(2) In the case of a company having no share capital, sub-section(1) shall apply as if the references therein to shares werereferences instead of the interest of the member in the company.

(3) Nothing contained in this section shall apply to transfer ofsecurity effected by the transferor and the transferee both ofBwhom are entered as beneficial owners in the records of adepository.”

86. It was also submitted that there is violation of section 108 ofthe Companies Act of 1956. It was submitted on behalf of Hillcrest thatthe Board meeting was held on 10.5.2005 in which 32,88,181 shares ofCHQRL were purportedly transferred by Moral to Mr. R.P. Mittal. Out of32,88,181 shares, 8,98,166 shares were lying with the Overseas Bankand were available before the Board of HQRL for recording of transfer.Shares can be transferred only in accordance with section 108 of theCompanies Act which provides for filing of the share certificate whichwas a mandatory requirement as observed in Mannalal Khetan & Ors.Dv. Kedar Nath Khetan & Ors. (1977) 2 SCC 424 thus:

“16. The provision contained in Section 108 of the Act states thata company shall not register a transfer of shares...unless a properinstrument of transfer duly stamped and executed by or on behalfof the transferor and by or on behalf of the transferee …. hasbeen delivered to the company along with the certificate relatingto the shares or debentures … or if no such certificate is inexistence along with the letter of allotment of the shares.

There are two provisos to section 108 of the Act. We are notconcerned with the first proviso in these appeals. The secondproviso states that nothing in this section shall prejudice any powerof the company to register as shareholder or debenture holderany person to whom the right to any shares in, or debentures of,the company has been transmitted by operation of law. The wordsshall not register” are mandatory in character. The mandatorycharacter is strengthened by the negative form of the language.The prohibition against transfer without complying with theprovisions of the Act is emphasised by the negative language.Negative language is worded to emphasise the insistence ofcompliance with the provisions of the Act. (See State of Bihar v.Maharajadhiraja Sir Kameshwar Singh of Darbhanga [1952] SCR889; K. Pentiah v. Muddala Veeramallappa [1961] 2 SCR 295

and unreported decision dated April 28, 1976 in Criminal Appeal279 of 1975 and Additional District Magistrate, Jabalpur v.Shivakant Shukla (1976) 2 SCC 521.) Negative words are clearlyprohibitory and are ordinarily used as a legislative device to makea statutory provision imperative.

17. In Raza Buland Sugar Co. Ltd. v. Municipal Board, Rampur.(1965) 1 SCR 970 this Court referred to various tests for findingout when a provision is mandatory or directory. The purpose forwhich the provision has been made, its nature, the intention of thelegislature in making the provision, the general inconvenience orinjustice which may result to the person from reading the provisionone way or the other, the relation of the particular provision toother provisions dealing with the same subject and the languageof the provision are all to be considered. Prohibition and negativewords can rarely be directory. It has been aptly stated that thereis one way to obey the command and that is completely to refrainfrom doing the forbidden act. Therefore, negative, prohibitory andexclusive words are indicative of the legislative intent when thestatute is mandatory. (See Maxwell on Interpretation of Statutes11th Ed. p. 362 seq.; Crawford: Statutory Construction,Interpretation of Laws p. 523 and Seth Bikhraj Jaipuria v.Union of India [1962] 2 SCR 880.

18. The High Court said that the provisions contained in Section108 of the Act are directory because non-compliance with section108 of the Act is not declared an offence. The reason given bythe High Court is that when the law does not prescribe theconsequences or does not lay down penalty for noncompliancewith the provision contained in Section 108 of the Act the provisionis to be considered as directory. The High Court failed to considerthe provision contained in Section 629(A) of the Act. Section 629(A)of the Act prescribes the penalty where no specific penalty isprovided elsewhere in the Act. It is a question of construction ineach case whether the legislature intended to prohibit the doing ofthe act altogether, or merely to make the person who did it liableto pay the penalty.”

87. Section 108 operates independently of section 286 or section300. The invalidation of meeting is dependent under the provisions ofsection 108. There was violation of section 108 of the Companies Act.

AHQRL did not file share certificate along with the duly executed sharetransfer form as on 10.5.2005, the date of Board resolution. The plea ofMr. R.P. Mittal has been disbelieved that share certificates were returnedon 23.6.2003. The High Court has also ordered the proceedings undersection 340 Cr.P.C. against Mr. R.P. Mittal for filing an affidavit to thecontrary. The High Court has relied on the affidavit of Mr. Vivek DixitBand Mr. Deepak Sudan, the concerned officials of the Indian OverseasBank. The High Court has found that the share certificates were deliveredto Mr. R.P. Mittal not on 23.6.2003 but on 23.6.2005. No doubt about itthat there was violation of the provisions of section.

88. With respect to the appropriate order to be passed under sectionC397 of the Companies Act of 1956, reliance has been placed uponM.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 CompanyLaw Board to remove oppression and mismanagement. If theDconsequences of refusal to exercise jurisdiction would lead to atotal chaos or mismanagement of the company, would still theCompany Law Board be powerless to pass appropriate orders isthe question. If a literal interpretation to the provisions of Section397 or 398 is taken recourse to, may be that would be theEconsequence. But jurisdiction of the Company Law Board havingbeen couched in wide terms and as diverse reliefs can be grantedby it to keep the company functioning; is it not desirable to passan order which for all intent and purport would be beneficial tothe company itself and the majority of the members? A court oflaw can hardly satisfy all the litigants before it. This, however, byFitself would not mean that the Company Law Board would refuseto exercise its jurisdiction, although the statute confers such apower on it.

24. It is now a well settled principle of law that the Courts shouldlean in favour of such construction of statute whereby itsGjurisdiction is retained enabling it to mould the relief, subject ofcourse, to the applicability of law in the fact situation obtaining ineach case.”

There can be no dispute with the aforesaid proposition.

89. In the fact and circumstances of the case, taking intoconsideration the overall scenario, the impugned order calls for nointerference. However, direction to prosecute appellant Ram ParshotamMittal in the facts of the case is set aside.

90. The appeals are accordingly disposed of. The parties to beartheir own costs.

Divya Pandey

Appeals disposed of.