Transfer of shares without filing of share certificates is invalid under the Cos. Act
CL : Shares can be transferred only in accordance with section 108 of Companies Act, 1956 which provides for filing of share certificate which was a mandatory requirement
- Where respondent-HQRL issued shares in favour of its holding company Moral and appellants (directors) without notice to Hillcrest which was a preference shareholder, allotment and transfer of shares without filing share certificate along with duly executed share transfer form were to be cancelled as Hillcrest had voting rights and there was breach of sections 286, 300 and 108 of the Companies Act, 1956
 105 taxmann.com 200 (SC)
SUPREME COURT OF INDIA
Ram Parshotam Mittal
Hotel Queen Road (P.) Ltd.
ARUN MISHRA AND INDIRA BANERJEE, JJ.
CIVIL APPEAL NOS. 3934,3935 OF 2017
MAY 10, 2019
Arun Mishra, J.- The appeal arises out of the judgment dated 31.5.2013 passed by the High Court of Delhi, setting aside an order dated 31.1.2006 passed by the Company Law Board in Company Petition No.64/2005.
- The backdrop facts indicate that the Government of India took a policy decision on 5.7.2002 to disinvest its shares in the Indian Tourism Development Corporation (in short, ‘the ITDC’) which owns various hotel properties; one of them being Indraprastha Hotel, formerly known as Hotel Ashok Yatri Niwas, (hereinafter referred to as “the hotel”).
- In terms of an approved scheme of Arrangement of Demerger the hotel was transferred to the Respondent No.1 – Hotel Queen Road Pvt. Ltd. (in short, ‘HQRL’) which was created as a Special Purpose Vehicle to enable disinvestment. The paid up capital of HQRL was Rs.90 lakhs comprising 9 lakh equity shares of Rs.10 each, of which the Government of India held 89.97% shares. Indian Hotels Co. Ltd. (IHCL) held 10% shares and the balance shares were held by the employees of hotels of ITDC under a Voluntary Retirement Scheme.
- Pursuant to its decision to disinvest, the Government invited bids for sale of shares in HQRL. The appellant No.3 – Moral Trading & Investment Ltd., in short hereinafter referred to as ‘Moral’, a public limited company, was declared the successful bidder.
- By a share purchase agreement dated 8.10.2002 Moral acquired the shares of Government of India and IHCL in HQRL for a sum of Rs.45 crores. Out of this, Rs.33.37 crores was obtained by way of loans from banks. 99.97% shares of HQRL being held by Moral, HQRL became Moral’s subsidiary.
- Appellant No.1, Mr. R.P. Mittal, and the appellant No.2, Mrs. Sarla Mittal, who held the controlling interest in Moral, and the Respondent No.3, Mr. Ashok Mittal, younger brother of the Appellant No.1, Mr. R.P. Mittal were appointed as Additional Directors of HQRL on 8.10.2002, and later, regular Directors at the Annual General Meeting of HQRL held on 28..12.2002.
- On 30.9.2002 HQRL passed a resolution in its Extra Ordinary General Meeting (EOGM) to change its status from ‘private limited’ to ‘limited’ company. The said resolution was rejected by the Registrar of Companies on the ground of late filing and according to the appellants, HQRL had not filed it again with the Registrar of Companies nor had removed the defects.
- On 21.12.2002 a Board meeting of HQRL was held. Moral transferred 13 equity shares valued at Rs.10 per equity share of HQRL to 7 persons, i.e. 2 shares to the appellant No.1, Mr. R.P. Mittal, 3 shares to the appellant No.2, Mrs. Sarla Mittal, one share to the respondent No.3, Mr. Ashok Mittal and 7 shares to 4 daughters of the appellant Nos.1 and 2, R.P. Mittal’s family thus held 99.97% equity shares, as against one equity share held by his brother, Mr. Ashok Mittal.
- On 28.12.2002 Annual General Meeting (AGM) of HQRL was held in which authorised capital was increased from Rs.90 lakhs to Rs.33 crores. The AGM was attended by Mr. Ashok Mittal. There was an increase of 71 lakh equity shares of Rs.10 each and 25 lakh preference shares of Rs.100 per share and a Special Business Resolution No.10 was passed under section 81(1A) of the Companies Act, 1956 (hereinafter referred to as ‘the Companies Act’). The appointment of Mr. R.P. Mittal, Mrs. Sarla Mittal and Mr. Ashok Mittal to the Board of Directors was approved by the majority of the shareholders of Moral. Mr. R.P. Mittal and Mrs. Sarla Mittal were appointed as whole time Directors. The Memorandum of Association of HQRL was also amended. Article IV (4) of Articles of Association was amended to state that the preference shares would not carry any voting rights.
- On 19.3.2003, Mr. R.P. Mittal, Chairman of HQRL issued letter to the Respondent No.2 – Hillcrest Realty SDN BHD Malaysia (for short, ‘Hillcrest’) inviting subscription in 8.5% cumulative redeemable preference shares of Rs.100 each up to Rs.30 crores. On 3.4.2003, the hotel was closed for renovation and upgradation. On 30.4.2003, Hillcrest accepted and applied for subscription requesting for allotment of 23,65,000, 8.5% redeemable preference shares in the company. On 5.5.03 HQRL approved the issuance of 23,65,000 redeemable preference shares to Hillcrest.
- On 25.6.2003 in order to facilitate issue of preference shares, HQRL increased authorised capital by Rs.5 crore comprising 5 lakh preference shares of Rs.100 each. On 19.7.2003 HQRL approved the issuance of 4,64,290 redeemable preference shares to Hillcrest respondent No.2. In or about August-September, 2003, to fund the redevelopment of the hotel, a term loan of Rs.40 crores was raised from Indian Overseas Bank. According to the appellants the loan was secured by the joint personal guarantees of Mr. R.P. Mittal, Mrs. Sarla Mittal and Mr. Ashok Mittal, the corporate guarantee of Moral and the collateral security of personal assets of Mr. R.P. Mittal and Mrs. Sarla Mittal.
- On 27.7.2004, HQRL in compliance of resolution dated 28.12.2002 passed under section 81(1A) of the Act, issued 23.90 lacs equity shares at par to Moral, the single shareholder holding 99.97% of equity. On 7.1.2005 HQRL in compliance of resolution dated 28.12.2002 passed under section 81(1A) of the Act issued 41.51 lakh equity shares to Moral, 1.10 lakh equity shares to Mr. R.P. Mittal and 4.5 lakh equity shares to Mrs. Sarla Mittal.
- On 14.1.2005 an Extra Ordinary General Meeting (EOGM) was held wherein a shareholder’s resolution was adopted pursuant to which 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 respondent No.4 Pondy Metals and Rolling Mills Pvt. Ltd., hereinafter referred to in short as Pondy Metals. Further, HQRL registered transfer by Moral of 32,88,181 equity shares in favour of Mr.. R.P. Mittal.
- On 26.5.2005, M/s. Ashok Mittal & Co. issued a notice to Moral for repayment of Rs.4,91,58,762/- along with interest claiming that the same was due since 2000 from running account for share trading for the years prior to 2000. It is the case of the appellants that Mr. Ashok Mittal, on realizing the bright prospects of development of the hotel, because of its location, in the heart of capital of India, turned dishonest to the R.P. Mittal group and hatched a conspiracy with preference shareholder Hillcrest to control the management of HQRL, It is alleged by the appellants that, in contravention of the provisions of the Companies Act and terms of issue of preference shares as prescribed in Articles of Company and correspondence exchanged, Mr. Ashok Mittal caused Hillcrest to issue notice under section 169(4) of the Act for EOGM to oust the duly elected board of HQRL and to appoint their nominee on the ground of non-payment of dividend on the redeemable preference shares as provided under section 87(2)(b) of the Companies Act. Section 87 of the Companies Act is extracted below:
“Sec 87 – Voting rights
(1) Subject to the provisions of section 89 and sub-section (2) of section 92 :
|(a)||every member of a company limited by shares and holding any equity share capital therein shall have a right to vote, in respect of such capital, on every resolution placed before the company ; and|
|(b)||his voting right on a poll shall be in proportion to his share of the paid-up equity capital of the company.|
(a) Subject as aforesaid and save as provided in clause (b) of this sub-section, every member of a company limited by shares and holding any preference share capital therein shall, in respect of such capital, have a right to vote only on resolutions placed before the company which directly affect the rights attached to his preference shares.
Explanation.: Any resolution for winding up the company or for the repayment or reduction of its share capital shall be deemed directly to affect the rights attached to preference shares within the meaning of this clause.
(b) Subject as aforesaid, every member of a company limited by shares and holding any preference share capital therein shall, in respect of such capital, be entitled to vote on every resolution placed before the company at any meeting, if the dividend due on such capital or any part of such dividend has remained unpaid:
|(i)||in the case of cumulative preference shares, in respect of an aggregate period of not less than two years preceding the date of commencement of the meeting; and|
|(ii)||in the case of non-cumulative preference shares, either in respect of a period of not less than two years ending with the expiry of the financial year immediately preceding the commencement of the meeting or in respect of an aggregate period of not less than three years comprised in the six years ending with the expiry of the financial year aforesaid.|
Explanation.: For the purposes of this clause, dividend shall be deemed to be due on preference shares in respect of any period, whether a dividend has been declared by the company on such shares for such period or not,
|(a)||on the last day specified for the payment of such dividend for such period, in the articles or other instrument executed by the company in that behalf; or|
|(b)||in case no day is so specified, on the day immediately following such period.|
|(c)||where the holder of any preference share has a right to vote on any resolution in accordance with the provisions of this sub-section, his voting right on a poll, as the holder of such share, shall, subject to the provisions of section 89 and sub-section (2) of section 92, be in the same proportion as the capital paid up in respect of the preference share bears to the total paid-up equity capital of the company.”|
- A Board meeting of HQRL was conducted on 4.7.2005 which was attended by Mr. R.P. Mittal, Mrs. Sarla Mittal and Mr. Ashok Mittal. Mr. Ashok Mittal attended the meeting for the first time. The Respondent No.6 Mr. N.P. Gupta and the Respondent No.5, Mr. Suman Jain were appointed as Additional Directors. On 8.7.2005 Hillcrest issued notice under section 169(6) of the Companies Act to call for EOGM on 4.8.2005.
- HQRL filed a civil suit being CS (OS) 992 of 2005 before the High Court of Delhi for declaration, cancellation and mandatory injunction against the requisition under section 169 of the Companies Act.
- On 4.8.2005 Hillcrest proceeded to convene EOGM and passed a resolution inter alia removing Mr.. R.P. Mittal and Mrs. Sarla Mittal from the Board of HQRL. On 12th August, 2005, Delhi High Court passed an order in an interlocutory application being IA 5505 in the said suit being CS (OS) No.992 of 2005 restraining Hillcrest from giving effect to the resolution passed in the EOGM held on 12.8.2005. Delhi High Court restrained Hillcrest from giving effect to the resolution passed in the EOGM.
- On 22nd August, 2005 Hillcrest and Ashok Mittal filed a petition bearing No.64/2005 in the Principal Bench of the Company Law Board at Delhi and under Sections 397 and 398 of the Companies Act alleging oppression and mis-management of HQRL by the R.P. Mittal Group. The Resolution passed in Board meetings regarding allotment/ transfer of shares was also challenged amongst others on the ground that no notice had been issued to Ashok Mittal who was, at the material time, a Director.
- The present case arises out of the said petition filed by Hillcrest and Mr. Ashok Mittal against the appellants in the Company Law Board in September, 2005 under Sections 397/398 of the Act, challenging the allotment/transfer of shares effected on 27.7.2004, 7.1.2005 and 10.5.2005 on inter alia grounds of (i) financial mismanagement of HQRL by Mr. R.P.Mittal and Mrs. Sarla Mittal; (ii) Invested in Cumulative Redeemable Preference Share (CRPS) on the understanding that HQRL would remain a subsidiary of Moral and that in the event of HQRL failing to pay any dividend for two years, Hillcrest would be entitled to exercise its voting rights in all resolutions; (iii) illegality of allotments made on 27.7.2004, 7.1.2005 and 10.5.2005. In the absence of notice under Section 286 of the Companies Act to Mr. Ashok Mittal, who was a Director of HQRL; (iv) the allotments having been made by the remaining Directors without disclosing their obvious interest in violation of section 300 of the Companies Act; (v) the allotments being made without any valuation of equity shares of HQRL; (vi) no money being paid for transfer of shares and (vii) the eventuality of the transfer bringing about a situation where HQRL would no longer remain a subsidiary of Moral and thus deprive Hillcrest of any voting right under section 87(2)(b) of the Act.
- It is alleged by the appellants that, in spite of various hurdles created by Hilcrest and Mr. Ashok Mittal by sending notices to various Government departments asking them not to grant licenses, the hotel had become operational, with the sole efforts of Mr. R.P. Mittal and had been granted all the requisite licenses.
- On 31.1.2006, C.P. No.64/2005 was dismissed, inter alia, on the ground that it was a mala fide petition by Hillcrest and Mr. Ashok Mittal to take over the company. In 2006 three cross appeals were filed against the order dated 31.1.2006 passed by the Company Law Board.
- In August, 2006 Hilcrest filed a suit being CS (OS) No.1832/ 2008 in Delhi High Court for a declaration that Hilcrest had voting rights in HQRL in view of the Resolution dated 30th September, 2002 passed by HQRL whereby HQRL had been converted from a private company limited by shares to a public company limited by shares. Hilcrest filed an application being IA No.12164/ 2008 in the said suit being CS (OS) No.1832/ 2008 contending that HQRL had obtained an order of injunction on 12th August, 2005 by fraudulently and concealing the fact that it had acquired the status of a public company in 2002. Hilcrest also made an application in suit being C.S. No.992/2005 for vacating of the interim order dated 12th August whereby Hilcrest had been restrained from giving effect to the Resolution passed at the meeting of HQRL on 4th August, 2005.
- Being aggrieved by the order dated 12th August, 2005 in C.S. (OS) No.992/ 2005 Hilcrest filed an appeal therefrom being FAO (OS) No.282/2005 before the Division Bench of Delhi High Court.
- On or about 1st October, 2008, Hilcrest filed an application being IA No.12164/ 2008 in C.S. (OS) No.1832/ 2008 inter alia praying that Hilcrest be allowed to participate in the Extraordinary General Meeting of HQRL to be held on 16th October, 2008 and further praying for appointment of an Administrator to look after the affairs of the company.
- On 15th October, 2008 the Delhi High Court passed an interim order in the said IA No.12164 of 2008 in C.S. (OS) 1382 of 2008 allowing Hilcrest to vote in the Extraordinary General Meeting to be held on 16th October, 2008 and also appoint Administrator to look after the day to day affairs of HQRL.
- On 16th October, 2008, Mr. R.P. Mittal, Mrs Sarla Mittal and HQRL filed an appeal against the orders dated 15th October, 2008 and 24th October, 2008 passed by the Delhi High Court in IA No.12164/ 2008 in C.S. (OS) 1832 of 2008 before the Division Bench.
- The appellants state that on or about 21st October, 2008, Mr. R.P. Mittal filed an application under the Right to Information Act whereupon the Registrar of Companies, by letter dated 21st October, 2008 informed the appellant that the status of HQRL had not been changed from private company limited by shares to public company limited by shares for the technical reasons specified in the said letter.
- On 24th October, 2008 the interim order passed by the Delhi High Court on 5th October, 2008 in IA No.12164/ 2008 in C.S. (OS) No.1832 of 2008 was made absolute.
- On 14th January, 2009, the Division Bench of Delhi High Court by a common order disposed of FAO (OS) No.282/2005, FAO (OS) 426 of 2008 and 440 of 2008 upholding the right of Hilcrest to vote in the meetings of HQRL. The question of whether HQRL was a private company limited by shares of public limited company was left open for adjudication in the suit. On 14th January, 2009, Hilcrest took over the management of HQRL from R.P. Mittal Group through Ashok Mittal.
- Appellant Nos.1 and 2 filed a special leave petition in this Court being SLP (C) No.1069 of 2009 under Article 136 of the Constitution. By a judgment and order dated 20th July, 2009, a Division Bench of the High Court upheld the right of Hilcrest to vote on the ground that HQRL was prima facie a public limited company.
- On 30th July, 2009, Hilcrest and Ashok Mittal sent notice to the existing shareholders of HQRL under Section 81 (21) of the Companies Act to allot further equity shares.
- On 14th August, 2009 the appellants filed an interim application being IA No.9920/ 2009 in C.S. (OS) 1832 of 2008 seeking injunction against Hilcrest and Mr. Ashok Mittal from going ahead with the rights issue.
- By a judgment and order dated 18th August, 2009 a Single Bench of Delhi High Court declined to interfere with the right issue and the application No.9920/2009 in C.S. (OS) 1832/2009 was dismissed.
- On 20th August, 2009, the appellant appealed against the order dated 18th August, 2009 referred to above. The Division Bench, however, declined to restrain the rights issue but only directed issuance of notice to HQRL and Ashok Mittal.
- On 31.5.2013, the High Court by the impugned order allowed CoA (SB) 4/2006 of Hillcrest and cancelled the allotment and transfers made on 27.7.2004, 7.1.2005 and 10..5.2005 on the grounds that Hillcrest had voting rights and there was breach of sections 286, 300 and 108 of the Companies Act.
- HQRL has contended that the claim of the appellants that they have funded HQRL at the time of acquisition of the hotel is incorrect. Rs.33.25 crores was obtained by way of bank loans, loan of Rs.5.5 crores was advanced by Mr. Ashok Mittal, loan of Rs.6.23 crores was advanced by Mr. R.P. Mittal. When the hotel was bought it required extensive renovation and thus further funds were required. Hillcrest contributed Rs.28.29 crores in preference share capital, Rs.40 crores bank loan from IOB on personal guarantee of Mr. Ashok Mittal, Mr. R.P. Mittal and Mrs. Sarla Mittal. HQRL has claimed that the net worth of Mr. Ashok Mittal was much higher than others.
- HQRL has further contended that the management changed hands from R.P. Mittal group on 15.1.2009 vide order of Delhi High Court. Prior to leaving the management of HQRL, Mr. R.P. Mittal and Mrs. Sarla Mittal with the help of their accomplices, removed and did away with the books of account and statutory records of HQRL. Thereafter, a number of third parties, all related to Mr. R.P. Mittal started claiming to have lent monies to HQRL.. Most of these demands were based on ‘oral agreements’ with Mr. R.P. Mittal. When the new management assumed charge of HQRL, the financial position of HQRL was weak, there being only Rs.2.82 lacs in the bank account of HQRL; the immediate liabilities including government dues, taxes and salaries of staff were Rs.98,62,563; HQRL had defaulted on payment of interest to the bank amounting to Rs.4,73,98,446 along with total bank liability of about Rs.30 crores; and its account was on the verge of becoming Non Performing Asset (NPA), due to defaults in repayment of interest and principal and it was already in litigation with the bank.
- In these circumstances, funds were brought in by Mr. Ashok Mittal. A sum of Rs..5 crore was brought as loan by Mr. Ashok Mittal before 31.3.2009; Rs.4.5 crore further loan by Mr. Ashok Mittal before 31.3.2009; and Rs.40 crore by Mr. Ashok Mittal through Rights Issue. Offer was given to the appellants who refused to subscribe to rights issue but litigated against the company. Prayer for grant of injunction was refused by Delhi High Court on the Rights Issue in 2009.
- According to the respondents, it is crystal clear from the above facts, that the entire funding was on the basis of investment either by Hillcrest or on the basis of creditworthiness of Mr. Ashok Mittal or investment made by him. The R.P. Mittal Group’s argument that they funded the project is incorrect. They have not been able to show how such funds have been brought in the company. Said group had neither funds nor creditworthiness to buy the hotel of HQRL.
- It was urged by Mr. Pinaki Misra, learned senior counsel on behalf of the appellants that the claim of Mr. Ashok Mittal that he had funded Rs.5.5 crores to Moral out of Rs.12.03 crores for acquisition of HQRL was false and an afterthought. In order to mislead this Court, he had made a false statement. The claim of Mr. Ashok Mittal that loan of Rs.33 crores to Moral was only on his personal guarantee was also wrong. The action of Mr. Ashok Mittal and Hillcrest was detrimental to the interest of HQRL.
- Mr. Misra argued that the High Court has erred in relying on decisions of this Court in interim injunction matters which did not decide finally the rights of parties. Suit is still pending. He urged that it is well settled by this Court in State of Assam v. Barak Upatyaka D.U. Karamchari Sanstha (2009) 5 SCC 694 that any interim order which does not finally and conclusively decide an issue cannot be a precedent.
- It was urged that admittedly, there was no financial mismanagement in the affairs of HQRL by appellants or R.P. Mittal group. The High Court while passing the impugned judgment has acted as a Civil Court and not as Company Court under section 10F of the Companies Act, 1956. The test as to whether an action is oppressive or not is not based on whether it is legally permissible or not since even if legally permissible, if the action is otherwise against probity, good conduct or is burdensome, harsh or wrong or is malafide or for collateral purpose, it would amount to oppression under section 397. Reliance has also been placed on Needle Industries (India)Ltd. & Ors. v. Needle Industries Newey (India)Holding Ltd. & Ors.  3 SCC 333; Sangramsinh P. Gaekwad & Ors. v. Shantadevi P. Gaekwad (Dead) through LRs. & Ors.  11 SCC 314; and V.S. Krishnan & Ors. etc. v.. Westfort Hi-tech Hospital Ltd. & Ors.  3 SCC 363.
- Shri Misra, learned senior counsel further urged that no oppression was caused to Mr. Ashok Mittal by allotment of shares on 27.7.2004, 7.1.2005 and allotment/transfer of shares on 10.5.2005 to majority shareholders having 99.97% equity. It was further submitted that there could not be any oppression caused to Mr. Ashok Mittal by inter se transfer of shares from Moral to Mr. R.P. Mittal as the said transaction was between Moral and Mr. R.P. Mittal, whereby HQRL only records the transfer. The argument on behalf of Mr. Ashok Mittal and Hillcrest that the allotment was done at undervalue was also not correct. The transfer of shares from Moral to Mr. R.P. Mittal on 10.5.2005 was between two separate legal entities i.e. Moral and Mr. R.P. Mittal, whereby HQRL only had the authority to record transfer. HQRL could not have raised any objection and also Hillcrest would have no locus to challenge the same. The only issue qua Hillcrest is when it was entitled to vote on every resolution placed before the company in terms of Section 87(2)(b) of the Companies Act. It was submitted that the first allotment made to Hillcrest was on 5.5.2003 hence as per the submissions of Hillcrest, two years period in terms of Section 87(2)(b) of the Companies Act, came to an end on 5.5.2005 and as per Hillcrest, if the dividend was not paid for 2 years, whether there is profit or not, Hillcrest were entitled to vote on resolution dated 10.5.2005 effecting transfer is not correct proposition of law. Section 205 of the Companies Act provides that no dividend shall be declared or paid by a company for any financial year except out of the profits of the company for that year arrived at after providing for depreciation in accordance with the provisions of sub-section.
- It was urged that the position of shareholders in a company is of analogous to that of partners inter se. Partnership is merely an association of persons for carrying on the business of partnership and in law the firm name is a compendious method of describing the partners. Such is, however, not the case of a company which stands as a separate juristic entity distinct from the shareholders.
- It was submitted on behalf of appellant that on 10.5.2005 Hillcrest had no voting right under section 87(2)(b) of the Companies Act, as there was no profit and no dividend due. Accordingly, no oppression can be said to have been caused to Hillcrest by inter se transfer of shares by resolution dated 10.5.2005. Moreover, Hillcrest had no right to requisition an EOGM under section 169(4) of the Companies Act. Thus, action of not calling of EOGM does not amount to oppression. Hillcrest’s contention that preference shareholders had acquired voting rights under section 87(2)(b) to requisition a meeting under section 169(4) is misconceived, in that section 98(2)(b) only provides that preference shareholders would only be entitled to vote on every resolution placed before the company at any meeting. Even otherwise, the ground of HQRL not remaining subsidiary of Moral (a public company) has itself been diluted by Hillcrest, as can be seen from the note with the heading “Shareholding pattern of R1 (HQRL)”. It is relevant to mention here that it was held by the High Court of Bombay in CDS Financial Services (Mauritius)Ltd. v. BPL Communications Ltd. & Ors.  121 Comp Case 374, that RBI’s special permission under the special laws of FEMA will prevail over the provisions of the Companies Act, 1956. If the analogy of the High Court in impugned order is applied then all earlier meetings of HQRL deserve to be declared void as violative of sections 286 and 300.
- It was also urged by Mr. Misra, learned senior counsel, that the finding of the High Court as to provision under section 108 of the Companies Act, 1956 and thereafter initiating the proceedings under section 340 Cr.P..C. against Mr. R.P. Mittal was also erroneous, as the High Court had itself recorded that there was no record available with the bank to ascertain when the certificates were released to the Mr. R.P. Mittal. The Rights Issue in 2009 was illegal and was only brought in to give the majority to Mr. Ashok Mittal, even though the issue was not part of these proceedings.
- In the wake of aforesaid submissions, the appellants prayed that the impugned order of the High Court passed in Co.A. (SB) No.4/2006 be set aside. The appellants have also sought a declaration that Hillcrest as preference shareholder, is not entitled to vote under section 87(2)(b) of the Companies Act, 1956, nor can requisition a meeting under section 169(4)(A) of the said Act. Mr. Misra submitted that the appellants be sent back into the management of HQRL.
- It was submitted by Mr. Jaideep Gupta, learned senior counsel for HQRL that the interest of the company must be uppermost in the mind of the Court while granting relief in a petition under Section 397 of the Companies Act.
- It was argued that it is well settled that the company does not merely represent the interest of the shareholders but also a much wider group of entities which would include employees, creditors and public in general. Reliance was also placed on National Textile Workers’ Union & Ors. v. P.R.Ramakrishnan & Ors.  1 SCC 228.
- Mr. Gupta further submitted that HQRL runs a prime hotel in New Delhi. It is desirable that the interest of business of the hotel be protected by this Court while giving relief under section 397/398 of the Companies Act. At the time of purchase of undertaking in 2002-03 the entire investment was made through Moral. The amount involved was about Rs.45 crores. Moral financed this sum through a bank loan of about Rs.33.25 crores obtained on the credit worthiness of Mr. Ashok Mittal and against personal guarantee of Mr. R.P. Mittal and Mr. Ashok Mittal. Mr. Ashok Mittal has substantial interest in the company, he only held one share in the company and was on the Board of Directors of the Company.
- Mr. Jaideep Gupta, also argued that with a view to operationalise the hotel further funds to the tune of Rs.68 crores were raised including investment of Rs.28.29 crores made by Hillcrest. Hillcrest was persuaded to make this investment at the behest of Mr. Ashok Mittal as is evident from the record. Balance sum of Rs.40 crores was raised by way of bank loans against personal guarantee of Mr. R.P. Mittal and Mr. Ashok Mittal. In or about 2004-05 the R.P. Mittal group through the three impugned resolutions sought to increase its shareholding in the company. Pursuant to an Extra Ordinary General Meeting Mr. Ashok Mittal and Hillcrest took over the management of the company. The actual change in management, hence, took place on or about 15.1.2009. After takeover of management by Mr. Ashok Mittal further investment amounting to Rs.49.5 crore was made by him out of which Rs.9.5 crores was directly invested by Mr. Ashok Mittal to pay out bank dues and other pressing creditors. In addition, on or about 30.7.2009 another Rs.40 crores were raised through a rights issue. R.P. Mittal group was offered shares in proportion to the shareholding in the company but declined to take any share or make any investment in the company. Hence, the entire amount was brought in by Mr. Ashok Mittal. As of now Mr. Ashok Mittal holds 92% of equity shares of HQRL whereas Moral and Mr. R.P. Mittal own about 8% shares of HQRL. The main disputes between the parties pertain to (i) allotment and transfer of shares to 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 place on or about July, 2009. With reference to (ii) above, it was stated that there is an interim arrangement which is binding on both the parties and which has been affirmed all the way up to this Court by a judgment and order dated 20.7.2009 in Ram Parshotam Mittal & Anr. v. Hillcrest Realty SDN. BHD. & Ors. (2009) 8 SCC 709. It was also submitted that the said interim arrangement cannot be gone into or modified at this stage.
- Mr. Gupta further contended that the only question in the present proceedings is validity of allotment and transfer which took place in 2004 and 2005 made by company in favour of Mr. R.P. Mittal, his wife Mrs. Sarla Mittal and Moral. These transactions are contained in three resolutions dated 27.7.2004, 7.1.2005 and 10.5.2005.
- It has been submitted on behalf of Mr. Ashok Mittal that the aforesaid transactions which were conducted in the meetings of the Board of Directors of which no notice had been given to him, though he was then a Director of HQRL, are illegal, null and void and oppressive. In Sri Parmeshwari Prasad Gupta v. The Union of India (1973) 2 SCC 543, this Court held Section 286 of the Companies Act to be mandatory and violation thereof has been held to render the resolution passed in such meeting void.
- He submitted that Resolutions passed in aforesaid meetings are also violative of section 300 of the Companies Act as in all of them arrangements and contracts in favour of two Directors namely Mr. R.P. Mittal and Mrs. Sarla Mittal have been discussed and voted upon by said two persons themselves. It is well settled that Directors act as fiduciaries when they conduct a Board meeting and as fiduciaries they cannot participate in decisions in their own favour. It is not only an established principle of law of equity relating to fiduciaries but is expressly forbidden by section 300 of the Companies Act. Reliance has been placed upon Dale & Carrington Invt. (P)Ltd. & Anr. v. P.K. Prathapan & Ors. (2005) 1 SCC 212; Firestone Tyre and Rubber Co. v.. Synthetics and Chemicals Ltd. & Ors. (1971) 41 Co. Cases 377 and Madras Tube Co. Ltd. & Ors. v. Hari Kishon Somani & Ors. (1985) 1 Comp Law Journal 195 (Mad).
- He further submitted that the decision to transfer shares from Moral to Mr. R.P. Mittal on 10.5.2005 is in violation of section 108 of the Companies Act because it has been found as a fact by the High Court that physical share certificate was not in possession of Moral on the relevant date. In proceedings under section 397 filed by Hillcrest and Mr. Ashok Mittal, the Company Law Board found that the resolution had been passed illegally but it declined to set aside the allotment and transfer on unsustainable grounds. It is well settled that in a petition under section 397 of the Companies Act it is normally desirable unless any special circumstances exist, to pass an order which to all intents and purposes would be beneficial to the company itself and the majority of its members.
- It was finally contended that the High Court order be upheld without upsetting the existing position in relation to management of company.
- It was submitted by Mr. Mihir Kumar, learned counsel for Hillcrest that the appellants have filed two appeals namely C.A. No. 3934/2017 and C.A. No.3935/2017. The sole legal question arising in the instant matters is whether the 3 meetings of the Board of Directors of HQRL held on 27.7.2004, 7.1.2005 and 10.5.2005 were legal and valid. The following issues were not germane to the question:
|(1)||whether HQRL is a public limited company or a private limited company?|
|(2)||whether Hillcrest, a preference shareholder had any voting rights in terms of section 87 of Companies Act, 1956?|
- Learned counsel would contend that the aforesaid three Board meetings before the Company Law Board were gravely vitiated and invalid for the reasons that they were in violation of Sections 286 and 300 of the Companies Act which operate independently. The resolutions passed in the impugned meetings were basically for allotment of shares by the appellants to themselves and one of the meetings held on 10.5.2005 also concerned with purported transfer of shares from Moral to Mr. R.P. Mittal. These meetings constituted continuous acts calculated to prejudice and oppress Hillcrest and Mr. Ashok Mittal. The appellants had limited financial investment in HQRL and Hillcrest and Mr. Ashok Mittal have substantially invested in HQRL. Moral transferred the bank loan to HQRL, and the latter repaid it.
- Learned counsel further contended that the appellants’ argument that the High Court had reached its conclusions on the basis of this Court’s prima facie view in the matter of grant of interim injunction, was incorrect and erroneous. The findings in the impugned judgment are based entirely on the settled legal propositions. It was submitted that the appellants’ reliance on FEMA is erroneous. It was further submitted that the appellants had on 30.8.2018 sought to file certain documents which were neither placed on record before the Company Law Board or the High Court; neither pleaded nor relied upon before courts below and not even pleaded before this Court. Finally, it was prayed that the appeals be dismissed.
- It was also submitted by learned counsel for Mr. Ashok Mittal that the appeals were decided by the High Court under section 10F of the Companies Act, 1956 and confined to questions of law. Reliance was placed on Sri Parmeshwari Prasad Gupta v. Union of India (supra). On the anvil of decision in M.S. Madhusoodhanan v. Kerala Kaumudi (P)Ltd.  9 SCC 204, the aforesaid 3 Board meetings were vitiated and invalid on account of being in violation of sections 286, 300 and 108 of the Companies Act, 1956. Strong reliance was also placed on Firestone Tyre & Rubber Co. v. Synthetics & Chemicals Ltd. & Ors. (supra).
- It was also contended by learned counsel for Mr. Ashok Mittal that he had seriously been oppressed as he admittedly had substantial interest in HQRL; allotment of shares by appellants allotted shares to themselves without providing any opportunity of representation to Mr. Ashok Mittal and also without providing any opportunity to Mr. Ashok Mittal to participate in the offer; said allotment was at gross undervaluation and in breach of the fiduciary position of Mr. R.P. Mittal and Mrs. Sarla Mittal as Directors of HQRL; the 3 meetings violated Section 286 thereby ipso facto invalidating the meetings. Mr. Ashok Mittal had a right to participate in the offer of shares to any extent irrespective of his existing equity shareholding of 1 share; and that transfer of shares by Moral to Mr. R..P. Mittal was against loan. Even Mr. Ashok Mittal had granted loan to Moral but against that Moral did not transfer any shares. Appellants’ reliance on section 81(1A) is unmerited. It was further contended that the appellants’ argument of Mr. Ashok Mittal holding only one share is manifestly erroneous. The Company Law Board concluded that inasmuch as Mr. Ashok Mittal was substantially interested and invested in HQRL, the shares ought to be allotted (as well as transferred by Moral) to him as well. As against Hillcrest’s investment of Rs.28,29,29,000/-, the appellants had invested only Rs.90 lakhs in the share capital of HQRL. The said 3 meetings had a direct bearing on shareholding of Hillcrest. The parent-subsidiary relationship between Moral and HQRL was independent of the status of HQRL as a public company limited by shares and as a consequence of the shareholders’ resolution dated 30.9.2002. The appellants sought to negate not only the rights of Mr. Ashok Mittal but also voting rights of Hillcrest. That the appellants had limited financial investment in HQRL. Factually, there was no substantial investment by Moral out of its own funds in HQRL; whereas Hillcrest and Mr. Ashok Mittal had substantially invested in HQRL. That the appellants’ reliance on FEMA is erroneous.
- Before dilating on the issue of validity of aforesaid three impugned resolutions, it is a common ground and it was stated by learned counsel appearing for the parties that two civil suits are pending consideration; one being OS No.992/2005 filed by HQRL for injunction to restrain Hillcrest Realty from proceeding with the proposed resolutions of EOGM and from exercising voting rights therein; the other Suit No.1832/2008 seeking declaration that HQRL had become a limited company by virtue of the resolution passed on 30.9.2002. The matter travelled to this Court in the matter of grant of injunction which has been decided in Ram Parshottam Mittal v. Hillcrest Realty (supra). Rival contentions were raised before this Court as to whether HQRL is a private limited or public limited company. This Court has observed that the decision on the aforesaid question would be dependent upon the decision of the issue whether by resolution adopted on 30.9.2002, HQRL had lost its private character and had been converted into a public limited company. While the issues are the same in the two suits, this Court has observed that the interim order dated 12.8.2005 had been obtained by suppression of material facts and prima facie finding recorded by the Division Bench of the High Court was that by resolution adopted on 30.9.2002, HQRL had shed its private character and had been converted into a public limited company. This Court without meaning to decide the issue finally prima facie observed that an application was filed before the Registrar in Form 23 along with resolution dated 30.9.2002 is sufficient to arrive at a prima facie conclusion that HQRL had altered its status and had become a public company. It was further observed by this Court that since the number of members exceeded 50 as the shares were said to have been allotted to 134 persons on 30.9..2002, prima facie HQRL lost its private character. However, this Court also observed significantly as this issue has to be decided in the two pending suits, it would not be proper for this Court to dwell into the question further. This Court held that considering the explanation to section 87(2)(b) gives Hillcrest as a cumulative preference shareholder the right to vote on every resolution. This Court also made it clear that the observations were prima facie in the nature of limited only for disposal of special leave petition and should not influence the final decision in the suits. The question relating to HQRL whether it is a private or public company has been left open for decision in the suits. 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, the reliefs sought for in the two suits are dependent on the question as to whether by the resolutions adopted on 30th September, 2002, Hotel Queen Road had lost its private character and had been converted into a Public Company. While the issues are the same in the two suits, the interim orders passed therein operate in contradictory fields.
- We are unable to appreciate the methodology adopted by the Division Bench of the High Court, but we are in agreement with the end result by which the Division Bench had set aside the interim order dated 12th August, 2005, passed in Suit No. 992 of 2005. In our view, apart from endorsing the view of the learned Single Judge that the interim order of 12th August, 2005, had been obtained by suppression of material facts, in order to decide the appeals, the Division Bench had to arrive at a prima facie finding as to whether by virtue of the resolutions adopted on 30th September, 2002, Hotel Queen Road had shed its private character and had been converted into a public company with all its consequences.
- From the materials on record, we are prima facie of the view that by the said resolutions, a final decision had been taken by Hotel Queen Road to convert itself into a public company with immediate effect without having to wait for any decision to be rendered by the Registrar of Companies who, in any event, had no authority to make any decision in that regard.
- The very fact that Form 23 was filed along with the resolutions dated 30th September, 2002, coupled with the fact that a Statement in lieu of Prospectus, which is required to be filed by a private company when it converts itself into a public company, was filed on behalf of Hotel Queen Road, is sufficient for the purpose of arriving at a prima facie conclusion that Hotel Queen Road had altered its status and had become a public company even though the necessary alterations had not been effected in the records of the Registrar of Companies.
- Having regard to the definition of “private company” in Section 3(1)(iii), as soon as the number of its members exceeds 50, it loses its character as a private company. Since in the instant case shares were said to have been allotted to 134 persons on 30th September, 2002, on which date the resolutions were passed by Hotel Queen Road Pvt. Ltd., the company lost its private character requiring the subsequent resolutions to be passed regarding alteration of the share capital.
- The moment the resolutions were passed by the company on 30th September, 2002, the provisions of the Companies Act became applicable and by operation of law, Hotel Queen Road simultaneously ceased to be a private limited company and under the conditions prescribed in the Act, Hillcrest Realty acquired voting rights in the meetings of the company by operation of Section 87(2)(b) and Section 44 of the said Act. The right of a preference shareholder to acquire voting rights is also indicated in clear and unambiguous terms in the Explanation to Section 87(2)(b).
- Since the question as to whether Hotel Queen Road ceased to be a private company upon the resolutions being passed on 30th September, 2002, is the crucial issue for decision in both the two suits referred to hereinabove, it would not be proper for this Court to delve into the question further.
- However, for the purpose of disposing of these Special Leave Petitions, we are prima facie of the view that by virtue of the resolutions dated 30th September, 2002, Hotel Queen Road had become a public company thereby attracting the provisions of Section 87(2)(b) of the Companies Act, 1956, upon the bar under Section 90(2) thereof having been lifted. A natural consequence is that in the event dividend had not been declared or paid for a period of two years as far as Hillcrest is concerned, the Explanation to Section 87(2)(b) would come into play thereby giving Hillcrest Realty, as a cumulative preference shareholder, the right to vote on every resolution placed before the Company, at any meeting, in keeping with Clause (i) of Section 87(2)(b) of the aforesaid Act.
- In keeping with the aforesaid principle, while dismissing the Special Leave Petitions filed by Hotel Queen Road and Hillcrest Realty, we make it clear that the observations made in this judgment are of a prima facie nature only for disposal of the Special Leave Petitions and should not influence the final decision in the suits, where the question relating to the status of Hotel Queen Road has been left open for decision. We, however, request the High Court, functioning as the Trial Court, to dispose of the suits at an early date so that the management and affairs of Hotel Queen Road are not left in a state of uncertainty.”
- It was jointly prayed by learned counsel appearing for the parties that the issues involved in the said two civil suits need not be dilated upon and decided in this matter as that may prejudice the outcome of the pending civil suits.
- This Court in the aforesaid decision has itself observed that it was deciding only interim injunction matter and the findings recorded in the order were prima facie not binding at the time of decision of civil suit and the question to be decided whether HQRL has lost its private character and has become a public limited company by virtue of resolution dated 30.9.2002..
- In view of the observations made by this Court, the order in Ram Purshottam Mittal (supra) is not final and is only a prima facie view in the matter of injunction. We find force in the submission of learned counsel appearing for the appellants that the observations in interim order cannot be taken as binding even for the purpose of deciding this matter as held in the State of Assam v. Barak Upatyaka D.U. Karamchari Sanstha (2009) 5 SCC 694:
“21. A precedent is a judicial decision containing a principle, which forms an authoritative element termed as ratio decidendi. An interim order which does not finally and conclusively decide an issue cannot be a precedent. Any reasons assigned in support of such non-final interim order containing prima facie findings, are only tentative. Any interim directions issued on the basis of such prima facie findings are temporary arrangements to preserve the status quo till the matter is finally decided, to ensure that the matter does not become either infructuous or a fait accompli, before the final hearing.”
- The Company Law Board as well as the High Court have found that the provision of notice under Section 286 of the Companies Act was not complied with. The High Court has observed that the interested Directors have participated in the meeting. Mr. R.P. Mittal and Mrs. Sarla Mittal were in a fiduciary capacity they could not participate in the decision where shares were transferred to their own group/company. Even if HQRL were a private limited company, the compliance with the provisions of section 300 of the Act was mandatory. The High Court has also observed that there was undervaluation of HQRL shares. The allotment of shares at par to Moral in the meeting on 10.5..2005 and on the same very date, shares of Moral were transferred to Mr. R.P. Mittal @ Rs.20 per share. Thus, the High Court has opined that these acts in overall factual matrix of the case, were sufficient to conclude that ground under section 397 had been made out.
- The High Court has also found that HQRL did not have the share certificates along with duly executed share transfer forms when a decision was taken at the Board meeting held on 10.5.2005 to transfer shares from Moral to Mr. R.P. Mittal. The decision has been held to be invalid for violation of provisions contained in Section 108 of the Act of 1956 for the aforesaid reason also. The Court has recorded suo motu proceedings under section 340 Cr. PC against Mr. R.P. Mittal. The Court has invalidated the impugned resolutions dated 27.7.2004, 7.1.2005 and 10.5.2005 and the decision of the Company Law Board has been set aside.
- Coming to the submission as to oppression whether the Act was oppressive or not within the purview of section 397 on behalf of the appellant, it was submitted that Mr. Ashok Mittal did not fund Rs.5.5 crores to Moral out of Rs.12.03 crores for acquisition of HQRL, as claimed. His claim that a loan of Rs.13 crores was obtained on basis of his personal guarantee was wrong. It was also urged that there was no financial mismanagement by the appellants. The test whether action was oppressive or not, is based on whether it is legally permissible or not. Reliance has been placed on Needle Industries (supra) in which this Court has observed:
“49. The question sometimes arises as to whether an action in contravention of law is per se oppressive. It is said, as was done by one of us, Bhagwati, J., in a decision of the Gujarat High Court in Seth Mohanlal Ganpatram v. Sayaji Jubilee Cotton & Jute Mills Co. Ltd.  34 Company Cases 777 that “a resolution passed by the directors may be perfectly legal and yet oppressive, and conversely a resolution which is in contravention of the law may be in the interests of the shareholders and the company”. On this question, Lord President Cooper observed in Elder v. Elder  S.C. 49:
The decisions indicate that conduct which is technically legal and correct may nevertheless be such as to justify the application of the ‘just and equitable” jurisdiction, and, conversely, that conduct involving illegality and contravention of the Act may not suffice to warrant the remedy of winding up, especially where alternative remedies are available. Where the ‘just and equitable’ jurisdiction has been applied in cases of this type, the circumstances have always, I think, been such as to warrant the inference that there has been, at least, an unfair abuse of powers and an impairment of confidence in the probity with which the company’s affairs are being conducted, as distinguished from mere resentment on the part of a minority at being outvoted on some issue of domestic policy..
Neither the judgment of Bhagwati J. nor the observations in Elder (supra) are capable of the construction that every illegality is per se oppressive or that the illegality of an action does not bear upon its oppressiveness. In Elder a complaint was made that Elder had not received the notice of the Board meeting. It was held that since it was not shown that any prejudice was occasioned thereby or that Elder could have bought the shares had he been present, no complaint of oppression could be entertained merely on the ground that the failure to give notice of the Board meeting was an act of illegality. The true position is that an isolated act, which is contrary to law, may not necessarily and by itself support the inference that the law was violated with a mala fide intention or that such violation was burdensome, harsh and wrongful. But a series of illegal acts following upon one another can, in the context, lead justifiably to the conclusion that they are a part of the same transaction, of which the object is to cause or commit the oppression of persons against whom those acts are directed. This may usefully be illustrated by reference to a familiar jurisdiction in which a litigant asks for the transfer of his case from one Judge to another. An isolated order passed by a Judge which is contrary to law will not normally support the inference that he is biased; but a series of wrong or illegal orders to the prejudice of a party are generally accepted as supporting the inference of a reasonable apprehension that the Judge is biased and that the party complaining of the orders will not get justice at his hands.
- It is clear from these various decisions that on a true construction of Section 397, an unwise, inefficient or careless conduct of a Director in the performance of his duties cannot give rise to a claim for relief under that section. The person complaining of oppression must show that he has been constrained to submit to a conduct which lacks in probity, conduct which is unfair to him and which causes prejudice to him in the exercise of his legal and proprietary rights as shareholder. It may be mentioned that the Jenkins Committee on Company Law Reform had suggested the substitution of the word ‘Oppression’ in Section 210 of the English Act by the words ‘unfairly prejudicial’ in order to make it clear that it is not necessary to show that the act complained of is illegal or that it constitutes an invasion of legal rights (see Gower’s Company Law, 4th edn., page 668). But that recommendation was not accepted and the English Law remains the same as in Meyer and in Re H.R. Harmer Ltd.,  WLR 62 as modified in Re Jermyn St. Turkish Baths (supra). We have not adopted that modification in India.
- Whether one looks at the matter from the point of view expressed by this Court in Nanalal Zaver (AIR 1950 SC 172) or from the point of view expressed by the Privy Council in Howard Smith, (1974 AC 821, 831) the test is the same, namely, whether the issue of shares is simply or solely for the benefit of the Directors. If the shares are issued in the larger interest of the Company, the decision to issue shares cannot be struck down on the ground that it has incidentally benefited the Directors in their capacity as shareholders. We must, therefore, reject Shri Seervai’s argument that in the instant case, the Board of Directors abused its fiduciary power in deciding upon the issue of rights shares.”
- Reliance has also been placed on a decision of this Court in Sangramsinh (supra) in which this Court has observed:
“196. The Court in an application under Sections 397 and 398 may also look to the conduct of the parties. While enunciating the doctrine of prejudice and unfairness borne in Section 459 of the English Companies Act, the Court stressed the existence of prejudice to the minority which is unfair and not just prejudice per se.
- The Court may also refuse to grant relief where the petitioner does not come to court with clean hands which may lead to a conclusion that the harm inflicted upon him was not unfair and that the relief granted should be restricted. (See London School of Electronics, Re  Ch. 211).
- Furthermore, when the petitioners have consented to and even benefited from the company being run in a way which would normally be regarded as unfairly prejudicial to their interests or they might have shown no interest in pursuing their legitimate interest in being involved in the company. (See RA Noble & Sons (Clothing) Ltd., Re  BCLC 273).”
- Reliance has also been placed on V.S. Krishnan (supra) in which this Court has observed:
“14. In a number of judgments, this Court considered in extenso the scope of Sections 397 and 398. The following judgments could be usefully referred to:
|(a)||Needle Industries (India)Ltd. and Ors. v. Needle Industries Newey (India)Holding Ltd. and Ors.  3 SCC 333.|
|(b)||M.S. Madhusoodhanan and Anr. v. Kerala Kaumudi (P)Ltd.  9 SCC 204.|
|(c)||Dale and Carrington Investment (P) Ltd. v. P.K. Prathapan  1 SCC 212.|
|(d)||Sangramsinh P. Gaekwad v. Shantadevi P. Gaekwad 2005 (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 be made out:
|(a)||Where the conduct is harsh, burdensome and wrong.|
|(b)||Where the conduct is mala fide and is for a collateral purpose where although the ultimate objective may be in the interest of the company, the immediate purpose would result in an advantage for some shareholders vis-a-vis the others.|
|(c)||The action is against probity and good conduct.|
|(d)||The oppressive act complained of may be fully permissible under law but may yet be oppressive and, therefore, the test as to whether an action is oppressive or not is not based on whether it is legally permissible or not since even if legally permissible, if the action is otherwise against probity, good conduct or is burdensome, harsh or wrong or is mala fide or for a collateral purpose, it would amount to oppression under Sections 397 and 398.|
|(e)||Once conduct is found to be oppressive under Sections 397 and 398, the discretionary power given to the Company Law Board under Section 402 to set right, remedy or put an end to such oppression is very wide.|
|(f)||As to what are facts which would give rise to or constitute oppression is basically a question of fact and, therefore, whether an act is oppressive or not is fundamentally/basically a question of fact.”|
- It was also urged that by inter se transfer between Moral and Mr. R.P. Mittal, no oppression could be caused to Mr. Ashok Mittal. The finding as to undervaluation is also not correct. HQRL could not have raised any objection regarding the aforesaid transaction between Moral and Mr. R.P. Mittal. The claim made by Hillcrest that they were entitled to vote on resolution dated 10.5.2005 is not correct proposition of law. In this regard reliance has been placed upon section 205 of the Companies Act. Learned counsel has also urged that position of shareholders in a company is analogous to that of partners inter se, is wholly inaccurate. Company 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.
- It was contended on behalf of respondents that out of Rs.45 crores that Moral financed the amount raised through Bank loans approximately Rs.33.25 crores which was obtained on the credit worthiness of Mr. Ashok Mittal and against personal guarantees of Mr. R.P. Mittal, and Mr. Ashok Mittal. Mr. R.P. Mittal contributed approximately Rs.6.23 crores to Moral and Mr. Ashok Mittal approximately Rs.5.5 crores. Thus they had substantial interest in the company. Though he held only one share in the company. Mr. Ashok Mittal was one of the Directors of the company. Investment of Rs.28.29 crores was made by Hillcrest and remaining amount of Rs.40 crores was raised by way of bank loans against the personal guarantees of Mr. R.P. Mittal and Mr. Ashok Mittal. The EOGM was held on 4.10.2005. The resolution taken at the EOGM has prima facie been upheld by the court. After taking over, Mr. Ashok Mittal has invested Rs.49.5 crores which consists of Rs.9.5 crores directly invested by Mr. Ashok Mittal to pay out bank dues and other personal creditors and on 13.7.2005 another Rs.40 crores was raised through rights issue. R.P. Mittal group was offered shares in proportion to the shareholding but they declined to take any shares. Mr. Ashok Mittal is the major investor in the company. He holds 92% of the equity shares and Mr. R.P. Mittal owns approximately 8% of the shares. The matter as to taking over of management by Mr. Ashok Mittal in 2009 and rights issue in July, 2009 are the subject matter of separate proceedings and are not required to be gone into in the present matter. The interim arrangement ordered by this Court in Ram Purshottam Mittal v. Hillcrest (supra) is binding. No notice was given to Mr. Ashok Mittal, the then Director of the company. Accordingly, all the three meetings convened under Section 286 of the Companies Act. For this purpose, reliance has been placed on Sri Parmeshwari Prasad Gupta v. Union of India (1973) 2 SCC 543. The resolutions are also violative of section 300 of the Companies Act of 1956. There was repeated violation. The action taken as per the impugned resolutions were oppressive as they involved repeated violation of the mandatory provisions of the Companies Act of 1956 and was done surreptitiously without giving any notice to Mr. Ashok Mittal or Hillcrest. The attempt to convert the statutory status of HQRL vis-à-vis public company, Moral by transferring the shares of Moral in HQRL was against the interest of the preference shareholders of Hillcrest, therefore, it is oppressive. Hillcrest and Mr. Ashok Mittal have also supported the aforesaid submissions.
- Mr. Jaideep Gupta, learned senior counsel to carry home the aforesaid submission has placed reliance on following paragraph of Sangramsinh P. Gaekwad (supra) thus:
“181. The jurisdiction of the Court to grant appropriate relief under Section 397 of the Companies Act indisputably is of wide amplitude. It is also beyond any controversy that the court while exercising its discretion is not bound by the terms contained in Section 402 of the Companies Act if in a particular fact situation, a further relief or reliefs, as the court may seem fit and proper, is warranted. (See Bennet Coleman & Co. v. Union of India [(1977) 47 Comp Cases 92 (Bom)] and Syed Mahomed Ali v. R. Sundaramoorthy; 1958 2 MLJ 259). But the same would not mean that Section 397 provides for a remedy for every act of omission or commission on the part of the Board of Directors. Reliefs must be granted having regard to the exigencie