2009 Supreme(SC) 1262

Supreme Court of India
THE HONOURABLE MR. JUSTICE ALTAMAS KABIR & THE HONOURABLE MR. JUSTICE CYRIAC JOSEPH
Ram Parshotam Mittal & Another
Versus
M/s Hillcrest Realty Sdn.Bhd. & Ors. Etc.
SPECIAL LEAVE PETITION (CIVIL)NOS.1069-1071 OF 2009 WITH SPECIAL LEAVE PETITION (CIVIL) NOS.9212-9214 of 2009
Decided On : 20-07-2009

MAIN POINTS
A private company gets converted into public company on its membership increasing 50, u/s 3(1)(iii).
As soon as a company passes resolution to convert into public company and takes steps accordingly the conversion comes into effect immediately by operation of Section 87(2)(b) and 44.
As soon as a company becomes public company, the preference shareholders acquire voting rights by operation of Explanation to Section 87(2)(b).
Dividend cannot be paid out of private sources.

Headnote:(a) Companies Act, 1956 – Section 3(1)(iii) – Number of members of the Company reaching 134 – Company losing its character as private company – Passing the required resolution and submitting the required statement instead of prospectus to the Registrar of Companies – Three resolutions interrelated – No occasion for last two resolutions in absence of the resolving to convert into a public company – Alteration in the register of Registrar of Companies only reflects status – Registrar has no authority to decide the status – Company became public company immediately on taking actions consequent to the resolutions on 30-9-2002 by operation of law – Section 87(2)(b) and 44 – Hillcrest Realty, a cumulative preference shareholder, acquired voting rights immediately by operation of Explanation to Section 87(2)(b). (Para 35, 36, 37, 38)

       1981 (1) All ER 533; 1956 (1) All E.R. 341; (2007) 4 SCC 221; (1994) 1 SCC 1; (1996) 3 SCC 310; (2005) 4 SCC 149; (1991) BCLC 224 – Referred

       (b) Companies Act, 1956 – Section 205 – Dividend – To be paid out of Company’s profits, not from some private source. (Para 37)

       1932 W. 3978 – Distinguished

       Facts of the case:

       These Special Leave Petitions mainly involve the interpretation and application of Section 87(2)(b) and Section 90(2) and other connected provisions of the Companies Act, 1956.

       M/s. Hotel Queen Road Pvt. Ltd, was incorporated as a Special Purpose Vehicle for taking over the assets of Hotel Ashok Yatri Niwas, which was a unit of the India Tourism Development Corporation, and to manage the same as part of the disinvestment process initiated by the Government of India.

       The Government of India invited bids for the purchase of 99.97% of the total voting equity share capital of Hotel Queen Road Pvt. Ltd. The requisite shares in the said Company were sold to the successful bidder, Moral Trading and Investment Ltd.,

       A meeting of the Board of Directors of the Company was convened in which Mr. Ram Parshotam Mittal, Mr. Ashok Mittal, Mrs. Sarla Mittal and Mr. C.S. Paintal were appointed as Additional Directors and in December, 2002, their appointment was approved at a meeting of the Company. A further resolution was passed to increase the share capital of the Company from Rs.90 lakhs to Rs.33 crores. The additional capital was divided into 71 lakh equity shares of Rs.10/- each and 25 lakh preference shares of Rs.100/-each. The Articles of Association of Hotel Queen Road Pvt. Ltd. were amended to exclude preference shareholders from having any voting rights.

       Subsequently, M/s. Hillcrest Realty (a Malaysian company) purchased 23,65,000 redeemable preference shares from Hotel Queen Road Pvt. Ltd. bearing interest at the rate of 8.5% per annum. The Board of Directors of the Company approved the allotment in favour of Hillcrest Realty on 5th May, 2003, subject to the condition that the allotment would not carry any voting rights. In July, 2003, Hillcrest Realty purchased another 4,64,290 preference shares on similar terms.

       In June, 2005, Hillcrest Realty served a notice on Hotel Queen Road Pvt. Ltd. asking the Company to convene an Extraordinary General Meeting (EGM) to remove Mr. Ram Parshotam Mittal and Mrs. Sarla Mittal as Directors of Hotel Queen Road Pvt. Ltd. and to appoint the nominees of Hillcrest Realty in their place. Inasmuch as, Hotel Queen Road Pvt. Ltd. declined to hold such a meeting, Hillcrest Realty issued another notice for holding an EGM on 4th August, 2005 for the same purpose.

       Hotel Queen Road Pvt. Ltd. thereupon filed Suit before the Delhi High Court in its original jurisdiction for an injunction to restrain Hillcrest Realty from going ahead with the proposed meeting and from exercising voting rights therein.

       The Single Judge held that the requisition for an EGM by Hillcrest Realty was illegal.

       In August, 2008, Hillcrest Realty filed Suit in the Delhi High Court for a declaration that by virtue of certain resolutions passed by Hotel Queen Road Pvt. Ltd. on 30th September, 2002, the Company had converted itself from a private company to a public company.

       The Single Judge allowed the application and permitted Hillcrest Realty to vote in the meeting which was scheduled to be held on 16th October, 2008.

       Being aggrieved by the said two orders passed by the learned Single Judge in Suit No.1832 of 2008 filed by Hillcrest Realty and Suit No.992 of 2008 filed by Hotel Queen Road Pvt. Ltd., Hotel Queen Road Pvt. Ltd., through Mr. Ram Parshotam Mittal and others, filed FAO(OS)Nos.426 and 440 of 2008 before the Division Bench of the Delhi High Court. Hillcrest Realty Sdn. Bhd. had earlier filed FAO(OS)No.282 of 2005 against the order dated 12th August, 2005, which had been passed by the learned Single Judge in Suit No.992 of 2005 filed by Hotel Queen Road Pvt. Ltd.

       All the three appeals were disposed of by a common judgment on 14th January, 2009. The Division Bench set aside the order dated 12th August, 2005, passed by the learned Single Judge in I.A.No.5505 of 2005 and dismissed the same, while holding further that the Suit itself could not be dismissed outright on such score.

       The Division Bench directed that Hillcrest Realty would thenceforth be permitted to exercise voting rights in all meetings of Hotel Queen Road, subject to the decision at the trial stage regarding the status of the company. While disposing of the appeals, the Division Bench awarded costs of Rs.19,76,000/-in favour of Hillcrest Realty Sdn. Bhd. and Rs.5,94,000/-in favour of Mr. Ashok Mittal, as per statements submitted by them, which was to be paid within a period of four weeks from the date of the order.

       Finding of the Court:

       The Division Bench of the High Court reached the right conclusion.

       Result:

       SLPs dismissed.