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High Court of Delhi
S. MURALIDHAR, J.
Hillcrest Realty SDN BHD & Others
Versus
Hotel Queen Road Pvt. Ltd. & Others
CO.A. (SB) Nos. 4, 5 & 10 of 2006
Decided on : 31-05-2013.
The Court set aside the order of the Company Law Board (CLB) and allowed the appeals filed by Hillcrest Realty Sdn. Bhd. (Hillcrest) and Mr. Ashok Mittal. The Court held that the CLB's decision upholding the validity of the Board resolutions dated 27th July 2004, 7th January 2005, and 10th May 2005 could not be sustained in law. The Court also held that the directions issued by the CLB in para 50 of the impugned order regarding the allotment of shares to Mr. Ashok Mittal were also set aside. The Court further directed that the status quo would be maintained as regards the Board of Directors (BoD) as well as the shareholding of Hotel Queen Road Pvt. Ltd. (HQR) till such time the suits concerning the status of HQR as a private or public limited company were finally decided.
Fact of the Case:
Hillcrest and Mr. Ashok Mittal filed Co.Pet. No. 64 of 2005 on 22nd August 2005 against HQR, Mr. R.P. Mittal, and Mrs. Sarla Mittal in the CLB challenging the allotment/transfer of shares effected on 27th July 2004, 7th January 2005, and 10th May 2005. Hillcrest and Mr. Ashok Mittal contended before the CLB that there had been financial mismanagement of HQR by Mr. R.P. Mittal and Mrs. Sarla Mittal. Secondly, it was contended that Hillcrest had invested in CRPS on the understanding that HQR would remain a subsidiary of Moral and that in the event of HQR failing to pay any dividend for two years, Hillcrest would be entitled to exercise its voting rights on all resolutions. Thirdly, the allotments made on 27th July 2004, 7th January 2005, and 10th May 2005 were challenged on the ground that there was no notice under Section 286 of the Act to Mr. Ashok Mittal, who was a Director of HQR. Fourthly, the allotments were done by the remaining Directors without disclosing their obvious interest and this was in violation of Section 300 of the Act. Fifthly, the allotments were done without any valuation of the equity shares of HQR. Sixthly, no money was paid for the transfer of shares. Seventhly, the transfer would bring about a situation where HQR would no longer remain a subsidiary of Moral and thus would deprive Hillcrest of any voting right under Section 87(2) (b) of the Act.
Finding of the Court:
The Court found that the CLB's decision upholding the validity of the Board resolutions dated 27th July 2004, 7th January 2005, and 10th May 2005 could not be sustained in law. The Court also found that the directions issued by the CLB in para 50 of the impugned order regarding the allotment of shares to Mr. Ashok Mittal were also set aside. The Court further directed that the status quo would be maintained as regards the Board of Directors (BoD) as well as the shareholding of Hotel Queen Road Pvt. Ltd. (HQR) till such time the suits concerning the status of HQR as a private or public limited company were finally decided.
Issues: 1. Whether the CLB's decision upholding the validity of the Board resolutions dated 27th July 2004, 7th January 2005, and 10th May 2005 could be sustained in law. 2. Whether the directions issued by the CLB in para 50 of the impugned order regarding the allotment of shares to Mr. Ashok Mittal were valid. 3. Whether the status quo should be maintained as regards the Board of Directors (BoD) as well as the shareholding of Hotel Queen Road Pvt. Ltd. (HQR) till such time the suits concerning the status of HQR as a private or public limited company were finally decided.
Ratio Decidendi: The Court held that the CLB's decision upholding the validity of the Board resolutions dated 27th July 2004, 7th January 2005, and 10th May 2005 could not be sustained in law because: * The CLB had proceeded on the basis that HQR was a private limited company, but the Supreme Court had prima facie found that HQR was a public limited company. * The CLB had failed to comply with the mandatory provision of notice to the Director Mr. Ashok Mittal in terms of Section 286 of the Act. * The CLB had erred in holding that the allotment of shares to Mr. Ashok Mittal and CRPS to Hillcrest would also be invalid if the Board resolutions approving allotments to Mr. R.P. Mittal, Mrs. Sarla Mittal, and Pondy, and the inter se transfers were invalid. * The CLB had failed to consider the fact that Section 300 of the Act was not complied with when decisions were taken at the Board meetings held on 27th July 2004, 7th January 2005, and 10th May 2005 to allot shares to Moral and thereafter to Mr. R.P. Mittal and Mrs. Sarla Mittal and finally to permit the transfer of shares from Moral to Mr. R.P. Mittal. * There had been a serious violation of Section 108 of the Act, which mandates that share certificates must actually be tendered along with the share transfer forms duly executed by the transferor in favour of the transferee at the time of the Board approving the transfer of shares.
Final Decision: The Court set aside the order of the Company Law Board (CLB) and allowed the appeals filed by Hillcrest Realty Sdn. Bhd. (Hillcrest) and Mr. Ashok Mittal. The Court also directed that the status quo would be maintained as regards the Board of Directors (BoD) as well as the shareholding of Hotel Queen Road Pvt. Ltd. (HQR) till such time the suits concerning the status of HQR as a private or public limited company were finally decided.
1. These are three appeals under Section 10(F) of the Companies Act, 1956 arising out of the order dated 31st January 2006 passed by the Company Law Board (‘CLB’) in Company Petition No. 64 of 2005. Background facts
2. The background facts are that the Government of India (‘GoI’) took a policy decision on 5th July 2002 to disinvest its shares in the India Tourism Development Corporation (‘ITDC’) which owns various hotel properties. One of these hotel properties was the Indraprastha Hotel formerly known as Ashok YatriNiwas. In terms of the approved Scheme of demerger, the hotel property was transferred to Hotel Queens Road Pvt. Ltd. (‘HQR’) which was created as a special purpose to enable the disinvestment. The paid up capital of HQR was Rs.90 lakhs comprising of 9 lakh equity shares of Rs.10 each/-. GoI held 89.97% shares, the Indian Hotels Company Ltd. (‘IHCL’) held 10% and balance shares were held by others.
3. Go I invited bids for sale of its shares in HQR. Moral Trading & Investment Ltd. (‘Moral’) a public limited company was the successful bidder. By a Share Purchase Agreement (‘SPA’) dated 8th October 2002 Moral acquired the shares of GoI and IHCL. The amount involved in the acquisition was Rs.45 crores. Of this Rs.33.37 crores was funded by borrowing/loans from banks. With 99.97% equity shares of HQR being held by Moral, HQR became Moral’s subsidiary. Moral’s shares were listed on the Delhi Stock Exchange.
4. Mr. R.P. Mittal and his family members held the controlling interest in Moral. The case of Mr. Ashok Mittal, the younger brother of Mr.R.P. Mittal, was that the balance sum for the acquisition of shares came from contributions by both of them. Mr. Ashok Mittal claimed that while he invested Rs.5.50 crores, Mr. R.P. Mittal brought in Rs.6.23 crores. Mr.R.P. Mittal and his wife Mrs.Sarla Mittal were appointed Additional Directors of HQR on 8th October 2002.
5. On 21st December 2002, 13 shares of Moral in HQR were transferred to 7 other members. 2 shares were transferred to Mr.R.P. Mittal, 3 shares to Mrs.Sarla Mittal and 1 share to Mr. Ashok Mittal.
6. Subsequently in the Annual General Meeting (‘AGM’) of HQR held on 28th December 2002, Mr.R.P. Mittal and Mrs.Sarla Mittal were appointed as whole-time Directors. The Memorandum of Association (‘MoA’) of HQR was altered to increase its authorised share capital to Rs.33 crores consisting of Rs.80 lakhs share of Rs.8/-each and 28 lakhs, 8.5% Cumulative Redeemable Preference Shares (‘CRPS’) of Rs.100/-each (Rs.25 lakhs). On 28th June 2003, the authorised capital was again altered by increasing the CRPS to Rs.30 crores.
7. Hillcrest Realty SdnBhd (‘Hillcrest’), the company registered in Malaysia was allotted 28,29,290 CRPS in HQR in two spells i.e. on 5th May 2003 and 19th July 2003 against a total investment of Rs.28.29 crores. To fund the redevelopment of the hotel, a term loan of Rs.40 crores was raised from Indian Overseas Bank (‘IOB’). The loan was secured by the joint personal guarantees of Mr.R.P. Mittal, Mrs.Sarla Mittal and Mr. Ashok Mittal, the collateral security of personal assets of Mr. R.P. Mittal and Mrs.Sarla Mittal and the corporate guarantee of Moral.
8. The subject matter of the disputes between the parties concerns the following allotments of equity shares. On 27th July 2004, 23,90,000 equity shares of HQR were allotted to Moral. On 7th January 2005, a further 41,51,648 shares were allotted to Moral. On the same day 1,10,000 shares were allotted to Mr. R.P. Mittal and 4,50,000 shares to Mrs.Sarla Mittal. On 10th May 2005, a further 10 lakhs equity shares of HQR were allotted to Pondi Metals and Restructuring Metals Pvt. Ltd. (‘Pondi’) (managed by Mr. R. P. Mittal at the relevant time). These allotments were stated to be made at par. On 10th May 2005 a transfer of 32,88,181 equity shares of HQR held by Moral in favour of Mr. R.P. Mittal was registered. At a Board meeting held on 4th July 2005, Mr.Sumaj Jain and Mr.Narinder Pal Gupta were appoi
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