2013 (9) TMI 941 - HC - Companies Law

Board Resolutions Invalidated for Non-Compliance | Supreme Court Upholds Shareholders' Rights

The High Court invalidated Board resolutions due to non-compliance with statutory provisions and the participation of interested directors. The Supreme ... Validity of CLB Order - public limited company or private limited company - allotment of shares - Two conclusions can be drawn from the above discussion. The first is that there is a clear violation of Section 108 of the Act. HQR did not have the share certificates along with the duly executed share transfer forms when a decision was taken at the Board meeting held on 10th May, 2005 to approve the transfer of shares from Moral to Mr. R.P. Mittal. The said decision therefore is invalid. The second conclusions that Mr. R.P. Mittal has, prima facie, made a false statement in his affidavit dated 5th March, 2013 and counter affidavit dated 30th April, 2013 before this Court that the share certificates pledged with IOB were returned to him on 23rd June, 2003. This Court is, therefore, inclined to institute suo motu proceedings under Section 340 of the Code of Criminal Procedure, 1973 ('CrPC') against Mr. R.P. Mittal for making a false statement before the Court on affidavit. Allotment/transfer of share - Voting rights not given - Held that:- independent of the prima facie finding of the Supreme Court that HQR is not a private but a public limited company, the Court finds that the impugned order dated 31st January 2006 of the CLB cannot be sustained in law. Pursuant to the orders of the DB as confirmed by the Supreme Court, the management of HQR is presently with the appellants in Co. Appeal (SB) No. 4 of 2006. They are also presently the majority shareholders. In light of the changed circumstances, the Court directs that status quo will be maintained as regards the BoD as well as the shareholding of HQR till such time the suits concerning the status of HQR as a private or public limited company are finally decided. The parties are, however, at liberty to seek any variation or modification of this direction from the court in which the suits are pending. Issues Involved:1. Disinvestment and share transfer of ITDC's hotel property.2. Financial mismanagement and oppression allegations.3. Validity of Board resolutions and share allotments.4. Voting rights of preference shareholders.5. Compliance with statutory provisions (Sections 286, 300, 108 of the Companies Act).6. Prima facie status of HQR as a public limited company.7. Alleged false statements and legal consequences.Detailed Analysis:1. Disinvestment and Share Transfer of ITDC's Hotel Property:The Government of India decided to disinvest its shares in the India Tourism Development Corporation (ITDC) on 5th July 2002, leading to the transfer of the Indraprastha Hotel property to Hotel Queens Road Pvt. Ltd. (HQR). Moral Trading & Investment Ltd. (Moral) became the successful bidder and acquired the shares through a Share Purchase Agreement (SPA) dated 8th October 2002.2. Financial Mismanagement and Oppression Allegations:Hillcrest and Mr. Ashok Mittal filed a petition challenging the allotment/transfer of shares effected on 27th July 2004, 7th January 2005, and 10th May 2005, alleging financial mismanagement and oppression by Mr. R.P. Mittal and Mrs. Sarla Mittal. The CLB dismissed these allegations, stating that the petitioners failed to substantiate their claims.3. Validity of Board Resolutions and Share Allotments:The CLB upheld the validity of the Board resolutions dated 27th July 2004, 7th January 2005, and 10th May 2005. However, the High Court found that the resolutions were invalid due to non-compliance with Section 286, which mandates notice to directors. The resolutions were also found to violate Section 300, as interested directors participated in the decisions.4. Voting Rights of Preference Shareholders:Hillcrest, holding Cumulative Redeemable Preference Shares (CRPS), claimed voting rights under Section 87(2)(b) due to non-payment of dividends for two years. The Supreme Court recognized Hillcrest's voting rights, stating that dividends must be paid from profits as per Section 205, which HQR failed to do.5. Compliance with Statutory Provisions (Sections 286, 300, 108 of the Companies Act):The High Court found violations of Sections 286, 300, and 108. Section 286 was violated as no notice was given to Mr. Ashok Mittal for Board meetings. Section 300 was violated as interested directors participated in decisions. Section 108 was violated as share certificates were not tendered with the share transfer forms at the time of the Board meeting approving the transfer.6. Prima Facie Status of HQR as a Public Limited Company:The Supreme Court concluded that HQR had converted into a public limited company on 30th September 2002. This prima facie finding changed the basis on which the CLB proceeded, recognizing Hillcrest's voting rights under Section 87(2)(b).7. Alleged False Statements and Legal Consequences:Mr. R.P. Mittal was found to have made a false statement regarding the return date of share certificates pledged with Indian Overseas Bank (IOB). The Court directed the Registrar General to file a complaint against Mr. R.P. Mittal for making a false statement, initiating proceedings under Section 340 CrPC.Conclusion and Directions:The impugned decision of the CLB upholding the Board resolutions was set aside. The status quo regarding the Board of Directors and shareholding of HQR was directed to be maintained until the suits concerning HQR's status as a private or public limited company are decided. The Court also directed the Registrar General to file a complaint against Mr. R.P. Mittal for making a false statement.