TaxTMI 
TaxTMI 
TaxTMI 
2009 (7) TMI 768
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....judgment. 2. Although, the 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, to the facts of this case, it is necessary to briefly set out the said facts to appreciate the background in which the said questions have arisen. 3. M/s. Hotel Queen Road (P.) Ltd., which is the proforma Respondent No. 3 in all these Special Leave Petitions, was incorporated as a Special Purpose Vehicle from 23-8-2001 for taking over the assets of Hotel Ashok Yatri Niwas, which was a unit of the India Tourism Development Corporation (hereinafter referred to as 'ITDC'), and to manage the same as part of the, disinvestment process initiated by the Government of India. After the transfer of assets was completed through a Scheme of Arrangement of Demerger between the ITDC and Hotel Queen Road (P.) Ltd., which was sanctioned by the Government of India on 5-7-2002, the Government of India invited bids for the purchase of 99.97 per cent of the total voting equity share capital of Hotel Queen Road (P.) Ltd. The requisite shares in the said Company were sold to the successful bidder, Moral Tra....
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....m exercising voting rights therein. Holding that the requisition for an EGM by Hillcrest Realty was illegal, the learned Single Judge, by his order dated 12-8-2005, further held that any Resolution passed in the said meeting was ineffective and that Hotel Queen Road being a private company, Hillcrest Realty had no voting rights which it could have exercised in the EGM. 6. In August, 2008, Hillcrest Realty filed Suit No. 1832 of 2008 in the Delhi High Court for a declaration that by virtue of certain resolutions passed by Hotel Queen Road (P.) Ltd., on 30-9-2002, the Company had converted itself from a private company to a public company. On an interim application, being I.A. No. 12164 of 2008, filed in the Suit by Hillcrest Realty, the learned Single Judge, upon holding that Hotel Queen Road (P.) Ltd., had fraudulently concealed the fact that it had acquired the status of a public company in the year 2002 and had obtained order of injunction on 12-8-2005 by virtue of such concealment, allowed the application and permitted Hillcrest Realty to vote in the meeting which was scheduled to be held on 16-10-2008. 7. Apart from the above, Hillcrest Realty also filed an application, being....
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....such denial was curable even at the appellate stage and that instead of remanding the said appeals to the learned Single Judge for fresh consideration, the appeals could be taken up for decision by the Division Bench itself. In that context, the Division Bench held that as a cumulative preference shareholder in Hotel Queen Road (P.) Ltd., Hillcrest Realty was entitled to vote at any EGM of its shareholders. The Division Bench took into consideration the statements made on behalf of Hillcrest Realty that since it had not been paid dividend on its preference shares for over two years, it became entitled to exercise voting rights on every resolution placed before the Company at any meeting, in accordance with the provisions of section 87(2) of the Companies Act and discarding the submissions made on behalf of Hotel Queen Road that by virtue of section 90(2) of the aforesaid Act, the provisions of section 87(2) thereof were not applicable to a private company, unless it was a subsidiary of a public company, the Division Bench decided the question on the assumption that Hotel Queen Road (P.) Ltd., was a public company. The latter part of the decision of the Division Bench was, therefore....
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....um and Articles of Association of the Company be and is hereby altered to reflect the above increased authorised share capital of the company. Further resolved that the Board of Directors of the Company be and is hereby authorised to do such acts, deeds, things that may necessary to effect the above resolution." 13. Mr. Sorabjee urged that the difference between the first resolution and the other resolutions would be clear from the very language used in respect of the said resolutions. Mr. Sorabjee submitted that while the first resolution was merely an enabling resolution for the conversion of the Company into a Public Limited Company, the other resolutions became effective immediately. As a result, the authorised share capital of the Company was increased from Rs. 1,00,000 divided into 10,000 equity shares of Rs. 10 each to Rs. 90,00,000 divided into 9,00,000 equity shares of Rs. 10 each and a further resolution was also adopted whereby the Memorandum and Articles of Association of the Company were altered to reflect the increased authorised share capital of the Company. Mr. Sorabjee urged that while the other resolutions took effect instantaneously, the first resolution was me....
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....rabjee urged that the very basis on which the Division Bench vacated the injunction order dated 12-8-2005, passed by the learned Single Judge, was non est, as no fraud had been perpetrated by Hotel Queen Road (P.) Ltd., since the conversion resolution of 30-9-2002, was not a final decision which would have had the effect of converting Hotel Queen Road (P.) Ltd. into a public limited company with immediate effect. 15. Mr. Sorabjee submitted that the approach of the Division Bench of the High Court treating Hotel Queen Road (P.) Ltd., to be a public company was wholly erroneous leading to the peculiar situation which had been created in the management of the company, by giving Hillcrest Realty, a preference shareholder, the right to vote at the meetings of the company. Mr. Sorabjee urged that since the very basis, of the order passed by the Division Bench was fallacious, the same was liable to be set aside and the management of Hotel Queen Road (P.) Ltd., was liable to be restored to the equity shareholder Directors. 16. The submissions of Mr. Sorabjee were strongly opposed by Mr. Jayant Bhushan, learned Senior Advocate appearing for M/s. Hillcrest Realty Sdn. Bhd. Learned counsel ....
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....ntained in his office. 19. Mr. Jayant Bhushan also pointed out that the Form 23 which had been submitted to the Registrar of Companies makes reference to section 31 of the aforesaid Act which relates to the alteration of the Articles of the Company, which lent strength to the submission that a positive decision had been taken to convert the company into a public limited company and that the said resolution was not an enabling provision as was contended by Mr. Sorabjee. Learned counsel submitted that the same would be borne out from the two subsequent resolutions which with immediate effect increased the share capital and the number of members beyond 50, which simultaneously took the company out of the definition of "private company" as defined in section 3(1)(iii) of the Companies Act, 1956. The Memorandum and Articles of Association were also altered with immediate effect to reflect the increased authorised share capital of the company which made it abundantly clear that the first resolution was, in fact, a definitive decision to convert Hotel Queen Road (P.) Ltd., into a public limited company. It was urged that once a decision was taken to convert the company into a public limi....
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....re so because it was the case of Hotel Queen Road that the said company was a private company and that as a result, the provisions of section 87(2)(b) of the Companies Act were not applicable to the company, being barred under section 90(2) thereof. It was submitted that having come to a finding that a fraud had been perpetrated by Hotel Queen Road in obtaining an order of injunction by suppression of material facts, the Division Bench erred in not dismissing the suit filed by Hotel Queen Road and only vacating the interim order passed on 12-8-2005. 22. Learned counsel submitted that the Division Bench of the High Court ought not to have left the decision as to the company's status as a public-company or a private company to the learned Single Judge. Instead, it should have decided the same and should have dismissed the suit. Referring to the oft-repeated observation of Lord Denning in Lazarus Estates Ltd. v. Beasley 1956 (1) All E.R. 341, Mr. Jayant Bhushan submitted that no judgment of a Court could be allowed to stand if it had been obtained by fraud as fraud unravels everything. Reliance was also placed on the decision of this Court in A.V. Papayya Sastry v. Government of Andh....
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....e for the legal fiction was that if the company is managed in such a manner that no profits are being made and no dividend is, therefore, declared or paid to preference shareholders, such preference shareholders would then be entitled to have voting rights on every resolution for the selecting a better management. Learned counsel referred to and relied on a decision of the Chancery Division in Bradford Investments Ltd. [1991] BCLC 224, where a similar question arose regarding the right of preference shareholders to vote at a General Meeting of the Company on account of non-declaration of dividend. On a consideration of the relevant provisions of the Companies Act, 1985 (English Act), it was held that the deeming provisions contained in Article 3(b)(3) regarding "dividend deemed to be payable" meant that the dividend was deemed payable whether or not there were profits out of which it could be paid. Consequently, as the dividend on the preference shares was in arrears, the preference shareholders were entitled to vote. 26. Regarding the offer made on behalf of the Hotel Queen Road to pay the dividend to the preference shareholders, Mr. Jayant Bhushan contended that such offer to ma....
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....disturbed in a proceeding under Article 136 of the Constitution. He urged that the suppression resorted to by Hotel Queen Road was sufficient for the Division Bench of the High Court to vacate the interim order passed earlier and even to dismiss the suit. 30. In reply to Mr. Jayant Bhushan's submissions, Mr. Sorabjee, while reiterating his earlier submissions, joined issue on the question of payment of dividend due by private arrangement other than from out of the profits of the company, as envisaged under section 205 of the Companies Act. Mr. Sorabjee contended that in Bradford Investments Ltd.'s case (supra) no occasion had arisen to consider a statutory provision similar to section 205 of the Companies Act, 1956 (Indian Act) and reliance was placed only on one of the Articles in the Articles of Association and was, therefore, clearly distinguishable from the facts of this case. Referring to the decision of the Chancery Division in Walters' Deed of Guarantee in Walters' 'Palm' Toffee, Limited v. Walters [1932 W. 3978], Mr. Sorabjee submitted that in the said decision it had been held that dividend guaranteed to preference shareholders could also be paid by the guarantor, who wou....
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....y, and based upon such presumption proceeded further to hold that on account of non-payment of dividend on its cumulative preference shares for two years, Hillcrest Realty became entitled to vote at the meeting, of the company under the provisions of section 87(2)(b) of the Companies Act, 1956. 33. Although, as pointed out by Mr. Sorabjee, the language of the first resolution was different from the language of the two following resolutions, and at first glance appears to militate against each other, on a closer look at the three resolutions taken one after the other, it is not difficult to discern that they were all part of the same thinking process or meeting of minds of the shareholders. Without the first resolution being accepted as a final decision taken by the company to convert itself from a private company into a public company, there could be no occasion for the subsequent two resolutions to have been passed. 34. 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 12-8-2005, passed in Suit No. 992 of 2005. In our view, apar....
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....acter requiring the subsequent resolutions to be passed regarding alteration of the share capital. 36. Whichever way we look at the three resolutions passed one after the other on 30-9-2002, it appears to have been the intention of the company to convert itself from a private company to a public company and that the same was effected by the three resolutions passed on 30-9-2002. 37. Then again, the offer to pay dividends from a private source and not out of the company's profits, is not contemplated under section 205 of the Companies Act. The decision referred to by Mr. Sorabjee in Walters' Deed of Guarantee in Walters' "Palm" Tofee, Limited's case (supra) had not been required to take into consideration a provision similar to section 205 of the Companies Act, 1956. The said decision is, therefore, of no help to the petitioners' case, particularly when the language of the section is clear and unambiguous. The moment the resolutions were passed by the company on 30-9-2002, 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 Rea....