TaxTMI 
TaxTMI 
2013 (9) TMI 941
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.... Pvt. Ltd. ('HQR') which was created as a special purpose to enable the disinvestment. The paid-up capital of HQR was Rs.90 lakh 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. GoI 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 crore. Of this Rs. 33.37 crore 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 crore, Mr. R.P. Mittal brought in Rs. 6.23 crore. Mr. R.P. Mittal and his wife Mrs. Sarl....
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....d unpaid, in case of CRPS, for an aggregate period of not less than two years preceding the date of commencement of the meeting. As CRPS of HQR had been allotted on 5th May, 2003 and no dividend had been paid thereon for two continuous years, Hillcrest asserted that its right to vote had accrued on 5th May, 2005. Accordingly it sent a requisition for an Extraordinary General Meeting ('EGM') by a notice dated 1st June, 2005 proposing the removal of Mr. R.P. Mittal and Mrs. Sarla Mittal as Directors and appointing two other Directors in their place. However since the EGM as requisitioned was not convened, Hillcrest issued another notice on 8th July, 2005 and convened an EGM on 4th August, 2005. 10. At that stage HQR filed a suit CS (OS) No. 992 of 2005 in this Court on 23rd July, 2005 challenging the EGM notices. According to Hillcrest it was only on the reading of plaint and suit it was learnt of the allotments made on 27th July, 2004, 7th January, 2005 and 10th May, 2005 in favour of Moral, Pondi and Mr. R.P. Mittal and Mrs. Sarla Mittal and the inter se transfer of shares from Moral to Mr. R.P. Mittal all of which according to Hillcrest was done fraudulently, without any notice o....
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....ement. (iii) Hillcrest and Mr. Ashok Mittal could not furnish any proof of any 'understanding' that Moral would continue to be the holding company of HQR and Hillcrest would be entitled to voting on preference shares in the event dividend was not paid for two years. No presumption could be drawn from the letters dated 30th April, 2003 and 21st July, 2003 written by Hillcrest to Mr. R.P. Mittal that it invested in HQR on the understating that HQR would continue to remain a subsidiary of Moral. Clause 9.5 of the SPA did not convey that Moral would continue as a holding company of HQR. (iv) The transfer of HQR shares by Moral to Mr. R.P. Mittal and Mrs. Sarla Mittal was a transfer "within the same group" and could not be held to be in breach of the assignment Clause 13.4 of the SPA. (v) There was nothing to show that Hillcrest sought payment of dividend either in the first year or in the second year. It also declined the offer made by HQR both before the High Court and before the CLB to pay dividend dues for the two years. Thus the sole object of Hillcrest was to gain control of HQR by removing Mr. R.P. Mitt....
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....not attend any of the said meetings for want of notice. If the principle that meetings could not be held without notice was to be applied uniformly to all Board meetings then neither Hillcrest not Mr. Ashok Mittal could claim to be shareholders of HQR, disentitling them from prosecuting the petition. Consequently, the CLB was not inclined to apply the said principle to any of the impugned Board meetings and declare that the allotment of shares and registration of transfer of shares was invalid on account of non issue of notice to Mr. Ashok Mittal for the Board meetings. (ix) If Section 300 regarding the interested Directors not participating or approving the registration of shares in favour of Mr. R.P. Mittal were to apply, then even the transfer of one share in favour of Mr. Ashok Mittal approved in the Board meeting held in December, 2002 would also have to be invalid. The complaint about Moral transferring shares of HQR without consideration and depositing it against the loan given by Mr. R.P. Mittal could not be examined in the present case. Consequently, the registration of transfer of shares was not oppressive to Hillcrest or against the provisions o....
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....sfer of shares. Consequently, the shares allotted to Mr. R.P. Mittal and Mrs. Sarla Mittal should be subject to an additional allotment to Mr. Ashok Mittal. Of the total loan Rs.11.73 crore given by both Mr. R.P. Mittal and Mr. Ashok Mittal the loan of Rs.5.5 crore given by Mr. Ashok Mittal constituted 46.9%. Consequently, Mr. R.P. Mittal should transfer 46.9% of 32,88,181 shares transferred to him by Moral to Mr. Ashok Mittal and this worked out to 15,42,156 shares. The consideration would be Rs.20 per share at which Moral transferred shares to Mr. R.P. Mittal. Since the consideration for such transfer was deposited against loan account of Mr. R.P. Mittal, the consideration for 15,42,156 shares to Mr.Ashok Mittal should be adjusted by debiting Mr. Ashok Mittal's account and crediting the personal account of Mr. R.P. Mittal. This is, however, subject to Mr. Ashok Mittal making a request to Mr. R.P. Mittal in writing referring to the CLB's directions and subject to availability of credit in the account of Mr. Ashok Mittal with Moral. Within 15 days of such request being made in writing, the transfer should be registered in the register of members of HQR. (x....
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....02 for converting HQR into a public limited company. Accordingly, Hillcrest contended that Mr. R.P. Mittal had played a fraud with the Court while obtaining the interim order dated 12th August, 2005 in CS (OS) No. 992 of 2005 whereby it was held that Hillcrest could not invoke Section 87(2) of the Act to claim voting rights. On the basis of the above documents Hillcrest filed CS (OS) No. 1832 of 2008 on 30th August, 2008 in this Court for permanent injunction, declaration and cancellation of the Board resolutions and the allotment of shares in favour of Moral, Mr. R.P. Mittal and Mrs. Sarla Mittal. On 3rd October, 2008, Hillcrest filed IA No. 12638 of 2008 under Order XXXIX Rule 4 CPC in CS (OS) No. 992 of 2005 seeking vacation of the interim order dated 12th August, 2005. The said application was allowed on 24th October, 2008 and the interim order dated 12th August, 2005 was vacated. An order was passed on 15th October, 2008 in IA No. 12164 of 2008 in CS (OS) No. 1832 of 2008 by the learned Single Judge observing that had the true facts been placed before the Court, the fate of the case would have been different as in the case of a public limited company, the right could have accr....
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....ssed by the Supreme Court by a judgment dated 20th July, 2009 in Ram Parshotam Mittal v. Hillcrest Realty Sdn. Bhd [2009] 94 SCL 120. The main plank of submission of Mr. R.P. Mittal and Mr. Sarla Mittal in their appeal was that there were three resolutions passed on the same date i.e. 30th September, 2002. The first converting HQR into a public limited company, the second increasing the authorised share capital from Rs.1 lakh to Rs.90 lakhs divided into 9 lakhs equity shares of Rs.10 each and the third altering the MoA and AoA to reflect the increased authorised share capital. It was contended that the language of the first resolution was different from those of the other two in that the first was only an enabling resolution whereas the other two came into effect immediately. Accordingly, it was contended that the Division Bench committed a serious error in treating HQR as a public limited company and in giving voting rights to Hillcrest without determining the real issue on whether HQR was a public limited company and leaving it open for decision of the learned Single Judge. 20. The Supreme Court in para 69 of its judgment (SCC) negatived the above contention and concluded that t....
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....lic 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. 80. 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....
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....the above order which was dismissed as withdrawn on 20th April, 2010. 24. As a result of the above rights issue, the present shareholding pattern of HQR is that Hillcrest holds 28,29,00,000 shares (59.82%), Mr. R.P. Mittal holds 1,837,694 shares (3.89%), Moral holds 4,151,648 shares (8.78%), Mrs. Sarla Mittal holds 375,003 shares (0.79%), Mr. Ashok Mittal holds 11,802,160 shares (24.95%) and the others holds 839,313 shares (4.41%). 25. This Court has heard the submissions of Mr. Jayant Bhushan learned Senior counsel and Mr. Arun Kathpalia, learned Advocate appearing for Hillcrest and Mr. Ashok Mittal and Mr. Aman Lekhi and Mr.Vibhu Bakhru, learned Senior counsel for Mr. R.P. Mittal and Mrs. Sarla Mittal. Effect of the judgment of the Supreme Court 26. The facts that have emerged after the impugned decision of the Company Law Board ('CLB') dated 31st January 2006 and which have led to further litigation between the parties culminating in the decision of the Supreme Court in Ram Parshotam Mittal (supra) has considerably changed the very basis on which the CLB proceeded. 27. The additional facts were brought on record by Mr. Ashok Mittal by filing CA No. 378 of 2009 in Co.A.(SB) ....
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....2,88,181 equity shares of HQR held by Moral in favour of Mr. R.P. Mittal as well as registration of such shares by HQR in favour of Respondent No.1 and for a direction to restore the shareholding pattern of HQR as on 1st April, 2004. 30. The above documents show that the BoD of HQR followed by its EGM had already resolved to convert into a public limited company. The fact of the aforementioned resolutions was suppressed by Mr. R.P. Mittal from the Court as well as the CLB. The above developments led to the order of 15th October, 2008 passed by the learned Single Judge in IA No. 12164 of 2008 in CS (OS) No. 1832 of 2008 followed by the further order dated 24th October, 2008 in IA No. 12638 of 2008 in CS (OS) No. 992 of 2005 vacating the interim stay granted by the learned Single Judge on 12th August, 2005 in IA No. 5505 of 2005 in CS (OS) No. 992 of 2005. 31. Both the learned Single Judge as well as the Division Bench ('DB') of the High Court as well as the Supreme Court have come to the prima facie conclusion that HQR had converted into a public limited company and that with the allotment of shares to 134 persons on 30th September, 2002 HQR lost its private character requiring th....
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....ereby depriving Hillcrest of its voting rights in terms of Section 87(2) (b) read with Section 90 (2) of the Act. That issues academic as of now. If indeed, HQR prima facie a public limited company, Section 90 (2) would not apply and Hillcrest would anyway have voting rights under Section 87 (2) (b) (i) of the Act. 34. Another issue that appears to have been decided in the judgment of the Supreme Court concerns the non-payment of dividend. The Supreme Court has negatived the plea of Mr. R.P. Mittal that the dividend could have been paid from other sources even when HQR was not making any profits. It was held that the wording of Section 205 of the Act was unambiguous and that dividend could be paid only from the profits of HQR. Admittedly HQR was not making any profits for a period of two years after Hillcrest was allotted CPRS of HQR. The right of Hillcrest as a holder of CPRS to exercise its voting rights has, therefore, been recognized by the Supreme Court. The assertion to the contrary by Mr. R.P. Mittal and Mrs. Sarla Mittal in their written submissions is untenable. The CLB had drawn an adverse inference against Hillcrest and Mr. Ashok Mittal for refusing to accept the divide....
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....ion 286 of the Act. The other principle is that no party can be allowed to take advantage of its own wrong [see Dale & Carrington Investment (P) Ltd v. PK Prathapan JT [2004 54 SCL 601 (SC). Once it was found by the CLB that there was no notice to Mr. Ashok Mittal for any of the board meetings, none of the resolutions could be held to be valid. 37. An attempt has been made by Mr. R.P. Mittal to show that Mr. Ashok Mittal had, in fact, ratified the minutes of the board meeting held on 10th May, 2005 because he attended the subsequent board meeting of 4th July, 2005, the minutes of which he signed on 3rd September, 2005. In the first place, the board meeting of 10th May, 2005 was challenged by Mr. Ashok Mittal by filing a petition in the CLB. He cannot be said to have acquiesced in the decisions taken at that meeting. Also when admittedly Mr. Ashok Mittal was not present at the meeting held on 10th May, 2005, he cannot be said to have ratified the decision taken at such meeting merely because he participated in a subsequent meeting that confirmed the minutes of the meeting of 10th May, 2005. The mere signing of the minutes of the meeting of 4th July, 2005 cannot lend validity to wha....
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....poration against dealing with the outsiders. However suspicion of irregularity has been widely recognised as an exception -to the doctrine of indoor management. The protection of the doctrine is not available where the circumstances surrounding the contract are suspicious and invite inquiry." Section 300 and disclosure of interest 39. The manner of the CLB dealing with the objection under Section 300 of the Act regarding interested directors not participating in the board meeting is also unconvincing. The application for allotment of shares and acceptance thereof is indeed a contract between the company and the applicant, as was explained in Union of India v. Allied International Products Ltd 1970 (3) SCC 594. Mr. Ashok Mittal and Mrs. Sarla Mittal were under a fiduciary duty not to participate in the decision where shares were to be transferred to their group companies. Even if HQR were a private limited company, the compliance with the requirement of Section 300 of the Act was mandatory as explained in the decision of the Bombay High Court in Firestone Tyre & Rubber Co. v. Synthetics & Chemicals Ltd. [1971] 41 Comp. Cas. 377 and Madras Tube Co. Ltd. v. HariKishonSomani [1985] 1....
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....whether he was willing to stand by the statement made by him earlier. 42. This is noted in the ordere 5th March, 2013 of the Court which reads as under: "1. At the beginning of his arguments in reply today, Mr. Atul Sharma, learned counsel tendered an affidavit dated 5th March, 2013 sworn by Mr. R.P. Mittal. The affidavit is taken on record. A copy of the affidavit has been given to learned counsel for the other parties. 2. The affidavit encloses a letter dated 22nd February, 2013 of the Indian Overseas Bank ('IOB'), Parliament Street Branch, New Delhi, stating that the share certificates of Hotel Queen Road Pvt. Ltd. ('HQRPL') pledged by Moral Trading Limited ('MTL') were delivered back on 23rd June, 2003. The said letter is stated to have been received by Mr. Mittal on 22nd February, 2013 itself. 3. Learned counsel for Mr. R.P. Mittal, on instructions from Mr. R.P. Mittal, confirms that the shares of HQRPL pledged by MTL were in fact delivered back to Mr. R.P. Mittal on 23rd June, 2003. 4. Mr. Jayant Bhushan, learned Senior counsel for Hillcrest Realty SDN BHD ('Hillcrest'), w....
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....s of the letter dated 22nd February, 2013, and further stating before this Court through counsel that the share certificates were delivered back to him on 23rd June, 2003, it becomes necessary for the Court to ascertain what the correct position is. Incorrect statements made on affidavits before this Court by either party would have serious consequences. 7. Notice without process fee will issue to the Manager of IOB, Parliament Street Branch, who wrote the letter dated 22nd February, 2013 and the AGM of IOB of the same Branch, who wrote the subsequent letter dated 1st March, 2013 to be present in Court together with whatever original records are there in their possession to clarify the position. Copies of both the letters dated 22nd February, 2013 and 1st March 2013 will be enclosed with the summons. A certified copy of this order will also be sent to each of them to appear before this Court on 14th March, 2013 at 2:15 pm. 8. A copy of this order be given dasti under signature of Court Master." 43. At the subsequent hearing on 14th March, 2013, the Court noted submissions of Mr. Vivek Dixit, Senior General Manager, IOB and then p....
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....r before 2nd April, 2013 .Both of them shall remain present in Court on the next date of hearing, i.e., 9th April, 2013. A certified copy of this order passed today as well as a certified copy of the order passed on 5th March, 2013 will be delivered to Mr. Vivek Dixit as well as Mr. Deepak Sudan by a special messenger within two days from today for compliance. Additionally Mr. Dixit will communicate this order to Mr. Sudan forthwith. The Court will take a serious view if there is any disobedience of this order. List for hearing on 9th April, 2013 at 2.15 pm. Order be given dasti." 44. Consequent upon the above order Mr. Vivek Dixit and Mr. Deepak Sudan filed affidavits which the Court did not find satisfactory and passed the following order on 9th April, 2013: "1. Separate affidavits have been filed by Mr. Vivek Dixit, Senior General Manager, Indian Overseas Bank ('IOB'), Parliament Street Branch and Mr. Deepak Sudan, Assistant General Manager, IOB in response to the order passed by the Court on 14th March, 2013. There was a specific query which the Court had asked these officers to address. They were a....
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....esponse to the aforementioned affidavits of the bank officials and stuck to his earlier stand that the shares were in fact delivered to him on 23rd June, 2003 itself. This is belied by the reasons explained by Hillcrest in its affidavit dated 9th April, 2013. There was no occasion for the share certificates to have been returned by IOB on 23rd June 2003. From the loan account statement of Moral, which has been annexed to the affidavit, it appears that the loan of Rs. 15,00,00,000 was disbursed by IOB on 7th October, 2002 and transferred to the account of HQR on 22nd July, 2003. The mortgage deed for securing the loan of HQR was executed only on 20th September, 2003. The question of release of the pledged share certificates on 23rd June, 2003 did not arise. Mr. Lekhi tried to explain that there was a doubt as to how IOB could have issued a clarification on the same date that Hillcrest and Mr. Ashok Mittal made a request to it, i.e., 9th February, 2009. It is sought to be suggested that the letter dated 9th February, 2009 is, in fact, a fabricated document. This submission is belied by the two sets of affidavits filed by Mr. Vivek Dixit and Mr. Deepak Sudan the concerned officials of....