TaxTMI 
TaxTMI 
2019 (5) TMI 763
X X X X Extracts X X X X
X X X X Extracts X X X X
....ferred to as "the hotel"). 3. In terms of an approved scheme of Arrangement of Demerger the hotel was transferred to the Respondent No.1 ­ Hotel Queen Road Pvt. Ltd. (in short, 'HQRL') which was created as a Special Purpose Vehicle to enable disinvestment. The paid up capital of HQRL was Rs. 90 lakhs comprising 9 lakh equity shares of Rs. 10 each, of which the Government of India held 89.97% shares. Indian Hotels Co. Ltd. (IHCL) held 10% shares and the balance shares were held by the employees of hotels of ITDC under a Voluntary Retirement Scheme. 4. Pursuant to its decision to disinvest, the Government invited bids for sale of shares in HQRL. The appellant No.3 ­ Moral Trading & Investment Ltd., in short hereinafter referred to as 'Moral', a public limited company, was declared the successful bidder. 5. By a share purchase agreement dated 8.10.2002 Moral acquired the shares of Government of India and IHCL in HQRL for a sum of Rs. 45 crores. Out of this, Rs. 33.37 crores was obtained by way of loans from banks. 99.97% shares of HQRL being held by Moral, HQRL became Moral's subsidiary. 6. Appellant No.1, Mr. R.P. Mittal, and the appellant No.2, Mrs. Sarla Mittal,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....questing for allotment of 23,65,000, 8.5% redeemable preference shares in the company. On 5.5.03 HQRL approved the issuance of 23,65,000 redeemable preference shares to Hillcrest. 11. On 25.6.2003 in order to facilitate issue of preference shares, HQRL increased authorised capital by Rs. 5 crore comprising 5 lakh preference shares of Rs. 100 each. On 19.7.2003 HQRL approved the issuance of 4,64,290 redeemable preference shares to Hillcrest respondent No.2. In or about August­September, 2003, to fund the redevelopment of the hotel, a term loan of Rs. 40 crores was raised from Indian Overseas Bank. According to the appellants the loan was secured by the joint personal guarantees of Mr. R.P. Mittal, Mrs. Sarla Mittal and Mr. Ashok Mittal, the corporate guarantee of Moral and the collateral security of personal assets of Mr. R.P. Mittal and Mrs. Sarla Mittal. 12. On 27.7.2004, HQRL in compliance of resolution dated 28.12.2002 passed under section 81(1A) of the Act, issued 23.90 lacs equity shares at par to Moral, the single shareholder holding 99.97% of equity. On 7.1.2005 HQRL in compliance of resolution dated 28.12.2002 passed under section 81(1A) of the Act issued 41.51 la....
X X X X Extracts X X X X
X X X X Extracts X X X X
....reference share capital therein shall, in respect of such capital, have a right to vote only on resolutions placed before the company which directly affect the rights attached to his preference shares. Explanation.: Any resolution for winding up the company or for the repayment or reduction of its share capital shall be deemed directly to affect the rights attached to preference shares within the meaning of this clause. (b) Subject as aforesaid, every member of a company limited by shares and holding any preference share capital therein shall, in respect of such capital, be entitled to vote on every resolution placed before the company at any meeting, if the dividend due on such capital or any part of such dividend has remained unpaid: (i) in the case of cumulative preference shares, in respect of an aggregate period of not less than two years preceding the date of commencement of the meeting; and (ii) in the case of non­cumulative preference shares, either in respect of a period of not less than two years ending with the expiry of the financial year immediately preceding the commencement of the meeting or in respect of an aggregate period of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ement of HQRL by the R.P. Mittal Group. The Resolution passed in Board meetings regarding allotment/ transfer of shares was also challenged amongst others on the ground that no notice had been issued to Ashok Mittal who was, at the material time, a Director. 19. The present case arises out of the said petition filed by Hillcrest and Mr. Ashok Mittal against the appellants in the Company Law Board in September, 2005 under Sections 397/398 of the Act, challenging the allotment/transfer of shares effected on 27.7.2004, 7.1.2005 and 10.5.2005 on inter alia grounds of (i) financial mismanagement of HQRL by Mr. R.P.Mittal and Mrs. Sarla Mittal; (ii) Invested in Cumulative Redeemable Preference Share (CRPS) on the understanding that HQRL would remain a subsidiary of Moral and that in the event of HQRL failing to pay any dividend for two years, Hillcrest would be entitled to exercise its voting rights in all resolutions; (iii) illegality of allotments made on 27.7.2004, 7.1.2005 and 10.5.2005. In the absence of notice under Section 286 of the Companies Act to Mr. Ashok Mittal, who was a Director of HQRL; (iv) the allotments having been made by the remaining Directors without disclosing ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....company. 25. On 15th October, 2008 the Delhi High Court passed an interim order in the said IA No.12164 of 2008 in C.S. (OS) 1382 of 2008 allowing Hilcrest to vote in the Extraordinary General Meeting to be held on 16th October, 2008 and also appoint Administrator to look after the day to day affairs of HQRL. 26. On 16th October, 2008, Mr. R.P. Mittal, Mrs Sarla Mittal and HQRL filed an appeal against the orders dated 15th October, 2008 and 24th October, 2008 passed by the Delhi High Court in IA No.12164/ 2008 in C.S. (OS) 1832 of 2008 before the Division Bench. 27. The appellants state that on or about 21st October, 2008, Mr. R.P. Mittal filed an application under the Right to Information Act whereupon the Registrar of Companies, by letter dated 21st October, 2008 informed the appellant that the status of HQRL had not been changed from private company limited by shares to public company limited by shares for the technical reasons specified in the said letter. 28. On 24th October, 2008 the interim order passed by the Delhi High Court on 5th October, 2008 in IA No.12164/ 2008 in C.S. (OS) No.1832 of 2008 was made absolute. 29. On 14th January, 2009, the Division Bench....
X X X X Extracts X X X X
X X X X Extracts X X X X
....personal guarantee of Mr. Ashok Mittal, Mr. R.P. Mittal and Mrs. Sarla Mittal. HQRL has claimed that the net worth of Mr. Ashok Mittal was much higher than others. 37. HQRL has further contended that the management changed hands from R.P. Mittal group on 15.1.2009 vide order of Delhi High Court. Prior to leaving the management of HQRL, Mr. R.P. Mittal and Mrs. Sarla Mittal with the help of their accomplices, removed and did away with the books of account and statutory records of HQRL. Thereafter, a number of third parties, all related to Mr. R.P. Mittal started claiming to have lent monies to HQRL. Most of these demands were based on 'oral agreements' with Mr. R.P. Mittal. When the new management assumed charge of HQRL, the financial position of HQRL was weak, there being only Rs. 2.82 lacs in the bank account of HQRL; the immediate liabilities including government dues, taxes and salaries of staff were Rs. 98,62,563; HQRL had defaulted on payment of interest to the bank amounting to Rs. 4,73,98,446 along with total bank liability of about Rs. 30 crores; and its account was on the verge of becoming Non Performing Asset (NPA), due to defaults in repayment of interest and principa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....probity, good conduct or is burdensome, harsh or wrong or is malafide or for collateral purpose, it would amount to oppression under section 397. Reliance has also been placed on Needle Industries (India) Ltd. & Ors. v. Needle Industries Newey (India) Holding Ltd. & Ors. (1981) 3 SCC 333; Sangramsinh P. Gaekwad & Ors. v. Shantadevi P. Gaekwad (Dead) through LRs. & Ors. (2005) 11 SCC 314; and V.S. Krishnan & Ors. etc. v. Westfort Hi­tech Hospital Ltd. & Ors. (2008) 3 SCC 363. 43. Shri Misra, learned senior counsel further urged that no oppression was caused to Mr. Ashok Mittal by allotment of shares on 27.7.2004, 7.1.2005 and allotment/transfer of shares on 10.5.2005 to majority shareholders having 99.97% equity. It was further submitted that there could not be any oppression caused to Mr. Ashok Mittal by inter se transfer of shares from Moral to Mr. R.P. Mittal as the said transaction was between Moral and Mr. R.P. Mittal, whereby HQRL only records the transfer. The argument on behalf of Mr. Ashok Mittal and Hillcrest that the allotment was done at undervalue was also not correct. The transfer of shares from Moral to Mr. R.P. Mittal on 10.5.2005 was between two separate lega....
X X X X Extracts X X X X
X X X X Extracts X X X X
....can be seen from the note with the heading "Shareholding pattern of R1 (HQRL)". It is relevant to mention here that it was held by the High Court of Bombay in CDS Financial Services (Mauritius) Ltd. v. BPL Communications Ltd. & Ors. (2004) 121 Comp Case 374, that RBI's special permission under the special laws of FEMA will prevail over the provisions of the Companies Act, 1956. If the analogy of the High Court in impugned order is applied then all earlier meetings of HQRL deserve to be declared void as violative of sections 286 and 300. 46. It was also urged by Mr. Misra, learned senior counsel, that the finding of the High Court as to provision under section 108 of the Companies Act, 1956 and thereafter initiating the proceedings under section 340 Cr.P.C. against Mr. R.P. Mittal was also erroneous, as the High Court had itself recorded that there was no record available with the bank to ascertain when the certificates were released to the Mr. R.P. Mittal. The Rights Issue in 2009 was illegal and was only brought in to give the majority to Mr. Ashok Mittal, even though the issue was not part of these proceedings. 47. In the wake of aforesaid submissions, the appellants prayed....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n management, hence, took place on or about 15.1.2009. After takeover of management by Mr. Ashok Mittal further investment amounting to Rs. 49.5 crore was made by him out of which Rs. 9.5 crores was directly invested by Mr. Ashok Mittal to pay out bank dues and other pressing creditors. In addition, on or about 30.7.2009 another Rs. 40 crores were raised through a rights issue. R.P. Mittal group was offered shares in proportion to the shareholding in the company but declined to take any share or make any investment in the company. Hence, the entire amount was brought in by Mr. Ashok Mittal. As of now Mr. Ashok Mittal holds 92% of equity shares of HQRL whereas Moral and Mr. R.P. Mittal own about 8% shares of HQRL. The main disputes between the parties pertain to (i) allotment and transfer of shares to R.P. Mittal Group and Moral in 2005; (ii) takeover of management by Ashok Mittal and Hillcrest in 2009 and (iii) rights issue which took place on or about July, 2009. With reference to (ii) above, it was stated that there is an interim arrangement which is binding on both the parties and which has been affirmed all the way up to this Court by a judgment and order dated 20.7.2009 in Ram....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lined to set aside the allotment and transfer on unsustainable grounds. It is well settled that in a petition under section 397 of the Companies Act it is normally desirable unless any special circumstances exist, to pass an order which to all intents and purposes would be beneficial to the company itself and the majority of its members. 56. It was finally contended that the High Court order be upheld without upsetting the existing position in relation to management of company. 57. It was submitted by Mr. Mihir Kumar, learned counsel for Hillcrest that the appellants have filed two appeals namely C.A. No. 3934/2017 and C.A. No.3935/2017. The sole legal question arising in the instant matters is whether the 3 meetings of the Board of Directors of HQRL held on 27.7.2004, 7.1.2005 and 10.5.2005 were legal and valid. The following issues were not germane to the question: (1) whether HQRL is a public limited company or a private limited company? (2) whether Hillcrest, a preference shareholder had any voting rights in terms of section 87 of Companies Act, 1956? 58. Learned counsel would contend that the aforesaid three Board meetings before the Company Law Board were grave....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o participate in the offer; said allotment was at gross undervaluation and in breach of the fiduciary position of Mr. R.P. Mittal and Mrs. Sarla Mittal as Directors of HQRL; the 3 meetings violated Section 286 thereby ipso facto invalidating the meetings. Mr. Ashok Mittal had a right to participate in the offer of shares to any extent irrespective of his existing equity shareholding of 1 share; and that transfer of shares by Moral to Mr. R.P. Mittal was against loan. Even Mr. Ashok Mittal had granted loan to Moral but against that Moral did not transfer any shares. Appellants' reliance on section 81(1A) is unmerited. It was further contended that the appellants' argument of Mr. Ashok Mittal holding only one share is manifestly erroneous. The Company Law Board concluded that inasmuch as Mr. Ashok Mittal was substantially interested and invested in HQRL, the shares ought to be allotted (as well as transferred by Moral) to him as well. As against Hillcrest's investment of Rs. 28,29,29,000/­, the appellants had invested only Rs. 90 lakhs in the share capital of HQRL. The said 3 meetings had a direct bearing on shareholding of Hillcrest. The parent­subsidiary relationship betwee....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... persons on 30.9.2002, prima facie HQRL lost its private character. However, this Court also observed significantly as this issue has to be decided in the two pending suits, it would not be proper for this Court to dwell into the question further. This Court held that considering the explanation to section 87(2)(b) gives Hillcrest as a cumulative preference shareholder the right to vote on every resolution. This Court also made it clear that the observations were prima facie in the nature of limited only for disposal of special leave petition and should not influence the final decision in the suits. The question relating to HQRL whether it is a private or public company has been left open for decision in the suits. This Court in Ram Parshotam Mittal & Anr. V. Hillcrest (supra) has made the following observations: "66. As will be evident from the pleadings in both the suits, the reliefs sought for in the two suits are dependent on the question as to whether by the resolutions adopted on 30th September, 2002, Hotel Queen Road had lost its private character and had been converted into a Public Company. While the issues are the same in the two suits, the interim orders passed ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o be a private limited company and under the conditions prescribed in the Act, Hillcrest Realty acquired voting rights in the meetings of the company by operation of Section 87(2)(b) and Section 44 of the said Act. The right of a preference shareholder to acquire voting rights is also indicated in clear and unambiguous terms in the Explanation to Section 87(2)(b). 78. Since the question as to whether Hotel Queen Road ceased to be a private company upon the resolutions being passed on 30th September, 2002, is the crucial issue for decision in both the two suits referred to hereinabove, it would not be proper for this Court to delve into the question further. 79. However, for the purpose of disposing of these Special Leave Petitions, we are prima facie of the view that by virtue of the resolutions dated 30th September, 2002, Hotel Queen Road had become a public 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 t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ngs are temporary arrangements to preserve the status quo till the matter is finally decided, to ensure that the matter does not become either infructuous or a fait accompli, before the final hearing." 66. The Company Law Board as well as the High Court have found that the provision of notice under Section 286 of the Companies Act was not complied with. The High Court has observed that the interested Directors have participated in the meeting. Mr. R.P. Mittal and Mrs. Sarla Mittal were in a fiduciary capacity they could not participate in the decision where shares were transferred to their own group/company. Even if HQRL were a private limited company, the compliance with the provisions of section 300 of the Act was mandatory. The High Court has also observed that there was undervaluation of HQRL shares. The allotment of shares at par to Moral in the meeting on 10.5.2005 and on the same very date, shares of Moral were transferred to Mr. R.P. Mittal @ Rs. 20 per share. Thus, the High Court has opined that these acts in overall factual matrix of the case, were sufficient to conclude that ground under section 397 had been made out. 67. The High Court has also found that HQRL did....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n, at least, an unfair abuse of powers and an impairment of confidence in the probity with which the company's affairs are being conducted, as distinguished from mere resentment on the part of a minority at being outvoted on some issue of domestic policy. Neither the judgment of Bhagwati J. nor the observations in Elder (supra) are capable of the construction that every illegality is per se oppressive or that the illegality of an action does not bear upon its oppressiveness. In Elder a complaint was made that Elder had not received the notice of the Board meeting. It was held that since it was not shown that any prejudice was occasioned thereby or that Elder could have bought the shares had he been present, no complaint of oppression could be entertained merely on the ground that the failure to give notice of the Board meeting was an act of illegality. The true position is that an isolated act, which is contrary to law, may not necessarily and by itself support the inference that the law was violated with a mala fide intention or that such violation was burdensome, harsh and wrongful. But a series of illegal acts following upon one another can, in the context, lead jus....
X X X X Extracts X X X X
X X X X Extracts X X X X
....must, therefore, reject Shri Seervai's argument that in the instant case, the Board of Directors abused its fiduciary power in deciding upon the issue of rights shares." (emphasis supplied). 69. Reliance has also been placed on a decision of this Court in Sangramsinh (supra) in which this Court has observed: "196. The Court in an application under Sections 397 and 398 may also look to the conduct of the parties. While enunciating the doctrine of prejudice and unfairness borne in Section 459 of the English Companies Act, the Court stressed the existence of prejudice to the minority which is unfair and not just prejudice per se. 197. The Court may also refuse to grant relief where the petitioner does not come to court with clean hands which may lead to a conclusion that the harm inflicted upon him was not unfair and that the relief granted should be restricted. (See London School of Electronics, Re [1986] Ch. 211). 198. Furthermore, when the petitioners have consented to and even benefited from the company being run in a way which would normally be regarded as unfairly prejudicial to their interests or they might have shown no interest in pu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....aluation is also not correct. HQRL could not have raised any objection regarding the aforesaid transaction between Moral and Mr. R.P. Mittal. The claim made by Hillcrest that they were entitled to vote on resolution dated 10.5.2005 is not correct proposition of law. In this regard reliance has been placed upon section 205 of the Companies Act. Learned counsel has also urged that position of shareholders in a company is analogous to that of partners inter se, is wholly inaccurate. Company is a separate juristic entity from shareholders. For this purpose, he has relied upon a decision of this Court in Mrs.Bacha F. Guzdar, Bombay v. Commissioner of Income Tax, Bombay AIR 1955 SC 74. 72. It was contended on behalf of respondents that out of Rs. 45 crores that Moral financed the amount raised through Bank loans approximately Rs. 33.25 crores which was obtained on the credit worthiness of Mr. Ashok Mittal and against personal guarantees of Mr. R.P. Mittal, and Mr. Ashok Mittal. Mr. R.P. Mittal contributed approximately Rs. 6.23 crores to Moral and Mr. Ashok Mittal approximately Rs. 5.5 crores. Thus they had substantial interest in the company. Though he held only one share in the c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n 397 of the Companies Act indisputably is of wide amplitude. It is also beyond any controversy that the court while exercising its discretion is not bound by the terms contained in Section 402 of the Companies Act if in a particular fact situation, a further relief or reliefs, as the court may seem fit and proper, is warranted. (See Bennet Coleman & Co. v. Union of India [(1977) 47 Comp Cases 92 (Bom)] and Syed Mahomed Ali v. R. Sundaramoorthy; 1958 2 MLJ 259). But the same would not mean that Section 397 provides for a remedy for every act of omission or commission on the part of the Board of Directors. Reliefs must be granted having regard to the exigencies of the situation and the court must arrive at a conclusion upon analyzing the materials brought on records that the affairs of the company were such that it would be just and equitable to order winding up thereof and that the majority acting through the Board of Directors by reason of abusing their dominant position had oppressed the minority shareholders. The conduct, thus, complained of must be such so as to oppress a minority of the members including the petitioners vis­à­vis the shareholders which a fortior....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ants for shares and the Company. Such a provision must be strictly construed. Unless the statute in clear terms so provides, when the Exchange intimates its desire to consider the application further, an inference that the Exchange has still rejected the application, cannot be made." (Emphasis supplied) 74. Section 286 of the Act of 1956 dealing with requirement of notice to Director, is as under: "Sec 286 ­ Notice of meetings. (1) Notice of every meeting of the Board of directors of a company shall be given in writing to every director for the time being in India, and at his usual address in India to every other director. (2) Every officer of the company whose duty it is to give notice as aforesaid and who fails to do so shall be punishable with fine which may extend to one thousand rupees." It has not been disputed that no notice under section 286 had been given to Mr. Ashok Mittal, the Director when impugned resolutions were passed. 75. In Needle Industries (supra), it has been observed by this Court that the resolution passed by the Director may be perfectly legal and yet oppressive and conversely a resolution which is in contrav....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the director aforesaid consists solely (i) in his being a director of such company and the holder of not more than shares of such number or value therein as is requisite to qualify him for appointment as a director thereof, he having been nominated as such director by the company referred to in sub­section (1), or (ii) in his being a member holding not more than two per cent of its paid­up share capital; (e) a public company, or a private company which is a subsidiary of a public company, in respect of which a notification is issued under sub­section (3), to the extent specified in the notification. (3) In the case of a public company or a private company which is a subsidiary of a public company, if the Central Government is of opinion that having regard to the desirability of establishing or promoting any industry, business or trade, it would not be in the public interest to apply all or any of the prohibitions contained in sub­section (1) to the company, the Central Government may, by notification in the Official Gazette, direct that that sub­ section shall not apply to such company, or shall apply thereto subject to such e....
X X X X Extracts X X X X
X X X X Extracts X X X X
....dle Industries case (supra) the Board of Directors had resolved to issue 16,000 equity shares of Rs. 100/­ each to be offered as rights shares to the existing shareholders in proportion to the shares held by them. The offer was to be made by a notice specifying the number of shares to which each shareholder was entitled to. The notice further said, in case the offer was not accepted within 16 days from the date on which it was made, it was to be deemed to have been declined by the shareholder concerned. The holding company held 18,990 shares and it was entitled to 9495 rights shares. The holding company could not avail its right to exercise the option for purchase of rights shares offered to it. As a result, the whole of the rights issue consisting of 16,000 shares was allotted to the Indian shareholders. The holding company filed a petition under Sections 397 and 398 of the Companies Act, 1956 in the High Court. The Single Judge held in favour of the holding company that it had suffered a loss in view of the fact that the market value of the rights share was Rs. 190/­ whereas the shares were allotted at par i.e. at Rs. 100/­. The grievance of the holding company was th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....at the duty of the Directors does not stop at "to act bona fide" requirement. They have evolved a doctrine called the 'proper purpose doctrine' regarding the duties of company directors. In Hogg v. Cramphorn (supra), explicit recognition was given to the proper purpose test over and above the traditional bonafide test. In this case the Director had allotted shares with special voting rights to the trustees of a scheme set up for the benefit of company employees with the primary purpose of avoiding a takeover bid. Buckley, J. found as a fact that the Directors had acted in subjective good faith. They had indeed honestly believed that their actions were in the best interests of the company. Despite this it was observed: (All ER p. 427 E) "An essential element of the scheme, and indeed its primary purpose, was to ensure control of the company by the Directors and those whom they could confidently regard as their supporters." 22. As such, he concluded that the allotment was liable to be set aside as a consequence of the exercise of the power for an improper motive. He also held that the power to issue shares was fiduciary in nature. In Howard Smith Ltd. v. Amp....
X X X X Extracts X X X X
X X X X Extracts X X X X
....l and management of the affairs of the company. In a petition filed under Sections 397 and 398 of the Companies Act, 1956, acts of Khaund were found to be by way of 'oppression and mismanagement' within the meaning of Sections 397 and 398 of the Companies Act. Allotment of 100 equity shares by the company to Khaund at a meeting of the Board of Directors said to have been held on 14 January, 1971 was held to be illegal. The Board of Directors of the company was superseded and a special officer was appointed to carry on management of the company with the advice of Barooah, Khaund and a representative of the labour union. There were several other directions issued by the Court which are not necessary to be mentioned here. The Division Bench considered in detail the relevant legal position. Without using the phrase 'proper purpose doctrine' the principle enunciated therein, was applied. The following observations of Justice A.N. Sen are reproduced: "It is well settled that the Directors may exercise their powers bona fide and in the interest of the company. If the Directors exercise their powers of allotment of shares bona fide and in the interest of the compan....
X X X X Extracts X X X X
X X X X Extracts X X X X
....as a proper and legal procedure followed to make the allotment. The motive for the allotment was mala fide, the only motive being to gain control of the company. Therefore, in our view, the entire allotment of shares to Ramanujam has to be set aside." (emphasis supplied) 79. In Firestone Tyre and Rubber Co. v. Synthetics and Chemicals Ltd. & Ors. (supra), it was observed: "Section 300 of the Companies Act, 1956, embodies, just as section 91B of the Indian Companies Act, 1913, did, the general rule of equity (see Pratt (T.R.) (Bombay) Ltd. v. M.T. Ltd. [1938] 8 Comp. Cas. 137. The clearest exposition of this rule is to be found in Aberdeen Rly. Co. v. Blaikie. [1854] 1 Macq. 461­471­72 (H.L.). In that case, Lord Cranworth said: "A corporate body can only act by agents and it is course the duty of those agents so to act as best to promote the interests of the corporation whose affairs they are conducting. Such agents have duties to discharge of a fiduciary nature towards their principle. And it is a rule of universal application, that no one, having such duties to discharge, shall be allowed to enter into engagements in which he has, or can have,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ility of conflict is enough to bring the case within the ambit of this rule nor does the application of this rule depend upon the extent of the adverse interest. Directors stand towards the company in a fiduciary position In India this fiduciary character has received statutory recognition in section 88 of the Indian Trusts Act, 1882. The reason underlying this rule is that the company has a right to the unbiased voice, advice and collective wisdom of its directors. (See Benson v. Heathorn; [1842] 1 Y. & C. Ch. Cas. 326, 341­42; Imperial Mercantile Credit Association v. Coleman and Victors Ltd. v. Lingard [1927] 1 Ch 323, 330)." (emphasis supplied) 80. In Madras Tube Co. Ltd. & Ors. v. Hari Kishon Somani & Ors. (supra), it was observed: "I do not think the pattern of section 91(a) and 91(B) should be superimposed on the enactment of the present group of sections 299, 300 and 301. Section 301, in terms, refers to a register being kept of contracts and arrangements to which section 297 or section 299 applies. It does not refer, in terms, to section 300. This is because the purpose of a register of contracts is to put the shareholder upon notice of the contrac....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ime importance that in any transaction in which the directors participate as directors of the company they should not only declare their personal interests therein, buy they must desist from participation in any decision­making. The theory is that the Board acts as a body. How the act of the Board as a body is shaped is a matter left to the inter­play of the minds of the directors, and the respective strength or weakness of each to carry the others along with him. If, therefore, a director who could sway the decision of the Board, one way or the other is a person interested in the subject matter of the deliberations and nevertheless participates in the meeting, and the interests of the director are not identical with those of the company, the ultimate damage to the company and the shareholders could well be imagined. This principle that where a director has a personal interest, he ought not to participate in the Board's deliberation is so sacred that no further inquiry is necessary to set at naught decisions brought about in violation of the principles. No harm might result to the company by allowing participation of an interested director, and yet the participation, per se....
X X X X Extracts X X X X
X X X X Extracts X X X X
....erest in order to learn what public grounds there are in favour of, or in opposition to, the winding up but such persons can be heard only as amicus curiae and cannot appeal" Our attention was also invited to Halsbury's Laws of England 4th Ed. Vol. 7 where a similar statement of the taw is to be found at page 614 paragraph 1028. Now it is undoubtedly true that according to the statement of the law contained in these three leading text books, it is only the company, the creditors and the contributories who are entitled to appear on the winding up petition and no other persons have a right to be heard, but this statement of the law is based on the old decision in Re. Bradford Navigation Company which was carried in appeal and decided as Re. Bradford Navigation Company. This decision given by the English Courts over a hundred years ago when a company was regarded merely as a legal device brought into being as a result of a contractual arrangement between the shareholders for the purpose of carrying on trade or business and the workers were looked upon as no more than employees of the company working under a master and servant relationship and the interest of the public as consumer....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tever has been decided in England. The rule enunciated in re: Bradford Navigation Company case (supra) does not commend itself to us and though it has been followed by a single Judge of the Bombay High Court in re Edward Textiles Limited (supra), we do not think it represents correct law. (c) He has also referred to Halsbury's Laws of England, Volume 6 (3rd Ed.), page 234, the law regarding the attributes of shares is thus stated: "A share is a right to specified amount of the share capital of a company carrying with it certain rights and liabilities while the company is a going concern and in its winding up. The shares or other interest of any member in a company are personal estate transferable in the manner provided by its articles, and are not of the nature of real estate." (d) Reliance has also been placed on M/s. Kothari Textiles Ltd., Madras & Ors. v. Commissioner of Wealth Tax, Madras; AIR 1963 Mad. 274 in which the High Court observed as under: "25. Article 147 also provides that no dividend shall be payable except out of the profits of the year or any other undistributed profits except as provided by Sections 205 and 208. It is obvious that the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e balance struck between the preference shareholders' understandable wish to vote at every possible occasion when their shares were at risk, and the general regime which is that they did not have the right to vote at all. He submitted that a particular balance had been struck between the differing groups of shareholders which created a strong incentive for the company to declare dividends because when dividends were not paid to the preference shareholders the ordinary shareholders were not paid either and for a longer period. In drawing attention to the constitution's use of language he concluded that dividends could not be in arrears in any ordinary use of English if they had never been payable and never would be payable." (emphasis supplied) (f) Reliance was also placed by Shri Misra on Indore Development Authority v. Shailendra (Dead) through LRs. & Ors. (2018) 3 SCC 412 thus: "40. In J. Dalmia v. CIT, AIR 1964 SC 1866, this Court has observed that the expression "paid" does not contemplate actual receipt of the dividend by the member. The dividend may be said to be paid within the meaning of Section 16(2) when the company discharges its liability and makes amount un....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mplied with and shall not be violated, including inter alia that there shall be a cap of 49% of foreign equity and the management control of the company shall remain with the Indian shareholders. 50. According to Mr. Chidambaram the conditions contained in the special permission of the Reserve Bank of India will prevail over the provisions of the Companies Act in view of section 29(l) of FERA which contains a non­obstante clause. He pointed out that FERA has been replaced by Foreign Exchange Management Act, l999 ("FEMA") and by virtue of section 49 of FEMA, the special permission is saved and now deemed to have been granted under the corresponding provisions of sections 6 of FEMA read with Regulation 5 of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India), Regulations, 2000 and Schedule I thereto read with Annexure B to the said Schedule. Mr. Chidambaram's contention is that the special permission is a statutory order passed by a statutory authority viz. Reserve Bank of India on which power to grant such permission was conferred by Parliament under section 29 of FERA and the special permission will prevail over the provis....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eree and specifying the name, address and occupation, if any, of the transferee, has been delivered to the company along with the certificate relating to the shares or debentures, or if no such certificate is in existence, along with the letter of allotment of the shares or debentures : Provided that where, on an application in writing made to the company by the transferee and bearing the stamp required for an instrument of transfer, it is proved to the satisfaction of the Board of directors that the instrument of transfer signed by or on behalf of the transferor and by or on behalf of the transferee has been lost, the company may register the transfer on such terms as to indemnity as the Board may think fit : Provided further that nothing in this section shall prejudice any power of the company to register as shareholder or debenture­holder any person to whom the right to any shares in, or debentures of, the company has been transmitted by operation of law. (1A) Every instrument of transfer of shares shall be in such form as may be prescribed, and: (a) every such form shall, before it is signed by or on behalf of the transferor and before an....
X X X X Extracts X X X X
X X X X Extracts X X X X
....h share, the date on which it decides that such share shall not be held in the name of the said director or nominee or, as the case may be, in the case of any share in respect of which any such declaration has been made to the Public Trustee, the Public Trustee stamps or otherwise endorses, on the form of transfer in respect of such share under his seal, the date on which the form is presented to him, and (2) the instrument of transfer in such form, duly completed in all respects, is delivered to the : (a) body corporate in whose share such company or corporation has made investment in the name of its director or nominee, or (b) company in which such share is held in trust, within two months of the date so stamped or otherwise endorsed ; or (B) any share deposited by any person with : (i) the State Bank of India, or (ii) any scheduled bank, or (iii) any banking company (other than a scheduled bank) or financial institution approved by the Central Government by notification in the Official Gazette (and any such approval may be accorded so as to be retrospective to any date not earlier than the 1st day of April, 1966), or (iv) the Central Government or a State Government or ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e or after the expiry of the periods aforesaid ; and the number of extensions granted hereunder and the period of each such extension shall be shown in the annual report laid before the Houses of Parliament under section 638. (2) In the case of a company having no share capital, sub­ section (1) shall apply as if the references therein to shares were references instead of the interest of the member in the company. (3) Nothing contained in this section shall apply to transfer of security effected by the transferor and the transferee both of whom are entered as beneficial owners in the records of a depository." 86. It was also submitted that there is violation of section 108 of the Companies Act of 1956. It was submitted on behalf of Hillcrest that the Board meeting was held on 10.5.2005 in which 32,88,181 shares of HQRL were purportedly transferred by Moral to Mr. R.P. Mittal. Out of 32,88,181 shares, 8,98,166 shares were lying with the Overseas Bank and were available before the Board of HQRL for recording of transfer. Shares can be transferred only in accordance with section 108 of the Companies Act which provides for filing of the share certificate which ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tly stated that there is one way to obey the command and that is completely to refrain from doing the forbidden act. Therefore, negative, prohibitory and exclusive words are indicative of the legislative intent when the statute is mandatory. (See Maxwell on Interpretation of Statutes 11th Ed. p. 362 seq.; Crawford: Statutory Construction, Interpretation of Laws p. 523 and Seth Bikhraj Jaipuria v. Union of India [1962] 2 SCR 880. 18. The High Court said that the provisions contained in Section 108 of the Act are directory because non­ compliance with section 108 of the Act is not declared an offence. The reason given by the High Court is that when the law does not prescribe the consequences or does not lay down penalty for noncompliance with the provision contained in Section 108 of the Act the provision is to be considered as directory. The High Court failed to consider the provision contained in Section 629(A) of the Act. Section 629(A) of the Act prescribes the penalty where no specific penalty is provided elsewhere in the Act. It is a question of construction in each case whether the legislature intended to prohibit the doing of the act altogether, or merely to make....