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IN THE HIGH COURT OF DELHI AT NEW DELHI
SUBJECT: CODE OF CIVIL PROCEDURE
FAO (OS) No. 282 of 2005
Judgment reserved on: November 21, 2008
Judgment delivered on: January 14, 2009
M/s Hillcrest Realty Sdn. Bhd.
Through Authorized Representative
Shri Nandkishore Chaturvedi
Registered office, 18th Floor, Bangunnan Arab
Malaysian, Letter Box No. 18D
55, Jalan Raja Chulan, Malaysia. Appellant
Through Mr.Jayant Bhushan, Sr. Advocate
with Mr.Mohit Chaudhary, Adv.
Versus
1. M/s Hotel Queen Road Pvt. Ltd.
Through its Managing Director
Having its registered office at:
19, Ashok Road
New Delhi-110 001.
2. Mr. Ram Parshotam Mittal
S/o Late Shri Gurdas Rai Mittal
81, Sainik Farms
New Delhi-110062.
3. Mrs. Sarla Mittal
W/o Mr.Ram Parshotam Mittal
81, Sainik Farms
New Delhi-110062.
4. Mr. Ashok Mittal
S/o Late Shri Gurdas Rai Mittal
107, Doctor Centre 135
August Kranti Marg
Kemps Corner
Mumbai-400036. Respondents
Through Dr.A.M. Singhvi and Mr.S.
Ganesh, Sr.Advocates with Mr.Arvind K.
Nigam and Mr.Sandeep Mittal, Advs.
for Respondents No. 1 and 2.
Mr.U.K. Chaudhary, Sr.Advocate
with Mr.Sudhir Nandarajog and
Mr.Manish Jain, Advs. for Resp. No.4.
WITH
FAO (OS) Nos. 426 of 2008 and 440 of 2008
1. M/s Hotel Queen Road Pvt. Ltd.
Through its Managing Director
Having its registered office at:
19, Ashok Road
New Delhi-110 001.
2. Mr.Ram Parshotam Mittal
S/o Late Shri Gurdas Rai Mittal
81, Sainik Farms
New Delhi-110062.
3. Mrs.Sarla Mittal
W/o Mr.Ram Parshotam Mittal
81, Sainik Farms
New Delhi-110062.
4. Mr. Sumaj Jain
S/o Mr. M.P. Jain
85, Sinik Farms
Central Avenue
New Delhi-110062.
5. Mr. N.P. Gupta
S/o Late Shri Om Prakash Gupta
W-20, Greater Kailash-II
New Delhi-110048. Appellants
Through Dr.A.M. Singhvi and Mr.S.
Ganesh, Sr.Advocates with Mr.Arvind K.
Nigam and Mr.Sandeep Mittal, Advs.
for Appellants No. 1 and 2.
Versus
1. M/s Hillcrest Realty Sdn. Bhd.
Through Authorized Representative
Shri Nandkishore Chaturvedi
Registered office, 18th Floor, Bangunnan Arab
Malaysian, Letter Box No. 18D
55, Jalan Raja Chulan, Malaysia.
2. Mr.Ashok Mittal
S/o Late Shri Gurdas Rai Mittal
At 107, Doctor Centre 135
August Kranti Marg
Kemps Corner
Mumbai-3642. Respondents
Through Mr.Jayant Bhushan, Sr. Advocate
with Mr.Mohit Chaudhary, Adv.
for Respondent No.1.
Mr.U.K. Chaudhary, Sr.Advocate
with Mr.Sudhir Nandarajog and
Mr.Manish Jain, Advs. for Resp. No.2.
Coram:
HON'BLE MR. JUSTICE MADAN B. LOKUR
HON'BLE MR. JUSTICE SURESH KAIT
MADAN B. LOKUR, J.
We are concerned with three appeals:
1. FAO (OS) No. 282 of 2005 This is directed against an order dated 12th August,
2005 passed by a learned Single Judge in I.A. No. 5505 of 2005 in Suit No. 992 of 2005
(Hotel Queen Road Pvt. Ltd. v. Hill Crest Realty Sdn. Bhd. and others). By the impugned
order, the learned Single Judge held, inter alia, that: a. Prima facie, Hotel Queen Road is
private limited company. b. Hill Crest Realty Sdn. Bhd. a preference shareholder in Hotel
Queen Road Pvt. Ltd. has no voting rights. c. The Extraordinary General Meeting (EGM)
of the shareholders of Hotel Queen Road Pvt. Ltd. requisitioned by Hill Crest Realty Sdn.
Bhd. for 4th August, 2005 is illegal. d. Consequently, any resolution passed at that
meeting is ineffective. Naturally, the Appellant in this appeal is Hill Crest Realty.
2. FAO (OS) No. 426 of 2008 This is directed against an order dated 15th October,
2008 passed by a learned Single Judge in I.A. No. 12164 of 2008 in Suit No. 1832 of
2008 (Hill Crest Realty Sdn. Bhd. v. Ram Parshotam Mittal and others). By the impugned
order, the learned Single Judge held that: a. Hotel Queen Road Pvt. Ltd. converted itself
into a public limited company in September/October, 2002 and it concealed this fact in
Suit No. 282 of 2005. b. Hill Crest Realty is entitled to vote at the EGM of the
shareholders of Hotel Queen Road scheduled to be held on 16th October, 2008. c. An
administrator is liable to be appointed (and is in fact appointed) to manage the affairs of
Hotel Queen Road. The Appellant in this appeal is, quite naturally, Hotel Queen Road. 3.
FAO (OS) No. 440 of 2008 - This is directed against an order dated 24th October, 2008
passed by a learned Single Judge in I.A. No. 12638 of 2008 in Suit No. 992 of 2005
(Hotel Queen Road Pvt. Ltd. v. Hill Crest Realty Sdn. Bhd. and others). By the impugned
order, the learned Single Judge held that: a. The order passed on 12th August, 2005 was
vacated by the order dated 15th October, 2008 but this was inadvertently not specifically
stated in that order. b. It is now made clear that the order dated 12th August, 2005 stands
vacated by the order 15th October, 2008 passed in Suit No. 1832 of 2008. The Appellant
in this appeal is Hotel Queen Road Pvt. Ltd. The issues: 2. We heard learned counsel for
the parties, primarily Hotel Queen Road and then Hill Crest Realty on 12, 14, 17, 19 and
21 November, 2008 when we reserved judgment. Three questions were raised before us:
a. Whether Hotel Queen Road Pvt. Ltd. is a private limited company or a public limited
company b. Whether, in Suit No. 992 of 2005, Hotel Queen Road Pvt. Ltd. concealed the
resolution dated 30th September, 2002 converting it into a public limited company If so,
what is the effect thereof c. Whether Hill Crest Realty, a cumulative preference
shareholder in Hotel Queen Road Pvt. Ltd. is entitled to vote at any EGM of its
shareholders
3. As regards the first question, we have left it open for decision by the learned
Single Judge hearing Suit No. 1832 of 2008. Our answer to the second question is in the
affirmative. The effect of the concealment is that the interim injunction obtained by Hotel
Queen Road Pvt. Ltd. in Suit No. 992 of 2005 is liable to be vacated. Learned counsel for
Hill Crest Realty canvassed for dismissal of the suit itself, but in the absence of any clear
jurisprudence in this regard, we are unable to accede to this request. We have also
considered the third question and our answer is that Hill Crest Realty should be entitled
to vote at the EGM of the shareholders of Hotel Queen Road on 4th August, 2005 and
16th October, 2008. The facts:
4. Hotel Queen Road Pvt. Ltd. was incorporated as a special purpose vehicle on 23rd
August, 2001 and its first directors were Mr. Ashwini Kumar Lohani and Mr. Samar
Kumar Bandopadhya. The special purpose vehicle was created with the intention, inter
alia, of taking over the assets of Hotel Ashok Yatri Niwas and to manage that hotel as a
part of the disinvestment process. This was achieved through a Scheme of Arrangement
of Demerger between India Tourism Development Corporation [ITDC] (of which Hotel
Ashok Yatri Niwas was a unit) and Hotel Queen Road Pvt. Ltd. The Scheme was
sanctioned by the Government of India on 5th July, 2002.
5. Thereafter, the Government invited bids for the purchase of 99.97% of the total
voting equity share capital of Hotel Queen Road Pvt. Ltd. Since Moral Trading and
Investment Ltd. met the parameters of the bid, the requisite shares in Hotel Queen Road
Pvt. Ltd. were sold to it through two share purchase agreements dated 8th October, 2002.
These agreements were entered into between the President of India, Moral Trading and
Investment Ltd. and Hotel Queen Road Pvt. Ltd. (It is not necessary to go into the details
of the share purchase agreements). On the same date, two other events occurred: firstly,
an agreement was entered into between the President of India and Hotel Queen Road Pvt.
Ltd. whereby the plot of land on which Hotel Ashok Yatri Niwas stands, was leased out
to Hotel Queen Road Pvt. Ltd. for 99 years. Secondly, a meeting of the Board of
Directors of Hotel Queen Road Pvt. Ltd. took place in which Mr. Ashwini Kumar Lohani
and Mr. Samar Kumar Bandopadhya resigned as directors and Mr. Ram Parshotam
Mittal, Mr. Ashok Mittal, Mrs. Sarla Mittal and Mr. C.S. Paintal were appointed as
additional directors.
6. In December, 2002 Hotel Queen Road Pvt. Ltd. approved the transfer of one share
from Moral Trading and Investment Ltd. to Mr. Ashok Mittal and two shares to Mr. Ram
Parshotam Mittal. Their appointment (along with that of Mrs. Sarla Mittal) was approved
in the Board of Directors of Hotel Queen Road Pvt. Ltd. It was also resolved to increase
the capital of Hotel Queen Road Pvt. Ltd. from Rs. 90 lakhs to Rs. 33 crores. The
additional capital was divided into 71 lakh equity shares of Rs. 10/- each and 25 lakh
preference shares of Rs. 100/- each. The Articles of Association of Hotel Queen Road
Pvt. Ltd. were amended to state that preference shares would not carry any voting rights.
7. Learned counsel for the parties informed us that Mr. Ram Parshotam Mittal and
Mr. Ashok Mittal are brothers and had a good working relationship until sometime in
2004 They also informed us that the controlling interest in Moral Trading and Investment
Ltd. is with Mr. Ram Parshotam Mittal and that Mr. Ashok Mittal has some influence
over Hill Crest Realty.
8. Apparently, because of Mr. Ashok Mittals persuasion, Hill Crest Realty (a
Malaysian company) purchased 23,65,000 redeemable preference shares from Hotel
Queen Road bearing interest at 8.5% per annum. The Board of Directors of Hotel Queen
Road approved the allotment on 5th May, 2003 subject to the condition that the allotment
did not carry any voting rights. This was followed (in July 2003) by a further purchase of
4,64,290 preference shares by Hill Crest Realty on similar terms.
9. It is not necessary to burden ourselves with the immediately subsequent events
except to note that the erstwhile Hotel Ashok Yatri Niwas was closed for renovation from
April, 2003 onwards and that apparently no hospitality business was carried on. It is also
necessary to note that relations between Mr. Ram Parshotam Mittal and Mr. Ashok Mittal
soured thereafter, giving rise to the present litigation and several other cases between the
parties before us.
10. Be that as it may, in June, 2005 Hill Crest Realty served a notice on Hotel Queen
Road to hold an EGM to remove Mr. Ram Parshotam Mittal and Mrs. Sarla Mittal as
directors of Hotel Queen Road and instead to appoint the nominees of Hill Crest Realty.
In response, Hotel Queen Road declined to hold the EGM, inter alia, on the ground that
the notice was illegal. This led Hill Crest Realty to issue another notice to Hotel Queen
Road purporting to hold an EGM on 4th August, 2005 for the same purpose as above.
11. The notice sent by Hill Crest Realty prompted Hotel Queen Road to file Suit No.
992 of 2005 in this Court for an injunction restraining Hill Crest Realty from going ahead
with the proposed meeting and exercising voting rights in the proposed meeting. As
mentioned above, by an order dated 12th August, 2005 a learned Single Judge held that
the requisition for an EGM by Hill Crest Realty was illegal and so, any resolution passed
in that meeting was ineffective. It is under these circumstances that FAO (OS) No. 282 of
2005 is before us. Among the important conclusions arrived at by the learned Single
Judge was that Hotel Queen Road is a private limited company and that Hill Crest Realty
had no voting rights in the EGM.
12. It appears that much later, sometime in August, 2008 Hill Crest Realty learnt and
came to believe that by a resolution passed by Hotel Queen Road Pvt. Ltd. on 30th
September, 2002 it had converted itself from a private limited company to a public
limited company. Accordingly, it filed a suit for a declaration to that effect, which came
to be registered in this Court as Suit No. 1832 of 2008. Summons was issued to the
defendants on 9th September, 2008 and accepted in Court. The case was then adjourned
to 3rd November, 2008. An interim application being IA No. 12164 of 2008 was filed in
that suit on 29th September, 2008 which was listed on 30th September, 2008. In the
application, it was prayed by Hill Crest Realty that it should be permitted to participate in
the EGM of Hotel Queen Road scheduled to be held on 16th October, 2008. It was also
prayed that an administrator be appointed to manage the affairs of Hotel Queen Road.
Alternatively, it was prayed that the EGM scheduled for 16th October, 2008 be stayed.
The application was actually heard on 30th September, 2008 at the notice stage, and three
days time was given to enable the parties to file their written submissions/synopsis
(which they did).
13. By an order dated 15th October, 2008 the interim application (IA No. 12164 of
2008) filed in Suit No. 1832 of 2008 was disposed of by the learned Single Judge. It was
held, inter alia, that Hotel Queen Road had played a fraud on this Court by suppressing a
material fact in Suit No. 992 of 2005 that it had become a public limited company by
virtue of the resolution dated 30th September, 2002 and subsequent actions (which too
were allegedly not disclosed by Hotel Queen Road). It is under these circumstances that
FAO (OS) No. 426 of 2008 is before us.
14. Hill Crest Realty also filed an application (IA No. 12638 of 2008) in Suit No. 992
of 2005 praying, inter alia, that Hotel Queen Road be declared a public limited company
and that the order dated 12th August, 2005 be vacated. This application was filed on 3rd
October, 2008 and was first listed for hearing on 17th October, 2008. Notice in the
application was issued to Hotel Queen Road and accepted in Court by learned counsel.
Time was given to file a reply and the hearing was adjourned to 24th October, 2008.
15. By 24th October, 2008 no reply was filed to the application. However, the learned
Single Judge took up the application filed by Hill Crest Realty for hearing and by an
order of the same date, vacated the interim order dated 12th August, 2005 on the ground,
inter alia, that it was a natural consequence of the earlier order dated 15th October, 2008.
That is how the third appeal being FAO (OS) No. 440 of 2008 is before us.
16. As is evident, the events disclose a rather complicated state of affairs, but
fortunately, the submissions made by learned counsel for the parties were simple and
uncomplicated. Whether, in Suit No. 992 of 2005, Hotel Queen Road Pvt. Ltd. concealed
the resolution dated 30th September, 2002 converting it into a public limited company If
so, what is the effect thereof
17. On 30th September, 2002 two special resolutions were proposed to be passed by
the shareholders of Hotel Queen Road Pvt. Ltd. They were necessary, as per the
Explanatory Statement pursuant to Section 173(2) of the Companies Act, 1956 (the Act)
for the allotment of equity shares to the shareholders of ITDC according to the ratio
envisaged in the Scheme of Arrangement of Demerger of the hotel property of ITDC.
The Explanatory Statement reads as follows: Item Nos. 1 and 2: Conversion of the
company into a public limited company and increase of authorised share capital. Pursuant
to the Scheme of Arrangement of Demerger as sanctioned by the Department of
Company Affairs, the hotel property of Indian Tourism Development Corporation
Limited (ITDC) has been demerged with the company. In accordance with the said
scheme the company is required to allot equity shares to the shareholders of ITDC as per
the ratio envisaged in the scheme. As the company is a private limited and restricts the
total number of shareholders to fifty, the present authorised share capital is insufficient to
allot equity shares in accordance with the said ratio. Accordingly the Board of Directors
have passed necessary resolutions for conversion of the company into public limited
company as well as increase of authorised share capital, however subject to the approval
of members in General Meeting. Hence the resolutions are proposed for approval of the
members. Copies of the order of the Department of Company Affairs sanctioning the
Scheme of Arrangement of Demerger shall be available for inspection at the Registered
Office of the Company at the time of the General Meeting. None of the Directors is in
any way concerned or interested in the resolutions.
18. The text of the two special resolutions that were eventually passed by the
shareholders of Hotel Queen Road Pvt. Ltd. on 30th September, 2002 is as follows:
Resolved that the company be converted into Public Limited Company and that such
consequential amendments as may be necessary, in such a manner that no longer the
provisions of Section 3 (1) (iii) of the Companies Act, 1956 are required to be included in
the Memorandum and Articles of Association of the Company. Further 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 resolutions. Resolved that the authorised share capital
of the company be and is hereby 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/-.
Resolved further that the Memorandum 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.
19. It appears that on or about 8th October, 2002 Mr. Ram Parshotam Mittal filed
Form No. 23 under the Act with the Registrar of Companies intimating to him the
contents of the Explanatory Statement as well as the text of the two special resolutions
passed by the shareholders of Hotel Queen Road Pvt. Ltd. on 30th September, 2002.
20. It further appears that pursuant to the two special resolutions mentioned above,
Hotel Queen Road Pvt. Ltd. (perhaps acting through Mr. Ram Parshotam Mittal) filed the
statement in lieu of prospectus under Section 44(1)(b) of the Act with the Registrar of
Companies on 12th December, 2003. The statute, however, requires the filing of the
statement in lieu of prospectus within 30 days of the alteration of the Articles of
Association of a private limited company ceasing to be so. In this context, Section 44(1)
of the Act reads as follows: 44. Prospectus or statement in lieu of prospectus to be filed
by private company on ceasing to the private company. - (1) If a company, being a
private company, alters its articles in such a manner that they no longer include the
provisions which, under clause (iii) of sub-section (1) of section 3, are required to be
included in the articles of a company in order to constitute it a private company, the
company- (a) shall, as on the date of the alteration, cease to be a private company; and (b)
shall, within a period of thirty days after the said date, file with the Registrar either a
prospectus or a statement in lieu of prospectus, as specified in sub-section (2). At this
stage, we may note that we had asked learned counsel for Hotel Queen Road to produce
the statement in lieu of prospectus, but were told that it is not traceable.
21. According to learned counsel for Hill Crest Realty, a few points of significance
emerge from the above facts: a. A special resolution was passed on 30th September, 2002
converting Hotel Queen Road Pvt. Ltd. into a public limited company. b. Mr. Ram
Parshotam Mittal had knowledge of this special resolution, in as much as he had filed
Form No. 23 as well as the statement in lieu of prospectus with the Registrar of
Companies. c. The second special resolution passed on 30th September, 2002 was acted
upon in as much as the share capital of Hotel Queen Road Pvt. Ltd. was in fact increased
from Rs. 1,00,000/- to Rs. 90,00,000/-.
22. According to learned counsel for Hotel Queen Road, a few counter points of
significance cannot be overlooked. They are: a. The first special resolution did not
become operative eo instanti. The decision for conversion was only an in-principle
decision and nothing more. This is clear from the following: i. When the two share
purchase agreements were entered into on 8th October, 2002 between the Government,
Moral Trading and Investment Ltd. and Hotel Queen Road, then the latter was described
as a private limited company. ii. Similarly, when the lease agreement dated 8th October,
2002 was entered into between the President of India and Hotel Queen Road, the latter
was described as a private limited company. iii. The language employed in the two
special resolutions is markedly different. In the resolution regarding the conversion of
Hotel Queen Road Pvt. Ltd. into a public limited company, it was resolved that the
company be converted and consequential amendments be carried out in the Memorandum
and Articles of Association of Hotel Queen Road Pvt. Ltd. However, for increasing the
share capital, it was resolved that the share capital of the company be and is hereby
increased and further that the Memorandum and Articles of Association of the company
be and is hereby altered to reflect the above increased authorized share capital of the
company. This suggested that for effecting the conversion, some acts needed to be
performed by Hotel Queen Road Pvt. Ltd. but not so for increasing the share capital. b.
The provisions of Section 3(1)(iii) of the Act were not deleted from the Memorandum
and Articles of Association of Hotel Queen Road Pvt. Ltd. c. No change was effected in
the name of Hotel Queen Road Pvt. Ltd. by deleting the word private as required by
Section 13 of the Act nor was any such change registered with the Registrar of
Companies. d. A letter issued by the Registrar of Companies as recently as on 21st
October, 2008 described Hotel Queen Road as Hotel Queen Road Pvt. Ltd. e. The letter
dated 21st October, 2008 issued by the Registrar of Companies pointed out the following:
i. The statement in lieu of prospectus was not filed within 30 days as required by Section
44(1)(b) of the Act, but it was filed more than a year later on 12th December, 2003. ii.
Hotel Queen Road Pvt. Ltd. had not passed a special resolution under the proviso to
Section 21 or under Section 16 of the Act with respect to the change of its name and
alteration of the name clause of the Memorandum of Association of the company
respectively. iii. The status of Hotel Queen Road Pvt. Ltd. was not changed from a
private company to a public company and so no fresh certificate of incorporation was
issued in accordance with the provisions of Section 23 of the Act. iv. As per the records
maintained by the Registrar of Companies, Hotel Queen Road is a private limited
company. This, according to learned counsel, is conclusive of the status of Hotel Queen
Road. (Sulphur Dyes Ltd. v. Hickson and Dadajee Ltd., [1995] 83 Comp Cas 533).
23. It is not necessary for us to decide whether Hotel Queen Road is a private limited
company or a public company. Indeed, by inviting us to do so, learned counsel on either
side are effectively inviting us to jump the gun, as it were. This is so because this is the
very issue for adjudication in Suit No. 1832 of 2008 (Hill Crest Realty Sdn. Bhd. v. Ram
Parshotam Mittal and others). It may be recalled that it is in this suit that Hill Crest Realty
has sought a declaration that Hotel Queen Road is a public company. Under these
circumstances, it would not be proper for us to virtually decree the suit at an interim
stage.
24. Indeed, learned counsel for Hotel Queen Road voiced a grievance that the learned
Single Judge while deciding the interim application in Suit No. 1832 of 2008 (Hill Crest
Realty Sdn. Bhd. v. Ram Parshotam Mittal and others) had virtually decided the suit itself
and that this was impermissible. He placed reliance upon Union of India and others v.
Modiluft Ltd., (2003) 6 SCC 65 in support of his case. It is true that the Supreme Court
set aside the order passed by the High Court because the interim relief was in the nature
of a final relief, which could not have been granted without deciding the issues involved
in the case. But, the Supreme Court did not lay down any inflexible proposition in this
regard. On the contrary, as is apparent from paragraph 17 of the Report, the conclusion
was based on the facts and circumstances of the case. Nevertheless, we do agree that the
power to grant interim relief, that has the effect of granting the final relief, should be
sparingly exercised by the Courts and, as the Supreme Court has suggested, depending
upon the facts of the case.
25. On a perusal of the facts and circumstances of the case before us, it does appear
that the issue whether Hotel Queen Road continues to remain a private limited company
or is masquerading as one is a contentious one. It needs to be decided after giving an
opportunity to the parties to lead evidence in support of their respective case. We may
add that we feel a little handicapped in taking a final decision in this regard in the
absence of the statement in lieu of prospectus filed by Hotel Queen Road on 12th
December, 2003.
26. However, more importantly, the focal issue before us for the present is whether
Hotel Queen Road Pvt. Ltd. is guilty of suppressing facts pertaining to the conversion
resolution dated 30th September, 2002 and the subsequent events connected therewith in
Suit No. 992 of 2005 (Hotel Queen Road Pvt. Ltd. v. Hill Crest Realty Sdn. Bhd. and
others). Learned counsel for Hotel Queen Road did not address us on the crucial issue at
all, except to contend that the allegation of playing a fraud upon the Court (through
suppression of facts) is a very serious allegation. No doubt about it but the submission
was made in a different context and we will certainly advert to it at the appropriate stage.
But, as a question of fact, it cannot be denied (and indeed it was not denied) by learned
counsel for Hotel Queen Road that in Suit No. 992 of 2005 (Hotel Queen Road Pvt. Ltd.
v. Hill Crest Realty Sdn. Bhd. and others) it did not advert to the resolution dated 30th
September, 2002 regarding the conversion of Hotel Queen Road Pvt. Ltd. into a public
company.
27. What is the legal position on the subject of suppression or non- disclosure of facts
Learned counsel for Hill Crest Realty invited our attention to Seemax Construction (P)
Ltd. v. State Bank of India and another, AIR 1992 Delhi 197. In that case, it was held
that, A party seeking discretionary relief has to approach the court with clean hands and
is required to disclose all material facts which may, one way or the other, affect the
decision. (emphasis given). The desirable disclosures versus obligatory disclosures
controversy was mentioned in this decision but not dealt with since it was observed that
in that case, there was an obligation to disclose the facts that were actually suppressed.
The interim application was dismissed for concealment of material facts.
28. In J.K. Kashyap v. J.K. Guha, 1993 IV AD (Delhi) 29, Anand Swarup v.
Municipal Corporation of Delhi, 36 (1988) DLT 304 and Standipack Pvt. Ltd. v. Oswal
Trading Co. Ltd., 80 (1999) DLT 56 it was held that suppression of a material fact
disentitles a litigant from obtaining discretionary relief from the Courts. In all these cases,
interim relief was either declined or vacated due to non-disclosure of a material fact.
Similarly, the Supreme Court declined to entertain a petition for special leave to appeal in
G. Narayanaswamy Reddy v. Government of Karnataka and another, (1991) 3 SCC 261
on account of non- disclosure and suppression of material facts.
29. Two other decisions were cited by learned counsel for Hill Crest Realty. In S.P.
Chengalvaraya Naidu v. Jagannath, (1994) 1 SCC 1 it was held that non-production or
failure to mention a relevant document at the trial stage is tantamount to playing a fraud
upon the Court. It was said, A litigant, who approaches the court, is bound to produce all
the documents executed by him which are relevant to the litigation. If he withholds a vital
document in order to gain advantage on the other side then he would be guilty of playing
fraud on the court as well as on the opposite party. Based on this, the Supreme Court
upheld the view of the trial court that the application for grant of a final decree of
partition was liable to dismissal.
30. In Gowrishankar v. Joshi Amba Shankar Family Trust, (1996) 3 SCC 310 the
view taken in Chengalvaraya Naidu was upheld. The Supreme Court went a step further
in this case (and that is important for our purposes) and observed that the failure by the
respondent to disclose the appellants offer to purchase the property in question was
sought to be justified on the ground that the offer was not bona fide. The Supreme Court
pointed out that it was pertinent that the issue of bona fides of the appellants offer was
raised only in support of the respondents inability to accept it and not in justification of
its non- disclosure. The Supreme Court then remitted the matter to the High Court to call
for fresh offers for the purchase of the property in question and did not dismiss the suit of
the respondent.
31. In State of Andhra Pradesh and another v. T. Suryachandra Rao, (2005) 6 SCC
149 the Supreme Court noted the above two decisions and understood them to mean that,
Suppression of a material document would also amount to a fraud on the court.
32. We need to refer to only two other passages. One from Chengalvaraya Naidu
wherein the Supreme Court quotes Chief Justice Edward Coke of England as having said
about three centuries ago: Fraud avoids all judicial acts, ecclesiastical or temporal. The
Supreme Court then goes on to say, It is the settled proposition of law that a judgment or
decree obtained by playing fraud on the court is a nullity and non est in the eyes of law.
Such a judgment/decree by the first court or the highest court has to be treated as a
nullity by every court, whether superior or inferior. It can be challenged in any court even
in collateral proceedings.
33. In Lazarus Estates Ltd. v. Beasley, (1956) 1 QB 702: (1956) 1 All ER 341 Lord
Denning observed: No judgment of a court, no order of a minister can be allowed to stand
if it has been obtained by fraud. Fraud unravels everything.
34. What are the principles that can be derived from these decisions Firstly, a litigant
approaching a Court must disclose all relevant facts and documents failure to do so
amounts to playing a fraud on the Court and the opposing party. Secondly, it is of no
consequence which way the facts or documents may impact they should be disclosed if
they are likely to affect the decision one way or another. Thirdly, playing a fraud upon
the Court would vitiate the proceedings and if a decision is obtained by playing a fraud
upon any Court (including a superior Court), it can be set aside by any Court (including
an inferior Court). This strict understanding of the law by the Courts hardly leaves any
choice to a litigant to decide what is relevant and what is not for the purposes of
disclosure of a fact or a document.
35. In this background, we quizzed learned counsel for Hill Crest Realty on the
significance of the conversion resolution dated 30th September, 2002 and the effect of its
suppression, if any. This was necessary since there was little to suggest, at least prima
facie, that Hotel Queen Road Pvt. Ltd. had in fact become a public company and that it
was a debatable proposition. It could have been argued by Hotel Queen Road Pvt. Ltd.
that since the resolution for conversion was not given effect to, it was not a relevant or
material fact that ought to have been disclosed. At best, it was desirable to have disclosed
the fact, but not obligatory the decision resting with Hotel Queen Road Pvt. Ltd.
36. As a result of his response, we may note three important points: Firstly, it may be
recalled that on 30th September, 2002 two resolutions were passed by the shareholders of
Hotel Queen Road Pvt. Ltd. one dealing with conversion and the other dealing with an
increase in the authorized share capital to 9,00,000 shares each of the value of Rs. 10/-. In
Suit No. 992 of 2005 (Hotel Queen Road Pvt. Ltd. v. Hill Crest Realty Sdn. Bhd. and
others) it was disclosed that the share capital of the Hotel Queen Road Pvt. Ltd. is
9,00,000 shares of Rs. 10/- each. In fact, the break-up is given in the decision of the
learned Single Judge dated 12th August, 2005. If that be so, it is not clear why there was
only a partial disclosure of facts by Hotel Queen Road Pvt. Ltd. unless there was an
intention to suppress some uncomfortable event.
37. Secondly, it is quite possible that the learned Single Judge dealing with the
interim application in Suit No. 992 of 2005 might have taken the view, on the available
facts, that Hotel Queen Road Pvt. Ltd. had actually been converted into a public
company. It cannot be said, one way or the other, what the decision might have been but
this disclosure might well have completely changed the decision taken by the learned
Single Judge. It would have certainly changed the status and character of Hotel Queen
Road Pvt. Ltd.
38. Thirdly, the desirability or obligatory nature of disclosure of facts is best left to
the Courts to decide. It is always obligatory for a litigant to approach the Court with clean
hands, which means a full disclosure of all facts, relevant or apparently not relevant. It is
for the Courts to decide whether the facts disclosed are relevant or not and then to make
use of them. A litigant cannot be selective about disclosure because then he would be
misleading not only the Court but also the opposing party. It may well be, in a given case
(as has actually happened in the cases that we are dealing with) that the opposing party
may not know all the facts, and non-disclosure may, therefore, prejudice that party. It
may also be (again, as has actually happened in the cases that we are dealing with) that a
fact might be considered not relevant or not material by one litigant, but might be
considered vital by the opposing party. It is for this reason that the choice cannot be left
to either of the litigants.
39. Learned counsel for Hotel Queen Road did contend that Hill Crest Realty was
aware of the conversion resolution of 30th September, 2002 and so there was no fraud
played upon the Court by his client. In this regard, he placed reliance on the Directors
Report of Hotel Queen Road Pvt. Ltd. for the year ended 31st March, 2004 This
document was filed by Hill Crest Realty before the learned Single Judge in Suit No. 992
of 2005.
40. We have been shown the Directors report. All that it says is: The companies
application for conversion into public limited company is pending with Registrar of
companies office. (sic) This does not make any reference to the resolution of 30th
September, 2002. We are of the opinion that notwithstanding this, it was the duty and
responsibility of Hotel Queen Road to place the full facts and documents before the
learned Single Judge. Hotel Queen Road cannot be heard to say that even though it did
not place the full facts and documents before the learned Single Judge, it would hardly
matter because Hill Crest Realty knew of those facts and documents. Hotel Queen Road
cannot shirk its primary duty and responsibility and cannot be permitted to fire its gun by
placing it on the shoulder of Hill Crest Realty.
41. What then is the result of this discussion Learned counsel for Hill Crest Realty
urged us to dismiss the suit filed by Hotel Queen Road Pvt. Ltd. since it was based on a
fraud. We do agree that suppression of the conversion resolution by Hotel Queen Road
amounted to playing a fraud upon the Court, but we cannot go so far as to dismiss the suit
filed by Hotel Queen Road since the jurisprudence in this regard has not developed to
that extent. In Seemax, Kashyap, Anand Swarup and Standipack the Court only
dismissed the application for interim relief and not the suit. Even in Chengalvaraya Naidu
the Supreme Court only upheld the dismissal of the application for the grant of a final
decree of partition. In Gowrishankar also the Supreme Court remitted the matter to the
High Court to call for fresh offers and did not dismiss the suit itself. That being the view
taken by this Court and the Supreme Court, we do not think it appropriate to accede to the
request of learned counsel for Hill Crest Realty to dismiss Suit No. 992 of 2005 (Hotel
Queen Road Pvt. Ltd. v. Hill Crest Realty Sdn. Bhd. and others). We do, however, allow
FAO (OS) No. 282 of 2005 and set aside the order dated 12th August, 2005 passed by the
learned Single Judge in I.A. No. 5505 of 2005 which is hereby dismissed.
42. Having done so, we wish to make it clear that this does not mean that Hotel
Queen Road automatically becomes a public limited company. Nor does it mean that Hill
Crest Realty automatically has voting rights in Hotel Queen Road that latter is an issue
which we will consider when we deal with the second and third appeals.
43. However, before we deal with the practical details of the issues before us in the
second and third appeals, it is necessary to first deal with a preliminary submission of
learned counsel for Hotel Queen Road in respect of these two appeals. It was urged that
his client had been unjustly dealt with by the learned Single Judge, in as much as it was
not given a fair hearing when the orders dated 15th and 24th October, 2008 were passed.
Whether the principles of natural justice were not complied with by the learned Single
Judge and if so, the effect thereof
44. The facts giving rise to this contention are, fortunately, quite straightforward. I.A
No. 12164 of 2008 (giving rise to FAO (OS) No. 426 of 2008) is an application in which
it is alleged that Hotel Queen Road Pvt. Ltd. had played a fraud upon the Court by
concealing a material fact, namely, that it had been converted into a public limited
company by a resolution passed on 30th September, 2002. Hill Crest Realty allegedly did
not know this fact earlier.
45. This application was filed on 29th September, 2008 and listed for the first time on
30th September, 2008. Without any time being given to Hotel Queen Road to file a reply
to this application, it was heard by the learned Single Judge on the same day. Time was
given to the parties to file their synopsis/ written submissions, which they did. Final
orders were passed on this application on 15th October, 2008 to the effect that Hotel
Queen Road had concealed a material fact from this Court and had thereby played a fraud
upon this Court. It was also directed that an administrator be appointed to manage the
affairs of Hotel Queen Road. According to learned counsel for Hotel Queen Road the
allegation of fraud through suppression is a very serious one and Hotel Queen Road
should have been given time to at least file a reply to the application. To make matters
worse, it was held by the learned Single Judge that Hill Crest Realty, a preference
shareholder, had voting rights. No opportunity, or in any case, an inadequate opportunity
was given to Hotel Queen Road to place the facts on record to demonstrate that Hill Crest
Realty had no such rights, as claimed. It was pointed out by learned counsel that in the
suit itself, no written statement had yet been filed and so the view point of Hotel Queen
Road was not on record in any manner whatsoever. Looked at from any perspective,
according to learned counsel, Hotel Queen Road had been very unfairly dealt with.
46. Learned counsel for Hotel Queen Road also submitted that in I.A. No. 12638 of
2008 (giving rise to FAO (OS) No. 440 of 2008) the situation was equally unfair. This
application was first listed on 17th October, 2008 and time was given to Hotel Queen
Road to respond to the allegations made in that application. It was submitted by learned
counsel that by this time the learned Single Judge had already passed an order on 15th
October, 2008 in I.A. No. 12164 of 2008 and to that extent damage had already been
done to Hotel Queen Road. When the application was again listed on 24th October, 2008
the learned Single Judge not only relied upon the earlier order passed by him against
Hotel Queen Road, but went a step further and vacated the original order dated 12th
August, 2005 in I.A. No. 5505 in Suit No. 992 of 2005 (Hotel Queen Road Pvt. Ltd. v.
Hill Crest Realty Sdn. Bhd. and others). This was despite the fact that Hill Crest Realty
had not made such a prayer in the application.
47. It was emphasized by learned counsel for Hotel Queen Road that in Suit No. 1832
of 2008 no opportunity of filing a written statement was given to the defendants since a
copy of the plaint was served only pursuant to the order dated 3rd November, 2008.
48. According to learned counsel for Hotel Queen Road, when all these facts and
proceedings are considered and appreciated cumulatively, it is clear that there has been a
complete travesty of justice. Reliance was placed on Suryachandra Rao to contend that a
charge of fraud is rather serious and the learned Single Judge ought to have given an
opportunity to meet the charge. It was submitted that the Supreme Court has held that
fraud is a deliberate deception and such a charge against his client should not be allowed
to stick without a fair hearing.
49. We agree with learned counsel that a charge of fraud is serious business and it
may be that the learned Single Judge acted rather hastily in accepting the charge. If so,
ordinarily the appropriate course of action would be to set aside the orders that are
adverse to the interests of Hotel Queen Road and remand the matter to the learned Single
Judge for reconsideration on merits. However, we have chosen not to do that for the
reason that this easy way out would take care of only the second and third appeals
pending before us. What about the first appeal against the order dated 12th August, 2005
To decide that, we would still have to consider the questions raised by learned counsel for
Hill Crest Realty to the effect that Hotel Queen Road had obtained that order by
suppressing a material fact and documents and playing a fraud upon this Court. In other
words, the decision in the first appeal would necessarily have an impact on the second
and third appeals. In fact, the decision in the first appeal would bind the learned Single
Judge (on remand) hearing the miscellaneous application moved by Hill Crest Realty in
Suit No. 992 of 2005 (Hotel Queen Road Pvt. Ltd. v. Hill Crest Realty Sdn. Bhd. and
others). For example, if we were to hold in the first appeal (as we have done) that Hotel
Queen Road had played a fraud on the Court, nothing substantial would remain to be
decided in the miscellaneous application on remand in Suit No. 992 of 2005, since the
learned Single Judge would be bound by our conclusions. Consequently, segregating the
first and third appeals would serve no useful purpose. Similarly, the issue of the voting
rights (if any) of Hill Crest Realty directly arise for consideration in the first and second
appeals. Therefore, segregating the first and second appeals would also serve no useful
purpose.
50. That apart, we have heard learned counsel for the parties in considerable detail
(hopefully there is no grievance in that respect!) and feel it appropriate to render a
decision on merits so that the parties can get on with their commercial interests, rather
than continually litigate.
51. Are we following the right course of action Learned counsel for Hotel Queen
Road submitted that an unfair initial trial cannot be set right in appeal. He cited Institute
of Chartered Accountants of India v. L.K. Ratna and others, (1986) 4 SCC 537 wherein
the Supreme Court (in paragraph 17 of the Report) referred with approval to Sir William
Wades Administrative Law (5th edition, page 487) to the following effect: If natural
justice is violated at the first stage, the right of appeal is not so much a true right of
appeal as a corrected initial hearing: instead of fair trial followed by appeal, the
procedure is reduced to unfair trial followed by fair trial.
52. In that decision, reliance was also placed upon Leary v. National Union of
Vehicle Builders, (1971) Ch 34 wherein Megarry, J held as follows: If one accepts the
contention that a defect of natural justice in the trial body can be cured by the presence of
natural justice in the appellate body, this has the result of depriving the member of his
right of appeal from the expelling body. If the rules and the law combine to give the
member the right to a fair trial and the right of appeal, why should he be told that he
ought to be satisfied with an unjust trial and a fair appeal As a general rule, at all events,
I hold that a failure of natural justice in the trial body cannot be cured by a sufficiency of
natural justice in an appellate body.
53. As noted by the Supreme Court, this view has been accepted by the Ontario High
Court in Canada in Re Cardinal and Board of Commissioners of Police of City of
Cornwall, (1974) 42 DLR (3d) 323, by the Supreme Court of New Zealand in Wislang v.
Medical Practitioners Disciplinary Committee, (1974) 1 NZLR 29 and the Court of
Appeal of New Zealand in Reid v. Rowley, (1977) 2 NZLR 472. Based on this, the
submission of learned counsel clearly was that the two impugned orders should be set
aside and Hotel Queen Road be given a fair hearing by the learned Single Judge.
54. Are there any exceptions to the general rule noted by the Supreme Court and
canvassed for our acceptance by learned counsel for Hotel Queen Road The answer is
provided in Ratna itself in paragraph 18 of the Report and also in United Planters
Association of Southern India v. K.G. Sangameswaran, (1997) 4 SCC 741.
55. The Supreme Court was of the view in Ratna that the immediate consequence of
the initial order is of importance. If the damage caused by the initial order is irreversible
(such as damage to a persons reputation) then, even the widest appellate power will not
be able to undo the damage. However, the situation would be completely different where
restitution is possible, as in a money claim. In that event, compliance with the principles
of natural justice at the appellate stage could right the wrong.
56. In Sangameswaran the services of an employee were terminated without holding a
domestic inquiry. The Appellate Authority allowed the appeal of the employee, set aside
the termination and ordered his reinstatement. The decision of the Appellate Authority
proceeded on the basis that the termination effected without a domestic inquiry was
illegal. Apparently, the Association had filed an application before the Appellate
Authority to lead evidence to prove the misconduct of the employee but that Authority
did not consider it. Before the Supreme Court, the Association contended that the
Appellate Authority should have dealt with the application on merits and taken a decision
thereon. The employee contended that if an opportunity of hearing was not given at the
initial domestic inquiry stage, then the defect could not be cured by giving an opportunity
at the appellate stage. Consequently, even if the Appellate Authority did not dispose of
the application filed by the Association, it would not vitiate the order of that authority.
The Supreme Court negatived this contention in the following words: It has already been
seen above that the Appellate Authority has full jurisdiction to record evidence to enable
it to come to its own conclusion on the guilt of the employee concerned. Since the
Appellate Authority has to come to its own conclusion on the basis of the evidence
recorded by it, irrespective of the findings recorded in the domestic enquiry, the rule laid
down in Ratna case will not strictly apply and the opportunity of hearing which is being
provided to the respondent at the appellate stage will sufficiently meet his demands for a
just and proper enquiry.
57. It is true that the Appellate Authority in Sangameswaran was not (in a sense) an
appellate authority as would be understood in common parlance, but was only described
as such. But, the derivative principle is that where an appellate authority has all the
powers of the original authority then, subject to the immediate impact of the initial order,
failure to comply with the principles of natural justice can be remedied at the appellate
stage.
58. We are, therefore, of the opinion that Ratna does not lay down any inflexible rule
that failure of natural justice is not curable at the appellate stage. There are at least two
exceptions to the rule, and the present cases fall within the exceptions. Additionally, for
the reasons given by us above, which are really peculiar to these cases, it is not advisable
to set aside the impugned orders in the second and third appeals and remand the
applications for fresh consideration. It would be more appropriate if we decide the issues
before us. Whether Hill Crest Realty, a cumulative preference shareholder in Hotel
Queen Road Pvt. Ltd. is entitled to vote at any EGM of its shareholders
59. It may be recalled that Hill Crest Realty had purchased preference shares of Hotel
Queen Road Pvt. Ltd. in May and July 2003. Whether the preference shares were
cumulative or non-cumulative was argued before the learned Single Judge in Suit No.
992 of 2005 but no decision was rendered since it was not necessary to do so. Before us,
however, submissions have been made as if the preference shares were cumulative and so
we are proceeding on that basis.
60. According to learned counsel for Hill Crest Realty, since his client was not paid
any dividend on these shares for two years, Hill Crest Realty became entitled to exercise
voting rights on every resolution placed before Hotel Queen Road Pvt. Ltd. at any
meeting. Learned counsel placed reliance on Section 87(2) of the Act. On the other hand,
learned counsel for Hotel Queen Road Pvt. Ltd. contended that by virtue of Section 90(2)
of the Act, the provisions of Section 87(2) were not applicable to a private limited
company unless it was a subsidiary of a public company. It was submitted that since
Hotel Queen Road Pvt. Ltd. fell in neither category, Hill Crest Realty could not exercise
voting rights on the basis of its preference shares.
61. In his order dated 12th August, 2005 the learned Single Judge came to the prima
facie conclusion that Hotel Queen Road was a private limited company and so, in view of
Section 90(2) of the Act, Hill Crest Realty could not exercise any voting rights. It was not
examined whether Hotel Queen Road was a subsidiary of a public company or not.
62. The learned Single Judge who heard the interim application in Suit No. 1832 of
2008 concluded in his order dated 15th October, 2008 that Hotel Queen Road was a
public company and, therefore, the bar of Section 90(2) of the Act was inapplicable.
Accordingly, he held that Hill Crest Realty could exercise voting rights on the basis of its
preference shares. The learned Single Judge did not examine the issue whether the
conditions prescribed by Section 87(2) of the Act were met or not.
63. As we have already indicated above, we are not deciding whether Hotel Queen
Road is a private limited company or a public company. We are also not deciding
whether it is a subsidiary of a public company or not because this was not argued before
us. There is no doubt that if it is held that Hotel Queen Road is a private limited
company, then Hill Crest Realty cannot exercise any voting rights in the face of the bar
created by Section 90(2) of the Act. We are, therefore, proceeding to decide the question
on the assumption that Hotel Queen Road is a public company. Why are we exercising
this option It is for four reasons: firstly, because the issue was argued before us by
learned counsel for both parties; secondly, it is entirely a legal issue, not requiring any
evidence to be recorded; thirdly, it is necessary to give a quietus to this issue now rather
than later and to enable the parties to determine their future course of action and; finally,
because for the relief to be granted (or denied), it is necessary to decide this issue.
64. Section 87(2)(b) of the Act is important and this reads as follows: 87. Voting
rights.(1) Subject to the provisions of Section 89 and sub-section (2) of Section 92 (a)
every member of a company limited by shares and holding any equity share capital
therein shall have a right to vote, in respect of such capital, on every resolution placed
before the company; and (b) his voting right on a poll shall be in proportion to his share
of the paid- up equity capital of the company. (2) (a) Subject as aforesaid and save as
provided in clause (b) of this sub- section, every member of a company limited by shares
and holding any preference 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 non-cumulative
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 not less than three years comprised in the six years
ending with the expiry of the financial year aforesaid. Explanation.For the purposes of
this clause, dividend shall be deemed to be due on preference shares in respect of any
period, whether a dividend has been declared by the company on such shares for such
period or not, (a) on the last day specified for the payment of such dividend for such
period, in the articles or other instrument executed by the company in that behalf; or (b)
in case no day is so specified, on the day immediately following such period; (c) where
the holder of any preference share has a right to vote on any resolution in accordance
with the provisions of this sub-section, his voting right on a poll, as the holder of such
share, shall, subject to the provisions of Section 89 and sub-section (2) of Section 92, be
in the same proportion as the capital paid up in respect of the preference share bears to
the total paid up equity capital of the company. Payment of dividend is dealt with by
Section 205 of the Act and the relevant portion thereof reads as follows: 205. Dividend to
be paid only out of profits.(1) No dividend shall be declared or paid by a company for
any financial year except out of the profits of the company for that year arrived at after
providing for depreciation in accordance with the provisions of sub-section (2) or out of
the profits of the company for any previous financial year or years arrived at after
providing for depreciation in accordance with those provisions and remaining
undistributed or out of both or out of moneys provided by the Central Government or a
State Government for the payment of dividend in pursuance of a guarantee given by that
Government: Provided that: xxx xxx xxx (not relevant)
65. Learned counsel for Hotel Queen Road made a three-fold submission in support
of his case. It was submitted that merely because there was a default in payment of
dividend does not mean that Hill Crest Realty automatically acquired voting rights. The
reasons for default have to be appreciated before any conclusion can be drawn in this
regard. Secondly, he questioned the right of a preference share holder to exercise voting
rights when the Articles of Association of the company prohibited such an exercise.
Thirdly, he submitted that an offer to pay dividend was made to Hill Crest Realty, but it
was rejected. He submitted that the effect of this has also to be fully understood and
appreciated. We propose to consider each of these submissions in seriatim. Reasons for
default in payment of dividend and the effect of non-payment:
66. The primary and in fact the only reason put forth for not paying dividend to Hill
Crest Realty is that Hotel Queen Road had not been able to commence business for the
last several years. The blame for this state of affairs was put on Mr. Ashok Mittal and on
the fact that the hotel building required extensive renovations. However, we are not
concerned with who is to blame for what. The fact of the matter is that admittedly
dividend was not paid by Hotel Queen Road to Hill Crest Realty right from 2003
onwards. It was pointed out by learned counsel that dividend can only be paid out of
profits earned by the company (Section 205(1) of the Act) and since it had not
commenced business, it could not earn profits. In other words, Hotel Queen Road cannot
be made to suffer the consequences of events beyond its control.
67. Reference was made to Company Law by Robert R. Pennington (4th edition,
pages 183-184) to contend that preference dividend becomes due only (a) when a
company makes profits that are available to pay dividend and (b) it has been properly
declared in accordance with the Articles of Association of the company. Indeed, even
Section 205 (1) of the Act also makes it clear that no dividend shall be declared or paid
except out of profits of the company. We were told that the usual practice is for the Board
of Directors to recommend and for the annual general meeting to declare the dividend.
(Guide to Companies Act by A. Ramaiya, 16th edition, page 1909). In the present case,
neither were any profits made by Hotel Queen Road nor was there any declaration of
dividend.
68. The follow-up to this contention was that there was no dividend due to the
preference shareholder and, therefore, Section 87(2)(b) of the Act was even otherwise
inapplicable. To explain the meaning of the word due reference was made to a handful of
dictionaries, both lay and legal and to State of Kerala and others v. V.R. Kalliyanikutty
and another, AIR 199 SC 1305. The sum and substance of the meaning attributable to due
in the various dictionaries is that for an amount to be due it must be legally recoverable.
In Kalliyanikutty it has been described as an amount which the creditor has a right to
recover. The Supreme Court also noted that, In every case the exact meaning of the word
due will depend upon the context in which that word appears.
69. In Re Bradford Investments Ltd. [1991] BCLC 224 a somewhat similar situation
had arisen in as much the company had not made any profits and so dividend was said to
be not payable to the preference shareholders, nor was it, of course, paid. It was held that
the obvious purpose of giving a vote to preference shareholders whose dividends are in
arrear, is . to allow them to participate in the selection of management of the company or
any other matters entrusted to a general meeting. This right is needed precisely in the case
in which insufficient profits have been made to enable their dividends to be paid.
70. The fact that no dividend was paid to Hill Crest Realty on its preference shares
would have certainly been a cause of concern to it, both financial and commercial. It is to
protect such interests, of similarly placed persons, that the Act gives them, through
Section 87(2), the right to vote.
71. As regards dividend due, the Explanation to Section 87(2)(b) of the Act
introduces a fiction to the effect that dividend shall be deemed to be due on preference
shares in respect of any period, whether it has been declared by the company or not. In
Principles of Statutory Interpretation by Justice G.P. Singh (9th edition, page 327) it is
observed (citing J.K. Cotton Spinning and Weaving Mills Ltd. v. Union of India, AIR
1988 SC 191) that, The legislature is quite competent to create a legal fiction, in other
words, to enact a deeming provision for the purpose of assuming existence of a fact
which does not really exist
72. It follows from this that even if a company does not declare a dividend, it is
deemed declared under certain circumstances. The existence of at least one of those
circumstances, as enumerated in the Explanation to Section 87(2)(b) of the Act, was not
disputed. As learned counsel for Hill Crest Realty submits, this takes care of the
declaration aspect the profit aspect having already been dealt with by us above.
73. Consequently, we are of the opinion that both the ingredients of preference
dividend as described by Pennington are taken care of. Even if no dividend was declared
by Hotel Queen Road, it is deemed to have been declared and even if no profits had
accrued to Hotel Queen Road, it is all the more reason for enabling Hill Crest Realty to
exercise its voting rights in terms of Section 87(2)(b) of the Act.
74. Learned counsel for Hotel Queen Road submitted that the words two years
occurring in Section 87(2)(b)(ii) of the Act have not been defined. He submitted that the
period of two years could mean two financial years or two accounting years. Looking at
the scheme of payment of dividend, particularly Section 205(1) of the Act, he submitted
that two years must mean two financial years. We cannot accept this submission. There is
absolutely no warrant for reading any additional words in the statute. If the legislature has
enacted the words two years without any adjective to them, we cannot add any adjective -
whether it is financial or accounting or calendar. Two years must mean what it means in
plain English language, namely, a period of 24 months, nothing more nor less.
75. We may, in this context, refer to another submission of learned counsel that the
expression financial year has been defined in Section 2(17) of the Act in the following
words: (17) financial year means, in relation to any body corporate, the period in respect
of which any profit and loss account of the body corporate laid before it in annual general
meeting is made up, whether that period is a year or not: Provided that, . (not relevant)
76. This does not advance the case of Hotel Queen Road at all. Firstly, in so far as
declaration of dividend by Hotel Queen Road is concerned, it need not be at an annual
general meeting as provided in Article 78 of its Articles of Association. Secondly, the
financial year may be less than 12 months, in a given case. Therefore, if we were to read
two years as two financial years it may really be to the disadvantage of Hotel Queen
Road, since the period of 24 months may well be curtailed.
77. That apart, in the absence of any definition of year, we have to look to the General
Clauses Act, 1897 which defines year in section 3(66) as: (66) year shall mean a year
reckoned according to the British calendar. Clearly, year must mean a period of 12
months. Effect of the Articles of Association on the entitlement of Hill Crest Realty to
vote:
78. It was submitted by learned counsel for Hotel Queen Road that the Articles of
Association of the company prohibited preference shareholders from voting in any
meeting. This contention does not impress us at all. First of all, Hotel Queen Road is
bound by the provisions of the Act and if there is any conflict between them and the
Articles, obviously the provisions of the Act will take precedence. We may also draw
attention to Section 9 of the Act, which clarifies the position beyond any doubt. This
Section reads as follows: 9. Act to override memorandum, articles, etc.Save as otherwise
expressly provided in the Act (a) the provisions of this Act shall have effect
notwithstanding anything to the contrary contained in the memorandum or articles of a
company, or in any agreement executed by it, or in any resolution passed by the company
in general meeting or by its Board of directors, whether the same be registered, executed
or passed, as the case may be, before or after the commencement of this Act; and (b) any
provision contained in the memorandum, articles, agreement or resolution aforesaid shall,
to the extent to which it is repugnant to the provisions of this Act, become or be void, as
the case may be.
79. Even otherwise, we have interpreted the relevant provisions of the Act as meaning
that a right to exercise its vote is conferred upon preference shareholders under certain
conditions - which have been fulfilled in this case. It is, therefore, not possible to accept
the view that notwithstanding the statute and its interpretation, the Articles of Association
of Hotel Queen Road would have overriding effect. Whether an offer to pay dividend was
made to Hill Crest Realty and the effect of its refusal:
80. There is no dispute that an offer to pay dividend was made to Hill Crest Realty
sometime in August, 2005 soon after Suit No. 992 of 2005 was filed by Hotel Queen
Road. Learned counsel for Hotel Queen Road said that Hill Crest Realty wrongly rejected
this offer and so no liability could be fastened on his client.
81. We find an inherent fallacy in this contention Hill Crest Realty was made an
offer, not of dividend, but an amount equal to dividend. These are clearly two different
concepts. Moreover, the offer was made after the two-year period had elapsed and was,
therefore, too late. Surely, it cannot be said with any degree of seriousness that the offer
of an amount in lieu of dividend effectively turned the clock back. Therefore, we find
nothing wrong in Hill Crest Realty rejecting the offer made.
82. Even otherwise, we are of the opinion that the offer, if described as an offer of
dividend, was an offer contrary to law, whether made within the two- year period or after.
Admittedly, Hotel Queen Road had not made any profits and so, quite clearly the offer
was not out of the profits made, nor was it as a result of a declaration made by the
company. Therefore, the offer cannot be termed as an offer of dividend. Additionally,
there is nothing to suggest that even if the offer was really an offer of dividend, it was
made to any other shareholder. If it was not, then Hotel Queen Road would have to
furnish some explanation how and why it chose only one particular shareholder for
making the offer and not others. There is no such explanation forthcoming. On the other
hand, if in fact an offer was made to other shareholders, Hotel Queen Road would need to
explain how it could do so without a declaration and without any profits having been
earned. Clearly, there are far too many unexplained holes in the theory propounded by
learned counsel for Hotel Queen Road and they cannot be papered over.
83. Our conclusion on this issue is that no offer of dividend was made to Hill Crest
Realty by Hotel Queen Road only an offer of payment of an amount in lieu of dividend
made and so, Hill Crest Realty could reject the offer, regardless of whether it was made
within the two-year period or after. Consequently, we are of the opinion that Hill Crest
Realty was entitled to vote at the EGM proposed for 4th August, 2005 as well as the
EGM scheduled for 16th October, 2008 provided Hotel Queen Road is a public company
and not a private limited company. Relief:
84. The position as it stands today is that there is a subsisting special resolution of
30th September, 2002 intending to convert Hotel Queen Road Pvt. Ltd. into a public
company. This special resolution has not been withdrawn it has simply been lying
dormant for the last several years. To an extent, it has been acted upon by Hotel Queen
Road since Form No. 23 was filled up and submitted to the Registrar of Companies on
8th October, 2002 and the statement in lieu of prospectus was also filed with the said
Registrar on 12th December, 2003. It was the duty and responsibility of the management
of Hotel Queen Road either to give full effect to the special resolution or to completely
abandon it. It has chosen to manage a halfway house without any apparent advantage to
itself and certainly to the detriment of the interests of Hill Crest Realty. Moreover,
another resolution passed on the same day, for increasing the share capital of Hotel
Queen Road Pvt. Ltd. was actually given effect to.
85. Under these circumstances, what possible relief could be given to Hill Crest
Realty One possible answer to the question is to appoint an administrator to manage the
affairs of Hotel Queen Road, as has been ordered by the learned Single Judge in his order
dated 15th October, 2008. We do not think this to be a wise course of action for the
reason that the hospitality industry requires special expertise. Appointing a judge (sitting
or retired) to manage a large hotel such as Hotel Queen Road as has been done in the
order dated 15th October, 2008 will perhaps put Hotel Queen Road in the hands of a
professionally unqualified person. Being an expert on hospitality arrangements and
entertainment is the very antithesis of being sober as a judge.
86. The other solution, one that commends itself to us, is to let the democratic process
of managing the affairs of Hotel Queen Road continue, subject to the decision, at the trial
stage on whether Hotel Queen Road is a private limited company or a public company.
Apart from this, we also feel that judicial interference in the internal affairs of a company
should be eschewed and the shareholders should be allowed to manage their affairs as
best as they can. We, therefore, direct that Hill Crest Realty may be permitted henceforth
to exercise its voting rights in all meetings of Hotel Queen Road subject to the decision,
at the trial stage on whether Hotel Queen Road is a private limited company or a public
company. The decisions taken at the EGM held on 4th August, 2005 should be given
effect to (subject to the above) and the meeting proposed for 16th October, 2008 should
be held as soon as possible in accordance with our above order and in accordance with
the statutory requirements. Should any of the parties apprehend any difficulty in holding
the EGM originally scheduled for 16th October, 2008 they are at liberty to approach the
learned Single Judge hearing Suit No. 1832 of 2008.
87. The third alternative of maintaining status quo, is not really viable at all. It would
mean that despite Hill Crest Realty succeeding on all counts, and having been deprived of
its legitimate entitlements for the past several years, it gains nothing and may continue to
lose if the present situation continues. The balance deserves to be set right and this is
possible only if Hill Crest Realty is now permitted a say in the affairs of Hotel Queen
Road. Costs:
88. The Supreme Court in Salem Advocates Bar Association, Tamil Nadu. v. Union
of India, (2005) 6 SCC 344 has opined that costs in litigation should follow the event
[Section 35(2) of the Code of Civil Procedure]. The Supreme Court has also said that the
costs should not be nominal but should be the actual reasonable costs incurred. This is
what the Supreme Court has said in paragraph 37 of the Report:- Judicial notice can be
taken of the fact that many unscrupulous parties take advantage of the fact that either the
costs are not awarded or nominal costs are awarded against the unsuccessful party.
Unfortunately, it has become a practice to direct parties to bear their own costs. In a large
number of cases, such an order is passed despite Section 35(2) of the Code. Such a
practice also encourages the filing of frivolous suits. It also leads to the taking up of
frivolous defences. Further, wherever costs are awarded, ordinarily the same are not
realistic and are nominal. When Section 35(2) provides for cost to follow the event, it is
implicit that the costs have to be those which are reasonably incurred by a successful
party except in those cases where the court in its discretion may direct otherwise by
recording reasons therefor. The costs have to be actual reasonable costs including the cost
of the time spent by the successful party, the transportation and lodging, if any, or any
other incidental costs besides the payment of the court fee, lawyers fee, typing and other
costs in relation to the litigation. It is for the High Courts to examine these aspects and
wherever necessary make requisite rules, regulations or practice direction so as to provide
appropriate guidelines for the subordinate courts to follow.
89. In line with the view expressed by the Supreme Court, we had informed learned
counsel for the parties at the commencement of the hearing of these appeals that we
would be awarding actual costs incurred in favour of the party that succeeds in the
appeals. We had requested learned counsel for the parties to submit a statement of
accounts which we would take as correct.
90. In our opinion, since the disputes between the parties are entirely of a commercial
nature, it is just and equitable that the losing party should suffer the consequences of the
litigation. We also note that the learned Single Judge who decided IA No.12164 of 2008
in Suit No.1832 of /2008 (Hill Crest Realty Sdn. Bhd. v. Ram Parshotam Mittal and
others) has mentioned in his order of 15th October, 2008 that an effort was made to bring
about a settlement between the parties but neither of them was agreeable to that. We also
had suggested to the parties to resolve their differences out of Court but to no avail.
91. Since we have decided the matter substantially in favour of Hill Crest Realty Sdn.
Bhd. and Mr. Ashok Mittal, we would award costs to them as per the statement that they
have submitted. Accordingly, Hill Crest Realty Sdn. Bhd. will be entitled to costs of
Rs.19,76,000/- and Mr. Ashok Mittal will be entitled to costs of Rs.5,94,000/-. The costs
will be paid by Hotel Queen Road Pvt. Ltd. within a period of four weeks from today. It
was suggested by learned counsel for Hill Crest Realty that costs should be borne by Mr.
Ram Parshotam Mittal but we do not think it appropriate to personally burden him with
the costs since the litigation was conducted by him on behalf of Hotel Queen Road Pvt.
Ltd. List for compliance on 20th February, 2009.
92. The appeals are disposed of as indicated above.
Sd./-
MADAN B. LOKUR, J
Sd./-
January 14, 2009 SURESH KAIT, J