Hotel Queen Road P. Ltd. vs Hill Crest Realty Sdn. Bhd And Ors.
2005 Latest Caselaw 1137 Del

JUDGMENT

O.P. Dwivedi, J.

1. This order shall govern the disposal of IA No. 5505/2005 filed by the plaintiff under Order 39 Rule 1 &2 CPC for grant of an ad-interim injunction restraining defendant No. 1 from requisitioning/ holding any Extra Ordinary General Meeting of the share holders proposed to be held on 4.8.2005.

2. Briefly narrated, the facts leading to this application are that the plaintiff owned hotel known as Ashok Yatri Niwas at Ashok Road, New Delhi. In the process of dis-investment of certain Hotels by the Government of India, bids were invited for sale of the hotel and the bid offered by Moral Trading Investment Limited was accepted. An agreement was duly executed between the plaintiff, Moral Trading Investment Limited and Government of India for the purchase of shares of the plaintiff company by the Moral Trading Investment Limited from the Government of India. At that time hotel was in dilapidated condition. Defendant No. 2 who is the promoter of the Moral Trading Investment Limited and also the Chairman and Managing Director of the plaintiff company secured loans from the financial institutions and also got financial accommodation from the defendant No. 1, a Malasian Company by way of redeemable preference shares. Besides, the share capital had been increased from time to time and further shares were allotted to various share holders to raise funds required for reconstruction of hotel. The present shares holding of the plaintiff company is as under:-

  S.No.    Name                                 No. of Shares % Held
1.       M/s Moral Trading & Investment Ltd.  41,51,648 46.13
2.       Shri R.P. Mittal                     33,98,183 37.76
3.       Mrs. Jyoti Kesri 2 -
4.       Mrs. Sapna Jain 1 -
5.       Mrs. Bhawna Gupta 2 -
6.       Mrs. Vandana Mittal 2 -
7.       Mrs. Sarla Mittal                    4,50,003 -
8.       Shri Ashok G. Mittal 1
9.       M/s Pondy Metals & Rolling Mills 
          (P) Limited                         10,00,000 11.11
10.    Others (share holders) 158 -
-------------   -------------------------------------------------------------
                             Total            90,00,000 100
------------------------------------------------------------------------------

 

3. It is pleaded that defendant No. 2 has purchased the shares of the plaintiff company from the Government of India for about Rs. 45 crores. Further amount of over Rs. 88 crores has been spent on renovation. In April 2003 defendant No. 1 applied for allotment of redeemable preference shares of the value of Rs. 100/- each. Accordingly, plaintiff allotted 28,29,290 redeemable non cumulative preference shares of face value of Rs. 100/- each to the defendant No. 1 on 5.5.2003 and 19.7.2003. The said shares have been duly issued to defendant No. 1. While allotting preference shares to the defendant No. 1 it was never the intention of the plaintiff to confer any managerial control on defendant No. 1 over the plaintiff. It was alleged that on 2.6.2005 the plaintiff received a letter dated 1.6.2005 from one Hill Crest Reality Sdn. Bhd. address C/o 101, Vasundhara Jankikutir, Juhu, Vile Parle, Mumbai. Through the said notice the plaintiff was called upon to convene an Extra Ordinary General Meeting to remove defendant No. 2 and 3 from the Directorship of the company and appoint the nominees of the said 'Hill Crest Reality Sdn. Bhd.' According to the plaintiff the said notice was totally invalid because plaintiff does not have any share holder in the name of 'Hill Crest Reality Sdn. Bhd.'having the address 'Vile Parley, Mumbai'. Moreover, defendant No. 1 had never informed the plaintiff of having appointed any attorney, therefore, vide their reply dated 21.6.2005 the plaintiff wrote to defendant that no cognizance of letter could be taken. Then the defendant No. 1 sent a letter dated 28.6.2005 affirming therein that letter dated 1.6.2005 was issued by their attorney and the Extra Ordinary General Meeting should have been called as per notice dated 1.6.2005. In the earlier letter dated 1.6.2005 it was asserted by 'Hill Crest Reality Sdn. Bhd.' that the company had failed to pay dividend to the preference share holders of the company, therefore, Sub-section 87 (2) of the Companies Act (for short 'the Act') is attracted and they have right to vote. Defendant No. 1 vide their letter dated 28.6.2005 informed the plaintiff that they are going to convene Extra Ordinary General Meeting under Section 169 of the Act for considering the matter of removal of two directors of the plaintiff and to appoint Mr. J.K. Gupta and Mr. Vikram Mittal as Directors. This meeting is proposed to be held on 4.8.2005. In this connection a notice has been issued by the defendant No. 1 copy whereof appears at page 69 of Part III of the record and hence this suit.

4. Plaintiff has challenged the validity of the proposed meeting on the ground that under Article 4 of Article of Memorandum of Association preference share holders have no right to vote. Besides, the plaintiff has not started running the hotel which is in the process of being built. The hotel has not started any business so far and therefore the question of declaring or paying any dividend does not arise, in view of the prohibition contained in Section 205 of the Act. Further contention of the plaintiff is that the plaintiff is a private limited company. Therefore, in view of the provisions of Section 90(2) of the Act, the defendant No. 1 cannot invoke Section 87(2) of the Act to claim voting rights and as such they have no right to convene/ hold proposed Extra Ordinary General Meeting on 4.8. 2005. As against this defendants' contention is that the plaintiff company is a subsidiary of Moral Trading Investment Limited which is a public company and since more than two years have expired from the date of issuance of preference shares and no dividend has been declared or paid so far, they are entitled to claim voting rights under Section 87(2) of the Act and as such competent to convene and hold proposed Extra Ordinary General Meeting on 4.8.2005. Various factual averments made by the plaintiff regarding the extent of their investment have been denied. It is also denied that the defendant's preference shares holding was non- cumulative. According to defendant No. 1it was cumulative and as such defendant No. 1 gets voting rights for non payment of dividend for a period of two years in view of Section 87(2)(b)(i) of the Act.

5. It is further pleaded by defendant No. 1 that changing the share holding pattern of the company at the back of defendant No. 1 without any notice or resolution of Board of Directors amounts to fraud being played on defendant No. 1. Several instances of mismanagement/ oppression have been detailed in the reply affidavit. In the rejoinder, the plaintiff has re-asserted that since the company has not yet commenced its business the question of earning profit does not arise and therefore no dividend is payable to defendant No. 1. Therefore, Section 87(2)(b) of the Act is not applicable. The allegation that the plaintiff is a subsidiary of M/s Moral Trading Investment Limited and regarding mismanagement/ oppression have been denied.

6. I have heard learned counsel for the parties and perused the record.

7. From the above recapitulation of the pleadings of the parties , it is clearly born out that main issue between the parties is regarding applicability of Section 87(2) of the Act. So far as Articles of association are concerned , it is clearly provided in Article 4 of Articles of Association that the preference shares will not carry any voting rights. Article 80 further declares that no dividend shall be payable except out of profits earned by the company or out of monies provided by the Central or State Government for the payment of the dividend in pursuance of any guarantee given by such government and no dividend shall carry interest against the government. Further, Section 205 of the Act mandates that :- '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....' It is admitted case between the parties that the company has not commenced its business and has not earned any profit. Clearly, therefore, in view of the mandate of Section 205 of the Act, the dividend has not yet become payable. Section 87 of the Act which confer voting rights on preference share holders under certain circumstances reads as under:-

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.

8. According to the plaintiff, the defendant No. 1 cannot invoke Section 87(2) in this case because the plaintiff is a private limited company. Section 90(2) excludes the applicability of Section 87 to private company. It reads as under: -

(2)Nothing in Sections 85 to 89 shall apply to a private company, unless it is a subsidiary of a public company.

9. Learned counsel for defendant No. 1 on the other hand contended that the plaintiff is a subsidiary of M/s Moral Trading Investment Limited which is a public company and therefore in view of the language of Section 90(2) of the Act, Section 87 will apply to the plaintiff company. The fact that Moral Trading Investment Limited is a public company is not in dispute. It is, therefore, to be seen prima facie whether plaintiff is a subsidiary of the said public company .

10. Subsidiary has been defined in Section 4 of the Companies Act, which reads as under:-

4. Meaning of 'holding company' and 'subsidiary'- (1) For the purposes of this Act, a company shall, subject to the provisions of Sub-section (3), be deemed to be a subsidiary of another if, but only if,-

(a) that other controls the composition of its Board of directors; or

(b) that other -

(i)where the first-mentioned company is an existing company in respect of which the holders of preference share issued before the commencement of this Act have the same voting rights in all respects as the holders of equity shares, exercises or controls more than half of the total voting power of such company;

(ii)where the first-mentioned company is any, other company, holds more than half in nominal value of its equity share capital; or

(c) the first-mentioned company is a subsidiary of any company which is that other's subsidiary.

(2)For the purposes of Sub-section (1), the composition of a company's Board of directors shall be deemed to be controlled by another company if, but only if, that other company by the exercise of some power exercisable by it at its discretion without the consent or concurrence of any other person, can appoint or remove the holders of all or a majority of the directorships; but for the purposes of this provision that other company shall be deemed to have power to appoint to a directorship with respect to which any of the following conditions is satisfied, that is to say:-

(a) that a person cannot be appointed thereto without the exercise in his favor by that other company of such a power as aforesaid;

(b) that a person's appointment thereto follows necessarily from his appointment as director or manager of, or to any other office or employment in, that other company; or (c) that the directorship is held by an individual nominated by that other company or a subsidiary thereof.

(3)In determining whether one company is a subsidiary of another-

(a) any shares held or power exercisable by that other company in a fiduciary capacity shall be treated as not held or exercisable by it;

(b) subject to the provisions of clauses (c) and (d), any shares held or power exercisable-

(i)by any person as a nominee for that other company (except where that other is concerned only in a fiduciary capacity; or

(ii)by, or by a nominee for, a subsidiary of that other company, not being a subsidiary which is concerned only in a fiduciary capacity, shall be treated as held or exercisable by that other company;

(c) any shares held or power exercisable by any person by virtue of the provisions of any debentures of the first-mentioned company or of a trust deed for securing any issue of such debentures shall be disregarded;

(d) any shares held or power exercisable by, or by a nominee for, that other or its subsidiary (not being held or exercisable as mentioned in clause (c)) shall be treated as not held, or exercisable by that other, if the ordinary business of that other or its subsidiary as the case may be, includes the lending of money and the shares are held or the power is exercisable as aforesaid by way of security only for the purposes of a transaction entered into in the ordinary course of that business.

(4)For the purposes of this Act, a company shall be deemed to be the holding company of another if, but only if, that other is its subsidiary.

(5)In this section, the expression " company" includes any body corporate, and the expression "equity share capital" has the same meaning as in Sub-section (2) of Section 85.

(6)In the case of a body corporate which is incorporated in a country outside India, a subsidiary or holding company of the body corporate under the law of such country shall be deemed to be a subsidiary or holding company of the body corporate within the meaning and for the purposes of this Act also, whether the requirements of this Section are fulfillled or not.

(7) A private company, being a subsidiary of a body corporate incorporated outside India, which, if incorporated in India, would be a public company within the meaning of this Act, shall be deemed for the purposes of this Act to be a subsidiary of a public company if the entire share capital in that private company is not held by that body corporate whether alone or together with one or more other bodies corporate incorporated outside India.)

11. Earlier, Moral Trading Investment Limited was holding 99% shares of the plaintiff but thereafter substantial number of shares were transformed to defendant No. 2 thereby reducing the share holding of M/s Moral Trading Investment Limited to mere 46%. According to the defendant No. 1, this was done at their back without any notice to them or any resolution of the Board of Directors. These allegations are repudiated by the plaintiff. Their contention is that no notice is required to be given to the preference share holders for transfer of equity shares amongst shareholders. Further contention of the defendant is that the share holding pattern of the plaintiff was changed after notice dated 1.6.2005 for convening the Extra Ordinary General Meeting was served on the plaintiff but this fact is disputed by the plaintiff. According to the plaintiff, shares were allotted in April 2004 , January 2005 and May 2005. The allegations of fraudulent transfers is denied. These are questions of fact which can not be decided without evidence. At present , there is nothing on record to indicate that M/s Moral Trading controls the composition of plaintiff''s Board of Directors. "Section 3(iii) of the Companies Act defines private company, as under:-

3. Definitions of 'company', 'existing company', 'private company' and 'public company'.

(1)x x x x x x x x x

(2)x x x x x x x x x x

(iii)'private company' ( means a company which has a minimum paid-up capital of one lakh rupees or such higher paid-up capital as may be prescribed, and by its articles, -)

(a) restricts the right to transfer its shares, if any;

(b) limits the number of its members of fifty not including

(i)persons who are in the employment of the company, and

(ii) persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased; and

(c) prohibits any invitation to the public so subscribe for any shares in, or debentures of, the company;

(d) prohibits any invitation or acceptance of deposits from persons other than its members, directors or their relatives:

12. Provided that where two or more persons hold one or more shares in a company jointly, they shall, for the purposes of this definition, be treated as a single member;

13. According to plaintiff, out of the existing share holders 137 are pre existing share holders being the persons who are/ were in the employment of the company when they became the member of the company. Therefore, for the purpose of calculating the numbers of members, the number of present or past employees of the company have to be excluded and thus calculating the number of plaintiff's shareholders comes to less than 50. Article 3 of the Article of Association of the plaintiff limits the number of member to 50 and also prohibits any invitation to the public to subscribe to the share of the company or any deposits from the outsiders. Besides, in the certificate of incorporation plaintiff has been described as private limited. Thus, prima facie, the plaintiff meets the ingredients of a private company. Learned counsel for defendant has referred to balance sheet of the Moral Trading Investment Limited for the year 2003-2004 wherein plaintiff has been shown to be their subsidiary. According to the plaintiff M/s Moral Trading Investment Limited have on 10.5.2005 transferred 3238181 shares to R.P. Mittal, Defendant No. 2, who is Managing Director of the plaintiff as well as Moral Trading Investment Limited thereby reducing the share holding of Moral Trading in the plaintiff company to mere 46%. These transfers are duly reflected in the account books of the plaintiff and the statutory forms submitted to the Registrar office. At this stage when, this court has to take only a prima facie view of the material on record, I think, the plaintiff's contention that it is a private limited company and not a subsidiary of any public company should prevail. Therefore, in view of Section 90(2) of the Companies Act, defendant No. 1 cannot invoke Section 87(2) of the Companies Act to claim voting rights.

14. Learned counsel for the defendant No. 1 heavily relied upon the observation of the Supreme Court in para 100 of the decision in the case of Life Insurance Corporation of India v. Escorts Limited and Ors. is reproduced below:-

100. Thus, we see that every shareholder of a company has the right, subject to statutorily prescribed procedural and numerical requirements, to call an extraordinary general meeting in accordance with the provisions of the Companies Act. He cannot be restrained from calling a meeting and he is not bound to disclose the reasons for the resolutions proposed to be moved at the meeting. Nor are the reasons for the resolutions subject to judicial review. It is true that under Section 173(2) of the Companies Act, there shall be annexed to the notice of the meeting a statement setting out all material facts concerning each item of business to be transacted at the meeting including, in particular, the nature of the concern or the interest, if any, therein of every director, the managing agent if any, the secretaries and treasures, if any, and the manager, if any. This is a duty cast on the management to disclose, in an explanatory note, all material facts relating to the resolution coming up before the general meeting to enable the shareholders to form a judgment on the business before them. It does not require the shareholders calling a meeting to disclose the reasons for the resolutions which they propose to move at the meeting. The Life Insurance Corporation of India, as a shareholder of Escorts Ltd., has the same right as every shareholder to call an extraordinary general meeting of the company for the purpose of moving a resolution to remove some Directors and appoint Ors. in their place. The Life Insurance Corporation of India cannot be restrained from doing so nor is it bound to disclose its reasons for moving the resolutions.

15. It must be noticed that in that case the question of voting rights of preference shares was not at all under consideration. In that case, dispute was between equity shareholders and in that connection these observations were made by the apex court. This decision was taken note of by a Division Bench of this Court in the case of Commissioner of Gift-Tax v. Raghu Hari Dalmia & Ors- Vol.255 Income Tax Reports page 300. At page 311 of the report, the Division Bench while taking note of the decision of LIC case (supra) has observed as under:-

"As noted in LIC of India V. Escorts Ltd (1986) 59 Comp Case 548 (SC), the equity shareholders have the following rights:

(a) Right to elect directors of the company and through them participate in the management of the company;

(b) Right to vote on resolutions at meetings of the company;

(c) Enjoy benefits earned by the company in the shape of dividend;

(d) Right to apply to court and get relief in the case of oppression and mismanagement;

(e)Right to move the court for winding up; and

(f) Share surplus on winding up of the company."

16. The value or market price of equity shares and preference shares of the same company will be different as a preference shareholder does not have the same rights in accompany as an equity shareholder. An equity shareholder has the right to elect the directors and through them participate in management. A preference shareholder does not have the right to elect directors and essentially there is no participation in the management. An equity shareholder has the right to vote on each resolution in a general body meeting of the shareholders and in case of poll his voting right is in proportion to the shares of the paid-up equity capital of the company. A preference shareholder does not have the right to vote in respect of all resolutions; he has the right to vote only on resolution, which directly affect rights attached to the preference shareholders. It is only if the dividend due on cumulative preference shares remains unpaid for an aggregate period of not less than two years preceding the date of commencement of meeting that a cumulative preference shareholder gets the right to vote on all resolutions. Section 87 of the Companies Act is relevant for this purpose. The preference shareholders have no voting rights. Under Section 87(2) , the rights conferred are restricted. The inevitable conclusion is that the transaction constituted transfer of property.

17. In view of observations made by the Division Bench regarding the meaning and scope of observations made by the Supreme Court in para 100 of LIC's case, defendant's contention that it governs voting rights of preference share holders, cannot be accepted.

18. Learned counsel for defendant No. 1 referred to a decision in Re. Jonh Smith's Tadcaster Brewery Co., Ltd. The Company v. Gresham Life Assurance Society, Ltd and another, All England Law Reports Vol-2, page 751, in support of his contention that the increase in the capital of the company by creation of more and more ordinary shares affects the rights of the preference share holders and therefore such exercise could be carried out only with their sanction expressed in an Extra Ordinary Resolution. On a close scrutiny of the judgment, it is noticed that in that case Article 54 of the Memorandum of Article provided as under:-

DANCKWERTS, J.: Article 54 provides:

"Subject to the provisions of Section 61 of the (Companies Act, 1929) all or any of the rights or privileges attached to any class of shares forming part of the capital for the time being of the company may be affected, modified, dealt with or abrogated in any manner with the sanction of an extraordinary resolution passed at a separate meeting of the members of that class."

19. Since Article 54 itself provided for sanction of an Extra Ordinary Resolution passed at a separate meeting of members of the class affected by the proposed resolution, the Court said that such a resolution could be carried out only with the sanction of the preference share holders whose rights are effected by the proposed increase in the share capital. In the present case, there is no such Article in plaintiff's Articles of Association. On the contrary Article 4 of Articles of Association which provides for share capital of the company clearly states that preference share holders will not carry any voting rights. In absence of any similar/analogous provision in the plaintiff's Article of Association, the defendant cannot draw any support from the decision in the case of John Smith's (supra).

20. Another decision of Chancery Division relied upon by learned counsel for defendant No. 1 deserves to be taken note of. The decision in the case Re Bradford Investments Ltd, Chancery Division, (1991) BCLC 224, (1990) BCC 740, Hearing Dates 29 June, 2, 3 July 1990), is also based on the interpretation of Articles of Association of the Company. It was held that Articles 3(b)(1),3(b)(3) must be construed with the obvious purpose of giving right to vote to the preference shareholders whose dividends are in arrears. In that case Articles 3(b)(3) of the Article of Association of the company provided that the preference share holders shall not be entitled to receive notice or attend or vote at any General Meeting unless the dividend was due for more than six months. Since the dividend had not been paid for more than six months in that case it was held that the preference share holders are entitled to vote. In the present case, as already noticed, Article 4 of the Articles of Association clearly denies any kind of voting rights to the preferential shareholders. So the defendant No. 1 cannot claim any voting rights under the Articles of Association of the company. Their claim for voting rights under the law i.e under Section 87(2) of the Companies Act is also untenable in view of the provisions of Section 90(2) of the Companies Act which excludes the application of Section 87(2) of the Companies Act to a private company.

21. Some arguments were also advanced on the point as to whether the dividend becomes due under the explanation to Section 87(2)(b) of the Act even when the company has not made any profits and also on the point as to whether the preference shares held by defendant No. 1 were cumulative or non-comutative but in view of my finding that Section 87 has no application to the plaintiff company because it is a private company, it is needless to go into these questions. It follows that defendant No. 1 cannot claim any voting rights and therefore their notice to convene the Extra Ordinary General Meeting proposed to be held on 4th August 2005 is illegal. Plaintiff has made out a prima facie case for grant of an ad interim injunction to stop the proposed General Meeting convened by members who are not entitled to vote. In such circumstances, Courts have been inclined to grant injunction. Reference may be had to B. Sivaraman and Ors. v. Egmore Benefit Society Ltd., Company Cases, (1992) Vol. 75 page 198 and Col. Kuldip Singh Dhillon and Ors. v. Paragaon Utility Financiers (P) Ltd. and Ors. , Company Cases (1986) Vol. 60 page 1075.

22. During the course of the argument objections were raised as to the authority of Mr. H.S. Toor, who has signed and verified the plaint and instituted suit on behalf of the plaintiff and in this regard an additional reply affidavit of respondents' attorney has also been filed. This fact was controverter by the plaintiff. This controversy again involves a question of fact which along with other disputed question of fact as already noticed can be decided only after the trial. The suit involves substantial question of fact and law which deserves trial.

23. Since the proposed meeting was scheduled for 4.8.20005 this case was taken up on 3.8.2005 for directions. It was pointed out by the learned counsel for defendant No. 1 that all necessary preparations for holding the meeting had already been made so on his request defendant No. 1 was allowed to proceed with the meeting subject to the condition that the resolution, if any, passed in the proposed meeting shall be kept confidential in a sealed cover and will not be given any publicity and effect till the disposal of this application. It was further made clear that if the proposed meeting is held to be illegal, the resolution, if any, passed therein will also be ineffective. Therefore, in view my finding above that defendant No. 1 could not claim any voting right under Section 87(2) of the Companies Act it follows that meeting held at the instance of defendant No. 1 on 4.8.2005 is illegal and resolution, if any, authorising removal of defendant No. 2 and 3 or appointing new Directors on their behalf is held to be ineffective. The defendant No. 1 is hereby restrained from giving effect to any such resolution which may have been passed in the meeting dated 4.8.2005.