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Judgment
Madan B. Lokur, J.—We are concerned with three appeals:
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 Ors.). 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.
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 Ors.). 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.
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 Ors.). 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:
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?
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:
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.
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.
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.
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.
Apparently, because of Mr. Ashok Mittal''s 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.
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.
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.
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.
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).
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.
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.
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.
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''
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.
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.
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.
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 u/s 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:
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.
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/-.
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 u/s 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.
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 Ors.). 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.
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 Ors.) had virtually decided the suit itself and that this was impermissible. He placed reliance upon Union of India (UOI) and Others Vs. Modiluft Ltd., 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.
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.
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 Ors.). 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 Ors.) it did not advert to the resolution dated 30th September, 2002 regarding the ''conversion'' of Hotel Queen Road Pvt. Ltd. into a public company.
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 M/s. Seemax Construction (P) Ltd. Vs. State Bank of India and another, . 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.
The desirable disclosures v 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.
In J.K. Kashyap v. J.K. Guha 1993 4 AD (Delhi) 29 , Anand Swarup Malik Vs. Municipal Corporation of Delhi, and Standipack Private Limited and Another Vs. M/s. Oswal Trading Co. Ltd., 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 (dead) by L.Rs. and another Vs. Government of Karnataka and another, on account of non- disclosure and suppression of material facts.
Two other decisions were cited by learned Counsel for Hill Crest Realty. In S.P. Chengalvaraya Naidu (dead) by L.Rs. Vs. Jagannath (dead) by L.Rs. and others, 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.
In Gowrishankar and Another Vs. Joshi Amba Shankar Family Trust and Others, 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 appellant''s 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 appellant''s offer was raised only in support of the respondent''s 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.
In The State of Andhra Pradesh and Another Vs. T. Suryachandra Rao, 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.
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.
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.
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.
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.
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 Ors.) 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.
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.
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.
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 Director''s 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.
We have been shown the Director''s 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.
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 Ors.). 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.
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.
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?
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.
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.
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 Ors.). This was despite the fact that Hill Crest Realty had not made such a prayer in the application.
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.
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.
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 Ors.). 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.
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.
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 Vs. L.K. Ratna and Others, wherein the Supreme Court (in paragraph 17 of the Report) referred with approval to Sir William Wade''s 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.
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.
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 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.
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 The United Planters Association of Southern India Vs. K.G. Sangameswaran and another, .
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 person''s 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.
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.
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.
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''
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.
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.
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.
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.
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.
Section 87(2)(b) of the Act is important and this reads as follows:
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:
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)
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:
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.
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.
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 Ors. v. V.R. Kalliyanikutty and Anr. 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.''
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.''
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.
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. and Anr Vs. Union of India (UOI) and Ors, 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.
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.
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.
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.
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)''
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.
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:
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:
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.''
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:
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.
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.
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.
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:
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.
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''.
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.
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:
The Supreme Court in Salem Advocate Bar Association, Tamil Nadu Vs. Union of India (UOI), 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 therefore. 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, lawyer''s 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.
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.
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 Ors.) 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.
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.
The appeals are disposed of as indicated above.