RAM PARSHOTAM MITTAL & Ors. v. HOTEL QUEEN ROAD PVT. LTD & Ors.

Pinaki Misra, Sr. Adv., S. Udaya Kumar Sagar, Ms. Bina Madhavan, Suryanarayan Singh, Nitesh Jain, Piyush Dwivedi, Ms. Shreyali Kunwar, Ms. Elizabeth Anthony, M/S. Lawyer S Knit & Co., Advs. for the Appellants. Rakesh Dwivedi, Shyam Diwan, Jaideep Gupta, Vikas Singh, Sr. Advs., Ardhendumauli Kumar Prasad, Kumar Mihir, Jayant Mehta, Saurabh Kalia, Sameer Choudhary, Ms. Drishti Harpalani, Ms. Anindita Misra, Kunal Verma, Yugandhara Pawar Jha, Gopal Jha, Advs. for the Respondents. The Judgment of the Court was delivered by ARUN MISHRA, J.

#1. The appeal arises out of the judgment dated 31.5.2013 passed by the High Court of Delhi, setting aside an order dated 31.1.2006 passed by the Company Law Board in Company Petition No.64/2005.

#2. The backdrop facts indicate that the Government of India took a policy decision on 5.7.2002 to disinvest its shares in the Indian Tourism Development Corporation (in short, ‘the ITDC’) which owns various hotel properties; one of them being Indraprastha Hotel, formerly known as Hotel Ashok Yatri Niwas, (hereinafter referred to as “the hotel”).

#3. In terms of an approved scheme of Arrangement of Demerger the hotel was transferred to the Respondent No.1 - Hotel Queen Road Pvt. Ltd. (in short, ‘HQRL’) which was created as a Special Purpose RAM PARSHOTAM MITTAL & ORS. v. HOTEL QUEEN ROAD PVT. LTD. & ORS. [ARUN MISHRA, J.] 983 Vehicle to enable disinvestment. The paid up capital of HQRL was Rs.90 lakhs comprising 9 lakh equity shares of Rs.10 each, of which the Government of India held 89.97% shares. Indian Hotels Co. Ltd. (IHCL) held 10% shares and the balance shares were held by the employees of hotels of ITDC under a Voluntary Retirement Scheme.

#4. Pursuant to its decision to disinvest, the Government invited bids for sale of shares in HQRL. The appellant No.3 - Moral Trading & Investment Ltd., in short hereinafter referred to as ‘Moral’, a public limited company, was declared the successful bidder.

#5. By a share purchase agreement dated 8.10.2002 Moral acquired the shares of Government of India and IHCL in HQRL for a sum of Rs.45 crores. Out of this, Rs.33.37 crores was obtained by way of loans from banks. 99.97% shares of HQRL being held by Moral, HQRL became Moral’s subsidiary.

#6. Appellant No.1, Mr. R.P. Mittal, and the appellant No.2, Mrs. Sarla Mittal, who held the controlling interest in Moral, and the Respondent No.3, Mr. Ashok Mittal, younger brother of the Appellant No.1, Mr. R.P. Mittal were appointed as Additional Directors of HQRL on 8.10.2002, and later, regular Directors at the Annual General Meeting of HQRL held on 28.12.2002.

#7. On 30.9.2002 HQRL passed a resolution in its Extra Ordinary General Meeting (EOGM) to change its status from ‘private limited’ to ‘limited’ company. The said resolution was rejected by the Registrar of Companies on the ground of late filing and according to the appellants, HQRL had not filed it again with the Registrar of Companies nor had removed the defects.

#8. On 21.12.2002 a Board meeting of HQRL was held. Moral transferred 13 equity shares valued at Rs.10 per equity share of HQRL to 7 persons, i.e. 2 shares to the appellant No.1, Mr. R.P. Mittal, 3 shares to the appellant No.2, Mrs. Sarla Mittal, one share to the respondent No.3, Mr. Ashok Mittal and 7 shares to 4 daughters of the appellant Nos.1 and 2, R.P. Mittal’s family thus held 99.97% equity shares, as against one equity share held by his brother, Mr. Ashok Mittal.

#9. On 28.12.2002 Annual General Meeting (AGM) of HQRL was held in which authorised capital was increased from Rs.90 lakhs to Rs.33 crores. The AGM was attended by Mr. Ashok Mittal. There was an increase of 71 lakh equity shares of Rs.10 each and 25 lakh preference A B C D E F G H 984 SUPREME COURT REPORTS [2019] 7 S.C.R. A B C D E F G H shares of Rs.100 per share and a Special Business Resolution No.10 was passed under section 81(1A) of the Companies Act, 1956 (hereinafter referred to as ‘the Companies Act’). The appointment of Mr. R.P. Mittal, Mrs. Sarla Mittal and Mr. Ashok Mittal to the Board of Directors was approved by the majority of the shareholders of Moral. Mr. R.P. Mittal and Mrs. Sarla Mittal were appointed as whole time Directors. The Memorandum of Association of HQRL was also amended. Article IV (4) of Articles of Association was amended to state that the preference shares would not carry any voting rights.

#10. On 19.3.2003, Mr. R.P. Mittal, Chairman of HQRL issued letter to the Respondent No.2 - Hillcrest Realty SDN BHD Malaysia (for short, ‘Hillcrest’) inviting subscription in 8.5% cumulative redeemable preference shares of Rs.100 each up to Rs.30 crores. On 3.4.2003, the hotel was closed for renovation and upgradation. On 30.4.2003, Hillcrest accepted and applied for subscription requesting for allotment of 23,65,000, 8.5% redeemable preference shares in the company. On 5.5.03 HQRL approved the issuance of 23,65,000 redeemable preference shares to Hillcrest.

#11. On 25.6.2003 in order to facilitate issue of preference shares, HQRL increased authorised capital by Rs.5 crore comprising 5 lakh preference shares of Rs.100 each. On 19.7.2003 HQRL approved the issuance of 4,64,290 redeemable preference shares to Hillcrest respondent No.2. In or about August-September, 2003, to fund the redevelopment of the hotel, a term loan of Rs.40 crores was raised from Indian Overseas Bank. According to the appellants the loan was secured by the joint personal guarantees of Mr. R.P. Mittal, Mrs. Sarla Mittal and Mr. Ashok Mittal, the corporate guarantee of Moral and the collateral security of personal assets of Mr. R.P. Mittal and Mrs. Sarla Mittal.

#12. On 27.7.2004, HQRL in compliance of resolution dated 28.12.2002 passed under section 81(1A) of the Act, issued 23.90 lacs equity shares at par to Moral, the single shareholder holding 99.97% of equity. On 7.1.2005 HQRL in compliance of resolution dated 28.12.2002 passed under section 81(1A) of the Act issued 41.51 lakh equity shares to Moral, 1.10 lakh equity shares to Mr. R.P. Mittal and 4.5 lakh equity shares to Mrs. Sarla Mittal.

#13. On 14.1.2005 an Extra Ordinary General Meeting (EOGM) was held wherein a shareholder’s resolution was adopted pursuant to which HQRL increased its authorised capital from existing Rs.38 crores RAM PARSHOTAM MITTAL & ORS. v. HOTEL QUEEN ROAD PVT. LTD. & ORS. [ARUN MISHRA, J.] 985 to Rs.40 crores, with an increase of 2 lakh equity shares of Rs.10 each. On 10.5.2005 HQRL allotted 10 lakh equity shares to the respondent No.4 Pondy Metals and Rolling Mills Pvt. Ltd., hereinafter referred to in short as Pondy Metals. Further, HQRL registered transfer by Moral of 32,88,181 equity shares in favour of Mr. R.P. Mittal.

#14. On 26.5.2005, M/s. Ashok Mittal & Co. issued a notice to Moral for repayment of Rs.4,91,58,762/- along with interest claiming that the same was due since 2000 from running account for share trading for the years prior to 2000. It is the case of the appellants that Mr. Ashok Mittal, on realizing the bright prospects of development of the hotel, because of its location, in the heart of capital of India, turned dishonest to the R.P. Mittal group and hatched a conspiracy with preference shareholder Hillcrest to control the management of HQRL, It is alleged by the appellants that, in contravention of the provisions of the Companies Act and terms of issue of preference shares as prescribed in Articles of Company and correspondence exchanged, Mr. Ashok Mittal caused Hillcrest to issue notice under section 169(4) of the Act for EOGM to oust the duly elected board of HQRL and to appoint their nominee on the ground of non-payment of dividend on the redeemable preference shares as provided under section 87(2)(b) of the Companies Act. Section 87 of the Companies Act is extracted below: “Sec 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. A B C D E F G H 986 SUPREME COURT REPORTS [2019] 7 S.C.R. A B C D E F G H 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.” RAM PARSHOTAM MITTAL & ORS. v. HOTEL QUEEN ROAD PVT. LTD. & ORS. [ARUN MISHRA, J.] 987

#15. A Board meeting of HQRL was conducted on 4.7.2005 which was attended by Mr. R.P. Mittal, Mrs. Sarla Mittal and Mr. Ashok Mittal. Mr. Ashok Mittal attended the meeting for the first time. The Respondent No.6 Mr. N.P. Gupta and the Respondent No.5, Mr. Suman Jain were appointed as Additional Directors. On 8.7.2005 Hillcrest issued notice under section 169(6) of the Companies Act to call for EOGM on 4.8.2005. 16. HQRL filed a civil suit being CS (OS) 992 of 2005 before the High Court of Delhi for declaration, cancellation and mandatory injunction against the requisition under section 169 of the Companies Act.

#17. On 4.8.2005 Hillcrest proceeded to convene EOGM and passed a resolution inter alia removing Mr. R.P. Mittal and Mrs. Sarla Mittal from the Board of HQRL. On 12th August, 2005, Delhi High Court passed an order in an interlocutory application being IA 5505 in the said suit being CS (OS) No.992 of 2005 restraining Hillcrest from giving effect to the resolution passed in the EOGM held on 12.8.2005. Delhi High Court restrained Hillcrest from giving effect to the resolution passed in the EOGM.

#18. On 22nd August, 2005 Hillcrest and Ashok Mittal filed a petition bearing No.64/2005 in the Principal Bench of the Company Law Board at Delhi and under Sections 397 and 398 of the Companies Act alleging oppression and mis-management of HQRL by the R.P. Mittal Group. The Resolution passed in Board meetings regarding allotment/ transfer of shares was also challenged amongst others on the ground that no notice had been issued to Ashok Mittal who was, at the material time, a Director.

#19. The present case arises out of the said petition filed by Hillcrest and Mr. Ashok Mittal against the appellants in the Company Law Board in September, 2005 under Sections 397/398 of the Act, challenging the allotment/transfer of shares effected on 27.7.2004, 7.1.2005 and 10.5.2005 on inter alia grounds of (i) financial mismanagement of HQRL by Mr. R.P.Mittal and Mrs. Sarla Mittal; (ii) Invested in Cumulative Redeemable Preference Share (CRPS) on the understanding that HQRL would remain a subsidiary of Moral and that in the event of HQRL failing to pay any dividend for two years, Hillcrest would be entitled to exercise its voting rights in all resolutions; (iii) illegality of allotments made on 27.7.2004, 7.1.2005 and 10.5.2005. In the absence of notice under Section 286 of the Companies Act to Mr. Ashok Mittal, who was a Director of HQRL; (iv) the allotments having been made by the remaining Directors without disclosing their obvious interest in violation A B C D E F G H 988 SUPREME COURT REPORTS [2019] 7 S.C.R. of section 300 of the Companies Act; (v) the allotments being made without any valuation of equity shares of HQRL; (vi) no money being paid for transfer of shares and (vii) the eventuality of the transfer bringing about a situation where HQRL would no longer remain a subsidiary of Moral and thus deprive Hillcrest of any voting right under section 87(2)(b) of the Act.

#20. It is alleged by the appellants that, in spite of various hurdles created by Hilcrest and Mr. Ashok Mittal by sending notices to various Government departments asking them not to grant licenses, the hotel had become operational, with the sole efforts of Mr. R.P. Mittal and had been granted all the requisite licenses.

#21. On 31.1.2006, C.P. No.64/2005 was dismissed, inter alia, on the ground that it was a mala fide petition by Hillcrest and Mr. Ashok Mittal to take over the company. In 2006 three cross appeals were filed against the order dated 31.1.2006 passed by the Company Law Board. 22. In August, 2006 Hilcrest filed a suit being CS (OS) No.1832/ 2008 in Delhi High Court for a declaration that Hilcrest had voting rights in HQRL in view of the Resolution dated 30th September, 2002 passed by HQRL whereby HQRL had been converted from a private company limited by shares to a public company limited by shares. Hilcrest filed an application being IA No.12164/ 2008 in the said suit being CS (OS) No.1832/ 2008 contending that HQRL had obtained an order of injunction on 12th August, 2005 by fraudulently and concealing the fact that it had acquired the status of a public company in 2002. Hilcrest also made an application in suit being C.S. No.992/2005 for vacating of the interim order dated 12th August whereby Hilcrest had been restrained from giving effect to the Resolution passed at the meeting of HQRL on 4th August, 2005.

#23. Being aggrieved by the order dated 12th August, 2005 in C.S. (OS) No.992/ 2005 Hilcrest filed an appeal therefrom being FAO (OS) No.282/2005 before the Division Bench of Delhi High Court.

#24. On or about 1st October, 2008, Hilcrest filed an application being IA No.12164/ 2008 in C.S. (OS) No.1832/ 2008 inter alia praying that Hilcrest be allowed to participate in the Extraordinary General Meeting of HQRL to be held on 16th October, 2008 and further praying for appointment of an Administrator to look after the affairs of the company. A B C D E F G H RAM PARSHOTAM MITTAL & ORS. v. HOTEL QUEEN ROAD PVT. LTD. & ORS. [ARUN MISHRA, J.] 989

#25. On 15th October, 2008 the Delhi High Court passed an interim order in the said IA No.12164 of 2008 in C.S. (OS) 1382 of 2008 allowing Hilcrest to vote in the Extraordinary General Meeting to be held on 16th October, 2008 and also appoint Administrator to look after the day to day affairs of HQRL.

#26. On 16th October, 2008, Mr. R.P. Mittal, Mrs Sarla Mittal and HQRL filed an appeal against the orders dated 15th October, 2008 and 24th October, 2008 passed by the Delhi High Court in IA No.12164/ 2008 in C.S. (OS) 1832 of 2008 before the Division Bench.

#27. The appellants state that on or about 21st October, 2008, Mr. R.P. Mittal filed an application under the Right to Information Act whereupon the Registrar of Companies, by letter dated 21st October, 2008 informed the appellant that the status of HQRL had not been changed from private company limited by shares to public company limited by shares for the technical reasons specified in the said letter.

#28. On 24th October, 2008 the interim order passed by the Delhi High Court on 5th October, 2008 in IA No.12164/ 2008 in C.S. (OS) No.1832 of 2008 was made absolute.

#29. On 14th January, 2009, the Division Bench of Delhi High Court by a common order disposed of FAO (OS) No.282/2005, FAO (OS) 426 of 2008 and 440 of 2008 upholding the right of Hilcrest to vote in the meetings of HQRL. The question of whether HQRL was a private company limited by shares of public limited company was left open for adjudication in the suit. On 14th January, 2009, Hilcrest took over the management of HQRL from R.P. Mittal Group through Ashok Mittal. 30. Appellant Nos.1 and 2 filed a special leave petition in this Court being SLP (C) No.1069 of 2009 under Article 136 of the Constitution. By a judgment and order dated 20th July, 2009, a Division Bench of the High Court upheld the right of Hilcrest to vote on the ground that HQRL was prima facie a public limited company.

#31. On 30th July, 2009, Hilcrest and Ashok Mittal sent notice to the existing shareholders of HQRL under Section 81 (21) of the Companies Act to allot further equity shares.

#32. On 14th August, 2009 the appellants filed an interim application being IA No.9920/ 2009 in C.S. (OS) 1832 of 2008 seeking injunction against Hilcrest and Mr. Ashok Mittal from going ahead with the rights issue. A B C D E F G H 990 SUPREME COURT REPORTS [2019] 7 S.C.R.

#33. By a judgment and order dated 18th August, 2009 a Single Bench of Delhi High Court declined to interfere with the right issue and the application No.9920/2009 in C.S. (OS) 1832/2009 was dismissed.

#34. On 20th August, 2009, the appellant appealed against the order dated 18th August, 2009 referred to above. The Division Bench, however, declined to restrain the rights issue but only directed issuance of notice to HQRL and Ashok Mittal.

#35. On 31.5.2013, the High Court by the impugned order allowed CoA (SB) 4/2006 of Hillcrest and cancelled the allotment and transfers made on 27.7.2004, 7.1.2005 and 10.5.2005 on the grounds that Hillcrest had voting rights and there was breach of sections 286, 300 and 108 of the Companies Act.

#36. HQRL has contended that the claim of the appellants that they have funded HQRL at the time of acquisition of the hotel is incorrect. Rs.33.25 crores was obtained by way of bank loans, loan of Rs.5.5 crores was advanced by Mr. Ashok Mittal, loan of Rs.6.23 crores was advanced by Mr. R.P. Mittal. When the hotel was bought it required extensive renovation and thus further funds were required. Hillcrest contributed Rs.28.29 crores in preference share capital, Rs.40 crores bank loan from IOB on personal guarantee of Mr. Ashok Mittal, Mr. R.P. Mittal and Mrs. Sarla Mittal. HQRL has claimed that the net worth of Mr. Ashok Mittal was much higher than others.

#37. HQRL has further contended that the management changed hands from R.P. Mittal group on 15.1.2009 vide order of Delhi High Court. Prior to leaving the management of HQRL, Mr. R.P. Mittal and Mrs. Sarla Mittal with the help of their accomplices, removed and did away with the books of account and statutory records of HQRL. Thereafter, a number of third parties, all related to Mr. R.P. Mittal started claiming to have lent monies to HQRL. Most of these demands were based on ‘oral agreements’ with Mr. R.P. Mittal. When the new management assumed charge of HQRL, the financial position of HQRL was weak, there being only Rs.2.82 lacs in the bank account of HQRL; the immediate liabilities including government dues, taxes and salaries of staff were Rs.98,62,563; HQRL had defaulted on payment of interest to the bank amounting to Rs.4,73,98,446 along with total bank liability of about Rs.30 crores; and its account was on the verge of becoming Non Performing Asset (NPA), due to defaults in repayment of interest and principal and it was already in litigation with the bank. A B C D E F G H RAM PARSHOTAM MITTAL & ORS. v. HOTEL QUEEN ROAD PVT. LTD. & ORS. [ARUN MISHRA, J.] 991

#38. In these circumstances, funds were brought in by Mr. Ashok Mittal. A sum of Rs.5 crore was brought as loan by Mr. Ashok Mittal before 31.3.2009; Rs.4.5 crore further loan by Mr. Ashok Mittal before 31.3.2009; and Rs.40 crore by Mr. Ashok Mittal through Rights Issue. Offer was given to the appellants who refused to subscribe to rights issue but litigated against the company. Prayer for grant of injunction was refused by Delhi High Court on the Rights Issue in 2009.

#39. According to the respondents, it is crystal clear from the above facts, that the entire funding was on the basis of investment either by Hillcrest or on the basis of creditworthiness of Mr. Ashok Mittal or investment made by him. The R.P. Mittal Group’s argument that they funded the project is incorrect. They have not been able to show how such funds have been brought in the company. Said group had neither funds nor creditworthiness to buy the hotel of HQRL.

#40. It was urged by Mr. Pinaki Misra, learned senior counsel on behalf of the appellants that the claim of Mr. Ashok Mittal that he had funded Rs.5.5 crores to Moral out of Rs.12.03 crores for acquisition of HQRL was false and an afterthought. In order to mislead this Court, he had made a false statement. The claim of Mr. Ashok Mittal that loan of Rs.33 crores to Moral was only on his personal guarantee was also wrong. The action of Mr. Ashok Mittal and Hillcrest was detrimental to the interest of HQRL.

#41. Mr. Misra argued that the High Court has erred in relying on decisions of this Court in interim injunction matters which did not decide finally the rights of parties. Suit is still pending. He urged that it is well settled by this Court in State of Assam v. Barak Upatyaka D.U. Karamchari Sanstha (2009) 5 SCC 694 that any interim order which does not finally and conclusively decide an issue cannot be a precedent. 42. It was urged that admittedly, there was no financial mismanagement in the affairs of HQRL by appellants or R.P. Mittal group. The High Court while passing the impugned judgment has acted as a Civil Court and not as Company Court under section 10F of the Companies Act, 1956. The test as to whether an action is oppressive or not is not based on whether it is legally permissible or not since even if legally permissible, if the action is otherwise against probity, good conduct or is burdensome, harsh or wrong or is malafide or for collateral purpose, it would amount to oppression under section 397. Reliance has also been placed on Needle Industries (India) Ltd. & Ors. v. Needle Industries A B C D E F G H 992 SUPREME COURT REPORTS [2019] 7 S.C.R. A B C D E F G H