Delhi High Court
Hillcrest Reality Sdn.Bhd. vs Mr. Ram Parshotam Mittal & Ors. on 18 August, 2009
Author: S.Ravindra Bhat
Bench: S. Ravindra Bhat
* IN THE HIGH COURT OF DELHI AT NEW DELHI
Date of Reserve : 12.08.2009
Pronounced on : 18.08.2009
+ I.A. No.9920/2009 in CS (OS) 1832/2008
Hillcrest Reality SDN.BHD. ........ Plaintiff
Through : Mr. Mohit Choudhary, Advocate
Versus
Mr. Ram Parshotam Mittal & Ors. ........ Defendants
Through : Dr.A.M. Singhvi, Sr. Advocate with Mr. Sandeep Mittal, Mr. R.P.
Mittal and Ms. Sarla Mittal, Advocates for Defendants 1,2,4 & 7.
Through : Mr. U.K. Chaudhary, Senior advocate with Mr. Deepak Singh and
Mr. Pervinder Singh for Defendant 3.
Mr. Raju Ramachandran, Sr. Advocate with Mr. Rudreshwar Singh and Mr.
Pradeep Chander, Advocates for Hotel Queen Road.
CORAM:
HON'BLE MR. JUSTICE S. RAVINDRA BHAT
1. Whether the Reporters of local papers Yes
may be allowed to see the judgment?
2. To be referred to Reporter or not? Yes
3. Whether the judgment should be Yes
reported in the Digest?
S.RAVINDRA BHAT, J.
*
1. This order will dispose of the Defendant Nos 1, 2, 4 and 7's (hereafter called "the applicants") temporary injunction application, (IA 9920/09) seeking a restraint upon the plaintiff's going ahead with its proposed rights issue, whereby it intends to offer 1,50,30,003 IA No.9920/2009 in CS (OS) 1832/2008 Page 1 shares of the face value of Rs. 10, at a premium of Rs. 30, thus proposing to realize Rs. 60 crores.
2. The facts necessary to decide the case are that HQRL Pvt. Ltd. (hereafter "HQRL") was incorporated as a special purpose vehicle (SPV) in August, 2001, with the intention, of taking over assets of, and managing, the Hotel Ashok Yatri Niwas as a part of the disinvestment scheme. This was effectuated by a Scheme of "Arrangement of Demerger" (sanctioned by the Central Government on 5th July, 2002) between India Tourism Development Corporation [ITDC] (of which Hotel Ashok Yatri Niwas was a unit) and HQRL.
3. The Central Government later invited bids for the purchase of 99.97% of the total voting equity share capital of HQRL; Moral Trading and Investment Ltd. ("Moral") met the parameters of the bid. The shares in HQRL were sold to it through two share purchase agreements dated 8th October, 2002. Those agreements were entered into between the President of India, Moral, and HQRL. On the same date, an agreement was entered into between the President of India and HQRL, by which the plot of land where Hotel Ashok Yatri Niwas stood was leased to HQRL, for 99 years. In addition, a meeting of the Board of Directors of HQRL 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.
4. In December, 2002 HQRL 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 HQRL. It was resolved to increase the capital of HQRL 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 HQRL Pvt. Ltd. were amended to state that preference shares would not carry any voting rights. Hill Crest Realty (a Malaysian company) purchased 23,65,000 redeemable preference shares from HQRL bearing interest at 8.5% per annum. The Board of Directors of HQRL approved the allotment on 5th May, 2003 subject to the condition that the allotment did IA No.9920/2009 in CS (OS) 1832/2008 Page 2 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.
5. In June, 2005 Hill Crest Realty served a notice on HQRL to hold an EGM to remove Mr. Ram Parshotam Mittal and Mrs. Sarla Mittal as directors of HQRL and instead to appoint the nominees of Hill Crest Realty. In response, HQRL 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 HQRL purporting to hold an EGM on 4th August, 2005 for the same purpose as above. The notice sent by Hill Crest Realty led HQRL to file Suit No. 992 of 2005 on the file of this Court, for injunction to restrain Hill Crest Realty from going ahead with the proposed meeting and exercising voting rights in the proposed meeting. By an order dated 12th August, 2005 a learned Single Judge of the court held that the requisition for an EGM by Hill Crest Realty was illegal and so, any resolution passed in that meeting was ineffective. Among the important conclusions arrived at by the learned Single Judge was that HQRL is a private limited company and that Hill Crest Realty had no voting rights in the EGM. Hill Crest Realty appealed against this decision, being FAO (OS) No. 282 of 2005 before the Division Bench.
6. In August, 2008 Hill Crest Realty alleged about its becoming aware of a resolution passed by HQRL 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 seeking such declaration, being Suit No. 1832 of 2008 (before this court). 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 claimed that by Hill Crest Realty that it should be permitted to participate in the EGM of HQRL scheduled to be held on 16th October, 2008. It was also prayed that an administrator be appointed to manage the affairs of HQRL. Alternatively, it was requested that the EGM scheduled for 16th October, 2008 be stayed.
7. 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 IA No.9920/2009 in CS (OS) 1832/2008 Page 3 was held, inter alia, that HQRL 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 HQRL). An appeal, FAO (OS) No. 426/ 2008 was filed by HQRL, before the Division Bench.
8. Hill Crest Realty also filed an application (IA No. 12638 of 2008) in Suit No. 992 of 2005 praying, inter alia, that HQRL 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 HQRL 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. 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 decision was appealed against before the Division bench, being FAO (OS) No. 440 of 2008.
9. The Division Bench disposed of all the three appeals, by its judgments dated 14-1-2009. It inter alia, observed as follows, in the operative portion of the order:
"84. The position as it stands today is that there is a subsisting special resolution of 30th September, 2002 intending to "convert" Hotel Queen Road Pvt. Ltd. into a public company. This special resolution has not been withdrawn; it has simply been lying dormant for the last several years. To an extent, it has been acted upon by Hotel Queen Road since Form No. 23 was filled up and submitted to the Registrar of Companies on 8th October, 2002 and the statement in lieu of prospectus was also filed with the said Registrar on 12th December, 2003. It was the duty and responsibility of the management of Hotel Queen Road either to give full effect to the special resolution or to completely abandon it. It has chosen to manage a halfway house without any apparent advantage to itself and certainly to the detriment of the interests of Hill Crest Realty. Moreover, another resolution passed on the same day, for increasing the share capital of Hotel Queen Road Pvt. Ltd. was actually given effect to.
IA No.9920/2009 in CS (OS) 1832/2008 Page 4
85. Under these circumstances, what possible relief could be given to Hill Crest Realty? One possible answer to the question is to appoint an administrator to manage the affairs of Hotel Queen Road, as has been ordered by the learned Single Judge in his order dated 15th October, 2008. We do not think this to be a wise course of action for the reason that the hospitality industry requires special expertise. Appointing a judge (sitting or retired) to manage a large hotel such as Hotel Queen Road as has been done in the order dated 15th October, 2008 will perhaps put Hotel Queen Road in the hands of a professionally unqualified person. Being an expert on hospitality arrangements and entertainment is the very antithesis of being "sober as a judge".
86. The other solution, one that commends itself to us, is to let the democratic process of managing the affairs of Hotel Queen Road continue, subject to the decision, at the trial stage on whether Hotel Queen Road is a private limited company or a public company. Apart from this, we also feel that judicial interference in the internal affairs of a company should be eschewed and the shareholders should be allowed to manage their affairs as best as they can. We, therefore, direct that Hill Crest Realty may be permitted henceforth to exercise its voting rights in all meetings of Hotel Queen Road subject to the decision, at the trial stage on whether Hotel Queen Road is a private limited company or a public company. The decisions taken at the EGM held on 4th August, 2005 should be given effect to (subject to the above) and the meeting proposed for 16th October, 2008 should be held as soon as possible in accordance with our above order and in accordance with the statutory requirements. Should any of the parties apprehend any difficulty in holding the EGM originally scheduled for 16th October, 2008 they are at liberty to approach the learned Single Judge hearing Suit No. 1832 of 2008.
87. The third alternative, of maintaining status quo, is not really viable at all. It would mean that despite Hill Crest Realty succeeding on all counts, and having been deprived of its legitimate entitlements for the past several years, it gains nothing and may continue to lose if the present situation continues. The balance deserves to be set right and this is possible only if Hill Crest Realty is now permitted a say in the affairs of Hotel Queen Road."
10. The above judgment was carried in appeal, by Special leave, to the Supreme Court, which dismissed it, and affirmed the judgment of the Division Bench. The Supreme Court gave detailed reasons, for its conclusions, in the judgment and order dated 20-7-2009, in SLP No. 1069-70/2009 (Ram Parshottam Mittal v. Hillcrest Realty Sdn. Bhd & Ors). The court observed that:
"The moment the resolutions were passed by the company on 30th September, 2002, the provisions of the Companies Act became applicable and by IA No.9920/2009 in CS (OS) 1832/2008 Page 5 operation of law, Hotel Queen Road simultaneously ceased to be a private limited company and under the conditions prescribed in the Act, Hillcrest Realty acquired voting rights in the meetings of the company by operation of Section 87(2)(b) and Section 44 of the said Act. The right of a preference shareholder to acquire voting rights is also indicated in clear and unambiguous terms in the Explanation to Section 87(2)(b).
38. Since the question as to whether Hotel Queen Road ceased to be a private company upon the resolutions being passed on 30th September, 2002, is the crucial issue for decision in both the two suits referred to hereinabove, it would not be proper for this Court to delve into the question further. However, for the purpose of disposing of these Special Leave Petitions, we are prima facie of the view that by virtue of the resolutions dated 30th September, 2002, Hotel Queen Road had become a public company thereby attracting the provisions of Section 87(2)(b) of the Companies Act, 1956, upon the bar under Section 90(2) thereof having been lifted. A natural consequence is that in the event dividend had not been declared or paid for a period of two years as far as Hillcrest is concerned, the Explanation to Section 87(2)(b) would come into play thereby giving Hillcrest Realty, as a cumulative preference shareholder, the right to vote on every resolution placed before the Company, at any meeting, in keeping with Clause (i) of Section 87(2)(b) of the aforesaid Act.
39. In keeping with the aforesaid principle, while dismissing the Special Leave Petitions filed by Hotel Queen Road and Hillcrest Realty, we make it clear that the observations made in this judgment are of a prima facie nature only for disposal of the Special Leave Petitions and should not influence the final decision in the suits, where the question relating to the status of Hotel Queen Road has been left open for decision. We, however, request the High Court, functioning as the Trial Court, to dispose of the suits at an early date so that the management and affairs of Hotel Queen Road are not left in a state of uncertainty."
11. The applicants contend that the impugned rights issue was decided upon by the plaintiff, in unseemly haste, on 30th July, 2009, by issuing a notice under Section 8 (1) of the Companies Act, barely 10 days after the Supreme Court judgment. The paid up capital of the company is Rs. 9 crores, divided into 90,00,000 equity shares of Rs. 10/- face value of which approximately 89% equity is held by the first defendant and his associates. The third defendant, says the applicant, holds only one equity share, while 10% equity is with one Pondy Metals and Rolling Mills Pvt. Ltd. It is contended that the first defendant would not be able to raise Rs. 60 crores at such short notice, thus establishing that the plaintiff's real motive is that the third defendant should become the single largest equity shareholder, in the company. Left IA No.9920/2009 in CS (OS) 1832/2008 Page 6 undisturbed, the resulting equity shareholding would change the picture, irrevocably, whereby the applicants' holding - along with associates, would be to the tune of Rs. 9 crores, and that of the plaintiff, would be pushed up to Rs. 15.30 crores. The applicants say that this would prejudice them, at the trial in the suit, to decide whether the company is a public limited company or a private company is yet to take place. It is claimed that the actual equity base enhancement through the impugned rights issue is only to the tune of Rs. 15 crores, and the balance Rs. 45 crores is the premium, which would not benefit the subscribers, in any manner. Learned counsel for the applicant also submits that the situations where the premia can be used by the company, do not exist; consequently, the fresh infusion is unnecessary, and would lead to changes of a fundamental character, in the functioning of the company, which should not be permitted by this court.
12. The applicants claim that this court should impose restrictions on the functioning of the HQRL since any acts done, during the interregnum, of the pendency of the suit, and a final decision, should not irrevocably prejudice their pre-existing dominant position as 89% shareholders, in the company.
13. Besides the averments, it was contended by Dr. A. M. Singhvi, applicants' learned senior counsel, that the court should protect the interests of the company, as well as those who hold a substantial stake in it. He stated that as those who were controlling spirits, in Moral Trading, the applicants had invested substantial amounts, to the tune of over Rs. 40 crores in the company. Even as on date, their commitment is to the tune of Rs. 63 crores. The order of the Division bench led to their virtually being ousted from the management of the affairs of the company; yet the reality is that they are the largest equity shareholders. In the absence of a final decision that the company is a public limited company, the plaintiffs cannot take decisions that would fundamentally alter its character, or make lasting or irreversible changes, as would be the natural consequence, if the plaintiffs are left unrestrained, in their plan to go ahead with the rights issue.
14. The applicants contend that the plaintiff cannot, by virtue of Section 78 of the Companies Act, 1956, "dip into" the monies that are sought to be raised through the proposed IA No.9920/2009 in CS (OS) 1832/2008 Page 7 issue. Counsel contends that the disclosure or justification, for the impugned issue, reveals that the plaintiffs intend to expend and fritter away the amounts likely to accrue, for inessential and frivolous purposes, and leave the company saddled with liabilities.
15. It is argued on behalf of the plaintiff, by Mr. Jayant Bhushan, learned senior counsel, that the application for temporary injunction, of the kind filed, is not maintainable at the behest of the defendant. It is urged, by placing reliance on the judgments reported as Liberty Sales Services v. M/S. Jakki Mull & Sons & Anr 66 (1997) DLT 506 (DB) that such applications can be maintained, and granted, only if they are in any way connected with or incidental to the object and purpose of the plaintiff's action. Reliance is also placed on the decision reported as Suganda Bai v. Sulu Bai, (AIR 1975 Kar. 137) which was referred to in Liberty Sales. The plaintiff argues that the purpose of seeking injunction through the present application, is entirely alien to the plaintiffs' object for seeking reliefs in the suit, and the application in essence seeks substantial reliefs based subsequent developments that occurred after the suit was filed, which may arguably constitute independent causes of action.
16. It is argued that the plaintiff was consciously put into management by the Division Bench, due to the prima facie findings about the company having become a public limited company, and also in view of the operation of law. It is submitted that the company has an exposure of over Rs. 30 crores which have to be repaid to the banks, in discharge of its debts, and that it needs fresh capital to upgrade its systems and operationalize the hotel. It is submitted that the plaintiff was a substantial investor, having put in over Rs. 30 crores, at the time when the Moral group placed its bid for taking over HQPL. In these circumstances, the defendant, who had frittered away precious resources, and did nothing to improve the hotel or the property when the previous management was in charge, cannot seek to obstruct in the smooth functioning of the management under the pretext that irreversible alterations in the company would be carried out, due to the proposed rights issue.
17. It is argued that the present market value of the shares is around Rs. 145/- and that after the rights issue is subscribed, it would be in the range of Rs. 78/-. Reliance is placed on values' reports, for this purpose. The plaintiffs' senior counsel argues that if the premium IA No.9920/2009 in CS (OS) 1832/2008 Page 8 proposed is not factored, the share holders' interest would be prejudiced, as the company would be offering the issue at a vastly discounted face value, which would be unconscionable, and also an actionable wrong, as far as the present management is concerned.
18. Before a discussion on the merits of the rival contentions, it would be essential to reproduce Sections 78, 100 and 101 of the Indian Companies Act, 1956 ("the Companies Act"), which are as follows:
"78. Application of premiums received on issue of [securities].--
(1) Where a company issues [securities] at a premium, whether for cash or otherwise, a sum equal to the aggregate amount or value of the premiums on those [securities] shall be transferred to an account, to be called "the [securities] premium account", and the provisions of this Act relating to the reduction of the [securities] capital of a company shall, except as provided in this Section, apply as if the [securities] premium account were paid-up [securities] capital of the company.
(2) The [securities] premium account may, notwithstanding anything in Sub-Section (1), be applied by the company--
(a) in paying up unissued [securities] of the company to be issued to members of the company as fully paid bonus [securities];
(b) in writing off the preliminary expenses of the company;
(c) in writing off the expenses of, or the commission paid or discount allowed on, any issue of [securities] or debentures of the company; or
(d) in providing for the premium payable on the redemption of any redeemable preference [securities] or of any debentures of the company.
(3) Where a company has, before the commencement of this Act, issued any [securities] at a premium, this Section shall apply as if the [securities] had been issued after the commencement of this Act:
Provided that any part of the premiums which has been so applied that it does not at the commencement of this Act form an identifiable part of the company's reserves within the meaning of Schedule VI, shall be disregarded in determining the sum to be included in the [securities]premium account.
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100. Special resolution for reduction of share capital--(1) Subject to confirmation by the Court, a company limited by shares or a company limited by guarantee and having a share capital, may if so authorized by its articles by special resolution, reduce its share capital in any way; and in particular and without prejudice to the generality of the foregoing power, may--
(a) extinguish or reduce the liability on any of its shares in respect of share capital not paid-up;
(b) either with or without extinguishing, or reducing liability on any of its shares, cancel any paid-up share capital which is lost, or is unrepresented by available assets; or
(c) either with or without extinguishing or reducing liability on any of its shares, pay off any paid up share capital which is in excess of the wants of the company;
and may, if and so far as it necessary, alter its memorandum by reducing the amount of its share capital and of its shares accordingly.
(2) A special resolution under this section is in this Act referred to as "a resolution for reducing share capital.
101. Application to Court for confirming order, objections by creditors, and of list of objecting creditors.--(1) Where a company has passed a resolution for reducing share capital, it may apply, by petition, to the Court for an order confirming the reduction.
(2) Where the proposed reduction of share capital involves either the diminution of liability in respect of unpaid share capital for the to any share holder of any paid up share capital, and in any other case if the Court so directs, the following provisions shall have effect, subject to the provisions of Sub-section (3):
(a) Every creditor of the company who at the date fixed by the Court is entitled to any debt or claim which, if that date were the commencement of the winding up of the company, would be admissible in proof against the company, shall be entitled to object to the reduction;
(b) the Court shall settle a list of creditors so entitled to object, and for that purpose shall ascertain, as far as possible without requiring an application from any creditor, the names of those creditors and the nature and amount of their debts or claims, and may publish notices fixing a day or days within which creditors not entered on the list are to claim to be so entered or are to be excluded from the right of objecting to reduction;
(c) where a creditor entered on the list whose debt or claim is not discharged or has not determined does not consent to the reduction, the Court may, if its thinks fit, dispense IA No.9920/2009 in CS (OS) 1832/2008 Page 10 with the consent of that creditor, on the company securing payment of his debt or claim by appropriating, as the Court may direct, the following amount:
(i) if the company admits the full amount of the debt or claim, or, thought not admitting it, is willing to provide for it, then, the full amount of the debt or claim;
(ii) if the company does not admit and is not willing to provide for the full amount of the debt or claim, or if the amount is contingent or not ascertained, then, an amount fixed by the Court after the like enquiry and adjudication as if the company were being would up by the Court.
(3) Where a proposed reduction of share capital involves either the diminution of any liability in respect of unpaid share capital or the payment to any shareholder of any paid up share capital, the Court may, if, having regard to any special circumstances of the case, it thinks proper so to do, direct that the provisions of Sub-section (2) shall not apply as regards any class or any classes of creditors."
19. A detailed recapitulation of the facts is unnecessary for a decision on the present application. The controversy which had to be considered in interlocutory proceedings, pertinently for the purpose of deciding this application, hinged in effect, albeit on a purely prima facie consideration, of the resolutions of 30th September, 2002, along with the effect of Section 87 (2) of the Companies Act. On a detailed discussion, of the soundness of the relative position of the parties (herein) the Division Bench, in its judgment, held that the company was deemed a public company. This is evident from a discussion in Paras 63 and 71 to 77 of the judgment; the Division Bench also examined the effect of the Articles of association of the company, on Hill Crest's entitlement to vote, in Paras 78-79 of its judgment. These constituted the backdrop for the relief granted, in paras 84-86 of the judgment. As a result today, the plaintiff is in effect, controlling HQRL.
20. The first question which the court has to address is whether the present application for ad-interim injunction, at the behest of the defendant, as it were is maintainable. The earliest decision of a High Court in India appears to be Suganda Bai, where the trial court allowed a defendant's application for interim injunction, in a suit filed by the plaintiff for permanent injunction, in respect of immovable property. The plaintiff had not sought for the relief when he filed the suit. The court, noting Carter v. Fey 1894 (2) Ch. 541, held that a defendant may, in certain circumstances, seek injunction without seeking a separate claim, or preferring counter IA No.9920/2009 in CS (OS) 1832/2008 Page 11 claim, if his relief was incidental to what was sought in the suit, by the plaintiff. Holding that the defendant's cause could not be said to be incidental, the court vacated the injunction (in Suganda Bai). The next case is Dr. Ashish Ranjan Dass v. Rajendra Nath Mullick AIR 1982 Cal 529, the plaintiff, who was in possession of the suit land, sought for specific performance of an alleged agreement, to lease it to him; the defendant denied existence of a concluded contract. During pendency of the suit, the defendant applied for injunction, claiming that the plaintiff had altered the nature and character of possession, by putting up bamboo structures, and seeking to collect parking fees. The court held that the plaintiff had claimed relief, in equity; after noticing Suganda Bai, the Calcutta High Court concluded that the defendant's claim was incidental to the plaintiff's relief, and granted the temporary injunction sought for. In an interesting decision, Vincent v. Aisumma, AIR 1989 Ker 81, the Kerala High Court, without noticing the previous decisions in Suganda Bai and Dr. Ashis Ranjan Das arrived at the same conclusion, on a textual interpretation of Order 39, Rules 1 to 3, Civil Procedure Code (CPC). The Court noted that the structure of Rule 2 enables only the plaintiff to seek relief, whereas the other provisions, such as Rules 1 and 3 are wider, and can be availed by parties other than the plaintiff. The court also, pertinently, observed that provisions such as Order 39 and 40 empower the court to preserve and protect the subject matter of the litigation, and have to be necessarily construed widely.
21. The decision of the Division Bench in Liberty Sales was in the context of the plaintiff suing for injunction, claiming to be a sub-tenant of the defendant. The defendant's application for temporary injunction was allowed, upon a finding that the true relationship between the parties was that of agent and principal, and not those between a sub-tenant and tenant. The Division Bench, after noticing various decisions of English and Indian courts, held that:
"It will be noticed therefore that a defendant can move for an injunction against the plaintiff without filing a counter-claim or suit or cross-action provided such a claim to relief arises out of the plaintiff's cause of action or is incidental to it. Halsbury's Laws of England, Vol. 24, 4th Ed. para 1048 refers to these cases. It is, as already stated, significant that the principle was applied by the English Courts in the main suit itself for they say that relief can be claimed in the suit by the defendant by filing an application and without a counter-claim or cross-action or by issuing a writ. The condition is that it should arise out of the plaintiff's cause of action or is incidental to it. In fact, in Collison v.
IA No.9920/2009 in CS (OS) 1832/2008 Page 12 Warrell, 1910(1) Ch. D 812, both plaintiff and defendant relied upon the same agreement, and it was held that defendant was entitled to apply for an injunction against the plaintiff. In that case, the plaintiff who was the owner of a business of running a hotel appointed defendant as trustee and executed a deed of arrangement describing the defendant as trustee to pay the plaintiff's creditors and agreed to occupy the lease hold house as Manager. Later the defendant terminated the plaintiff's services as Manager and requested plaintiff to leave the premises. The plaintiff sued for a declaration that he was to be continued as Manager and sought for injunction, damages etc. Defendant gave notice of motion against plaintiff to restrain plaintiff from remaining in or upon the hotel and not to interfere in the management. Plaintiff contended that the defendant's request was in ejectment and could not be granted in plaintiff's suit for injunction. Buckley, J. applied Carter v. Fey, (1894)(2) Ch. D 541, while holding plaintiff has no right to continue in occupation or retain possession held:
"What is the defendant's cause of action? It is identically the same thing from the opposite point of view. He negatives the plaintiff's claim to be employed and claims to prevent him from interfering with the management. In the state of things, I think he is entitled to move in the plaintiff's action.
It is a novelty to me that an order can be obtained to restrain a person from remaining in a house, which is, of course equivalent to a mangatory order upon him to go out."
After referring to Spurgin v. White, (1960) 2 Giff, 473 where such an injunction of a mandatory nature was held could be issued, Buckley, J. held:
"That appears to me to be a precedent for an order I am prepared to make, which will have the effect of restraining the plaintiff from remaining in possession of the premises."
The said order was affirmed by the Court of Appeal, in the same report, by Rigby, Vaughan Williams and Stirling, L. JJ."
22. This court cannot be unmindful of the circumstance that the plaintiff has sought relief in equity, i.e. various declarations. As noted in Dr. Ashis Ranjan Das (supra), the court should be alive to the kind of relief, sought in the suit, in such circumstances, and should, wherever necessary require the plaintiff, to maintain the equities.
23. In this case, the plaintiff has sought for declaratory reliefs. The principal among these is a declaration that the company is a public company. The other reliefs include a declaration that certain Board resolutions are contrary to law, and are void, and further, that the company IA No.9920/2009 in CS (OS) 1832/2008 Page 13 should be permanently restrained from commencing business operations, till issue of ownership is undecided. The interlocutory determinations, flowing from the Division Bench's judgment, as affirmed by the Supreme Court's judgment, has resulted in the plaintiffs wresting control, albeit as an interim arrangement. The defendants' anxieties, in a sense (whatever be the merits of the case, finally) are understandable. The reliefs they seek are closely twined with the nature of injunction that the plaintiff seeks. Therefore, the court clearly discerns the temporary injunctions sought by the defendant, through the present application, as incidental to, or part and parcel of the plaintiff's cause of action, for its reliefs. In these circumstances, the court is of the view that the present application for temporary injunction, is maintainable, at the behest of the defendant.
24. In its opposition to the application, the plaintiff contends that the defendant company has left considerable liabilities, which have to be discharged. It relies on averments, showing that even when it took control of the company, the expenses for the month of December, 2008 was to the tune of Rs. 1.1 crore; the certificate relied on it (Annexure R-11, dated 6th August, 2008, issued by its finance department) states that Rs. 9,80,00,000/- (Rupees nine crores, eighty lakhs only) was received from Mr. Ashok Mittal during the period 30 th March, 2009, to 3rd August, 2009, of which Rs. 6.50 crores was deposited with the Indian Overseas Bank, to liquidate the company's liabilities; the dates of deposit of those amounts have been indicated in the document. It is also asserted that besides this, the sum of Rs. 30.85 crores is due and outstanding to the Bank. In addition to these, the plaintiff alludes that the market value of its share, was ascertained as Rs. 143/- per share, and that after the rights issue, it would be in the range of Rs. 78/- per share. It is submitted that in these circumstances, and with a view to modernize and upgrade the hotel, the plaintiff proposes to go ahead with the issue, at the premium, indicated, without which the company and its shareholders would be prejudiced.
25. The applicant's position, during the hearing was that interim arrangements, which have altered the management of the company, should not result in decisions that have far reaching and irreversible consequences. It was contended that the company could well have raised the amounts, without indicating any premium, in which event, if the defendants had chosen to pick IA No.9920/2009 in CS (OS) 1832/2008 Page 14 up any shares, they would not be prejudiced irreparably, and the rights equity, after allotment, would be reflective of their existing shareholding. The first irreversible position pointed out, therefore, is that the defendants' extent of shareholding, in terms of percentage and proportion, would dwindle or get diluted, which cannot be restituted at all. It is contended, additionally, that the proposed expenditure of the amounts received from the rights issue, are impermissible, having regard to Section 78 of the Companies Act. It is also argued that the defendants too have spent substantial amounts, which equals if not surpasses what the plaintiffs claim to have spent, on the company and the hotel.
26. What has to be first decided is the correctness of the applicant/ defendant's plea that the issue should not have indicated a premium, and instead, the rights offer should have been on the basis of the face value of the shares (Rs. 10). Now, the materials before the court suggest that the contemporaneous market value - at least as on 11th August, 2009, was Rs. 143/-; the defendants rely on a value's assessment. The court cannot, in the absence of any contrary material, arrive at a different conclusion, or hold that such valuation is either exaggerated or artificial. The plaintiffs' position also is that after the allotment of the rights issue, and infusion of new shares, the value of each share would be Rs. 78/-. In these circumstances, the court discerns no infirmity in the plaintiff's proposal of a rights offer, with the premium suggested. Irrespective of the final outcome of the suit, the amounts would enrich the company; the applicant defendants being significant shareholders, would also benefit. It is ultimately their choice of either exercising whatever their rights are, in that issue. If the court eventually agrees with them and holds the company to be a private company, the applicant's position as dominant shareholders would continue. If on the other hand, they choose not to exercise the full extent of their rights, in the proposed offer, and ultimately succeed, the consequences of their not exercising the choice at this stage, (though in a sense irreversible) would be the result of their volition. In these circumstances, there is nothing illegal or reprehensible in the proposed offer of the plaintiff, placing a premium on the rights issue for the company's shares.
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27. The second, and perhaps equally substantial issue is the impact of provisions of the Companies Act, on the proposed issue. Here, the plaintiffs had urged that Section 78 merely mandates that the amounts should be kept in a separate account, and that those provisions do not constrain the expenditure, which a company has to legitimately incur, as a running commercial venture. Though this argument is attractive, and has its merit, the court has to examine the provision itself. Section 78 (1) establishes what may be termed as the "governing law" where a company issues shares, at a premium. It enjoins that such premium amounts shall be transferred to an account, to be called "the [securities] premium account", and "the provisions of this Act relating to the reduction of the [securities] capital of a company shall, except as provided in this Section, apply as if the [securities] premium account were paid-up [securities] capital of the company."
Section 78 (2), which begins with a non-obstante clause, enacts the exceptions from the general rule mandated by Section 78 (1) and enables a company to apply the securities premium account in paying up its unissued securities, to be issued to its members as fully paid bonus shares; in writing off its (the company's) preliminary expenses; in writing off the expenses of or the commission paid or discount allowed on any issue of securities or debentures of the company or in providing for the premium payable on the redemption of any redeemable preference securities or any debentures of the company. The provisions of, and procedure prescribed for under Sections 100-102 of the Companies Act, for reduction of share capital would apply, wherever a company proposes to utilize amounts from the securities premium account, for any purpose, other than what is provided for under Section 78.
28. Sections 78 and 100 were the subject of two decisions, where their impact was discussed, in the following terms. In re Hyderabad Industries [2005]123 Comp Cas 458 (AP), a judgment of the Andhra Pradesh High Court, observed that:
"if the Share Premium Account is to be applied to any of the purposes mentioned in Sub- section (2) of Section 78, the company need not seek the approval/confirmation of the Company Court. It is only in case the company desires to apply Share Premium Account for any other purpose, it has to approach the Company Court for confirmation. The learned Company Judge had also rightly observed that there could be myriad situation where the Company may have to use Share Premium Account or reserve or reserve fund IA No.9920/2009 in CS (OS) 1832/2008 Page 16 provided such use is authorized by the Articles of Association and must be within the four corners of law."
The judgment In Re: Ushacomm India Private Ltd. 2006(2) CHN 473 held that:
"9. Section 78 provides for a separate account known as securities premium account for premium collected on issue of securities. The securities premium account is not share capital of the company. Share capital as defined in Section 86 of the said Act provides for only two kinds of share capital, namely, equity share capital and preference share capital. By reason, however, of Section 78(1) of the said Act, the provisions of the said Act with regard to reduction of share capital are applicable to the securities premium Account.
10. Notwithstanding anything in Section 78 (1) of the said Act the securities premium account may be applied by the company in paying up unissued securities of the company, to be issued to members of the company as fully paid bonus shares, in writing off the preliminary expenses of the company, in writing off the expenses of or the commission paid or discount allowed on any issue of securities or debentures of the company or in providing for the premium payable on the redemption of any redeemable preference securities or any debentures of the company.
11. Under Section 100 of the said Act the company, if so authorized by its Articles, might, by special resolution, reduce its share capital, if so permitted by its Articles and thereby
(i) extinguish or reduce the liability on any of its share in respect of share capital not paid up, (ii) cancel any paid up share capital which is lost or is unrepresented by available assets, either with or without extinguishing or reducing liability on any of its shares or
(iii) pay off any paid up share capital which is in excess of the wants of the company, with or without extinguishing or reducing liability on any of its shares and may also, if and so far as is necessary, alter its memorandum by reducing the amount of its share capital and of its shares. The purposes listed above are only illustrative and not exhaustive.
12. Where a company has adopted a special resolution for reducing the securities capital, it may by petition to the Court apply for confirming the reduction. Where, however, the proposed reduction involves diminution of liability in respect of unpaid share capital or involves the payment to any shareholder of any paid up share capital or, in any other case, if the Court so directs, every creditor of the company would be entitled to object to the reduction and the Court would settle the list of creditors so entitled to object and for that purpose ascertain the names of creditors and the nature and amount of their debts or claims.
13. Where a creditor, entered in the settled list of creditors, does not consent to the reduction, the Court may, if it thinks fit, dispense with the consent of that creditor, on the company securing payment of its debt or claim. Where a proposed reduction of IA No.9920/2009 in CS (OS) 1832/2008 Page 17 capital either involves diminution of any liability in respect of unpaid share capital or the payment to any shareholder of any paid up share capital, the Court may if, having regard to the special circumstances of the case, it thinks proper so to do direct that the provisions of Section 100(2) shall not apply as regards any class or any classes of creditors. In the instant case, the proposed reduction does not involve any diminution of liability or payment to any shareholder."
29. The above observations emphasize the concern for shareholders' rights, and ensuring that the liability of the company, towards the value of their share, is not diminished. The procedure envisioned under the Act apparently has safeguards: one, a special resolution, and two, approval for the proposed reduction of capital (outside of the permitted situations under Section 78) by the court. Here, prima facie, the proposed expenditure indicated in the plaintiff's reply, may fall within Section 78 only to a limited extent. However, the proposals for upgrading the business, and purchase of various equipment, renovations, etc, may not fall within the description of Section 78 (2), i.e (1) unissued securities, to be issued to its members as fully paid bonus shares;
(2) writing off its (the company's) preliminary expenses;
(3) writing off the expenses of or the commission paid or discount allowed on any issue of securities or debentures of the company or the (4) provision for the premium payable on the redemption of any redeemable preference securities or any debentures of the company.
In the circumstances, the court is of opinion that the plaintiff would have to approach and seek approval under Sections 100 and 101 of the Companies Act.
30. As a result of the above discussion, it is held that though the application is maintainable, the defendant cannot be granted the relief of injunction, as sought. However, in view of Section 78, the plaintiff is directed to seek approval, in accordance with law, in respect of the expenditure proposed by it, for the purposes which do not fall within Section 78 (2). The plaintiff shall file an undertaking, and also cause an undertaking to be filed by the company IA No.9920/2009 in CS (OS) 1832/2008 Page 18 (which is a party to the present suit, and of which the plaintiffs are in control at present), to comply with these directions, in the form of affidavits, within one week.
31. The application IA 9920/2009 is disposed of in the above terms. Order dasti.
August 18, 2009 (S. RAVINDRA BHAT)
JUDGE
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