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[Cites 36, Cited by 3]

Delhi High Court

Asian Hotels Ltd., Bhikaji Cama Place vs D.D.A. Vikas Minar, I.P.Estate, New ... on 17 July, 1998

Equivalent citations: 1998IVAD(DELHI)708, 1998(46)DRJ310

Author: K.Ramamoorthy

Bench: K. Ramamoorthy

ORDER
 

 K.Ramamoorthy, J.

1. The plaintiff has filed the suit for recovery of sum of Rs.11,97,100/- with interest thereon. Before I refer to the pleadings, I feel it necessary to notice the facts culminating in the filing of the suit.

2. The Delhi Development Authority had put up the plot of land measuring 20,000 square metres in Bhikaji Cama Place, District Centre, Rama Krishna Puram, New Delhi for auction. The booklet issued by the DDA, mentioning the terms and conditions of the auction, is marked as Ex.D-1. The terms and conditions of the auction in the form of booklet is also filed by the plaintiff and is marked as Ex.P-13. The auction was held on the 9th of September, 1980. Shri C.L.Jhunjhnuwala participated in the auction on behalf of the plaintiff company which was under process of incorporation. On behalf of the plaintiff, the highest bid was made by Mr.C.L.Jhunjhnuwala for Rs.4.36 crores. On the same date, on behalf of the proposed company, a sum of Rs.1.09 crores was paid towards earnest money. The receipt issued by the DDA is marked as Ex.D-3. A bid form was issued by the DDA. That is marked as Ex.D-2. It is mentioned therein that Shri C.L.Jhunjhunuwala was a promoter of the proposed private limited company. The names of the directors are mentioned in the form, for information of the DDA and the names are as under:-

1. Shri Chaman Lal Gupta
2. Shri Radhey Sham Saraf
3. Shri Harish Sharma
4. Shri Brajesh Batra
5. Shri C.L.Jhunjhnuwala
6. Shri L.N.Jhunjhnuwala
7. Shri Kishan Lal Mittal
8. Shri S.C.Jhunjhnuwala

3. On the 10th of September, 1980, the DDA issued the letter of acceptance, Ex.P-1 or Ex.D-4, in the following terms:-

"To, Shri C.L.Jhunjhnuwala, (Promoter of a proposed Pvt. Ltd. Co.) 7A, Rajpur Road, Delhi.
Sub: Auction of Hotel Plot measuring 20,000 sq.mtrs. in Bhikaji Kama Place, District Centre, R.K.Puram Delhi.
Sir, I am directed to inform you that the bid of Rs.4,36,00,000/- (Rupees four crores & thirty six lacs only) offered by you in the auction held on 9.9.1980 in respect of Hotel Plot mentioned above has been accepted by the Authority.
2. You are now requested to deposited within 90 days from the date of issue of this letter, a sum of Rs.3,27,00,000/- (Rupees three crores & twenty seven lacs only) as detailed below through Demand Draft in favour of Delhi Development Authority.
i) Total premium of the : 4,36,00,000/- plot.
ii)Earnest money already: 1,09,00,000/- deposited vide receipt No.4998 dated 9-9-80
iii)Balance amount to : 3,27,00,000/- be paid. (Rupees three crores & twenty seven lacs only)
3. Please note that part payment will not be accepted and if the amount demanded above is not paid within the prescribed period, it will be treated as breach of condition No.II(G) of the terms & conditions of auction and the earnest money deposited by you will be forfeited as provided under condition No.II(4) of the said terms and conditions.
4. You are also requested to send the terms and conditions of auction duly typed and signed on Rs.2/- non-judicial stamp paper. The said terms & conditions be please also sent alongwith the Draft. If the terms & conditions duly signed on non-judicial stamp paper are not received alongwith the Demand Draft, the Draft will not be got encashed and interest @ 16% per annum will be levied against you for the period till the said terms & conditions duly typed and signed on the non-judicial stamp paper are submitted by you. Please note that interest chargeable on this account would be for the full fortnight or month, as the case may be, and not for a fraction thereof.
5. I may also inform you that besides the above amount, another amount calculated as per the terms & conditions of auction on account of yearly rent payable in advance will be required to be paid by you at the time of execution of the lease deed. The cost of stamping and registration of the lease deed and the Corporation Duty on transfer of immovable property will also be borne by you."

The DDA itself had addressed Shri C.L.Jhunjhnuwala as Promoter of a proposed private limited company.

On the 19th of September, 1980, (Ex.D-5) the DDA wrote to Shri C.L.Jhunjhunwala in the following terms:-

"To, Shri C.L.Jhunjhnuwala, (Promoter of a proposed Pvt. Ltd. Co.) 7A, Rajpur Road, Delhi.
Sub: Auction of Hotel Plot measuring 20,000 sq.mtrs. in Bhikaji Kama Place, District Centre, R.K.Puram Delhi.
Sir, In continuation of this office letter of even number dated 10-9-1980 on the subject noted above, I invite your attention to the terms and conditions of the auction of the Hotel plot and particularly to clause 3(2)(c) at page 2 & 3 of the brochure. It has been stipulated that the construction shall have to be started within six months of the offer of the possession of the plot, failing which the auction bid/lease of the plot is liable to be cancelled without assigning any reasons.
I would, therefore, request you to kindly make the payment of balance premium as early as possible so that the offer of possession can be made to you at an early date and you are in a position to start the construction within stipulated period."

Here also Shri C.L.Jhunjhunwala is mentioned as Promoter for a proposed Pvt. Ltd. Co.

5. On the 29th of October, 1980, (Ex.P-1/A) Shri.C.L.Jhunjhunwala informed the DDA that private limited company had been formed. The letter reads as under:-

"Kindly refer to your letter No.F-65(1)/80/IMPL dated 10th September, 80.
I am the bidder of the Hotel Plot situated at Bhikaji Cama Place,New Delhi, measuring 20000 Sq. Metres for a 5 Star Hotel, whereas I have paid 25% of the bid amount Rs.1,09,00,000/- (Rupees One crore and nine lacs only).
We have formed a Public Limited Company under the name and style Asian Hotels Limited having Registered Office at 1/23-B, Asaf Ali Road, New Delhi, which is under process of registration with the Registrar of Companies, New Delhi.
The company shall submit the remaining balance of the bid amount within the stipulated time.
Kindly deliver the possession of the site at an early date so that the company may chalk programme in connection with building of 5 Star Hotel.
The company assures that the above referred 5 Star Hotel shall be completed before Asian Games."

6. On the 13th of November, 1980, the Board of Directors of Asian Hotels Limited (plaintiff) had a meeting and the minutes of the meeting was sent to the DDA and the same is marked as Ex.D-7 and it reads as under:-

"Leasehold rights in respect of land:
The Chairman stated that the Board is aware that the participation of Mr.C.L.Jhunjhunuwala - one of the non-resident promoters of the company, in the public auction for the lease-hold rights in respect of a hotel plot of land measuring approx. 20,000 sq.metres at Bhikaji Cama Place, New Delhi, organized by the Delhi Development Authority, New Delhi, was for and on behalf of the company.
He further stated that Mr.C.L.Jhunjhunuwala had at the time of auction did indicate to the said Delhi Development Authority that the bid by him was for an on behalf of a company to be incorporated for the purposes, besides others, of constructing, running and managing a 5 star hotel on the said plot of land. This was subsequently confirmed by Mr.C.L.Jhunjhunuwala to the Delhi Development Authority vide his letter dated 29th October, 1980, a copy of which was placed before the meeting and initialled by the Chairman for the purposes of identification. The Chairman stated that in the said communication of 29th October, 1980, addressed to the Delhi Development Authority by Mr.C.L.Jhunjhunwala, the name of the company to be incorporation, as referred to hereinabove, was also stated to be Asian Hotels Limited.
The Chairman further brought to the notice of the meeting that Mr.C.L.Jhunjhunuwala had also in a letter of 15th September, 1980, addressed to Mr.Sushil Gupta, Director of the company, confirmed his said communication to incorporate a company, giving also a list of subscribers to the Memorandum of Association of the said proposed company. The said letter was also placed before the meeting and initialled by the Chairman for the purposes of identification.
The Chairman further brought to the notice of the meeting that the proposed company has now been duly formed and registered with the Registrar of Companies, Delhi & Haryana, under the name and style of Asian Hotels Limited, with the subscribers to the Memorandum of Association as specified in the communication addressed to Mr.Sushil Gupta dated the 15th of September, 1980, referred to hereinabove.
The Chairman stated that the company has now been advised that the Board should ratify all the acts of Mr.C.L.Jhunjhunuwala in the said direction regarding the acquisition of leasehold rights in respect of the said plot of land mentioned hereinabove and take over all rights, title and interest in the said leasehold rights.
On a proposal by the Chairman and seconded by Mr.Sushil Kumar Gupta it was resolved that the Board hereby ratifies all acts and deeds of Mr.C.L.Jhunjhunuwala, one of the promoters of the company, in the acquisition of the leasehold rights in the land measuring 20,000 sq.metres situated at Bhikaji Cama Place, allotted by the Delhi Development Authority.
It was further resolved that the company takes over all rights, title and interest in the said leasehold rights relating to the said land,as referred to hereinabove, which shall heretofore vest exclusively and absolutely in the company.
Further resolved that Mr.Sushil Kumar Gupta, Director, be and is hereby authorised to take all necessary steps in respect of getting the leasehold rights to the said property registered in the name of Asian Hotels Limited."

7. The Memorandum and Articles of Association of the plaintiff company is marked as Ex.D-8. The company was incorporated on the 13th of November, 1980. On the 17th of November, 1980, (Ex.P-2) the plaintiff wrote to the DDA giving information about the incorporation, including a photocopy of the registration certificate. On the 29th of November, 1980, the plaintiff wrote to the DDA stating that extension of time may be grated for paying the amount. The letter reads as under:-

"We are attaching herewith a copy of our letter addressed to the Controller, Reserve Bank of India, Bombay requesting him to expedite the permission from Reserve Bank of India for a interest free loan of Rs.3.20 crores to be secured by us from our Indian Promoters abroad. This amount will be changed into equity after getting the required permission from Government agencies.
We are pursuing this matter with them vigorously in order that we may make the payment for the plot in full within the stipulated time i.e. before 8th December, 1980.
In case, however, the Reserve Bank of India takes some time in granting the necessary approval, (because, we understand, that the Officer Incharge has had to proceed on leave at a very short notice), we may be constrained to request you to grant us the extension of time to make the payment by 8-10 days."

8. On the 6th of December, 1980, (Ex.P-4) the DDA wrote to the promoter, Shri C.L.Jhunjhunuwala requesting to furnish documents for regularising the allotment. The letter reads as under:-

"With reference to the letter of M/s.Asian Hotels Limited dated 29th Nov., 1980 regarding extension of time for payment of balance premium, I am to inform you that it has been agreed that the payment of balance premium may be made by 3rd Jan., 1981. This payment will be accepted along with interest at the rate of 16% for the period of delay.
In this connection I have further to inform you that this Hotel plot was purchased by you as Promoter of a proposed Pvt. Ltd., Co. but now all the correspondence is being made in the name of M/s.Asian Hotels Limited. You are, therefore, requested to furnish all the necessary documents like the articles and memorandum of Associate etc. so that the allotment of plot in the name of M/s.Asian Hotels Limited may be regularised."

9. On this date, the DDA knew about the incorporation of the company. The DDA granted time for paying the balance amount till the 3rd of January, 1981. On the 6th of January, 1981, the plaintiff wrote to the DDA requesting that the allotment may be regularised in the name of the plaintiff, company, and the perpetual lease deed may be executed in favour of the plaintiff, company. The document is marked as Ex.D-6. On the 7th of January, 1981, a sum of Rs.2,05 crores was paid by the plaintiff and the copy of the receipt is marked as Ex.P-6. On the 16th of January, 1981, a sum of Rs.1.22 crores was paid and the copy of the receipt is marked as Ex.P-7. On the 20th of January, 1981, (Ex.P-8) DDA wrote to the plaintiff in the following terms to hand over possession:-

"It is intended to hand over possession of the plot mentioned above to you in anticipation of execution of the lease which is likely to take some time. The Junior Engineer concerned has been directed to hand over the possession of the plot on 21.1.81 at 2.00 p.m. to you and you are requested to be present at site.
You may kindly sign the possession slip acknowledging the possession and also the undertaking to execute the lease deed, when called upon to do so, which would be presented to you by him at the site."

10. Ex.P-9, dated the 21st of January, 1981, is a certificate showing the handing over possession of the plot to the plaintiff company. On the 16th of October, 1981, the DDA wrote to the plaintiff relating to sanction for the construction of a building in the plot in the following terms:-

"With reference to your application dated 15.12.80 for the grant of sanction to erect/re-erect/add to/alteration in the building to carry out the development specified in the said application relating to Plot No.Hotel, Block No.Nil situated in/at Bhikaji Kama Place, District Centre. I have to state that the same has been sanctioned on 16.10.81 by the DDA subject to the following conditions and corrections made on the plans:-
1. The construction will be undertaken as per sanction plan only and no deviation from the bye-laws will be permitted without prior sanction. Any deviation done against the bye-laws is liable to be demolished and the supervising architect engaged on the job will run the risk of having license cancelled.
2. Violation of building bye-laws will not be compounded.
3. It will be the duty of the owner of the plot and the architect preparing the plans to ensure that the sanctioned plans are as per prevalent building bye-laws. If any infringement of bye-laws remains unnoticed, the DDA reserved the right to amend the plains as and when the infringement comes to its notice and DDA will stand indemnified against any claim on this court.
4. The erection of the building of execution of work shall be commenced within one year of the date of this sanction and completion not later than two years from the date of sanction. However, the validity of building plans will remain for two years.
5. A notice in writing shall be sent to DDA before commencement of the erection of the building as per bye-laws. Similar, notice will be sent to DDA when the building has reached plinth level.
6. The party shall not occupy or permit it to occupy the building or use or permit to be used the building or any part thereof affected by any such or until occupancy certificate is issued by the licensed architect.
7. DDA will stand indemnified and kept harmless from all proceedings in courts and before other authorities of all expenses/losses/claims which the DDA may incur or become liable to pay as a result or in consequences, of the sanction accorded by it to these building plans.
8. The door and window leaves shall be fixed in such a way that they shall not, when open, project on any street.
9. The party will not convert the house into two dwelling units on each floor.
10. The building shall not be constructed wit in 5' of the lines electric wire running on any side of the site.
11. The land left open on consequences of the enforcement of the set back rule shall form part of the public street.
12. The sanction will be void-abinitio if auxiliary conditions mentioned above are not complied.
13. Construction of building above 31 metres shall be done only after getting no objection from Dir. Civil Aviation.

11. On the same day by letter dated the 16th of October, 1981, Ex.P-15, the sanction letter was issued. Ex.P-16 is the receipt dated the 15th of December, 1981 showing the payment of Rs.17,100/- by the plaintiff. On the 9th of July, 1982, the DDA wrote to the plaintiff that a sum of Rs.10,90,000/- towards unearned increase because of transfer of land to the plaintiff was to be paid. The letter marked as Ex.P-10 reads as under:-

"With reference to your letter No.AHL/C/S/81/547 dated 22nd Feb., 1982 on the subject noted above, I am directed to inform you that it has been decided by the Lessor (Lt.Governor, Delhi) to recover the un-earned increase of Rs.10,90,000/- Rs.Ten lacs & ninety thousand only) levied on transfer due to the change in the constitution of M/s.Asian Hotels Ltd. before the execution of the lease-deed.
2. You are, therefore, required to pay the aforesaid amount within 15 days from the date of issue of this letter, so that further action for the execution of the lease-deed could be initiated.
3. It is advised that the aforesaid amount can be deposited in the Central Bank of India, Vikas Mandir, I.P.Estate, New Delhi through Challan available from the bank by demand draft drawn in favour of DDA or in case."

12. The plaintiff paid the amount under protest. On the 22nd of July, 1982, (Ex.P-12) the plaintiff wrote to the defendant in the following terms:-

"We thankfully acknowledge receipt of your above letter and are enclosing herewith challan No.24420 for the amount of Rs.10,90,000.00 already paid as directed to enable you to take further steps for the execution of the lease-deed in respect of the hotel site at Bhikaji Cama Place, District Centre (R.K.Puram) in favour of Messers Asian Hotels Limited.
However, in this respect we would like to state that the remittance of this amount is without prejudice to our legal right as there has been no change in the constitution of Messers Asian Hotels Limited and there is no occasion for recovery of this amount as there has been no transfer as alleged."

13. Ex.P-11 is the copy of the receipt showing the payment of Rs.10,90,000/- and Ex.D-11 is the copy of the receipt maintained by the DDA showing the payment of the amount.

14. Mr.Sushil Kumar Gupta, the Executive Director of the plaintiff, company, sworn to an affidavit before the DDA stating that there was no change in the constitution of the company. The affidavit, Ex.D-10, reads as under:-

"I, Sushil Kumar Gupta S/o Shri Chaman Lal Gupta R/o E-71, Kirti Nagar, New Delhi hereby solemnly affirm and declare as under:-
1. That I Sushil Kumar Gupta, Executive Director of the Company, Asian Hotel Ltd.
2. That I have been duly authorised by the Board of Directors/partners of the Company/Firm to execute this affidavit on behalf of the said Company/Firm.
3. That the said Company/Firm has purchase plot No.Hotel Site in Bhikaji Cama Place, R.K.Puram, New Delhi from the President of India against the allotment made by the DDA.
4. That the company/firm is bound by the terms and conditions of lease deed and such clauses of Articles and Memorandum of Association/Partnership deed which come in conflict with the terms & conditions of lease deed shall not apply to Plot No.Hotel Site in Bhikaji Cama Place, R.K.Puram. That there is no change in the constitution of the ltd. Co. since the date of allotment to the date of execution."

15. On the 24th of July, 1982, Ex.D-12, the perpetual lease deed was executed between the plaintiff and the defendant. The plaintiff has filed the suit, as I mentioned above, for the recovery of the amount paid under protest. Ex.PW-1/1 is the extract from the minutes of meeting of the Board of Directors authorising Shri A.N.Vijaya Kumar, Company Secretary to institute the suit. Ex.PW-1/2 is the extract of the minutes of the meeting of the Board of Directors of the plaintiff, company, dated 10.12.1986 authorising Shri G.L.Bagaria to continue and prosecute the suit. The plaintiff filed the suit on the 7th of January, 1983.

16. The main case of the plaintiff is that it was the company, when it was being formed, who bid at the auction. Shri C.L.Jhunjhnuwala was acting for the proposed company and it was the company who was the highest bidder. The company was incorporated on the 3rd of November, 1980 a few days after the auction, which was on the 9th of September, 1980. There was no question of any transfer in the name of the company.

17. In paragraph 14 of the plaint, it is stated:-

"The Memorandum of Association of the plaintiff was subscribed by seven persons in accordance with the requirements of the Companies Act. Although the company has been promoted by Shri C.L.Jhunjhnuwala, Shri R.S.Saraf, Shri C.L.Gupta and Shri R.K.Jatia, they had not subscribed to the Memorandum as they are non-resident Indians. However, on incorporation of the Company, the said promoters were appointed as Directors. Shri C.L.Jhunjhnuwala is, in fact, the Vice-Chairman of the Company. There has, thus, been no change in the constitution of the Company nor has it made any "unearned increase"."

18. On the 16th of October, 1982, a notice under Section 53B of the Delhi Development Act, 1957 was served on the defendant.

19. The case of the defendant is that the bid for the purchase of the hotel plot was given by Shri Jhunjhnuwala as promoter of the company. His bid was as a promoter of the proposed private limited company and not for a public limited company. In paragraph 11 of the amended writ statement it is stated by the defendant:

"In reply to para 11 it is submitted that the auction of the plot was held on 9.9.80 on certain terms & conditions of auction announced at the time of auction and the same were duly accepted by the auction purchaser Sh.C.L.Jhunjhunuwala S/o Sh.Brij Lal as promoter of a proposed Pvt.Ltd. Co. The offer of Sh.C.L.Jhunjhunuwala was accepted by the defendant Authority's letter Bo.F65(1)/80-Impl. dated 10.9.80. The names of the following persons as Directors of the proposed Pvt.Ltd.Co were given by the auction purchaser Sh.Jhunjhunuwala.
1. Sh.Chaman Lal Gupta
2. Sh.Radhey Sham
3. Sh.Harish Sharma
4. Sh.Brajesh Batra
5. Sh.C.L.Jhunjhunuwala
6. Sh.Kishan Lal Mittal
7. Sh.S.S.Jhunjhunwala
8. Sh.L.N.Jhunjhuwala The Memorandum and Articles of Association of the newly formed M/s.Asian Hotels Ltd. shows that following are the original subscribers of the company:-
1. Shri Ram Gopal Saraf
2. Shri Sham Sundar Saraf
3. Shri Naresh Chander Jain
4. Maj.Shiv Lal Chhibber
5. Shri Sushil Kumar Gupta
6. Smt.Binta Gupta
7. Shri Piare Lal Gupta The newly formed Co. named as Asian Hotels Ltd. to whom the plot has subsequently been transferred unauthorisedly was not in existence either at the time of auction or subsequently at the time of acceptance of the bid on 10.9.80. The subscribers of M/s.Asian Hotels Ltd. did not include any of the names given by Sh.C.L.Jhujhunuwala at the time of auction as Directors of the proposed Pvt.Ltd.Co. As such, Sh.C.L.Jhujhunuwala unauthorisedly transferred the plot in question to M/s.Asian Hotels Ltd. without the prior permission of the lessor as required under the terms and conditions of auction. In the terms & conditions of the auction Clause 3(2)(f) and in the terms and conditions of the lease deed so executed between the parties under Clause II(4)(a) it is provided that the lessee is not entitled to sell, transfer, assign, or part with the possession of the whole or part of the plot or the building that may be constructed thereon without the prior permission of the lessor in writing which he shall be entitled to refuse in his absolute discretion. It has further been provided that if such permission is granted an amount equivalent to 50% of the unearned increase in the value of the plot i.e. the difference between the premium paid and the market value of the plot at the time of transfer shall be paid by the lessee to the DDA. Under the circumstances as the plot has been unauthorisedly transferred by Sh.C.L.Jhunjhunuwala to M/s.Asian Hotels Ltd., the DDA has rightly charged unearned increase of Rs.10,90,000/- as communicated to the plaintiff vide letter dt.9.7.82 before the transfer of the title of the plot in the name of M/s.Asian Hotels Ltd. was allowed. The said unearned increase determined by the lessor was deposited by the intending lessee on 22.7.82 without any reservation and the lease was accordingly executed. Issue of letter F65(1)82-Impl dated 9th July, 82 calling upon plaintiffs for payment of 50% unearned increase for Rs.10,90,000/- on account of change in the constitution of the proposed Pvt.Ltd.Co. was just and legal. They were required to deposit this amount within 15 days from the date of this letter. As regard deposit of balance amount of Rs.3.27 crores by the plaintiff it is mentioned that the same was deposited by the plaintiff in the name of M/s.Asian Hotel Ltd. with the Cashier, DDA for his own interest. It is pertinent to point out that the demand-cum-confirmation letter dated 10.9.80 was issued in the name of Sh.C.L.Jhunjhunuwala, promoter of the proposed Pvt.Ltd.Co. calling upon to deposit the balance 75% premium and not in the name of M/s.Asian Hotels (P) Ltd.

As regards handing over of possession in the names of Public Ltd. Co. i.e. M/s.Asian Hotel Ltd., it is submitted that the same was done with the connivance of certain officers of the DDA without obtaining orders of Competent Authority. The matter is pending investigation by the Vigilance Deptt."

20. It is submitted by the DDA that there was no question of any coercion exercised by the defendant. The defendant admitted the receipt of the notice under Section 53B of the Delhi Development Act, 1957.

21. The plaintiff filed its replication on the 11th of October, 1983 and amended replication was filed on the 16th of May, 1989. In paragraph 11 of the amended replication, it is stated:

"Para 11 is denied and the corresponding para of the plaint is reiterated as true and correct. The correct position is that newly formed company Asian Hotels Ltd., was not in existence either the time of auction or subsequently at the time of acceptance of the bid on 10th September, 1980. It is submitted that Shri C.L.Jhunjhunuwala had paid the sum of Rs.1.09 crores on behalf of himself, Shri R.S.Saraf and Shri C.L.Gupta (who were non resident Indians) as promoters of the proposed company and which in fact in the process of being formed. In fact Shri C.L.Jhunjhunuwala had written a letter on 29th of October, 1980 informing the defendant that the public limited company under the name and style of Asian Hotels Ltd., has been formed and that possession of the plot were delivered to the said Asian Hotels Limited. Subsequently, certificate of incorporation was received from the Registrar of Companies on 13th November, 1980 and a copy was sent to the defendant on 17th November, 1980. In view of the pending permission from the Reserve Bank of India for the interest free loan of Rs.3.20 crores to be secured by the plaintiff's promoters abroad, the plaintiff vide its letter dated 29th November, 1980 requested the defendant to grant 8-10 days extension of time to make the payment of the balance amount. The defendant vide its letter No.PA/DIR/CL/80/2048 dated 6th December, 1980 informed the non-resident Indian promoter Shri C.L.Jhunjhunuwala that the balance payment may be made by 3rd January, 1981 subject to interest @ 16% p.a. for the period of delay and requested to furnish all the necessary documents like Articles and Memorandum of Association etc. so that the allotment of subject plot in the name of the plaintiff may be regularised. The plaintiff vide its letter dated 6th January, 1981 furnished the Articles and Memorandum of Association as well as the resolutions by which Shri C.L.Jhunjhunuwala and other promoters were appointed and requested for the regularisation of the allotment of plot and execution of Deed of Perpetual lease in favour of the plaintiff company. After the documents were furnished, the defendant accepted the balance amount due from the plaintiff company. That the plaintiff through its bankers i.e. Grindlays Bank, Connaught Circus Branch, New Delhi vide pay order made the payment of the balance of the premium amount to the defendant for the sum of Rs.2.05 crores and Rs.1.22 crores on 7th and 16th January, 1981 respectively against receipt No.30743 dated 7th January, 1981 and receipt No.33828 dt.16th January, 1981 from the defendant in favour of the plaintiff. All correspondence in respect of the plot subsequent to 13th November, 1980 was addressed by the defendant to the plaintiff company.
The reasons why the promoters of the company, namely, Shri C.L.Jhunjhunuwala, Shri R.S.Saraf and Shri C.L.Gupta did not subscribe to the Memorandum and Articles of Association were also explained by the plaintiff vide his letter dated 17th January, 1981, namely, that non-resident Indians as per law cannot subscribe to the Memorandum and Articles of Association of the Indian Company under Section 29 of the Foreign Exchange Regulation Act. They were, however, appointed as Directors in the very first meeting of the Board of Directors. This explanation was duly accepted by the defendant and thereafter the said defendant represented to the plaintiff on 20th January, 1981 asking it to take delivery of possession on 21st January, 1981 at 3.00 p.m. The possession was thereafter delivered to plaintiff company on 21st January, 1981.
It is further submitted that of the even subscribers to the Memorandum of Association of Asian Hotels Limited as many as five subscribers are direct blood relations of the three original promoters, namely, Shri C.L.Gupta, Shri Jhunjhunuwala and Shri R.S.Saraf. It is, therefore, for all the above reasons absolutely incorrect to suggest that there has been any transfer of interest in respect of the plot. The price has been paid by the plaintiff company and possession has been delivered to the said company as an intending purchaser. It is further denied that the sum of Rs.10.9 lacs recovered from the plaintiff on account of alleged unearned increase was deposited on 22nd July, 1982 without any reservation. It is submitted that the same has been paid under coercion, in any case, by mistake.
It is also submitted that the handing over of possession to Asian Hotels Limited was ordered by the competent authority in DDA and it is not now open to the defendant to claim that the same was done in an unauthorised manner and on that basis, the plaintiff cannot suffer any loss or damage.
It is denied that there was any transfer of the plot. It is submitted that during the formation of M/s.Asian Hotels Limited the names of other family members of Shri C.L.Gupta and Shri R.S.Saraf were included in the said company. It is denied that Shri C.L.Jhunjhunuwala had either transferred the plot nor assigned the same to any body else. The correct position has been explained above. The defendant has all along been informed of the position from time to time. There has been no transfer much less unauthorised transfer by Shri C.L.Jhunjhunuwala. There was no occasion for the defendant authority to charge unearned increase.
The allegations of the defendant regarding transfer is misnomer and only a malafide devise to claim unearned increase. It is, however, submitted that there was no increase in the cost of land even otherwise. The determination of the alleged increase is also malafide, arbitrary, capricious and without authority of law.
There was in fact no change in the constitution of the company. As a matter of fact the company was in the process of formation and due intimation was sent to the defendant after the company had been formed in accordance with the Indian Companies Act, 1956. It is denied that there could be any connivance between the plaintiff and the defendant who by themselves are not making false allegations to make out a false defense in the case. Rest of the para is denied."

22. In paragraph 14 of the amended replication, it is stated:

"Para 14 is false and is denied and corresponding para of the plaint is reiterated. The defendants were aware at the time of accepting the earnest money that the same was paid out of the foreign exchange remittance through Indian Overseas Bank, Janpath, New Delhi and cannot make the grievance that they were not aware of the fact as stated under the para."

23. The following issues were framed for trial on the 25th of April, 1990.

"1. Whether the suit has been instituted and plaint signed and verified by a competent person to do so? OPP
2. Whether the plaintiff is entitled to claim refund of Rs.10,90,000/- paid on account of unearned increase, as claimed by the defendant (DDA) for the reasons stated in the plaint? OPP
3. If issue No.2 is answered in favour of the plaintiff, whether plaintiff is also entitled to claim interest? If so, at what rate and for what period? OPP
4. Whether the plaintiff is estopped from filing the present suit and claim refund of the amount paid on account of unearned increase for the reasons stated in the written statement? If so, to what effect? OPD
5. Relief."

24. Shri G.L.Bagaria, was examined as PW-1 on the 3rd of December, 1991. He has spoken to the fact that the plaint was signed and verified by Shri Vijay Kumar who was Secretary of the plaintiff company.

25. The plaintiff examined PW-2, Mr.Sushil Kumar Gupta, the Managing Director of the plaintiff company. In his evidence he has stated:

At the time of giving the bid, the main promoters of the proposed company were as follows:-
1. Mr.C.N.Jhunjhunuwala
2. Mr.R.S.Saraf, and
3. Mr.Chaman Lal Gupta

26. According to him, the bid was given on behalf of the proposed company. He has explained the position with reference to the subscribers to the Memorandum of Association of the plaintiff, company, and the relationship between the parties. He would depose:-

"I have seen page 49 of Ex.D-8. It gives the names of the persons those who were subscribers. They were seven in number. Out of these seven persons, two persons namely Ram Gopal Saraf, Shyam Sunder Saraf are the real brothers of Mr.R.S.Saraf and the three persons - Sushil Kumar Gupta is the son of Mr.C.L.Gupta; Bimla Gupta is wife of Sushil Kumar Gupta and daughter-in-law of C.L.Gupta and Piare Lal Gupta is the brother of C.L.Gupta. Above said three persons namely Mr.C.N.Jhunjhunwala, R.S.Saraf and C.L.Gupta were non-resident Indians at the time of the bid. Their names could not be included in the names of subscribers due to FERA restrictions. Letter dated 29th October, 1980 was written by Mr.C.N.Jhunjhunwala on behalf of Asian Hotels Ltd. to the DDA."

27. He refers to the letter Ex.P-1/A dated the 29th of October, 1980, which has been extracted above, about the formation of the plaintiff company as a public limited company. He had explained:

"When the bid was given, it was specified that it would be a private limited company but later on, we formed Asian Hotel Limited Company and right from the beginning, we had communicated this fact to the DDA and at no point of time DDA objected to it. In fact, no private limited company was formed at any time from the date of the bid till the execution of the lease deed."

28. The defendant did not examine any officers. The only question is whether there was any transfer of the property in favour of the plaintiff company which would attract the payment of unearned increase.

29. It is not disputed that Shri C.L.Jhunjhunuwala bid at the auction representing a proposed company, whether it is private or public is not a matter of any moment. The representation by Shri C.L.Jhunjhunuwala to the DDA was that it is not an individual or group of individuals who had bid at the auction but it was only a company. In Ex.D-2, the names of the directors of the proposed company were given. It was only to confirm the fact that a company was in the process of incorporaton. Under the Companies Act, 1956, 'A' might have been a promoter of the company. He along with 'B' and 'C' might have taken steps for the purpose of promoting a company. The fact to be noticed is, whether it was only a make believe affair or really a company was being formed. Instead 'A','B','C','D','E' & 'F' may be promoters of the company. So long as the persons are recognised as directors or subscribers to the memorandum, it cannot be predicted with any certainty that who would be the subscribers(promoters) or who would be the directors of the company. What the law expects is, whether the persons making representation were really intending to promote a company and project that company as being a party to transaction. The evidence of PW-2 clearly brings out what happened at the time of auction and what happened at the time of actual incorporation of the company. PW-2 (Sushil Kumar Gupta) has clearly explained as to why the persons, mentioned in Ex.D-2, could not be the subscribers to the memorandum and could not be the directors of the company. Whenever there was a change in the directors of the company, it cannot be said that automatically there is a change or transfer, as contemplated in law. Parties at the time of auction had the clear intention of purchasing a property for the company. The DDA had accepted the bid and had received the amount from the company. It has not been explained by the DDA at what point of time there was a transfer or the contract or the ownership of the property from an individual or a group of individuals to the plaintiff company. In the written statement, what is emphasised is that Shri C.L.Jhunjhunuwala represented that he was a promoter of the proposed private limited company and he gave the names of the future directors of the company in Ex.D-2 and in the Ex.D-8 (Memorandum of Articles and Association of the Company) the subscribers are different from the names given in Ex.D-2, therefore, there was a transfer by Mr.C.L.Jhunjhnuwala unauthorisedly to the plaintiff company and, consequently, the plaintiff was bound to pay the unearned increase.

30. It cannot be disputed that a representation was made at the time of auction on the 9th of September, 1980 and that the bid was on behalf of the company to be promoted. The earnest money of Rs.1.09 crores was paid on behalf of the proposed company. In law, the act of a promoter of a company would amount to an offer and if there is evidence of acceptance of the offer by the DDA, the latter is bound by the contract. On the 7th of January, 1981 (Ex.P-6), a sum of Rs.2.05 crores was paid by Asian Hotels Limited and it was accepted by the DDA. On the 16th of January, 1981 (Ex.P-7), a sum of Rs.1.22 crores was paid by Asian Hotels Limited and it was also accepted by the DDA, the defendant.

31. I am not able to appreciate the stand of the DDA that there was any transfer warranting the demand of unearned increase. In paragraph 11 of the amended written statement, reference is made to clause 3(2)(f) of the terms and conditions of the auction. That clause reads as under:-

"The lessee shall not be entitled to sell, transfer or assign or part with possession of the whole or part of the plot or the building that may be constructed thereon without the prior permission of the lessor in writing which he shall be entitled to refuse in his absolute discretion. If such permission is granted, an amount equivalent to 50% of the unearned increase in the value of the plot i.e. the difference between the premium paid and the market value of the plot at the time of transfer shall be paid by the lessee to the Delhi Development Authority. The Delhi Development Authority shall have a right of pre-emption and may exercise its rights of pre-emption and take over the plot along with the building or part thereof that may have been constructed thereon by paying the market value after deducting the amount equivalent of 50 per cent increase in the value of the plot. Vice-Chairman, DDA shall decide as to the market value off the plot and his decision thereon shall be final and binding."

32. That contemplates a situation whereafter the document of lease is executed, the lessee would not have the right to sell, transfer or assign, and unearned increased would become payable. In the written statement clause II(4)(a) of the lease deed is referred to and that is also not relevant when we consider the position of parties anterior to the execution of the lease. The main thrust of the written statement is that the names mentioned in Ex.D-2 are not found in the Memorandum and Articles of Association of the plaintiff company, and that has been explained by PW-2. That factual situation also is not relevant because the question is whether there had been a contract between the plaintiff and the defendant. In paragraph 6 of the amended written statement, it is stated:

"With respect to para 6 it is submitted that the fact regarding the incorporation of the public limited company alleged to have been communicated to the answering defendants from non-resident Indian promoters of the proposed Ltd. Co. vide letter dt.29-10-80 is controverted and as such is denied. The receipt of letter dt.6-1-81 is accepted. The certified true copy of the resolution passed in the meeting of Board of Directors of the public limited company on 13.11.80 was also received along with the above mentioned letter dated 6-1-81, both received on 7-1-1981. In the letter dt.6-1-86 it was requested by Sh.R.K.Jain, attorney of Sh.Jhunjhunuwala, that the allotment of plot in the name of Asian Hotels Ltd. may be regularised and perpetual lease deed be executed in favour of said Ltd. Co. It is further admitted that extension of time for payment of balance 75% premium was granted till 3-1-81 subject to payment of interest @ 16% per annum. Rest of the para is wrong and denied."

33. In paragraph 7, of the amended written statement, the receipt of amounts, as evidenced by Ex.P-6 and Ex.P-7, is admitted.

34. Section 46 of the Companies Act, 1956 dealing with the contracts by the company would read as under:-

"Form of Contracts (1) Contracts on behalf of a company may be made as follows:_
(a) a contract which, if made between private persons, would by law be required to be in writing signed by the parties to be charged therewith, may be made on behalf of the company in writing signed by any person acting under its authority, express or implied, and may in the same manner be varied or discharged;
(b) a contract which, if made between private persons, would by law be valid although made by parol only and not reduced into writing, may be made by parol on behalf of the company by any person acting under its authority, express or implied, and may in the same manner be varied or discharged.
(2) A contract made according to this section shall bind the company."

35. The scope of, what is called, a pre-incorporation contract was subject matter of decision by the Madras High Court in "G.K.Palaniswami Vs. Sri Nandhi Transports (P) Ltd. & Others ILR 1967 (3) Madras 80 There, a promoter of a private limited company made an application for the grant of stage-carriage permit under Section 57(2) of the Motor Vehicles Act, 1939 and that was challenged by the rival applicant. The Division Bench posed the question for decision in the following terms:-

"Can a private limited company, which came into existence and was incorporated subsequent to the last date notified under the Act for receipt of such applications, ratify the application of the promoter in such manner that the ratification dated back to the date of the application itself and thereby qualify the company for the grant of a stage-carriage permit?"

The Division Bench observed:-

"Conceivably, the promoter might merely be a person with the most hazy idea of forming a company in due course, or none; he might merely have been impelled by the notification of the route, to apply on behalf of an unborn company, in the hope that he would be able to persuade some financiers to bring it into existence, with benefit to himself. Since its later existence is hypothetical it may never be borne. If the company could be incorporated and could ratify the act of the promoter with the effect of dating back, even after the last date fixed for filing applications, grave prejudice might be caused to rights of third parties, who had applied in time.
For all these reasons we are definitely of the view that the application of the promoter of an unborn company, in the context of a notification of a route and the fixing of a date for receipt of such applications under Section 57 (2), can only be regarded by the relevant Regional Transport Authority as some kind of advance intimation that a legal person, namely, a company, proposes to apply or intends to apply. Certainly if the company comes into existence by incorporation before the determined date, and applies in any form, it may even be by a letter approbating and accepting that act of the promoter, that would make the application by the company a perfectly valid one. It could be justified, either on the principle of adoption, or novation by a substituted application. But if the company is incorporated subsequent to the last date, it cannot ratify the application of the promoter, and the Regional Transport Authority would not merely be justified in rejecting the application of the promoter as not valid, but would be constrained to do so, as the legal person or individual was not in existence at all on or before the last date."

The Division Bench though referred to Sections 21(f), 23(h) and 27(e) of the Specific Relief Act, (I of 1877), did not think it necessary to pursue the matter further. But the Division Bench broadly recognised the proposition that there could be ratification, adoption, novation and continuing offer in a situation like this.

36. The point sought to be made out by the defendant that no doubt a representation was made by Shri C.L.Jhunjhunuwala but what he represented was that he was a promoter of a private limited company but the plaintiff is a public limited company. In my view, it is only a difference without any distinction.

37. The Madras High Court again considered the same question in "The Weavers Mills Ltd. Vs. Balkis Ammal & Others", The Bench observed that the provisions of the Specific Relief Act, 1963 are concerned with executory contracts and had considered the position of the promoter company.

38. Before the Supreme Court, the effect of contract prior to the incorporation was considered in the light of provisions of Section 12B and Section 66 of the Income Tax Act, 1922 in "Commissioner of Income Tax Vs. Bhurangya Coal Co.", . The agreement by the promoters of the company was of 16.3.1946. After the incorporation, the directors adopted the transaction by a Resolution dated 29.3.1946. On the 30th of March, 1946, all the properties, including in the agreement,moveables and immovables, were put in to the possession of the company. On the 17th of May, 1946, a sale deed was executed and registered in respect of the immovable properties. The question was raised as to the exigibility to tax under Section 12 B of the Income Tax Act, 1952. The Supreme Court held that so far as immovable properties are concerned, the title passed only when the sale deed was executed on 17.5.1946 and not when the agreement was concluded on 16.3.1947. Therefore, the Supreme Court had recognised the concept of pre-incorporation contract.

39. The question was again considered by the Supreme Court in "Alapati Venkataramiah Vs. Commissioner of Income Tax", 1966 SC 115

40. The statement of law in Palmer's Company Law, 25th Edition,(Vol.1), para 3.003, is interesting and instructive and the same is as follows:-

"Pre-incorporation contracts under the Companies Act 1985,s.36(C) This provision deals with pre-incorporation contracts. It provides that such a contract, whether purported to be made by the company or on its behalf, " has effect subject to any agreement to the contrary, as one made with the person purporting to act for the company or as agent for it, and he is personally liable on the contract accordingly" (s.36C(1)). This provision is also applied to the making of a deed in England and Wales or the undertaking of an obligation in Scotland (s.36C(2)).
This provision swept away the subtle distinctions wrongly thought to exist in the common law and thought to depend on the form of signature by the purported agent, when acting for the unformed company. These distinctions were founded, in particular, on Kelner v. Baxter and Newborne v. Sensolid(Great Britain) Ltd., decisions which can be regarded as overruled by what is now section 36C, as interpreted in Phonogram Ltd. v. Lane. In this case negotiations took place for the financing of a new pop ground which was to be managed by a company to be called Fragile Management Ltd. Before the formation of this company, the plaintiffs Phonogram Ltd. paid $6,000 as initial payment for records to be produced by the pop group. The defendant Lane signed the contract in the following manner: "Signed by [Brian Lane] for an on behalf of Fragile Management Ltd.' When the contract was made, all parties concerned were aware that that company was still unformed. In fact, Fragile Management Ltd. was never formed and the pop group never performed under it. Phonogram Ltd. sued Mr.Lane personally for the $6,000. The trial judge, Phillips J., found as a fact that the intention of the contracting parties was that Mr.Lane should not be personally liable under the contract. The Court of Appeal, which had to accept this finding of fact, unanimously held that Mr.Lane was personally liable by virtue of what is now section 36C. In the words of Lord Denning M.R., this provision "means that in all cases such as the present, where a person purports to contract on behalf of a company not yet formed, then however he expresses his signature, he himself is personally liable on the contract."

The meaning of the phrase "subject to any agreement to the contrary" in subsection 1 of section 36C is apparently that the agent who purports to act for the unformed company and the other party may agree that the agent shall not be personally liable. It is thought that in view of the wording of this provision such agreement must either be made expressly or must be capable of being clearly and unambiguously inferred from the other terms of the contract. The onus is on the agent who claims that he is not personally liable, and it is not an easy onus to discharge.

It is doubtful whether the phrase "subject to any agreement to the contrary" can also be interpreted, as meaning that the parties may agree that the company, after its formation, may ratify the contract. The English courts would probably answer this question in the negative. It is regrettable that the United Kingdom legislature has not yet seen fit to introduce this change. Other common law jurisdictions admit the ratification of a pre-incorporation contract by the company after its formation. Thus, the Singapore Companies Act 1967, s.35(1), as amended, states:

"Any contract or other transaction purporting to be entered into by a company prior to its formation or by any person on behalf of a company prior to its formation may be ratified by the company after its formation and thereupon the company shall become bound by and entitled to the benefit thereof as if it had been in existence at the date of the contract or other transaction had been party thereto."

This provision was applied by the Privy Council on appeal from Singapore in Cosmic Insurance Corporation Ltd. v. Khoo Chiang Poh."

The learned author had in mind Section 36C of the Companies Act, 1985 (England) which was introduced by the Amendment Act, 1989.

41. In Pennington's Company Law (5th Edition), the learned author has expressed the view that such a pre-incorporation contract would amount to an offer and that could be accepted and ratified.

42. The learned counsel for the plaintiff, Mr.R.K.Aggarwal, had relied upon the following judgments:-

1. "Hindustan Lever Ltd. Vs. Bombay Soda Factory by R.K. & Others", AIR 1964 Mysore 173
2. "Vali Pattabhirama Rao & Another Vs. Sri Ramanuja Ginning & Rice Factory (P) Ltd. & Others", AIR 1984 Andhra Pradesh 176
3. "Scindia Potteries & Services Ltd. & Others Vs. Deputy Land & Development Officer & Others",
4. "Rama Association (P) Ltd. Vs. Delhi Development Authority",

43. In Hindustan Lever's case, AIR 1964 Mysoor 173, the question was: When a private company was converted into a public company, whether there would be any change in the legal position of the company in question? K.S.Hegde, J, as His Lordship then was, observed:-

"Our attention has not been invited to any provision in the Companies Act on the basis of which it is even possible to urge that when a "Private Company" alters its articles in the manner provided in Section 44 and converts itself into a "Public Company", the original company must be deemed to be wound up and a new company constituted. No decision of any Court either of this Country or outside has been brought to our notice in support of the view taken by the trial Court. Our conclusion finds support from the judgment of a Bench of the Patna High Court In Re, Radiant Chemical Co. Ltd., Monghyr, AIR 1943 Pat 278. This is what Harries, C. J. who spoke for the Bench observed therein:
"In my view, however, the learned Judge was wrong in holding that a public company could not be converted into a private company except by winding up and reconstitution. It is in my judgment, now well established that such a conversion can take place if suitable amendments are made to the articles of association, and it is to be observed that amendments to the articles of association do not require the confirmation of this Court."

These observations apply with full force even to a converse case _ conversion of a private company to a public company.

We have no hesitation in holding that the conversion of Lever Brothers (India) Private Limited into a Public company did not effect any change in the legal personality of the company. Hence there was no need to apply under Section 35 of the Trade Marks Act. On the other hand when a change in the name of the regis tered proprietor is required the authorities of the company need only apply under Section 47 of the Trade Marks Act. What Section 47 says is:

"47(1)(b). The Registrar, may on application made in the prescribed manner by the registered proprietor, enter any change in the name address or description of the person who is registered as proprietor of a trade mark."

As seen earlier, an application under S.47 had been made and the change in the name of the registered proprietor of the suit trade mark had been duly effected."

44. In Vali Pattabhirama Roa's case, AIR 1984 Andhra Pradesh 176, the Division Bench of the Andhra Pradesh High Court asked itself two questions:

1. Whether a conveyance is necessary to vest the property of the firm when the same was converted into a company?
2. Similarly, whether such conveyance is necessary to claim title by the company in respect of the property acquired by the promoter before the incorporation?

The learned Judges dealt with the questions by observing:-

"The original lessee undoubtedly played the part of a promoter of the company. We have already noticed that lease deed Ex.A-1 recited that the land was taken for purpose of constructing the factory and the necessary buildings for running the same. Ex.B-53 the deed of partnership recited that the original lessee took the permanent lease of the land in his name for the benefit of erecting the joint factory and the firm was carrying on business for the benefit of the members of the firm since 1904. Ex.B-65 is the first list of shareholders of the 1st defendant company signed by all the shareholders and the original lessee is one of the signatories and four shares were given to him. Ex.B-54, the Articles of Association recites that the permanent lease was taken by the original lessee on behalf of all the shareholders and hence the permanent lease hold rights in the said lease and also the buildings constructed in the land, machinery and other equipment shall be treated as property of the factory. The capital of the factory was declared at Rs.41,600/- divided into 104 shares each share valued at Rs.400/- and this arrangement was adopted by a special resolution of the Directors. I was also recited that this capital can be enhanced further by a special resolution by the Directors. Ex.B-54 is the latest cop of the Articles of Association adopted in the general body meeting of the company dated 30.12.1955 and the company itself is called Sri Ramanuja Ginning and Rice Factory (Private) Limited. The question is whether this lease hold interest in the factory has become the property of the 1st defendant private limited company. In view of the part played by the original lessee in securing the lease for the purpose of the 1st defendant as promoter we have to see legal consequences. For this purpose we have to examine (1) The nature of jural relationship between the promoter and the company. (2) The rights of the company in respect of contracts before its incorporation. (3) Whether this transaction comes under the purview of Section 5 of the Transfer of Property Act.
The word 'Promoter' is not defined by the Companies Act I of 1956 or by its predecessor Act VII of 1913. It is said that it is not a term of law but of business. The earliest definition given in Phosphate Sewage Co. Vs. Hartmount, (1877) 5 Ch D 394 as a person who as principal procures or aids in procuring the incorporation of a company, was generally accepted as the correct definition which was subsequently approved by House of Lords in Official Receiver and Liquidator of Jubilee Cotton Mills Ltd. Vs. Lewis, (1924) AC 958. A person although is not a Director may be a promoter of a company. The promoter stands in a fiduciary position towards the company and his position was defined so in Erlanger Vs. New Sombrero Phosphate Co., (1878) 3 AC 1218 by the House of Lords. Halsbury's Laws of England, Fourth Edition, paragraph 38 states, "A promoter stands in a fiduciary position with respect to the company which he promotes from the time when he first becomes until he ceases to be a promoter thereof; but his relation to the company is not that of trustee and beneficiary, or agent and principal." Lord Cairns, L.C.observes in the above case: "They (promoters) stand, in my opinion, undoubtedly in a fiduciary position. They have in their hands the creation and moulding of the company; they have the power of defining how, and when, and in what shape, and under what supervision, it shall start into existence and begin to act as a trading corporation. If they are doing all this in order that the company may, as soon as it starts into life, become, through its managing directors, the purchaser of the property of themselves, the promoters, it is, in my opinion, incumbent upon the promoters to take care that in forming the company they provide it with an executive, that is to say, within a board of directors, who shall both be aware that the property which they are asked to buy is the property of the promoters, and who shall be competent and impartial judges as to whether the purchase ought or ought not to be made. I do not say that the owner of property may not promote and form a joint stock company, and then sell his property to it, but I do say that if he does he is bound to take care that he sells it to the company through the medium of a board of directors who can and do exercise an independent and intelligent judgment on the transaction, and who are not left under the belief that the property belongs, not to the promoter, but to some other person." Again Lord Blackburn at page 1269 observes: "They must make a reasonable use of the powers which they accept from the Legislature with regard to the formation of the corporation, and that require them to pay some regard to its interests. And consequently they do stand with regard to that corporation when formed, in what is commonly called a fiduciary relation to some extent." He further observes: "Where, as in the present case, the company is formed for the purpose of becoming purchasers from the promoters as vendors, the interests of the promoters and of the company clash. It is the vendor's interest to get as high a price as possible, and they have a strong bias to overvalue the property which they are selling; it is the purchasers' interest to give as low a price as possible, and to secure that the price actually given is not more than the property is really worth to them."

Thus, it is seen that they have got both fiduciary relationship and at the same time they have individual interest to be served in the process of floating the company and hence it is ruled that a promoter cannot therefore retain any profit made out of a transaction to which the company is a party without full disclosure. It is necessary in this connection to see the binding nature of the contracts entered into by them before the incorporation. The law in our country varies from that obtained in England. Again Halsbury states in Fourth Edition at page 435 paragraph 727: "A company is not bound by contracts purporting to be entered into on its behalf by its promoters or other persons before its incorporation. After incorporation it cannot ratify or adopt any such contract because in such cases there is no agency and the contract is that of the parties making it. The adoption and confirmation by a directors' resolution of a contract made before the incorporation of the company by persons purporting to act on its behalf does not create any contractual relation between it and the other party to the contract or impose any obligation on it towards him." Hence the commentator states in paragraph 728 "that in order that the company may be bound by agreements entered into before its incorporation, there must be a new contract to the effect of the previous agreement." The Editors of Palmer's Company Law, in their 22nd Edition at page 271 state regarding Pre-incorporation contracts: "In common Law, Before its incorporation a company has no capacity to contract. Consequently , in common law nobody can contract for it as agent because an act which cannot be done by the principal himself cannot be done by him through an agent, nor can a pre-incorporation contract be ratified by the company after its incorporation. There is, however, nothing to prevent the company, when incorporated, from entering into a new contract to put into effect the terms of the pre-incorporation contract. But the mere acting after incorporation on the preliminary contract does not in itself constitute sufficient evidence of the creation of a new contract" Thus, virtually a new contract has to be entered into in order to bind the company in respect of contracts entered before the incorporation. But in India both the Specific Relief Acts I of 1877and 47 of 1963 made provisions making the pre-incorporation contracts binding on the company. Sec.21(f) of 1877 Act which corresponds to Section 14 of 1963 Act did not retain in the said provision as the said clause is covered by Sec.9. The present Section 15(h) corresponds to Section 23(h) of the previous Act and Section 19(e) of the present Act corresponds to Section 27(e) of the previous Act. Section 15(h) provides that the company can enforce pre-incorporation contracts. If such contract is warranted by the terms of the incorporation and the company has accepted the contract and has communicated such acceptance to the other party. The converse position is covered by Section 19(e) where the third party can enforce the contract against the company if such contract is warranted by the terms of the incorporation of the company and the company has accepted the contract and communicates such acceptance to the other party to the contract, and hence the dicta in Natal Land and C., Company Vs. Pauline Colliery Syndicate, (1904) AC 120 of Lord Davey speaking for the Judicial Committee "that a company could not by adoption or ratification obtain the benefit of a contract purporting to have been made on its behalf before the company came into existence", cannot be invoked in our country. No doubt it is true that the sections in the Specific Relief Act are concerned with the executory contracts and cannot be applied to conveyances of immovable property and hence we have to see whether the title has passed to the company and whether the provisions of the Transfer of Property Act stand in the way."

45. Regarding the position of a promoter, the Division Bench observed:-

"Thus we see a promoter of a company though fulfills some fiduciary duties, he cannot be described as a trustee as there is no beneficiary as defined under Section 3 of the Trust Act. He cannot also be an agent as there is no principal born by that time. Hence the promoter occupies a peculiar position of a quasitrustee. Hence the question is whether the declaration made by him constitutes transfer of property and whether the company can claim any interest in the property so declared belonging to it by the promoter. The declaration of the promoter that the property is held by him for the company to be formed does not constitute either a sale, mortgage, lease, exchange or gift and the company before its incorporation is not a living person and hence Section 5 is not attracted. Such declaration also does not constitute a transfer to himself and the company has not come into force as a beneficiary and hence it will not become a trust. Hence the transaction is out side the purview of Section 5 of the Transfer of Property Act and also Trust Act and it does constitute a conveyance as a vesting instrument or other assurance of property and can be made orally under Section 9 of the transfer of Property Act.
If he purchases property from third party he will be acquiring the title though apparently in his name for the benefit of the company yet to be formed. The property vests in him for the benefit of the company though his assurance is sufficient to clothe the company after its birth to claim full title. Hence we hold that the property acquired by a promoter can become the property of the company by its acceptance and adoption after its birth. A Division Bench of the Madras High Court had an occasion to consider in an unreported judgment in Writ Appeals Nos.85 and 86 of 1963 dated 5th August, 1964 whether a promoter of a private limited company prior to its incorporation can make a valid application on its behalf for the grant of a stage carriage permit and it was held that if the company came into existence before the actual determination by the authorities it can be justified either on principle of adoption or novation by a subsequent application. But if the company is incorporated subsequent to the last date of consideration it cannot ratify the application of the promoter. In that case Section 57 (2) of the Motor Vehicles Act requires an application to be made on behalf of the legal person. So their Lordships had some difficulty in sustaining the claim on behalf of the company before its incorporation as the application itself must be made on behalf of a legal person. In Weavers Mills Vs. Balkis Ammal, , Justice Veeraswami as he then was held that the benefit of the purchase made by the promoter passed to the company on its incorporation without any registered deed. But in that case the claim of the company was negative on the ground that the previous proceedings operate as res judicata and hence the company lost its claim for the said property. We find from the reasoning of the learned Judge a clear supportable legal principle to sustain the claim of a company in respect of the property acquired by a promoter on its behalf."

46. The decisions in Scindia Potteries' case, , and Rama Association's case, , do not help the plaintiff and I do not want to deal with them.

47. The learned senior counsel, Mr.Ishwar Sahai, submitted that the promoters did not participate in the auction and the names given in Ex.D-2 are different from the persons who had subscribed to the Memorandum and Articles of Association, a stand which is taken in the written statement, and, therefore, there was a transfer or assignment in involved in this case, therefore, the DDA was justified in demanding the unearned increase. I am unable to accept this submission.

48. From the facts, it is clear that a promoter of the company participated in the auction and earnest money was paid on behalf of a proposed company and the defendant accepted the payments on the 7th of January, 1981 and the 16th of January, 1981 from the plaintiff, company, after its incorporation on the 13th of November, 1980. A promoter of a company offered to purchase the leasehold interest and the payment was made and that was accepted by the defendant and acceptance of the sum of Rs.4.36 crores is very significant in this case. It is only thereafter that the defendant wanted the plaintiff to produce the Memorandum and Articles of Association and after perusing the same came to the conclusion that there was a transfer. The defendant had completely misunderstood the legal position without appreciating the concept involved in the transaction which had originated on the 9th of September, 1980 from the promoter of a company up to the payment of money in January, 1981, nearly two months after the incorporation of the company and had also chosen to apply clause 3(2)(f) in the terms and conditions. I have no hesitation, having regard to the well settled principles, that there was no transfer involved and the demand for unearned increase was wholly unjustified in law. Consequently I hold that the plaintiff shall be entitled to the payment claimed in the suit.

49. The plaintiff had claimed the refund of Rs.10,90,000/- plus a sum of Rs.1,07,100/- as interest @ 18% per annum from the date of the payment, which was under protest, till the date of suit. The plaintiff claimed the same rate of interest after the date of suit. The claim of interest @ 18% per annum on the amount of Rs.10,90,000/- from the date of the payment till the date of institution of the suit, in my view, is quite justified and, therefore, I hold that the plaintiff shall be entitled to Rs.10,90,000/- plus Rs.1,07,100/- total Rs.11,97,100/-.

50. The question arises whether the plaintiff would be entitled to 18% interest on the amount of Rs.10,90,000/- after the date of institution of the suit. The defendant being a public body, who had acted on a totally wrong approach to law, is obliged to pay interest. I am of the view that the plaintiff cannot claim interest @ 18% on the aforesaid amount after the date of institution of the suit and I am of the view that the rate of interest at 10% per annum from the date of institution of the suit till the date of payment would be reasonable.

51. I now proceed to to give my findings on the issues framed.

52. On Issue No.1, I find that the suit has been instituted, signed and verified by a competent person. This was not seriously contested by the defendant.

53. On Issue No.2, I hold that the plaintiff is entitled to claim Rs.10,90,000/-.

54. On Issue No.3, I hold that the plaintiff shall be entitled to interest @ 18% from the date of payment till the date of institution of the suit and @ 10% from the date of institution of the suit till the date of realisation.

55. On Issue No.4, there is no question of estoppel. The plaintiff paid the amount under protest and, therefore, the plaintiff shall be entitled to claim the payment, if in law, there was no transfer involved. The issue is answered against the defendant.

56. Regarding the costs claimed by the plaintiff, I am of the view that when the plaintiff is now getting the money back with interest, this is not a fit case where a public body like the defendant should be mulcted with costs.

57. Accordingly, there shall be a decree:-

1. directing the defendant to pay the plaintiff the sum of Rs.11,97,100/-.
2. directing the defendant to pay interest @ 10% per annum on the sum of Rs.10,90,000/- from the date of institution of the suit (7.1.1983) till the date of realisation.
3. directing the parties to bear their respective costs.