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

A . “Section 300 of the Companies Act, 1956, embodies, just as section 91B of the Indian Companies Act, 1913, did, the general rule of equity (see Pratt (T.R.) (Bombay) Ltd. v. M.T. Ltd. [1938] 8 Comp. Cas. 137. The clearest exposition of this rule is to be found in Aberdeen Rly. Co. v. Blaikie. [1854] 1 Macq. 461-471- 72 (H.L.). In that case, Lord Cranworth said: B “A corporate body can only act by agents and it is course the duty of those agents so to act as best to promote the interests of the corporation whose affairs they are conducting. Such agents have duties to discharge of a fiduciary nature towards their principle. And it is a rule of universal application, that no one, having such duties to discharge, shall be allowed to enter into engagements in which he has, or can have, a personal interest conflicting, or which possibly may conflict, with the interest of those whom he is bound to protect. So strictly is this principle adhered to, that no question is allowed to be raised as to the fairness or unfairness of a contract so entered into. It obviously is, or may be, impossible to demonstrate how far in any particular case the terms of such a contract have been the best for the interest of cestui que trust, which it was possible to obtain. It may sometimes happen that the terms on which a trustee has dealt or attempted to deal with the estate or interests of those for whom he is a trustee, have been as good as could have been obtained from any other person, - they may even at the time have been better. But still so inflexible is the rule that no inquiry on that subject is permitted.” Though this was a case from Scotland, the rule of English law is the same, for, as observed by Swinfen Eady. L.J., in Transvaal Lands Company v. New Belgium (Transvaal) Land and Development Company, [1914] 2 Ch. 488, 502 (C.A.), the doctrine rests on such obvious principles good sense that it is difficult to suppose that there could be any system of law in which it would not be found, In Transvaal Land Company’s case it was held at page 503 that: “Where a director of a company has an interest as shareholder in another company or is in a fiduciary position towards, and owes a duty to, another company which is proposing to enter into engagements with the company of which he is a director, he is in

RAM PARSHOTAM MITTAL & ORS. v. HOTEL QUEEN ROAD 1019 PVT. LTD. & ORS. [ARUN MISHRA, J.]

our opinion within this rule. He has a personal interest within this rule or owes a duty which conflicts with his duty to the company of which he is a director. It is immaterial whether this conflicting interest belongs to him beneficially or as trustee for others.” This rule was characterised by Lord Cairns L.C. in Parker v. McKenna [1874] LR 10 Ch. App. 96, 118, as not a technical or arbitrary rule but a rule founded upon the highest and truest principle of morality. Thus, this rule applies not only where there in a conflict of interest or conflict of interest and duty but also where there is a conflict to two duties. It is immaterial whether the interest is a personal interest or arises out of a fiduciary capacity or whether the duty which is owed is in a fiduciary capacity. Actual conflict is also not necessary. A possibility of conflict is enough to bring the case within the ambit of this rule nor does the application of this rule depend upon the extent of the adverse interest. Directors stand towards the company in a fiduciary position In India this fiduciary character has received statutory recognition in section D 88 of the Indian Trusts Act, 1882. The reason underlying this rule is that the company has a right to the unbiased voice, advice and collective wisdom of its directors. (See Benson v. Heathorn; [1842] 1 Y. & C. Ch. Cas. 326, 341-42; Imperial Mercantile Credit Association v. Coleman and Victors Ltd. v. Lingard [1927] 1 Ch 323, 330).” E

(emphasis supplied)

80Copy pinpoint80. In Madras Tube Co. Ltd. & Ors. v. Hari Kishon Somani & Ors. (supra), it was observed: “I do not think the pattern of section 91(a) and 91(B) should be superimposed on the enactment of the present group of sections 299, 300 and 301. Section 301, in terms, refers to a register being kept of contracts and arrangements to which section 297 or section 299 applies. It does not refer, in terms, to section 300. This is because the purpose of a register of contracts is to put the shareholder upon notice of the contract and arrangements in which the directors are interested and which they have disclosed whereas the function of section 300 is quite different which is to render invalid any resolution of a Board Meeting in which an interested director participates or votes. H

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A The result of this discussion is that the appointment of an additional director by a resolution of the Board in terms of the power given to the Board under the company’s articles must be regarded as an arrangement rendered by or on behalf of the company if in that appointment a director who is interested in the appointee participates or votes, then two consequences flow. One is that he B could not form the quorum; the other is that the resolution itself is void. In this case H M Periwal being the brother of P C Periwal must be regarded as interested in the appointment of his brother in the board of directors in the real sense of that expression. As the Supreme Court had occasion to point out in the Firestone case C (1970) 2 Company Law Journal p 200), the expressions ‘interested or concerned’ are fairly wide in their connotation and they include not merely a financial concern or interest, but include any interest arising out of the closeness of relationship as between father and son, father and daughter, husband and wife, brother and sister and the like. I am therefore satisfied that in this case the first D resolution was wanting in quorum because H M Periwal was not entitled to participate in the voting and the resolution itself was not valid because H M Periwal has voted that resolution. It follows that P C Periwal was not validly appointed as Additional Director. xxxxx E As I earlier remarked the fundamental principle of equity which runs right through like a golden thread in all the decisions of courts is that no director can participate or vote in a Board meeting where he is aware that his duties and interests conflict or are likely to be in competition. This rule attaches to the very office of a director which is of a fiduciary character. Corporate enterprises, in which the ultimate properties are the shareholders, are entrusted completely in the hands of the Board of Directors. The only basis for the Board being given the management and administration of the corporate enterprise is the trust and confidence reposed by the shareholders in the directors. It is, therefore, of prime importance that in any transaction in which the directors participate as directors of the company they should not only declare their personal interests therein, buy they must desist from participation in any decision-making. The theory is that the Board acts as a body. How the act of the Board as a body is shaped is a matter H

RAM PARSHOTAM MITTAL & ORS. v. HOTEL QUEEN ROAD 1021 PVT. LTD. & ORS. [ARUN MISHRA, J.]

left to the inter-play of the minds of the directors, and the respective strength or weakness of each to carry the others along with him. If, therefore, a director who could sway the decision of the Board, one way or the other is a person interested in the subject matter of the deliberations and nevertheless participates in the meeting, and the interests of the director are not identical with those of the company, the ultimate damage to the company and the shareholders could well be imagined. This principle that where a director has a personal interest, he ought not to participate in the Board’s deliberation is so sacred that no further inquiry is necessary to set at naught decisions brought about in violation of the principles. No harm might result to the company by allowing participation of an interested director, and yet the participation, per se, is vicious.” (emphasis supplied)

81Copy pinpoint81. In the light of the aforesaid decisions it was improper for the Directors to allot shares to themselves and to the exclusion of Mr. Ashok Mittal in the facts and circumstances of the case and that too without issuance of notice to him.

82Copy pinpoint82. It was also submitted that Hillcrest would have no right to vote as no dividend was declared in view of the provisions contained in section 87 of the Companies Act of 1956. Reliance has been placed on following decisions: E

(a) In Mrs. Bacha F. Guzdar, Bombay (supra), the Court observed: “9. It was argued that the position of shareholders in a company is analogous to that of partners ‘inter se’. This analogy is wholly inaccurate. Partnership is merely an association of persons for F carrying on the business of partnership and in law the firm name is a compendious method of describing the partners. Such is, however, not the case of a company which stands as a separate juristic entity distinct from the shareholders. In Halsbury’s Laws of England, Volume 6 (3rd Ed.), page 234, the law regarding the attributes of shares is thus stated: G “A share is a right to a specified amount of the share capital of a company carrying with it certain rights and liabilities while the company is a going concern and in its winding up. The shares or other interest of any member in a company are personal estate H

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A transferable in the manner provided by its articles, and are not of the nature of real estate.” (b) This Court in National Textile Workers Union & Ors. v. P. R. Ramakrishna & Ors. (1983) 1 SCC 228 has observed: “9. Considerable reliance was however placed on behalf of respondent Nos. 6 to 9 on the statement of the law on this point contained in the leading text books on company law. Respondent Nos. 6 to 9 drew our attention to Palmer Company Precedents (17th Edn.) volume 2 at page 77 where it is stated that any creditor or shareholders may appear to support or oppose the petition but no one else can do so even if he has an indirect interest in the continued existence of the company. So also in Buckley on the Companies Act (14th Edn.) at page 546 the law has been stated in the following terms, namely, “the only persons entitled to be heard are the company, its creditors and contributories...the court may in its discretion hear other persons who have an interest in order to learn what public grounds there are in favour of, or in opposition to, the winding up but such persons can be heard only as amicus curiae and cannot appeal” Our attention was also invited to Halsbury’s Laws of England 4th Ed. Vol. 7 where a similar statement of the taw is to be found at page 614 paragraph 1028. E Now it is undoubtedly true that according to the statement of the law contained in these three leading text books, it is only the company, the creditors and the contributories who are entitled to appear on the winding up petition and no other persons have a right to be heard, but this statement of the law is based on the old decision in Re. Bradford Navigation Company which was carried in appeal and decided as Re. Bradford Navigation Company. This decision given by the English Courts over a hundred years ago when a company was regarded merely as a legal device brought into being as a result of a contractual arrangement between the shareholders for the purpose of carrying on trade or business and the workers were looked upon as no more than employees of the company working under a master and servant relationship and the interest of the public as consumers or otherwise was a totally irrelevant consideration and it can have no validity in the present times when the entire concept of a company has changed and it has been transformed into a dynamic socio-economic institution H

RAM PARSHOTAM MITTAL & ORS. v. HOTEL QUEEN ROAD 1023 PVT. LTD. & ORS. [ARUN MISHRA, J.]

in which capital and labour are both equal partners, possibly with heavy weightage in favour of labour and the interest of the public as consumers as also the general welfare and common good of the community constitute a vital consideration. We cannot allow the dead hand of the past to stifle the growth of the living present. Law cannot stand still; it must change with the changing social concepts and values. If the bark that protects the tree fails to grow and expand along with the tree, it will either choke the tree or if it is a living, tree, it will shed that bark and grow a new living bark for itself. Similarly, if the law fails to respond to the needs of changing society, then either it will stifle the growth of the society and choke its progress or if the society is vigorous enough, it will cast away the law which stands in the way of its growth. Law must therefore constantly be on the move adopting itself to the fast changing society and not lag behind. It must shake off the inhibiting legacy of its colonial past and assume a dynamic role in the process of social transformation. We cannot therefore mechanically accept as valid a legal rule which found favour with the English courts in the last century when the doctrine of laissez faire prevailed. It may be that even today in England the courts may be following the same legal rule which was laid down almost a hundred years ago, but that can be no reason why we in India should continue to do likewise. It is possible that this legal rule might still be finding a place in the English text books because no case like the present one has arisen in England in the last 30 years and the English courts might not have had any occasion to consider the acceptability of this legal rule in the present times. But whatever be the reason why this legal rule continues to remain in the English F text books, we cannot be persuaded to adopt it in our country, merely on the ground that it has been accepted as a valid rule in England. We have to build our own jurisprudence and though we may receive light from whatever source it comes, we cannot surrender our judgment and accept as valid in our country whatever has been decided in England. The rule enunciated in re: Bradford G Navigation Company case (supra) does not commend itself to us and though it has been followed by a single Judge of the Bombay High Court in re Edward Textiles Limited (supra), we do not think it represents correct law. H

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A (c) He has also referred to Halsbury’s Laws of England, Volume 6 (3rd Ed.), page 234, the law regarding the attributes of shares is thus stated: “A share is a right to specified amount of the share capital of a company carrying with it certain rights and liabilities while the B company is a going concern and in its winding up. The shares or other interest of any member in a company are personal estate transferable in the manner provided by its articles, and are not of the nature of real estate.” (d) Reliance has also been placed on M/s. Kothari Textiles Ltd., C Madras & Ors. v. Commissioner of Wealth Tax, Madras; AIR 1963 Mad. 274 in which the High Court observed as under: “25. Article 147 also provides that no dividend shall be payable except out of the profits of the year or any other undistributed profits except as provided by Sections 205 and 208. It is obvious that the dividend payable to holders of preference shares must necessarily depend upon there being distributable profits and in terms of the relevant article, what the preference shareholders get is only a priority to payment over the equity shareholders. That they are entitled to certain special rights on the winding up of the company does not make any difference. Whether or not there are distributable profits is for the general body to decide and only if the general body declares a dividend will the preference shareholders be entitled to be paid.” (e) In Trojan Equity Ltd. v. CMI Ltd. [2009] QSC (Supreme Court of Queensland) 114 with respect to rights of shareholders, it was observed: “16. The argument that the commercial purpose of the rules is supported by construing “in arrears” as applying to the situation where dividends have not been paid, rather than only where they have been declared and not paid, was developed by reference to G ASX listing rule 6.3 which provides that the holder of a preference share must be entitled to a right to vote during a period in which a dividend or part of a dividend is in arrears. That seems to me, however, simply to beg the question. The argument was that the purpose of the rules, where no dividends could be paid because there were no profits, was enhanced by adopting the interpretation H

RAM PARSHOTAM MITTAL & ORS. v. HOTEL QUEEN ROAD 1025 PVT. LTD. & ORS. [ARUN MISHRA, J.]

that would permit Class A shareholders to vote when dividends had not been paid, regardless of whether there had been a declaration by the directors. The submission was that those rules have the function of setting requirements for the organisations whose securities are to be publicly traded. The commercial purpose of both the restriction on voting of preference shares and the exceptions from that restriction, as set out in the listing rules, was said to be to leave the voting control of the company in the hands of ordinary shareholders, except when the situations identified in the listing rule arose, when the additional right and protection of being entitled to vote was conferred on the preference shareholder. Mr Jackson QC submitted that nothing about that purpose dictated or suggested that it would be better served by restricting the operation of r. 30.16(c) to dividends declared but not paid.

18. Mr McKenna’s response was that the proper focus was the meaning of the words in the constitution and what they revealed about the balance struck between the preference shareholders’ D understandable wish to vote at every possible occasion when their shares were at risk, and the general regime which is that they did not have the right to vote at all. He submitted that a particular balance had been struck between the differing groups of shareholders which created a strong incentive for the company to declare dividends because when dividends were not paid to the E preference shareholders the ordinary shareholders were not paid either and for a longer period. In drawing attention to the constitution’s use of language he concluded that dividends could not be in arrears in any ordinary use of English if they had never been payable and never would be payable.” F (emphasis supplied) (f) Reliance was also placed by Shri Misra on Indore Development Authority v. Shailendra (Dead) through LRs. & Ors. (2018) 3 SCC 412 thus: “40. In J. Dalmia v. CIT, AIR 1964 SC 1866, this Court has G observed that the expression “paid” does not contemplate actual receipt of the dividend by the member. The dividend may be said to be paid within the meaning of Section 16(2) when the company discharges its liability and makes amount unconditionally available the members entitled thereto: (AIR p. 1869, para 10) H

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A “10. …The expression “paid” in Section 16(2) it is true does not contemplate actual receipt of the dividend by the member. In general, dividend may be said to be paid within the meaning of Section 16(2) when the company discharges its liability and makes the amount of dividend unconditionally available to the member entitled thereto.” B (emphasis supplied)” (g) In CDS Financial Services (supra) it was observed: “48. Regarding plaintiff’s right to vote on preference shares:

C Now the only question that remains to be considered is whether the plaintiff is entitled to exercise voting rights on preference shares held by it. The case of the plaintiff in short is that the dividend has not been paid in respect of the preference shares for financial year ending March 3l, l998, l999, and 2000 and, therefore, by virtue of section 87(2)(b)(ii), the plaintiff is entitled to vote on the said D preference shares. The company has not disputed that the dividend in respect of the preference shares has remained unpaid and, therefore, the plaintiff as shareholder has acquired voting rights. However, it is the case of the company that exercising of voting right would violate conditions imposed by Reserve Bank of India. E It is the submission of the company that plaintiff cannot vote beyond the limit of 49%. In order to appreciate this issue, it would be necessary to state few admitted facts. When the plaintiff purchased preference shares, it had applied and obtained permission from the Reserve Bank of India under section 29(l)(b) of the Foreign Exchange Regulations Act, l973 (“FERA”). While F granting such permission under section 29(l)(b) of the FERA, the Reserve Bank of India vide letter dated l².l.l998 imposed several conditions. Two conditions which are relevant for our purpose are as follows: (l) that no shares be acquired by CDC without the prior permission G of the Reserve Bank of India; (2) that the conditions contained in the letter dated 6.l.l998 shall be complied with. The letter dated 6.l.l998 stipulates that foreign equity shall not exceed 49% as is permissible under the policy for investing in H

RAM PARSHOTAM MITTAL & ORS. v. HOTEL QUEEN ROAD 1027 PVT. LTD. & ORS. [ARUN MISHRA, J.]

companies. Further the licence granted by the DOT when amended A by letter dated 29.l.200l stipulated that certain conditions shall always be complied with and shall not be violated, including inter alia that there shall be a cap of 49% of foreign equity and the management control of the company shall remain with the Indian shareholders. B

50. According to Mr. Chidambaram the conditions contained in the special permission of the Reserve Bank of India will prevail over the provisions of the Companies Act in view of section 29(l) of FERA which contains a non-obstante clause. He pointed out that FERA has been replaced by Foreign Exchange Management Act, l999 (“FEMA”) and by virtue of section 49 of FEMA, the C special permission is saved and now deemed to have been granted under the corresponding provisions of sections 6 of FEMA read with Regulation 5 of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India), Regulations, 2000 and Schedule I thereto read with Annexure B D to the said Schedule. Mr. Chidambaram’s contention is that the special permission is a statutory order passed by a statutory authority viz. Reserve Bank of India on which power to grant such permission was conferred by Parliament under section 29 of FERA and the special permission will prevail over the provisions of the Companies Act. E

56. Mr. Chagla also submitted that the stage to consider whether there would be violation of conditions of Reserve Bank of India would arise only when the plaintiff actually exercise voting rights and its rights cannot be pre-empted prematurely merely on the basis of the apprehension that it would result in violation of the F conditions laid down by the Reserve Bank of India. We cannot accept the submission of Mr. Chagla for the simple reason that granting such voting rights would necessarily have the effect of breach of the condition viz. cap of 49% equity and will result in virtually transferring the management to the non-Indian G shareholders. Moreover, if the relief claimed by the plaintiff is granted, it would virtually amount to passing a decree at the interim stage. Therefore, the prayer of the plaintiff for permitting it to exercise voting rights in respect of the preference share cannot be accepted.” H

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83Copy pinpoint83. Section 19(2) of the Companies Act provides that nothing in sections 85 to 89 shall apply to a private company unless it is a subsidiary of a public company and this question has to be finally decided whether it is a private or public limited company in the pending civil suit which have been stated to be transferred to NCLT for decision in accordance with law. Otherwise, section 87 provides that notice has to be issued to B preference shareholders also for the meeting and they have a right to participate in the meeting. It appears prima facie even if dividend has not been declared. In that case also, preference shareholders shall have a right to vote in the meeting.

84Copy pinpoint84. Reliance has also been placed on the provisions of section C 169(4) of the Companies Act regarding calling of EOGM on requisition. The resolution with respect to EOGM is not in issue in the present case. As such we need not dilate upon the provisions of section 169(4) and the submissions.

85Copy pinpoint85. Coming to the submissions based upon the provisions of section D 108 of the Act of 1956. Section 108 is extracted hereunder: “Sec 108 - Transfer not to be registered except on production of instrument of transfer. (1) A company shall not register a transfer of shares in, or debentures of, the company, unless a proper instrument of transfer duly stamped and executed by or on behalf of the transferor and by or on behalf of the transferee and specifying the name, address and occupation, if any, of the transferee, has been delivered to the company along with the certificate relating to the shares or debentures, or if no such certificate is in existence, along with the letter of allotment of the shares or debentures : Provided that where, on an application in writing made to the company by the transferee and bearing the stamp required for an instrument of transfer, it is proved to the satisfaction of the Board of directors that the instrument of transfer signed by or on behalf of the transferor and by or on behalf of the transferee has been lost, the company may register the transfer on such terms as to indemnity as the Board may think fit : Provided further that nothing in this section shall prejudice any power of the company to register as shareholder or debenture- H

RAM PARSHOTAM MITTAL & ORS. v. HOTEL QUEEN ROAD 1029 PVT. LTD. & ORS. [ARUN MISHRA, J.]

holder any person to whom the right to any shares in, or debentures of, the company has been transmitted by operation of law. (1A) Every instrument of transfer of shares shall be in such form as may be prescribed, and: (a) every such form shall, before it is signed by or on behalf of the transferor and before any entry is made therein, be presented to the prescribed authority, being a person already in the service of the Government, who shall stamp or otherwise endorse thereon the date on which it is so presented, and (b) every instrument of transfer in the prescribed form with the date of such presentation stamped or otherwise endorsed thereon shall, after it is executed by or on behalf of the transferor and the transferee and completed in all other respects, be delivered to the company, (i) in the case of shares dealt in or quoted on a recognized stock exchange, at any time before the date on which the register of members is closed, in accordance with law, for the first time after the date of the presentation of the prescribed form to the prescribed authority under clause (a) or within twelve months from the date of such presentation, whichever is later; E (ii) in any other case, within two months from the date of such presentation. (1B) Notwithstanding anything contained in sub-section (1A), an instrument of transfer of shares, executed before the commencement of section 13 of the Companies (Amendment) F Act, 1965 (31 of 1965) or executed after such commencement in a form other than the prescribed form, shall be accepted by a company, (a) in the case of shares dealt in or quoted on a recognized stock exchange, at any time not later than the expiry of six G months from such commencement or the date on which the register of members is closed, in accordance with law, for the first time after such commencement, whichever is later; (b) in any other case, at any time not later than the expiry of six months from such commencement. H

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A (1C) Nothing contained in sub-sections (1A) and (1B) shall apply to: (A) Any share : (i) which is held by a company in any other body corporate in the name of a director or nominee in pursuance of sub-section (2), or as the case may be, sub- B section(3), of section 49, or (ii) which is held by a corporation, owned or controlled by the Central Government or a State Government, in any other body corporate in the name of a director or nominee, or (iii) in respect of which a declaration has been made to the Public Trustee under section 153B, if : (1) the company or corporation, as the case may be, stamps or C otherwise endorses, on the form of transfer in respect of such share, the date on which it decides that such share shall not be held in the name of the said director or nominee or, as the case may be, in the case of any share in respect of which any such declaration has been made to the Public Trustee, the Public D Trustee stamps or otherwise endorses, on the form of transfer in respect of such share under his seal, the date on which the form is presented to him, and (2) the instrument of transfer in such form, duly completed in all respects, is delivered to the : (a) body corporate in whose share such company or corporation has made investment in the name of its director or nominee, or E (b) company in which such share is held in trust, within two months of the date so stamped or otherwise endorsed ; or (B) any share deposited by any person with : (i) the State Bank of India, or (ii) any scheduled bank, or (iii) any banking company (other than a scheduled bank) or financial institution F approved by the Central Government by notification in the Official Gazette (and any such approval may be accorded so as to be retrospective to any date not earlier than the 1st day of April, 1966), or (iv) the Central Government or a State Government or any corporation owned or controlled by the G Central Government or a State Government, by way of security for the repayment of any loan or advance to, or for the performance of any obligation undertaken by, such person, if : (1) the bank, institution, Government or corporation, as the case may be, stamps or otherwise endorses on the form of transfer of such share : (a) the date on which such share is returned by H

RAM PARSHOTAM MITTAL & ORS. v. HOTEL QUEEN ROAD 1031 PVT. LTD. & ORS. [ARUN MISHRA, J.]

it to the depositor, or (b) in the case of failure on the part of the depositor to repay the loan or advance or to perform the obligation, the date on which such share is released for sale by such bank, institution, Government or corporation, as the case may be, or (c) where the bank, institution, Government or corporation, as the case may be, intends to get such share registered in its own name, the date on which the instrument of transfer relating to such share is executed by it ; and (2) the instrument of transfer of such form, duly completed in all respects, is delivered to the company within two months from the date so stamped or endorsed. Explanation. : Where any investment by a company or a C corporation in the name of its director or nominee referred to in clause (A)(i) or clause (A)(ii), or any declaration referred to in clause (A)(iii), or any deposit referred to in clause (B), of this sub-section is made after the expiry of the period or date mentioned in clause (a) of sub-section (1B) or after the expiry of the period D mentioned in clause (b) of that sub-section, as the case may be, the form of transfer, in respect of the share which is the subject of such investment, declaration or deposit, means the prescribed form ; or E (C) any share which is held in any company by the Central Government or a State Government in the name of its nominee, except that every instrument of transfer which is executed on or after the 1st day of October, 1966, in respect of any such share shall be in the prescribed form. F (1D) Notwithstanding anything in sub-section (1A) or sub-section (1B) or sub-section (1C) where in the opinion of the Central Government it is necessary so to do to avoid hardship in any case, that Government may on an application made to it in that behalf, extend the periods mentioned in those sub-sections by such further G time as it may deem fit whether such application is made before or after the expiry of the periods aforesaid ; and the number of extensions granted hereunder and the period of each such extension shall be shown in the annual report laid before the Houses of Parliament under section 638. H

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A (2) In the case of a company having no share capital, sub-section (1) shall apply as if the references therein to shares were references instead of the interest of the member in the company. (3) Nothing contained in this section shall apply to transfer of security effected by the transferor and the transferee both of B whom are entered as beneficial owners in the records of a depository.”

86Copy pinpoint86. It was also submitted that there is violation of section 108 of the Companies Act of 1956. It was submitted on behalf of Hillcrest that the Board meeting was held on 10.5.2005 in which 32,88,181 shares of C HQRL were purportedly transferred by Moral to Mr. R.P. Mittal. Out of 32,88,181 shares, 8,98,166 shares were lying with the Overseas Bank and were available before the Board of HQRL for recording of transfer. Shares can be transferred only in accordance with section 108 of the Companies Act which provides for filing of the share certificate which was a mandatory requirement as observed in Mannalal Khetan & Ors. D v. Kedar Nath Khetan & Ors. (1977) 2 SCC 424 thus: “16. The provision contained in Section 108 of the Act states that a company shall not register a transfer of shares...unless a proper instrument of transfer duly stamped and executed by or on behalf of the transferor and by or on behalf of the transferee …. has been delivered to the company along with the certificate relating to the shares or debentures … or if no such certificate is in existence along with the letter of allotment of the shares. There are two provisos to section 108 of the Act. We are not concerned with the first proviso in these appeals. The second proviso states that nothing in this section shall prejudice any power of the company to register as shareholder or debenture holder any person to whom the right to any shares in, or debentures of, the company has been transmitted by operation of law. The words shall not register” are mandatory in character. The mandatory character is strengthened by the negative form of the language. The prohibition against transfer without complying with the provisions of the Act is emphasised by the negative language. Negative language is worded to emphasise the insistence of compliance with the provisions of the Act. (See State of Bihar v. Maharajadhiraja Sir Kameshwar Singh of Darbhanga [1952] SCR H 889; K. Pentiah v. Muddala Veeramallappa [1961] 2 SCR 295

RAM PARSHOTAM MITTAL & ORS. v. HOTEL QUEEN ROAD 1033 PVT. LTD. & ORS. [ARUN MISHRA, J.]

and unreported decision dated April 28, 1976 in Criminal Appeal A 279 of 1975 and Additional District Magistrate, Jabalpur v. Shivakant Shukla (1976) 2 SCC 521.) Negative words are clearly prohibitory and are ordinarily used as a legislative device to make a statutory provision imperative.

18. The High Court said that the provisions contained in Section 108 of the Act are directory because non-compliance with section 108 of the Act is not declared an offence. The reason given by the High Court is that when the law does not prescribe the consequences or does not lay down penalty for noncompliance with the provision contained in Section 108 of the Act the provision is to be considered as directory. The High Court failed to consider the provision contained in Section 629(A) of the Act. Section 629(A) of the Act prescribes the penalty where no specific penalty is provided elsewhere in the Act. It is a question of construction in each case whether the legislature intended to prohibit the doing of the act altogether, or merely to make the person who did it liable to pay the penalty.”

87Copy pinpoint87. Section 108 operates independently of section 286 or section

300. The invalidation of meeting is dependent under the provisions of section 108. There was violation of section 108 of the Companies Act. H

p. 1034 Copy page pinpoint

A HQRL did not file share certificate along with the duly executed share transfer form as on 10.5.2005, the date of Board resolution. The plea of Mr. R.P. Mittal has been disbelieved that share certificates were returned on 23.6.2003. The High Court has also ordered the proceedings under section 340 Cr.P.C. against Mr. R.P. Mittal for filing an affidavit to the contrary. The High Court has relied on the affidavit of Mr. Vivek Dixit B and Mr. Deepak Sudan, the concerned officials of the Indian Overseas Bank. The High Court has found that the share certificates were delivered to Mr. R.P. Mittal not on 23.6.2003 but on 23.6.2005. No doubt about it that there was violation of the provisions of section.

88Copy pinpoint88. With respect to the appropriate order to be passed under section C 397 of the Companies Act of 1956, reliance has been placed upon M.S.D.C. Radha Ramanan v. M.S.D. Chandrasekara Raja & Anr. (2008) 6 SCC 750 thus: “23. Sections 397 and 398 of the Act empower the Company Law Board to remove oppression and mismanagement. If the consequences of refusal to exercise jurisdiction would lead to a total chaos or mismanagement of the company, would still the Company Law Board be powerless to pass appropriate orders is the question. If a literal interpretation to the provisions of Section 397 or 398 is taken recourse to, may be that would be the consequence. But jurisdiction of the Company Law Board having been couched in wide terms and as diverse reliefs can be granted by it to keep the company functioning; is it not desirable to pass an order which for all intent and purport would be beneficial to the company itself and the majority of the members? A court of law can hardly satisfy all the litigants before it. This, however, by itself would not mean that the Company Law Board would refuse to exercise its jurisdiction, although the statute confers such a power on it.

24. It is now a well settled principle of law that the Courts should lean in favour of such construction of statute whereby its jurisdiction is retained enabling it to mould the relief, subject of course, to the applicability of law in the fact situation obtaining in each case.” There can be no dispute with the aforesaid proposition.

RAM PARSHOTAM MITTAL & ORS. v. HOTEL QUEEN ROAD 1035 PVT. LTD. & ORS. [ARUN MISHRA, J.]

89Copy pinpoint89. In the fact and circumstances of the case, taking into A consideration the overall scenario, the impugned order calls for no interference. However, direction to prosecute appellant Ram Parshotam Mittal in the facts of the case is set aside.

90Copy pinpoint90. The appeals are accordingly disposed of. The parties to bear their own costs. B

Divya Pandey Appeals disposed of.