Status of private limited company if shareholders exceed 50 and importance of records of ROC

SUMMARY OF CASE LAW

Supreme Court inter alia on prerequisites for conversion of a private company into a public company – It is not the records of the Registrar of Companies which determines the status of a company but the definition of a “private company” or “public company” as defined in section 3(1)(iii) and 3(1)(iv) of the Companies Act, 1956; having regard to the definition of “private company” in section 3(1)(iii), as soon as the number of its members exceeds 50, it loses its character as a private company.

RELEVANT PARAGRAPH

31. In deciding the two separate sets of Special Leave Petitions, it has to be kept in mind that they arise out of two separate suits, one filed by Hotel Queen Road and the other filed by Hillcrest Realty. While Suit No.992 of 2005 was filed by Hotel Queen Road Pvt. Ltd. for an injunction to restrain Hillcrest Realty from proceeding with the proposed EGM on 4th August, 2005, and from exercising voting rights therein, Suit No.1832 of 2008 was filed by Hillcrest Realty for a declaration that Hotel Queen Road had become a public company by virtue of the resolutions passed on 30th September, 2002. While in the suit filed by Hillcrest Realty, the learned Single Judge permitted the Plaintiff to vote in the meeting of Hotel Queen Road to be held on 16th October, 2008, in the suit filed by Hotel Queen Road, the learned Single Judge also passed an interim order prohibiting any effect being given to the resolutions passed in the EGM on 4th August, 2005, upon holding that Hotel Queen Road being a private company, Hillcrest Realty could not have exercised voting rights in the EGM.

32. As will be evident from the pleadings in both the suits, the reliefs ought for in the two suits are dependent on the question as to whether by the resolutions adopted on 30th September, 2002, Hotel Queen Road had lost its private character and had been converted into a Public Company. While the issues are the same in the two suits, the interim orders passed therein operate in contradictory fields. On the one hand, the learned Single Judge has passed an order on the basis that Hotel Queen Road was a Private Limited Company in which Hillcrest Realty, as a preference shareholder, had no voting rights and, on the other, an interim order has been passed on the basis that the said company was, a Public Company and by operation of Section of 87(2)(b) of the Companies Act, 1956, Hillcrest Realty, as a preference shareholder, was entitled to vote at all the meetings of the company. In an attempt to reconcile the two contradictory positions, the Division Bench of the High Court, without deciding the core issue, proceeded to dispose of the appeals before it by treating Hotel Queen Road to be a Public Company, and based upon such presumption proceeded further to hold that on account of non-payment of dividend on its cumulative preference shares for two years, Hillcrest Realty became entitled to vote at the meeting of the company under the provisions of Section 87(2)(b) of the Companies Act, 1956.

Please become a Premium member. If you are already a Premium member, login here to access the full content.