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.

33. Although, as pointed out by Mr. Sorabjee, the language of the first resolution was different from the language of the two following resolutions, and at first glance appears to militate against each other, on a closer look at the three resolutions taken one after the other, it is not difficult to discern that they were all part of the same thinking process or meeting of minds of the shareholders. Without the first resolution being accepted as a final decision taken by the company to convert itself from a private company into a public company, there could be no occasion for the subsequent two resolutions to have been passed.

34. We are unable to appreciate the methodology adopted by the Division Bench of the High Court, but we are in agreement with the end result by which the Division Bench had set aside the interim order dated 12th August, 2005, passed in Suit No.992 of 2005. In our view, apart from endorsing the view of the learned Single Judge that the interim order of 12th August, 2005, had been obtained by suppression of material facts, in order to decide the appeals, the Division Bench had to arrive at a prima facie finding as to whether by virtue of the resolutions adopted on 30th September, 2002, Hotel Queen Road had shed its private character and had been converted into a public company with all its consequences.

35. From the materials on record, we are prima facie of the view that by the said resolutions, a final decision had been taken by Hotel Queen Road to convert itself into a public company with immediate effect without having to wait for any decision to be rendered by the Registrar of

Companies who, in any event, had no authority to make any decision in that regard. The very fact that Form 23 was filed along with the resolutions dated 30th September, 2002, coupled with the fact that a Statement in lieu of Prospectus, which is required to be filed by a private company when it converts itself into a public company, was filed on behalf of Hotel Queen Road, is sufficient for the purpose of arriving at a prima facie conclusion that Hotel Queen Road had altered its status and had become a public company even though the necessary alterations had not been effected in the records of the Registrar of Companies. We are unable to agree with the contention canvassed on behalf of Hotel Queen Road that till such time as the records of the Registrar of Companies were not altered to show that Hotel Queen Road had become a public company, it could not be treated as such. It is not the records of the Registrar of Companies which determines the status of a company but whether it falls within the definition of a “private company” or “public company” as defined in Section 3(1)(iii) and 3(1)(iv) of the Companies Act. On the other hand, the records of the Registrar of Companies reflect the status of the Company as per the information received from the company in accordance with the provisions of the aforesaid Act. 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. Since in the instant case shares were said to have been allotted to 134 persons on 30th September, 2002, on which date the resolutions were passed by Hotel Queen Road Pvt. Ltd., the company lost its private character requiring the subsequent resolutions to be passed regarding alteration of the share capital.

36. Whichever way we look at the three resolutions passed one after the other on 30th September, 2002, it appears to have been the intention of the company to convert itself from a private company to a public company and that the same was effected by the three resolutions passed on 30th September, 2002.

37. Then again, the offer to pay dividends from a private source and not out of the company’s profits, is not contemplated under Section 205 of the Companies Act. The decision referred to by Mr. Sorabjee in the Walters’ Deed of Guarantee in Walters’ “Palm” Tofee, Limited’s case (supra) had not been required to take into consideration a provision similar to Section 205 of the Companies Act, 1956. The said decision is, therefore, of no help to the petitioners’ case, particularly when the language of the Section is clear and unambiguous. The moment the resolutions were passed by the company on 30th September, 2002, the provisions of the Companies Act became applicable and by operation of law, Hotel Queen Road simultaneously ceased to be a private limited company and under the conditions prescribed in the Act, Hillcrest Realty acquired voting rights in the meetings of the company by operation of Section 87(2)(b) and Section 44 of the said Act. The right of a preference shareholder to acquire voting rights is also indicated in clear and unambiguous terms in the Explanation to Section 87(2)(b).

38. Since the question as to whether Hotel Queen Road ceased to be a private company upon the resolutions being passed on 30th September, 2002, is the crucial issue for decision in both the two suits referred to herein above, it would not be proper for this Court to delve into the question further. However, for the purpose of disposing of these Special Leave Petitions, we are prima facie of the view that by virtue of the resolutions dated 30th September, 2002, Hotel Queen Road had become a public company thereby attracting the provisions of Section 87(2)(b) of the Companies Act, 1956, upon the bar under Section 90(2) thereof having been lifted. A natural consequence is that in the event dividend had not been declared or paid for a period of two years as far as Hillcrest is concerned, the Explanation to Section 87(2)(b) would come into play thereby giving Hillcrest Realty, as a cumulative preference shareholder, the right to vote on every resolution placed before the Company, at any meeting, in keeping with Clause (i) of Section 87(2)(b) of the aforesaid Act.