Case Law Companies Act Needle Industries India Ltd And Orsvs Needle Industries Newey India Holding Ltd. And Ors

Case Law Companies Act

Needle Industries India Ltd And Orsvs

Needle Industries Newey India Holding Ltd. And Ors

 

DATE OF JUDGMENT-07/05/1981

 

BENCH: CHANDRACHUD, Y.V. ((CJ)

BENCH: CHANDRACHUD, Y.V. ((CJ) BHAGWATI, P.N. VENKATARAMIAH, E.S. (J)

 

CITATION: 1981 AIR 1298 1981 SCR  (3) 698 1981 SCC  (3) 333

CITATOR INFO : MV 1983 SC  75  (61)

 

ACT: Companies Act  1956, Ss.3(1)(iii), 43A,45, 81, 299(1), 397(1), 397  and 398  and Foreign  Exchange  Regulation  Act 1973, Ss. 29(1), (2) and 4(a)-Scope and effect of. Private company  becoming a  public company  by  S.43A- Reserve Bank  directive that  holding of the foreign company should be  reduced-Reduction effected by issue of new rights shares-Such shares  to be offered to all shareholders Indian as well  as the  holding company-Shares  however allotted to only  Indian   shareholders-Notice  of   meeting  at   which allotment made not properly given to holding company-Holding company whether  could renounce  the offer  in favour of the person of its choice-Allotment to Indian shareholder-Whether amounts to oppression. `Directly or  indirectly, concerned  in the contract or arrangement’-Effect  of-Relationship  of  friendliness  with Director-Lawyer-client  relationship  with  Director-Whether will disqualify a person from acting as Director. Public company-Private  company-What  are-When  does  a private  company   become  a   public  company-No  exception provided in  S.45 in  favour of S.43A proviso companies-Need for legislative amendment. Practice and  Procedure  Allegation  of  a  mala  fide- Examination of-Whether can be on the basis of affidavits and correspondence only.

HEADNOTE: M/s.  Needle   Industries (India)   Ltd.  (NIIL),  the appellant was  incorporated under  the Indian  Companies Act 1913 as  a Private  Company on 20.7.1949 with its Registered office at Madras and at the time of its incorporation it was a wholly owned subsidiary of Needle Industries (India) Ltd., Studley, England  (NI-Studley). In  1961, NI-Studley entered into an agreement with Newey Bros. Ltd., Birmingham, England (Newey) to invest in the Indian Company. In 1963, NI-Studley and Newey  combined to  form the  Holding Company in England M/s  Needle   Industries-Newey  (India)  Holding  Ltd.,  the respondent. The  entire share  capital of  NIIL held  by  NI Studley and  Newey was transferred to the Holding Company in which NI-Studley and Newey became equal shares. 699 As a  result of  this arrangement,       the Holding Company came to  acquire 99.95  per cent  of the  issued and paid up capital of  NIIL. The  balance of 0.05 cent, which consisted of six shares being the original nominal shares, was held by Devagnanam the managing director of NIIL. By virtue of the  introduction of  section 43A  in the Companies Act  in 1961,  NIIL became a public company, since not less  than twenty-five  per cent  of its  paid-up  share capital was  held by  a body corporate, the Holding Company.

However, under the first proviso to section 43(1) it had the option to  retain its articles relating to matters specified in section 3(1)(iii) of the Companies Act. NIIL did  not alter  the  relevant provisions  of  its articles after  its  became  a  public  company  within  the meaning of  section 43A.  By 1971  about 40  per cent of the share capital  of  NIIL  came  to  be  held  by  the  Indian employees of the company and their relatives and the balance of about  60 per  cent remained  in the hands of the Holding Company NINIH Ltd. In 1972 Coats Paton Ltd. became an almost 100% owner of NI-Studley. The  position at  the beginning of the year 1973 was that  60% (to  be exact  59.3%) of  the share capital of NIIL came  to be owned half and half by Coats and NEWEY, the remaining 40%  being in  the hands  of the  Indian Group  of which 28.5% was held by the Devagnanam’s group. Though NIIL  was at one time wholly owned by NI-Studley and later  by NI Studley and Newey, the affairs were managed ever since  1956  by  an  entirely  Indian  Management  with Devagnanam as its Chief Executive and Managing Director with effect from  the year  1961.

The Holding Company  which was formed in  1963 had  only one representative on the Board of Directors of  NIIL. He  was N.T. Sanders,  who  resided  in England and  hardly ever  attended the  Board Meetings.  The holding company  reposed  great  confidence  in  the  Indian management which  was under  the direction  and  control  of Devagnanam In July  1972 Mr.Devagnanam was offered by the office of Managing Director of group of four companies in Hong Kong and Taiwan  and his  family began to reside in Hong Kong and he cogitated  over resigning  from  his  position  in  NIIL. Coats, on  their part  were  clear  that  Devagnanam  should relinquish his responsibilities in NIIL. in view of the time his role in Newey’s Far Eastern interests was consuming. The Foreign  Exchange Regulation  Act 1973,  came       into force on  Junuary 1, 1974. S.29(1) prohibited non-residents, non-citizens  and  non-banking  companies  not  incorporated under any  Indian law  or in which the non-resident interest was more  than 40 per cent, from carrying on any activity in India of  a trading,  commercial or Industrial nature except with the  general or  special permission of the Reserve Bank of India.  By section 29(2)(a) if such person was engaged in any such  activity at  the commencement of the Act, he or it had to apply to the Reserve Bank of India, for permission to carry  on   that  activity,   within  six   months  of   the commencement of  the Act  or such further period the Reserve Bank may  allow. S. 29 (4) (a) imposed a similar restriction on such  person or  company from holding shares in India, of any company  referred to cause (b) of section 29(1), without the permission of the Reserve Bank.

The 700 time for making the application for the requisite permission under section  29 was  extended by  the Reserve  Bank  until August 31, 1974. Since the       Holding Company  was a  non-resident and its interest in  NIIL exceeded  40% NIIL  had to  apply for  the permission of  the Reserve  Bank under  S. 29  (1) FERA  for continuing to carry on its business. The Holding Company had also to  apply for  the permission of the Reserve Bank under S. 29  (4) (a)  FERA for  continuing to  hold its  shares in NIIL. NIIL applied  to the  Reserve Bank for  the  necessary permission on September 3, 1974. By its letter dated May 11, 1976 the  Reserve Bank  condoned the  delay and  allowed the application and  imposed conditions  on NIIL  that  it  must bring down  the non-resident interest from 60% to 40% within one year  of the  receipt of its letter. The Holding Company applied to  the Reserve  Bank for  a Holding  Licence  under section 29  (4) (a)  of FERA,  on September  18, 1974; which application was  late by  18 days and was still pending with the Reserve Bank Devagnanam who  was residing  in Hong  Kong obtained  a holding licence dated March 5, 1975 from the Reserve Bank in respect of his shares in NIIL. On receipt of the  letter of  the Reserve  Bank  dated March 11,1976  NIIL’s secretary sent a reply on May 18, 1976 to  the  Bank  confirming  the  acceptance  of  the  various conditions under  which permission  was granted  to NIIL  to continue its  business. On  August  11,  1976  the  term  of Devagnanam’s appointment  as the  Managing Director  of NIIL came to  an end  but in the meeting dated October 1, 1976 of NIIL’s Board  of Directors his appointment was renewed for a further period  of 5 years.

 

On October 20th and 21st, 1976 a meeting took  place between  the U.K.  shareholders and  the Indian shareholders  of NIIL.  But the  meeting ended  in  a stalemate because  whereas  the  Holding  Company  wanted  a substantial part  of the  share capital held by it in excess of 40  per cent  to be transferred to Madura Coats an Indian company  in   which  the  Holding  Company  had  substantial interest as  an Indian shareholder. Devagnanam insisted that the existing Indian shareholders of NIIL alone had the right under its  Articles of  Association to  take up  the  shares which the  Holding Company  was no  longer in  a position to hold because  of the  directives issued  by the Reserve Bank pursuant to FERA. As negotiations  were going  on between  the  competing groups regarding the Indianisation of NIIL, on April 4, 1977 NIIL received  a reminder  letter dated  March 30, 1977 from the Reserve  Bank which pointed out that the company had not submitted any  concrete proposal  for reduction  of the non- resident interest  and asked  it to  submit its  proposal in that behalf  without any  further delay  and that failure to comply with  the directive  regarding  dilution  of  foreign equity  within   the  stipulated   period  would  be  viewed seriously. A meeting       of NIIL’s  Board of  Directors was  held  on April 6, 1977. All the directors were present in the meeting with Devagnanam  in the  chair at  the commencement  of  the proceedings. Mr. C. Doraiswamy, solicitor-partner of 701 King and  Partridge was  one of the directors present at the meeting. He had no interest in the proposal of Indianisation which the  meeting was  to discuss. In order to complete the quorum of  two independent  directors, the  other  directors apart from C. Doraiswamy being interested in the business of the meeting,  Silverston an  ex-partner of Doraiswamy’s firm of solicitors,  was appointed  to the board as an additional director under  article 97  of the  Articles of Association. Silverston chaired  the meeting  after  his  appointment  as additional director.

 

The meeting resolved that the issued capital of NIIL be increased by  a new issue of 16,000 equity shares of Rs. 100 each  to  be  offered  as  rights  shares  to  the  existing shareholders in  proportion to  the shares held by them. The offer was  to be  made by  a notice specifying the number of shares which  each shareholder  was entitled  to and in case the offer  was not  accepted within 16 days from the date on which it  was made it was to be deemed to have been declined by the concerned shareholder. In pursuance  to the  aforesaid resolution a letter of offer dated  April  14,  1977  was  prepared.  The  envelope containing Devagnanam’s  explanatory letter  dated April  12 (without the  copy of  the letter  of the Reserve Bank dated March 30,  1977) and the letter of offer dated April 14 were received by  the Holding  Company  on  May  2,  1977  in  an envelope bearing  the Indian  postal mark of April 27, 1977. The letter  of offer  which was  sent to  one of  the Indian shareholders, Manoharan was posted in an envelope which also bore the  postal mark of 27th April. The next meeting of the Board was due to be held on May 2, 1977. The Holding Company was thus  denied  an  opportunity  to  exercise  its  option whether or not to accept the offer of right shares, assuming that any such option was open to it. The meeting  of the  Board of Directors was held an May 2, 1977 as scheduled and in the meeting the whole of the new issue consisting  of 16,000 rights share was allotted to the Indian  shareholders  including  members  of  the  Manoharan group.

 

Out of these the Devagnanam group was allotted 11,734 shares. After  marking the  allotment of shares a letter was sent to  the Reserve  Bank by NIIL reporting compliance with the requirements  of F.E.R.A.  by the issue of 16,000 rights shares and  the allotment thereof to the Indian shareholders which resulted  in the  reduction of  the foreign holding to approximately  40%   and  increased   that  of   the  Indian shareholders to almost 60%. The Holding  Company filed a company  petition in  the High Court under section 397 and 398 of the Indian Companies Act, 1956  alleging that  the Indian  Directors abused their fiduciary position in the Company by deciding in the meeting of April  6 to  issue  the  rights  shares  at  par  and  by allotting them exclusively to the Indian shareholders in the meeting of  2nd May, 1977. In doing so, they acted mala fide and in order to gain an illegal advantage for themselves. By deciding to issue the rights shares at par, they conferred a tremendous  and   illegitimate  advantage   on  the   Indian shareholders. Devagnanam delayed deliberately the intimation of the  proceedings of the 6th April to the Holding Company. By that means and by the late giving of the notice of the 702 meeting of  the 2nd  May, the  Devagnanam group  presented a fait uccompli  to the Holding Company in order to prevent it from exercising its lawful rights.

 

The conduct of the Indian directors lacked  in probity  and  fair  dealing  which  the Holding Company was entitled to expect. The  acting   Chief  Justice   who       tried  the  Company Petition, found  several  defects  and  infirmities  in  the Board’s meeting dated May 2, 1977 and being of the view that the average  market value of the rights shares was about Rs. 190 per share on the crucial date and that, since the rights shares were  issued at par, the Holding Company was deprived unjustly of  a sum  Rs. 8,54,550  at the  rate of Rs. 90 per share on  the 9,495  rights shares to which it was entitled. Exercising the  power under section 398 (2) of the Companies Act, the  learned Judge directed NIIL to make good that loss which, could  have been avoided by adopting a fairer process of  communication   with  the   Holding   Company   and   ‘a consequential dialogue’ with them in the matter of the issue of rights shares at a premium. The Holding  Company being       aggrieved by  the aforesaid judgment filed  an appeal and NIIL filed cross-objections to the decree.  The appeal  and cross  objections  were  argued before the  Division Bench of the High Court on the basis of affidavits, the  correspondence that  had passed between the parties and  certain additional  documents which  were filed before the  Appellate Court.  The Division  Bench  concluded that the  affairs of  NIIL were  being conducted in a manner oppressive, that is to say burdensome, harsh and wrongful to the Holding  Company and  held that  since the action of the Board of  Directors of NIIL was taken merely for the purpose of welding  the Company  into Newey’s Far Eastern complex it was just  and equitable  to wind up the Company. With regard to the  cross-objections, the  Division Bench  held that the injuries suffered  by  the  Holding  Company  could  not  be remedied by  the award  of compensation  and, therefore, the action of  the Board  of Directors  in  issuing  the  rights shares had  to be quashed. It accordingly allowed the appeal filed by  the  Holding  Company  and  dismissed  the  cross- objections of  the appellant  and directed that the Board of Directors be  suspended and  an interim  Board consisting of nine  directors   proposed  by   the  Holding   Company   be constituted and  that the  rights issue  made on  6th April, 1977 and  the allotment  of shares  made on 2nd May, 1977 at the Board  Meeting be  set aside  and the  Interim Board  be directed to make a fresh issue of shares at a premium to the existing shareholders  including the  Holding Company  which was to have a right of renunciation. In the  appeals to this Court, on the question whether the decisions  taken  at  the  meetings  of  the  Boards  of Directors of NIIL on April 6 and May 2, 1977 constitute acts of oppression  within the meaning of S. 397 of the Companies Act 1956. Allowing the appeals

 HELD:  1. The  charge  of  oppression  rejected  after applying to  the conduct  of Devagnanam  and his  group  the standard of  probity and  fairplay,  which  is  expected  of partners in  a business  venture. Not only is the law on his side, but  his conduct cannot be characterised as lacking in probity, considering  the extremely rigid attitude by Coats. He was driven into a tight corner from which the only escape was to allow the law to have its full play. [824 B-C; G-H] 703 2. Even  though the  company  petition  falls  and the appeals succeed  on the finding that the Holding Company has failed to  make out  a case  of oppression, the court is not powerless to  do substantial justice between the parties and place them,  as nearly  as it  may, in  the same position in which they  would have  been, if the meeting of 2nd May were held in accordance with law. [824 H-825 A] 3. The  willingness of the Indian shareholders to pay a premium on  the excess  holding or  the rights  shares is  a factor which,  to some  extent, has  gone in their favour on the question  of oppression.  Having had the benefit of that stance, they must now make it good. Besides, it is only meet and just  that the  Indian shareholders, who took the rights shares at  par when the value of those shares was much above par, should  be asked  to pay  the difference  in  order  to nullify their  unjust and  unjustifiable enrichment  at  the cost of the Holding Company. The Indian shareholders are not asked to  pay the premium as a price of oppression. The plea of oppression  having been rejected the course being adopted is intended primarily to set right the course of justice. [825 F-G] 4. Devagnanam,  his group  and the  other Indian share- holders who  took the  rights shares  offered to the Holding Company shall  pay, pro rata, the sum of Rs. 8,54,550 to the Holding Company.  The amount  shall be  paid by  them to the holding company  from their own funds and not from the funds or assets of NIIL. [827 A-B]

 

5. As  a  further measure  of  neutralisation  of  the benefit  which  the  Indian  shareholders  received  in  the meeting of  2nd May,  1977, it  is directed  that the 16,000 rights shares  which were  allotted in  that meeting  to the Indian shareholders  will be  treated as  not qualifying for the payment  of dividend for a period of one year commencing from January  1, 1977  the Company’s year being the Calendar year. The  interim dividend or any further dividend received by the  Indian shareholders  on the 16,000 rights shares for the year ending December 31, 1977 shall be repaid by them to NIIL, which  shall distribute  the same  as if the issue and allotment of  the rights  shares was  not made  until  after December 31,  1977. This  direction will  not be  deemed  to affect or  ever to  have affected  the exercise of any other rights by  the Indian  shareholders in respect of the 16,000 rights shares allotted to them. [827 B-D] 6. In  order to  ensure the  smooth functioning of NIIL and with a view to ensuring that the directions are complied with expeditiously,  it is directed that Shri M.M. Sabharwal who was appointed as a Director and Chairman of the Board of Directors under  the orders  of this Court dated November 6, 1978 will  continue to  function as  such until December 31, 1982. [827 F] 7. The  Company will take all effective steps to obtain the sanction  or permission  of the Reserve Bank of India or the Controller  of Capital Issues, as the case may be, if it is necessary  to obtain  such  sanction  or  permission  for giving effect to the directions.

 

[827 G] 8. Devagnanam and his group acted in the best interests of NIIL,  in the  matter of  the issue  of rights shares and indeed, the  Board of  Directors followed  in the meeting of the 6th April a course which they had no option but to adopt and in  doing  which,  they  were  solely  actuated  by  the consideration as to what 704 was  in   the  interest  of  the  company.  The  shareholder Directors who  were interested in the issue of rights shares neither participated  in the discussion of that question nor voted upon  it. The two Directors who, forming the requisite quorum, received  upon  the  issue  of  rights  shares  were Silverston who,  was a disinterested Director and Doraiswamy who, unquestionably, was so. [792 A-C] 9. Disinvestment  by the Holding Company, as one of the two courses  which could  be adopted  for reducing  the non- resident interest in NIIL to 40% stood ruled out, on account of the  rigid attitude  of  Coats  who,  during  the  period between the  Ketty meeting  of October  20-21, 1976  and the Birmingham discussions  of March  29-31, 1977 clung to their self interest,  regardless of  the  pressure  of  FERA,  the directive of the Reserve Bank of India and their transparent impact on the future of NIIL. [792 D-E] 10. Devagnanam  and the disinterested Directors, having acted  out   of  legal   compulsion  precipitated   by   the obstructive attitude  of Coats  and their action it being in the larger interest of the company, it is impossible to hold that the resolution passed in the meeting of April 6 for the issue of  rights shares  at par to the existing shareholders of NIIL constituted an act of oppression against the Holding Company. [792 E-F] 11. It  puts a  severe  strain  on       ones  credulity  to believe that  the letters  of offer  dated April  14 to  the Holding Company,  to Raeburn and to Manoharan were posted on the 14th  itself but  that somehow  they rotted  in the post office  until   the  27th   on  which  date  they  took  off simultaneously for their respective destinations. [793 E]

 

12. The purpose behind the planned delay in posting the letters of  offer to Raeburn and to the Holding Company, and in posting  the notice  of the  Board’s meeting for May 2 to Sanders, was palpably to ensure that no legal proceeding was taken to  injunct the  holding of the meeting. The object of withholding these  important documents,  until it  was quite late to act upon them, was to present to the Holding Company a fait  accompli in  the shape  of the  Board’s decision for allotment  of   rights  shares   to  the   existing   Indian shareholders. [794 C-E] 13. In so far as Devagnanam himself is concerned, there is room enough to suspect that he was the part-author of the late postings  of important  documents, especially  since he was the prime actor in the play of NILL’s Indianisation. But even in  regard to  him, it  is difficult  to carry the case beyond the  realm of  suspicion and ‘room enough’ is not the same thing as ‘reason enough’. [795 B-C] 13A. With       regard to  the impact on the legality of the offer and the validity of the meeting of May 2, (i) It is quite clear from the circumstances that the rights shares offered to the Holding Company could not have been allotted to anyone in the meeting of May 2,  for the  supposed failure  of the  Holding Company to communicate its acceptance before April 30. The  meeting of  May  2, of  which  the  main purpose was  to consider ‘Allotment’ of the rights shares must,therefore, be  held to  be abortive, [796 H-797 A] 705 (ii) The utter  inadequacy of  the notice to Sanders in terms of  time stares in the  face and  needs  no further argument  to justify    the finding that the holding of the meeting was illegal, at least in so far as  the Holding  Company is  concerned. It  is self-evident that  Sanders could not possibly have attended the    meeting.

 

There  is, therefore,  no alternative save  to hold  that the decision taken in the  meeting of  May 2  cannot, in    the  normal circumstances, affect    the  legal  rights  of  the Holding Company  or create  any legal    obligations against it. [797 D-E] 13B. The  dilution of  the non-resident interest in the equity capital  of the  Company to a level not exceeding 40% “within a  period of  1 (one)  year from the date of receipt of” the  letter was  of the  very essence of the matter. The sanction for  enforcement of  a  conditional  permission  to carry on  business, where  conditions are  breached, is  the cessation, ipso  facto, of the permission itself on the non- performance of  the conditions  at  the  time  appointed  or agreed. When  NIIL wrote  to the  Bank on  February 4,  1976 binding itself  to the performance of certain conditions, it could not be heard to say that the permission will remain in force despite  its non-performance of the conditions. Having regard to  the provisions  of section  29 read with sections 49, 56(1) and (3) and section 68 of FERA, the continuance of business after May 17, 1977 by NIIL would have been illegal, unless the  condition of dilution of non-resident equity was duly complied with. [799 B; F-H] 14. By  reason of the provisions  of section 29(1) and (2) of  FERA and  the conditional  permission granted by the RBI by  its letter  dated May  11, 1976  the offer of rights shares made  by  NIIL  to  the  Holding  Company  could  not possibly have been accepted by it. [800 B] The acceptance  of the  offer of  rights shares  by the Holding Company  would have  resulted in  a violation of the provisions of FERA and the directive of the Reserve Bank. No grievance can  be made  by the Holding Company that since it did not  receive the  offer in  time, it  was deprived of an opportunity to accept it. [800 D-G] 14A.

 

An  offer of       shares  undoubtedly  creates  “fresh rights” but,  the right which it creates is either to accept the offer or to renounce it; it does not create any interest in the shares in respect of which the offer is made. [801 B] Mathalone v. Bombay Life  Assurance Co. [1954] SCR 117 referred to. 15(i) Before  granting relief  in an  application under section 210  of the  English Companies  Act as under section 397 of  the Indian  Companies Act  the Court  has to satisfy itself that  to wind  up the company will unfairly prejudice the members  complaining of  oppression, but  that otherwise the facts  will justify  the making of a winding up order on the ground  that it  is just  and equitable that the company should be  wound up. The fact that the company is prosperous and makes  substantial profits  is no  obstacle to its being wound up if it is just and equitable to do so. [744 A-B; 775 G] Scottish Co-op.  Wholesale Society Ltd. v. Meyer [1959] A.C. 324,  Re Associated  Tool Industries  Ltd. [1964] Argus Law Reports, 75, Ebrahimi v. Westbourne 706 Galleries LTd.  [1973] A.  C. 360 (H.L.), Blissett v. Daniel [68] E.R.  1024. Re  Yenidge Tobacco  Co. [1916] 2 Ch. 426 & Loch v. John Blackwood [1924] A.C. 783 referred to.

 

(ii) On  a true construction of section 397, an unwise, inefficient  or  careless  conduct  of  a  Director  in  the performance of  his duties  cannot give  rise to a claim for relief  under   that  section.  The  person  complaining  of oppression must  show that he has been constrained to submit to a conduct which lacks in probity, conduct which is unfair to him  and which causes prejudice to him in the exercise of his legal and proprietary rights as a shareholder. [748 E-G] (iii) Technicalities  cannot be permitted to defeat the exercise of  the equitable jurisdiction conferred by section 397 of the Companies Act. Blissett v. Daniel 68 E.R. 1024 referred to. 16. An  isolated act  which is contrary to law, may not necessarily and by itself support the inference that the law was violated  with  a  mala  fide  intention  or  that  such violation was  burdensome, harsh  and wrongful. But a series of illegal  acts following  upon one  another  can,  in  the context, lead  justifiably to the conclusion that they are a part of  the same  transaction, of  which the  object is  to cause or commit the oppression of persons against whom those acts are directed. [746 G-747 A] 17. An  isolated order  passed  by  a  Judge  which  is contrary to law will not normally support the inference that he is biased, but a series of wrong or illegal orders to the prejudice of  a party  are generally  accepted as supporting the inference of a reasonable apprehension that the Judge is biased and that the party complaining of the orders will not get justice at his hands. [747 B-C] S.M. Ganpatram  v. Sayaji Jubilee Cotton and Jute Mills Co. [1964]  34 Company  Cases 830-31 & Elder v. Elder [1952] S.C. 49 referred to. 18. It  is generally unsatisfactory to record a finding involving grave  consequences to  a person  on the  basis of affidavits and  documents  without  asking  that  person  to submit to  cross-examination. Men may lie but documents will not and  often, documents  speak louder  than words.  But  a total  reliance  on  the  written  word,  when  probity  and fairness of conduct are in issue, involves the risk that the person accused  of wrongful conduct is denied an opportunity to  controvert   the  inferences  said  to  arise  from  the documents. [754 E-G] Re Smith and Fowcett Ltd. [1942} 1 All ER 542, 545; Nana Lal Zaver v. Bombay Life Assurance [1950] SCR 390, 394 Piercy v. Mills [1920]

 

(1) Chancery  77, Hogg v. Cramphorn, [1967] 1, Chancery 254,  260;  Mills  v.  Mills  [60]  CLR  150,  160, Harlowe’s Hominees  [121] CLR  483, 485  & Howard  Smith  v. Amphol [1974] A.C. 821, 831 Punt v. Symons [1903] 2 Ch. 506; Franzer v. Whalley 71 E.R. 361 referred to. In the instant case the High Court was right in holding that, having taken up a particular attitude, it was not open to Devagnanam and his group to con- 707 end that the allegation of mala fides could not be examined, on the  basis of  affidavits and  the  correspondence  only. There is  ample material  on  the  record  in  the  form  of affidavits correspondence  and other documents, on the basis of which  proper and  necessary inferences  can  safely  and legitimately be drawn. [755B-C] These documents  and many more documents were placed on the record  mostly  by  consent  of  parties,  as  the  case progressed from  stage to stage. That shows that the parties adopted willingly  a mode  of trial  which they  found to be most convenient and satisfactory. [756 A-B] 19.

 

When  the dominant motivation is to acquire control of a  company, the  sparring groups  of shareholders  try to grab the  maximum benefit  for themselves. If one decides to stay on  in such a company, one must capture its control. If one decides  to quit,  one must  obtain the  best price  for one’s holding,  under and  over the  table, partly in rupees and partly  in foreign  exchange. Then, the tax laws and the foreign exchange regulations look on helplessly, because law cannot operate  in a vacuum and it is notorious that in such cases evidence is not easy to obtain. [761 G-H; 762A] 20. It is difficult to hold that by the issue of rights shares the  Directors of  NIIL interfered in any manner with the legal  rights of  the  majority.  The  majority  had  to disinvest or else to submit to the issue of rights shares in order to  comply with the statutory requirements of FERA and the  Reserve   Bank’s  directives.   Having  chosen  not  to disinvest, an  option which  was open  to them, they did not any longer  possess the  legal rights  to  insist  that  the Directors shall  not  issue  the  rights  shares.  What  the Directors did  was clearly  in the  larger interests  of the Company and  in obedience  to their  duty to comply with the law of  the land.  The fact that while discharging that duty they  incidentally   trenched  upon  the  interests  of  the majority cannot  invalidate their  action. The conversion of the existing  majority into  a minority was a consequence of what  the  Directors  were  obliged  lawfully  to  do.  Such conversion was not the motive force of their action. [782 A- E] Howard Smith  Ltd. v.  Ampol Petroleum Ltd. [1974] A.C. 821, 874,  Punt v.  Symons [1903]  2 Ch.  506  &  Fraser  v. Whalley [71]

 

E.R. 361 Piercy v. Mills [1920] 1 Ch. 77, Hogg v. Cramphorn [1967] 1 Ch. 254, 260 referred to 21.  (i)  The Directors  have exercised  their power for the purpose of  preventing the  affairs of the company from    being   brought  to   a  grinding   halt,  a consumption devoutly    wished for  by Coats  in the interest of  their extensive    world-wide business. [784 C] (ii) The mere  circumstance that  the Directors  derive benefit as shareholders by reasons of the exercise of their fiduciary power to issue shares, will not vitiate the exercise of that power. [785 E] (iii) The test is whether the issue of shares is simply or solely for the benefit of the Directors. If the shares are issued in the larger interest of the 708 company that decision cannot be struck down on the ground that  it  has    incidentally  benefited  the Directors in their capacity as share holders, [786 C] In the  instant case  the Board  of Directors  did  not abuse its  fiduciary power  in deciding  upon the  issue  of rights shares. [786 D] Harlowe’s       Nominess   Pvt.  Ltd.   v.  Woodside  (Lakes Entrance) Oil  Company No.  Liability &  Anr. (121) CLR 483, 485, Trek Corporation Ltd. v. Miller et al (33) DLR 3d. 288; Nanalal Zaver  & Anr.  v. Bombay  Life  Assurance  Co.  Ltd. [1950] SCR  390, 419-429;  Hirsche v.  Sims [1894] A.C. 654, 660-661; Gower in Principles of Modern Company Law, 4th Edn. 578 referred to. 22. Under       section 287  (2) of  the Companies Act, 1956 the quorum for the meeting of the Board of Director was two. There can be no doubt that a quorum of two directors means a quorum of  two directors  who are  competent to transact and vote on the business before the Board. [786 E] 23.  (i)  It is  wrong to  attribute any  bias to Silverston for having  acted as    an  adviser  to  the  Indian shareholders in  the Ketty  meeting. Silverston is by profession    a solicitor  and legal  advisers do not  necessarily   have  a   biased  attitude     to questions on    which  their  advice  is  sought  or tendered. Silverston’s  alleged personal hostility to Coats cannot, within the meaning of section 300 (1)  of   the    Companies   Act,  make  him  person “directly or    indirectly, concerned  or interested in the  contract or arrangement” in the discussion of which  he had  to participate  or upon which he had to vote. [787 E-G]

 

(ii) The concern  or interest of the Director which has to be    disclosed at  the Board  meeting must be in relation to  the contract entered or to be entered into by  or on behalf of the company. The interest or concern  spoken of    by sections 299 (1) and 300 (1) cannot  be a  merely sentimental    interest  or ideological concern.    Therefore, a relationship of friendliness with the Directors who are interested in the  contract or  arrangement or  even the mere fact of  a lawyer-client  relationship  with    such directors will not disqualify a person from acting as a    Director on  the ground  of his being, under section  300     (1)   as   “interested”   Director. Howsoever one    may stretch the language of section 300 (1)  in the  interest  of    purity  of  company administration, it  is next to impossible to bring Silverston’s appointment  within the    framework of that provision. [788 A-C] The  argument   that  Silverston        was  an   interested Director, that  therefore his  appointment as  an Additional Director was  invalid and  that consequently  the resolution for the  issue of  rights  shares  was  passed  without  the necessary quorum  of  two  disinterested  Directors  has  no force. [788 D-E] 709 Firestone       Tyre   and  Rubber  Co.  v.  Synthetics  and Chemicals Ltd., [1971] 41 Company Case 377 distinguished. 24. Silverston’s  appointment as an Additional Director is not  open to challenge on the ground of want of agenda on that subject. Section 260 of the Companies Act preserves the power of  the  Board  of  Directors  to  appoint  additional Directors if  such a  power is conferred on the Board by the Articles of Association of the Company. Article 97 of NIIL’s Articles of  Association confers  the requisite power on the Board to  appoint  additional  Directors.  The  occasion  to appoint Silverston as an Additional Director arose only when the picture  emerged clearly  that the  Board would  have to consider the  only other  alternative for  reduction of  the non-resident holding, namely, the issue of rights shares. It is for  this reason  that the  subject of  appointment of an Additional Director  could not  have, in the state of facts, formed a part of the agenda. [788 F.G; 789 A- C] 25.

 

(i) The power to issue shares is given primarily to enable  capital to  be raised         when it  is required for  the purposes of the company but that power  is not  conditioned by such need. That power  can be  used for other reasons as for example  to create a sufficient number of shareholders  to          enable  the   company   to exercise statutory  powers or to enable it to comply with legal requirements. [789 D-E] Punt v. Symons and  Co., [1903]  2 Ch.  506; Hogg v. Cramphorn, [1967]  1 Ch. 254; Howard Smith v. Amphol, [1974] A.C. 821. (ii) The minutes  of the  Ketty meeting of October 20-21, 1976  saying that         it was  agreed that the   rights    issues,  with   the   Indian shareholders  taking  up         the  U.K.  members’ rights, would  be considered  provided it was demonstrated by NIIL that “there is a viable development plan         requiring  funds  that  the expected NIIL  cash flow cannot meet”, cannot also justify  the argument  that the power of the Company  to issue  rights shares  was, by agreement conditioned  by the  need to  raise additional capital  for a  development  plan. [790 H; 791 A] (iii) In  the instant case the rights shares were issued  in   order  to  comply  with   legal requirements   which    apart   from    being obligatory as  the only viable course open to the Directors,  was for the benefit  of  the company since,  otherwise, its  developmental activities would         have  stood  frozen  as  of December 31, 1973. The shares were not issued as a  part of  takeover war between the rival groups of shareholders. [790 B-C] 26. It  is not true to say, as a statement of law, that Directors have  no power  to issue  shares at  par, if their market price  is above  par. These  are primarily matters of policy for  the Directors to decide in the exercise of their discretion and  no hard  and fast  rule can  be laid down to fetter that discretion. Such discretionary powers in company administration are  in the  nature of  fiduciary powers  and must be  exercised in faith. Mala fides vitiate the exercise of such discretion. [791 E & G] Hilder and       Others  v.  Dexter  [1902]  A.C.  474,  480 referred to. 27.

 

The  definition of ‘private company’ and the manner in which  a ‘public  company’ is  defined  (“public  company means a company which is not a private 710 company”) bear out the argument that these two categories of companies are  mutually exclusive. But it is not true to say that between them, they exhaust the universe of companies. A private company  which has become a public company by reason of S.  43A, may  continue to retain in its articles, matters which are  specified in  S. 3(1)(iii)  and the number of its members may  be or  may at any time be reduced below 7. [810 H; 811 A-B] (i)  A section  43A company may include in its articles as part  of its  structure, provisions relating to restrictions on  transfer of    shares, limiting the number of  its members  to 50,  and prohibiting an invitation to    the public to subscribe for shares, which are  typical characteristics  of  a  private company.  The     expression  ‘public   company’  in section 3(i)(iv)  cannot therefore be equated with a ‘private  company’ which  has  become  a  public company by virtue of section 43A. [811 D-E] (ii) A section  43A  company  can       still  maintain  its separate corporate indentity qua debts even if the number of  its members  is reduced below seven and is not liable to be wound up for that reason. [811 F] (iii) A  section 43A company can never be incorporated and registered as such under the Companies Act. It is registered as a private company and becomes, by operation of law, a public company. [811 G] (iv) The three contingencies in which a private company becomes a  public company by virtue of section 43A (mentioned in sub-sections (1), (1A) and (1B) read with the  provisions of  sub-section (4)  of    that section) show    that it becomes and continues to be a public company so long as the conditions in sub- sections (1),    (1A) or  (1B) are  applicable.  The provisos to  each of    these sections  clarify  the legislative intent  that such companies may retain their registered  corporate  shell  of  a  private company but  will be    subjected to  discipline  of public companies. When necessary conditions do not obtain, the  legislative device  in S.  43A is  to permit them  to go back into their corporate shell and function once again as private companies, with all the  privileges and  exemptions applicable  to private companies.

 

The proviso to each of the sub- sections of S. 43A clearly indicates that although the private company has become a public company by virtue of  that section, it is permitted to retain the structural  characteristics of its origin, its birthmark. [811 H-812 A-B] (v)  Section 43A  when introduced by Act 65 of 1960 did not adopt  the language either of section 43 or of section 44. Under section 43 where default is made in  complying     with  the  provisions  of  section 3(1)(iii) a  private company    shall  cease  to  be entitled  to     the   privileges   and   exemptions conferred on    private companies  by or  under this Act, and this Act shall apply to the company as if it were not a private company. Under section 44 of the  Act,  where  a  private    company  alters  its Articles  in    such  manner  that  they  no  longer include  the     provisions,  which   under  section 3(1)(iii) are    required  to  be  included  in  the Articles in  order  to  constitute  it  a  private company, the    company “shall as on the date of the alteration cease to be a private company”. Neither of the 711 expression, namely,  “This Act  shall apply to the company as  if it  were  not    a  private  company” (section 43)    nor that the company “shall… cease to be    a private  company (section  44) is used in section 43A.    If a section 43-A company were to be equated in  all respects  with a  public  company, that    is   a  company  which  does  not  have  the characteristics of  a private    company, Parliament would have  used language  similar to    the one  in section  43  or  section  44,    between  which  two sections,  section   43A  was     inserted.  If  the intention was    that the  rest of  the Act  was  to apply to  a section 43A company “as if it were not a private company”, nothing would have been easier than to adopt that language in section 43A; and if the intention was that a section 43A company would for all  purposes “cease to be a private company”, nothing would    have been easier than to adopt that language in section 43A. [812 E-H; 813 A] (vi) A private  company which  becomes a public company by virtue of section 43A is not required to file a prospectus or a statement in lieu of a prospectus. [813 C] After the       Amending Act 65 of 1960 these distinct types of companies  occupy a  distinct place  in the scheme of our Companies Act:  (1) private  companies (2)  public companies and (3) private companies which have become public companies by virtue  of section  43A, but which continue to include or retain the  three  characteristics  of  a  private  company. Private companies  enjoy certain  exemptions and  privileges which are  peculiar to their constitution and nature. Public companies are  subjected severely  to the  discipline of the Act.

 

 

Companies  of the  third kind  like NIIL,  which become public companies  but which  continue to  include  in  their articles the  three matters  mentioned in clauses (a) to (c) of  section  3(1)(iii)  are  also,  broadly  and  generally, subjected to the rigorous discipline of the Act. They cannot claim  the   privileges  and  exemptions  to  which  private companies which  are outside  section 43A  are entitled. And yet, there  are certain  provisions of  the Act  which would apply to  public companies but not to section 43A companies. [813 D; 814 A-C] There is no difficulty in giving full effect to clauses (a) and  (b) of  section 81(1) in the case of a company like NIIL, even  after it  becomes a public company under section 43A. Clause (a) requires that further shares must be offered to  the   holders  of   equity  shares  of  the  Company  in proportion, as nearly as circumstances admit, to the capital paid up  on these shares, while clause (b) requires that the offer further shares must be made by a notice specifying the number of  shares offered  and limiting  the time, not being less than  fifteen days  from the  date of the offer, within which the offer, if not accepted will be deemed to have been declined. [815 H; 816 A-B] The  provision   contained       in  clause  (c)  cannot  be construed in a manner which will lead to the negation of the option exercised  by the  company to  retain in its articles the three  matters referred  to in  section 3(1)(iii).  Both these are statutory provisions and they are contained in the same statute.  They must  be harmonised, unless the words of the statute  are so  plain and unambiguous and the policy of the statute  so  clear  that  to  harmonise  will  be  doing violence to  those words  and to  that policy. The policy of the statute if any- 712 thing, points  in  the  direction  that  the  integrity  and structure of  the section  43-A proviso companies should, as far as possible not be broken up. [817 E-F] Park v.  Royalty Syndicates  [1912] 1  K.B. 330  and Re Pool Shipping Co. Ltd. [1920] 1 Ch. 251 referred to. Palmer’s Company  Law 22nd.  Vol. I  para 12-18 Gower’s Company Law 4th End p. 351 referred to. 27. When  section 43A was introduced by Act 65 of 1960, the legislature  apparently overlooked  the need  to  exempt companies falling  under it,  read with  its first  proviso, from the  operation of  clause (c)  of sec.  81(1). That the legislature has  overlooked such  a need  in regard to other matters, in respect of which there can be no controversy, is clear from  the provisions  of sections 45 and 433(d) of the Companies Act.  Undar section  45, if at any time the number of members  of a company is reduced, in the case of a public company below  seven, or  in the  case of  a private company below two,  every member  of the  company becomes  severally liable, under  the stated  circumstances, for the payment of the whole  debt of  the company  and can  be severally  sued therefor. No  exception has yet been provided for in section 45 in  favour of the section 43A-proviso companies, with the result that  a private  company having,  say, three  members which  becomes  a  public  company  under  section  43A  and continues to  function with the same number of members, will attract the  rigour of  section 45.

Similarly, under section 433(d)  such   a  company   would  automatically  incur  the liability of being wound up for the same reason. [818 A-D] While construing  the opening words of section 81(1)(c) it has  to be  remembered that  section  43A  companies  are entitled under  the  proviso  to  that  section  to  include provision in their Articles relating to matters specified in section 3(1)(iii).  The right  of renunciation  in favour of any other person is wholly inconsistent with the Articles of a private  company. If  a private  company becomes  a public company by virtue of section 43A and retains or continues to include in  its Articles  matters  referred  to  in  section 3(1)(iii) it  is difficult  to say  that the Articles do not provide something  which is  otherwise than what is provided in clause  (c). The  right of  renunciation in favour of any other person  is of  the essence of clause (c). On the other hand, the  absence of  that right  is of  the essence of the structure of  a private company, It must follow, that in all cases in  which erstwhile  private companies  become  public companies by  virtue of  section 43A  and retain  their  old Articles, there  would of  necessity be a provision in their Articles which is otherwise than what is contained in clause (c). Considered  from this point of view, the argument as to whether the  word “provide”  in the  opening words of clause (c) means  “provide expressly”  loses its significance. [820 B-D] In the  context in       which a  private company  becomes a public company under section 43A and by reason of the option available to it under the proviso the word “provide” must be understood  to  mean  “provide  expressly  or  by  necessary implication”. The  necessary implication  of a provision has the same effect and relevance in law as an express provision has, unless  the relevance of what is necessarily implied is excluded by the use of clear words. [820 E-F] 713 The  right        of  renunciation   is  tentamount   to  an invitation to  the public to subscribe for the shares in the company and  can violate  the provision  in  regard  to  the limitation on  number of  members. Article  11, by reason of its clause  (iv) prevails  over the  provisions of all other Articles if  there is inconsistency between it and any other Article. [821 C] 28.

 

Clause (c) of  section 81(1)  of the Companies Act apart from  the consideration  arising out  of  the  opening words of  that clause,  can have  no application  to private companies which  have become  public companies  by virtue of section 43A  and which  retain in  their Articles  the three matters referred  to in  section 3(1)(iii) of the Act. In so far as the opening words of clause (c) are concerned they do not require  an express  provision in  the Articles  of  the Company which  otherwise than what is provided for in clause (c). It is enough, in order to comply with the opening words of clause  (c). that  the Articles of the Company contain by necessary implication  a provision  which is  otherwise than what is provided in clause (c). Articles 11 and 50 of NIIL’s Articles of  Association negate  the right  of renunciation. [821 D-F] 29. The right to renounce shares in favour of any other person, which  is conferred by clause (c) has no application to a  company like  NIIL and,  therefore, its members cannot claim the right to renounce shares offered to them in favour of any  other member  or members.  The Articles of a company may well  provide for  a right  of transfer of shares by one member to  another, but  that right  is very  much different from the  right of renunciation, properly so called. [821 G- H] Re Poal Shipping Co. Ltd. [1920] 1 Ch. 251 referred to. 30. A  change in  the pro  rata method  of offer of new shares is necessarily violative of the basic characteristics of a  private company  which becomes  a  public  company  by virtue of  section 43A. To this limited extent only, but not beyond it,  the provisions of sub-section (1A) of section 81 can apply to such companies. [822 F] 31.  The  following  propositions emerge  out  of  the discussions of  the provisions  of FERA, Sections 43A and 81 of the  Companies Act  and of the Articles of association of NIIL: (1)  The Holding  Company had  to part  with 20% out of the 60% equity capital held by it in NIIL; [822 H]

 

(2)The offer  of Rights shares made  to the  Holding Company as a result of the decision taken by Board of Directors in their  meeting of  April 6,  1977 could    not  have  been  accepted  by  the  Holding Company; [822 H; 823 A] (3)  The Holding  Company had  no right to renounce the Rights shares offered to it in favour of any other person, member or non-member; and [823 B] (4)  Since the  offer of  Rights Shares  could not have been either  accepted or  renounced by the Holding Company, the former for one reason and 714 the latter  for another,  the shares offered to it could,  under  article  50  of  the  articles  of association, be  disposed  of    by  the  directors, consistently     with    the   articles   of   NIIL, particularly article    11, in  such manner  as they thought most beneficial to the Company. [822 B-C] 32. These       propositions afford a complete answer to the respondents’  contention   that   what   truly   constitutes oppression of the Holding Company is not the issue of Rights Shares to  the existing  Indian shareholders  only  but  the offer of  Rights Shares to all existing shareholders and the issue thereof to existing Indian shareholders only. [823 D] 33. It  was neither  fair nor  proper on  the  part  of NIIL’s officers  not to  ensure the  timely posting  of  the notice of the meeting for 2nd May so as to enable Sanders to attend that  meeting. But  there the  matter rests.  Even if Sanders were  to attend the meeting, he could not have asked either that  the Holding  Company  should  be  allotted  the rights shares or alternatively, that it should be allowed to “renounce”  the  shares  in  favour  of  any  other  person, including the  Manoharan group.  The  charge  of  oppression arising out  of the  central accusation  of non-allotment of the rights  shares to  the Holding  Company must,  therefore fail. [823 H; 824 A-B]

 

 

JUDGMENT: CIVIL APPELLATE  JURISDICTION: Civil Appeals Nos. 2139, 2483 and 2484 of 1978. Appeals by Special Leave  from the  judgment and order dated the  6th October,  1978 of  the Madras  High Court  in O.S.A. No. 64 of 1978. F.S. Nariman, A.K. Sen, Dr. Y.S. Chitaley, S.N. Kackar, T. Dalip  Singh, K.J. John, Ravinder Narain, A.G. Menses and R. Narain for the Appellants. H.M. Seervai,  Anil B.  Divan, A.R. Wadia, S.N. Talwar, I.N. Shroff and H.S. Parihar for Respondent No. 1. D.N. Gupta       for Respondents  Nos. 2-7,  10- 12, 15, 16, 18-22, 26 and 28-33. The Judgment of the Court was delivered by CHANDRACHUD, C. J. These three appeals by special leave arise out  of a  judgment of  a Division  Bench of  the High Court of  Madras dated  October 6,  1978 allowing  an appeal against the  judgment of  a learned  Single Judge, dated May 17, 1978  in Company  Petition No.  39  of  1977.  The  main contending parties  in these  appeals are:  (i)  the  Needle Industries (India) Limited and (ii) the 715 Needle Industries-Newey (Indian Holdings) Limited. These two companies have  often been referred to in the proceedings as the Indian Company and the English Company respectively, but it would  be convenient  for us  to refer  to the  former as ‘NIIL’ and  to the  latter as  the  ‘Holding  Company’.  The Holding Company  has been  referred to  in  a  part  of  the proceedings as ‘NINIH’. In Civil  Appeal 2139  of 1978, which was argued as the main  appeal,  NIIL  is  appellant  No.  1  while  one  T.A. Devagnanam is  appellant No.  2.

 

The  latter  figures  very prominently in  these proceedings  and is  indeed one of the moving  spirits  of  this  acrimonious  litigation.  He  was appointed as  a Director of NIIL in 1956 and as its Managing Director in 1961. He is referred to in the correspondence as ‘TAD’ or  ‘Theo’ but we prefer to call him ‘Devagnanam’. The Holding Company  is Respondent  1 to  the main  appeal,  the other  respondents   being  some   of  the   Directors   and shareholders of  NIIL. Civil Appeal 2483 of 1978 is filed by some of  the shareholders of NIIL while Civil Appeal 2484 of 1978 is  filed by  some of  its directors  and officers. The Holding Company  is the  contesting respondent  to these two appeals. We  will deal with the main appeal and our judgment therein will dispose of all the three appeals. The NIIL  was incorporated       as a  Private Company under the Indian  Companies Act,  1913 on  July 20,  1949 with its Registered Office  at Madras.  Its factory  is  situated  at Ketty, Nilgiris.  At the time of its incorporation, NIIL was a wholly owned subsidiary of Needle Industries (India) Ltd., Studley,  England  (hereinafter  called  ‘NI-Studley’).  The authorised capital  of NIIL  was Rs.  50,00,000 divided into 50,000 equity shares of Rs. 100 each. Its issued and paid up capital prior  to 1961  was Rs.  6,75,600 divided into 6,756 equity shares  of Rs.  100 each.  The  issued  and  paid  up capital was  increased to  Rs. 11,09,000/-  in 1961. In that year, NI-Studley  entered into an agreement with NEWEY BROS. LIMITED, Birmingham,  England, (hereinafter  called  NEWEY), under which  NEWEY  agreed  to  participate  in  the  equity capital of  NIIL to the extent of Rs. 4,33,400/-, consisting of 4,334 equity shares of Rs. 100/- each. Thus, in 1961, the position of  the share  holding in  NIIL was that NI-Studley held approximately  60.85% of  the issued  capital and NEWEY held the  balance of  39.14%. In  1963, NIIL  increased  its share capital  by issuing  2,450 additional  shares  to  NI- Studley, as  a result  of which the latter became the holder of about 68% shares in NIIL, the rest of the 716 32% belonging  to NEWEY.

 

Later in the same year, NI-Studley and NEWEY combined to form the Holding Company, of which the full  official   name.  as  stated  earlier  is  the  Needle Industries-Newey (Indian  Holding) Ltd.  The Holding Company was incorporated  in the  United Kingdom  under the  English Companies  Act,   1948  with   its  Registered   Office   at Birmingham, England.  The entire share capital of NIIL, held by NI-Studley  and NEWEY,  was transferred  to  the  Holding Company in  which NI-Studley and NEWEY became equal sharers. As a result of this arrangement, the Holding Company came to acquire 99.95%  of the  issued and  paid up capital of NIIL. The balance  of 0.05%, which consisted of 6 shares being the original nominal shares, was held by Devagnanam. The NIIL,       it shall have been noticed, was incorporated about two  years after  India attained  independence.  As  a result of  an undertaking  given by  it to the Government of India at  the time  of its incorporation and pursuant to the subsequent directives  given  by  the  said  Government  for achieving Indianisation  of the  share  capital  of  foreign companies, three  issues of  shares were made by NIIL in the years 1968,  1969 and  1971, all  at par.  There was also an issue of  Bonus shares in 1971. As a result of these issues, about 40%  of the  share Capital  of NIIL came to be held by the Indian  employees of  the Company  and  their  relatives while the  balance of about 60% remained in the hands of the Holding Company.  In terms of the number of shares, by 1971- 72 the  Holding Company  owned 18, 990 shares and the Indian shareholders owned 13,010 shares. Out of the latter block of shares, Devagnanam and his relatives held 9,140 shares while the remaining  3,870 shares were held by other employees and their relatives,  amongst whom  were N.  Manoharan  and  his group who  held 900  shares and  D.P. Kingsley and his group who held  530 shares.  The total  share capital of NIIL thus came to consist of 32,000 equity shares of Rs. 100 each. In or about 1972, a company called Coats Paton Limited, Glasgow, U.K.  (hereinafter called ‘Coats’) became an almost 100% owner  of NI-Studley.

 

The position at the beginning of the year  1973 thus  was that 60% (to be exact 59.3%) of the share capital  of NIIL  came to  be owned  half and  half by Coats and NEWEY, the remaining 40% being in the hands of the Indian group.  The bulk of this 40% block of shares was held by Devagnanam’s  group, which  came to  about 28.5%  of  the total number of shares. 717 Though NIIL  was at one time wholly owned by NI-Studley and later, by NI-Studley and NEWEY, the affairs of NIIL were managed ever  since 1956  by an  entirely Indian management, with Devagnanam as its Chief Executive and Managing Director with effect  from the  year 1961.  The Holding Company which was formed in 1963, had only one representative on the Board of Directors  of NIIL.  He was  N.T. Sanders.  He resided in England and  hardly ever  attended the  Board meetings.  The Holding Company  reposed  great  confidence  in  the  Indian management which  was under  the direction  and  control  of Devagnanam. But the  acquisition of NI-Studley by Coats in 1972 and their consequent  entry in  NIIL created in its wake a sense of uneasy quiet between the Coats on one hand, which came to own half  of the  60% share  capital  held  by  the  Holding Company, that  is to  say, 30% of the total share capital of NIIL, and  the Devagnanam  group on  the other  hand,  which owned 28.5% of that share capital. By the mere size of their almost equal holding in NIIL, Coats and Devagnanam developed competing interests  in the  affairs of  NIIL. Coats were in the same  line of  business as NIIL, namely, manufacture and sale of  needles for various uses, fish-hooks etc., and they had established  trading centres  far and wide, all over the world. It is plain business, involving no moral turpitude as far as  business  ethics  go,  that  Coats  could  not  have welcomed competition  from NIIL  with their world interests. Devagnanam was  a man  of considerable ability and foresight and in  NIIL  he  saw  an  opportunity  of  controlling  and dominating as industrial enterprise of enormous potential in a rapidly growing market. The turnover of NIIL had increased from 2.80  lakhs in  1953 to  149.93 lakhs  in 1972  and the profits ran  as high  as 19.4%  of  the  turnover.  Implicit confidence in  the Indian  management which was the order of the day almost till 1974 gradually gave way to an atmosphere of suspicion  and distrust  between  Coats  and  Devagnanam. NEWEY apparently  kept away  from the differences which were gradually mounting  up between  the two but, evidently, they nursed a  preference  for  Devagnanam.  Coats  are  a  giant multinational organization.

 

NEWEY, comparatively, are small fish though,  they too  had their  own independent  business interests to protect and foster. NEWEY owned  a flourishing       business in  Malaysia, Hong Kong, Taiwan, Japan and Australia and from 1972 onwards they drew Devagnanam  increasingly into  the orbit  of their  Far Eastern 718 interests. In  July, 1972  he  was  offered  the  office  of Managing Director  of a group of four companies in Hong Kong and Taiwan on a five year contract, with an annual salary of six thousand  pounds. He  had already  been appointed to the Board of  the NEWEY joint venture company in Osaka and Japan and acted  as the  liaison Director for that company. He had also been  asked to  coordinate sales  with NEWEY  Brothers, Australia.    Willing     to    accept     these    manifold responsibilities,  Devagnanam  became  strenuously  involved therein. He and his wife began to reside in Hong Kong and he cogitated over  resigning from  his position in NIIL. Coats, on their  part, were clear that Devagnanam should relinquish his responsibilities  in NIIL,  in view of the time his role in NEWEY’s Far Eastern interests was consuming. The question of appointing  his successor  as Managing  Director in  NIIL then began  to be  discussed, the Holding Company wanting to have Manoharan  as  a  substitute.  Devagnanam  carried  the feeling that  he was  already persona  non grata with Coats, because of  certain incidents  which had  taken  place  some years ago. The Foreign  Exchange Regulation  Act, (‘FERA’),  46 of 1973, which  came into  force on January 1, 1974 provided to Coats and  Devagnanam a  legal matrix for fighting out their differences. The provisions of FERA, which was passed, inter alia, for  the conservation of foreign exchange resources of the country  and  the  proper  utilisation  thereof  in  the interests of  the economic  development of  the country  are stringent beyond  words. Putting  it  broadly  and  briefly, section 29 (1) of FERA prohibits non-residents, non-citizens and non-banking  companies not incorporated under any Indian Law or  in which the non-resident interest is more than 40%, from carrying  on  any  activity  in  India  of  a  trading, commercial or  industrial nature  except with the general or special permission  of the Reserve Bank of India. By section 29 (2)  (a),

if  such a  person or company is engaged in any such activity  at the  commencement of the Act, he or it has to apply  to the  Reserve Bank  of India,  for permission to carry  on   that  activity,   within  six   months  of   the commencement of  the Act  or  such  further  period  as  the Reserve Bank  may allow. Since the Holding Company is a non- resident and  its interest in NIIL exceeded 40%, NIIL had to apply for  the permission of the Reserve Bank for continuing to carry  on its  business. Section  29 (4)  (a)  imposes  a similar restriction  on such  person or company from holding shares in  India of any company referred to in clause (b) of section 29  (1), without the permission of the Reserve Bank. Therefore, the  Holding Company  also had  to apply  for the permission of 719 the Reserve  Bank for continuing to hold its shares in NIIL. The time for making application for the requisite permission under section  29 was  extended by  the Reserve  Bank by two months generally, that is to say, until August 31, 1974. The need to  comply with the provisions of section 29 of FERA is the pivot round which the whole case revolves. NIIL applied  to the  Reserve Bank for  the  necessary permission  through   its  Director   and  Secretary,

 

D.P. Kingsley, on  September 3,  1974 By its letter dated May 11, 1976, the  Reserve Bank  allowed that application on certain conditions. NIIL’s  application was  late by  three days but the delay  was evidently  ignored or  condoned. One  of  the conditions imposed  by the  Reserve Bank on NIIL was that it must bring  down the  non-resident interest  from 60% to 40% within one  year of  the receipt  of its letter. That letter having been  received by NIIL on May 17, 1976, the dead-line for reducing  the non-resident  interest to  40% was May 17, 1977. The Holding  Company applied  to the Reserve Bank for a ‘Holding  Licence’   under  section  29(4)(a)  of  FERA,  on September 18,  1974. That  application which  was late by 18 days is,  we are  informed, still  pending with  the Reserve Bank. Perhaps, it will be disposed of after the non-resident interest in  NIIL is  reduced to  40% in terms of section 29 (1) of FERA. Devagnanam was  residing in  Hong Kong  to       fulfil  his commitment to  NEWEY’s far-eastern  business interests. FERA had its  implications for him too, especially since he could be regarded  as a  nonresident and  did consider  himself as such. He obtained a holding licence dated March 4, 1975 from the Reserve  Bank in respect of his shares in NIIL. But, his interest in the affairs of NIIL began to flag for one reason or another  and he  started looking  out for a purchaser who would buy  his shares on convenient and attractive terms. In a note  dated April  29, 1975  which he prepared on “further Indianisation-Needle Industries (India) Ltd.” he pointed out that Indianisation  should be considered on the footing that the non-resident interest should be reduced to 40% and that, as  between  the  two  feasible  methods  of  Indianisation, namely, (1) Going to public and (2) placement of shares, the latter was preferable. He said: 720 There can be no question of my becoming in any way involved with Ketti and its future as I am committed to NEWEY.

 

There  appears to be no possibility of returning to India  in  what       is  left  of  my  working  life.  I therefore have little choice but to sell my shares. (‘Ketty’ in Nilgiris, is the place where NIIL’s factory is  situated  and  is  treated  as  synonymous  with  NIIL). Devagnanam referred  in his  note to  an inquiry  from a Mr. Khaitan, the head of a powerful group with diverse interests and investment  in industry, who was already involved in the manufacture of products allied to NIIL’s. Coats were alarmed that Devagnanam was negotiating the sale of his shares “to a Marwari, one Khaitan of Shalimar, a sewing needle competitor to Ketti”.  In a  letter dated  August 6,  1975 addressed to Doraiswamy, a  partner in a Madras firm of solicitors called ‘King and  Partridge’ who was a Director of NIIL, Sanders, a Director of  the Holding  Company on NIIL’s Board, expressed his grave concern at the proposed deal thus: No doubt  Mr.    Khaitan  would  pay  the  earth  to acquire NIIL  and judging by what Theo (Devagnanam) had said about       him in  the past,  he may  be  prepared  to arrange or facilitate payment abroad, a most attractive possibility from  Theo’s point  of view,  since he       has said clearly  that he  intends leaving  India for good, finally settling in Australia. Sanders added  that the deal was so dangerous from the point of view of NIIL that the Holding Company “would feel obliged to prevent  it by  whatever means  were open”  to it. By his reply dated  August 12,  1975, Doraiswamy said that the news of the  proposed sale came as no surprise to him and that he had heard  that Silverston,  a former  Solicitor-partner  of his, was  acting as a “go-between” in Devagnanam’s deal with Khaitan. On September  16, 1975 Devagnanam wrote to M.M.C. NEWEY of NEWEY, Birmingham. pointing out the advantages that would accrue by  the sale  of the  shares to  Khaitan.

 

Devagnanam reiterated his total identification with NEWEY’s Far Eastern interests and expressed his anxiety to free himself from all commitments  to  or  involvement  with  NIIL,  as  early  as possible. On October       22, 1975  an important  meeting was held in which Alan Machrael, a Director of the Holding Company, made it clear 721 on behalf of Coats that neither Khaitan nor any other single purchaser would be acceptable to the Holding Company if that meant the acquisition of 30% share holding. The notes of the meeting record  that Devagnanam had confirmed that the offer which he had received from Khaitan was at Rs. 360 per share, out of which a substantial proportion (perhaps 50%) would be payable outside  India. Mackrael  stated at the meeting that the price  in rupees  could be matched but not the method of payment which  was illegal  and reiterated  that the Holding Company would  prevent any attempt by Devagnanam to sell his holding to  Khaitan. The notes of the meeting were signed by Mackrael on  October 30, 1975. On that date, Sanders wrote a letter to Manoharan stating that the Holding Company was not prepared that  30% of  the share capital should get into the hands of  any one  person, bearing in mind the problems that had arisen  in allowing  Devagnanam to  acquire a holding of nearly that  proportion. On  November 7,  1975 M.M.C.  Newey wrote to Devagnanam making it clear beyond the manner of any doubt that Coats, will not accept Khaitan and that according to Bannatyne of Coats, they were put to considerable trouble in finding  Indian residents who would match Khaitan’s offer of 3.6 times par. Newey made it clear that in any event, the sale price  would have  to be  paid in  India and  that they would not  be a  party to any illicit currency deal. Finding that Coats  were determined  not to  allow him  to sell  his shares to  Khaitan, Devagnanam  changed his mind and decided against disposing  of his  holding in  NIIL. On November 13, 1975, he wrote to Newey saying:

 

“I do    not think  any of  us  want  to  see  Coats dominate Ketti.  Hence there  can  be  no  question  of selling any part of my shares to their nominee. As they in turn  will not approve of anyone we choose, there is no way  of solving  the problem…The best thing to do, therefore, is  for me  to revert  to the original basis and they should have no cause to complain. This will of course include effectively managing the Indian company. Let me  however assure  you that  it will not be at the expense of Newey.” And so did Devagnanam remain in NIIL, with the stage set for a battle  between him  and Coats  for acquisition of control over the affairs of NIIL. Yet another  statutory provision which has an important bearing on  the issues  arising in  these appeals is the one contained 722 in section 43 A of the Indian Companies Act, 1956, which was introduced in  1961 by Act 65 of 1960. NIIL was incorporated as a Private Company in 1949 under the Indian Companies Act, 1913. It  was a  Private Company as defined in section 3 (1) (iii) of  that Act since, by its Articles of Association, it restricted the  right to  transfer its  shares, limited  the number of its members to fifty and prohibited any invitation to  the  public  to  subscribe  to  any  of  its  shares  or debentures. By  section 43  A, it  became a  Public Company, since not  less than  twenty-five per  cent of  its  paid-up share capital  was held  by a  body corporate,  namely,  the Holding Company. But, under the first proviso to section 43A (1), it  had the  option to  retain its Articles relating to matters specified  in section  3 (1)  (iii) of the Companies Act. NIIL  did not  alter the  relevant  provisions  of  its Articles after it became a Public Company within the meaning of section 43A. One of the points in controversy between the parties is  whether, in  the absence  of any  positive  step taken by  NIIL for  exercising  the  option  to  retain  its Articles relating  to matters  specified in  section  3  (1)

 

(iii) of  the Companies Act, it can be held that NIIL had in fact exercised  the option,  which was available to it under the 1st  proviso  to  section  43A,  to  include  provisions relating to those matters in its Articles. To resume       the thread  of events,  on  receipt  of  the letter of  the Reserve  Bank dated May 11, 1976 Kingsley, as NIIL’s Secretary,  sent a  reply on May 18, 1976 to the Bank confirming the  acceptance of  the various  conditions under which  permission  was  granted  to  NIIL  to  continue  its business. On  August  11,  1976  the  term  of  Devagnanam’s appointment as  the Managing Director of NIIL came to an end but in  the meeting dated October 1, 1976 of NIIL’s Board of Directors, that appointment was renewed for a further period of  five   years.  On  being  informed  of  the  renewal  of Devagnanam’s appointment,  NEWEY’s Chairman, C. Raeburn, who used to  attend to  the affairs  of the Holding Company, did not object  as such to the Board’s decision (“It may well be that the  reappointment in itself is right”) but he demurred to the  modality by  which the  decision  was  taken  since, according to  him, questions  relating  to  appointments  to senior positions  in the  Company ought  to  be  decided  in consultation with  the U.K.  Shareholders so that they could have an  opportunity to express their views. Sanders, it may be mentioned,  had received  the notice of the meeting duly. On October  20 and  21, 1976,  a meeting took place at Ketti between the U.K. shareholders and the Indian shareholders of NIIL. The  former were  represented by  Alan  Mackrael,  the Managing Director 723 of the  Holding Company,  and C.  Raeburn, the  Chairman  of NEWEY the  latter by  Devagnanam and  Kingsley.  One  Martin Henry, the  Managing Director  of ‘Madura  Coats’, an Indian Company  in   which  the  Holding  Company  had  substantial interest, also  attended that  meeting and  took part in its deliberations. Silverston,  an Englishman who was practising in India  asa Solicitor,  attended the meeting as an advisor to the  Indian shareholders. C. Raeburn chaired the meeting. Para 2  of the  note prepared by him of the discussions held at the  meeting says  that it  was agreed that Indianisation should be  brought about  by May  1977, as  requested by the Government, so  as  to  achieve  40%  U.K.  and  60%  Indian shareholding. But the meeting virtually ended in a stalemate because whereas  the Holding  Company wanted  a  substantial part of  the share capital held by it in excess of 40% to be transferred  to  Madura  Coats  as  an  Indian  shareholder, Devagnanam insisted  that the  existing Indian share-holders of  NIIL   alone  had  the  right,  under  its  Articles  of Association, to take up the shares which the Holding Company was  no  longer  in  a  position  to  hold  because  of  the directives issued  by the  Reserve Bank  pursuant  to  FERA. Thus, the  difference between  the two  groups who were fast falling out was not, as it could not be, whether the Holding Company had  to reduce its share holding in NIIL from 60% to 40%, but  as regards the mode by which that reduction was to be brought  about.

 

The  bone of  contention was  as to which Indian Party  should take  up the excess of 20%-the existing Indian shareholders  of NIIL  or an  outside Indian Company, the Madura  Coats. Raeburn played the role of a mediator but did not  succeed. On  the conclusion  of the  Ketty meeting, Silverston  wrote   a  letter   to  Kingsley  conveying  his appreciation of  the efforts  made by  Raeburn to  bring the parties together  and his  distress at the attitude of Coats which, according to Silverston, showed that they were trying to circumvent  the provisions  of FERA.  Raeburn too wrote a letter on  October 23,  1976 to Devagnanam saying that Coats were not really interested in any independent Indians taking their excess  share-holding. On December 11, 1976 Devagnanam wrote to  Raeburn expressing  the resentment  of himself and his group  at the  attempts made  by Coats to maintain their control  over  NIIL  by  indirect  means.  On  December  14, Devagnanam offered  a package  deal under which the existing Indian shareholders  would augment  their  holding  to  60%, Mackrael and  Raeburn would be on the Board of Directors but not Martin  Henry, and  even B.T. Lee, a Senior Executive of NI-Studley, could  be appointed  as a  wholetime Director of NIIL to be in charge of its export programme. On January 20, 1977 the Reserve Bank sent a reminder to NIIL asking 724 it to  submit at an early date the progress report regarding dilution non-resident  interest. By its reply dated February 21, 1977  NIIL  confirmed  its  commitment  to  achieve  the desired Indianisation  by the stipulated date, viz., May 17, 1977. On  March 9,  1977 Raeburn wrote to Devagnanam, saying that after  a discussion with Mackrael and three other high- ranking persons  of Coats,  it was clear that Coats were not agreeable to  allowing the  present Indian  shareholders  to acquire 60%  of the  equity capital  of NIIL,  since such  a course carried  in the  long run  too great  a risk to their world trade.  Raeburn made  certain fresh  proposals by  his letter in  the hope  that they  would be acceptable to Coats and  invited   Devagnanam  to   come   to   Birmingham   for negotiations. On March  18,  1977  a  notice  was  issued  by  NIIL’s Secretary, D.P.  Kingsley, intimating  that a meeting of the Board of Directors will be held on April 6, 1977. One of the items on  the agenda  of the  meeting was  shown as “Policy- Indianisation”. Sanders  received the  notice of the meeting duly but did not attend the meeting.

 

Devagnanam went to Birmingham in the last week of March 1977. Between  29th and 31st March, he held discussions with four out of the six Directors of the Holding Company, namely NEWEY, Jackson,  White-house  and  Raeburn.  The  other  two Directors, Mackrael  and Sanders,  did not  take any part in those  discussions.   During  his   visit   to   Birmingham, Devagnanam expended  considerable time in discussing various matters  with   NEWEY,  pertaining   to  their   Far-Eastern business. On April  4, 1977 NIIL received a reminder letter dated March 30, 1977 from the Reserve Bank which pointed out that the Company  had not yet submitted any concrete proposal for reduction of  the non-resident  interest  and  asked  it  to submit its  proposal in  that  behalf  without  any  further delay. The  letter warned  the Company  that if it failed to comply with  the directive  regarding  dilution  of  foreign equity within  the stipulated  period,  the  Bank  would  be constrained to view the matter seriously. Raeburn had written a letter to Devagnanam on 4th April on the question of the compromise formula and Devagnanam too had written  a letter  to Raeburn on the 5th, saying that he would place the formula before his colleagues. These letters evidently crossed each other. The 6th April was then just at hand. 725 The meeting  of NIIL’s  Board of  Directors was held on April 6,  1977 as scheduled. Seven Directors were present at the  meeting,   with  Devagnanam   in  the   chair  at   the commencement of  the proceedings.  C. Doraiswamy, solicitor- partner of  ‘King and  Partridge’, was  one of the Directors present at  the meeting.  He had no interest in the proposal of “Indianisation” which the meeting was to discuss and was, therefore, considered  to be  an  independent  Director.

 

In order to  complete the  quorum of two independent Directors, the  other   Directors  apart   from  C.   Doraiswamy  being interested in  the business  of the  meeting, Silverston, an ex-partner of Doraiswamy’s firm of solicitors, was appointed to the  Board as  an additional Director under article 97 of the Articles  of Association. Silverston chaired the meeting after his appointment as an additional Director. The meeting resolved that the issued capital of NIIL be increased to Rs. 48,00,000/- by  a new  issue of  16,000 equity shares of Rs. 100/- each,  to be  offered as rights shares to the existing shareholders in  proportion to  the shares held by them. The offer was  to be  made by  a notice specifying the number of shares which  each shareholder  was entitled to, and in case the offer  was not  accepted within 16 days from the date on which it was made, it was to be deemed to have been declined by the  concerned shareholder.  The minutes  of the  meeting recorded that as a matter of abundant caution, the Directors who were  holding shares in NIIL did not take part either in the discussions  which took  place in  the meeting or in the voting on the resolution. After the aforesaid meeting of the Board dated April 6, 1977, Devagnanam wrote a letter bearing the date April 12 to Raeburn, explaining  that  every  alternative  proposal  was discussed in  the meeting  and setting  out  the  compelling circumstances arising  out of the requirements of FERA which led to  the passing  of the  particular resolution.

 

It  was stated in  the letter  that a  copy of  the  Reserve  Bank’s letter of March 30, 1977 to NIIL was enclosed therewith, but in fact  it was  not so  enclosed. The letter of offer dated April 14,  1977 was  prepared  pursuant  to  the  resolution passed in  the meeting of 6th April. The envelope containing Devagnanam’s letter  dated April 12 (without the copy of the letter of  the Reserve  Bank dated  March 30,  1977) and the letter of  offer dated  April 14 were received by Raeburn on May 2, 1977 in an envelope bearing the Indian postal mark of April 27, 1977, The letter of offer which was sent to one of the  Indian   shareholders,  Manoharan,  was  posted  in  an envelope which  also bore the postal mark of 27th April. The next meeting of the Board was due to be 726 held on  May 2,  1977 and  it is  on that  date that Raeburn received  the   letter  of   offer  dated  April  14,  which evidently, was  posted at  Madras on  April  27,  1977.  The Holding  Company   was  thereby  denied  an  opportunity  to exercise its  option whether  or not  to accept the offer of rights shares, assuming that any such option was open to it. Whether such  an option  was open  to it  and whether, if it could not  or did  not want  to take  the rights  shares, it could transfer  its rights, under NIIL’s letter offering the rights shares,  to a  person of  its choice depends upon the provisions  of  FERA,  the  necessity  to  Comply  with  the directives of  the Reserve Bank the terms of NIIL’s Articles of Association  and the  provisions of  the Indian Companies Act. On April  19,  1977  a  notice  was  issued  by  NIIL’s Secretary  intimating   that  a  meeting  of  the  Board  of Directors will  be held  on May 2, 1977. One of the items of agenda   mentioned    in   the    notice   was   “Policy-(a) Indianisation, (b)  Allotment of  shares”.

 

The notice of the meeting was sent to the Holding Company in an envelope which also bore  the Indian  postal mark  of April  27, 1977.  The notice was  received by  Sanders in  England on  May 2, 1977 i.e. on  the date  when the  meeting was  due to  be held in India. Even  the  fastest  and  the  most  modern  means  of transport could  not have  enabled  Sanders  to  attend  the meeting. In between,  on April  26, 1977  Raeburn had  written a letter to  Devagnanam at  Malacca, following a telex message which said: HAD HELPFUL  DISCUSSIONS  COATS  YESTERDAY  PLEASE MAKE NO DECISIONS RE INDIANISATION PENDING LETTER” By his  letter of  26th April,  which is  said to  have been received by  Devagnanam on  May 4, 1977, Raeburn stated that Coats were  still unwilling  to grant  majority shareholding control to  the existing  Indian shareholders, but that they were equally  not keen  to  do  any  thing  which  would  be regarded as  circumventing the proposal for Indianisation or the law  bearing on  the subject, since that would undermine the position of the Indian shareholders. A meeting       of the Board of Directors was held on May 2, 1977 as  scheduled. The  minutes of  that meeting  show that Kingsley, the  Secretary of NIIL, pointed out in the meeting that applications for allotment of the rights shares offered as also the amounts payable 727 along with  the acceptance  of the  offer had  been received from all  the shareholders  except the U.K. shareholders and the Manoharan  group. The  offer to  Manoharan was  sent  at Virudh Nagar  but Silverston pointed out to the meeting that Manoharan was  working in  Jaipur  and  that  therefore,  he should be  given further  time to  participate in the rights issue. The  Manoharan group  was accordingly  allowed twenty days’ time from the date of the allotment letter for payment of the  allotment amount.  In the  meeting of  2nd May,  the whole of  the new  issue consisting  of 16,000 rights shares was allotted  to the  Indian shareholders, including members of the  Manoharan group.

 

Out of these, the Devagnanam group was allotted  11, 734 shares. A dividend of 30%, subject to tax, amounting to  Rs.9,60,000/-was  recommended  by  the Board, and  it was  resolved that the Annual General meeting of the  Company be  held on  4th June, 1977. Silverstone was appointed as  an additional  Director of the Company and his election  as   such  at   the  Annual  General  meeting  was recommended by  the Board.  Further, it  was  resolved  that deposits be  invited from  the public.  On the same day i.e. 2nd May,  Devagnanam wrote a letter to Raeburn intimating to him that  in a  meeting held  that morning  the  formalities relating to allotment of shares were completed, bringing the Company  under  the  control  of  the  Indian  shareholders. Devagnanam reiterated  by his  letter the  hope of  a closer association with the NEWEY group. Raeburn reacted sharply to Devagnanam’s letter of April 12 and  to the  letter of  offer dated  April 14.  As stated earlier, he  had received  both of  these on  May  2  in  an envelope which  bears the postal mark of Madras dated April, 27. Raeburn  sent a  telex, message to Devagnanam on 2nd May and another  to Kingsley  on 3rd May. By the first telex, he complained about the inadequacy of the notice of the meeting and by  the second,  he conveyed that there was considerable doubt on  the question  whether the  necessary disinterested quorum was available at the meeting of the Directors held on April 6. On receipt of the telex message, Devagnanam wrote a letter to  Raeburn on  May  4  explaining  the  pressure  of circumstances which compelled the Board to take the decision which it did in the meeting of May 2, 1977.

 

Raeburn followed up his  telex messages  by a  letter to Devagnanam on May 3. While expressing  his distress and displeasure at the manner in which  the decision  regarding the issue of rights shares was taken  and the allotment of the shares was made, Raeburn stated in his letter that the rights issue at par, which was considerably less than the fair value 728 of the shares, was most unfair to the shareholders who could not take up the rights issue. After making  the allotment of shares in the meeting of May 2,  NIIL sent  a letter  to the  Reserve Bank  reporting compliance with  the requirements  of FERA  by the  issue of 16,000 rights  shares and  the allotment  thereof the Indian shareholders which  resulted in the reduction of the foreign holding to  approximately 40%  and  increased  that  of  the Indian shareholders to almost 60%. Reference was made in the letter  to   the  fact  that  the  allotment  money  of  Rs. 1,10,700/- had  yet to  be received,  which was obviously in reference to the amount due on the 1,107 rights shares which were allotted  to the  Manoharan group in the meeting of 2nd May. The  Manoharan group did not evidence any interest even later in  taking up  those  shares.  Manoharan,  it  may  be stated, who  was a  Director and General Manager of NIIL had resigned his  post in  April 1976, after serving the Company for nearly 17 years. Between the  2nd and  9th May, there was an exchange of cables between  Mackrael and  Doraiswamy which  led  to  the latter writing a letter on the 9th to the former. Doraiswamy stated in  that letter  that he  had thoroughly investigated the position by perusing all available records placed before him by  Devagnanam and  Kingsley and  that  he  was  of  the opinion that, in the meeting of the 6th April, there was the required quorum of two disinterested Directors consisting of Silverston and  himself and,  therefore, there  could be  no doubt whatsoever about the legality of the resolution passed in that  meeting.

 

He  admitted that  although the time-limit fixed by the Reserve Bank had expired on 17th May, 1977, “it may have  been possible  for the Company to get further time from the  Reserve Bank of India”. As regards the decision to issue the additional shares at par, he explained that if the issue had been made at a premium, it would have necessitated an approach  to the  Controller of Capital Issues, a process which was  time-consuming and  complicated. He  pointed  out that the  authorities would  not have allowed the Company to issue the  rights shares  at a premium and that even if they were to  allow such  a course, the premium permissible would have been only nominal. He asserted that the delay caused in the  offer   of  new  shares  being  received  by  the  U.K. shareholders was  of little  consequence because  they would not have  been able  to take  up the shares in any event. He expressed the  hope  that  Mackrael  would  agree  that  the decision regarding  the issue  of rights shares taken at the Board meeting on April 6, 1977 was bona fide and in the best interests 729 of the Company. He concluded his letter by an assurance that as regards  the late  despatch of  the notice  of the  Board Meeting of 2nd May, further enquiries were being made. On May  11, Devagnanam wrote to Raeburn apologising for the manner  in  which  the  foreign  shareholding  had  been reduced and  for good  measure,  he  projected  the  various advantages which  the NEWEY  group would enjoy under the new Indian management  and control  of NIIL.

 

As if to illustrate that it  is better  late than  never, he  enclosed with  his letter a copy of the Reserve Bank’s letter dated 30th March, 1977 which was to have been sent along with the letter dated April 12 but was in fact not so sent. On May  17, 1977  Mackrael, acting       on  behalf  of  the Holding Company, filed a Company Petition in the Madras High Court under  sections 397  and 398  of the  Indian Companies Act, 1956 out of which the present appeals arise. It is alleged in the petition that the Indian Directors abused their  fiduciary position  in the Company by deciding in the  meeting of April 6 to issue the rights shares at par and by  allotting them  exclusively  to  the  Indian  shares holders in  the meeting  of 2nd May, 1977. In so doing, they acted mala  fide and  in order  to gain an illegal advantage for themselves.  The  Indian  Directors,  according  to  the company petition,  either knew  or ought  to have known that the fair  value of  the shares  of the Company was about Rs. 204 per  share. By  deciding to  issue the  rights shares at par, they  conferred a tremendous and illegitimate advantage on the  Indian shareholders. Devagnanam delayed deliberately the intimation  of the  proceedings of  the 6th April to the Holding Company. By that means and by the late giving of the notice of  the meeting  of the 2nd May, the Devagnanam group presented a fait accompli to the Holding Company in order to prevent  it   from  exercising   its  lawful  rights.  Thus, according  to   the  petition  the  conduct  of  the  Indian Directors lacked  in probity  and  fair  dealing  which  the Holding Company was entitled to expect. By the Petition, the Holding Company asked for the following reliefs:- (a)  That the  Board of  Directors of  the       Company  be superseded  and  one    or  more  Administrators  be appointed to administer the affairs of the Company or, in  the alternative, the Board of Directors be reconstituted so  as to  ensure that    the  Holding Company had adequate representation on it; 730 (b)  That the proceeding of the meeting of the Board of Directors held  on April  6 and  May    2,  1977  be declared illegal, void and inoperative; (c)  That Silverston’s  appointment  as  an  Additional Director of  the Company  be declared    as void and inoperative and  he be restrained from functioning as a Director of the Company; (d)  That the  purported  allotment  of  16,000  shares pursuant to  the impugned  resolution of the Board of May 2, 1977 be declared void;

 

(e)  That the  Indian group of shareholders to whom the rights shares    were allotted  be  restrained  from exercising any voting rights in regard to any part of those shares; (f)  That the  Company be restrained from giving effect to the  allotment of    the 16,000 rights shares and from making  any  payment  of    dividend  on  those shares; (g)  That the Articles of Association of the Company be amended so as to permit the transfer of the shares to persons  other than the existing members of the Company in  order to enable the Holding Company to comply  with    the  requirement  of  disinvestments without   prejudice     to   its   interest   as   a shareholder; and (h)  That a special majority for decisions of the Board be prescribed    in regard  to all important matters and provision    be  made  for  the  appointment  of Directors by proportional representation. The learned  Acting Chief Justice who tried the Company Petition, found  several  defects  and  infirmities  in  the Board’s  meeting  dated  May  2,  1977  and  concluded  that appropriate relief  should be granted to the Holding Company under section  398 of  the Companies  Act. The learned Judge was of  the view that the average market value of the rights shares was  about Rs.  190 per share on the crucial date and that, since  the rights  shares  were  issued  at  par,  the Holding Company  was deprived  unjustly  of  a  sum  of  Rs, 8,54,550/- at  the rate  of Rs.  90/- per share on the 9,495 rights shares to which it was 731 entitled. Exercising  the power  under section 398(2) of the Companies Act,  the learned Judge directed NIIL to make good that loss  which, according  to him, could have been avoided by it

 

“by adopting  a fairer process of communication” with the Holding  Company and  “a  consequential  dialogue”  with them, in  the matter  of the  issue of  rights shares  at  a premium. The  learned Judge  directed NIIL  to  pay  to  the Holding Company  the aforesaid  sum of  Rs. 8,54,550/-  as a “solatium” in order to meet the ends of justice. Being aggrieved  by the aforesaid judgment, the Holding Company filed  O.S. Appeal  No. 64  of 1978 while NIIL filed cross objections  to  the  decree.  The  appeal  and  cross- objections were argued before the Division Bench of the High Court on  the basis  of affidavits,  the correspondence that had  passed  between  the  parties  and  certain  additional documents which  were filed  before the  Appellate Court  by consent of  parties. Though  the Company  Petition was filed under section 397 as also under section 398 of the Companies Act and though the trial court had granted partial relief to the Holding  Company under section 398, it was stated in the Appellate Court on its behalf that its entire case was based on section  397 and  that it  did not  want  to  invoke  the provisions of  section 398.  A similar  statement  was  made before us also. On a  consideration of  the matters and material before it, the Division Bench formulated its view in the form of 18 conclusions on  various aspects  of the  case. They  may  be summed up thus: (a)  As soon  as Devagnanam  became involved in the far eastern ventures  of NEWEY, he decided to sell his share- holding  in NIIL  to an  Indian concern  or party from which he expected to receive at least a part of the consideration in a foreign country. (b)  Seeing that  Coats were  opposed to  his receiving any part  of the consideration for the sale of his shares in  a foreign    country, Devagnanam  decided not to  part with  his shares    but to  obtain  the control of the Company. (c)  The directives of the Reserve Bank of India on the question  of     Indianisation  were   exploited  by Devagnanam for  compelling the  Holding Company to part with  its shares    in  favour  of  the  Indian shareholders. 732 (d)

 

Coats were  willing to carry out the directives of the Reserve Bank but they did not want to transfer their shares    to the  existing Indian shareholders because thereby,  the latter would have acquired a controlling interest in NIIL which Coats wanted to prevent. Coats  were willing    to part  with  their excess shares in favour of other Indian residents. (e)  Though Coats       originally contemplated the transfer of 15% of their excess 20% shares to Madura Coats, or the  incorporation of  a company  to take    over their excess    20%  shares,  they  were  ultimately agreeable that  the existing    Indian  shareholders should get  9% out of that 20% so as to have a 49% holding in  the share capital of NIIL and that 11% should   go      to   new,    independent,    Indian Institutional shareholders.  The object  of  Coats was that  any one group of shareholders should not have a dominating position in the affairs of NIIL. (f)  At the  Ketti meeting       held on  October 20 and 21, 1976, the issue of rights shares was considered as an alternative  to  disinvestment,  but  that    was subject to  two conditions: one, that it should be shown that  there was    a viable  development  plan which required additional funds which the existing cash flow  of NIIL  could not    meet, and two, that the value  of the U.K. equity interest required to be transferred  would be  no less  favourable than what would  be achieved  by a    direct sale of that interest. (g)  Though by  his letters of December 11 and 14, 1976 Devagananam had  informed Raeburn  of the decision of the  Indian shareholders  to acquire 60% shares for themselves, he did not ever say one word about the issue  of rights shares in any of the numerous communications  which     he  sent  to  Raeburn.  No reference was    made to  the issue of rights shares even in  the memorandum  of discussions which took place during    the visit of Devagnanam to U.K. from March 29-31,    1977.  Thus,

 

the  issue  of  rights shares was  sprung  as  a  surprise  on  the    U.K. shareholders. 733 (h)  The notice dated March 13, 1977 for the meeting of the Board  of Directors  held    on  April  6,  1977 referred  to    the  main  item  on  the  agenda  in ambiguous terms as: “Policy-Indianisation”. In the context of  the discussions  which had taken place until then  between the  parties, N.T. Sanders who represented the  Holding Company  on the Board had no  means  or    opportunity  of  knowing  that  the particular  item   on    the   agenda  involved  the question of the issue of rights shares. (i)  Since every  major decision was taken by the Board of Directors    in  consultation  with  the  Holding Company and  since there  was no  agenda  for    the appointment  of   an    additional   Director  under article 97 of Articles of Association of NIIL, the decision taken  by the  Board in  its    meeting  of April 6  on the  issue of  rights shares  and    the appointment  of   Silverston    as   an   Additional Director constituted    a departure from established practice and showed want of good faith and lack of fair play on the part of the Board of Directors of NIIL.

 

(j)  The letter  dated April  12, the  letter of  offer dated April  14 and  the notice for meeting of the Board of  Directors to  be held on May 2, were all got posted  by Devagnanam  as late as on April 27, 1977    at  Madras,  so  as  to  ensure  that  these important documents  should not  reach the Holding Company in time to enable it to participate in the all  important  meeting  of  the  2nd.  Davagnanam wanted to  present a    fait accompli to the Holding Company so  as  to  prevent  it  from    taking  any preemptive action. (k)  Whenever NIIL       wrote to  the Reserve Bank alleging that the  Holding Company was not willing to carry out the  directives of  the Bank or to comply with the  provisions   of    FERA,   its  object  was  to prejudice the    Bank against the Holding Company by drawing a red-herring across the track. (l)  The directives  of the  Reserve Bank       of India had the provisions of FERA were not concerned with who should be  the Indian    shareholders of  NIIL.  All that they  were concerned with was that 60% of the share- 734 holding must be with the Indian residents. For the purpose of  achieving that  result, three  courses were    available  to  NIIL:  (1)  Disinvestment  by foreign   shareholders   in     favour   of   Indian shareholders; (2)  Issue of rights shares pursuant to section 81 of the Companies Act, and (3) Action under section    81 (1-A)  of the  Companies Act for issuing  additional  shares  to  Indian  residents other than  the existing  Indian  shareholders  by passing an  appropriate special  resolution, or if no special  resolution  was  passed,    then,  by  a majority of  the  shareholders  approving  such  a course with the consent of the Central Government. The first  course was    ruled out  since Coats  had taken a  definite stand  that they  will not allow the existing    Indian shareholders  to  obtain  the excess shares.  As far  as the  second alternative was concerned,

 

the Holding  Company had the right to renounce  shares offered to it in favour of any other person    under section  81  (1)  (c)  of  the Companies  Act,  which  right    was  denied  to  it because, the    letter of  offer dated  April 14 did not contain  a statement regarding renunciation of the right  to take  shares and  also because    that letter was  not posted  in time.  As    regards  the third course,    if the  Holding Company  were given adequate notice  of the  proposal to    issue rights shares, it  might have  taken    appropriate  action under section 81 (1-A) of the Companies Act. (m)  The object  of the  Directors of  NIIL in deciding upon the  issue of  rights shares, and that too in the manner  in which    they did  so, was clearly to obtain control  of the  Company and  to eschew and eliminate the    controlling power which the Holding Company had  over  NIIL.  The    conversion  of  the existing minority  of Indian    shareholders into  a majority, far    from being  a matter  of  statutory compulsion, was  an act  of self-aggrandizement on the part of the existing Indian shareholders. (n)  The action  taken by       the Indian  shareholders was against the interest of the Company itself because the rights shares were issued at par which was far below their market price. (o)  The true  motivation of the various steps taken by the     Devagnanam-NEWEY    Combination   was    the furtherance 735 of   the    interest     of    NEWEY’s   Far-Eastern enterprises, coupled with the personal interest of Devagnanam himself.  Devagnanam was  receiving Rs. 96,000/- per    annum  in  addition  to  substantial fringe benefits  as the Managing Director of NIIL. He was  also getting    a large  salary  from  NEWEY which was  $10,000 in    1075 $11,000  in  1976  and $12,000 for the Year ending July 31, 1977. (p)  The fact that NIIL informed the Holding Company on May 21,  1977 which was after the Company Petition was filed,  that the    Holding  Company  could  not exercise and    will not  be allowed to exercise any rights in  respect of    the whole  of 18,990 shares held by  it since its application under section 29 (4) of  FERA was  not granted    by the Reserve Bank shows that the object of the Board of Directors in taking the  impugned decision    was to  exclude the Holding Company  from all  control over NIIL.

 

That is why  NIIL advised    the Reserve Bank of India by its letter  dated May 24, 1977 that no application for holding any shares by a non-resident should be allowed by  the Bank    without  the  knowledge  and consent of  NIIL. That also is the reason why NIIL conveyed to  the Reserve  Bank by  its  letter  of September 20,    1977 that  until such  time as  the Company  Petition  was  finally  disposed  of,  no licence   should   be     issued   to   non-resident shareholders and  no remittance of dividend out of India    should  be  permitted  with  out  the  non- resident share-holders  reducing their  holding in NIIL to less than 40%. The two  other conclusions       are comprehended within the 16 set out above. On       the   basis  of  the  aforesaid  formulations,  the Division Bench concluded that the affairs of NIIL were being conducted  in   a  manner   oppressive,  that   is  to  say, burdensome, harsh and wrongful to the Holding Company. After referring to  certain passages from Palmer’s Company Law and Gore-Browne on  Companies, and the decisions of the House of Lords, this  Privy Council, and our own Courts including the Supreme Court, the Division Bench held that since the action of the Board of Directors of NIIL was not in the interest of the Company but was taken merely for the purpose of 736 welding the Company into NEWEY’s Far Eastern complex, it was just and equitable to wind up the Company. NIIL had  filed  cross-objections       in  the  High  Court appeal contending  that, in  any event,  the learned  Acting Chief Justice was in error in directing it to pay the sum of Rs. 8,  54,550/- to  the Holding Company. While dealing with the cross-objections,  the  Division  Bench  held  that  the injury suffered  by the  Holding Company  on account  of the oppression practised by the Board of Directors of NIIL could not be remedied by the award of compensation and, therefore, the action  of the  Board of Directors in issuing the rights shares had  to be  quashed. Having  found that  the  Holding Company was  entitled to  relief under  section 397  of  the Companies Act  and the  award of  solatium made by the trial Court was  not the appropriate relief to grant, the Division Bench allowed  the appeal  filed  by  the  Holding  Company, dismissed the  cross-objections in  substance and  adjourned the appeal  for a fortnight for hearing further arguments on the nature of the relief to be granted in the case.

 

Eventually, by  its order       dated October  26, 1978  the Division Bench granted the following reliefs: (a)  Devagnanam  was  removed  forthwith  both  as       the Managing Director  and Director  of NIIL  and    was asked to  vacate the    bungalow occupied by him, by November  1,     1978.  He   was  paid   one  Year’s remuneration as  compensation for  the termination of his appointment as the Managing Director. (b)  The Board  of       Directors  was  superseded  and  an interim  Board   consisting  of   nine   directors proposed by  the Holding  Company was constituted, with    Shri   M.M.  Sabharwal   as  an  independent Chairman. (c)  Harry       Bridges,   an  executive   of  COATS,   was appointed as the Managing Director for a period of four months. (d)  The rights  issue made  on 6th April, 1977 and the allotment of    shares made  on 2nd May, 1977 at the Board meetings  were set  aside  and    the  Interim Board was directed to make a fresh issue of shares at  a     premium  to   the  existing  shareholders, including the    Holding Company which was to have a right of  renunciation. The new Board was directed to apply to the Controller 737 of Capital  Issues for  determining the  amount of premium. (e)  The Articles       of Association were to be altered by appropriate additions    and deletions  in order  to provide for  election of Directors by proportional representation; and (f)  Devagnanam was asked to pay to the Holding Company the     costs   of   appeal   and   cross-objections quantified at    Rs. 25,000/-.

 

He  was  also  asked personally to    reimburse the  expenses incurred by NIIL in the appeal and cross-objections. These appeals  were heard       in  the  first  instance  by Justice  Untwalia   and  Justice  Pathak.  In  view  of  the importance of  the questions  arising therein,  on  some  of which our  learned Brothers, it seems, were unable to agree, they desired  that the  appeals be  heard by a larger Bench. That is how the appeals are now before us. The petition  of the Holding Company out of which these appeals arise  sought relief  under sections  397 and 398 of the Companies  Act, 1956.  The case  under section  398  not having been  pressed except  before the learned trial Judge, we are  only concerned with the question whether the Holding Company is  entitled to relief under section 397 which reads thus: “397(1)-Any members of a company who complain that the affairs  of the  company are  being conducted       in a manner prejudicial       to public  interest or  in a manner oppressive to  any member or members (including any one or more  of themselves)  may apply       to the Court for an order under  this section: provided such members have a right so to apply in virtue of section 399. (2) If,  on any  application under sub-section (1) the Court is of the opinion: (a)       that  the   company’s  affairs  are  being conducted in  a manner  prejudicial to public interest or  in a  manner oppressive  to         any member or members; and (b)     that to  wind up  the company would unfairly prejudice such  member or  members, but that other- 738 wise the         facts would justify the making of a winding up  order on  the ground         that it was just and equitable that the company should be wound up;  the Court  may,  with         a  view  to bringing to an end the matters complained of, make such order as it thinks fit.” Section 398  provides for  relief in cases of mismanagement. Section 399(1)  restricts the  right to apply under sections 397 and  398 to  persons mentioned in clauses

 

(a) and (b) of sub-section (1) It is  necessary to  refer briefly to the relevant part of the  pleadings before  examining the charge of oppression made by  the Holding Company against a group of the minority shareholders of  NIIL After tracing the history of formation and composition  of NIIL,  the company  petition states that the management  of NIIL  was in  the hands  of the  Board of Directors in  which the  Indian group  had a large majority. The Holding  Company had  implicit trust  in  them  and  was content to  leave  the  management  in  their  hands.  After referring to the impact of section 43A of the Companies Act, the  company  petition  says  that  in  the  wake  of  FERA, discussions  and   negotiations  were   held   between   the representatives of the Holding Company and the Management of NIIL amongst  themselves as well as with the Reserve Bank of India, in  order to  enable NIIL  to  obtain  the  requisite permission for carrying on its business. Paragraph 13 of the company petition  states that  the Reserve  Bank of India by its letter  dated May 11, 1976 granted to NIIL the necessary permission subject  to the  condition, inter  alia, that  it reduced non-resident  shareholding to  40  per  cent  on  or before May  17, 1977.  The case  of the  Holding Company  in regard to its own attitude is stated succinctly in paragraph 14 of  the company  petition which  may  with  advantage  be reproduced: “Discussions were  thereafter held  on a number of occasions between       the petitioner and the management of the  Company  to  effectuate  the       aforesaid  condition imposed  by   the       Reserve  Bank  of  India  which  the petitioner was at all times ready and willing to comply with. The petitioner did not, however, desire to dilute its holding of shares in the company by a further issue of       capital   and  preferred  to  effectuate  the  said intention by disinvesting or selling 20% of its holding in the company. The Reserve Bank of India was agreeable to such dilution taking place by the petitioner selling a part  of its  holding to an Indian resident or Indian residents. The Reserve Bank had indicated that 739 they would be willing for such dilution taking place by a further       issue of  shares  provided  that  additional capital was  required for       purposes of  expansion.

 

The petitioner was  not willing  to  sell  a  part  of       its holding to the Indian group as such a sale would result in the  Indian group  acquiring  an  absolute  majority interest.       Further   more   under   the   Articles   of Association of  the Company the consent of the existing shareholders would be required (apart from the approval of the  Reserve Bank) before the petitioner sold any of its shares to an Indian party, other than to a member.” According to  the Holding       Company, the  various  steps which culminated  in the  allotment of  rights shares to the existing Indian  shareholders were  vitiated by  mala  fide, their dominant  object being to convert an existing minority into a  majority. The  decision taken  in the meeting of the Board on  April 6,  1977 was taken deliberately in haste and hurry in order to pre-empt any action by the Holding Company to restrain  the Board from taking the desired decision. The Reserve Bank,  according to  the company petition, would not have been  so unreasonable  as not  to extend  the time  for complying with  its directive,  especially since the Holding Company had  agreed in  principle to  dilute its holding and the only  difference between  the parties was as regards the method by  which  such  dilution  was  to  be  effected.  In Paragraph 27  of the  company petition it is stated that the Devagnanam group  decided to  issue the rights shares with a view to securing an illegal and unjust advantage for itself, for improving  its own  position in the Company and in order to deprive  the Holding  Company of  its  lawful  rights  as majority shareholders. In this behalf, reliance is placed on the following facts and circumstances, inter alia: (a)  The Holding  Company was  never  informed  of       any specific proposal to make the rights issue. (b)  The notice  of the  Board meeting of April 6, 1977 did not refer to the said proposal.

 

(c)  The notice  offering rights  shares to the Holding Company was not prepared till April 14 and was not posted till April 27, 1977. By the time the notice was received    by the Holding Company, the Board of NIIL had met to allot the rights shares. 740 (d)  The time  given in  the notice  was much less than was customary. (e)  The notice did not contain a statement relating to the right  of the  shareholders  to  renounce    the rights shares. (f)  The notice of the Board meeting of May 2, although dated 19th  April 1977,  was posted  to Sanders on 27.4.1977, thereby  ensuring that  it would  reach him only after the date of the meeting. (g)  By issuing  shares at       par, though their value was much higher  than Rs.    100/- per  share,  existing Indian share    holders were  enabled to acquire the shares at  a gross  undervalue and the Company was put to a heavy loss. (i)  The Reserve  Bank  of       India  had  indicated  that dilution of  the foreign holding by a rights issue could    be   considered  if  the  Company  required further capital  for expansion. At the discussions and negotiations  held between the Holding Company and the Indian group it was inter alia agreed that the rights issue would be made only if there was a viable development  plan requiring  further funds. The rights issue was made even though no such need for  expansion   or  development  existed  or    was referred to.

 

(j)  Though the  Reserve Bank had inter alia stipulated that the said dilution should be effectuated on or before 17th  May, 1977, the time-schedule is never strictly insisted  upon. There  have been numerous instances  when   the    Reserve  Bank  has  granted reasonable extension    of time  to comply with such conditions. The  Board of NIIL never requested the Reserve Bank to grant further time. C. Doraiswamy, the 8th  respondent stated  in  his  letter  dated 9.5.1977 to  Mackrael, a  Director of    the Holding Company, that    it would have been possible for the Company to  get further time from the Reserve Bank of India. The Holding  Company contends  further that  M.J. Silverston was not  a  disinterested  person,  that  his  vote  on  the resolution for the 741 issue of  rights shares had therefore to be ignored in which case there  was no quorum of two disinterested directors and that his appointment as an Additional Director was not valid since the  notice for  the meeting of the Board of Directors to be  held on  6.4.1977 did  not contain  in the agenda any subject regarding  appointment  of  an  additional  Director under Article 97 of the Company’s Articles of Association. In answer       to these  contentions, Devagnanam  filed  an elaborate counter-affidavit  on his  behalf as  well  as  on behalf of  NIIL. In that counter-affidavit, every one of the material contentions  put forward by the Holding Company has been denied or disputed. Devagnanam contends that it was the Holding Company which wanted to retain its control over NIIL contrary to  the directive of the Reserve Bank of India, the national policy of the Central Government and the provisions of FERA.  According to Devagnanam, every action taken in the Board meetings of 6.4.1977 and 2.5.77 was in accordance with law, that  Sanders never  used to attend the meetings of the Board, being  a non-resident  he was  not entitled  to  have notice of the Board meetings,

 

that there was no violation of section 81  of the Companies Act at all, that section 81 (c) of the  Companies Act  did not apply to the present case and that, in  view of  the attitude  adopted by  Coats, NIIL, in order to comply with the restrictions imposed by the Reserve Bank and  to carry  out its  directive, had no option but to decide upon  the issue  of rights  shares to bring about the reduction  in   the  non-resident  shareholding.  Devagnanam repudiates emphatically  the charge  of  mala  fides  or  of conduct in  breach of  the fiduciary duty of NIIL’s Board of Directors. Having regard to these pleadings, the main question for consideration is whether the decisions taken in the meetings of the Board of Directors of NIIL on April 6 and May 2, 1977 constitute acts  of oppression within the meaning of section 397 of Companies Act, 1956. The High Court has answered this question in  the affirmative  and has  issued  consequential directions in  regard to  the management  of NIIL’s affairs. The findings  recorded by the High Court in appeal have been challenged before  us with vehemence and ability in an equal measure, matched  equally in  both respects  on either side. Learned counsel  who led  the arguments  on the rival sides, Shri F.S.  Nariman for  the appellants and Shri H.M. Seervai for the  respondents, have  drawn our  attention in  copious details to 742 the correspondence  that transpired between the parties, the correspondence  with   the  Reserve   Bank  of   India,  the discussions at  Ketty  and  Birmingham  which  preceded  the impugned decisions, the conduct of Devagnanam as a man and a Managing Director, the attitude of Coats stated to arise out of their  world-wide business  interests and the predicament of NEWEY which was willing to strike but was afraid to wound its partner  Coats.

 

We  have also been taken through several decisions and texts bearing particularly on: (a) The meaning of ‘oppression’  of the members of a Company within  the terms  of section    397 and the circumstances in  which a  Company can be wound up under the  just and equitable clause under section 433 (f) of the Companies Act, 1956; (b)  The approach which the court should adopt in cases wherein mala    fides and abuse of power on the part of Directors    are alleged  but no oral evidence is led; (c)   The fiduciary  powers  of  Directors       in  issuing shares; (d)   The impact  of  the       provisions  of  the  Foreign Exchange  Regulation    Act,  1973  with  particular reference to    section  2  (p),  (q)  and  (u)  and section 29; (e)   The question       as to  whether it  is necessary  to issue a prospectus under section 81 (1) (c) of the Companies Act; (f)   The constraints  on public  and private companies under the  Companies Act,  and  their    duties  and obligations, with particular reference to sections 2 (35),  2(37), 3  (1) (iii) and (iv) and sections 43A and 81 of the Companies Act; (g)  The relationship of partnership between the Indian shareholders,     Coats    and   NEWEY   who   owned respectively 40%, 30%, and 30% of the shareholding in NIIL; (h)     The  question   whether   Silverston   was        an ‘interested’    Director   within  the   meaning  of section 300 of the Companies Act; and (i)   Whether Silverston’s appointment as an Additional Director in the meeting of the Board held on April 6, 1977 was, in the circumstances, valid. 743 Coming to       the law  as to  the concept  of ‘oppression’ section  397  of  our  Companies  Act  follows  closely  the language of  section 210  of the  English Companies  Act  of 1948. Since  the decisions on section 210 have been followed by our Court, the English decisions may be considered first. The leading  case on  ‘oppression’ under  section 210 is the decision of  the House of Lords in Scottish Co-op. Wholesale Society Ltd.  v. Meyer.

 

(1) Taking the dictionary meaning of the word  ‘oppression’, Viscount  Simonds said  at page  342 that the  appellant society  could justly  be  described  as having behaved  towards  the  minority  shareholders  in  an ‘oppressive’  manner,   that  is   to  say,   in  a   manner “burdensome, harsh  and  wrongful”.  The  learned  Law  Lord adopted, as  difficult of  being bettered, the words of Lord President Cooper  at the  first hearing  of the  case to the effect that  section 210  “warrants the  court in looking at the business realities of the situation and does not confine them to  a narrow  legalistic view”.  Dealing with  the true character of  the company,  Lord Keith said at page 361 that the  company   was  in  substance,  though  not  in  law,  a partnership, consisting  of the  society, Dr.  Meyer and Mr. Lucas  and   whatever  may  be  the  other  different  legal consequences following  on one  or other  of these  forms of combination, one  result followed  from the  method adopted, “which is  common to  partnership, that  there should be the utmost good faith between the constituent members”. Finally, it was  held that  the court  ought not  to allow  technical pleas to  defeat the  beneficent provisions  of section  210 (page 344 per Lord Keith; pages 368-369 per Lord Denning). In Meyer  (supra) above referred to, the House of Lords was dealing  with a  case in which the appellant company was accused of  having committed  acts of oppression against its subsidiary. In  that context  it was  held that  the  parent company must,

 

if  it  is  engaged  in  the  same  class  of business, accept  as  a  result  of  having  formed  such  a subsidiary an  obligation so to conduct, what are in a sense its own  affairs, as  to deal fairly with its subsidiary. In Re Associated  Tool Industries  Ltd. (2) of which judgment a photographic copy was supplied to us, Joske J. held that the rule in  Meyer (supra)  involved the  consequence  that  the subsidiary companies  must also  exercise good  faith to the holding company and not merely that the latter should so act to the former. 744 In an  application under  section 210  of  the  English Companies Act,  as under  section 397  of our Companies Act, before granting relief the court has to satisfy that to wind up  the   company  will   unfairly  prejudice   the  members complaining of oppression, but that otherwise the facts will justify the  making of a winding up order on the ground that it is  just and  equitable that  the company should be wound up. The  rule as  regards the  duty of utmost good faith, on which stress  was laid  by  Lord  Keith  in  Meyer,  (supra) received further  and closer  consideration  in  Ebrahim  v. Westbourne  Galleries   Ltd.,(1)  wherein  Lord  Wilberforce considered the  scope, nature  and extent  of the  ‘just and equitable’ principle  as a  ground for winding up a company. The business of the respondent company was a very profitable one and  profits used  to be distributed among the directors in the  shape of fees, no dividends being declared. On being removed as  a director  by the votes of two other directors, the appellant  petitioned for  an order  under section  210. Allowing an appeal from the judgment of the Court of Appeal, it was  held by  the House of Lords that the words ‘just and equitable’ which  occur in  section 222  (f) of  the English Act, corresponding  to our  section 433  (f), were not to be construed ejusdem generis with clauses (a) to (e) of section 222 corresponding  to our clauses (a) to (e) of section 433. Lord  Wilberforce   observed  that   the  ‘words’  just  and equitable’ are  a recognition  of the  fact that  a  limited company is more than a mere legal entity, with a personality in law of its own; and that there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals,  with rights,  expectations and obligations inter se  which are not necessarily submerged in the company structure: “The ‘just  and equitable’  provision does not, as the respondents suggest, entitle one party to disregard the obligation  he assumes       by entering  a company, nor the court       to dispense  him from it. It does, as equity always does,  enable the  court to subject the exercise of        legal    rights   to   equitable   considerations; considerations,  that   is,  of  a  personal  character arising between  one individual  and another, which may make it  unjust or       inequitable,  to  insist  on  legal rights, or to exercise  them in  a particular way”. (p 379) 745 Observing that  the  description  of  companies  as  “quasi- partnerships” or  “in substance  partnerships” is confusing, though convenient, Lord Wilberforce said: “company, however  small, however  domestic, is  a company not  a partnership  or even a quasi-partnership and it  is through  the just  and equitable clause that obligations, common  to partnership relations, may come in”. (p 380) Finally,

 

it  was held  that it  was  wrong  to  confine  the application of the just and equitable clause to proved cases of mala  fides, because  to do  so would  be to negative the generality of the words. As observed by the learned Law Lord in the same judgment, though in another context: “Illustrations may  be  used,    but  general  words should remain  general and not be reduced to the sum of particular instances.” (pp 374-375) In his judgment in Re Westbourne Galleries (supra) Lord Wilberforce has  referred at  two places  to the decision in Blissett v.  Daniel, (1)  which is recognised as the leading authority in  the Law  of Partnership  on the duty of utmost good faith  which partners  owe to  one another.  Lindley on Partnership (14th  Edition, pages  194-95) cites Blissett v. Daniel (1) as an authority for the proposition that: “The utmost good faith is due from every member of a partnership  towards every  other member;  and if any dispute arise between partners touching any transaction by which one seeks to benefit himself at the expense of the firm, he will be required to show, not only that he has the law on his side, but that his conduct will bear to be tried by the highest standard of honour”. The fact  that the       company  is  prosperous  and  makes substantial profits  is no obstacle to its being wound up if it is  just and  equitable  to  do  so.

 

This  position  was accepted in  the decision  of the  Court  of  Appeal  in  Re Yenidge Tobacco  Co. (2) and of the Privy Council in Loch v. John Blackwood (3). 746 The question  sometimes arises  as to whether an action in contravention of law is per se oppressive. It is said, as was done by one of us, N.H. Bhagwati J. in a decision of the Gujarat High  Court in  S.M.  Ganpatram  v.  Sayaji  Jubilee Cotton &  Jute Mills  Co., (1)  that “a resolution passed by the directors may be perfectly legal and yet oppressive, and conversely a resolution which is in contravention of the law may  be  in  the  interests  of  the  shareholders  and  the company”. On  this question,  Lord President Cooper observed in Elder v. Elder (2): “The decisions  indicate  that  conduct  which  is technically legal       and correct may nevertheless be such as       to   justify  the  application  of  the  ‘just  and equitable’ jurisdiction,  and, conversely, that conduct involving illegality  and contravention  of the Act may not suffice  to  warrant  the  remedy  of       winding  up, especially where  alternative remedies  are  available. Where the       ‘just and  equitable’ jurisdiction  has been applied in       cases of  this type, the circumstances have always, I       think, been such as to warrant the inference that there       has been,  at least,  an  unfair  abuse  of powers and       an impairment  of confidence in the probity with which       the company’s  affairs are being conducted, as distinguished  from mere resentment on the part of a minority at  being outvoted  on some  issue of domestic policy”. Neither the  judgment of Bhagwati J. nor the observations in Elder are  capable of the construction that every illegality is per  se oppressive  or that  the illegality  of an action does not  bear upon its oppressiveness. In Elder a complaint was made that Elder had not received the notice of the Board meeting.

 

It  was held  that since  it was not shown that any prejudice was  occasioned thereby  or that  Elder could have bought the  shares had  he been  present,  no  complaint  of oppression could  be entertained  merely on  the ground that the failure  to give  notice of the Board meeting was an act of illegality.  The true  position is  that an isolated act, which is  contrary to law, may not necessarily and by itself support the  inference that the law was violated with a mala fide intention  or that such violation was burdensome, harsh and wrongful.  But a  series of  illegal acts following upon one another  can, in  the context,  lead justifiably  to the conclusion that  they are a part of the same transaction, of which 747 the object  is to  cause or commit the oppression of persons against whom  those acts  are directed. This may usefully be illustrated by reference to a familiar jurisdiction in which a litigant  asks for the transfer of his case from one Judge to another.  An isolated  order passed  by a  Judge which is contrary to law will not normally support the inference that he is  biassed; but  a series  of wrong or illegal orders to the  prejudice   of  a   party  are  generally  accepted  as supporting the  inference of  a reasonable apprehension that the Judge  is biassed  and that the party complaining of the orders will not get justice at his hands. In England, after the decision of the House of Lords in Meyer, (supra) a restricted interpretation has been given to section 210  by the Court of Appeal in re Jermyn St. Turkish Baths,(1) which  has  adversely  criticised  by  writers  on Company Law  (see Palmer’s  Company Law, 22nd ed., page 613, paras 57-06,  57-07; Gore Brown on Companies, 43rd ed., para 28-12). In India, this restrictive development has no place, for, in  S.P. Jain v. Kalinga Tubes, (2) Wanchoo J. accepted the broad  and liberal  interpretation given  to the Court’s powers in Meyer. In       Kalinga  Tubes,  Wanchoo  J.  referred  to  certain decisions under  section 210  of the  English Companies  Act including Meyer (supra) and observed: “These observations  from the    four cases referred to above  apply to       section 397 also which is almost in the same  words as

 

section 210 of the English Act, and the question  in each  is whether       the conduct  of  the affairs of       the company,  by the  majority shareholders was oppressive  to the  minority shareholders  and that depends upon  the facts proved in a particular case. As has already  been indicated,  it is  not enough to show that there       is just  and equitable cause for winding up the company,  though that       must be shown as preliminary to the  application of  section 397. It must further be shown that the conduct of the majority shareholders was oppressive to the minority as members and this requires that events  have to be considered not in isolation but as a  part       of  a  consecutive  story.  There  must  be continuous       acts   on  the   part   of   the   majority shareholders, 748 continuing upto  the date of petition, showing that the affairs of the company were being conducted in a manner oppressive to  some part  of the  members. The  conduct must be burdensome, harsh and wrongful and mere lack of confidence between       the majority  shareholders and  the minority shareholders  would not  be enough  unless the lack  of        confidence  springs  from  oppression  of  a minority  by  a  majority       in  the  management  of  the company’s affairs,       and such oppression must involve at least an  element of lack of probity of fair dealing to a member  in the  matter of his proprietary rights as a shareholder. It  is in  the light       of these  principles that we  have to  consider the facts…..with reference to section 397”. (page 737) At pages  734-735 of  the judgment in Kalinga Tubes, Wanchoo J. has  reproduced from  the judgment  in  Meyer,  the  five points which  were stressed  in Elder. The fifth point reads thus: “The power  conferred on  the    Court  to  grant  a remedy in       an appropriate  case appears  to envisage  a reasonably wide  discretion  vested  in  the  Court  in relation to  the order  sought by       a complainer  as the appropriate  equitable   alternative  to  a  winding-up order”. It is clear from these various decisions that on a true construction of  section  397,

 

an  unwise,  inefficient  or careless conduct  of a  Director in  the performance  of his duties cannot  give rise  to a  claim for  relief under that section. The person complaining of oppression must show that he has  been constrained  to submit to a conduct which lacks in probity,  conduct which is unfair to him and which causes prejudice  to   him  in   the  exercise  of  his  legal  and proprietary rights  as shareholder. It may be mentioned that the Jenkins  Committee on  Company Law  Reform had suggested the substitution  of the word ‘Oppression’ in section 210 of the English Act by the words ‘unfairly prejudicial’ in order to make  it clear  that it is not necessary to show that the act complained  of is  illegal or  that  it  constitutes  an invasion of legal rights (see Gower’s Company Law, 4th edn., page 668).  But that recommendation was not accepted and the English Law remains the same as in Meyer and in Re H.R. 749 Harmer Ltd., (1) as modified in Re Jermyn St. Turkish Baths. (supra) We have not adopted that modification in India. Having seen  the legal  position which obtains in cases where a  member or  members  of  a  company  complain  under section 397  of the  Companies Act  that the  affairs of the company are being conducted in a manner oppressive to him or them, we  can proceed  to consider  the catena  of facts and circumstances on  which reliance  is placed  by the  Holding Company in support of its case that the conduct of the Board of Directors  of  NIIL  constitutes  an  act  of  oppression against it.  There is,  however, one  matter which has to be dealt with before adverting to facts, namely, the provisions of FERA their impact on the working of NIIL and on the right of the  Holding Company  to continue  to hold  its shares in NIIL. This  we  consider  necessary  to  discuss  before  an appraisal of  the factual  situation since, without a proper understanding of the working of FERA, it would be impossible to appreciate  the turn  of intertwined events. It is in the setting  of  FERA  that  the  significance  of  the  various happenings can properly be seen. The Foreign Exchange Regulation Act, 46 of 1973, is

 

“An Act to  consolidate and  amend the  law  regulating  certain payments,  dealings  in  foreign  exchange  and  securities, transactions indirectly  affecting foreign  exchange and the import  and   export  of   currency  and  bullion,  for  the conservation  of  the  foreign  exchange  resources  of  the country and  the proper utilisation thereof in the interests of the economic development of the country”. It repealed the earlier Act,  namely, The  Foreign Exchange  Regulation Act, 1947, and came into force on January 1, 1974. “Person resident  in India” is defined in clause (p) of section 2 to mean: (i)  a citizen of India, who has, at any time after the 25th day of March 1947, been staying in India, but does not  include a  citizen of India who has gone out of, or stays outside, India, in either case- (a)  for or on taking up employment outside India, or (b)     for carrying  on outside India a business or vocation outside India, or 750 (c)     for any other purpose, in such circumstances as  would  indicate  his         intention  to  stay outside India for an uncertain period; (ii) a citizen of India, who having ceased by virtue of paragraph (a) or paragraph (b) or paragraph (c) of sub clause (i) to be resident in India, returns to or stays in India, in either case- (a)  for or on taking up employment in India, or (b)     for carrying  on  in  India  a  business  or vocation in India, or (c)     for any other purpose, in such circumstances as would         indicate his  intention to  stay in India for an uncertain period. “Person  resident   outside  India”  according  to clause (q)       means “a  person who  is  not  resident  in India”. Under  clause  (u)

“security”  means  “shares, stocks, bonds,” etc. Section 19 (1) provides: “Notwithstanding anything  contained in section 81 of the  Companies  Act,  1956,  no  person  shall, except with  the general  or special permission of the Reserve Bank. (a)     take or  send  any  security  to  any  place outside India; (b)     transfer any security, or create or transfer any interest  in a  security, to or in favour of a person resident outside India; (d)     issue, whether  in India  or elsewhere,  any security         which   is  registered   or  to  be registered in  India, to  a  person  resident outside India;” Section 29  which is  directly relevant for our purpose reads thus: 751 “29. (1)  Without prejudice  to the  provisions of section 28  and section 47 and notwithstanding anything contained in  any other  provision of  this Act  or the provisions       of   the  Companies  Act,  1956,  a  person resident outside  India (whether  a citizen of India or not) or  a person       who is not a citizen of India but is resident in  India, or  a company (other than a banking company) which  is not  incorporated under       any law  in force in India or in which the non-resident interest is more than forty  per  cent,  or  any  branch  of  such company, shall  not, except with the general or special permission of the Reserve Bank,- (a) carry on  in India,  or establish in India a branch, office  or other or other  place  of business for  carrying on  any activity of a trading, commercial  or  industrial  nature, other than an activity for the carrying on of which permission of the Reserve Bank has been obtained under section 28; or (2) (a) where any person or company (including its branch) referred  to in  sub-section

 

(1) carries on any activity referred to in  clause(a) of that sub-section at the  commencement of  this Act or has established a branch, office  or other  place  of  business  for       the carrying on  of such  activity  at  such  commencement, then, such person or company (including its branch) may make an application to the Reserve Bank within a period of six  months from  such commencement  or such further period as the Reserve Bank may allow in this behalf for permission to  continue to carry on such activity or to continue the  establishment of  the branch,  office  or other place  of business  for the carrying on  of such activity, as the case may be. (b)  Every application made under clause (a) shall be in  such form and contain such particulars as may be specified by the Reserve Bank. (c)     Where any  application has  been made  under clause  (a),  the  Reserve  Bank         may,  after making such  inquiry  as  it  may  deem  fit, either allow  the application subject to such conditions, if any, as 752 the Reserve  Bank may  think fit to impose or reject the application: …                 …                 … (4)    (a)  Where at the commencement of this Act any person or company  (including its  branch) referred to in sub-section (1)  holds any  shares in India of any company referred  to in  clause (b)  of that    sub- section, then,  such person  or company (including its branch)  shall not  be entitled to continue to hold such  shares unless  before the    expiry of  a period of  six months    from such  commencement  or such further    period as the Reserve Bank may allow in this  behalf such    person or company (including its branch) has made an application to the Reserve Bank in  such form and containing such particulars as may  be  specified    by  the  Reserve  Bank  for permission to continue to hold such shares.

 

(b)Where an  application has  been made under clause (a) the  Reserve  Bank  may, after  making  such inquiry as  it may  deem  fit,  either  allow    the application subject to such conditions, if any, as the Reserve Bank may think fit to impose or reject the application :” It is  clear from these provisions  that NIIL, being a Company in  which the  non-resident interest  of the Holding Company was  more than  40%, could not carry on its business in India  except with  the permission  of  Reserve  Bank  of India. An application for permission to continue to carry on such business  had to be filed within a period of six months from the  commencement of  the Act or such further period as the  Reserve  Bank  may  allow.  The  time  for  filing  the application was  extended in  all cases  by two  months and, therefore, it  could be filed by August 31, 1974, NIIL filed its application  three days  late on  September 3, 1974, and the application  was granted  by the Reserve Bank on certain conditions, by  its letter  dated May  10, 1976.  Under  the terms and  conditions imposed  by the Reserve Bank, the non- resident interest  of the  Holding Company,  which  came  to about 60%,  had to be brought down to 40% within one year of the receipt of the letter dated May 10, 1976, that is to say before May 17, 1977. 753 By reason       of section  29  (4)  of  FERA,

 

the  Holding Company too  had to  apply for permission to hold its shares in NIIL.  It applied  to the  Reserve  Bank  for  a  Holding licence on  September 18,  1974. The  application which  was filed late by 18 days is still pending with the Reserve Bank and is  likely to  be disposed  of  after  the  non-resident interest of the Holding Company in NIIL is reduced to 40%. There is a sharp controversy between the parties on the question as to whether May 17, 1977 was a rigid dead-line by which the  reduction of  the non-resident interest had to be achieved or  whether NIIL  could have applied to the Reserve Bank before  that date  for extension of time to comply with the Bank’s  directive, in  which case, it is urged, no penal consequences would  have flown. We will deal later with this aspect of  the matter,  including the  question of  business prudence involved  in applying  to the Reserve Bank for such an extension of time. Shri Nariman  raised at  the outset  an objection       to a finding of  mala fides or abuse of the fiduciary position of Directors being  recorded on  the basis merely of affidavits and  the   correspondence,  against   the  NIIL’S  Board  of Directors or  against Devagnanam and his group. He contends. Under  the   Company  Court  Rules  framed  by  this  Court, petitions, including  petitions under section 397, are to be heard in  the open court (Rules 11 (12) and Rule 12 (1), and the practice  and procedure  of the  Court and  of the Civil Procedure Code  are applicable  to such  petitions (Rule 6).

 

Under Order XIX Rule 2 of the Code, it is open to a party to request the  Court that  the deponent of an affidavit should be asked to submit to cross-examination. No such request was made  in  the  Trial  Court  for  the  cross-examination  of Devagnanam  who,   amongst  all   those  who   filed   their affidavits, was the only person having personal knowledge of everything that  happened at  every stage. Why he did or did not do  certain things  and what was his attitude of mind on crucial  issues  ought  to  have  been  elicited  in  cross- examination. It  is not permissible to rely argumentively on inferences  said  to  arise  from  statements  made  in  the correspondence, unless  such inferences  arise  irresistibly from admitted  or virtually admitted facts. The verification clause of Mackrael’s affidavit shows that he had no personal knowledge on  most of  the  material  points.  Raeburn  who, according to Mackrael, was the Chief negotiator on behalf of the Holding  Company in  the Birmingham meeting did not file any affidavit at all. Whitehouse, the Secretary 754 of the  Holding Company  and N.T.  Sanders who  was the sole representative of  the Holding  Company on  NIIL’s Board  of Directors, did  file affidavits  but they  are restricted to the question  of the  late receipt of the letter of offer of shares and  the notice for the Board meeting of May 2, 1977. Their  affidavits  being  studiously  silent  on  all  other important points  and the  affidavit filed  on behalf of the Holding Company  being utterly  inadequate  to  support  the charge of  mala fides  or abuse  of the Directors’ fiduciary powers, it  was absolutely essential for the Holding Company to adduce  oral evidence  in support of its case or at least to ask  that Devagnanam  should submit  himself  for  cross- examination.  This,   according  to   Shri  Nariman,   is  a fundamental infirmity  from which  the case  of the  Holding Company suffers  and therefore,  this  Court  ought  not  to record a  finding of  mala fides  or  of  abuse  of  powers, especially when  such findings  are likely  to involve grave consequences,  moral   and  material,   to  Devagnanam   and jeopardise the very functioning of NIIL itself. In support       of his  submission, Shri Nariman has relied upon many a case to show that issues of mala fides and abuse of fiduciary  powers are  almost always  decided not  on the basis of  affidavits but on oral evidence. Some of the cases relied upon  in this  connection are:  Re. Smith  &  Fawcett Ltd.,(1) Nanalal  Zaver v.  Bombay Life Assurance,(2) Plexcy v.  Mills,(3)   Hogg  v.  Cramphorn(4)  Mills

 

v.  Mills,(5) Harlowe’s Nominees(6) and Howard Smith v. Amphol.(7) We appreciate  that it  is generally  unsatisfactory to record a finding involving grave consequences to a person on the basis  of affidavits  and documents  without asking that person to  submit to  cross-examination. It is true that men may lie  but documents  will not  and often, documents speak louder than words. But a total reliance on the written word, when probity  and fairness of conduct are in issue, involves the risk  that the  person accused  of wrongful  conduct  is denied an  opportunity to  controvert the inferences said to arise from the documents. But then, Shri Nariman’s objection seems to us a belated attempt to avoid an inquiry into the 755 conduct and  motives of Devagnanam. The Company Petition was argued both in the Trial Court and in the Appellate Court on the  basis   of  affidavits   filed  by   the  parties,  the correspondence and  the  documents.  The  learned  Appellate Judges of  the High  Court have  observed in  their judgment that it  was admitted,  that before the learned trial Judge, both sides  had agreed  to proceed  with the  matter on  the basis of  affidavits and  correspondence  only  and  neither party asked  for a  trial in  the sense  of  examination  of witnesses. In  these circumstances, the High Court was right in holding that, having taken up the particular attitude, it was not open to Devagnanam and his group to contend that the allegation of mala fides could not be examined, on the basis of affidavits  and the  correspondence only.

 

There is ample material  on  the  record  of  this  case  in  the  form  of affidavits, correspondence and other documents, on the basis of which  proper and  necessary inferences  can  safely  and legitimately be drawn. Besides, the  cases on  which counsel relies do not all support  his   submission  that   from  mere  affidavits  or correspondence, mala  fides or  breach  of  fiduciary  power ought not  to be  inferred. In  Re  Smith  &  Fawcett  Ltd., (supra) Lord Greene, after stating that he strongly disliked being  asked   on  affidavit   evidence  alone  to  draw  up inferences as to the bona fides or mala fides of the actors, added that  this did  not mean  that it is illegitimate in a proper case  to draw  inferences as  to bona  fides or  mala fides  in   cases,  where  there  is  on  the  face  of  the affidavits,  sufficient   justification  for  doing  so.  In Nanalal Zaver, (supra) the judgment of Kania C.J. contains a statement at page 394 that ‘Considerable evidence was led in the trial Court on the question of hona fides’ but it is not clear what kind of evidence was so led and besides, the fact that oral  evidence was led in some cases does not mean that it must  be led  in all cases or that without it, the matter in issue  cannot be  found upon. We may mention that in Punt v. Symons,(1)  Fraser v.  Whalley(2) and  Hogg v. Cramphorn, (supra) the  breach of  fiduciary  duty  was  inferred  from affidavit evidence. We       have  therefore  no  hesitation  in  rejecting  the submission that  we ought  not to  record a  finding of mala fides or  abuse of  fiduciary power  on  the  basis  of  the affidavits, correspondence and the 756 other documents  which are on the record of the case. May it be said  that these are on the record by consent of parties. Not merely  that, but  more documents  were  placed  on  the record, mostly by consent of parties, as the case progressed from stage  to stage.  A very  important  document,  namely, Devagnanam’s telex  to Raeburn dated May 25, 1977 was put on the record  for the  first time before us since Shri Nariman himself desired it to be produced, waiving the protection of the caveat

 

“without prejudice”. That shows that the parties adopted willingly  a mode  of trial  which they  found to be most convenient and satisfactory. That takes       us to  the question  as to  whether on  the basis of the material which is on the record of the case, it can be  said that  the decision  taken by  NIIL’s  Board  of Directors in  their meetings  of April  6 and  May  2,  1977 constitute  acts   of  oppression  as  against  the  Holding Company. The  case of  the Holding Company as put forward by Shri Seervai is like this: (i)   Devagnanam  kept  Raeburn  and  Coats  under       the impression that  negotiations were  still going on and were  not to be treated as concluded while, in reality, he  had made    up his  mind to  treat  the matter as at an end. (ii) He  kept the Holding Company in total ignorance of the steps  which he  was taking  in behalf  of the issuance and    allotment of  the rights shares. The copy of the letter of the Reserve Bank dated March 30,  1977  which  is    said  to  have  spurred  the decision taken  in the meetings of April 6 was not sent to  the Holding Company though Devagnanam had stated in  his letters  dated April  12 to Raeburn that the  said copy  was being enclosed along with that    letter.  Deliberately  and  designedly,  the letter of offer dated April 14, 1977 meant for the Holding Company  in England  was not    posted until April 27.  Similarly, the notice calling a meeting of the  Board on  May 2  was not posted till April 27. The notice to Manoharan too was posted as late as on April 27, since he was believed to be siding with Coats.  The letter of offer and the notice of meeting of  May 2  which were    posted at Madras on April 27  were received  by the Holding Company on May 2,  after the Board’s meeting for allotment of rights shares was held. 757 (iii) The Reserve Bank of India was not informed of the proposal to  issue right  shares to  the  existing shareholders although    it  was  the  most  obvious thing to do, in response to its letter dated March 30, 1977, calling upon NIIL to submit its proposal for reducing    its  non-resident  interest  without delay. (iv) No  application was  made  to       the  Controller  of Capital Issues  for fixing  the premium  on rights shares, not withstanding that the Reserve Bank had informed NIIL,  that if  necessary, an application to that  effect may  be made    to the Controller of Capital Issues. (v)   The whole  idea was       to cut  off all  sources  of information from Raeburn and Coats and to confront them with  the fait  accompli of  the allotment of rights  shares   to     the   Indian   shareholders, including  the  shares  formally  offered  to    the Holding Company  which were  not allotted to it on the ground  of its  non-compliance with the letter of offer.

 

(vi) The  agenda of  the meetings of April 6 and May 2, 1977    was  purposely  expressed  in  vague  terms: ‘Policy- Indianisation’, in order that the Holding Company should  not know that the reduction of the non-resident interest    was proposed to be effected by the issue of rights shares. By suppressing from the knowledge    of the Holding Company what was its right to  know, and  what  was  the  duty  of    the Board’s Secretary  to    convey  to  it,  Devagnanam succeeded in    achieving his purpose on the sly and pre-empted any  action by  the Holding  Company to restrain the    holding of the meeting, the issue of rights   shares    and   the     allotment   thereof exclusively to  the existing shareholders (barring Manoharan). (vii) Silverston was appointed as an additional Director in the meeting of April 6 to make up the quorum of two “disinterested”  directors even  though he was in the  true sense  not a  disinterested person in the  decision     taken   in   that   meeting.   The appointment of  additional directors    was not even an item on the agenda of the meeting. 758 (viii)  Devagnanam was  emboldened to  take this  course because he  believed that  no matter    how wrongful his conduct,    he could  count upon  the support of NEWEY to  see that he was not brought to book in a court of justice for his wrongful conduct. He even attempted  to    thwart  the  Company  Petition  and render  it  infructuous  by  persuading  NEWEY  to withdraw the    power of  attorney executed by them, authorizing the filing of the petition. (ix) In  these machinations, Devagnanam was actuated by the sole desire to acquire the control of NIIL for his  personal    benefit,  by  ousting  the  Holding Company from its control over the affairs of NIIL. (x) In fact,  the rights       shares were  issued at par, though their  market value  was far  greater, as a measure  of personal   aggrandisement   in   the supposition and  forethought that such shares will inevitable go  to Devagnanam  and his  group.

 

This was  blatantly in  breach of   the   fiduciary obligation of the Directors. (xi) By  these means  and methods, which totally lacked in probity, Devagnanam succeeded in converting the existing majority into a minority and the minority into a  majority, a  conduct which  is burdensome, harsh and unlawful, qua the existing majority. According to  Shri Seervai, the question before the Court is not whether  the issue  of rights  shares  to  the  existing Indian  shareholders   only,  amounted   to  oppression  but whether,  the   offer  of  rights  shares  to  all  existing shareholders of  NIIL but  the issue  of  rights  shares  to existing Indian shareholders only, constituted oppression of the Holding Company on the facts and circumstances disclosed in the  case. This  argument raises  questions regarding the interpretation of  sections 43A and 81 of the Companies Act, 1956. These contentions  of the  Holding  Company  have  been controverted  by   Shri  Nariman,  according  to  whom,  the appellate Court  has taken  a one-sided  view of  the matter which is  against the  weight of  evidence  on  the  record. Counsel contends  that Devagnanam  had done  all that lay in his power to persuade the Holding Company to disinvest so as to reduce its holding in NIIL to 40%, that the Direc- 759 tors of  NIIL were  left with  no option save to decide upon the issue of rights shares, since disinvestment was a matter of the  Holding Company’s  volition, that the wording of the agenda of  the meetings  of April  6 and  May 2 conveyed all that  there  was  to  say  on  the  subject  since,  in  the background of the negotiations which had taken place between the parties,  it was  clear that  what was meant by ‘Policy- Indianization’ and  ‘Allotment of  Shares’ was the allotment of rights  shares in  order to  effectuate the policy of the Reserve Bank that the Indianization of the Company should be achieved by the reduction of the non-resident holding to 40% that  Coats   refused  persistently,

 

both   actively   and passively, either to disinvest or to consider the only other alternative of  the issue  of rights  shares, and  that  the impugned decisions  were taken  by the  Board  of  Directors objectively  in   the  larger   interests  of  the  Company. According to  Shri Nariman,  Coats left  no doubt  by  their attitude that  their real  interest lay  in their  worldwide business and  they wanted  to bring the working of NIIL to a grinding halt  with a  view to  eliminating  an  established competitor from their business. It is denied by counsel that important   facts   or   circumstances   were   deliberately suppressed from  the Holding  Company or  that the letter of offer and  the notice  of the  Board’s meeting of May 2 were deliberately posted  late on  April 27. It is contended that neither by  the issue of rights shares nor by the failure to give the  right of  renunciation to  the Holding Company was any injury caused to its proprietary rights as a shareholder in  NIIL.  As  a  result  of  the  operation  of  FERA,  the directives issued by the Reserve Bank thereunder and because of the  fact that  NIIL had  retained its old Articles after becoming a public company under section 43A of the Companies Act, the  Holding Company could neither have participated in the issue  of rights  shares nor could it have renounced the rights shares  offered to  it in  favour of an outsider, not even in  favour of  a resident  Indian Company  like  Madura Coats. It  is denied that Silverston was not a disinterested Director or  that his  appointment as an additional Director was otherwise  invalid. Counsel  sums  up  his  argument  by saying that  the Board of Directors of NIIL had in no manner abused its  fiduciary  position  and  that  far  from  their conduct being  burdensome, harsh  and wrongful,

 

it was  the attitude of  Coats which was unfair, unjust and obstructive. Coats  having  come  into  an  equitable  jurisdiction  with unclean hands,  contends Shri  Nariman, no  relief should be granted to  them assuming  for the  sake  of  argument  that Devagnanam from  the  position  of  Managing  Director,  are characterised   by   counsel   as   wholly   uncalled   for, transcending the exigencies of the situation. 760 It seems  to us unquestionable that Devagnanam played a key role  in the  negotiations with  the Holding Company and ultimately master-minded  the issue  of  rights  shares.  He occupied  a  pivotal  position  in  NIIL,  having  been  its Director for  over twenty years and a Managing Director over fifteen years,  in which capacity he held an undisputed sway over the  affairs of NIIL. The Holding Company had nominated only one  Director  on  the  Board  of  NIIL,  namely,  N.T. Sanders, who resided in England and hardly ever attended the Board’s meetings.  Devagnanam was  thus a  little monarch of all that he surveyed in Ketty. He had a large personal stake in NIIL’s  future since  he and  his group  held nearly  30% shares in  it, the  other Indian  shareholders owning a mere 10%. In  the 60% share capital owned by the Holding Company, Coats and  NEWEY were  equal sharers  with the  result  that Coats, NEWEY  and Devagnanam  each held an approximately 30% share capital  in NIIL.  This equal holding created tensions and rivalries between Coats and Devagnanam, NEWEY preferring to side  with the  latter  in  a  silent,  unspoken  manner. Eventually. after  the filing of the Company Petition, Coats bought over NEWEY’s interest in NIIL sometime in July 1977. The picture  which Devagnanam has drawn of himself as a person deeply committed to Ketty, and as having built up the business with scrupulous regard to the observance of Foreign Exchange Regulations and Indian Laws in contradistinction to Coats who,  he alleged,  wanted to  contravene  the  Foreign Exchange Regulations  of our country is not borne out by the correspondence. In fact, the letter which he wrote to Shread of Newey-Goodman Ltd. on August 11, 1973 (which was filed by consent in the Appeal Court) shows that he wanted to dispose of his shares at a large premium by officially receiving the par value  in Rupees  in India  and obtaining the balance in foreign currency  outside India.  Nevertheless, he stated on oath in  para 13  of his rejoinder affidavit that “it is not true that  in selling  my shares,

 

I wanted  a part  of  the consideration  in   foreign  exchange”.   The  said   letter discloses that  over and  above proposing  to make  a  large profit in  contravention of the Foreign Exchange Regulations and the  tax laws of India by receiving money outside India, Devagnanam proposed  to take away from Ketty its “select key personnel and  technicians” to  Malacca and  to  manufacture competitively, products  which  were  then  manufactured  by Needle Industries,  U.K. The  foot note  to  the  letter  to Shread asked  him to  keep these  matters secret  from Coats till the  shares had  been sold,  and till the deed had been done. 761 There is  another aspect  of  Devagnanam’s       conduct  to which reference  must be  made. The statement made by him in para 15  of his  reply affidavit  denying that he was a non- resident is  not entirely  true  because  at  least  between August 26,  1974 and  June 9,  1976 he  was  a  non-resident within the  meaning of section 2 (p) (i) (a) of FERA. By his letter dated  August 26, 1974 to the Reserve Bank, he asked, though out of abundant caution, for permission under section 29 (4)  of FERA  to hold  his shares in NIIL. He referred in that letter  to his  contract with  Newey and  Taylor  under which he  was to  be a  full-time Managing  Director of that Company for  five years from August 1, 1974 to July 31, 1979 and asked  the Reserve  Bank to  determine  his  status.  On September 3,  1975 he  wrote to  the Reserve Bank contending that he  was a

 

‘resident’, referring  this time  not to his contract with Newey-Taylor but to the agreement between NILL and Newey  Goodman Ltd., a Company about to be formed, under which he  was to  be on deputation with it as an employee of NIIL. Devagnanam’s letter  dated August 11, 1973 to Shread of Newey-Goodman, the  gloss which  he put  on his  status as a resident in his letters to the Reserve Bank dated August 26, 1974 and September 3, 1975 and the clever manner in which he had his status determined as a resident, cast a cloud on his conduct and  credibility. And  though, as  contended by Shri Seervai,  we   do  not  propose  to  apply  to  Devagnanam’s affidavit-evidence the  rule of  ‘corroboration in  material particulars’ which  is generally  applied in criminal law to accomplice evidence,  we shall  have to  submit Devagnanam’s conduct to  the closet  scrutiny and statements made by him, from time to time, to the most careful examination. We shall have to  look to something beyond his own assertion in order to accept his claim or contention. Shri Nariman  attacked the conduct of  Coats almost as plausibly as  Shri  Seervai  attacked  that  of  Devagnanam, though in  terms of  a saying in a local language we may say that ‘a  brick is  softer than  a stone’,  Coats  being  the brick. Coats,  as will  presently  appear,  are  not  to  be outdone by  Devagnanam in  the matter  of lack  of  business ethics. But  that is  no wonder  because when  the  dominant motivation is  to acquire control of a company, the sparring groups of  shareholders try  to grab the maximum benefit for themselves. If one decides to stay on in a company, one must capture its control.

 

If one decides to quit, one must obtain the best price for one’s 762 holding, under  and over  the table,  partly in  rupees  and partly in  foreign exchange.  Then, the  tax  laws  and  the foreign exchange regulations look on helplessly, because law cannot operate  in a vacuum and it is notorious that in such cases evidence is not easy to obtain. Alan  Mackrael  says  in  paragraph  20  of  his  reply affidavit in  the Company Petition that it was made clear to Devagnanam that  neither Coats  nor  the  Needle  Industries (U.K.) would  ever be  a party  to any transaction which was illegal under the Indian law. In a letter dated May 24, 1976 to Devagnanam, A.D. Jackson of NEWEY has this to say:- “In broad  terms  the    proposition  is  that  Alan Mackrael, Martin  Henry and myself should meet with you in Malacca       during September  to  discuss  arrangements whereby  an  Indian  gentleman  known  to  Coats  would purchase both  your shares       and our  own share  of  the NINTH holding  in the manner which I outlined to you on the telephone.  In order  to provide  a  base  for  the calculations, Kingsley  is to  be asked  to obtain       the government approved  price but, of course, the basis of our discussions  has been  that the actual payment will be higher than this”. In the  same letter Jackson, after warning that Coats/Needle Industries (U.K.)  are “certainly  not going  to  relinquish control of  Ketty without  a major  struggle”,  proceeds  to describe the  helpless condition  of NEWEY by saying that in the financial  position in which they found themselves, they were “in  no state to do battle with this particular giant”. Leaving aside  the determination  of Coats  to engage  in  a major struggle  with NIIL’s  Board of  Directors,  Jackson’s letter leaves no doubt that Coats were willing to be a party to the  arrangement whereby  the shares  of  Devagnanam  and NEWEY would  be sold  to an  ‘Indian gentleman’, under which the actual  payment would  be  higher  than  the  government approved price  ascertained by  Kingsley, the  Secretary  of NIIL. This is doubtful ethics which justifies Shri Nariman’s argument that  he who comes into equity must come with clean hands; if  he does  not, he  cannot ask  for relief  on  the ground that the other man’s hands are unclean.

 

The “Notes on further Indianization” made by Devagnanam on April 29, 1975, at a  time when  the relations  between the parties were not under a  strain, show that N.T. Sanders who was nominated by the Holding  Company as  a Director of NIIL was “aware of an inquiry from  a Mr. Khaitan”. This shows that Devagnanam was not trying 763 to dispose  of his shares secretly to Khaitan and Coats were aware of that move. In para  20 of  his reply affidavit, Alan Mackrael says that none  of the  proposals  put  forward  by  the  Holding Company for  achieving  Indianization  to  comply  with  the requirements of FERA would have given the control of NIIL to the Holding  Company. This  is falsified by Raeburn’s letter dated October  25, 1976 to Devagnanam, in which he says that the idea  of an outside independent party holding 15% of the share capital of NIIL was raised, but this did not appear to be acceptable  to Coats since “they want to achieve not only that the  present Indian  shareholders hold  a minority  but that they  (Coats) hold  and influence  a substantial block, thereby hoping  to influence  NEWEY to  their views”.  Thus, there is  a wide  difference between  what  Coats  practised earlier and  pleaded later. Towards the end of paragraph 21, Mackrael  asserts  that  the  shareholders  of  the  Holding Company, namely,  Coats and  NEWEY, were  unanimous  in  the filing of  the Company  Petition and  the prosecution of the proceedings following  upon it,  which is  said to  be clear from the  fact that  two powers of attorney were attested by the Directors  of the  Holding Company,  both of  whom  were Directors of  NEWEY also. The fact that Coats and NEWEY were not of  one  mind  is  writ  large  on  the  face  of  these proceedings and,

 

in fact,  the charge against NEWEY is that because of  their Far-Eastern  interests in  which Devananam was a  great asset to them, they were supporting Devagnanam. We may  in this  connection draw attention to a letter dated June 8,  1977  by  Raeburn  to  Mackrael,  saying  that  the insistence of  Coats (‘Glasgow’)  to  hold  on  to  the  60% shareholding in  NIIL or at least to ensure that 60% did not get into the hands of the Indian shareholders will involve a long and costly legal battle. Raeburn proceeds to say: “We, as  Neweys, have    neither the  will  nor  the means to participate in that battle, nor do we think it right to  do so  bearing in  mind       the  legal  position regarding Indianisation,  the provision in the Articles and the  fact that substantially the modern business of N.I.I.L. has  been built  up  by  the  efforts  of       the present Indian shareholders”. In paragraph  5 of  the aforesaid  letter, Raeburn clarifies the attitude of NEWEY by saying that if Coats were unable to agree to  the arrangement  suggested by  NEWEY, then,  NEWEY will be compelled to notify to those concerned in India that they can  no longer  be parties  to the  power  of  attorney granted by the Holding Company 764 to Mackrael  or to  any  other  proceedings  in  the  Indian Courts. In  spite of  this letter  of Raeburn (dated June 8, 1977), Mackrael  had the  temerity in  his  reply  affidavit dated July  8, 1977,  to  say  that  Coats  and  NEWEY  were unanimous in  the prosecution  of the proceedings consequent upon the  filing of  the  Company  Petition.  There  was  no agreement between  Coats  and  NEWEY  either  in  regard  to Indianisation of  NIIL or in regard to the legal proceedings instituted to challenge the issue of rights shares. There are       many other contradictions on material points between  the   actual  state   of  affairs  and  what  Coats represented them  to be,  but we  consider it unnecessary to cover the whole of that field. We will refer to one of these only, in order to show how difficult it is to choose between Coats  and  Devagnanam.  In  paragraph  19  of  the  Company Petition, which  is sworn  by Mackrael,  it is  stated  that Devagnanam was  in U.K.  sometime towards  the end  of March 1977  and   that  he   held  several  discussions  with  the representatives of  the Holding  Company.

 

In paragraph 40 of his reply  affidavit, Mackrael  says that as to the contents of paragraph  19 of the Company Petition, he himself was not present at  such meeting,  since it  was a  meeting  between Devagnanam and  the officials  of NEWEY  for the  purpose of discussing matters concerning NEWEY’s Far-Eastern interests. The verification  clause of  Mackrael’s affidavit in support of the Company Petition shows that the contents of paragraph 19 are  based on information which he believed to be true. A clearer contradiction  between the  parent petition  and the reply affidavit  is difficult  to imagine.  It would  appear that it  was not  until quite  late that Coats realised that they had  to plead  all ignorance  of the  discussions which were held  in U.K.  towards the  end of  March 1977  between Devagnanam and the representatives of the Holding Company. We will  now shift       our attention  to another  scene in order to show how unethical the Coats are. Coats’ subsidiary called the Central Agency Ltd., who were sole-selling agents of NIIL’s  products in  various markets in the world, ceased to be  so after  NIIL put an end to the agreement with them. The Central  Agency never  applied during the time that they were sole-selling agents of NIIL’s products for registration of the Indian Company’s Trade Marks as a protective measure. The learned  Trial  Judge,  Ramaprasada  Rao,  Acting  C.J., delivered the  judgment in the Company’s Petition on May 17, 1978. Immediately  thereafter, Application No. 34991 of 1978 was filed  by the  Japanese Trade  Marks  Agents  of  Needle Industries, 765 U.K.,  for  registration  of  the  Trade  Marks  ‘Pony’  and ‘Rathna’, which  were the  registered Indian  Trade Marks of NIIL. That  application was  made under  the authority  of a Power of  Attorney signed  by Alan  Marckrael. In June 1978, Application No.  102987 was  filed in  Thailand on behalf of the Needle  Industries U.K.  as owners  of  the  Trade  Mark ‘Pony’ which  is clear from the Trade Mark Attorney’s letter dated January  22, 1979. In October 1978, Coats Patons, Hong Kong, got the Indian Company’s Trade Mark ‘Pony’ registered.

 

In November  1978, the  Trade Mark  Agents and Solicitors of NIIL in Hong Kong had to give a notice to Coats Patons, Hong Kong, that  the latter  had registered the ‘Pony’ Trade Mark in Hong Kong with the full knowledge that NIIL was the legal owner of  that Trade Mark and threatening legal action. As a result of  that notice,  the  Indian  Company’s  Trade  Mark ‘Pony’ which  was registered by Coats Patons in Hong Kong as their own  Trade Mark, was assigned to the Indian Company on December 21,  1978 for  a nominal sum of 10 dollars. Items 7 and 8  of the minutes dated March 28, 1979 of the meeting of the  interim  Board  of  Directors  of  NIIL  refer  to  the registration in  Hong Kong  by Coats  Patons of  the  Indian Trade Mark of NIIL and subsequent assignment thereof to NIIL when legal  action was  threatened. Harry  Bridges, who  was appointed as  a temporary  Managing  Director  by  the  High Court, has  stated in  his counter affidavit dated March 27, 1980 that  the application  for registration  of the  ‘Pony’ Trade Mark  was made  in Hong Kong and other places in order to protect  that Trade  Mark from  its improper use by other traders. This  is a  lame explanation  of  an  act  of  near piracy. Were  this explanation  true,  the  application  for registration of  the Trade Mark would have mentioned that it was being  filed on  behalf of  NIIL, and that ‘Pony’ was in fact the  Trade Mark  of NIIL.  It is quite amazing that any one should claim that the registration of the Trade Mark was being sought as a protective measure when a battle royal was raging between  the Holding  Company and  NIIL and after the Trial Court  had delivered its judgment. We may mention that by a  letter dated  June  15,  1977  Mackrael  had  informed Devagnanam that  he was  removed from the Board of Directors of the Holding Company and M.D.P. Whiteford was appointed in the vacancy.  The fact  that Needle  Industries,  U.K.,  had surreptitiously made  an application for the registration of NIIL s  Trade Mark  ‘Pony’ came  to  light  fortuitously  in January 1979  when NIIL  applied for the registration of the

 

‘Pony’ Trade  Mark in  Thailand and Japan. NIIL’s Trade Mark Agents there  found, on  inspection of  the registers,  that certain 766 applications made  by Needle  Industries, U.K., claiming the same mark as their own pending consideration. The decision,  in appeal,       of the High Court appointing Harry Bridges  as a  Managing  Director  for  4  months  was pronounced on  October 26,  1978.  As  a  Managing  Director appointed by  the Court,  Bridges called  a Board meeting of their members of the Board appointed by the Appellate Court, for  November   2,  1978.  Bridges  took  away  many  files, documents and statements from the NIIL’s factory at Ketty on October 28,  1978, his  explanation being  that he wanted to carry these  documents to Madras where the Board meeting was to be  held. A  little before Bridges left Ketty for Madras, he was  informed that this Court had passed an interim order on November  1, 1978.  Consequently, the  meeting of the 2nd November did  not take  place. Bridges  says  that  when  it became clear  that he  was no  longer required  to act  as a Managing Director  of NIIL, he took the earliest opportunity of returning  the documents  which he  had  taken  from  the office of the factory at Ketty. It is  understandable that       Bridges wanted to take with him certain documents to help him perform his functions as a Managing Director in the meeting of November 2, 1978. But it is surprising  that, in  addition  to  the  documents  which Bridges returned  on November  8,  he  had  taken  with  him several other documents which he returned when pressed to do so. He took away with him (1) Design drawing (2) Statistical Returns  (3)  the  Master  Budget  summary,  1978  (4)  Cash forecast for  1978-79 (5)  Detailed Project Report with cash flow forecast  (6) Details of Project Investment (7) Note on activity upto  October 1978  and one or two other documents. These were  eventually returned  by  the  Holding  Company’s Advocate, Shri  Raghavan. When  NIIL wrote  on November  21, 1978 to  Shri Raghavan  asking him  to call  upon Bridges to confirm that  he had  not retained  copies  of  any  of  the documents which  he had  removed from Ketty, Bridges replied by his  letter dated  November 29,  1978 that  he had  taken copies of  such documents  which he  considered relevant and that he proposed to retain such copies since “as director of the Company,  I am  entitled to  peruse and  take copies  of whatever records  I choose”.

 

This is  a wee  bit  high  and mighty. The  Design drawing is not the drawing of a bungalow (with a  swimming pool) which was being built for Devagnanam but it  is a  ‘Ring spring  fastener tool design’. The other documents which  Bridges had  taken away and of which he got copies made  in assertion  of his Directorial right, contain important matters like details 767 of production,  sales and exports of NIIL’s products, orders outstanding and  sales, the proposed additional turnover and the working  capital requirements,  etc. The  fact of  Harry Bridges’s taking  away these  documents  and  making  copies thereof for  his own use leaves not the slightest doubt that the motivation  of Coats  at all  times was to advance their own  world   interests  at  the  expense  of  NIIL.  In  the background  of   such  conduct,   it  becomes  difficult  to appreciate the  Holding Company’s  contention,  so  strongly pressed upon  us, that  Coats, NEWEY and Devagnanam being in the position  of  partners,  the  greatest  good  faith  and probity  were   expected  to   be  displayed  by  them.  The contention, as  a bald proposition of law is sound. The snag is: who should harp upon it ? Not Devagnanam, we agree. But, not Coats either, we think. We       have   said,  while   discussing  the   conduct  of Devagnanam, that  it would  be difficult  to accept his word unless  there  is  support  forthcoming  to  it  from  other circumstances on  the record.

 

We feel the same about Coats. It would  be equally  unsafe to  accept their word unless it finds support  from the other facts and circumstances on the record of  the case. It is true that in saying this, we have partly taken  into account  facts which  came into existence after the Company Petition was filed. But those facts do not reflect a  new trend or a new thinking on the part of Coats, generated by  success in  the litigation.  Finding that they had succeeded  in the  High Court,  Coats  took  courage  to pursue relentlessly their old attitude with the added vigour which success brings. On the question of oppression, there is a large mass of correspondence and  other documentary evidence on the record before us. We shall have to concentrate on the essentials by separating the  chaff from the grain. In the earlier part of this judgment  we have  already referred  to the  course  of events generally, which culminated in the meetings of NIIL’s Board of  Directors, held  on April  6 and  May 2,  1977. We propose now to refer to these events selectively.

 

FERA having  come into  force on  January 1, 1974, D.P. Kingsley,  the   Secretary-Director  of   NIIL,  applied  on September 3,  1974 to  the Reserve  Bank for  the  necessary permission under  section 29  (2) of  that Act.  The Reserve Bank intimated  to NIIL by its letter dated November 5, 1975 that permission  would be  accorded to NIIL under section 29 (2) (a) read with section 29 (2) (c) of FERA to carry on its activities in India subject to the conditions enumerated 768 in  paragraph  2  of  the  letter.  One  of  the  conditions mentioned in  the aforesaid  paragraph  was  that  the  non- resident interest in the equity capital must be reduced to a level not  exceeding 40%,  within a  period of one year from the date  of receipt  of the  letter. The Reserve Bank asked NIIL to  submit a  scheme within  a period  of three months, showing how it proposed to achieve the required reduction in the non-resident  interest: “(a) whether by disinvestment by non-resident  shareholders,  or  (b)  whether  by  issue  of additional equity  capital to Indian residents to the extent necessary   to    finance   any    scheme    of    expansion diversification, or (c) by both”. Kingsley wrote a letter to Mackrael on November 19, 1975, enclosing therewith a copy of the letter of the Reserve Bank dated November 5. On February 4, 1976  Kingsley wrote  to the  Reserve Bank  that NIIL was prepared to agree to reduce the non-resident interest in the equity capital  to a  level not  exceeding 40%  and that the Company was  proposing to  bring this about by disinvestment though, depending  upon  future  developments,  the  Company reserved its  right to  reduce the  non-resident interest by issue of  additional equity  capital to Indian shareholders. Kingsley requested  the Bank  to extend  the stipulated time one year in case NIIL was not able to comply with the Bank’s directive by  reason of  circumstances beyond its control. A copy of  this letter  dated February  4, 1976  was  sent  by Kingsley  to   Whitehouse,  the  Secretary  of  the  Holding Company. It  is significant  that there  was no  response as such to this communication, from the Holding Company.

 

On May 11, 1976  the Reserve  Bank of  India sent  a letter to NIIL granting permission  to  it  under  FERA  to  carry  on  its business on  certain conditions,  one of them being that the non-resident interest  in  the  equity  capital  had  to  be reduced to  a level not exceeding 40% within a period of one year from  the date  of receipt  of the  letter. The Reserve Bank stated  in the aforesaid letter that until such time as the non-resident  interest  was  not  reduced  to  40%,  the manufacturing activity  of the Company shall not exceed such capacity as  was  validly  approved  or  recognised  by  the appropriate authority  on December  31, 1973  and  that  the Company shall not expand its manufacturing activities beyond the level  so approved  or recognised. It is clear from this letter that  all  developmental  activities  of  NIIL  stood frozen as  of the  date December  31, 1973,  until the  non- resident interest  was reduced  to  40%.  The  Reserve  Bank stated  further  in  the  letter  that  NIIL  should  submit quarterly reports  to it  indicating the  progress  made  in implementing the  reduction of the non-resident interest and that the  transfer of  shares from  non-residents to  Indian residents would  be required  to be confirmed by the Reserve Bank under section 19 (5) of FERA. 769 The letter  of the  Reserve Bank was received by NIIL on May 17, 1976, which meant that the reduction of the non-resident interest had to be achieved by May 17, 1977. It shall have been seen that by the time the permission was granted  by the  Reserve Bank  to NIIL in May 1976, FERA had been  in force  for a  period of  about 2  1/2 years.  A period of  one year  and eight  months had gone by since the filing by  NIIL of  the application for dilution of the non- resident interest. Over and above that, the Reserve Bank had granted a  long period  of one  year for  bringing about the dilution of  the non-resident  interest.  It  is  true  that public authorities  are not  generally averse, in the proper exercise of  their discretion,  to extending  the time limit fixed by  them, as  and when  necessary. But  an  elementary sense of  business prudence  would  dictate  that  the  time schedule fixed  by the Reserve Bank had to be complied with. The firm  tone of the Reserve Bank’s letter conveyed that it would not  be easy  to  obtain  an  extension  of  time  for complying with its directive, while the stringent conditions imposed  by   it,   particularly   in   regard   to   future developmental activities,  dictated an early compliance with the directive. Kingsley sent  a letter  to the Reserve Bank on May 18, 1976, confirming  the acceptance  of the  various conditions under which  permission was  granted to NIIL to carry on its business. Kingsley  pointed out  a difficulty  in implenting one of  the  conditions  regarding  the  sale  of  petroleum products, but  the Reserve  Bank by its letter dated May 29, 1976 informed  him that after a careful consideration of the request,

 

the  Bank regretted  its inability  to enhance  the ceiling on the turnover from the Company’s trading activity, as stipulated in the letter dated May 11, 1976. In the  meeting of       the Board  held on October 1, 1976, Devagnanam’s appointment  as Managing  Director was  renewed for a  further period  of five  years. Raeburn,  Chairman of NEWEY who  was looking  after the  affairs  of  the  Holding Company, wrote to Devagnanam on October 4, 1976, complaining that it  was necessary  that the  Holding Company  should be kept informed  in ample  time of  the  Board’s  meetings  on important organisational matters. Raeburn and  Mackrael came       to  India  to  discuss  the question of  dilution of the non-resident holding in NIIL. A meeting was  held at  Ketty on  October 20  and 21,  1976 in which the U.K. shareholders were represented by Mackrael and Raeburn  and  the  Indian  shareholders  by  Devagnanam  and Kingsley. Silverston took part 770 in the  meeting as  an adviser  to the  Indian shareholders. Martin Henry, the Managing Director of Madura Coats which is an Indian  company in which the Needle Industries (U.K.) and Cotas have  substantial interest,  attended the  meeting and took part  in the  discussions. A  note of  the  discussions which took  place at Ketty on October 20 and 21 was prepared by Raeburn  and forwarded along with a letter dated November 10, 1976  to Devagnanam,  with copies  to  Mackrael,  Newey, Jackson and  Whitehouse. Paragraph  2 of this note, which is important, says: “It  was   agreed  that  Indianization  should  be brought about by May, 1977, as requested by Government, so       as   to  achieve   a  40%   U.K.  and   60%  Indian shareholding”. The main features of the discussions which took place in the Ketty meeting are these: (1)   Mackrael and Martin Henry suggested acceptability of Madura  Cotas as holding part of the 60% of the equity to  be held  by  Indian  shareholders.    The latter “saw  no reason  to give up the right which the Indianization  legislation, combined  with the Company’s  Articles,     conferred  upon  them  and, therefore they  insisted on taking up the whole of their    entitlement   to  60%   of   the   equity”. Silverston who  was an  Englishman by    nationality and a    Solicitor by  profession in  India and  was acting as an Adviser to the Indian shareholders in the Ketty  meeting plainly and rightly pointed out that Government’s  approval of a holding by Madura Coats of  15% of  NIIL shares    would be  unlikely, because by  that method Coats would indirectly and effectively     with    NEWEY   hold    over    40%, approximately 46%,  share in    NIIL.

 

It is apparent that this  would have    been a  clear violation  of FERA. (2) To allay  the concern  of U.K.  shareholders when they became in minority by the Indian shareholders coming to hold 60%, some safeguards were suggested which, amongst  others, were, (i) the Articles of the Company  could be    altered only  by a  special resolution which  requires a    75% majority  of the members voting in person or by proxy. Thus, either group of  the shareholders  could prevent the sale of shares to any one not 771 approved, (ii) the Board could be reconstructed as mentioned in    para 4.3  of the  note to  give U.K. shareholders sufficient safeguards and hand in the management of the Indian Company. (3)   The preferred  method of  transferring 20% of the equity to Indian shareholders was thought to be by sale by  U.K. members of the appropriate number of shares at  the  price    to  be  determined  by  the Government and  the advice  to be taken from Price Waterhouse in    this regard.  As an  alternative it was suggested that a rights issue, with the Indian shareholders taking  up the  U.K. Members’  rights would    also   be  considered,   provided  it   was demonstrated by  Ketty that  there  was  a  viable development plan requiring funds that the expected NIIL cash  flow could    not meet.  The value of the U.K. equity  interest thus  transferred was not to be less  favourable  than  by    a  direct  sale  of shares. (4)   Approval was given in principle to the renewal of contract of  Devagnanam as  Managing    Director  of NIIL. Devagnanam agreed to devote adequate time to the  affairs     of  Ketty  and  was  authorised  to continue to  supervise the  NEWEY affairs  in Hong Kong and Malacca. At the  resumed discussion  on October  21, 1976, both sides stuck to  their stand. Devagnanam was insistent that he will “not accept  on behalf  of the  Indian shareholders anything less than  the full entitlement of 60% of the shares”, while Mackrael, equally  insistent, “could not accept on behalf of NI/Coats that  the full  60% be  held by  the present Indian shareholders,  even   with  the  safeguards  and  assurances discussed previously”. The Ketty meeting thus ended in a stalemate, both sides insisting on  what, what  they considered  to be their right and entitlement.  Raeburn attempted  to play  the role  of a mediator but  failed. In this situation, the parties decided to give further consideration to the matter and to adhere to the following time-table: “Mid-December TAD (Devagnanam) to submit to the U.K. shareholders 772 both the  decisions reached  by the Indian shareholders as regards       the 60%  and the case, if any, for a Rights Issue.

 

Mid-January U.K. shareholders  to decide  on their  reaction to the Indian shareholders’ decision”. Silverston conveyed  to Kingsley  his regret  that       the Ketty meeting  could  product  no  outcome  because  of  the attitude  of  Coats  who  wanted  to  put  pressure  on  the Directors of  NIIL by  giving 15%  of  the  shareholding  to Madura Coats  and thereby  avoiding the  provisions of FERA. This reaction of Silverston finds support in the reaction of Raeburn himself,  which he  described in  his  letter  dated October 23,  1976 to Devagnanam. Raeburn says in that letter that he had learnt from Martin Henry that Coats were keen to introduce Prym  technology in  India in  their Madura  Coats factory. It  may be  mentioned that the Prym technology when introduced in  Madura Coats  would  have  created  a  direct competition between  it and  NIIL. It would also appear from Devagnanam’s letter  of October  21, 1976  to  Jackson  that Coats were  intending to  start an  Engineering Division  at Bangalore for  the manufacture of Dynecast and Prym products with an  investment of  the tune  of Rs. 3,00,00,000 (Rupees three crores).  Compared with that, the interest of Coats in NIIL was just about Rs. 10 lakhs, even if the shares of NIIL were to be valued at Rs. 190/- per share. Devagnanam wrote  a letter       dated December  11, 1976 to Raeburn, informing him that they had just closed the Board’s meeting in  which the  principal subject  of discussion  was “Indianization”. Devagnanam  expressed resentment of himself and his colleagues that after they had faithfully served the Holding Company for almost the whole of their working lives, the Holding  Company should  be unwilling  to accept them as partners, especially  when they  were legally entitled to be so considered.  Devagnanam made it clear in this letter that any attempt  by Coats  to retain  an indirect control in the management of  NIIL will  not be  acceptable to  the  Indian shareholders. Then comes       the important  letter of December 14, 1976, which was  written  by  Devagnanam  to  Raeburn.  Devagnanam informed  Raeburn   by  that  letter  that  he  had  further discussions with  his colleagues  and was  able to  persuade them to  agree to  a kind  of Package deal. The terms of the deal so suggested were: “(1) 773 Indianization should  take place  with the  existing  Indian shareholders acquiring  60% of  the stock;  (2) Mackrael and Raeburn should be taken on NIIL’s Board as Directors, but in no event  Martin Henry  who was  connected with Madura Coats which had a powerful plan of development of Prym technology; (3) the  Indian shareholders were prepared to take B.T. Lee, a senior executive of Needle Industries/Coats, Studley, as a permanent whole time Director of NIIL to be put specifically in charge  of exports”.  Some other suggestions were made by Devagnanam to show the bona fides of the Indian shareholders and to  alleviate the apprehensions in the minds of the U.K. shareholders.  Devagnanam   asked  Raeburn   to  convey  his reactions in  the  matter.  This  letter  has  been  gravely commented upon  by the Holding Company on the ground that it did not  contemplate the  issue of  rights  shares.  We  are unable to  see the  validity of this criticism. There is not the  slightest  doubt  that  the  Indian  shareholders  were insisting all  along that  they should  become the owners of 60% of  the equity  capital of  NIIL.  A  simple  method  of bringing this  about was the transfer by the Holding Company of  20%   of  its   shareholding  to   the  existing  Indian shareholders.

It was only when this plain method of bringing about  reduction  in  the  equity  holding  failed  and  the deadline fixed  by the Reserve Bank was drawing nearer, that the Board  of NIIL  decided upon the issue of rights shares, which was the only other alternative that could be conceived of for  reducing the  non-resident interest. The issuance of rights shares, after all, was not like a bolt from the blue. In any event, it was mentioned in the Ketty meeting. On December  20, 1976  Silverston       wrote  a  letter  to Raeburn saying  that he would be proceeding to U.K. early in January in  connection with his personal matters and that he would then visit Raeburn also. Silverston stated candidly in the letter  that the  situation which was developing between the  U.K.   and  the  Indian  shareholders,  if  allowed  to continue, could  do much damage to the British interests and “as one who is still concerned with the interests of British industry, I  feel I  cannot sit  by  and  allow  matters  to deteriorate to  their detriment, without making some attempt towards bringing  the issues  between the  parties to a fair conclusion.” Raeburn  wrote to  Kingsley on  January 14,1977 stating that he had a discussion with Silverston a couple of days back,  during which  Silverston had  stated clearly the legal position  and given  his advice  upon it.  In the last paragraph of this letter, Raeburn said: 774 “We have  now put  our views    quite clearly to Mr. Makrael and we are awaiting the reaction of Needle Industries and Coats. Therefore, I am hoping but I cannot be sure of this, to be able to let you know fairly soon  what the    formal decision of the U.K. shareholders is. It       needs   to  be  emphasised,  especially  since  its importance was  not fully appreciated by the Appellate Bench of the  High Court,  that  the  Indian  point  of  view  was communicated  with   the  greatest  clarity  to  Raeburn  in Devagnanam’s letter  dated  December  14,  1976,  which  was within the  time schedule  which was agreed to be adhered to in the  Ketty meeting.  The views  of the  U.K. shareholders were  most   certainly  not   communicated  to   the  Indian shareholders by  the middle  of January  1977 as was clearly agreed upon  in the  Ketty meeting. In fact, they were never communicated. On January       20, 1977,  the Reserve Bank sent a reminder to NIIL.

 

After referring to the letter of May 11, 1976, the Reserve Bank  asked NIIL  to submit  at an  early  date  the progress  report  regarding  dilution  of  the  non-resident interest. In  reply, a  letter dated  February 21,  1977 was sent by NIIL to the Bank, stating: “We confirm  that we    are following  up the matter regarding dilution of non-resident interest and we confirm our  commitment  to  achieve    the  desired Indianization by  the stipulated  date, i.e.    17th May, 1977.” It is  very important to note that a copy of this letter was forwarded both to Whitehouse and Sanders. They must at least be assumed  to know  that not  only was  Indianization to be achieved by May 17, 1977, but that NIIL had committed itself to do so by that date. It is  contended by  Shri Seervai that the negotiations with Coats  had in  fact not  come to  an end and that Coats were never  told that  the compromise talks will be regarded as having  failed. It  is urged  that Coats  were all  along labouring  under  the  impression,  and  rightly,  that  the compromise proposals  which were  discussed with  Raeburn in the meeting  of March 29-31, 1977 in U.K. would be placed by Devagnanam before the Indian shareholders, and the 775 U.K. shareholders apprised whether or not the proposals were acceptable. Shri Seervai relies strongly on a letter dated March 9, 1977 written  by Raeburn to Devagnanam. After saying that on the Friday  preceding the 9th March, he had discussions with Mackrael and  three high-ranking personnel of Coats, Raeburn says in that letter that Coats had refused to agree that the Indian shareholders  should acquire  a 60%  shareholding  in NIIL that  this had  created a new situation and that he was appending to  the letter an outline of what he believed, but could not  be  sure,  would  be  agreeable  to  Coats/Needle Industries. Raeburn stated further in that letter: “I know  that all  this will    be difficult for you and your  fellow Indian  shareholders, but  I urge you to support this view and get their acceptance, and to come here to be able to negotiate. If these or similar  principles can  be agreed    during your visit, I  have no  doubt that    the detailed method can be quickly arranged.” Raeburn stated  that the  proposal annexed to the letter had not been agreed with Coats but he, on his own part, believed that Coats  could  be  persuaded  to  agree  to  it.  Stated briefly, the  proposal annexed  by  Raeburn  to  his  letter aforesaid involved  (i)  the  existing  Indian  shareholders holding 49%  of the  shares,  (ii)  new  Indian  independent institutional shareholders  holding 11%  of the  shares, and (iii) the  existing U.K.  shareholders, either  directly  or indirectly, holding 40% of the shares. The proposed Board of Directors  was   to  consist   of  representatives   of  the shareholders appointed by them thus: “Existing Indian  shareholders 3,  New independent Indian shareholders  1, existing U.K. shareholders

 

2, and  an independent  Indian Chairman acceptable to all parties.” It is  contended by  Shri Seervai       that these proposals are crucial  for more  than one  reason since,  in the first place, the  proposal to increase the holding of the existing Indian shareholders  to 49%  and the  offer of  11%  to  new Indian   independent    institutional    shareholders    was inconsistent with  the charge  that Coats  wanted to  retain control over NIIL, directly or indirectly. The second reason why it  is  said  that  the  proposal  is  crucial  is  that Raeburn’s letter of 776 March 9  must have  been received by Devagnanam before March 14 since  it was replied to on the 14th. Therefore, contends Shri Seervai,  the negotiations  between  the  parties  were still not  at an  end. Counsel  says that  it  was  open  to Devagnanam to refuse to negotiate on the terms suggested and insist that  the Indian  shareholders must  have 60%  of the shares. Instead  of conveying  his reactions to the proposal Devagnanam, it  is contended,  went to the United Kingdom to discuss the  question. The minutes of discussions which took place in  U.K., Mackrael  and Sanders  not taking  any  part therein, show  that NEWEY continued to plead that the Indian shareholders  and   Coats  should  consider  the  compromise formula and  that Devagnanam  undertook to put to the Indian shareholders  further   proposals  for   compromise  and  to consider what  other  proposals  or  safeguards  they  might suggest. Reliance  is also  placed by  counsel on  a  letter which Devagnanam  wrote to Raeburn on April 5, in support of the submission  that the  negotiations were  still not at an end. The last but one paragraph of that letter reads thus: “As  undertaken,  I  shall  place  the  compromise formula, very    kindly suggested  by you, before my colleagues later  today. We shall discuss it fully at  the   Board  Meeting   tomorrow  and  I  shall communicate     the    outcome   to    you   shortly thereafter.” We are  unable to       agree that  the proposal  annexed to Raeburn’s letter of March 9 1977 was either a proposal by or on behalf  of Coats  or one  made with  their knowledge  and approval. Were  it so,  it is  difficult to  understand  how Raeburn could  write to  Mackrael on June 8, 1977 that Coats were still  insistent on the entire 20% of the excess equity holding not going to the existing Indian shareholders. There is also no explanation as to why, if the proposal annexed to Raeburn’s letter  of March  9 was a proposal by or on behalf of Coats,  Raeburn said  at the U.K. meeting of March 29-31, 1977 that  it was  better to ‘let Coats declare their hand’. It is  indeed impossible  to understand  why Coats, on their own  part,  did  not  at  time  communicate  any  compromise proposal of theirs to the Indian shareholders directly. They now seem to take shelter behind the proposal made by Raeburn in his  letter of  March 9 adopting it as their own. Even in the letter  which Crawford  Bayley &  Co., wrote on June 21, 1977 on  behalf of  Sanders to the Reserve Bank of India, no reference was at all made to any proposal by or on behalf of Coats to the Indian shareholders. The vague statement 777 made in  that letter  is that ‘certain proposals’ were being considered and  would  be  submitted  ‘shortly’  before  the authorities.  No  such  proposals  were  ever  made  by  the Solicitor or their client to anyone. These letters  and events       leave no  doubt in  our mind that the  negotiations between  the parties  were at  an end that there  were no  concrete proposals  by or  on behalf of Coats which  remained outstanding  to be  discussed  by  t

 

he Indian shareholders. To repeat, Devagnanam declared his hand in his letter of December 14,1976 by reiterating, beyond the manner of  doubt, that  nothing less  than 60%  share in the equity capital  of NIIL  would be  acceptable to  the Indian shareholders. Coats  never replied to that letter nor indeed did they  convey their  reaction to  it in any other form or manner at  any time.  In fact,  it would be more true to say that Coats themselves treated the matter as at an end since, they  were  wholly  opposed  to  the  stand  of  the  Indian shareholders that  they must  have 60%  share in  the equity capital of  NIIL. What  happened in  the meeting of April 6, 1977 has  to be  approached in the light of the finding that the negotiations  between the  parties had  fallen  through, that Coats  had refused  to declare  their hand and that all that could  be inferred  from their  attitude  with  a  fair amount  of   certainty  was  that  they  were  unwilling  to disinvest. On March 18, 1977 NIIL’s Secretary gave a notice of the Board meeting  for April  6, 1977. The notice was admittedly received by Sanders in U.K., well in time but did not attend the meeting.  The explanation  for his failure to attend the meeting is  said to  be that  the item  on the agenda of the meeting, ‘Policy-Indianisation’ was vague and did not convey that any  matter of  importance was going to be discussed in the meeting,  like for  example, the issue of rights shares. We find  it quite difficult to accept this explanation. Just as a  notice to  quit in  landlord-tenant matters  cannot be allowed to  split on  a straw,  notices of Board meetings of companies have  to be  construed reasonably,  by considering what they  mean to  those to  whom  they  are  given.  To  a stranger, ‘Policy-Indianisation’  may not convey much but to Sanders and the U.K. shareholders it would speak volumes. By the time that Sanders received the notice, the warring camps were clearly  drawn on  two sides  of the  battle-line,  the Indian group insisting that they will have nothing less than a 60%  share in  the equity  capital of  NIIL and  the  U.K. shareholders insisting  with equal  determination that  they will not allow the existing Indian 778 shareholders to have anything more than 49%. In pursuance of a resolution  passed by the Board, a letter had already been written to  the Reserve  Bank confirming  the commitment  of NIIL to  achieve the required Indianisation by May 17, 1977.

 

A copy  of NIIL’s  letter to  the Reserve  Bank was  sent to Sanders and  Whitehouse. In  view of  the fact  that to  the common knowledge  of the  two  sides  there  were  only  two methods  by   which  the   desired  Indianisation  could  be achieved,  namely,   either  disinvestment  by  the  Holding Company in  favour of  the existing Indian shareholders or a rights issue,  the particular item on the agenda should have left no  doubt in  the mind  of the  U.K. shareholders as to what the  Board was  likely to  discuss and  decide  in  the meeting  of  the  6th.  Disinvestment  stood  ruled  out  of consideration, a fact which was within the special knowledge of the  Holding Company,  since whether  to disinvest or not was a matter of their volition. After the       despatch of  the notice  dated March 18,1977 two important  events happend.  Firstly, Devagnanam  went to Birmingham, where  discus ions  were held  from March 29-31, 1977 in  which Indianisation of NIIL was discussed, as shown by the  minutes of  that discussion.  NEWEY were  willing to accept Indianisation,  by the  existing Indian  shareholders acquiring a  60% interest in the share capital of NIIL while “COATS  were   adamantly  opposed”   to  that  view.  It  is surprising that  during the  time  that  Devagnanam  was  in Birmingham, Sanders  did not meet him to seek an explanation of what  the particular item on the agenda of the meeting of April 6  meant Sanders  had received  the notice of March 18 before  the   Birmingham   discussions   took   place,   and significantly he  has  made  no  affidavit  at  all  on  the question as to why he did not meet Devagnanam in Birmingham, or why  he did not attend the meeting of April 6 or what the particular item on the agenda meant to him. The second       important event  which happened  after  the notice of March 18 was issued was that on April 4, 1977 NIIL received a  letter dated  March 30,  1977 from  the  Reserve Bank. The letter which was in the nature of a stern reminder left  no  option  to  NIIL’s  Board  except  to  honour  the commitment which  it had  made to  the Reserve  Bank. By the letter the  Reserve Bank  warned NIIL:  “Please note that if you fail  to comply with our directive regarding dilution of foreign equity  within the  stipulated period,  we shall  be constrained to view the matter seriously.” 779 We do  not see  any substance  in the contention of the Holding Company  that despite  the commitment which NIIL had made to the Reserve Bank, the long time which had elapsed in the meanwhile  and the virtual freezing of its developmental activities as  of December  31, 1973, NIIL should have asked for an extension of time from the Reserve Bank. In the first place, it  could not  be assumed or predicated that the Bank would grant  extension, and  secondly,

 

it  was  not  in  the interest of NIIL to ask for such an extension. The Board       meeting was  held as  scheduled on  April 6, 1977. The  minutes of  the meeting  show that two directors, Sanders and  M.S.P. Rajes,  asked for leave of absence which was granted  to them.  Sanders,  as  representing  the  U.K. shareholders on NIIL’s Board, did not make a request for the adjournment of  the meeting  on the ground that negotiations for a  compromise had  not yet  come to  an end  or that the Indian shareholders  had not  yet conveyed their response to the “Coats’  compromise formula”.  Nor did he communicate to the Board  his views  on ‘Policy-Indianisation’, whatever it may have  meant to  him. Seven Directors were present in the meeting, with Devagnanam in the chair at the commencement of the meeting.  C. Doraiswamy,  a Solicitor  by profession and admittedly an  independent Director,  was amongst the seven. In  order  to  complete  the  quorum  of  two  “independent” directors, other  directors being interested in the issue of rights shares,  Silverston was  appointed to the Board as an Additional Director  under article  97 of NIIL’s Articles of Association. Silverston  then  chaired  the  meeting,  which resolved that the issued capital of the Company be increased to Rs.  48,00,000/- by  the issue of 16,000 equity shares of Rs. 100/-  each to  be  offered  as  rights  shares  to  the existing shareholders  in proportion  to the  shares held by them.  The  offer  was  decided  to  be  made  by  a  notice specifying the  number of shares which each shareholders was entitled to,  and in  case the offer was not accepted within 16 days  from the  date of the offer, it was to be deemed to have been declined by the shareholder concerned. The aforesaid  resolution of  the       Board  raises  three important questions, inter alia, which have been passed upon us by  Shri Seervai  on behalf  of the  Holding Company: (1) Whether the Directors of NIIL, in issuing the rights shares, abused the fiduciary power which they possessed as directors to issue shares; (2) Whether Silverston was a ‘disinterested Director’; and

 

(3)  Whether  Silverston’s  appointment  was otherwise invalid, since there was no item on the agenda 780 of  the   meeting  for  the  appointment  of  an  Additional Director.  If  Silverston’s  appointment  as  an  Additional Director is  bad either  because he  was not a disinterested director or  because there  was no  item on the agenda under which his  appointment could be made, the resolution for the issue of  rights shares  which was  passed  in  the  Board’s meeting of  April 6  must fall  because then,  the necessary quorum of two disinterested directors would be lacking. On the  first of these three questions, it is contended by Shri  Seervai that  notwithstanding that  the  issues  of shares is intra vires the Directors, the Directors’ power is a fiduciary  power, and  although an  exercise of such power may be formally valid, it may be attacked on the ground that it was  not exercised  for the  purpose  for  which  it  was granted. It  is urged  that the issue of shares by Directors which is directed to affect the right of the majority of the shareholders or  to defeat that majority and convert it into a minority  is unconstitutional,  void and  in breach of the fiduciary duty of Directors, though in certain situations it may be  ratified by  the Company in the General Meeting. Any reference by the Company to a general meeting in the present case, it  is said, would have been futile since, without the impugned issue  of rights  shares, the  majority was against the issue.  It was finally argued that good faith and honest belief that in fact the course proposed by the Directors was for the  benefit  of  the  shareholders  or  was  bona  fide believed to  be for  their benefit is irrelevant because, it is for the majority of the shareholders to decide as to what is for  their benefit,  so long as the majority does not act oppressively or  illegally. Counsel  relies  in  support  of these and  allied contentions  on the  decision of the Privy Council in  Howard Smith  Ltd. and  of the English Courts in Fraser, Punt, Piercy and Hogg. (supra) In Punt  v. Symons, (supra) which applied the principle of Fraser v. Whallcy, (supra)

 

it was held that: Where shares had been issued by the Directors. not for the  general benefit  of the  company, but for the purpose  of controlling  the  holders  of    the greater number  of shares  by obtaining a majority of voting  power, they ought to be restrained from holding the  meeting at which the votes of the new shareholders were to have been used. But Byrne J. stated: 781 There may  be occasions  when Directors may fairly and properly issue shares in the case of a Company constituted like  the present    for other  reasons. For  instance     it  would   not  be   at  all   an unreasonable thing  to create    a sufficient number of shareholders  to enable  statutory powers to be exercised. In the  instant case, the issue of rights shares was made by the  Directors   for  the  purpose  of  complying  with  the requirements of  FERA  and  the  directives  issued  by  the Reserve Bank  under that  Act. The  Reserve Bank had fixed a deadline and  NIIL. had  committed itself  to complying with the Bank’s directive before that deadline. Peterson J.  applied the principle enunciated in Fraser and in  Punt in  the case  of Piercy  v. S. Mills & (Company Ltd. (supra) The learned Judge observed at page 84: “The basis of both cases is, as I understand, that Directors are    not entitled to use their powers of issuing  shares   merely  for     the   purpose   of maintaining  their   control    or  the  control  of themselves and  their friends    over the affairs of the  company,     or  merely   for  the  purpose  of defeating the    wishes of  the existing majority of shareholders.

 

” The fact  that by the issue of shares the Directors succeed, also or  incidentally, in maintaining their control over the Company or  in newly  acquiring it,  does not  amount to  an abuse  of   their  fiduciary   power.  What   is  considered objectionable is  the use  of  such  powers  merely  for  an extraneous  purpose   like  maintenance  or  acquisition  of control over the affairs of the Company. In Hogg  v. Cramphorn Ltd., (supra) it was held that if the power  to issue  shares was  exercised from  an improper motive, the  issue was  liable to  be set  aside and  it was immaterial that  the issue  was made  in a  bona fide belief that it  was in  the interest  of the  Company.  Buckley  J. reiterated the  principle in Punt and in Piercy, (Supra) and observed: “Unless  a   majority    in   a  company  is  acting oppressively    towards  the  minority,  this  Court should not  and will not itself interfere with the exercise by  the majority  of    its  constitutional rights  or   embark  upon   an  inquiry  into    the respective merits of the views held or policies 782 favoured by  the majority  and the  minority.    Nor will    this  Court  permit  directors  to  exercise powers, which    have been  delegated to them by the company in  circumstances which  put the directors in a    fiduciary  position  when  exercising  those powers, in  such a  way as  to interfere  with the exercise by  the majority  of    its  constitutional rights; and  in a  case of  this kind    also, in my judgment, the    court should  not  investigate  the rival merits    of the  views  or  policies  of  the parties.” (p. 268) Applying this  principle, it  seems to  us difficult to hold that by  the issue  of rights  shares the  Directors of NIIL interfered in  any manner  with  the  legal  rights  of  the majority. The majority had to disinvest or else to submit to the issue  of rights  shares in  order to  comply  with  the statutory  requirement   of  FERA  and  the  Reserve  Bank’s directives. Having  chosen not to disinvest, an option which was open  to them, they did not any longer possess the legal right to  insist that  the Directors  shall  not  issue  the rights shares.  What the  Directors did  was clearly  in the larger interests  of the  Company and  in obedience to their duty to comply with the law of the land. The fact that while discharging that  duty they  incidentally trenched  upon the interests of  the majority  cannot invalidate  their action. The conversion  of the existing majority into a majority was a consequence of what the Directors were obliged lawfully to do. Such  conversion was  not  the  motive  force  of  their action. Before we       advert to  the decision of the Privy Chuncil in Howard  Smith Ltd.  v. Ampol  Petroleum Ltd.,  (supra) we would like  to refer  to the  decision of  the High Court of Australia in  Harlowe’s Nominees Pty. Ltd v. Woodside (Lakes Entrance) oil  Company No Liability and another, (supra) and to the  Canadian decision  of Berger J. of the Supreme Court of British Columbia, in the case of Teck Corporation Ltd. v. Miller et  al(1), both  of which  were  considered  by  Lord Wilberfore in  Howard  Smith.  On  a  consideration  of  the English decisions,  including  those  in  Punt  and  Plercy, Barwick C.J. said in Harlowe’s Nominees (supra):

“The principle  is  that  although  primarily    the power is given to enable capital to be raised when required for    the purposes  of the  company, there may be occasions when the directors may fairly and properly issue  shares for  other reasons, so long as those reasons relate to a 783 purpose of  benefiting the  company as a whole, as distinguished from  a    purpose,  for  example,  of maintaining control of the company in the hands of the directors    themselves  or  their  friends.  An inquiry  as  to  whether  additional    capital  was presently required  is often    most relevant to the ultimate question  upon which    the validity or the invalidity of the issue depends; but that ultimate question must always be whether in truth the issue was  made   honestly    in   the  interests  of  the company.” (p. 493) We agree with the principle so stated by the Australian High Court and,  in our  opinion, it  applies with great force to the situation  in the  present case.  In  Teck  Corporation, (supra) the  Court examined several decisions of the English Courts and  of other  Courts, including  the  one  in  Hogg. (supra) The  last headnote  of the  report at page 289 reads thus: “Where directors  of a  company seek,    by entering into an  agreement to  issue new  shares, to  prevent a majority shareholder  from exercising  control  of       the company, they  will not be held to have failed in their fiduciary duty to the company if they act in good faith in what  they believe. on reasonable grounds, to be the interests of  the company.       If the  directors’  primary purpose is to act in the interests of the company, they are acting       in good faith even though they also benefit as a result”. In Howard  Smith, no  new  principle  was  evolved  by  Lord Wilberforce  who,   distinguishing  the  decisions  in  Teck Corporation and Harlowe’s Nominees, (supra) said: “By contrast to the cases of Harlowe and Teck, the present  case,  on       the  evidence,  does  not,  on  the findings of  the trial judge, involve any consideration of       management,   within  the   proper  sphere  of  the directors. The purpose found by the judge is simply and solely to       dilute the  majority voting  power  held  by Ampol and       Bulkships so as to enable a then minority of shareholders to  sell their shares more advantageously. So far as authority goes, an issue of shares purely for the purpose  of creating  voting power  has  repeatedly been condemned”. (page 837) 784 The dictum  of Byrne  J. in  Punt (supra) that “there may be reasons other  than to raise capital for which shares may be issued” was approved at page 836 and it was observed at page 837 “Just as  it is established that directors, within their management powers, may take decisions against the wishes of the majority of shareholders, and indeed that the majority of shareholders cannot control them in the exercise of  these powers       while they  remain in office (Automatic Self  Cleansing Filter Syndicate Co. Ltd. v. Cuninghams,  (1906)   2  Ch.   34),

so   it  must  be unconstitutional for  directors to  use their fiduciary powers over  the shares  in the  company purely for the purpose of destroying an existing majority, or creating a new majority which did not previously exist. To do so is to  interfere with  that element  of  the  company’s constitution which       is separate  from and  set  against their powers.  If there  is added,       moreover,  to  this immediate purpose,       an ulterior  purpose to  enable  an offer for shares to proceed which the existing majority was in  a position       to block,  the departure  from  the legitimate use of the fiduciary power becomes not less, but all  the greater. The right to dispose of shares at a given  price is essentially an individual right to be exercised       on   individual  decision  and  on  which  a majority, in  the       absence  of  oppression  or  similar impropriety, is entitled to prevail”. In our judgment, the decision of the Privy Council in Howard Smith, (supra) instead of helping the Holding Company goes a long way  in favour  of the appellants. The Directors in the instant case  did not  exercise their  fiduciary powers over the shares merely or solely for the purpose of destroying an existing majority  or for  creating a new majority which did not previously  exist. The  expressions ‘merely’,  ‘purely’, ‘simply’ and ‘solely’ virtually lie strewn all over page 837 of the  report in Howard Smith. The Directors here exercised their power for the purpose of preventing the affairs of the Company  from   being  brought   to  a   grinding  halt,   a consummation devoutly wished for by Coats in the interest of their extensive world-wide business. In Nanalala  Zaver and another v. Bombay Life Assurnnce Co. Ltd.,  (supra) Das  J., in  his separate  but concurring judgment deduced the following principle on the basis of the English decisions: 785 “It  is  well    established  that  directors  of  a company are  in  a       fiduciary  position  vis-a-vis  the company and  must exercise       their power for the benefit of the company. If the power to issue further shares is exercised by  the directors  not for the benefit of the company  but  simply  and       solely  for  their  personal aggrandisement and to the detriment of the company, the Court will       interfere and  prevent the  directors  from doing so. The very basis of the Court’s interference in such a  case is  the existence of the relationship of a trustee  and   of       cestui  que  trust  as  between  the directors and the company”. (pp. 419-420) It is  true that  Das J.  held that Singhanias were complete strangers to the company and consequently the Directors owed no duty,  much less  a fiduciary  duty, to  them. But we are unable to  agree with  the contention  that the observations extracted above  from the judgment of Das J. are obiter.

The learned Judge  has set  forth  the  plaintiffs’  contentions under three sub-heads at page 415. At the bottom of page 419 he finished  discussion of  the 2nd sub-head and said: “This leads me  to a  consideration of  the third  sub-head on the assumption  that…..   the  additional  motive  was  a  bad motive”. The  question was  thus argued before the Court and was squarely dealt with. Before we       leave this  topic, we  would like to mention that the mere circumstance that the Directors derive benefit as shareholders by reason of the exercise of their fiduciary power to issue shares, will not vitiate the exercise of that power. As  observed by Gower in Principles of Modern Company Law, 4th edn., p. 578: “As it  was happily put in an Australian case they are ‘not  required by  the law  to live  in  an  unreal region of       detached altruism and to act in a vague mood of ideal  abstraction from       obvious facts which must be present to       the mind  of any honest and intelligent man when he exercises his power as a director”. The Australian  case referred to above by the learned author is Mills  v. Mills,  (supra) which was specifically approved by Lord Wilberforce in Howard Smith. In Manala Zaver (supra) too, Das  J. stated  at page 425 that the true principle was laid down  by the Judicial Committee of the Privy Council in Hirsche v. Sims(1), thus: 786 “If the true effect of the whole evidence is, that the defendants  truly and       reasonably believed  at  the time that       what they  did was  for the  interest of the company they  are not  chargeable with  dolus malus  or breach  of        trust  merely  because  in  promoting  the interest of  the company they were also promoting their own, or  because the  afterwards sold  shares at prices which gave them large profits”. Whether one  looks at the matter from the point of view expressed by this Court in Nanala Zaver or from the point of view expressed by the Privy Council in Howard Smith, (supra) the test is the same, namely, whether the issue of shares is simply or  solely for  the benefit  of the Directors. If the shares are issued in the larger interest of the Company, the decision to issue shares cannot be struck down on the ground that it  has incidentally  benefited the  Directors in their capacity as  shareholders. We  must, therefore,  reject Shri Seervai’s argument  that in  the instant  case, the Board of Directors abused  its fiduciary  power in  deciding upon the issue of rights shares.

 

The second       of the  three questions  arising out of the proceedings of  the Board’s  meeting  dated  April  6,  1977 concerns the validity of the appointment of Silverston as an Additional Director.  Under section  287(2) of the Companies Act, 1956  the quorum  for the said meeting of Directors was two. There  can be  no doubt  that a quorum of two Directors means a  quorum  of  two  directors  who  are  competent  to transact and  vote on  the business  before the  Board. (see Greymouth v.  Greymouth and  Palmer’s Company Precedents.(1) 17th Edn.:  p. 579,  f.n.3). The  contention of  the Holding Company is  that Silverston  was  a  Director  “directly  or indirectly concerned  or interested”  in the  arrangement or contract arising  from the  resolutions to  offer and  allot rights  shares   and  consequently,   the  resolutions  were invalid: firstly  on the  ground that  they were passed by a vote of  an interested director without which there would be no quorum  and secondly because, Silverston’s appointment as an Additional  Director was  for the purpose of enabling the said resolution  to be  passed for the benefit of interested directors. Relying  upon a decision of the Bombay High Court in Firestone  Tyre &  Rubber Co.  v. Synthetics  & Chemicals Ltd.,(2) Shri  Seervai contends  that  section  300  of  the Companies Act  embodies the  general rule  of equity that no person who  has to discharge duties on behalf of a corporate body shall be 787 allowed to enter into engagements in which he has a personal interest conflicting,  or which  may possibly conflict, with the interests of those whom he is bound to protect. The  reason   why       it   is  said  that  Silverston  was interested in  or concerned with the allotment of the rights shares to  the existing  shareholders is, firstly because at the Ketty  meeting held  in October  1976 he had acted as an ‘Advisor to  the Indian  shareholders’ and secondly, because on October  25, 1976  he had  written a  letter to  Kingsley purporting to  convey his  advice to the Board of Directors. That  letter   contains  allegations   against  the   Needle Industries, U.K.  and  of  Coats.  In  other  words,  it  is contended, Silverston  was  hostile  to  Needle  Industries, U.K., and  to Coats,  and no  person in  his position  could possibly bring to bear an unbiased or disinterested judgment on the  question which arose between the Holding Company and the Indian  shareholders as  regards  the  issue  of  rights shares. It  is also  said  that  certain  other  aspects  of Silverston’s conduct,  including his attitude in the meeting of the 6th April, show that he was an interested director. We are  unable to accept the contention that Silverston is an  ‘interested’ director  within the  meaning of section 300 of the Companies Act. In the first place,

 

it is wrong to attribute any  bias to  Silverston for  having acted  as  an adviser to  the Indian  shareholders in  the Ketty  meeting. Silverston is  by profession a solicitor and we suppose that legal advisers do not necessarily have a biassed attitude to questions on  which their  advice is sought or tendered. The fact that  Silverston was received cordially in U.K. both by Raeburn and  Mackrael when  he went  there in  January  1977 shows that  even after  he had  acted as  an adviser  to the Indian shareholders  it was  not thought  that he was in any sense biassed in their favour. Silverston’s alleged personal hostility to  Coats cannot,  within the  meaning of  section 300(1) of  the Companies Act, make him a person “directly or indirectly, concerned  or  interested  in  the  contract  or arrangement”  in   the  discussion   of  which   he  had  to participate or  upon which  he had  to vote.  Section 300(1) disqualifies a  Director from  taking part in the discussion of or  voting on any contract or arrangement entered into or on behalf  of the  company, if he is in any way concerned or interested in  that contract  or arrangement.  Under section 299(1) of  the Companies  Act, “Every  director of a Company who is in any way, whether directly or indirectly, concerned or interested  in a  contract  or  arrangement  or  proposed contract or arrangement, entered into or to be entered into, by or on behalf of the company, shall disclose the nature of his concern or interest at a meeting of the Board 788 of Directors.” The concern or interest of the Director which has to be disclosed at the Board meeting must be in relation to the contract or arrangement entered into or to be entered into by or on behalf of the company. The interest or concern spoken of  by sections  299(1) and 300(1) cannot be a merely sentimental interest  or ideological  concern. Therefore,  a relationship of  friendliness with  the  Directors  who  are interested in  the contract  or arrangement or even the mere fact of  a lawyer-client  relationship with  such  directors will not  disqualify a  person from  acting as a Director on the  ground   of  his   being,  under   section  300(1),  an “interested” Director.  Thus, howsoever  one may stretch the language of  section 300(1)  in the  interest of  purity  of company administration,  it is  next to  impossible to bring Silverston’s  appointment   within  the  framework  of  that provision. In  the Firestone  (supra) the Solicitor-Director was held  to be concerned or interested in the agreement for the appointment of Kilachands as selling agents, as he had a substantial shareholding  in a  private limited  company  of Kilachands. Besides,  he was  also a shareholder director in various other concerns of Kilachands.

 

We       must,   accordingly,  reject   the  argument   that Silverston  was   an  interested   director,  therefore  his appointment as  a Additional  Director was  invalid and that consequently, the  resolution for the issue of rights shares was passed without the necessary quorum of two disinterested directors. We  have already held that the resolution was not passed for  the benefit of the Directors. There is therefore no question of Silverston’s appointment having been made for the purpose of enabling such a resolution to be passed. The third contention, arising out of the proceedings of the meeting  of 6th  April, to  the effect that Silverston’s appointment as an Additional Director is invalid since there was no item on the agenda of the meeting for the appointment of an  Additional Director  is  equally  without  substance. Section 260  of the Companies Act preserves the power of the Board of Directors to appoint additional Directors if such a power  is   conferred  on  the  Board  by  the  Articles  of Association of  the Company.  We are  not concerned with the other conditions  laid down  in the  section, to  which  the appointment is  subject. It  is  sufficient  to  state  that Article 97  of NIIL’s  Articles of  Association confers  the requisite  power   on  the   Board  to   appoint  additional Directors. We do  not see  how the  appointment of  an  additional Director could  have been  foreseen before the 6th April, on which date  the meeting of the Board was due to be held. The occasion to 789 appoint Silverston  as an Additional Director arose when the Board met  on 6th  April, with  Devagnanam in chair. Sanders was absent  and no  communication was  received from  or  on behalf of  the Holding Company that they had decided finally not to  disinvest. They always had the right to such a locus penitentia. Were  they to  intimate that  they were ready to disinvest, there  would have  been no occasion to appoint an additional Director.  That  occasion  arose  only  when  the picture  emerged  clearly  that  the  Board  would  have  to consider the  only other  alternative for  reduction of  the non-resident holding, namely, the issue of rights shares. It is for  this reason  that the  subject of  appointment of an additional Director  could not  have, in  the then  state of facts, formed a part of the Agenda. Silverston’s appointment is, therefore,  not open  to challenge on the ground of want of agenda on that subject. It is  necessary to  clear a misunderstanding in regard to the Directors to issue shares. It is not the law that the power to  shares can  be used only if there is need to raise additional capital.  It is  true that  the  power  to  issue shares is  given primarily  to enable  capital to  be raised when it is required for the purposes of the company but that power is  not conditioned  by such  need. That  power can be used  for  other  reasons  as,  for  example,  to  create  a sufficient number  of share-holders to enable the company to exercise statutory  powers (Punt v. Symons and Co.), (Supra) or to  enable it to comply with legal requirements as in the instant case.  In Hogg  v. Cramphorn  (supra). Buckley J. (p 267) agreed with the law of Byrne J. in Punt And so did Lord Wilberforce (pp  835-836) in  Howard Smith  (supra) where he said: “It is, in their Lordships’ opinion, too narrow an approach to  say that  the only valid purpose for which shares may       be issued  is  to  raise  capital  for  the company. The discretion is not in terms limited in this way: the  law should  not impose  such a  limitation on Directors’ powers.

To define  in advance  exact limits beyond which  directors must  not  pass  is,  in  their Lordships’ view,  impossible. This       clearly  cannot  be done by  enumeration, since  the variety  of  different types of  Company in  different  situations  cannot  be anticipated”. The Australian decision in Harlowe Nominees (supra) took the same view  of the  directors’ power  to issue shares. It was said therein: “The principle  is  that  although  primarily    the power is  given to       enable capital  to be  raised  when required for the 790 purposes of  the company,       there may  be occasions when the directors  may fairly and properly issue shares for other reasons,  so long  as those       reasons relate  to a purpose of       benefiting  the  company  as  a  whole,  as distinguished  from   a  purpose,        for   example,   of maintaining control  of the  company in the hand of the directors themselves or their friends”. We have  already expressed       our view  that  the  rights share were  issued in  the instant  case in  order to comply with  the   legal  requirements,  which,  apart  from  being obligatory as  the only viable course open to the Directors, was for  the benefit  of the  company since,  otherwise, its developmental activities  would  have  stood  frozen  as  of December 31,  1973. The  shares were not issued as a part of takeover war between the rival groups of shareholders. The decision to issue rights shares was assailed on the ground also  that the  company did  not, as  required by the Reserve Bank’s  letter dated  May 11, 1975 submit any scheme indicating  whether   the  reduction   in  the  non-resident interest was  proposed to  be  brought  about  by  issue  of additional equity  capital to Indian residents to the extent necessary  to   finance   any   scheme   of   expansion   or diversification. It  is true  that by  the aforesaid letter, the Reserve  Bank had  asked NIIL  to report to it as to how the Company  proposed to  reduce the  non-resident interest: whether by disinvestment by non-resident shareholders, or by issue of  additional equity  capital to  Indian residents to the   extent    necessary   to   finance   any   scheme   of expansion/diversification, or  by  both.  We  are,  however, unable to  read the Bank’s letter as requiring or asking the Company not  to issue  the additional  capital unless it was necessary to  do so  for financing  a scheme of expansion or diversification. The Reserve Bank could not have intended to impose any  such condition  by way of a general direction in face of  the legal  position, which  we have  set out above, that the  power of  the Directors  to issue  shares  is  not conditioned by  the need  for additional capital. We are not suggesting that  the Reserve  Bank, in  the exercise  of its statutory functions,  cannot ever  impose such conditions as it deems appropriate, subject to which alone a new issue may be made.  But neither  the wording  of the Bank’s letter nor the true  legal position  justifies the stand of the Holding Company. The  minutes of the Ketty meeting of October 20-21, 1976 saying  that it  was agreed that the rights issue, with the Indian share-holders taking up the U.K. members’ rights, would be  considered provided  it was  demonstrated by  NIIL that “there  is a  viable development  plan requiring  funds that the expected NIIL cash flow 791 cannot meet”,

cannot also  justify the  argument  that  the power  of  the  company  to  issue  rights  shares  was,  by agreement, conditioned  by  the  need  to  raise  additional capital for  a development  plan. In  fact, the occasion for consideration by  the Holding  Company of NIIL’s proposal to issue rights shares did not arise, since the Holding Company virtually boycotted the meeting of April 6. Assuming for the sake of  argument that  there  was  any  such  understanding between the  parties, the  minutes of the meeting of April 6 show that  the Company  needed additional  capital  for  its expansion. The minutes say: “As per  the final  budget for  the year 1977, the working capital requirements amounted to nearly Rs. 100 lakhs and  even after  tapping the  facilities that  we will be  entitled to obtain from the Banking sector, we will be left with a gap of about Rs. 25 lakhs which can be met by only increasing equity capital and attracting deposits from public”. There is  no reason to believe that this statement does not accord  with the  economic realities of the situation as assessed by the Directors of the Company. Finally, it  is also not true to say, as a statement of law, that Directors have no power to issue shares at par, if their market price is above par. These are primarily matters of policy  for the  Directors to  decide in  the exercise of their discretion  and no hard and fast rule can be laid down to fetter  that discretion.  As observed  by Lord  Davey  in Hilder and others v. Dexter(1). “I am not aware of any law which obliges a company to issue its shares above par because they are saleable at       a   premium  in  the  market.  It  depends  on  the circumstances of  each case  whether it will be prudent or even possible to do so, and it is a question for the directors to decide”. What is necessary to bear in mind is that such discretionary powers in  company  administration  are  in  the  nature  of fiduciary powers  and must, for that reason, be exercised in good  faith.   Mala  fides  vitiate  the  exercise  of  such discretion. We  may mention  that in  the past, whenever the need for  additional capital was felt, or for other reasons, NIIL issued shares to its members at par. 792 We are therefore of the opinion that Devagnanam and his group acted  in the  best interests of NIIL in the matter of the  issue  of  rights  shares  and  indeed,  the  Board  of Directors followed  in the meeting of the 6th April a course which they  had no  option but  to adopt and in doing which, they were  solely actuated  by the  consideration as to what was  in  the  interest  of  the  company.  The  shareholder- Directors who  were interested in the issue of rights shares neither participated  in the discussion of that question nor voted upon  it. The two Directors who, forming the requisite quorum, resolved  upon  the  issue  of  rights  shares  were Silverston who, in our opinion, was a disinterested Director and  Doraiswamy,  who  unquestionably  was  a  disinterested Director. The  latter has  been referred  to in  the company petition, Mackrael’s  reply affidavit  and  in  the  Holding Company’s  Memorandum   of  Appeal  in  the  High  Court  as “uninterested”,

“disinterested”  and  “independent”.  At  a crucial time when Devagnanam was proposing to dispose of his shares to  Khaitan, Sanders asked for Doraiswamy’s advice by his letter  dated August  6,  1975  in  which  he  expressed “complete confidence” in Doraisway in the knowledge that the Holding Company  could count  on his guidance. Disinvestment by the  Holding Company,  as one  of the  two courses  which could be  adopted for  reducing the non-resident interest in NIIL to  40% stood  ruled  out,  on  account  of  the  rigid attitude of  Coats who,  during the period between the Ketty meeting  of   October  20-21,   1976  and   the Birmingham discussions of  March  29-31,  1977  clung  to  their  self- interest, regardless  of the pressure of FERA, the directive of the Reserve Bank of ndia and their transparent impact on the  future   of  NIIL.  Devagnanam  and  the  disinterested Directors, having acted out of legal compulsion precipitated by the  obstructive attitude of Coats and their action being in the  larger interests of the company, it is impossible to hold that  the resolution  passed in  the meeting of April 6 for the  issue of  rights shares  at  par  to  the  existing shareholders  of  NIIL  constituted  an  act  of  oppression against the  Holding Company. That cannot, however, mark the end of  the case  because 2nd May has still to come and Shri Seervai’s argument  is that  the true  question  before  the Court is  whether the offer of rights shares to all existing shareholders of  NIIL but  the issue  of  rights  shares  to existing Indian shareholders only, constitutes oppression of the Holding Company. That takes us to the significant, and if we may so call them, sordid,  happenings between  April 6  and May 2, 1977. Devagnanam wrote  a letter  to Raeburn  on  April  12,  1977 stating that a copy of 793 the Reserve  Bank’s letter dated March 30, 1977 was enclosed therewith. It  was in  fact not  enclosed. Pursuant  to  the decision taken  in the  Board’s meeting of April 6, a letter of offer  dated April  14 was prepared by NIIL. Devagnanam’s letter to  Raeburn dated  April 12,  (without a  copy of the Reserve Bank’s  letter dated  March 30)  and the  letter  of offer dated April 14 were received by Raeburn on May 2, 1977 in an envelope bearing the postal mark of Madras dated April 27, 1977.  The letter  of offer  which  was  posted  to  the Holding Company  also bore  the postal  mark of Madras dated April 27, 1977 and that to was received in Birmingham on May 2, 1977.  The letter of offer which was posted to one of the Indian shareholders,  Manoharan, who  was siding with Coats, was also posted in an envelope which bore the postal mark of Madras dated  April 27, 1977. On April 19, 1977, a notice of the Board’s meeting for May 2, 1977 was prepared. One of the items on  the Agenda of the meeting was stated in the notice as “Policy-(a)  Indianisation (b)  Allotment of shares”. The notice dated  April 19  of the Board’s meeting for May 2 was posted to  Sanders in an envelope which bore the postal mark of Madras  dated April  27, 1977  and was received by him in Birmingham on  May 2,  1977, after the Board’s meeting fixed for that date had already taken place.

It puts  a severe strain on one’s credulity to believe that the  letters of  offer dated  April 14  to the  Holding Company, to  Raeburn and  to Manoharan  were posted  on  the 14thitse If  but that somehow they rotted in the post office until the  27th, on  which date they took off simultaneously for  their respective  destinations.   The  affidavit   of Selvaraj, NIIL’s senior clerk in the despatch Department and the  relevant  entry  in  the  outward  register  are  quite difficult to  accept on  this point since they do not accord with the  ordinary course  of human  affairs. Not  only  the three letters of offer above said, but even the notice dated April 19,  of the  Board meeting  for May 2, was received by Sanders at  Birmingham in  an envelope  bearing  the  Madras postal mark  of April  27. Selvaraj’s  affidavit, apparently supported by  an entry  in the  outward register,  that  the envelope addressed  to Sanders containing the notice of 19th April was posted on the 22nd is also difficult to accept. It takes all kinds to make the world and we do not know whether the NIIL’s  staff was advised astrologically that 27th April was an auspicious date for posting letters. But if only they had sought  a little  legal  advice  which,  at  least  from Doraiswamy and  Silverston, was  readily available  to them, they  would  have  seen  the  folly  of  indulging  in  such behaviour. Add  to that  the circumstance  that Devagnanam’s letter to  Raeburn dated  April  12  was  put  in  the  same envelope in which the letter of 794 offer  dated   April  14   was  enclosed  and  the  envelope containing these  two important  documents bore  the  postal mark of  Madras dated 27th April. These coincidences are too tell-tale to  admit of  any doubt that someone or the other, not  necessarily   Devagnanam,  unduly   solicitous  of  the interest of  NIIL and of the Indian shareholders manipulated to delay  the posting of the letters of offer and the notice of the Board meeting for 2nd May, until the 27th April. What is naively  sought to  be explained  as a  mere  coincidence reminds one  of the ‘Brides in the Bath Tub’ case:

The death of the  first bride  in the  bath tub  may pass  off  as  an accident  and  of  the  second  as  suicider  but  when,  in identical circumstances, the third bride dies of asphyxia in the  bath  tub,  the  conclusion  becomes  compelling,  even applying the  rule of circumstantial evidence, that she died a homicidal death. The purpose  behind the  planned delay  in posting the letters of  offer to Raeburn and to the Holding Company, and in posting  the notice  of the  Board’s meeting for May 2 to Sanders, was palpably to ensure that no legal proceeding was taken to  injunct the  holding of the meeting. The object of withholding these  important documents,  until it  was quite late to act upon them, was to present to the Holding Company a fait  accompli in  the shape  of the  Board’s decision for allotment  of   rights  shares   to  the   existing   Indian shareholders. We are,  however, unable to share the view expressed in the ’12th  Conclusion’ in the appellate judgment of the High Court that  Devagnanam and  “his colleagues  in the Board of Directors” arranged  to  ensure  the  late  posting  of  the letters of  offer and  the notice  of the meeting. We do not accept Shri  Nariman’s  argument  that  Devagnanam  must  be exonerated from all responsibility in this behalf because he was away in Malacca from April 13 to 26. In the first place, to be in a place on two dates is not necessarily to be there all along  between those dates and therefore we cannot infer that Devagnanam  was in  Malacca from  13th to 26th since he was there on the 13th and the 26th. Besides, it was easy for a man  of Devagnanam’s  importance and  ability to  pull the strings from  a distance  and his  physical presence was not necessary to achieve the desired result. That is how puppets are moved. But there is no evidence, at least not enough, to justify the  categorical finding  recorded by  the appellate Bench of  the High  Court. The fact that Devagnanam stood to gain by  the machination  is a  relevant factor  to be taken into account but even that is not the whole truth: NIIL, not Devangnanam was the real beneficiary, a thesis 795 which we  have expounded  over the  last many pages. And the involvement  of   the  other   Directors  by   calling  them Devagnanam’s colleagues  is less than just to them. There is not a  shred of  evidence to  justify the  grave charge that they were willing tools in Devagnanam’s hands and lent their help to  concoct evidence. We clear their conduct, expressly and categorically.

In so  far as Devagnanam himself is concerned, there is room enough  to suspect  that he  was the part-author of the late postings  of important  documents, especially  since he was the  prime actor in the play of NIIL’s Indiansation. But even in  regard to  him, it  is difficult  to carry the case beyond the  realm of  suspicion and ‘room enough’ is not the same thing  as ‘reason  enough’. Section  15 of the Evidence Act which  carries  the  famous  illustration  of  a  person obtaining insurance  money on  his houses  which caught fire successively,  the  question  being  whether  the  fire  was accidental or intentional or whether the act was done with a particular knowledge  or intention,  will not help to fasten the blame on Devagnanam because, it is not shown that he was instrumental or  concerned  in  any  of  the  late  postings complained of. Were his complicity shown in any of these, it would have been easy to implicate him in all of them. On the contrary, there is an admitted act, described as a lapse,  on Devagnanam’s part which shows that he failed to do what  was to his advantage to do. It may be recalled that in his  letter dated  April 12 to Raeburn, Devagnanam stated that he was enclosing therewith a copy of the Reserve Bank’s letter dated  March 30,  1977 but  that  was  not  enclosed. Nothing was  to be  gained by suppressing the Reserve Bank’s letter from Raeburn who was always sympathetic to the Indian shareholders. If  anything, there  was something  to gain by apprising Raeburn  of the  urgency of  the matter in view of the Reserve  Bank’s letter. The strongest point in favour of the Indian  shareholders was  the last  para of  the Reserve Bank’s  letter   which  they   would  have  liked  the  U.K. shareholders to  know. Raeburn’s  response  of  2nd  May  to Devagnanam’s letter  of 12 April and the letter of offer was without the  knowledge of Reserve Bank’s letter of March 30.

When the  Bank’s letter  was  sent  to  Racburn  along  with Devagnanam’s  letter   of  May   11, Raeburn   categorially supported the  stand of the Indian shareholders, as is clear from paragraph 4 of the letter dated June 8, 1977 by Raeburn to Mackrael,  a  copy  of  which  was  sent  by  Raeburn to Devagnanam along with his letter dated June 17, 1977. 796 The inferences  arising from  the late  posting of the letter of offer to the Holding Company as also of the notice of meeting for May 2 to Sanders and the impact of inferences on the  conduct and  intentions of Devagnanam are one thing: we have  already dealt with that aspect of the matter. Their impact on  the legality of the offer and the validity of the meeting of  May 2  is quite another matter, which we propose now  to  examine.  In  doing  this,  we  will  keep  out  of consideration  all   questions  relating  to  the  personal involvement of  Devagnanam and his group in the delay caused in sending  the letters  of offer  and the notice of meeting for May 2. First, as  to the  letter of offer: The letter of offer dated  April  14,  1977  sent  to  the  Holding  Company  at Birmingham, like all other letters of offer, mentions, inter alia that  it was  resolved in  the meeting  of April  6  to increase the  issued capital  of  the  company  from  32,000 shares of  Rs. 100  each to 48,000 shares of Rs. 100 each by issuing Rights  Shares to  the existing  shareholders on the five  conditions   mentioned  in   the  letter.  The  second condition reads  thus: “If  the offer is not accepted within 16 days  from the  date of offer, it shall be deemed to have been declined  by the  shareholder”. The Holding Company was informed by  the last  paragraph of the letter of offer that in respect  of its holding of 18,990 shares, it was entitled to 9495  rights shares  and that its acceptance of the offer together with  the application money (at Rs. 50/- per share) should be  forwarded so as to reach the registered office of NIIL on  or before April 30, 1977. A postal communication by air between  U.K. and  Madras, which  is the  normal mode of communication,  generally  takes  five  days  to  reach  its destination. If the letter of offer were to be posted on the 14th itself  in Mardas,  it would  have reached  the Holding Company in Birimingham, say, on the 19th. Even assuming that the 16 days’ period allowed for communicating the acceptance of offer  is to  be counted  from the  14th and not from the 19th, it would expire on 30th April, To that has to be added the period  of five  days which the Holding Company’s letter would take  to reach  Madras. That  means that  the  Holding Company would be within its rights if its acceptance reached NIIL on  or before  May 5, 1977.

The Board of Directors had, however, met  in Madras  three  days  before  that  and  had allotted the entire issue of the rights shares to the Indian shareholders, on  the ground  that Holding  Company had  not applied for  the allotment of the shares due to it. In these circumstances, it  is quite  clear that  the  rights  shares offered to  the Holding Company could not have been allotted to anyone  in the meeting of May 2, for the supposed failure of the  Holding Company to communicate its acceptance before April 30. The meeting of May 2, of which the 797 main purpose  was to  consider  ‘Allotment’  of  the  rights shares must,  therefore, be  held to be abortive which could produce no  tangible result.  The matter  would be  worse if April 27,  and much  worse if May 2, were to be taken as the starting point  for counting  the period  of 16 days. Except for circumstances,  hereinafter appearing  the allotment  to Indian shareholders  of the rights shares which were offered to the  Holding Company  would have been difficult to accept and act upon. The objection  arising out       of the  late posting of the notice dated April 19 for the meeting of 2nd May goes to the very root of the matter. That notice is alleged to have been posted to N.T. Sanders, Studley, Warwickshire, U.K. on April 22. But  we have  already held that in view of the fact that the envelope  in which  the notice was sent bears the postal mark of  Madras dated  April 27, 1977, this latter date must be taken  to be the date on which the notice was posted. The notice was  received by  Sanders on May 2, on which date the Board’s meeting for allotment of rights shares was due to be held and  was, in  fact, held.  The utter  inadequacy of the notice to  Sanders in  terms of  time stares in the face and needs no  further argument  to justify  the finding that the holding of  the meeting  was illegal,  at least in so far as the Holding  Company is  concerned. It  is self-evident that Sanders could  not possibly have attended the meeting. There is, therefore, no alternative save to hold that the decision taken in  the  meeting  of  May  2  cannot,  in  the  normal circumstances,  affect  the  legal  rights  of  the  Holding Company or create any legal obligations against it. The next  question, and a very important one at that on which there  is a  sharp controversy between the parties, is as to  what is  the consequence of the finding which we have recorded that the objection arising out of the late position of the notice of the meeting for 2nd May goes to the root of the matter. The answer to this question depends upon whether the Holding  Company could  have accepted  the offer  of the rights shares  and if,  either for reasons of volition or of legal compulsion,

it could  not have  accepted  the  offer, whether it could have at least renounced its right under the offer to  a resident  Indian, other than the existing Indian shareholders. The decision of this question depends upon the true construction  of the provisions of FERA and of sections 43A and 81 of the Companies Act, 1956. We have  already reproduced  the relevant provisions of FERA, namely,  section 2(p),  (q) and (u); section 19(1)(a), (b) and (d); 798 section 29(1)(a); section 29(2)(a), (b) and (c); and section 29(4)(a) and (b). Section 29(1) provides that: …  notwithstanding    anything  contained  in  the provisions of  the Companies  Act, 1956 a company which is not  incorporated under any law in force in India or in which  the non-resident       interest is more than forty per cent  shall not, except with the general or special permission of  the Reserve Bank carry  on in India any trading, commercial  or industrial       activity other than the one  for which  permission of  the Reserve Bank has been obtained under section 28. The other  provisions are  of  ancillary  and  consequential nature, following upon the main provision summarised above. NIIL had  applied for  the necessary  permission, since the non  resident interest  therein was  more than  40%  the Holding Company  owing nearly 60% of its share capital. That permission was  accorded by  the  Reserve  Bank  on  certain conditions which,  inter alia, stipulated that the reduction in the  non-resident holding  must be  brought down  to  40% within one  year of  the receipt  of its  letter,  that  is, before May  17, 1977  and that until then, the manufacturing and business activities of the Company shall not be extended beyond the approved level as of December 31, 1973. It is  contended by  Shri Seervai  that  non-compliance with the  condition regarding  the dilution  of non-resident interest  within   the  stipulated  period  could  not  have resulted in  the  RBI  directing  NIIL  to  close  down  its business or  not to carry on its business. It is also argued that  noncompliance   with  the   conditions   imposed   for permission to  carry on  its business would not have exposed the Indian  directors to  any penalties  or liabilities  and that, in  the absence  of a  power to  revoke the permission already granted  (as in  other sections  like sections 6 and 32), the  RBI had  no power to revoke the permission granted to  NIIL  even  if  the  conditions  subject  to  which  the permission was  granted were breached. According to counsel, closing down  a business  which the  RBI had  allowed to  be continued by  granting  permission  would  have  such  grave consequences-public and private-that the power to direct the business to  be discontinued  was advisably  not  conferred, even if the conditions are breached. Section 29(4)(c), it is urged, which enables the RBI to direct non residents to sell their shares  or cause  them to be sold where an application under section 29(4)(a), for permission to continue to 799 hold shares,  was rejected  is the  only power  given to the Reserve Bank  where a  condition imposed under section 29(2) is breached. We are  unable to accept these contentions. The Reserve Bank granted  permission to  NIIL to  carry on its business, “subject to  the conditions”  mentioned in the letter of May 11, 1976.  It may be that each of those conditions is not of the  same   rigour  or  importance  as  e.g.

the  condition regarding  the  progress  made  in  implementing  the  other conditions, which could reasonably be relaxed by condonation of the  late filing  of any particular quarterly report. But the dilution  of the  non-resident interest  in  the  equity capital of  the Company to a level not exceeding 40% “within ‘a period  of 1(one)  year from  the date of the receipt of” the letter  was  of  the  very  essence  of  the  matter.  A permission  granted  subject  to  the  condition  that  such dilution shall  be effected would cease automatically on the non-compliance  with   the  condition  at  the  end  of  the stipulated period  or the  extended period,  as the case may be. The  argument of  the Holding  Company  would  make  the granting of  a conditional permission an empty ritual since, whether or not the company performs the conditions, it would be  free  to  carry  on  its  business,  the  only  sanction available to  the Bank  being, as argued, that it can compel or cause the sale of the excess non-resident interest in the equity holding  of the  Company, under  section 29(4)(c)  of FERA. This  particular provision,  in our  opinion, is not a sanction for  the enforcement  of conditions  imposed  on  a Company under  clause (c) of section 29(2). Section 29(4)(c) provides for a situation in which an application for holding shares in a Company is not made or is rejected. The sanction for enforcement  of a  conditional permission  to  carry  on business, where  conditions are  breached, is the cessation, ipso facto,  of the permission itself on the non-performance of the  conditions at  the time  appointed or  agreed.  This involves no  element of  surprise or  of unjustness  because permission is  granted, as  was done  here, only  after  the applicant  agrees  to  perform  the  conditions  within  the stipulated period.  When NIIL  wrote to the Bank on February 4,  1976  binding  itself  to  the  performance  of  certain conditions, it could not be heard to say that the permission will remain  in force  despite its  non-performance  of  the conditions. Having  regard to  the provisions  of section 29 read with sections 49, 56(1) and (3) and section 68 of FERA, the continuance of business after May 17, 1977 by NIIL would have been  illegal, unless the condition of dilution of non- resident equity was duly complied with. It is needless, once again, to  dwell upon  the impracticability of NIIL applying for extension of the period of one year allowed to it by the 800 Bank. Coats  could be  optimistic about  such  an  extension being granted  especially, since thereby they could postpone the evil  day. For  NIIL, the wise thing to do, and the only course open to it, was to comply with the obligation imposed upon it by law, without delay or demur. It seems  to us  quite clear,  that by  reason  of       the provisions  of  section  29(1)  and  (2)  of  FERA  and  the conditional permission  granted by  the RBI  by  its  letter dated May  11, 1976, the offer of rights shares made by NIIL to the Holding Company could not possibly have been accepted by it.

The object  of section  29, inter alia, is to ensure that a  company (other  than a banking company) in which the non-resident interest  is more than 40% must reduce its to a level not  exceeding 40%.  The RBI  allowed NIIL to carry on its business  subject to the express condition that it shall reduce its  non-resident holding  to a  level not  exceeding 40%. The  offer of  rights shares  was made  to the existing shareholders, including  the Holding  Company, in proportion to the  shares held by them. Since the issued capital of the Company which  consisted of  32,000 shares  was increased by the issue of 16,000 rights shares, the Holding Company which held 18,990  shares was  offered 9495 shares. The acceptance of the  offer of  rights shares by the Holding Company would have resulted  in a  violation of the provisions of FERA and the directive  of the Reserve Bank. Were the Holding Company to  accept  the  offer  of  rights  shares,  it  would  have continued to  hold 60%  share capital in NIIL and the Indian shareholders would  have continued  to hold  their 40% share capital in the Company. It would indeed be ironical that the measure which was taken by NIIL’s Board of Directors for the purpose of  reducing the non-resident holding to a level not exceeding  40%   should  itself   become  an  instrument  of perpetuating the  ownership by the Holding Company of 60% of the equity  capital of  NIIL. We are not suggesting that the offer of  rights shares  need not  have  been  made  to  the Holding Company  at all.  But the  question is  whether  the offer when  made could  have been  accepted by it. Since the answer to  this question  has to  be  in  the  negative,  no grievance can  be made by the Holding Company that, since it did not  receive the  offer in  time, it  was deprived of an opportunity to accept it. We see  no substance  in Shri Nariman’s contention that the letter  of offer could not have been sent to the Holding Company without  first obtaining  the RBI  s approval  under section 19  of FERA.  Counsel contends  that  under  section 19(1)(b), notwithstanding  anything contained  in section 81 of the Companies Act, no person can, except with 801 the general  or special  permission  of  the  Reserve  Bank, create `any  interest in  a security’  in favour of a person resident outside  India. The  word “security”  is defined by section 2(u) to shares, stocks, bonds, etc. We are unable to appreciate how  an offer  of shares  by itself  creates  any interest in  the shares  in favour of the person to whom the offer is made. An offer of shares undoubtedly creates “fresh rights” as  said by  this Court  in Mathalone v. Bombay Life Assurance Co.(1)  but, the  right which it creates is either to accept  the offer  or to  renounce it, it does not create any interest  in the shares in respect of which the offer is made. But though       it could  not have  been possible  for  the Holding Company to accept the offer of rights shares made to it, the  question still  remains whether it had the right to renounce the  offer in  favour of any resident Indian person or company of its choice, be it an existing shareholder like Manoharan or  an outsider  like Madura  Coats. The answer to this question depends on the effect of section 43A and 81 of the Companies Act, 1956. We will  first notice the relevant parts of sections 3, 43A and 81 of the Companies Act. Section 3(1)(iii) defines a “private company” thus : “private company”  means a  company which,  by its articles :-

(a) restricts the  right to transfer its shares, if any; (b)  limits the number of its members to fifty and (c) prohibits any  invitation to  the public  to subscribe for  any shares  in, or  debentures of, the company. Clause (iv)  of section  3(1) define  a “public  company” to mean a company which is not a private company. Section 43A of the Companies Act, which was inserted by Act 65 of 1960, reads thus : 43A. (1)   Save  as otherwise provided in this section, where not  less than  twenty-five per cent of the  paid-up   share  capital  of  a  private company having  a share capital, is  held by one or  more bodies  corporate, the  private, company shall…… 802 become by  virtue of  this section  a  public company : Provided that  even      after  the  private company has  so become  a public company, its articles          of    association   may    include provisions relating  to the  matter specified in clause (iii) of sub-section (1) of section 3 and  the number  of its  members may be, or may at any time be reduced, below seven : (2)     Within three months from the date on which a private company becomes a  public company by virtue of  this section,         the  company  shall inform the  Registrar that  it has  become  a public company  as aforesaid,  and  thereupon the Registrar shall delete the word “Private” before the  word “Limited” in the name of the company upon the register and shall also make the necessary  alterations in the certificate of incorporation issued to the company and in its memorandum of association.

(4) A private  company which has become a public company by  virtue  of  this  section  shall continue to be a public company until it has, with the         approval of  the Central Government and in accordance with the provisions of this Act, again become a private company. Section 81 of the Companies Act reads thus : 81. (1)  Where  it is proposed to increase the subscribed  capital of  the  company  by allotment of further shares, then, (a)  such further shares, shall be offered to the persons      who  at  the  date  of  the offer, are      holders of the equity shares of the  company in proportion, as nearly as circumstances  admit, to      the capital paid up on those shares at that date ; 803 (b)   the offer aforesaid shall  be made  by notice specifying  the number  of shares offered and      limiting a  time not  being less than  fifteen days from the date of the offer within which the offer, if not accepted, will  be deemed  to have      been declined ; (c)   unless  the  articles  of the  company otherwise provide,      the offer  aforesaid shall  be  deemed  to  include  a  right exercisable by  the person      concerned to renounce the  shares offered  to him  or any of  them  in  favour  of  any  other person, and      the notice  referred to  in clause (b)      shall contain a statement of this right ; (d)   after the expiry of the time specified in the  notice aforesaid,  or on receipt of earlier intimation from the person to whom  such       notice  is  given  that  he declines to      accept the  shares offered, the Board  of directors  may dispose  of them in  such manner  as they think most beneficial to the company. (1A) Notwithstanding    anything contained  in  sub- section (1)  the further shares aforesaid may be offered  to any  persons (whether  or         not those persons include the persons referred to in clause  (a) of  sub-section (1)  ) in         any manner whatsoever- (a)   if a  special resolution to that effect is passed  by  the      company  in  general meeting, or (b)   where no  such  special  resolution  is passed  if       the  votes  cast………in favour of  the proposal ……… exceed the votes,      if  any,  cast  against  the proposal  ………       and  the   Central Government       is    satisfied,   on    an application      made   by  the   Board   of directors  in   this  behalf   that      the proposal  is   most      beneficial  to  the company.

(3) Nothing in this section shall apply – (a) to a private company. 804 While interpreting       these and  allied provisions of the Companies Act,  it would  be necessary to have regard to the relevant Articles  of Association  of NIIL, especially since Section 81(1)(c)  of that  Act, which is extracted above, is subject to  the qualification  : “Unless the articles of the Company  otherwise   provide”.  The  relevant  Articles  are Articles 11, 32, 38 and 50 and they read thus : Article 11:      In  order that the Company may be a private Company within  the  meaning  of         the  Indian Companies Act, 1913, the following provisions shall have effect, namely :- (i)   No invitation  shall be  issued to         the public  to      subscribe  for  any  shares, debentures, or  debenture stock  of      the Company. (ii) The number of the members of the Company (Exclusive of  persons in the employment of the  Company)  shall  be      limited  to fifty, provided that for the purposes of this Article  where two  or more persons hold one  or more  shares in the Company jointly, they  shall  be  treated  as  a single member. (iii) The  right to  transfer shares  of the Company   is    restricted       in   manner hereinafter provided. (iv) If there  shall  be  any  inconsistency between the      provisions of  this Article and the  provisions of any other Article the provisions  of      this  Article  shall prevail. Article 32  :    A  share  may  subject  to  article  38  be transferred  by a  member  or  other  person entitled to  transfer to         any member selected by the transferor; but, save as aforesaid, no share shall be transferred to a person who is not a member so long as any member is willing to purchase  the same at the fair value. Such value to be ascertained in manner hereinafter mentioned. Article 38  :    The  Directors may  refuse to  register any transfer of a share (a) where the Company has a lien on the share, or (b) in case of shares not fully  paid-up, where it is not proved to their satisfaction 805 that the proposed transferee is a responsible person, or  (c) where  the Directors  are  of opinion that  the  proposed  transferee (not being already  a member) is not  a desirable person to  admit to  membership, or (d) where the result  of such  registration would be to make the  number of  members exceed the above mentioned limit.

But clauses  (b) and (c) of this  Article   shall  not  apply  where the proposed transferee is already a member. Article 50  : When  the Directors  decide to increase the capital of  the Company by the  issue of new shares such  shares shall  be offered  to the shareholders in proportion to  the  existing shares to  which they are entitled. The offer shall be made by notice specifying the number of shares  offered and limiting a time within which the  offer, if  not accepted,  will  be deemed  to   be declined   and   after   the expiration of such time, or on the receipt of an intimation  from the person to  whom  the offer is  made that he declines to accept the shares offered, the Directors may dispose of the same in such  manner as  they think most beneficial to  the Company. The Directors may likewise so  dispose of any new shares which (by reason  of the ratio which the new shares bear to the shares  held by persons entitled to an  offer of new shares)  cannot, in  the opinion of  the Directors,  be  conveniently offered under this Article. It is  contended by  Shri Nariman that by reason of the articles of  the Company  and on  a true  interpretation  of section 81,  the right of renunciation of the shares offered by NIIL  was not available to the Holding Company since NIIL was not  a full-fledged public company in the sense of being incorporated as  a public  company but  had become  a public company under  section  43A(1)  and  had,  under  the  first proviso to  that section,  retained its articles relating to matters specified  in section  3(1) (iii). According to Shri Nariman,  section  81(1A)  can  have  no  application  to  a `section 43A  (1) proviso  company’ (for short, the `proviso company’) because  it contemplates  issue of  shares to  the public and  to persons  other than  members of  the company, which cannot  be done  in the  case of a company which falls under the proviso to section 43A(1). 806 Section 81(1A),  it is urged, is complementary to section 81 and since  the latter cannot apply to the `proviso company’, the former  too cannot  apply to it. In any event, according to counsel,  section 81  (1) (c) cannot apply in the instant case since  the  articles  of  NIIL  provide,  by  necessary implication at  any rate,  that the members of company shall have no  right to  renounce the  shares in  favour of  “any” other person,  because such  a right would include the right to renounce  in favour of persons who are not members of the company, and  NIIL had  retained its  articles under  which, shares could  not be  transferred or  renounced in favour of outsiders. Shri Seervai  has refuted       these contentions,  his main argument being  that the definitions of `public company’ and `private company’  are mutually exclusive and, between them, are exhaustive  of all  categories of  companies. There  is, according to  the  learned  counsel  no  third  category  of companies recognised by the Companies Act, like the `proviso company’.

Shri Seervai further contends : (a)   The right of renunciation is not a `transfer’ and therefore  the   directors’  power  to  refuse  to register the    shares under  the articles  does not extend to renunciation ; (b)  Before considering Section 43A, which was inserted for the  first time  in the  Act of  1956  by    the amending Act    of 1960,  it should  be  noted  that Section 81 as enacted in the Act of 1956 contained three sub-sections (1), 2 and 3, and sub-section 3 provided that “nothing in this section shall apply to  a    private  company”.  The  opening  words  of Section 81, as they now stand, were substituted by the Amending Act of 1960, and sub-section (1A) was inserted by the said Amending Act, and sub-section (3) was  substituted by  the Amending Act of 1963. But subsection 3 (a) reproduced sub-section (3) of the Act  of 1956, namely, “nothing in this section shall apply  to a  private company”.    It is  clear therefore that  the rights conferred by Section 81 (1) and (2) do not apply to a private company, and this    provision   in  the  Act  of  1956  was  not connected with  the insertion    Section 43A for the first time in 1960. (c)  The provisos to Section 43A (1), (1A) and (1B) are very important  in connection    with Section  81 of the 807 Act of  1956. Just as the crucial words in Section 27(3) are  “shall contain”,  the crucial  words in the provisos    are “may  include” (or  may retain). The words  “shall contain” are mandatory and go to the constitution  of a  private company. The words “may include” are permissive and they do not go to the constitution  of a  company which has become a public company  by virtue  of Section    43A because whether the  articles include    (or  retain)  those requirements or do not include those requirements, the  constitution  of    the  company  as  a  public company remains unaffected; (d)   No  statutory  consequence  follows,       as  to  the company being    a public  company, on the retention of the  three requirements or one or more of them, or in    not complying  with those requirements. But in the  case of  a private  company which does not comply with the requirements of Section 3 (1)(iii) serious consequences    follow under Section 43, and in the  case of  a private  company  altering    its articles so  as not  to include  all    the  matters referred  to     in  Section  3  (1)  (iii)  serious consequences follow  under Section  43, and in the case of a private company altering its articles so as not  to include  all the matters referred to in Section 3  (1) (iii)    serious consequences  follow under Section    44.

In  short,  the  inclusion,  or retention, of    all  the  matters  referred  to  in Section 3(1)    (iii) has a radically different part of function  in a  private company which becomes a public company  by virtue of Section 43A from that which    it   has  in   a  private   company.   More particularly the  non-compliance  with  the  three requirements of  Section 3  (1)(iii) included,  or retained, in    the articles  of a  private  company which has  become a  public company  by virtue  of Section 43A, involves no statutory consequences or disabilities, since  such a  company is  a  public company and Section 43 is not attracted. (e)   It is  wrong to contend that the whole of Section 81(1)    does  not  apply  to  a  `proviso  company’ because it  is a  private company  entitled to the protection of    subsection 3 (a). Section 81(3) (a) applies to a private 808 company; a  `proviso company’    is  one  which  has become, and continues to remain, a public company; (f)   Section 81 (1) (c) applies to all companies other than private    companies. The  articles of a public company may include all of the matters referred to in Section  3 (1) (iii), or may include one or two of the matters referred to therein without ceasing to be a public company. A public company which has become such  by virtue  of Section  43A can delete all the matters referred to in Section 3 (1) (iii) or may  delete one  or two  of them or may include (or retains)    all the three matters referred to in Section 3  (1) (iii).    The retention  of the three matters mentioned  in Section    3(1) (iii) does not in any  way affect the constitution of the company because it has become and continues to be a public company ; (g)   Section 81  when enacted  in 1956  consisted of 3 subsections. The  need to exempt private companies arose    from   Section  81(c),  for  the  right  to renounce in  favour  of  any    person  might,  (not must), conflict  with the limitation on the number of members  to 50  and since    that was  one of the matters  which  went    to  the  constitution  of  a company as  a private    company, private  companies were expressly  exempted. No    such  exemption  was necessary in the case of a `proviso company’ which retains in  its articles  all    the  three  matters referred to  in Section  3(1)    (iii),  because  an increase in  the number  of its  members above  50 will not  affect the    constitution of  the company which remains that of a public company; (h)

Section 81  as enacted  in 1956  did not  contain subsection (1A)  which was  inserted for the first time by  the Amending    Act of 1960, which Amending Act also inserted Section 43A. After the insertion of subsection    (1A) the effect of the exemption of private companies from the operation of section 81 became even  more necessary  for the provisions of sub-section (1A) (a) and (b) override the whole of Section 81  (1) and  shares need not be offered to existing  shareholders.   Section  81     (1A)  also overrides Article 50 of NIIL; 809 (i)   The Articles       of NIIL provide for the transfer of shares, and  Article 38 sets out the circumstances under which  the directors  may refuse to transfer the shares.  However, since renunciation of shares is not  a transfer,  the  restriction    in  Article 11(iii) is  not violated  by an existing member of NIIL renouncing  his share  in favour of any other person; (j)   The opening       words of  Sections 81  (1)  (c)  are “unless the  articles    of  the  company  otherwise provide”. Section 81 (1) (c) contains no reference to  “expressly   provide”  or     “expressly  or  by necessary implication    provide”. According  to the plain meaning    of the  words “other wise provide”, there must  be a  provision in  the Articles which says that  the offer of shares to existing members does not  entitle them  to renounce  the shares in favour of  any person.  Article 11  of NIIL merely states  the  matters    necessary  to  constitute  a company a  private  company.    Such  companies  are exempt from  Section 81  and so,  the questions of its `otherwise  providing’ does not arise. Article 50 refers  to the  rights shares  but it  makes no other    provision  with  regard  to  the  right  of renunciation than  is made  in  Section  81(1)(c). Unless such  other provision    is made, the opening words    of  Section  81(1)(c)  are  not  attracted. Secondly, Section  81(1)(c) provides    that  unless the  articles     otherwise   provide   “the   offer aforesaid shall  be  deemed  to  include  a  right exercisable by  the person  concerned to  renounce the shares offered to him or any of them in favour of any person”. The right conferred by the deeming clause  can     be  taken  away  only  by  making  a provision in    the Articles  to prevent the deeming provision  from   taking   effect.   The   deeming provision cannot be avoided by implications; and (k)

The Holding Company  could  have  renounced  the rights shares  offered to it at least in favour of the Manoharan group and  the fact  that after the shares were  allotted, the  Manoharans stated that they were  not interested  in subscribing  to the shares offered does not affect the question of the legal right. Besides, it  was one thing to refuse to subscribe to the shares offered; it was another thing to  accept the    renunciation of merely 6,190 shares 810 which    would   have   given   the   Manoharans   a substantial stake in the affairs of the company. Shri Seervai  relies upon many a text and authority in support  of  the  proposition  that  the  classification  of companies into  private and public is mutually exclusive and collectively exhaustive.  He relies  upon a decision in Park v. Royalty  Syndicates(1) in  which Hamilton  J. (later Lord Summer) observed  that a  public company is simply one which is not  a private company and that there is no “intermediate state or  terbium quid”.  In support of the proposition that the right  to renunciation  of shares  is  not  a  transfer, counsel relies  upon a  decision in  Re  Pool  Shipping  Co. Ltd.(2). Reliance  is also  placed in  this  behalf  on  the statement of  law in Halsbury (Vol. 7, 4th edition, p. 218), Palmer’s Company  Law Vol. 1, 22nd edition p. 393), Palmer’s Company Precedents  (Part 1,  17th edition,  p. 688),  Gore- Brown on  Companies (43rd edition, para 16.3) and Buckley on Companies Act  (13th edition,  p. 815). While indicating his own reasons  as to  why the  legislature  enacted  identical provisos to  sub-sections (1),(1A)  and (1B) of section 43A, counsel mentioned that no light is thrown for enacting these provisos, either  by the  Shastri Committee Report which led to the  Companies (Amendment)  Act, 1960  or by the Notes on clauses, or  by the Report of the Joint Select Committee. In regard to  the opening  words of  section 81 (1)(c); “Unless the articles  of the  company  otherwise  provide”,  counsel cited the  Collins  English  Dictionary,  the  Random  House Dictionary and the Oxford English Dictionary. An interesting instance of  the use of the word “provide’ is to be found in the Random House Dictionary, 1967, p. 1157, to this effect :

“The Mayor’s  wife of the city provided in her will that she would be buried without any pomp or noise”. It       shall   have   been   noticed   that   the   entire superstructure of  Shri  Seervai’s  argument  rests  on  the foundation that  the definitions  of  `public  company’  and `private company’  are mutually  exclusive and  collectively exhaustive of  all categories  of companies, that is to say, that there  is no  third kind  of company  recognised by the Companies Act,  1956. The argument merits close examinations since it  finds support,  to an appreciable extent, from the very text  of the  Companies Act. The definition of `private company’ and  the manner  in which  a  `public  company’  is defined (“public  company means  a company  which is  not  a private company”) bear out the argument that these 811 two categories of companies are mutually exclusive. If it is this it  cannot be that and if it is that it cannot be this. But, it  is not  true to say that between them, they exhaust the universe  of companies.  A  private  company  which  has become a  public company  by  reason  of  section  43A,  may include, that  is to  say, may  continue to  retain  in  its articles, matters  which are specified in section 3 (1)(ii), and the  number of  its members  may at  any time be reduced below  7.   This  provision   itself  highlights  the  basic distinction  between,  on  one  hand,  a  company  which  is incorporated as  a public company or a private company which is converted  into a public company under section 44, and on the other  hand, a private company which has become a public company by reason of the operation of section 43A. In the  first place,  a section-43A company may include in its  articles,  as  part  of  its  structure,  provisions relating to restrictions on transfer of shares, limiting the number of  its members  to 50, and prohibiting an invitation to the  public to  subscribe for  shares, which  are typical characteristics of  a  private  company.  A  public  company cannot possibly do so because, by the very definition, it is that which  is not  a private company, that is to say, which is  not  a  company  which  by  its  articles  contains  the restrictions mentioned in section 3 (1)(iii). Therefore, the expression `public  company’ in  section 3(1) (iv) cannot be equated with  a `private  company which  has become a public company by virtue of section 43A’. Secondly, the  number of  members of  a public  company cannot  fall   below  7   without  attracting   the  serious consequences provided  for by section 45 (personal liability of members  for the  company’s  debts)  and  section  433(d) (winding up  in case  the number  of its members falls below 7).

A  section 43A  company can  still maintain its separate corporate identity  qua debts  even if  the  number  of  its members is reduced below seven and is not liable to be wound up for that reason. Thirdly,  a   section  43A,   company  can        never   be incorporated and registered as such under the Companies Act. It is  registered as  a  private  company  and  becomes,  by operation of law, a public company. Fourthly, the  three contingencies       in which  a private company becomes  a public  company by  virtue of section 43A (mentioned in  sub-sections (1), (1A) and (1B) read with the provisions of  subsection (4)  of the  section) show that it becomes and  continues to be a public company so long as the conditions in sub-sections (1), (1A) or (1B) are applicable. The provisos to each of these sub-sections 812 clarify the  legislative intent  that companies  may  retain their registered  corporate shell  of a  private company but will be  subjected to  the discipline  of public  companies. When the necessary conditions do not obtain, the legislative device in  section 43A  is to  permit them  to go  back into their corporate  shell and  function once  again as  private companies, with all the privileges and exemptions applicable to private companies. The proviso to each of the subsections of section  43A clearly  indicates that although the private company has  become a  public  company  by  virtue  of  that section,  it   is  permitted   to  retain   the   structural characteristics of  its origin,  its birth marks, so to say. Any provision  of the Companies Act which would endanger the corporate shell  of a `proviso company’ cannot be applied to it because,  that would  constitute an  infraction of one or more of  the characteristics  of the `proviso company’ which are statutorily  allowed to  be preserved and retained under each of  the three  provisos to  the three  sub-sections  of section 43A.  A right of renunciation in favour of any other person, as  a statutory  term of  an offer of rights shares, would be  repugnant to  the integrity of the Company and the continued retention by it of the basic characteristics under section 3(1)(iii). Fifthly, section  43A, when  introduced by  Act  65  of 1960, did  not adopt the language either of section 43 or of section 44.  Under section  43  where  default  is  made  in complying  with  the  provisions  of  section  3(1)(iii),  a private  company   “shall  cease   to  be  entitled  to  the privileges and  exemptions conferred on private companies by or under  this Act,  and this Act shall apply to the company as if  it were  not a  private company”. Under section 44 of the Act, where a private company alters its Articles in such a manner  that they  no longer  include the provisions which under, section  3(1)(iii) are required to be included in the Articles in  order to  constitute it  a private company, the company “shall  as on the date of the alteration cease to be a private  company”. Neither  of  the  expressions,  namely, “This Act  shall apply  to the  company as  if it were not a private company” (section 43) or that the company “shall … cease to  be a  private company  (section  44)  is  used  in section 43A.  If a section 43A company were to be equated in all respects  with a public company, that is a company which does  not  have  the  characteristics  of  private  company, Parliament would  have used  language similar  to the one in section 43  or  section  44,  between  which  two  sections, section 43A was inserted. If the intention was that the rest of the  Act was  to apply to a section 43A company “as if it were not a private company” nothing would have been easier 813 than to  adopt that  language in  section 43A,  and  if  the intention was  that a  section 43A  company  would  for  all purposes “cease to be a private company”, nothing would have been easier than to adopt that language in section 43A. Sixthly, the  fact that a private company which becomes a public  company by virtue of section 43A does not cease to be for  all purposes  a “private company” becomes clear when one compares  and contrasts  the provisions  of section  43A with section  44 :

when the Articles of a private company no longer include  matters  under  section  3(1)(iii),  such  a company shall as on the date of the alteration cease to be a private company (section 44(1)(a)). It has then to file with the Registrar  a  prospectus  or  a  statement  in  lieu  of prospectus under  section 44(2).  A  private  company  which becomes a  public company  by virtue  of section  43A is not required to  file a  prospectus or  a statement in lieu of a prospectus. These considerations  show that, after the Amending Act 65 of  1960, three  distinct types  of  companies  occupy  a distinct place  in the  scheme of  our Companies  Act :  (1) private companies  (2)  public  companies  and  (3)  private companies which  have become  public companies  by virtue of section 43A,  but which  continue to  include or  retain the three characteristics of a private company. Sections 174 and 252 of the Companies Act which deal respectively with quorum for meetings  and minimum  number  of  directors,  recognise expressly, by  their  parenthetical  clauses,  the  separate existence of  public companies  which have  become  such  by virtue of section 43A. We may also mention that while making an amendment  in sub-clause  (ix) of Rule 2 of the Companies (Acceptance of  Deposits) Rules,  1975, the Amendment Rules, 1978 added  the expression  : “Any amount received….. by a private company  which has  become a  public  company  under section 43A  of the  Act and  continues to  include  in  its Articles of  Association provisions  relating to the matters specified in clause (iii) of sub-section (1) of section 3 of the Act”,  in order  to  bring  deposits  received  by  such companies within the Rules. The various  points discussed  above will facilitate a clearer perception  of the position that under the Companies Act, there  are three  kinds of  companies whose  rights and obligations  fall   for   consideration,   namely,   private companies, public  companies and companies which have become public companies under section 43(1) but which retain, under the first proviso to that section, the three characteristics of private companies mentioned in section 3(1)(iii) 814 of the  Act, private  companies enjoy certain exemptions and privileges which  are peculiar  to  their  constitution  and nature. Public  companies  are  subjected  severely  to  the discipline of  the Act.  Companies of  the third  kind  like NIIL, which  become public  companies but  which continue to include in  their articles  the three  matters mentioned  in clauses (a)  to (c)  of section

3(1)(iii) are also, broadly and generally,  subjected to  the rigorous discipline of the Act. They  cannot claim  the privileges  and  exemptions  to which private  companies which  are outside  section 43A are entitled. And  yet, there  are certain provisions of the Act which would apply to public companies but not to section 43A companies. Is  section 81  of the  Companies  Act  one  such provision ?  and if  so, does the whole of it not apply to a section 43A  company or  only some  particular part  of it ? These are the questions which we have now to consider. On these  two questions,  both the learned counsel have taken up  extreme positions  which, if  accepted, may create confusion and  avoidable inconvenience in the administration of section  43A companies  like NIIL.  Shri Nariman contends that a  section 43A company becomes a public company qua the outside  world,  as  e.g.  in  matters  of  remuneration  of directors, disclosure, commencement of business, information to be  supplied but it remains a private company qua its own shareholders. Therefore,  says counsel,  no provision of the Companies  Act   can  apply  to  such  companies,  which  is inconsistent with  or destructive  of the  retention of  the three essential  features of  private companies as mentioned in section  3(1)(iii). Section  81, it  is said, is one such provision and  in so  far as  private companies  go, it  can apply  only  to  (a)  such  companies  which  become  public companies under  section 43A  but which  do not  retain  the three essential  features and to (b) private companies which are duly  converted into  public companies. It is urged that even  assuming   that  the   expression  “private   company” occurring in  the various  provisions of  the Companies  Act (including section  81(3)(a)) does not include a section 43A proviso Company,  that does  mean that  section 81  would be applicable to  a 43A  Proviso Company,

because  :  (a)  The proviso  to   section  43A(1)   and  section   81  are  both substantive provisions  and neither  is subordinate  to  the other ;  in fact  section 43A  was introduced later in 1960; and (b)  An offer  of rights shares to a member in a section 43A proviso  company cannot  include a right to renounce the shares in  favour of  any other person, because such a right would be  inconsistent  with  the  article  of  the  company limiting the  number of  its members  to  50  and  with  the article prohibiting  invitation to  the public  to subscribe for shares  in  the  company.  The  fact  that  the  statute overrides the 815 articles is  not  a  sufficient  ground  for  rendering  the provisions of  section 81  applicable to  a  section  43A(1) proviso company  since the  right  to  continue  to  include provisions in its articles specified in section 3(1)(iii) is itself  a  statutory  right.  Counsel  says  that  in  these circumstances-and this  is without  taking the assistance of the words  “unless the  articles of  the  company  otherwise provide” in  section 81(1)(c)-the  provision  regarding  the right of  renunciation cannot  apply to  section 43A proviso company. The answer       of Shri  Seervai to  this contention  flows from what truly is the sheet anchor of his argument, namely, that  the  definitions  of  `public  company’  and  `private company’ are  mutually exclusive  and between them, they are exhaustive of  all categoric  of companies. Counsel contends that section  81(1A) overrides section 81(1); that by reason of  sub-section  (3)  of  section  81,  section  81  is  not applicable to a “private company” but NIIL is not a “private company’ since  it became  a public  company  by  virtue  of section 43A; and that, therefore, the offer of rights shares made by  NIIL can  be renounced by the offerees in favour of any other person. Neither of       the two  extreme positions  for  which  the counsel contend  commends itself  to us.

The acceptance  of Shri Nariman’s  argument involves  tinkering with clause (a) of section 81(3), which shall have to be read as saying that “Nothing in  section 81  shall apply  to a `private company’ and to a company which becomes a public company by virtue of section  43A  and  whose  Articles  of  Association  include provisions relating to the matters specified in clause (iii) of sub-section  (1) of  section 3”.  Section 81(1)  does not contain a  non obstante  clause. But,  if  Shri  Nariman  is right, there  would be  no alternative  save to  exclude the applicability of  all of  its provisions  to a  company like NIIL, by reading into it an overriding provision which alone can achieve  such result.  On  the  other  hand,  to  accept wholesale the  argument of  Shri Seervai  would  render  the first proviso  to section  43A(1)  nugatory.  The  right  to retain  in   the  Articles   the  provision   regarding  the restriction on  the right to transfer shares, the limitation on the number of members to fifty and the prohibition of any invitation to  the public  to subscribe  for the  shares  or debentures of the Company will then be washed off. The truth seems to  us to  lie in  between the  extreme stands  of the learned counsel for the two sides. There is no difficulty in giving full effect to clauses (a) and  (b) of section 81 (1) in the case of a company like NIIL, even after it 816 becomes a  public company  under  section  43A.  Clause  (a) requires that  further shares must be offered to the holders of equity shares of the Company in proporation, as nearly as circumstances admit, to the capital paid up on those shares, while clause  (b) requires  that the offer of further shares must be  made by  a notice  specifying the  number of shares offered and  limiting the  time, not being less than fifteen days from  the date of the offer, within which the offer, if not accepted, will be deemed to have been declined. The real difficulty arises  when one  reaches clause (c) according to which, the  offer shall  be deemed  to include  the right of renunciation of shares or any of them in favour of any other person. We  will keep  aside for  the time being the opening words of  clause (c)  : “unless  the articles of the company otherwise provide”.  Clause (c)  further requires  that  the notice referred to in clause (b) must contain a statement as to the  right of  renunciation provided  for by  clause (c). Having given  to the  matter our most anxious consideration, we are  of the  opinion that  clause (c)  of  section  81(1) cannot apply to the earth while private companies which have become public companies under section 43A and which include, that is to say which retain or continue to include, in their articles of  association the  matters specified  in  section 3(1)(iii) of  the Act,  as specified in the first proviso to section 43A. If clause (c) were to apply to the section 43A- proviso companies,  it would  be open  to  the  offerees  to renounce the  shares offered  to them in favour of any other person  or   persons.  That   may  result  directly  in  the infringement of the article relating to the matter specified in section  3(1)(iii)

(b)  because,  under  clause  (c)  of section 81(1),  the offeree  is entitled  to spilt the offer and renounce  the shares  in favour of as many persons as he chooses, depending partly on the number of shares offered by the company  to him.  The right  to renounce  the shares  in favour of  any other  person is  also bound to result in the infringement of the article relating to the matter specified in section 3(1)(iii)(c), because an offer which gives to the offeree the right to renounce the shares in favour of a non- member is,  in truth  and substance,  an invitation  to  the public to subscribe for the shares in the company. As stated in Palmer’s Company Law (22nd Ed., Vol. I, para 21-18) : “Where the  Company issues renounceable letters of allotment the  circle of  original allottees can easily be broken by renunciation of those rights and complete strangers may become the allottees; here the offer will normally be held to be made to the public.” There is statement to the same effect in Gower’s Company Law 4th Ed., page 351) : 817 “It is therefore clear that an invitation by or on behalf of a private company to a few of the promoter’s friends and relations will not be deemed to be an offer to the  public. Nor, generally, will an offer which can only be  accepted by  the shareholder  of a  particular company. On  the other hand it is equally clear that an offer of  securities in  a public company  even  to  a handful people  may be  an offer to the public if it is calculated (which presumably means “Likely” rather than “intended”) to  lead to the securities being subscribed (i.e. applied  for on  original allotment) or purchased (i.e. bought after original allotment) by persons other than those       receiving the initial offer. In particular, if securities to be issued under renounceable allotment letter or       letter of  right the invitation to take them up must be deemed to be made to the public, since these securities are  obviously liable  to be  subscribed  or purchased by others.” The learned  author says  at page  430 that in the case of a private placing-an  issue  by  a  private  company-allotment letters will  probably be  dispensed with, “in any case they cannot be freely renounceable”. In foot-note (22) the author points out  that the  real danger  is that  if  renounceable allotment letters are issued, the company may be regarded as having made  an offer  to the public.

We cannot construe the provision contained  in clause  (c) in  a manner  which will lead to  the negation of the option exercised by the company to retain in its articles the matters referred to in section 3 (1)(iii). Both these are statutory provisions and they are contained in  the same  statute.  We  must  harmonise  them, unless the words of the statute are so plain and unambiguous and the  policy of  the statute  so clear  that to harmonise will be  doing violence  to those  words and to that policy. Words of  the statute,  we have  dealt with.  Its policy, if anything, points  in the  direction that  the integrity  and structure of  the section  43A provisio companies should, as far as possible, not be broken up. The exemption  in favour  of  private  companies  would appear to  have been inserted in section 81(3)(a) because of the right  of renunciation  conferred by  section  81(1)(c).

Section 105C  of the  Companies  Act  1973  which  contained substantially all  the provisions  that are  to be  found in section 81(1)(a),  (b) and (d) applied to all companies. The right of  renunciation in  favour of  any other  person  was conferred for the first time by the Act of 1956. That led to the  insertion   of  the  exception  in  favour  of  private companies since,  a right of renunciation in favour of other persons is wholly inconsistent 818 with the  structure of  a  private  company,  which  has  to contain  the  three  characteristics  mentioned  in  section 3(1)(iii). When  section 43A  was introduced  by Act  65  of 1960, the  legislature apparently  overlooked  the  need  to exempt companies  falling under  it,  read  with  its  first proviso, from  the operation of clause (c) of section 81(1). That the legislature has overlooked such a need in regard to other  matters,   in  respect  of  which  there  can  be  no controversy, is  clear from  the provisions  of sections 45, and 433  (d) of  the Companies  Act. Under section 45, if at any time  the number  of members of a company is reduced, in the case  of a public Company below seven, or in the case of a Private  Company below  two, every  member of  the company becomes severally  liable, under  the stated  circumstances, for the  payment of the whole debt of the company and can be severally sued  therefor. No exception has yet been provided for in  section 45  in favour  of  the  section  43A-proviso companies, with  the result  that a  private company having, say, three  members which  becomes a  public  company  under section 43A  and continues  to function with the same number of  members,   will  attract   the  rigour  of  section  45. Similarly,  under  section  433(d),  such  a  company  would automatically incur  the liability of being wound up for the same  reason.   If  and   when  these  provisions  fall  for consideration, due  regard may  have  to  be  given  to  the principle of  harmonious construction,  in order  to exclude section 43A  proviso companies from the application of those provisions. We  hope that  before such  and occasion arises, the Legislature  will make  appropriate  amendments  in  the relevant provisions  of the  Companies Act.  Such amendments have been  made in  sections 174(1),  clause  (iii)  of  the second proviso  to  sub-section  (1)  of  section  220,  and section 252(1)  in order  to accord  separate  treatment  to private companies which become public companies by virtue of section 43A,  as distinguished  from public companies of the general kind. In coming       to the conclusion that clause (c) of section 81(1) cannot apply to section 43A-proviso companies, we have not taken into consideration the impact of the opening words of  clause  (c)  :  “Unless  the  articles  of  the  company otherwise  provide”.   The  effect  of  these  words  is  to subordinate the  provisions of  clause

(c) to the provisions of the  articles of  association of  the company.  In  other words, the provisions that the offer of further shares shall be deemed  to include the right of renunciation in favour of any other  person will  not apply  if the  articles  of  the company “otherwise  provide”. Similarly the requirement that the notice of offer must contain a statement of the right of renunciation will not apply if the articles of 819 the company otherwise provide. The question which we have to consider  under   this  head  is  whether  the  articles  of association of  NIIL provide otherwise than what is provided by clause  (c) of  section 81(1).  We have already extracted the relevant  articles, namely,  articles 11, 32, 38 and 50. To recapitulate,  article 11, which has an important bearing on the  subject now under discussion, provides that in order that the company may be a private company, (i) no invitation shall be  issued to  the public to subscribe for any shares, debentures, etc;  (ii) the  number of members of the company shall be  limited to  50; and  (iii) the  right to  transfer shares of  the company  will be  restricted  in  the  manner provided in  the articles.  By article  32, a  share may  be transferred, subject  to article  38, by  a  member  to  any member  selected  by  the  transferor  but  no  share  shall otherwise be  transferred to a person who is not a member so long as any member is willing to purchase the same at a fair value. Article  38 confers  upon the  directors the power to refuse to register the transfer of a share for four reasons, the last  of which is that the transfer will make the number of members  exceed the  limit of 50. Article 50, which also, is important, provides that the offer of new shares shall be made by a notice specifying the number of shares offered and limiting the  time within  which the offer, if not accepted, will be  deemed to  have been  declined.  If  the  offer  is declined or  is not  accepted, before  the expiration of the time fixed  for its  acceptance, the directors have power to dispose of  the shares  in such  manner as  they think  most beneficial to the company. It is  urged by  Shri Seervai that none of the articles of the  company provides  otherwise than what is provided in clause (c)  of section  81(1) and therefore, clause (c) must have its  full play  in the case of NIIL. On the other hand, it is  contended by  Shri Nariman that the opening words, of clause (c)  do not require or postulate that the articles of the company must contain an “express” provision, contrary to what is  contained in  clause (c).  The contention, in other words, is  that if  the articles  of  a  company  contain  a provision which, by necessary implication, is otherwise than what is  provided in  clause (c);  that clause  can have  no application.

In  view of  our finding that keeping aside the opening words  of clause  (c), the provisions of that clause cannot  apply   to  section  43A-proviso  companies,  it  is academic to  consider whether  the  word  “provide”  in  the opening part  of clause  (c) postulates an express provision on the  subject of  renunciation or whether it is sufficient compliance with  the opening  words, if the articles contain by necessary implication a provision which is otherwise than what is provided in clause 820 (c). We  would, however,  like  to  express  our  considered conclusion on  this point  since the  point has  been argued fully by both the counsel and needs to be examined, as it is likely to arise in other cases. In the  first place, while construing the opening words of section  81(1)(c), it  has to  be remembered that section 43A companies are entitled under the proviso to that section to include  provisions in their Articles relating to matters specified in section 3(1)(iii). The right of renunciation in favour of  any other  person is wholly inconsistent with the Articles of  a private company. If a private company becomes a public  company by  virtue of  section 43A  and retains or continues to  include in its Articles matters referred to in section 3(1)(iii),  it is difficult to say that the Articles do not  provide something  which is  otherwise than  what is provided in  clause (c). The right of renunciation in favour of any  other person is of the essence of clause (c). On the other hand,  the absence  of that right is of the essence of the structure  of a private company. It must follow, that in all cases in which erstwhile private companies become public companies by  virtue of  section 43A  and retain  their  old Articles, there  would of  necessity be a provision in their Articles which is otherwise than what is contained in clause (c). Considered  from this  point of  view, argument  as  to whether the  word “provide”  in the  opening words of clause

(c) means “provide expressly” loses its significance. On the  question  whether  the  word  “provide”  means “provide expressly”,  we are unable to accept Shri Seervai’s submission that  the Articles must contain a provision which is expressly  otherwise than what is provided in clause (c). In the  context in  which a private company becomes a public company under  section 43A  and  by  reason  of  the  option available to  it under  the proviso, the word “provide” must be understood  to mean  “provide expressly  or by  necessary implication”. The  necessary implication  of a provision has the same effect and relevance in law as an express provision has, unless  the relevance of what is necessarily implied is excluded by  the use  of clear words. Considering the matter from all reasonable points of view, particularly the genesis of section 43A-proviso companies, we are of the opinion that in order  to attract  the opening  words of  clause  (c)  of section 81(1),  it is not necessary that the Articles of the Company must  contain an  express provision  otherwise  than what is contained in clause (c). We do  not think  it necessary to consider the decision of the  Privy  Council  in  Shanmugam  v.  Commissioner  for Registration, 821 cited by  Shri Nariman,  which says  that to  be an “express provision” with regard to something it is not necessary that the thing  should be  specially mentioned;  it is sufficient that it  is directly  covered by the language, however broad the language  may  be  which  covers  it,  so  long  as  the applicability arises directly from the language used and not by inference  therefrom. We  may only  mention  that  though Articles of  NIIL do  not contain  an express provision that there shall be no right of renunciation, the right is wholly inconsistent with the Articles. We have already stated above that  the   right  of   renunciation  is  tantamount  to  an invitation to  the public to subscribe for the shares in the company and  can violate  the provision  in  regard  to  the limitation on  the number  of members. Article 11, by reason of its  clause (iv),  prevails over  the provisions  of  all other Articles  if there is inconsistency between it and any other Article. For these reasons we are of the opinion that clause (c) of section  81(1) of  the  Companies  Act,  apart  from  the consideration arising  out of  the  opening  words  of  that clause, can  have no  application to private companies which have become  public companies  by virtue  of section 43A and which retain in their Articles the three matters referred to in section  3(1)(iii) of  the Act.  In so for as the opening words of clause(c) are concerned, we are of the opinion that they do  not require an express provision in the Articles of the Company  which is otherwise than what is provided for in clause (c).

It is  enough, in  order  to  comply  with  the opening words  of clause  (c),  that  the  Articles  of  the Company contain  by necessary  implication a provision which is otherwise  than what  is provided in clause (c). Articles 11 and 50 of NIIL’s Articles of Association negate the right of renunciation. The question  immediately arises, which  is  of  great practical importance  in this case, as to whether members of a section  43A-proviso  company  have  a  limited  right  of renunciation, under  which  they  can  renounce  the  shares offered to  them in favour of any other member or members of the company.  Consistently with the view which we have taken of clause  (c) of  section 81(1) our answer to this question has to  be in  the negative. The right to renounce shares in favour of any other person, which is conferred by clause (c) has no application to a company like NIIL and therefore, its members cannot claim the right to renounce shares offered to them in  favour of any other member or members. The Articles of a  company may  well provide  for a  right of transfer of shares by one member to another, but that right is very much different from the right or 822 renunciation, properly  so called.  In fact, learned counsel for the  Holding Company  has cited  the decision in Re Pool Shipping Co.  Ltd., (supra)  in which  it was  held that the right of  renunciation is  not the  same  as  the  right  of transfer of shares. Coming to  sub-section (1A) of section 81, it provides, stated briefly,  that notwithstanding  anything contained in sub-section (1),  the further  shares may  be offered to any persons in  any manner  whatsoever,  whether  or  not  those persons include  a person  referred to in clause (a) of sub- section (1).  That can  be done  under clause  (a)  of  sub- section (1A)  by passing a special resolution in the General Meeting of  the company  or under  clause (b), where no such special resolution is passed, if the votes cast in favour of the proposal  exceed the  votes  cast  against  it  and  the Central Government  is satisfied  that the  proposal is most beneficial to  the company.  For reasons  similar  to  those which we  have come  to the  conclusion that  clause (c)  of section 81 cannot apply to a section 43A-proviso company, we must hold that sub-section (1A) can also have no application to such  companies. To  permit  the  further  shares  to  be offered to  the persons  who are  not members of the company will be clearly contrary to the Articles of Association of a section 43A-proviso  company, in regard to the three matters which bear  on the  structure  of  such  companies.  At  the highest, the  method provided  for in clauses (a) and (b) of sub-section (1A) may be resorted to by a section 43A-proviso company for  the limited  purpose of offering the net shares to its  members otherwise  than in proportion to the capital paid up on the equity shares of the company. That course may be open  for the  reason that  sub-section (1A)  permits the further shares  to be  offered “in any manner whatsoever”. A change in  the pro rata method of offer of new shares is not necessarily violative  of the  basic  characteristics  of  a private company  which becomes a public company by virtue of section 43A. To this limited extent only, but not beyond it, the provisions  of sub-section  (1A) of section 81 can apply to such companies. The following  proposition emerge out of the discussion of the  provisions of  FERA, sections  43A  and  81  of  the Companies Act and of the articles of association of NIIL: (1)  The Holding  Company had  to part  with 20% out of the 60% equity capital held by it in NIIL; (2)   The offer  of Rights       Shares made  to the Holding Company as a result of the decision taken by Board of 823 Directors in    their meeting of April 6, 1977 could not have been accepted by the Holding Company; (3)   The Holding       Company had no right to renounce the Right Shares    offered to it in favour of any other person, member or non-member;

and (4)   Since the  offer of Rights Shares could not have been either  accepted or  renounced by the Holding Company, the former for one reason and the latter for another, the shares offered to it could, under article SO  of the  articles of  association,  be disposed of  by the  directors, consistently    with the articles    of NIIL, particularly article 11, in such manner as they thought most beneficial to the Company. These proposition afford a complete answer to Shri Seervai’s contention that  what truly  constitutes oppression  of  the Holding Company  is not  the issue  of Rights  Shares to the existing Indian  shareholders only  but the  offer of Rights Shares to all existing shareholders and the issue thereof to existing Indian shareholders only. The meeting of 2nd May, 1977 was unquestionably illegal for reasons already stated. It must follow that the decision taken by  the Board  of Directors in that meeting could not, in  the  normal  circumstances,  create  mutual  rights  and obligations between  the parties. But we will not treat that decision  as  non-est  because  a  point  of  preponderating Importance is  that the  issue of  Rights Shares to existing Indian shareholders  only and  the non-allotment  thereof to the  Holding  Company  did  not  cause  any  injury  to  the proprietary rights  of the  Holding Company as shareholders, for the  simple reason  that they  could not  have  possibly accepted  the   offer  of   rights  shares  because  of  the provisions of FERA and the conditions imposed by the Reserve Bank in its letter dated May 11, 1976, nor indeed could they have renounced  the shares  offered to them in favour of any other  person   at  all  because  section  81(1)(c)  has  no application to  companies like  NIIL which were once private companies but  which become  public companies  by virtue  of section 43A  and retain  in their articles the three matters referred to in section 3(1)(iii) of the Act. It was  neither fair  nor proper  on the part of NIIL’s officers not  to ensure  the timely posting of the notice of the meeting  for 2nd  May so  as to enable Sanders to attend that meeting. But there the 824 matter rests. Even if Sanders were to attend the meeting, he could not  have asked either that the Holding Company should be allotted  the rights  shares or  alternatively,  that

it should be  allowed to “renounce” the shares in favour of any other person,  including the  Manoharan group. The charge of oppression arising  out of  the central  accusation of  non- allotment of  the rights shares to the Holding Company must, therefore, fail. We must  mention that  we have  rejected the  charge of oppression after  applying to  the conduct of Devagnanam and his group  the standard  of probity  and fairplay  which  is expected of partners in a business venture. And this we have done without  being influenced  by the consideration pressed upon us  by Shri  Nariman that Coats and NEWEY, who were two of the  three main  partners, were  not of one mind and that NEWEY never  complained of  oppression. They may or they may not. That is beside the point. Such technicalities cannot be permitted  to   defeat  the   exercise  of   the   equitable jurisdiction conferred  by section 397 of the Companies Act. Shri Seervai  drew our attention to the decision in Blissett v. Daniel  (supra) the  facts of  which as they appear at pp 1036-37, bear,  according to  him, great  resemblance to the facts before us. The following observations in that case are of striking relevance; “As has  been well  observed during  the course of the argument,  the view taken by this Court with regard to       morality   of  conduct   amongst  all  parties-most especially amongst       those who  are bound by the ties of partnership is  one of the highest degree. The standard by which  parties are tried here, either as trustees or as co-partners, or in various other relations which may be suggested,  is a  standard, I am thankful to say so, far higher       than the  standard of the world; and, tried by the standard, I hold it to be impossible to sanction the   removal    of   this         gentleman   under   these circumstances”. (p 1040) Not only  is the  law on  the side  of  Devagnanam  but  his conduct cannot  be  characterised  as  lacking  in  probity, considering the  extremely rigid  attitude adopted by Coats. They drove  him into  a tight  corner from  which  the  only escape was to allow the law to have its full play. Even though  the company petition fails and the appeals succeed on  the finding  that the Holding Company has failed to make out a case of oppression, the court is not powerless to do  substantial justice  between the  parties  and  place them, as nearly as it may, in the same 825 position in  which they  would have  been, if the meeting of 2nd May  were held in accordance with law.

The notice of the meeting was  received by Sanders in U.K. On the 2nd May when everything was  over, bar  the  post-meeting  recriminations which eventually  led to  this expensive  litigation. If the notice of  the meeting  had reached  the Holding  Company in time, it  is reasonable  to suppose  that  they  would  have attended the  meeting, since  one of the items on the Agenda was “Policy-(a)  Indianisation, (b)  allotment  of  shares”. Devagnanam and  his group  were always  ready and willing to buy the excess shares of the Holding Company at a fair price as clear  from the correspondence to which our attention has been drawn.  In the affidavit dated May 25, 1977, Devagnanam stated  categorically  that  the  Indian  shareholders  were always ready  and  willing  to  purchase  one-third  of  the shareholding of the non-resident shareholders, at a price to be fixed  in accordance  with the articles of Association by the Reserve  Bank of  India. On  May 27,  he sent  a  cable, though ‘without  prejudice’, offering  to pay premium if the Holding Company  were to  adopt disinvestment as a method of dilution of  their interest. In the Trial Court, counsel for the Indian  shareholders to  whom  the  rights  shares  were allotted offered to pay premium on the 16,000 rights shares. The cable  and the  offer were  mentioned before  us by Shri Nariman and  were not  disputed by Shri Seervai. There is no reason why  we should  not call upon the Indian shareholders to do what they were always willing to do, namely, to pay to the Holding  Company a fair premium on the shares which were offered to  it, which it could neither take nor renounce and which were  taken up  by  the  Indian  shareholders  in  the enforced absence  of the Holding Company. The willingness of the Indian  shareholders to  pay a  premium  on  the  excess holding or  the rights  shares is  a factor  which, to  some extent,  has  gone  in  their  favour  on  the  question  of oppression. Having had the benefit of that stance, they must now make it good. Besides, it is only meet and just that the Indian shareholders,  who took the rights shares at par when the value  of those  shares was  much above  par, should  be asked to  pay the  difference in  order  to  nullify  unjust unjustifiable enrichment at the cost of the Holding Company. We must  make it  clear that  we are  not asking  the Indian shareholders to pay the premium as a price of oppression. We have rejected the plea of oppression and the course which we are now  adopting is  intended primarily  to set  right  the course of justice, in so far as we may. The question  then is  as to what should be taken to be the reasonable value of the shares which were offered to the Holding Company  but taken  over by  the bulk  of the Indian shareholders. In 826 his letter  dated December  17, 1975  to M.M.C.

Newey, D.P. Kingsley, the  Secretary of  NIIL, had assessed the value of NIIL’s shares  at Rs.  175 per share. That value was arrived at by  averaging the  break-up  value,  the  yield  and  the average market  price in the case of quoted shares. Citing a paragraph from  a book  on the  Foreign Exchange  Regulation Act, Kingsley  says in  his letter that the method which was adopted by  him far  valuing the shares was also followed by the Controller  of  Capital  Issues.  Copies  of  Kingsley’s letter were sent to Alan Mackrael and Devagnanam. On June 9, 1976 Price  Waterhouse, Peat  & Co.,  Chartered Accountants, Calcutta wrote  a letter  to Mackrael  in  response  to  the latter’s cable,  valuing the  shares of  NIIL at Rs. 204 per share. That letter shows that while valuing the shares, they had  taken  into  account  various  factors  including  “the average of  the net  asset value  and the  earnings  basis”, which, according to them, are considered as relevant factors by the Controller of Capital Issues while valuing the shares of companies.  The Chartered  Accountants applied  “the  CCI formula” and after making necessary adjustments to the fixed assets, the  proposed dividend  and the gratuity liabilities for 1975, they valued NIIL’s business, on a net asset basis, at Rs.  50 lakhs. On an earnings basis, the valuation of the Company  based   on  the   past  three  years’  net  profits capitalized at  15% was  Rs. 80 lakhs. That gives an average valuation of  Rs. 65  lakhs for  the business or Rs. 204 per share. The  purported offer  to  Devagnanam  by  Khaitan  “a sewing needle competitor to Ketti”, at 3.6 times par, cannot afford any  criterion for  valuing NIIL’s  shares.  Khaitan, purportedly, had  competitive  business  interests  and  was therefore prepared to “pay the earth to acquire NIIL”. According to  the learned       trial Judge, one thing which appeared to  be certain  was that  the market  value of  the shares of  NIIL at  or about  the time  when disputes  arose between the parties, and particularly during the period when the controversial  meetings of  the Board  of Directors were held, ranged  between Rs. 175 and Rs. 204. We agree with the learned Judge  and hold that it would be just and reasonable to take the average market value of the rights shares on the crucial date  at Rs.  190 per share. The learned trial Judge awarded a  sum of  Rs. 90  per share  on 9495  shares to the Holding Company  by way  of “solatium”, which, with respect, is not an accurate description of the award and is likely to confuse the  basis and  reasons for directing the payment to be made.  Since the average market price of NIIL’s shares in April-May 1977  can be  taken to  be Rs.  190 per share, the Holding Company,  which was offered 9495 rights shares, will be entitled to receive from the Indian shareholders 827 an amount  equivalent to  that by  which they  unjustifiably enriched themselves,  namely, Rs. 90×9495 which comes to Rs. 8,54,550. We direct that Devagnanam, his group and the other Indian shareholders  who took  the rights  shares offered to the Holding  Company shall  pay, pro  rata, the  sum of  Rs. 8,54,550 to the Holding Company. The amount shall be paid by them to  the Holding  Company from  their own  funds and not from the funds or assets of NIIL. As a  further measure  of neutralisation of the benefit which the Indian shareholders received in the meeting of 2nd May, 1977,  we direct  that the  16,000 rights  shares which were allotted  in that  meeting to  the Indian  shareholders will be  treated  as  not  qualifying  for  the  payment  of dividend for a period of one year commencing from January 1, 1977, the  Company’s  year  being  the  Calendar  year.

The interim dividend  or any  further dividend  received by  the Indian shareholders on the 16,000 rights shares for the year ending December  31, 1977  shall be  repaid by them to NIIL, which  shall  distribute  the  same  as  if  the  issue  and allotment of  the rights  shares was  not made  until  after December 31,  1977. This  direction will  not be  deemed  to affect or  ever to  have affected  the exercise of any other rights by  the Indian  shareholders in respect of the 16,000 rights shares allotted to them. We have  not considered  the possibility  of Manoharans taking up  the rights  shares offered  to them because, by a letter dated  May 11, 1977 to NIIL’s Secretary, N. Manoharan had declined  the offer  on the ground that he was “not in a position to take those shares”. Finally, in  order to  ensure the smooth functioning of NIIL, and  with a  view to  ensuring that our directions are complied  with  expeditiously,  we  direct  that  Shri  M.M. Sabharwal who  was appointed  as a  Director and Chairman of the Board  of Directors under the orders of this Court dated November 6,  1978 will  continue to  function as  such until December 31, 1982. The Company will take all effective steps to obtain the sanction or  permission of  the Reserve Bank of India or the Controller of  Capital Issues,  as the case may be; if it is necessary to  obtain such  sanction or permission for giving effect to the directions given by us in this judgment. In       the  result,  the  appeals  are  allowed  with  the directions above  mentioned and the judgments of the learned single Judge and of the Division Bench of the High Court are set aside. We make no order as to costs since both the sides are, more or less, equally to 828 blame, one  for creating  an impasse  and the  other for its unjust enrichment.  All parties  shall bear  their own costs throughout. The interim orders passed by this Court are vacated. The  amount   of  Rs.   8,54,550        which   the   Indian shareholders have  been  directed  to  pay  to  the  Holding Company shall be paid in two instalments, the first of which shall be  paid before  August 31, 1981 and the second before November 30, 1981. The interim  Board of  Directors shall  forthwith       hand over charge to the Board which was superseded, but with Shri M.M. Sabharwal  as a  Director and  Chairman of the Board of Directors. After  taking the  charge from the interim Board, the Board  of Directors  will  take  expeditious  steps  for convening an Annual General Meeting for the year 1976-77 and the  years   thereafter  for  the  purpose  of  passing  the accounts, declaring dividends electing all Directors and for dealing with other necessary or incidental matters. N.V.K.

Appeals allowed. 829

 

2 thoughts on “Case Law Companies Act Needle Industries India Ltd And Orsvs Needle Industries Newey India Holding Ltd. And Ors”

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