PETITIONER:
NEEDLE INDUSTRIES (INDIA) LTD., & ORS.
Vs.
RESPONDENT:
NEEDLE INDUSTRIES NEWEY (INDIA) HOLDING LTD. & ORS.
DATE OF JUDGMENT07/05/1981
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”. (p379)
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 personor 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 April27. 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 the
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. (p267) 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 India 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 April22. 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 and32), 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
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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
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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.
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