{"id":230797,"date":"1981-05-07T00:00:00","date_gmt":"1981-05-06T18:30:00","guid":{"rendered":"https:\/\/www.legalindia.com\/judgments\/needle-industries-india-ltd-vs-needle-industries-newey-india-on-7-may-1981"},"modified":"2018-02-19T12:18:35","modified_gmt":"2018-02-19T06:48:35","slug":"needle-industries-india-ltd-vs-needle-industries-newey-india-on-7-may-1981","status":"publish","type":"post","link":"https:\/\/www.legalindia.com\/judgments\/needle-industries-india-ltd-vs-needle-industries-newey-india-on-7-may-1981","title":{"rendered":"Needle Industries (India) Ltd., & … vs Needle Industries Newey (India) … on 7 May, 1981"},"content":{"rendered":"
Supreme Court of India<\/div>\n
Needle Industries (India) Ltd., & … vs Needle Industries Newey (India) … on 7 May, 1981<\/div>\n
Equivalent citations: 1981 AIR 1298, \t\t 1981 SCR (3) 698<\/div>\n
Author: Y Chandrachud<\/div>\n
Bench: Chandrachud, Y.V. ((Cj)<\/div>\n
           PETITIONER:\nNEEDLE INDUSTRIES (INDIA) LTD., & ORS.\n\n\tVs.\n\nRESPONDENT:\nNEEDLE INDUSTRIES NEWEY (INDIA) HOLDING LTD. & ORS.\n\nDATE OF JUDGMENT07\/05\/1981\n\nBENCH:\nCHANDRACHUD, Y.V. ((CJ)\nBENCH:\nCHANDRACHUD, Y.V. ((CJ)\nBHAGWATI, P.N.\nVENKATARAMIAH, E.S. (J)\n\nCITATION:\n 1981 AIR 1298\t\t  1981 SCR  (3) 698\n 1981 SCC  (3) 333\n CITATOR INFO :\n MV\t    1983 SC  75\t (61)\n\n\nACT:\n     Companies Act  1956, Ss.3(1)(iii),\t 43A,45, 81, 299(1),\n397(1), 397  and 398  and Foreign  Exchange  Regulation\t Act\n1973, Ss. 29(1), (2) and 4(a)-Scope and effect of.\n     Private company  becoming a  public company  by  S.43A-\nReserve Bank  directive that  holding of the foreign company\nshould be  reduced-Reduction effected by issue of new rights\nshares-Such shares  to be offered to all shareholders Indian\nas well\t as the\t holding company-Shares\t however allotted to\nonly  Indian   shareholders-Notice  of\t meeting  at   which\nallotment made not properly given to holding company-Holding\ncompany whether\t could renounce\t the offer  in favour of the\nperson of its choice-Allotment to Indian shareholder-Whether\namounts to oppression.\n     `Directly or  indirectly, concerned  in the contract or\narrangement'-Effect  of-Relationship  of  friendliness\twith\nDirector-Lawyer-client\trelationship  with  Director-Whether\nwill disqualify a person from acting as Director.\n     Public company-Private  company-What  are-When  does  a\nprivate\t company   become  a   public  company-No  exception\nprovided in  S.45 in  favour of S.43A proviso companies-Need\nfor legislative amendment.\n     Practice and  Procedure  Allegation  of  a\t mala  fide-\nExamination of-Whether can be on the basis of affidavits and\ncorrespondence only.\n\n\n\nHEADNOTE:\n     M\/s.  Needle   Industries\t(India)\t  Ltd.\t(NIIL),\t the\nappellant was  incorporated under  the Indian  Companies Act\n1913 as\t a Private  Company on 20.7.1949 with its Registered\noffice at Madras and at the time of its incorporation it was\na wholly owned subsidiary of Needle Industries (India) Ltd.,\nStudley, England  (NI-Studley). In  1961, NI-Studley entered\ninto an agreement with Newey Bros. Ltd., Birmingham, England\n(Newey) to invest in the Indian Company. In 1963, NI-Studley\nand Newey  combined to\tform the  Holding Company in England\nM\/s  Needle   Industries-Newey\t(India)\t Holding  Ltd.,\t the\nrespondent. The\t entire share  capital of  NIIL held  by  NI\nStudley and  Newey was transferred to the Holding Company in\nwhich NI-Studley and Newey became equal shares.\n699\n     As a  result of  this arrangement,\t the Holding Company\ncame to\t acquire 99.95\tper cent  of the  issued and paid up\ncapital of  NIIL. The  balance of 0.05 cent, which consisted\nof six shares being the original nominal shares, was held by\nDevagnanam the managing director of NIIL.\n     By virtue\tof the\tintroduction of\t section 43A  in the\nCompanies Act  in 1961,\t NIIL became a public company, since\nnot less  than twenty-five  per cent  of its  paid-up  share\ncapital was  held by  a body corporate, the Holding Company.\nHowever, under the first proviso to section 43(1) it had the\noption to  retain its articles relating to matters specified\nin section 3(1)(iii) of the Companies Act.\n     NIIL did  not alter  the  relevant\t provisions  of\t its\narticles after\tits  became  a\tpublic\tcompany\t within\t the\nmeaning of  section 43A.  By 1971  about 40  per cent of the\nshare capital  of  NIIL\t came  to  be  held  by\t the  Indian\nemployees of the company and their relatives and the balance\nof about  60 per  cent remained\t in the hands of the Holding\nCompany NINIH Ltd.\n     In 1972 Coats Paton Ltd. became an almost 100% owner of\nNI-Studley. The\t position at  the beginning of the year 1973\nwas that  60% (to  be exact  59.3%) of\tthe share capital of\nNIIL came  to be owned half and half by Coats and NEWEY, the\nremaining 40%  being in\t the hands  of the  Indian Group  of\nwhich 28.5% was held by the Devagnanam's group.\n     Though NIIL  was at one time wholly owned by NI-Studley\nand later  by NI Studley and Newey, the affairs were managed\never since  1956  by  an  entirely  Indian  Management\twith\nDevagnanam as its Chief Executive and Managing Director with\neffect from  the year  1961. The  Holding Company  which was\nformed in  1963 had  only one representative on the Board of\nDirectors of  NIIL. He\twas N.T.  Sanders,  who\t resided  in\nEngland and  hardly ever  attended the\tBoard Meetings.\t The\nholding company\t reposed  great\t confidence  in\t the  Indian\nmanagement which  was under  the direction  and\t control  of\nDevagnanam\n     In July  1972 Mr.\tDevagnanam was offered by the office\nof Managing Director of group of four companies in Hong Kong\nand Taiwan  and his  family began to reside in Hong Kong and\nhe cogitated  over resigning  from  his\t position  in  NIIL.\nCoats, on  their part  were  clear  that  Devagnanam  should\nrelinquish his responsibilities in NIIL. in view of the time\nhis role in Newey's Far Eastern interests was consuming.\n     The Foreign  Exchange Regulation  Act 1973,  came\tinto\nforce on  Junuary 1, 1974. S.29(1) prohibited non-residents,\nnon-citizens  and  non-banking\tcompanies  not\tincorporated\nunder any  Indian law  or in which the non-resident interest\nwas more  than 40 per cent, from carrying on any activity in\nIndia of  a trading,  commercial or Industrial nature except\nwith the  general or  special permission of the Reserve Bank\nof India.  By section 29(2)(a) if such person was engaged in\nany such  activity at  the commencement of the Act, he or it\nhad to apply to the Reserve Bank of India, for permission to\ncarry  on   that  activity,   within  six   months  of\t the\ncommencement of\t the Act  or such further period the Reserve\nBank may  allow. S. 29 (4) (a) imposed a similar restriction\non such\t person or  company from holding shares in India, of\nany company  referred to cause (b) of section 29(1), without\nthe permission of the Reserve Bank. The\n700\ntime for making the application for the requisite permission\nunder section  29 was  extended by  the Reserve\t Bank  until\nAugust 31, 1974.\n     Since the\tHolding Company\t was a\tnon-resident and its\ninterest in  NIIL exceeded  40% NIIL  had to  apply for\t the\npermission of  the Reserve  Bank under\tS. 29  (1) FERA\t for\ncontinuing to carry on its business. The Holding Company had\nalso to\t apply for  the permission of the Reserve Bank under\nS. 29  (4) (a)\tFERA for  continuing to\t hold its  shares in\nNIIL.\n     NIIL applied  to the  Reserve Bank\t for  the  necessary\npermission on September 3, 1974. By its letter dated May 11,\n1976 the  Reserve Bank\tcondoned the  delay and\t allowed the\napplication and\t imposed conditions  on NIIL  that  it\tmust\nbring down  the non-resident interest from 60% to 40% within\none year  of the  receipt of its letter. The Holding Company\napplied to  the Reserve\t Bank for  a Holding  Licence  under\nsection 29  (4) (a)  of FERA,  on September  18, 1974; which\napplication was\t late by  18 days and was still pending with\nthe Reserve Bank\n     Devagnanam who  was residing  in Hong  Kong obtained  a\nholding licence dated March 5, 1975 from the Reserve Bank in\nrespect of his shares in NIIL.\n     On receipt\t of the\t letter of  the Reserve\t Bank  dated\nMarch 11,1976  NIIL's secretary sent a reply on May 18, 1976\nto  the\t Bank  confirming  the\tacceptance  of\tthe  various\nconditions under  which permission  was granted\t to NIIL  to\ncontinue its  business. On  August  11,\t 1976  the  term  of\nDevagnanam's appointment  as the  Managing Director  of NIIL\ncame to\t an end\t but in the meeting dated October 1, 1976 of\nNIIL's Board  of Directors his appointment was renewed for a\nfurther period\tof 5 years. On October 20th and 21st, 1976 a\nmeeting took  place between  the U.K.  shareholders and\t the\nIndian shareholders  of NIIL.  But the\tmeeting ended  in  a\nstalemate because  whereas  the\t Holding  Company  wanted  a\nsubstantial part  of the  share capital held by it in excess\nof 40  per cent\t to be transferred to Madura Coats an Indian\ncompany\t in   which  the  Holding  Company  had\t substantial\ninterest as  an Indian shareholder. Devagnanam insisted that\nthe existing Indian shareholders of NIIL alone had the right\nunder its  Articles of\tAssociation to\ttake up\t the  shares\nwhich the  Holding Company  was no  longer in  a position to\nhold because  of the  directives issued\t by the Reserve Bank\npursuant to FERA.\n     As negotiations  were going  on between  the  competing\ngroups regarding the Indianisation of NIIL, on April 4, 1977\nNIIL received  a reminder  letter dated\t March 30, 1977 from\nthe Reserve  Bank which pointed out that the company had not\nsubmitted any  concrete proposal  for reduction\t of the non-\nresident interest  and asked  it to  submit its\t proposal in\nthat behalf  without any  further delay\t and that failure to\ncomply with  the directive  regarding  dilution\t of  foreign\nequity\twithin\t the  stipulated   period  would  be  viewed\nseriously.\n     A meeting\tof NIIL's  Board of  Directors was  held  on\nApril 6, 1977. All the directors were present in the meeting\nwith Devagnanam\t in the\t chair at  the commencement  of\t the\nproceedings. Mr. C. Doraiswamy, solicitor-partner of\n701\nKing and  Partridge was\t one of the directors present at the\nmeeting. He had no interest in the proposal of Indianisation\nwhich the  meeting was\tto discuss. In order to complete the\nquorum of  two independent  directors, the  other  directors\napart from C. Doraiswamy being interested in the business of\nthe meeting,  Silverston an  ex-partner of Doraiswamy's firm\nof solicitors,\twas appointed  to the board as an additional\ndirector under\tarticle 97  of the  Articles of Association.\nSilverston chaired  the meeting\t after\this  appointment  as\nadditional director.\n     The meeting resolved that the issued capital of NIIL be\nincreased by  a new issue of 16,000 equity shares of Rs. 100\neach  to  be  offered  as  rights  shares  to  the  existing\nshareholders in\t proportion to\tthe shares held by them. The\noffer was  to be  made by  a notice specifying the number of\nshares which  each shareholder\twas entitled  to and in case\nthe offer  was not  accepted within 16 days from the date on\nwhich it  was made it was to be deemed to have been declined\nby the concerned shareholder.\n     In pursuance  to the  aforesaid resolution\t a letter of\noffer dated  April  14,\t 1977  was  prepared.  The  envelope\ncontaining Devagnanam's\t explanatory letter  dated April  12\n(without the  copy of  the letter  of the Reserve Bank dated\nMarch 30,  1977) and the letter of offer dated April 14 were\nreceived by  the Holding  Company  on  May  2,\t1977  in  an\nenvelope bearing  the Indian  postal mark of April 27, 1977.\nThe letter  of offer  which was\t sent to  one of  the Indian\nshareholders, Manoharan was posted in an envelope which also\nbore the  postal mark of 27th April. The next meeting of the\nBoard was due to be held on May 2, 1977. The Holding Company\nwas thus  denied  an  opportunity  to  exercise\t its  option\nwhether or not to accept the offer of right shares, assuming\nthat any such option was open to it.\n     The meeting  of the  Board of Directors was held an May\n2, 1977 as scheduled and in the meeting the whole of the new\nissue consisting  of 16,000 rights share was allotted to the\nIndian\tshareholders  including\t members  of  the  Manoharan\ngroup. Out of these the Devagnanam group was allotted 11,734\nshares. After  marking the  allotment of shares a letter was\nsent to\t the Reserve  Bank by NIIL reporting compliance with\nthe requirements  of F.E.R.A.  by the issue of 16,000 rights\nshares and  the allotment thereof to the Indian shareholders\nwhich resulted\tin the\treduction of  the foreign holding to\napproximately  40%   and  increased   that  of\t the  Indian\nshareholders to almost 60%.\n     The Holding  Company filed\t a company  petition in\t the\nHigh Court under section 397 and 398 of the Indian Companies\nAct, 1956  alleging that  the Indian  Directors abused their\nfiduciary position in the Company by deciding in the meeting\nof April  6 to\tissue  the  rights  shares  at\tpar  and  by\nallotting them exclusively to the Indian shareholders in the\nmeeting of  2nd May, 1977. In doing so, they acted mala fide\nand in order to gain an illegal advantage for themselves. By\ndeciding to issue the rights shares at par, they conferred a\ntremendous  and\t  illegitimate\tadvantage   on\tthe   Indian\nshareholders. Devagnanam delayed deliberately the intimation\nof the\tproceedings of the 6th April to the Holding Company.\nBy that means and by the late giving of the notice of the\n702\nmeeting of  the 2nd  May, the  Devagnanam group\t presented a\nfait uccompli  to the Holding Company in order to prevent it\nfrom exercising its lawful rights. The conduct of the Indian\ndirectors lacked  in probity  and  fair\t dealing  which\t the\nHolding Company was entitled to expect.\n     The  acting   Chief  Justice   who\t tried\tthe  Company\nPetition, found\t several  defects  and\tinfirmities  in\t the\nBoard's meeting dated May 2, 1977 and being of the view that\nthe average  market value of the rights shares was about Rs.\n190 per share on the crucial date and that, since the rights\nshares were  issued at par, the Holding Company was deprived\nunjustly of  a sum  Rs. 8,54,550  at the  rate of Rs. 90 per\nshare on  the 9,495  rights shares to which it was entitled.\nExercising the\tpower under section 398 (2) of the Companies\nAct, the  learned Judge directed NIIL to make good that loss\nwhich, could  have been avoided by adopting a fairer process\nof  communication   with  the\tHolding\t  Company   and\t  'a\nconsequential dialogue' with them in the matter of the issue\nof rights shares at a premium.\n     The Holding  Company being\t aggrieved by  the aforesaid\njudgment filed\tan appeal and NIIL filed cross-objections to\nthe decree.  The appeal\t and cross  objections\twere  argued\nbefore the  Division Bench of the High Court on the basis of\naffidavits, the\t correspondence that  had passed between the\nparties and  certain additional\t documents which  were filed\nbefore the  Appellate Court.  The Division  Bench  concluded\nthat the  affairs of  NIIL were\t being conducted in a manner\noppressive, that is to say burdensome, harsh and wrongful to\nthe Holding  Company and  held that  since the action of the\nBoard of  Directors of NIIL was taken merely for the purpose\nof welding  the Company\t into Newey's Far Eastern complex it\nwas just  and equitable\t to wind up the Company. With regard\nto the\tcross-objections, the  Division Bench  held that the\ninjuries suffered  by  the  Holding  Company  could  not  be\nremedied by  the award\tof compensation\t and, therefore, the\naction of  the Board  of Directors  in\tissuing\t the  rights\nshares had  to be quashed. It accordingly allowed the appeal\nfiled by  the  Holding\tCompany\t and  dismissed\t the  cross-\nobjections of  the appellant  and directed that the Board of\nDirectors be  suspended and  an interim\t Board consisting of\nnine  directors\t  proposed  by\t the  Holding\tCompany\t  be\nconstituted and\t that the  rights issue\t made on  6th April,\n1977 and  the allotment\t of shares  made on 2nd May, 1977 at\nthe Board  Meeting be  set aside  and the  Interim Board  be\ndirected to make a fresh issue of shares at a premium to the\nexisting shareholders  including the  Holding Company  which\nwas to have a right of renunciation.\n     In the  appeals to\t this Court, on the question whether\nthe decisions  taken  at  the  meetings\t of  the  Boards  of\nDirectors of NIIL on April 6 and May 2, 1977 constitute acts\nof oppression  within the meaning of S. 397 of the Companies\nAct 1956.\n     Allowing the appeals\n^\n     HELD:  1.\tThe  charge  of\t oppression  rejected  after\napplying to  the conduct  of Devagnanam\t and his  group\t the\nstandard of  probity and  fairplay,  which  is\texpected  of\npartners in  a business\t venture. Not only is the law on his\nside, but  his conduct cannot be characterised as lacking in\nprobity, considering  the extremely rigid attitude by Coats.\nHe was driven into a tight corner from which the only escape\nwas to allow the law to have its full play.\n\t\t\t\t\t      [824 B-C; G-H]\n703\n     2. Even  though the  company  petition  falls  and\t the\nappeals succeed\t on the finding that the Holding Company has\nfailed to  make out  a case  of oppression, the court is not\npowerless to  do substantial justice between the parties and\nplace them,  as nearly\tas it  may, in\tthe same position in\nwhich they  would have\tbeen, if the meeting of 2nd May were\nheld in accordance with law. [824 H-825 A]\n     3. The  willingness of the Indian shareholders to pay a\npremium on  the excess\tholding or  the rights\tshares is  a\nfactor which,  to some\textent, has  gone in their favour on\nthe question  of oppression.  Having had the benefit of that\nstance, they must now make it good. Besides, it is only meet\nand just  that the  Indian shareholders, who took the rights\nshares at  par when the value of those shares was much above\npar, should  be asked  to pay  the difference  in  order  to\nnullify their  unjust and  unjustifiable enrichment  at\t the\ncost of the Holding Company. The Indian shareholders are not\nasked to  pay the premium as a price of oppression. The plea\nof oppression  having been rejected the course being adopted\nis intended primarily to set right the course of justice.\n\t\t\t\t\t\t   [825 F-G]\n     4. Devagnanam,  his group\tand the\t other Indian share-\nholders who  took the  rights shares  offered to the Holding\nCompany shall  pay, pro rata, the sum of Rs. 8,54,550 to the\nHolding Company.  The amount  shall be\tpaid by\t them to the\nholding company\t from their own funds and not from the funds\nor assets of NIIL. [827 A-B]\n     5. As  a  further\tmeasure\t of  neutralisation  of\t the\nbenefit\t which\tthe  Indian  shareholders  received  in\t the\nmeeting of  2nd May,  1977, it\tis directed  that the 16,000\nrights shares  which were  allotted in\tthat meeting  to the\nIndian shareholders  will be  treated as  not qualifying for\nthe payment  of dividend for a period of one year commencing\nfrom January  1, 1977  the Company's year being the Calendar\nyear. The  interim dividend or any further dividend received\nby the\tIndian shareholders  on the 16,000 rights shares for\nthe year ending December 31, 1977 shall be repaid by them to\nNIIL, which  shall distribute  the same\t as if the issue and\nallotment of  the rights  shares was  not made\tuntil  after\nDecember 31,  1977. This  direction will  not be  deemed  to\naffect or  ever to  have affected  the exercise of any other\nrights by  the Indian  shareholders in respect of the 16,000\nrights shares allotted to them. [827 B-D]\n     6. In  order to  ensure the  smooth functioning of NIIL\nand with a view to ensuring that the directions are complied\nwith expeditiously,  it is directed that Shri M.M. Sabharwal\nwho was appointed as a Director and Chairman of the Board of\nDirectors under\t the orders  of this Court dated November 6,\n1978 will  continue to\tfunction as  such until December 31,\n1982. [827 F]\n     7. The  Company will take all effective steps to obtain\nthe sanction  or permission  of the Reserve Bank of India or\nthe Controller\tof Capital Issues, as the case may be, if it\nis necessary  to obtain\t such  sanction\t or  permission\t for\ngiving effect to the directions. [827 G]\n     8. Devagnanam and his group acted in the best interests\nof NIIL,  in the  matter of  the issue\tof rights shares and\nindeed, the  Board of  Directors followed  in the meeting of\nthe 6th April a course which they had no option but to adopt\nand in\tdoing  which,  they  were  solely  actuated  by\t the\nconsideration as to what\n704\nwas  in\t  the  interest\t of  the  company.  The\t shareholder\nDirectors who  were interested in the issue of rights shares\nneither participated  in the discussion of that question nor\nvoted upon  it. The two Directors who, forming the requisite\nquorum, received  upon\tthe  issue  of\trights\tshares\twere\nSilverston who,\t was a disinterested Director and Doraiswamy\nwho, unquestionably, was so.\n\t\t\t\t\t\t   [792 A-C]\n     9. Disinvestment  by the Holding Company, as one of the\ntwo courses  which could  be adopted  for reducing  the non-\nresident interest in NIIL to 40% stood ruled out, on account\nof the\trigid attitude\tof  Coats  who,\t during\t the  period\nbetween the  Ketty meeting  of October\t20-21, 1976  and the\nBirmingham discussions\tof March  29-31, 1977 clung to their\nself interest,\tregardless of  the  pressure  of  FERA,\t the\ndirective of the Reserve Bank of India and their transparent\nimpact on the future of NIIL. [792 D-E]\n     10. Devagnanam  and the disinterested Directors, having\nacted  out   of\t legal\t compulsion  precipitated   by\t the\nobstructive attitude  of Coats\tand their action it being in\nthe larger interest of the company, it is impossible to hold\nthat the resolution passed in the meeting of April 6 for the\nissue of  rights shares\t at par to the existing shareholders\nof NIIL constituted an act of oppression against the Holding\nCompany. [792 E-F]\n     11. It  puts a  severe  strain  on\t ones  credulity  to\nbelieve that  the letters  of offer  dated April  14 to\t the\nHolding Company,  to Raeburn and to Manoharan were posted on\nthe 14th  itself but  that somehow  they rotted\t in the post\noffice\tuntil\tthe  27th   on\twhich  date  they  took\t off\nsimultaneously for their respective destinations. [793 E]\n     12. The purpose behind the planned delay in posting the\nletters of  offer to Raeburn and to the Holding Company, and\nin posting  the notice\tof the\tBoard's meeting for May 2 to\nSanders, was palpably to ensure that no legal proceeding was\ntaken to  injunct the  holding of the meeting. The object of\nwithholding these  important documents,\t until it  was quite\nlate to act upon them, was to present to the Holding Company\na fait\taccompli in  the shape\tof the\tBoard's decision for\nallotment  of\trights\tshares\t to  the   existing   Indian\nshareholders.\n\t\t\t\t\t\t   [794 C-E]\n     13. In so far as Devagnanam himself is concerned, there\nis room enough to suspect that he was the part-author of the\nlate postings  of important  documents, especially  since he\nwas the prime actor in the play of NILL's Indianisation. But\neven in\t regard to  him, it  is difficult  to carry the case\nbeyond the  realm of  suspicion and 'room enough' is not the\nsame thing as 'reason enough'.\n\t\t\t\t\t\t   [795 B-C]\n     13A. With\tregard to  the impact on the legality of the\noffer and the validity of the meeting of May 2,\n     (i)  It is\t quite clear from the circumstances that the\n\t  rights shares offered to the Holding Company could\n\t  not have been allotted to anyone in the meeting of\n\t  May 2,  for the  supposed failure  of the  Holding\n\t  Company to communicate its acceptance before April\n\t  30. The  meeting of  May  2,\tof  which  the\tmain\n\t  purpose was  to consider 'Allotment' of the rights\n\t  shares must,\ttherefore, be  held to\tbe abortive,\n\t  [796 H-797 A]\n705\n     (ii) The utter  inadequacy of  the notice to Sanders in\n\t  terms of  time stares\t in the\t face and  needs  no\n\t  further argument  to justify\tthe finding that the\n\t  holding of the meeting was illegal, at least in so\n\t  far as  the Holding  Company is  concerned. It  is\n\t  self-evident that  Sanders could not possibly have\n\t  attended the\tmeeting.  There\t is,  therefore,  no\n\t  alternative save  to hold  that the decision taken\n\t  in the  meeting of  May 2  cannot, in\t the  normal\n\t  circumstances, affect\t the  legal  rights  of\t the\n\t  Holding Company  or create  any legal\t obligations\n\t  against it. [797 D-E]\n     13B. The  dilution of  the non-resident interest in the\nequity capital\tof the\tCompany to a level not exceeding 40%\n\"within a  period of  1 (one)  year from the date of receipt\nof\" the\t letter was  of the  very essence of the matter. The\nsanction for  enforcement of  a\t conditional  permission  to\ncarry on  business, where  conditions are  breached, is\t the\ncessation, ipso\t facto, of the permission itself on the non-\nperformance of\tthe conditions\tat  the\t time  appointed  or\nagreed. When  NIIL wrote  to the  Bank on  February 4,\t1976\nbinding itself\tto the performance of certain conditions, it\ncould not be heard to say that the permission will remain in\nforce despite  its non-performance of the conditions. Having\nregard to  the provisions  of section  29 read with sections\n49, 56(1) and (3) and section 68 of FERA, the continuance of\nbusiness after May 17, 1977 by NIIL would have been illegal,\nunless the  condition of dilution of non-resident equity was\nduly complied with. [799 B; F-H]\n     14. By  reason of\tthe provisions\tof section 29(1) and\n(2) of\tFERA and  the conditional  permission granted by the\nRBI by\tits letter  dated May  11, 1976\t the offer of rights\nshares made  by\t NIIL  to  the\tHolding\t Company  could\t not\npossibly have been accepted by it. [800 B]\n     The acceptance  of the  offer of  rights shares  by the\nHolding Company\t would have  resulted in  a violation of the\nprovisions of FERA and the directive of the Reserve Bank. No\ngrievance can  be made\tby the Holding Company that since it\ndid not\t receive the  offer in\ttime, it  was deprived of an\nopportunity to accept it. [800 D-G]\n     14A. An  offer of\tshares\tundoubtedly  creates  \"fresh\nrights\" but,  the right which it creates is either to accept\nthe offer or to renounce it; it does not create any interest\nin the shares in respect of which the offer is made. [801 B]\n     Mathalone v.  Bombay Life\tAssurance Co.<\/a> [1954] SCR 117\nreferred to.\n     15(i) Before  granting relief  in an  application under\nsection 210  of the  English Companies\tAct as under section\n397 of\tthe Indian  Companies Act  the Court  has to satisfy\nitself that  to wind  up the company will unfairly prejudice\nthe members  complaining of  oppression, but  that otherwise\nthe facts  will justify\t the making of a winding up order on\nthe ground  that it  is just  and equitable that the company\nshould be  wound up. The fact that the company is prosperous\nand makes  substantial profits\tis no  obstacle to its being\nwound up if it is just and equitable to do so. [744 A-B; 775\nG]\n     Scottish Co-op.  Wholesale Society Ltd. v. Meyer [1959]\nA.C. 324,  Re Associated  Tool Industries  Ltd. [1964] Argus\nLaw Reports, 75, Ebrahimi v. Westbourne\n706\nGalleries LTd.\t[1973] A.  C. 360 (H.L.), Blissett v. Daniel\n[68] E.R.  1024. Re  Yenidge Tobacco  Co. [1916] 2 Ch. 426 &\nLoch v. John Blackwood [1924] A.C. 783 referred to.\n     (ii) On  a true construction of section 397, an unwise,\ninefficient  or\t careless  conduct  of\ta  Director  in\t the\nperformance of\this duties  cannot give\t rise to a claim for\nrelief\tunder\tthat  section.\tThe  person  complaining  of\noppression must\t show that he has been constrained to submit\nto a conduct which lacks in probity, conduct which is unfair\nto him\tand which causes prejudice to him in the exercise of\nhis legal and proprietary rights as a shareholder. [748 E-G]\n     (iii) Technicalities  cannot be permitted to defeat the\nexercise of  the equitable jurisdiction conferred by section\n397 of the Companies Act.\n     Blissett v. Daniel 68 E.R. 1024 referred to.\n     16. An  isolated act  which is contrary to law, may not\nnecessarily and by itself support the inference that the law\nwas violated  with  a  mala  fide  intention  or  that\tsuch\nviolation was  burdensome, harsh  and wrongful. But a series\nof illegal  acts following  upon one  another  can,  in\t the\ncontext, lead  justifiably to the conclusion that they are a\npart of\t the same  transaction, of  which the  object is  to\ncause or commit the oppression of persons against whom those\nacts are directed. [746 G-747 A]\n     17. An  isolated order  passed  by\t a  Judge  which  is\ncontrary to law will not normally support the inference that\nhe is biased, but a series of wrong or illegal orders to the\nprejudice of  a party  are generally  accepted as supporting\nthe inference of a reasonable apprehension that the Judge is\nbiased and that the party complaining of the orders will not\nget justice at his hands. [747 B-C]\n     S.M. Ganpatram  v. Sayaji Jubilee Cotton and Jute Mills\nCo. [1964]  34 Company\tCases 830-31 & Elder v. Elder [1952]\nS.C. 49 referred to.\n     18. It  is generally unsatisfactory to record a finding\ninvolving grave\t consequences to  a person  on the  basis of\naffidavits and\tdocuments  without  asking  that  person  to\nsubmit to  cross-examination. Men may lie but documents will\nnot and\t often, documents  speak louder\t than words.  But  a\ntotal  reliance\t on  the  written  word,  when\tprobity\t and\nfairness of conduct are in issue, involves the risk that the\nperson accused\tof wrongful conduct is denied an opportunity\nto  controvert\t the  inferences  said\tto  arise  from\t the\ndocuments.\n\t\t\t\t\t\t   [754 E-G]\nRe Smith and Fowcett Ltd. [1942} 1 All ER 542, 545; Nana Lal\nZaver v. Bombay Life Assurance<\/a> [1950] SCR 390, 394 Piercy v.\nMills [1920]  (1) Chancery  77, Hogg v. Cramphorn, [1967] 1,\nChancery 254,  260;  Mills  v.\tMills  [60]  CLR  150,\t160,\nHarlowe's Hominees  [121] CLR  483, 485\t & Howard  Smith  v.\nAmphol [1974] A.C. 821, 831 Punt v. Symons [1903] 2 Ch. 506;\nFranzer v. Whalley 71 E.R. 361 referred to.\n     In the instant case the High Court was right in holding\nthat, having taken up a particular attitude, it was not open\nto Devagnanam and his group to con-\n707\nend that the allegation of mala fides could not be examined,\non the\tbasis of  affidavits and  the  correspondence  only.\nThere is  ample material  on  the  record  in  the  form  of\naffidavits correspondence  and other documents, on the basis\nof which  proper and  necessary inferences  can\t safely\t and\nlegitimately be drawn.\n\t\t\t\t\t\t    [755B-C]\n     These documents  and many more documents were placed on\nthe record  mostly  by\tconsent\t of  parties,  as  the\tcase\nprogressed from\t stage to stage. That shows that the parties\nadopted willingly  a mode  of trial  which they\t found to be\nmost convenient and satisfactory. [756 A-B]\n     19. When  the dominant motivation is to acquire control\nof a  company, the  sparring groups  of shareholders  try to\ngrab the  maximum benefit  for themselves. If one decides to\nstay on\t in such a company, one must capture its control. If\none decides  to quit,  one must\t obtain the  best price\t for\none's holding,\tunder and  over the  table, partly in rupees\nand partly  in foreign\texchange. Then, the tax laws and the\nforeign exchange regulations look on helplessly, because law\ncannot operate\tin a vacuum and it is notorious that in such\ncases evidence is not easy to obtain. [761 G-H; 762A]\n     20. It is difficult to hold that by the issue of rights\nshares the  Directors of  NIIL interfered in any manner with\nthe legal  rights of  the  majority.  The  majority  had  to\ndisinvest or else to submit to the issue of rights shares in\norder to  comply with the statutory requirements of FERA and\nthe  Reserve   Bank's  directives.   Having  chosen  not  to\ndisinvest, an  option which  was open  to them, they did not\nany longer  possess the\t legal rights  to  insist  that\t the\nDirectors shall\t not  issue  the  rights  shares.  What\t the\nDirectors did  was clearly  in the  larger interests  of the\nCompany and  in obedience  to their  duty to comply with the\nlaw of\tthe land.  The fact that while discharging that duty\nthey  incidentally   trenched  upon  the  interests  of\t the\nmajority cannot\t invalidate their  action. The conversion of\nthe existing  majority into  a minority was a consequence of\nwhat  the  Directors  were  obliged  lawfully  to  do.\tSuch\nconversion was not the motive force of their action. [782 A-\nE]\n     Howard Smith  Ltd. v.  Ampol Petroleum Ltd. [1974] A.C.\n821, 874,  Punt v.  Symons [1903]  2 Ch.  506  &  Fraser  v.\nWhalley [71]  E.R. 361 Piercy v. Mills [1920] 1 Ch. 77, Hogg\nv. Cramphorn [1967] 1 Ch. 254, 260 referred to\n21.  (i)  The Directors\t have exercised\t their power for the\n\t  purpose of  preventing the  affairs of the company\n\t  from\tbeing\tbrought\t to   a\t grinding   halt,  a\n\t  consumption devoutly\twished for  by Coats  in the\n\t  interest of  their extensive\tworld-wide business.\n\t  [784 C]\n     (ii) The mere  circumstance that  the Directors  derive\n\t  benefit as shareholders by reasons of the exercise\n\t  of their fiduciary power to issue shares, will not\n\t  vitiate the exercise of that power. [785 E]\n     (iii) The test is whether the issue of shares is simply\n\t  or solely for the benefit of the Directors. If the\n\t  shares are issued in the larger interest of the\n708\n\t  company that decision cannot be struck down on the\n\t  ground that  it  has\tincidentally  benefited\t the\n\t  Directors in their capacity as share holders, [786\n\t  C]\n     In the  instant case  the Board  of Directors  did\t not\nabuse its  fiduciary power  in deciding\t upon the  issue  of\nrights shares. [786 D]\n     Harlowe's\tNominess   Pvt.\t Ltd.\tv.  Woodside  (Lakes\nEntrance) Oil  Company No.  Liability &\t Anr. (121) CLR 483,\n485, Trek Corporation Ltd. v. Miller et al (33) DLR 3d. 288;\nNanalal Zaver  & Anr.  v. Bombay  Life\tAssurance  Co.\tLtd.<\/a>\n[1950] SCR  390, 419-429;  Hirsche v.  Sims [1894] A.C. 654,\n660-661; Gower in Principles of Modern Company Law, 4th Edn.\n578 referred to.\n     22. Under\tsection 287  (2) of  the Companies Act, 1956\nthe quorum for the meeting of the Board of Director was two.\nThere can be no doubt that a quorum of two directors means a\nquorum of  two directors  who are  competent to transact and\nvote on the business before the Board. [786 E]\n23.  (i)  It is\t wrong to  attribute any  bias to Silverston\n\t  for having  acted as\tan  adviser  to\t the  Indian\n\t  shareholders in  the Ketty  meeting. Silverston is\n\t  by profession\t a solicitor  and legal\t advisers do\n\t  not  necessarily   have  a   biased  attitude\t  to\n\t  questions on\twhich  their  advice  is  sought  or\n\t  tendered. Silverston's  alleged personal hostility\n\t  to Coats cannot, within the meaning of section 300\n\t  (1)  of   the\t Companies   Act,  make\t him  person\n\t  \"directly or\tindirectly, concerned  or interested\n\t  in the  contract or arrangement\" in the discussion\n\t  of which  he had  to participate  or upon which he\n\t  had to vote. [787 E-G]\n     (ii) The concern  or interest of the Director which has\n\t  to be\t disclosed at  the Board  meeting must be in\n\t  relation to  the contract entered or to be entered\n\t  into by  or on behalf of the company. The interest\n\t  or concern  spoken of\t by sections 299 (1) and 300\n\t  (1) cannot  be a  merely sentimental\tinterest  or\n\t  ideological concern.\tTherefore, a relationship of\n\t  friendliness with the Directors who are interested\n\t  in the  contract or  arrangement or  even the mere\n\t  fact of  a lawyer-client  relationship  with\tsuch\n\t  directors will not disqualify a person from acting\n\t  as a\tDirector on  the ground\t of his being, under\n\t  section  300\t (1)   as   \"interested\"   Director.\n\t  Howsoever one\t may stretch the language of section\n\t  300 (1)  in the  interest  of\t purity\t of  company\n\t  administration, it  is next to impossible to bring\n\t  Silverston's appointment  within the\tframework of\n\t  that provision. [788 A-C]\n     The  argument   that  Silverston\twas  an\t  interested\nDirector, that\ttherefore his  appointment as  an Additional\nDirector was  invalid and  that consequently  the resolution\nfor the\t issue of  rights  shares  was\tpassed\twithout\t the\nnecessary quorum  of  two  disinterested  Directors  has  no\nforce. [788 D-E]\n709\n     Firestone\tTyre   and  Rubber  Co.\t v.  Synthetics\t and\nChemicals Ltd., [1971] 41 Company Case 377 distinguished.\n     24. Silverston's  appointment as an Additional Director\nis not\topen to challenge on the ground of want of agenda on\nthat subject. Section 260 of the Companies Act preserves the\npower of  the  Board  of  Directors  to\t appoint  additional\nDirectors if  such a  power is conferred on the Board by the\nArticles of Association of the Company. Article 97 of NIIL's\nArticles of  Association confers  the requisite power on the\nBoard to  appoint  additional  Directors.  The\toccasion  to\nappoint Silverston as an Additional Director arose only when\nthe picture  emerged clearly  that the\tBoard would  have to\nconsider the  only other  alternative for  reduction of\t the\nnon-resident holding, namely, the issue of rights shares. It\nis for\tthis reason  that the  subject of  appointment of an\nAdditional Director  could not\thave, in the state of facts,\nformed a part of the agenda.\n\t\t\t\t\t    [788 F.G; 789 A-\nC]\n     25.    (i) The power to issue shares is given primarily\n\t       to enable  capital to  be raised\t when it  is\n\t       required for  the purposes of the company but\n\t       that power  is not  conditioned by such need.\n\t       That power  can be  used for other reasons as\n\t       for example  to create a sufficient number of\n\t       shareholders  to\t  enable  the\tcompany\t  to\n\t       exercise statutory  powers or to enable it to\n\t       comply with legal requirements. [789 D-E]\n\t       Punt v.\tSymons and  Co., [1903]\t 2 Ch.\t506;\n\t       Hogg v.\tCramphorn, [1967]  1 Ch. 254; Howard\n\t       Smith v. Amphol, [1974] A.C. 821.\n\t  (ii) The minutes  of the  Ketty meeting of October\n\t       20-21, 1976  saying that\t it was\t agreed that\n\t       the   rights    issues,\t with\tthe   Indian\n\t       shareholders  taking  up\t the  U.K.  members'\n\t       rights, would  be considered  provided it was\n\t       demonstrated by\tNIIL that \"there is a viable\n\t       development plan\t requiring  funds  that\t the\n\t       expected NIIL  cash flow cannot meet\", cannot\n\t       also justify  the argument  that the power of\n\t       the Company  to issue  rights shares  was, by\n\t       agreement conditioned  by the  need to  raise\n\t       additional capital  for a  development  plan.\n\t       [790 H; 791 A]\n\t   (iii) In  the instant case the rights shares were\n\t       issued  in   order  to\tcomply\twith   legal\n\t       requirements   which    apart   from    being\n\t       obligatory as  the only viable course open to\n\t       the Directors,  was for\tthe benefit  of\t the\n\t       company since,  otherwise, its  developmental\n\t       activities would\t have  stood  frozen  as  of\n\t       December 31, 1973. The shares were not issued\n\t       as a  part of  takeover war between the rival\n\t       groups of shareholders. [790 B-C]\n     26. It  is not true to say, as a statement of law, that\nDirectors have\tno power  to issue  shares at  par, if their\nmarket price  is above\tpar. These  are primarily matters of\npolicy for  the Directors to decide in the exercise of their\ndiscretion and\tno hard\t and fast  rule can  be laid down to\nfetter that discretion. Such discretionary powers in company\nadministration are  in the  nature of  fiduciary powers\t and\nmust be\t exercised in faith. Mala fides vitiate the exercise\nof such discretion. [791 E & G]\n     Hilder and\t Others\t v.  Dexter  [1902]  A.C.  474,\t 480\nreferred to.\n     27. The  definition of 'private company' and the manner\nin which  a 'public  company' is  defined  (\"public  company\nmeans a company which is not a private\n710\ncompany\") bear out the argument that these two categories of\ncompanies are  mutually exclusive. But it is not true to say\nthat between them, they exhaust the universe of companies. A\nprivate company\t which has become a public company by reason\nof S.  43A, may\t continue to retain in its articles, matters\nwhich are  specified in\t S. 3(1)(iii)  and the number of its\nmembers may  be or  may at any time be reduced below 7. [810\nH; 811 A-B]\n     (i)  A section  43A company may include in its articles\n\t  as part  of its  structure, provisions relating to\n\t  restrictions on  transfer of\tshares, limiting the\n\t  number of  its members  to 50,  and prohibiting an\n\t  invitation to\t the public to subscribe for shares,\n\t  which are  typical characteristics  of  a  private\n\t  company.  The\t  expression  'public\tcompany'  in\n\t  section 3(i)(iv)  cannot therefore be equated with\n\t  a 'private  company' which  has  become  a  public\n\t  company by virtue of section 43A. [811 D-E]\n     (ii) A section  43A  company  can\tstill  maintain\t its\n\t  separate corporate indentity qua debts even if the\n\t  number of  its members  is reduced below seven and\n\t  is not liable to be wound up for that reason. [811\n\t  F]\n      (iii) A  section 43A company can never be incorporated\n\t  and registered as such under the Companies Act. It\n\t  is registered as a private company and becomes, by\n\t  operation of law, a public company. [811 G]\n     (iv) The three contingencies in which a private company\n\t  becomes a  public company by virtue of section 43A\n\t  (mentioned in sub-sections (1), (1A) and (1B) read\n\t  with the  provisions of  sub-section (4)  of\tthat\n\t  section) show\t that it becomes and continues to be\n\t  a public company so long as the conditions in sub-\n\t  sections (1),\t (1A) or  (1B) are  applicable.\t The\n\t  provisos to  each of\tthese sections\tclarify\t the\n\t  legislative intent  that such companies may retain\n\t  their registered  corporate  shell  of  a  private\n\t  company but  will be\tsubjected to  discipline  of\n\t  public companies. When necessary conditions do not\n\t  obtain, the  legislative device  in S.  43A is  to\n\t  permit them  to go back into their corporate shell\n\t  and function once again as private companies, with\n\t  all the  privileges and  exemptions applicable  to\n\t  private companies. The proviso to each of the sub-\n\t  sections of S. 43A clearly indicates that although\n\t  the private company has become a public company by\n\t  virtue of  that section, it is permitted to retain\n\t  the structural  characteristics of its origin, its\n\t  birthmark.\n\t\t\t\t\t     [811 H-812 A-B]\n     (v)  Section 43A  when introduced by Act 65 of 1960 did\n\t  not adopt  the language either of section 43 or of\n\t  section 44. Under section 43 where default is made\n\t  in  complying\t  with\tthe  provisions\t of  section\n\t  3(1)(iii) a  private company\tshall  cease  to  be\n\t  entitled  to\t the   privileges   and\t  exemptions\n\t  conferred on\tprivate companies  by or  under this\n\t  Act, and this Act shall apply to the company as if\n\t  it were not a private company. Under section 44 of\n\t  the  Act,  where  a  private\tcompany\t alters\t its\n\t  Articles  in\tsuch  manner  that  they  no  longer\n\t  include  the\t provisions,  which   under  section\n\t  3(1)(iii) are\t required  to  be  included  in\t the\n\t  Articles in  order  to  constitute  it  a  private\n\t  company, the\tcompany \"shall as on the date of the\n\t  alteration cease to be a private company\". Neither\n\t  of the\n711\n\t  expression, namely,  \"This Act  shall apply to the\n\t  company as  if it  were  not\ta  private  company\"\n\t  (section 43)\tnor that the company \"shall... cease\n\t  to be\t a private  company (section  44) is used in\n\t  section 43A.\tIf a section 43-A company were to be\n\t  equated in  all respects  with a  public  company,\n\t  that\tis   a\tcompany\t which\tdoes  not  have\t the\n\t  characteristics of  a private\t company, Parliament\n\t  would have  used language  similar to\t the one  in\n\t  section  43  or  section  44,\t between  which\t two\n\t  sections,  section   43A  was\t  inserted.  If\t the\n\t  intention was\t that the  rest of  the Act  was  to\n\t  apply to  a section 43A company \"as if it were not\n\t  a private company\", nothing would have been easier\n\t  than to adopt that language in section 43A; and if\n\t  the intention was that a section 43A company would\n\t  for all  purposes \"cease to be a private company\",\n\t  nothing would\t have been easier than to adopt that\n\t  language in section 43A. [812 E-H; 813 A]\n     (vi) A private  company which  becomes a public company\n\t  by virtue of section 43A is not required to file a\n\t  prospectus or a statement in lieu of a prospectus.\n\t  [813 C]\n     After the\tAmending Act 65 of 1960 these distinct types\nof companies  occupy a\tdistinct place\tin the scheme of our\nCompanies Act:\t(1) private  companies (2)  public companies\nand (3) private companies which have become public companies\nby virtue  of section  43A, but which continue to include or\nretain the  three  characteristics  of\ta  private  company.\nPrivate companies  enjoy certain  exemptions and  privileges\nwhich are  peculiar to their constitution and nature. Public\ncompanies are  subjected severely  to the  discipline of the\nAct. Companies\tof the\tthird kind  like NIIL,\twhich become\npublic companies  but which  continue to  include  in  their\narticles the  three matters  mentioned in clauses (a) to (c)\nof  section  3(1)(iii)\tare  also,  broadly  and  generally,\nsubjected to the rigorous discipline of the Act. They cannot\nclaim  the   privileges\t and  exemptions  to  which  private\ncompanies which\t are outside  section 43A  are entitled. And\nyet, there  are certain\t provisions of\tthe Act\t which would\napply to  public companies but not to section 43A companies.\n[813 D; 814 A-C]\n     There is no difficulty in giving full effect to clauses\n(a) and\t (b) of\t section 81(1) in the case of a company like\nNIIL, even  after it  becomes a public company under section\n43A. Clause (a) requires that further shares must be offered\nto  the\t  holders  of\tequity\tshares\tof  the\t Company  in\nproportion, as nearly as circumstances admit, to the capital\npaid up\t on these shares, while clause (b) requires that the\noffer further shares must be made by a notice specifying the\nnumber of  shares offered  and limiting\t the time, not being\nless than  fifteen days\t from the  date of the offer, within\nwhich the offer, if not accepted will be deemed to have been\ndeclined. [815 H; 816 A-B]\n     The  provision   contained\t in  clause  (c)  cannot  be\nconstrued in a manner which will lead to the negation of the\noption exercised  by the  company to  retain in its articles\nthe three  matters referred  to in  section 3(1)(iii).\tBoth\nthese are statutory provisions and they are contained in the\nsame statute.  They must  be harmonised, unless the words of\nthe statute  are so  plain and unambiguous and the policy of\nthe statute  so\t clear\tthat  to  harmonise  will  be  doing\nviolence to  those words  and to  that policy. The policy of\nthe statute if any-\n712\nthing, points  in  the\tdirection  that\t the  integrity\t and\nstructure of  the section  43-A proviso companies should, as\nfar as possible not be broken up. [817 E-F]\n     Park v.  Royalty Syndicates  [1912] 1  K.B. 330  and Re\nPool Shipping Co. Ltd. [1920] 1 Ch. 251 referred to.\n     Palmer's Company  Law 22nd.  Vol. I  para 12-18 Gower's\nCompany Law 4th End p. 351 referred to.\n     27. When  section 43A was introduced by Act 65 of 1960,\nthe legislature\t apparently overlooked\tthe need  to  exempt\ncompanies falling  under it,  read with\t its first  proviso,\nfrom the  operation of\tclause (c)  of sec.  81(1). That the\nlegislature has\t overlooked such  a need  in regard to other\nmatters, in respect of which there can be no controversy, is\nclear from  the provisions  of sections 45 and 433(d) of the\nCompanies Act.\tUndar section  45, if at any time the number\nof members  of a company is reduced, in the case of a public\ncompany below  seven, or  in the  case of  a private company\nbelow two,  every member  of the  company becomes  severally\nliable, under  the stated  circumstances, for the payment of\nthe whole  debt of  the company\t and can  be severally\tsued\ntherefor. No  exception has yet been provided for in section\n45 in  favour of the section 43A-proviso companies, with the\nresult that  a private\tcompany having,\t say, three  members\nwhich  becomes\ta  public  company  under  section  43A\t and\ncontinues to  function with the same number of members, will\nattract the  rigour of\tsection 45. Similarly, under section\n433(d)\tsuch   a  company   would  automatically  incur\t the\nliability of being wound up for the same reason.\n\t\t\t\t\t\t   [818 A-D]\n     While construing  the opening words of section 81(1)(c)\nit has\tto be  remembered that\tsection\t 43A  companies\t are\nentitled under\tthe  proviso  to  that\tsection\t to  include\nprovision in their Articles relating to matters specified in\nsection 3(1)(iii).  The right  of renunciation\tin favour of\nany other person is wholly inconsistent with the Articles of\na private  company. If\ta private  company becomes  a public\ncompany by virtue of section 43A and retains or continues to\ninclude in  its Articles  matters  referred  to\t in  section\n3(1)(iii) it  is difficult  to say  that the Articles do not\nprovide something  which is  otherwise than what is provided\nin clause  (c). The  right of  renunciation in favour of any\nother person  is of  the essence of clause (c). On the other\nhand, the  absence of  that right  is of  the essence of the\nstructure of  a private company, It must follow, that in all\ncases in  which erstwhile  private companies  become  public\ncompanies by  virtue of\t section 43A  and retain  their\t old\nArticles, there\t would of  necessity be a provision in their\nArticles which is otherwise than what is contained in clause\n(c). Considered\t from this point of view, the argument as to\nwhether the  word \"provide\"  in the  opening words of clause\n(c) means  \"provide expressly\"\tloses its significance. [820\nB-D]\n     In the  context in\t which a  private company  becomes a\npublic company under section 43A and by reason of the option\navailable to it under the proviso the word \"provide\" must be\nunderstood  to\tmean  \"provide\texpressly  or  by  necessary\nimplication\". The  necessary implication  of a provision has\nthe same effect and relevance in law as an express provision\nhas, unless  the relevance of what is necessarily implied is\nexcluded by the use of clear words. [820 E-F]\n713\n     The  right\t  of  renunciation   is\t tentamount   to  an\ninvitation to  the public to subscribe for the shares in the\ncompany and  can violate  the provision\t in  regard  to\t the\nlimitation on  number of  members. Article  11, by reason of\nits clause  (iv) prevails  over the  provisions of all other\nArticles if  there is inconsistency between it and any other\nArticle. [821 C]\n     28. Clause\t (c) of\t section 81(1)\tof the Companies Act\napart from  the consideration  arising out  of\tthe  opening\nwords of  that clause,\tcan have  no application  to private\ncompanies which\t have become  public companies\tby virtue of\nsection 43A  and which\tretain in  their Articles  the three\nmatters referred  to in\t section 3(1)(iii) of the Act. In so\nfar as the opening words of clause (c) are concerned they do\nnot require  an express\t provision in  the Articles  of\t the\nCompany which  otherwise than what is provided for in clause\n(c). It is enough, in order to comply with the opening words\nof clause  (c). that  the Articles of the Company contain by\nnecessary implication  a provision  which is  otherwise than\nwhat is provided in clause (c). Articles 11 and 50 of NIIL's\nArticles of  Association negate\t the right  of renunciation.\n[821 D-F]\n     29. The right to renounce shares in favour of any other\nperson, which  is conferred by clause (c) has no application\nto a  company like  NIIL and,  therefore, its members cannot\nclaim the right to renounce shares offered to them in favour\nof any\tother member  or members.  The Articles of a company\nmay well  provide for  a right\tof transfer of shares by one\nmember to  another, but\t that right  is very  much different\nfrom the  right of renunciation, properly so called. [821 G-\nH]\n     Re Poal Shipping Co. Ltd. [1920] 1 Ch. 251 referred to.\n     30. A  change in  the pro\trata method  of offer of new\nshares is necessarily violative of the basic characteristics\nof a  private company  which becomes  a\t public\t company  by\nvirtue of  section 43A. To this limited extent only, but not\nbeyond it,  the provisions of sub-section (1A) of section 81\ncan apply to such companies. [822 F]\n     31.  The  following  propositions\temerge\tout  of\t the\ndiscussions of\tthe provisions\tof FERA, Sections 43A and 81\nof the\tCompanies Act  and of the Articles of association of\nNIIL:\n     (1)  The Holding  Company had  to part  with 20% out of\n\t  the 60% equity capital held by it in NIIL; [822 H]\n     (2)  The offer  of Rights\tshares made  to the  Holding\n\t  Company as a result of the decision taken by Board\n\t  of Directors\tin their  meeting of  April 6,\t1977\n\t  could\t not  have  been  accepted  by\tthe  Holding\n\t  Company;\n\t\t\t\t\t      [822 H; 823 A]\n     (3)  The Holding  Company had  no right to renounce the\n\t  Rights shares offered to it in favour of any other\n\t  person, member or non-member; and [823 B]\n     (4)  Since the  offer of  Rights Shares  could not have\n\t  been either  accepted or  renounced by the Holding\n\t  Company, the former for one reason and\n714\n\t  the latter  for another,  the shares offered to it\n\t  could,  under\t  article  50  of  the\tarticles  of\n\t  association, be  disposed  of\t by  the  directors,\n\t  consistently\t with\t the   articles\t  of   NIIL,\n\t  particularly article\t11, in\tsuch manner  as they\n\t  thought most beneficial to the Company. [822 B-C]\n     32. These\tpropositions afford a complete answer to the\nrespondents'  contention   that\t  what\t truly\t constitutes\noppression of the Holding Company is not the issue of Rights\nShares to  the existing\t Indian shareholders  only  but\t the\noffer of  Rights Shares to all existing shareholders and the\nissue thereof to existing Indian shareholders only. [823 D]\n     33. It  was neither  fair nor  proper on  the  part  of\nNIIL's officers\t not to\t ensure the  timely posting  of\t the\nnotice of the meeting for 2nd May so as to enable Sanders to\nattend that  meeting. But  there the  matter rests.  Even if\nSanders were  to attend the meeting, he could not have asked\neither that  the Holding  Company  should  be  allotted\t the\nrights shares or alternatively, that it should be allowed to\n\"renounce\"  the\t shares\t in  favour  of\t any  other  person,\nincluding the  Manoharan group.\t The  charge  of  oppression\narising out  of the  central accusation\t of non-allotment of\nthe rights  shares to  the Holding  Company must,  therefore\nfail. [823 H; 824 A-B]\n\n\n\nJUDGMENT:\n<\/pre>\n
     CIVIL APPELLATE  JURISDICTION: Civil Appeals Nos. 2139,
\n2483 and 2484 of 1978.\n<\/p>\n
     Appeals by\t Special Leave\tfrom the  judgment and order
\ndated the  6th October,\t 1978 of  the Madras  High Court  in
\nO.S.A. No. 64 of 1978.\n<\/p>\n
     F.S. Nariman, A.K. Sen, Dr. Y.S. Chitaley, S.N. Kackar,
\nT. Dalip  Singh, K.J. John, Ravinder Narain, A.G. Menses and
\nR. Narain for the Appellants.\n<\/p>\n
     H.M. Seervai,  Anil B.  Divan, A.R. Wadia, S.N. Talwar,
\nI.N. Shroff and H.S. Parihar for Respondent No. 1.\n<\/p>\n
     D.N. Gupta\t for Respondents  Nos. 2-7,  10- 12, 15, 16,
\n18-22, 26 and 28-33.\n<\/p>\n
     The Judgment of the Court was delivered by
\n     CHANDRACHUD, C. J. These three appeals by special leave
\narise out  of a\t judgment of  a Division  Bench of  the High
\nCourt of  Madras dated\tOctober 6,  1978 allowing  an appeal
\nagainst the  judgment of  a learned  Single Judge, dated May
\n17, 1978  in Company  Petition No.  39\tof  1977.  The\tmain
\ncontending parties  in these  appeals are:  (i)\t the  Needle
\nIndustries (India) Limited and (ii) the
\n715<\/span>
\nNeedle Industries-Newey (Indian Holdings) Limited. These two
\ncompanies have\toften been referred to in the proceedings as
\nthe Indian Company and the English Company respectively, but
\nit would  be convenient\t for us\t to refer  to the  former as
\n‘NIIL’ and  to the  latter as  the  ‘Holding  Company’.\t The
\nHolding Company\t has been  referred to\tin  a  part  of\t the
\nproceedings as ‘NINIH’.\n<\/p>\n
     In Civil  Appeal 2139  of 1978, which was argued as the
\nmain  appeal,  NIIL  is\t appellant  No.\t 1  while  one\tT.A.
\nDevagnanam is  appellant No.  2.  The  latter  figures\tvery
\nprominently in\tthese proceedings  and is  indeed one of the
\nmoving\tspirits\t of  this  acrimonious\tlitigation.  He\t was
\nappointed as  a Director of NIIL in 1956 and as its Managing
\nDirector in 1961. He is referred to in the correspondence as
\n‘TAD’ or  ‘Theo’ but we prefer to call him ‘Devagnanam’. The
\nHolding Company\t is Respondent\t1 to  the main\tappeal,\t the
\nother  respondents   being  some   of  the   Directors\t and
\nshareholders of\t NIIL. Civil Appeal 2483 of 1978 is filed by
\nsome of\t the shareholders of NIIL while Civil Appeal 2484 of
\n1978 is\t filed by  some of  its directors  and officers. The
\nHolding Company\t is the\t contesting respondent\tto these two
\nappeals. We  will deal with the main appeal and our judgment
\ntherein will dispose of all the three appeals.\n<\/p>\n
     The NIIL  was incorporated\t as a  Private Company under
\nthe Indian  Companies Act,  1913 on  July 20,  1949 with its
\nRegistered Office  at Madras.  Its factory  is\tsituated  at
\nKetty, Nilgiris.  At the time of its incorporation, NIIL was
\na wholly owned subsidiary of Needle Industries (India) Ltd.,
\nStudley,  England  (hereinafter\t called\t ‘NI-Studley’).\t The
\nauthorised capital  of NIIL  was Rs.  50,00,000 divided into
\n50,000 equity shares of Rs. 100 each. Its issued and paid up
\ncapital prior  to 1961\twas Rs.\t 6,75,600 divided into 6,756
\nequity shares  of Rs.  100 each.  The  issued  and  paid  up
\ncapital was  increased to  Rs. 11,09,000\/-  in 1961. In that
\nyear, NI-Studley  entered into an agreement with NEWEY BROS.
\nLIMITED, Birmingham,  England, (hereinafter  called  NEWEY),
\nunder which  NEWEY  agreed  to\tparticipate  in\t the  equity
\ncapital of  NIIL to the extent of Rs. 4,33,400\/-, consisting
\nof 4,334 equity shares of Rs. 100\/- each. Thus, in 1961, the
\nposition of  the share\tholding in  NIIL was that NI-Studley
\nheld approximately  60.85% of  the issued  capital and NEWEY
\nheld the  balance of  39.14%. In  1963, NIIL  increased\t its
\nshare capital  by issuing  2,450 additional  shares  to\t NI-
\nStudley, as  a result  of which the latter became the holder
\nof about 68% shares in NIIL, the rest of the
\n716<\/span>
\n32% belonging  to NEWEY.  Later in the same year, NI-Studley
\nand NEWEY combined to form the Holding Company, of which the
\nfull  official\t name.\tas  stated  earlier  is\t the  Needle
\nIndustries-Newey (Indian  Holding) Ltd.\t The Holding Company
\nwas incorporated  in the  United Kingdom  under the  English
\nCompanies  Act,\t  1948\twith   its  Registered\t Office\t  at
\nBirmingham, England.  The entire share capital of NIIL, held
\nby NI-Studley  and NEWEY,  was transferred  to\tthe  Holding
\nCompany in  which NI-Studley and NEWEY became equal sharers.
\nAs a result of this arrangement, the Holding Company came to
\nacquire 99.95%\tof the\tissued and  paid up capital of NIIL.
\nThe balance  of 0.05%, which consisted of 6 shares being the
\noriginal nominal shares, was held by Devagnanam.\n<\/p>\n
     The NIIL,\tit shall have been noticed, was incorporated
\nabout two  years after\tIndia attained\tindependence.  As  a
\nresult of  an undertaking  given by  it to the Government of
\nIndia at  the time  of its incorporation and pursuant to the
\nsubsequent directives  given  by  the  said  Government\t for
\nachieving Indianisation\t of the\t share\tcapital\t of  foreign
\ncompanies, three  issues of  shares were made by NIIL in the
\nyears 1968,  1969 and  1971, all  at par.  There was also an
\nissue of  Bonus shares in 1971. As a result of these issues,
\nabout 40%  of the  share Capital  of NIIL came to be held by
\nthe Indian  employees of  the Company  and  their  relatives
\nwhile the  balance of about 60% remained in the hands of the
\nHolding Company.  In terms of the number of shares, by 1971-
\n72 the\tHolding Company\t owned 18, 990 shares and the Indian
\nshareholders owned 13,010 shares. Out of the latter block of
\nshares, Devagnanam and his relatives held 9,140 shares while
\nthe remaining  3,870 shares were held by other employees and
\ntheir relatives,  amongst whom\twere N.\t Manoharan  and\t his
\ngroup who  held 900  shares and\t D.P. Kingsley and his group
\nwho held  530 shares.  The total  share capital of NIIL thus
\ncame to consist of 32,000 equity shares of Rs. 100 each.\n<\/p>\n
     In or about 1972, a company called Coats Paton Limited,
\nGlasgow, U.K.  (hereinafter called ‘Coats’) became an almost
\n100% owner  of NI-Studley.  The position at the beginning of
\nthe year  1973 thus  was that 60% (to be exact 59.3%) of the
\nshare capital  of NIIL\tcame to\t be owned  half and  half by
\nCoats and NEWEY, the remaining 40% being in the hands of the
\nIndian group.  The bulk of this 40% block of shares was held
\nby Devagnanam’s\t group, which  came to\tabout 28.5%  of\t the
\ntotal number of shares.\n<\/p>\n
717<\/span><\/p>\n
     Though NIIL  was at one time wholly owned by NI-Studley
\nand later, by NI-Studley and NEWEY, the affairs of NIIL were
\nmanaged ever  since 1956  by an\t entirely Indian management,
\nwith Devagnanam as its Chief Executive and Managing Director
\nwith effect  from the  year 1961.  The Holding Company which
\nwas formed in 1963, had only one representative on the Board
\nof Directors  of NIIL.\tHe was\tN.T. Sanders.  He resided in
\nEngland and  hardly ever  attended the\tBoard meetings.\t The
\nHolding Company\t reposed  great\t confidence  in\t the  Indian
\nmanagement which  was under  the direction  and\t control  of
\nDevagnanam.\n<\/p>\n
     But the  acquisition of NI-Studley by Coats in 1972 and
\ntheir consequent  entry in  NIIL created in its wake a sense
\nof uneasy quiet between the Coats on one hand, which came to
\nown half  of the  60% share  capital  held  by\tthe  Holding
\nCompany, that  is to  say, 30% of the total share capital of
\nNIIL, and  the Devagnanam  group on  the other\thand,  which
\nowned 28.5% of that share capital. By the mere size of their
\nalmost equal holding in NIIL, Coats and Devagnanam developed
\ncompeting interests  in the  affairs of\t NIIL. Coats were in
\nthe same  line of  business as NIIL, namely, manufacture and
\nsale of\t needles for various uses, fish-hooks etc., and they
\nhad established\t trading centres  far and wide, all over the
\nworld. It is plain business, involving no moral turpitude as
\nfar as\tbusiness  ethics  go,  that  Coats  could  not\thave
\nwelcomed competition  from NIIL\t with their world interests.
\nDevagnanam was\ta man  of considerable ability and foresight
\nand in\tNIIL  he  saw  an  opportunity\tof  controlling\t and
\ndominating as industrial enterprise of enormous potential in
\na rapidly growing market. The turnover of NIIL had increased
\nfrom 2.80  lakhs in  1953 to  149.93 lakhs  in 1972  and the
\nprofits ran  as high  as 19.4%\tof  the\t turnover.  Implicit
\nconfidence in  the Indian  management which was the order of
\nthe day almost till 1974 gradually gave way to an atmosphere
\nof suspicion  and distrust  between  Coats  and\t Devagnanam.
\nNEWEY apparently  kept away  from the differences which were
\ngradually mounting  up between\tthe two but, evidently, they
\nnursed a  preference  for  Devagnanam.\tCoats  are  a  giant
\nmultinational organization.  NEWEY, comparatively, are small
\nfish though,  they too\thad their  own independent  business
\ninterests to protect and foster.\n<\/p>\n
     NEWEY owned  a flourishing\t business in  Malaysia, Hong
\nKong, Taiwan, Japan and Australia and from 1972 onwards they
\ndrew Devagnanam\t increasingly into  the orbit  of their\t Far
\nEastern
\n718<\/span>
\ninterests. In  July, 1972  he  was  offered  the  office  of
\nManaging Director  of a group of four companies in Hong Kong
\nand Taiwan on a five year contract, with an annual salary of
\nsix thousand  pounds. He  had already  been appointed to the
\nBoard of  the NEWEY joint venture company in Osaka and Japan
\nand acted  as the  liaison Director for that company. He had
\nalso been  asked to  coordinate sales  with NEWEY  Brothers,
\nAustralia.    Willing\t  to\taccept\t   these    manifold
\nresponsibilities,  Devagnanam  became  strenuously  involved
\ntherein. He and his wife began to reside in Hong Kong and he
\ncogitated over\tresigning from\this position in NIIL. Coats,
\non their  part, were clear that Devagnanam should relinquish
\nhis responsibilities  in NIIL,\tin view of the time his role
\nin NEWEY’s Far Eastern interests was consuming. The question
\nof appointing  his successor  as Managing  Director in\tNIIL
\nthen began  to be  discussed, the Holding Company wanting to
\nhave Manoharan\tas  a  substitute.  Devagnanam\tcarried\t the
\nfeeling that  he was  already persona  non grata with Coats,
\nbecause of  certain incidents  which had  taken\t place\tsome
\nyears ago.\n<\/p>\n
     The Foreign  Exchange Regulation  Act, (‘FERA’),  46 of
\n1973, which  came into\tforce on January 1, 1974 provided to
\nCoats and  Devagnanam a\t legal matrix for fighting out their
\ndifferences. The provisions of FERA, which was passed, inter
\nalia, for  the conservation of foreign exchange resources of
\nthe country  and  the  proper  utilisation  thereof  in\t the
\ninterests of  the economic  development of  the country\t are
\nstringent beyond  words. Putting  it  broadly  and  briefly,
\nsection 29 (1) of FERA prohibits non-residents, non-citizens
\nand non-banking\t companies not incorporated under any Indian
\nLaw or\tin which the non-resident interest is more than 40%,
\nfrom carrying  on  any\tactivity  in  India  of\t a  trading,
\ncommercial or  industrial nature  except with the general or
\nspecial permission  of the Reserve Bank of India. By section
\n29 (2)\t(a), if\t such a\t person or company is engaged in any
\nsuch activity  at the  commencement of the Act, he or it has
\nto apply  to the  Reserve Bank\tof India,  for permission to
\ncarry  on   that  activity,   within  six   months  of\t the
\ncommencement of\t the Act  or  such  further  period  as\t the
\nReserve Bank  may allow. Since the Holding Company is a non-
\nresident and  its interest in NIIL exceeded 40%, NIIL had to
\napply for  the permission of the Reserve Bank for continuing
\nto carry  on its  business. Section  29 (4)  (a)  imposes  a
\nsimilar restriction  on such  person or company from holding
\nshares in  India of any company referred to in clause (b) of
\nsection 29  (1), without the permission of the Reserve Bank.
\nTherefore, the\tHolding Company\t also had  to apply  for the
\npermission of
\n719<\/span>
\nthe Reserve  Bank for continuing to hold its shares in NIIL.
\nThe time for making application for the requisite permission
\nunder section  29 was  extended by  the Reserve\t Bank by two
\nmonths generally, that is to say, until August 31, 1974. The
\nneed to\t comply with the provisions of section 29 of FERA is
\nthe pivot round which the whole case revolves.\n<\/p>\n
     NIIL applied  to the  Reserve Bank\t for  the  necessary
\npermission  through   its  Director   and  Secretary,\tD.P.
\nKingsley, on  September 3,  1974 By its letter dated May 11,
\n1976, the  Reserve Bank\t allowed that application on certain
\nconditions. NIIL’s  application was  late by  three days but
\nthe delay  was evidently  ignored or  condoned. One  of\t the
\nconditions imposed  by the  Reserve Bank on NIIL was that it
\nmust bring  down the  non-resident interest  from 60% to 40%
\nwithin one  year of  the receipt  of its letter. That letter
\nhaving been  received by NIIL on May 17, 1976, the dead-line
\nfor reducing  the non-resident\tinterest to  40% was May 17,
\n1977.\n<\/p>\n
     The Holding  Company applied  to the Reserve Bank for a
\n‘Holding  Licence’   under  section  29(4)(a)  of  FERA,  on
\nSeptember 18,  1974. That  application which  was late by 18
\ndays is,  we are  informed, still  pending with\t the Reserve
\nBank. Perhaps, it will be disposed of after the non-resident
\ninterest in  NIIL is  reduced to  40% in terms of section 29
\n(1) of FERA.\n<\/p>\n
     Devagnanam was  residing in  Hong Kong  to\t fulfil\t his
\ncommitment to  NEWEY’s far-eastern  business interests. FERA
\nhad its\t implications for him too, especially since he could
\nbe regarded  as a  nonresident and  did consider  himself as
\nsuch. He obtained a holding licence dated March 4, 1975 from
\nthe Reserve  Bank in respect of his shares in NIIL. But, his
\ninterest in the affairs of NIIL began to flag for one reason
\nor another  and he  started looking  out for a purchaser who
\nwould buy  his shares on convenient and attractive terms. In
\na note\tdated April  29, 1975  which he prepared on “further
\nIndianisation-Needle Industries (India) Ltd.” he pointed out
\nthat Indianisation  should be considered on the footing that
\nthe non-resident interest should be reduced to 40% and that,
\nas  between  the  two  feasible\t methods  of  Indianisation,
\nnamely, (1) Going to public and (2) placement of shares, the
\nlatter was preferable.\n<\/p>\n
He said:\n<\/p>\n
720<\/span><\/p>\n
\t  There can be no question of my becoming in any way
\n     involved with Ketti and its future as I am committed to
\n     NEWEY. There  appears to be no possibility of returning
\n     to India  in  what\t is  left  of  my  working  life.  I
\n     therefore have little choice but to sell my shares.<\/p>\n
     (‘Ketty’ in Nilgiris, is the place where NIIL’s factory
\nis  situated  and  is  treated\tas  synonymous\twith  NIIL).
\nDevagnanam referred  in his  note to  an inquiry  from a Mr.
\nKhaitan, the head of a powerful group with diverse interests
\nand investment\tin industry, who was already involved in the
\nmanufacture of products allied to NIIL’s. Coats were alarmed
\nthat Devagnanam was negotiating the sale of his shares “to a
\nMarwari, one Khaitan of Shalimar, a sewing needle competitor
\nto Ketti”.  In a  letter dated\tAugust 6,  1975 addressed to
\nDoraiswamy, a  partner in a Madras firm of solicitors called
\n‘King and  Partridge’ who was a Director of NIIL, Sanders, a
\nDirector of  the Holding  Company on NIIL’s Board, expressed
\nhis grave concern at the proposed deal thus:\n<\/p>\n
\t  No doubt  Mr.\t Khaitan  would\t pay  the  earth  to
\n     acquire NIIL  and judging by what Theo (Devagnanam) had
\n     said about\t him in\t the past,  he may  be\tprepared  to
\n     arrange or facilitate payment abroad, a most attractive
\n     possibility from  Theo’s point  of view,  since he\t has
\n     said clearly  that he  intends leaving  India for good,
\n     finally settling in Australia.\n<\/p><\/blockquote>\n
Sanders added  that the deal was so dangerous from the point
\nof view of NIIL that the Holding Company “would feel obliged
\nto prevent  it by  whatever means  were open”  to it. By his
\nreply dated  August 12,\t 1975, Doraiswamy said that the news
\nof the\tproposed sale came as no surprise to him and that he
\nhad heard  that Silverston,  a former  Solicitor-partner  of
\nhis, was  acting as a “go-between” in Devagnanam’s deal with
\nKhaitan.\n<\/p>\n
     On September  16, 1975 Devagnanam wrote to M.M.C. NEWEY
\nof NEWEY, Birmingham. pointing out the advantages that would
\naccrue by  the sale  of the  shares to\tKhaitan.  Devagnanam
\nreiterated his total identification with NEWEY’s Far Eastern
\ninterests and expressed his anxiety to free himself from all
\ncommitments  to\t or  involvement  with\tNIIL,  as  early  as
\npossible.\n<\/p>\n
     On October\t 22, 1975  an important\t meeting was held in
\nwhich Alan Machrael, a Director of the Holding Company, made
\nit clear
\n721<\/span>
\non behalf of Coats that neither Khaitan nor any other single
\npurchaser would be acceptable to the Holding Company if that
\nmeant the acquisition of 30% share holding. The notes of the
\nmeeting record\tthat Devagnanam had confirmed that the offer
\nwhich he had received from Khaitan was at Rs. 360 per share,
\nout of which a substantial proportion (perhaps 50%) would be
\npayable outside\t India. Mackrael  stated at the meeting that
\nthe price  in rupees  could be matched but not the method of
\npayment which  was illegal  and reiterated  that the Holding
\nCompany would  prevent any attempt by Devagnanam to sell his
\nholding to  Khaitan. The notes of the meeting were signed by
\nMackrael on  October 30, 1975. On that date, Sanders wrote a
\nletter to Manoharan stating that the Holding Company was not
\nprepared that  30% of  the share capital should get into the
\nhands of  any one  person, bearing in mind the problems that
\nhad arisen  in allowing\t Devagnanam to\tacquire a holding of
\nnearly that  proportion. On  November 7,  1975 M.M.C.  Newey
\nwrote to Devagnanam making it clear beyond the manner of any
\ndoubt that Coats, will not accept Khaitan and that according
\nto Bannatyne of Coats, they were put to considerable trouble
\nin finding  Indian residents who would match Khaitan’s offer
\nof 3.6 times par. Newey made it clear that in any event, the
\nsale price  would have\tto be  paid in\tIndia and  that they
\nwould not  be a\t party to any illicit currency deal. Finding
\nthat Coats  were determined  not to  allow him\tto sell\t his
\nshares to  Khaitan, Devagnanam\tchanged his mind and decided
\nagainst disposing  of his  holding in  NIIL. On November 13,
\n1975, he wrote to Newey saying:\n<\/p>\n
\t  “I do\t not think  any of  us\twant  to  see  Coats
\n     dominate Ketti.  Hence there  can\tbe  no\tquestion  of
\n     selling any part of my shares to their nominee. As they
\n     in turn  will not approve of anyone we choose, there is
\n     no way  of solving\t the problem…The best thing to do,
\n     therefore, is  for me  to revert  to the original basis
\n     and they should have no cause to complain. This will of
\n     course include effectively managing the Indian company.
\n     Let me  however assure  you that  it will not be at the
\n     expense of Newey.”\n<\/p><\/blockquote>\n
And so did Devagnanam remain in NIIL, with the stage set for
\na battle  between him  and Coats  for acquisition of control
\nover the affairs of NIIL.\n<\/p>\n
     Yet another  statutory provision which has an important
\nbearing on  the issues\tarising in  these appeals is the one
\ncontained
\n722<\/span>
\nin section 43 A of the Indian Companies Act, 1956, which was
\nintroduced in  1961 by Act 65 of 1960. NIIL was incorporated
\nas a Private Company in 1949 under the Indian Companies Act,
\n1913. It  was a\t Private Company as defined in section 3 (1)\n<\/p>\n
(iii) of  that Act since, by its Articles of Association, it
\nrestricted the\tright to  transfer its\tshares, limited\t the
\nnumber of its members to fifty and prohibited any invitation
\nto  the\t public\t to  subscribe\tto  any\t of  its  shares  or
\ndebentures. By\tsection 43  A, it  became a  Public Company,
\nsince not  less than  twenty-five per  cent of\tits  paid-up
\nshare capital  was held\t by a  body corporate,\tnamely,\t the
\nHolding Company. But, under the first proviso to section 43A
\n(1), it\t had the  option to  retain its Articles relating to
\nmatters specified  in section  3 (1)  (iii) of the Companies
\nAct. NIIL  did not  alter the  relevant\t provisions  of\t its
\nArticles after it became a Public Company within the meaning
\nof section 43A. One of the points in controversy between the
\nparties is  whether, in\t the absence  of any  positive\tstep
\ntaken by  NIIL for  exercising\tthe  option  to\t retain\t its
\nArticles relating  to matters  specified in  section  3\t (1)\n<\/p>\n
(iii) of  the Companies Act, it can be held that NIIL had in
\nfact exercised\tthe option,  which was available to it under
\nthe 1st\t proviso  to  section  43A,  to\t include  provisions
\nrelating to those matters in its Articles.\n<\/p>\n
     To resume\tthe thread  of events,\ton  receipt  of\t the
\nletter of  the Reserve\tBank dated May 11, 1976 Kingsley, as
\nNIIL’s Secretary,  sent a  reply on May 18, 1976 to the Bank
\nconfirming the\tacceptance of  the various  conditions under
\nwhich  permission  was\tgranted\t to  NIIL  to  continue\t its
\nbusiness. On  August  11,  1976\t the  term  of\tDevagnanam’s
\nappointment as\tthe Managing Director of NIIL came to an end
\nbut in\tthe meeting dated October 1, 1976 of NIIL’s Board of
\nDirectors, that appointment was renewed for a further period
\nof  five   years.  On  being  informed\tof  the\t renewal  of
\nDevagnanam’s appointment,  NEWEY’s Chairman, C. Raeburn, who
\nused to\t attend to  the affairs\t of the Holding Company, did
\nnot object  as such to the Board’s decision (“It may well be
\nthat the  reappointment in itself is right”) but he demurred
\nto the\tmodality by  which the\tdecision  was  taken  since,
\naccording to  him, questions  relating\tto  appointments  to
\nsenior positions  in the  Company ought\t to  be\t decided  in
\nconsultation with  the U.K.  Shareholders so that they could
\nhave an\t opportunity to express their views. Sanders, it may
\nbe mentioned,  had received  the notice of the meeting duly.
\nOn October  20 and  21, 1976,  a meeting took place at Ketti
\nbetween the U.K. shareholders and the Indian shareholders of
\nNIIL. The  former were\trepresented by\tAlan  Mackrael,\t the
\nManaging Director
\n723<\/span>
\nof the\tHolding Company,  and C.  Raeburn, the\tChairman  of
\nNEWEY the  latter by  Devagnanam and  Kingsley.\t One  Martin
\nHenry, the  Managing Director  of ‘Madura  Coats’, an Indian
\nCompany\t in   which  the  Holding  Company  had\t substantial
\ninterest, also\tattended that  meeting and  took part in its
\ndeliberations. Silverston,  an Englishman who was practising
\nin India  asa Solicitor,  attended the meeting as an advisor
\nto the\tIndian shareholders. C. Raeburn chaired the meeting.
\nPara 2\tof the\tnote prepared by him of the discussions held
\nat the\tmeeting says  that it  was agreed that Indianisation
\nshould be  brought about  by May  1977, as  requested by the
\nGovernment, so\tas  to\tachieve\t 40%  U.K.  and\t 60%  Indian
\nshareholding. But the meeting virtually ended in a stalemate
\nbecause whereas\t the Holding  Company wanted  a\t substantial
\npart of\t the share capital held by it in excess of 40% to be
\ntransferred  to\t Madura\t Coats\tas  an\tIndian\tshareholder,
\nDevagnanam insisted  that the  existing Indian share-holders
\nof  NIIL   alone  had  the  right,  under  its\tArticles  of
\nAssociation, to take up the shares which the Holding Company
\nwas  no\t longer\t in  a\tposition  to  hold  because  of\t the
\ndirectives issued  by the  Reserve Bank\t pursuant  to  FERA.
\nThus, the  difference between  the two\tgroups who were fast
\nfalling out was not, as it could not be, whether the Holding
\nCompany had  to reduce its share holding in NIIL from 60% to
\n40%, but  as regards the mode by which that reduction was to
\nbe brought  about. The\tbone of\t contention was\t as to which
\nIndian Party  should take  up the excess of 20%-the existing
\nIndian shareholders  of NIIL  or an  outside Indian Company,
\nthe Madura  Coats. Raeburn played the role of a mediator but
\ndid not\t succeed. On  the conclusion  of the  Ketty meeting,
\nSilverston  wrote   a  letter\tto  Kingsley  conveying\t his
\nappreciation of\t the efforts  made by  Raeburn to  bring the
\nparties together  and his  distress at the attitude of Coats
\nwhich, according to Silverston, showed that they were trying
\nto circumvent  the provisions  of FERA.\t Raeburn too wrote a
\nletter on  October 23,\t1976 to Devagnanam saying that Coats
\nwere not really interested in any independent Indians taking
\ntheir excess  share-holding. On December 11, 1976 Devagnanam
\nwrote to  Raeburn expressing  the resentment  of himself and
\nhis group  at the  attempts made  by Coats to maintain their
\ncontrol\t over  NIIL  by\t indirect  means.  On  December\t 14,
\nDevagnanam offered  a package  deal under which the existing
\nIndian shareholders  would augment  their  holding  to\t60%,
\nMackrael and  Raeburn would be on the Board of Directors but
\nnot Martin  Henry, and\teven B.T. Lee, a Senior Executive of
\nNI-Studley, could  be appointed\t as a  wholetime Director of
\nNIIL to be in charge of its export programme. On January 20,
\n1977 the Reserve Bank sent a reminder to NIIL asking
\n724<\/span>
\nit to  submit at an early date the progress report regarding
\ndilution non-resident  interest. By its reply dated February
\n21, 1977  NIIL\tconfirmed  its\tcommitment  to\tachieve\t the
\ndesired Indianisation  by the stipulated date, viz., May 17,
\n1977. On  March 9,  1977 Raeburn wrote to Devagnanam, saying
\nthat after  a discussion with Mackrael and three other high-
\nranking persons\t of Coats,  it was clear that Coats were not
\nagreeable to  allowing the  present Indian  shareholders  to
\nacquire 60%  of the  equity capital  of NIIL,  since such  a
\ncourse carried\tin the\tlong run  too great  a risk to their
\nworld trade.  Raeburn made  certain fresh  proposals by\t his
\nletter in  the hope  that they\twould be acceptable to Coats
\nand  invited   Devagnanam  to\tcome   to   Birmingham\t for
\nnegotiations.\n<\/p>\n
     On March  18,  1977  a  notice  was  issued  by  NIIL’s
\nSecretary, D.P.\t Kingsley, intimating  that a meeting of the
\nBoard of Directors will be held on April 6, 1977. One of the
\nitems on  the agenda  of the  meeting was  shown as “Policy-
\nIndianisation”. Sanders\t received the  notice of the meeting
\nduly but did not attend the meeting.\n<\/p>\n
     Devagnanam went to Birmingham in the last week of March
\n1977. Between  29th and 31st March, he held discussions with
\nfour out of the six Directors of the Holding Company, namely
\nNEWEY, Jackson,\t White-house  and  Raeburn.  The  other\t two
\nDirectors, Mackrael  and Sanders,  did not  take any part in
\nthose  discussions.   During  his   visit   to\t Birmingham,
\nDevagnanam expended  considerable time in discussing various
\nmatters\t with\tNEWEY,\tpertaining   to\t their\t Far-Eastern
\nbusiness.\n<\/p>\n
     On April  4, 1977 NIIL received a reminder letter dated
\nMarch 30,  1977 from the Reserve Bank which pointed out that
\nthe Company  had not yet submitted any concrete proposal for
\nreduction of  the non-resident\tinterest  and  asked  it  to
\nsubmit its  proposal in\t that  behalf  without\tany  further
\ndelay. The  letter warned  the Company\tthat if it failed to
\ncomply with  the directive  regarding  dilution\t of  foreign
\nequity within  the stipulated  period,\tthe  Bank  would  be
\nconstrained to view the matter seriously.\n<\/p>\n
     Raeburn had written a letter to Devagnanam on 4th April
\non the question of the compromise formula and Devagnanam too
\nhad written  a letter  to Raeburn on the 5th, saying that he
\nwould place the formula before his colleagues. These letters
\nevidently crossed each other. The 6th April was then just at
\nhand.\n<\/p>\n
725<\/span><\/p>\n
     The meeting  of NIIL’s  Board of  Directors was held on
\nApril 6,  1977 as scheduled. Seven Directors were present at
\nthe  meeting,\twith  Devagnanam   in  the   chair  at\t the
\ncommencement of\t the proceedings.  C. Doraiswamy, solicitor-
\npartner of  ‘King and  Partridge’, was\tone of the Directors
\npresent at  the meeting.  He had no interest in the proposal
\nof “Indianisation” which the meeting was to discuss and was,
\ntherefore, considered  to be  an  independent  Director.  In
\norder to  complete the\tquorum of two independent Directors,
\nthe  other   Directors\tapart\tfrom  C.   Doraiswamy  being
\ninterested in  the business  of the  meeting, Silverston, an
\nex-partner of Doraiswamy’s firm of solicitors, was appointed
\nto the\tBoard as  an additional Director under article 97 of
\nthe Articles  of Association. Silverston chaired the meeting
\nafter his appointment as an additional Director. The meeting
\nresolved that the issued capital of NIIL be increased to Rs.
\n48,00,000\/- by\ta new  issue of\t 16,000 equity shares of Rs.
\n100\/- each,  to be  offered as rights shares to the existing
\nshareholders in\t proportion to\tthe shares held by them. The
\noffer was  to be  made by  a notice specifying the number of
\nshares which  each shareholder\twas entitled to, and in case
\nthe offer  was not  accepted within 16 days from the date on
\nwhich it was made, it was to be deemed to have been declined
\nby the\tconcerned shareholder.\tThe minutes  of the  meeting
\nrecorded that as a matter of abundant caution, the Directors
\nwho were  holding shares in NIIL did not take part either in
\nthe discussions\t which took  place in  the meeting or in the
\nvoting on the resolution.\n<\/p>\n
     After the aforesaid meeting of the Board dated April 6,
\n1977, Devagnanam wrote a letter bearing the date April 12 to
\nRaeburn, explaining  that  every  alternative  proposal\t was
\ndiscussed in  the meeting  and setting\tout  the  compelling
\ncircumstances arising  out of the requirements of FERA which
\nled to\tthe passing  of the  particular resolution.  It\t was
\nstated in  the letter  that a  copy of\tthe  Reserve  Bank’s
\nletter of March 30, 1977 to NIIL was enclosed therewith, but
\nin fact\t it was\t not so\t enclosed. The letter of offer dated
\nApril 14,  1977 was  prepared  pursuant\t to  the  resolution
\npassed in  the meeting of 6th April. The envelope containing
\nDevagnanam’s letter  dated April 12 (without the copy of the
\nletter of  the Reserve\tBank dated  March 30,  1977) and the
\nletter of  offer dated\tApril 14 were received by Raeburn on
\nMay 2, 1977 in an envelope bearing the Indian postal mark of
\nApril 27, 1977, The letter of offer which was sent to one of
\nthe  Indian   shareholders,  Manoharan,\t was  posted  in  an
\nenvelope which\talso bore the postal mark of 27th April. The
\nnext meeting of the Board was due to be
\n726<\/span>
\nheld on\t May 2,\t 1977 and  it is  on that  date that Raeburn
\nreceived  the\tletter\tof   offer  dated  April  14,  which
\nevidently, was\tposted at  Madras on  April  27,  1977.\t The
\nHolding\t Company   was\tthereby\t denied\t an  opportunity  to
\nexercise its  option whether  or not  to accept the offer of
\nrights shares, assuming that any such option was open to it.
\nWhether such  an option\t was open  to it  and whether, if it
\ncould not  or did  not want  to take  the rights  shares, it
\ncould transfer\tits rights, under NIIL’s letter offering the
\nrights shares,\tto a  person of\t its choice depends upon the
\nprovisions  of\tFERA,  the  necessity  to  Comply  with\t the
\ndirectives of  the Reserve Bank the terms of NIIL’s Articles
\nof Association\tand the\t provisions of\tthe Indian Companies
\nAct.\n<\/p>\n
     On April  19,  1977  a  notice  was  issued  by  NIIL’s
\nSecretary  intimating\tthat  a\t meeting  of  the  Board  of
\nDirectors will\tbe held\t on May 2, 1977. One of the items of
\nagenda\t mentioned    in   the\t  notice   was\t “Policy-(a)
\nIndianisation, (b)  Allotment of  shares”. The notice of the
\nmeeting was sent to the Holding Company in an envelope which
\nalso bore  the Indian  postal mark  of April  27, 1977.\t The
\nnotice was  received by\t Sanders in  England on\t May 2, 1977
\ni.e. on\t the date  when the  meeting was  due to  be held in
\nIndia. Even  the  fastest  and\tthe  most  modern  means  of
\ntransport could\t not have  enabled  Sanders  to\t attend\t the
\nmeeting.\n<\/p>\n
     In between,  on April  26, 1977  Raeburn had  written a
\nletter to  Devagnanam at  Malacca, following a telex message
\nwhich said:\n<\/p>\n
\t  HAD HELPFUL  DISCUSSIONS  COATS  YESTERDAY  PLEASE
\n     MAKE NO DECISIONS RE INDIANISATION PENDING LETTER”
\nBy his\tletter of  26th April,\twhich is  said to  have been
\nreceived by  Devagnanam on  May 4, 1977, Raeburn stated that
\nCoats were  still unwilling  to grant  majority shareholding
\ncontrol to  the existing  Indian shareholders, but that they
\nwere equally  not keen\tto  do\tany  thing  which  would  be
\nregarded as  circumventing the proposal for Indianisation or
\nthe law\t bearing on  the subject, since that would undermine
\nthe position of the Indian shareholders.\n<\/p>\n
     A meeting\tof the Board of Directors was held on May 2,
\n1977 as\t scheduled. The\t minutes of  that meeting  show that
\nKingsley, the  Secretary of NIIL, pointed out in the meeting
\nthat applications for allotment of the rights shares offered
\nas also the amounts payable
\n727<\/span>
\nalong with  the acceptance  of the  offer had  been received
\nfrom all  the shareholders  except the U.K. shareholders and
\nthe Manoharan  group. The  offer to  Manoharan was  sent  at
\nVirudh Nagar  but Silverston pointed out to the meeting that
\nManoharan was  working in  Jaipur  and\tthat  therefore,  he
\nshould be  given further  time to  participate in the rights
\nissue. The  Manoharan group  was accordingly  allowed twenty
\ndays’ time from the date of the allotment letter for payment
\nof the\tallotment amount.  In the  meeting of  2nd May,\t the
\nwhole of  the new  issue consisting  of 16,000 rights shares
\nwas allotted  to the  Indian shareholders, including members
\nof the\tManoharan group.  Out of these, the Devagnanam group
\nwas allotted  11, 734  shares. A dividend of 30%, subject to
\ntax, amounting\tto  Rs.\t 9,60,000\/-was\trecommended  by\t the
\nBoard, and  it was  resolved that the Annual General meeting
\nof the\tCompany be  held on  4th June, 1977. Silverstone was
\nappointed as  an additional  Director of the Company and his
\nelection  as   such  at\t  the  Annual  General\tmeeting\t was
\nrecommended by\tthe Board.  Further, it\t was  resolved\tthat
\ndeposits be  invited from  the public.\tOn the same day i.e.
\n2nd May,  Devagnanam wrote a letter to Raeburn intimating to
\nhim that  in a\tmeeting held  that morning  the\t formalities
\nrelating to allotment of shares were completed, bringing the
\nCompany\t under\tthe  control  of  the  Indian  shareholders.
\nDevagnanam reiterated  by his  letter the  hope of  a closer
\nassociation with the NEWEY group.\n<\/p>\n
     Raeburn reacted sharply to Devagnanam’s letter of April
\n12 and\tto the\tletter of  offer dated\tApril 14.  As stated
\nearlier, he  had received  both of  these on  May  2  in  an
\nenvelope which\tbears the postal mark of Madras dated April,\n<\/p>\n
27. Raeburn  sent a  telex, message to Devagnanam on 2nd May
\nand another  to Kingsley  on 3rd May. By the first telex, he
\ncomplained about the inadequacy of the notice of the meeting
\nand by\tthe second,  he conveyed that there was considerable
\ndoubt on  the question\twhether the  necessary disinterested
\nquorum was available at the meeting of the Directors held on
\nApril 6. On receipt of the telex message, Devagnanam wrote a
\nletter to  Raeburn on  May  4  explaining  the\tpressure  of
\ncircumstances which compelled the Board to take the decision
\nwhich it did in the meeting of May 2, 1977. Raeburn followed
\nup his\ttelex messages\tby a  letter to Devagnanam on May 3.
\nWhile expressing  his distress and displeasure at the manner
\nin which  the decision\tregarding the issue of rights shares
\nwas taken  and the allotment of the shares was made, Raeburn
\nstated in his letter that the rights issue at par, which was
\nconsiderably less than the fair value
\n728<\/span>
\nof the shares, was most unfair to the shareholders who could
\nnot take up the rights issue.\n<\/p>\n
     After making  the allotment of shares in the meeting of
\nMay 2,\tNIIL sent  a letter  to the  Reserve Bank  reporting
\ncompliance with\t the requirements  of FERA  by the  issue of
\n16,000 rights  shares and  the allotment  thereof the Indian
\nshareholders which  resulted in the reduction of the foreign
\nholding to  approximately 40%  and  increased  that  of\t the
\nIndian shareholders to almost 60%. Reference was made in the
\nletter\tto   the  fact\tthat  the  allotment  money  of\t Rs.
\n1,10,700\/- had\tyet to\tbe received,  which was obviously in
\nreference to the amount due on the 1,107 rights shares which
\nwere allotted  to the  Manoharan group in the meeting of 2nd
\nMay. The  Manoharan group did not evidence any interest even
\nlater in  taking up  those  shares.  Manoharan,\t it  may  be
\nstated, who  was a  Director and General Manager of NIIL had
\nresigned his  post in  April 1976, after serving the Company
\nfor nearly 17 years.\n<\/p>\n
     Between the  2nd and  9th May, there was an exchange of
\ncables between\tMackrael and  Doraiswamy which\tled  to\t the
\nlatter writing a letter on the 9th to the former. Doraiswamy
\nstated in  that letter\tthat he\t had thoroughly investigated
\nthe position by perusing all available records placed before
\nhim by\tDevagnanam and\tKingsley and  that  he\twas  of\t the
\nopinion that, in the meeting of the 6th April, there was the
\nrequired quorum of two disinterested Directors consisting of
\nSilverston and\thimself and,  therefore, there\tcould be  no
\ndoubt whatsoever about the legality of the resolution passed
\nin that\t meeting. He  admitted that  although the time-limit
\nfixed by the Reserve Bank had expired on 17th May, 1977, “it
\nmay have  been possible\t for the Company to get further time
\nfrom the  Reserve Bank of India”. As regards the decision to
\nissue the additional shares at par, he explained that if the
\nissue had been made at a premium, it would have necessitated
\nan approach  to the  Controller of Capital Issues, a process
\nwhich was  time-consuming and  complicated. He\tpointed\t out
\nthat the  authorities would  not have allowed the Company to
\nissue the  rights shares  at a premium and that even if they
\nwere to\t allow such  a course, the premium permissible would
\nhave been only nominal. He asserted that the delay caused in
\nthe  offer   of\t new  shares  being  received  by  the\tU.K.
\nshareholders was  of little  consequence because  they would
\nnot have  been able  to take  up the shares in any event. He
\nexpressed the  hope  that  Mackrael  would  agree  that\t the
\ndecision regarding  the issue  of rights shares taken at the
\nBoard meeting on April 6, 1977 was bona fide and in the best
\ninterests
\n729<\/span>
\nof the Company. He concluded his letter by an assurance that
\nas regards  the late  despatch of  the notice  of the  Board
\nMeeting of 2nd May, further enquiries were being made.\n<\/p>\n
     On May  11, Devagnanam wrote to Raeburn apologising for
\nthe manner  in\twhich  the  foreign  shareholding  had\tbeen
\nreduced and  for good  measure,\t he  projected\tthe  various
\nadvantages which  the NEWEY  group would enjoy under the new
\nIndian management  and control\tof NIIL. As if to illustrate
\nthat it\t is better  late than  never, he  enclosed with\t his
\nletter a copy of the Reserve Bank’s letter dated 30th March,
\n1977 which was to have been sent along with the letter dated
\nApril 12 but was in fact not so sent.\n<\/p>\n
     On May  17, 1977  Mackrael, acting\t on  behalf  of\t the
\nHolding Company, filed a Company Petition in the Madras High
\nCourt under  sections 397  and 398  of the  Indian Companies
\nAct, 1956 out of which the present appeals arise.\n<\/p>\n
     It is alleged in the petition that the Indian Directors
\nabused their  fiduciary position  in the Company by deciding
\nin the\tmeeting of April 6 to issue the rights shares at par
\nand by\tallotting them\texclusively  to\t the  Indian  shares
\nholders in  the meeting\t of 2nd May, 1977. In so doing, they
\nacted mala  fide and  in order\tto gain an illegal advantage
\nfor themselves.\t The  Indian  Directors,  according  to\t the
\ncompany petition,  either knew\tor ought  to have known that
\nthe fair  value of  the shares\tof the Company was about Rs.
\n204 per\t share. By  deciding to\t issue the  rights shares at
\npar, they  conferred a tremendous and illegitimate advantage
\non the\tIndian shareholders. Devagnanam delayed deliberately
\nthe intimation\tof the\tproceedings of\tthe 6th April to the
\nHolding Company. By that means and by the late giving of the
\nnotice of  the meeting\tof the 2nd May, the Devagnanam group
\npresented a fait accompli to the Holding Company in order to
\nprevent\t it   from  exercising\t its  lawful  rights.  Thus,
\naccording  to\tthe  petition  the  conduct  of\t the  Indian
\nDirectors lacked  in probity  and  fair\t dealing  which\t the
\nHolding Company was entitled to expect. By the Petition, the
\nHolding Company asked for the following reliefs:-\n<\/p>\n
     (a)  That the  Board of  Directors of  the\t Company  be
\n\t  superseded  and  one\tor  more  Administrators  be
\n\t  appointed to administer the affairs of the Company
\n\t  or, in  the alternative, the Board of Directors be
\n\t  reconstituted so  as to  ensure that\tthe  Holding
\n\t  Company had adequate representation on it;\n<\/p><\/blockquote>\n
730<\/span><\/p>\n
     (b)  That the proceeding of the meeting of the Board of
\n\t  Directors held  on April  6 and  May\t2,  1977  be
\n\t  declared illegal, void and inoperative;\n<\/p><\/blockquote>\n
     (c)  That Silverston’s  appointment  as  an  Additional
\n\t  Director of  the Company  be declared\t as void and
\n\t  inoperative and  he be restrained from functioning
\n\t  as a Director of the Company;\n<\/p><\/blockquote>\n
     (d)  That the  purported  allotment  of  16,000  shares
\n\t  pursuant to  the impugned  resolution of the Board
\n\t  of May 2, 1977 be declared void;\n<\/p><\/blockquote>\n
     (e)  That the  Indian group of shareholders to whom the
\n\t  rights shares\t were allotted\tbe  restrained\tfrom
\n\t  exercising any voting rights in regard to any part
\n\t  of those shares;\n<\/p><\/blockquote>\n
     (f)  That the  Company be restrained from giving effect
\n\t  to the  allotment of\tthe 16,000 rights shares and
\n\t  from making  any  payment  of\t dividend  on  those
\n\t  shares;\n<\/p><\/blockquote>\n
     (g)  That the Articles of Association of the Company be
\n\t  amended so as to permit the transfer of the shares
\n\t  to persons  other than the existing members of the
\n\t  Company in  order to enable the Holding Company to
\n\t  comply  with\tthe  requirement  of  disinvestments
\n\t  without   prejudice\tto   its   interest   as   a
\n\t  shareholder; and\n<\/p><\/blockquote>\n
     (h)  That a special majority for decisions of the Board
\n\t  be prescribed\t in regard  to all important matters
\n\t  and provision\t be  made  for\tthe  appointment  of
\n\t  Directors by proportional representation.<\/p><\/blockquote>\n
     The learned  Acting Chief Justice who tried the Company
\nPetition, found\t several  defects  and\tinfirmities  in\t the
\nBoard’s\t meeting  dated\t May  2,  1977\tand  concluded\tthat
\nappropriate relief  should be granted to the Holding Company
\nunder section  398 of  the Companies  Act. The learned Judge
\nwas of\tthe view that the average market value of the rights
\nshares was  about Rs.  190 per share on the crucial date and
\nthat, since  the rights\t shares\t were  issued  at  par,\t the
\nHolding Company\t was deprived  unjustly\t of  a\tsum  of\t Rs,
\n8,54,550\/- at  the rate\t of Rs.\t 90\/- per share on the 9,495
\nrights shares to which it was
\n731<\/span>
\nentitled. Exercising  the power\t under section 398(2) of the
\nCompanies Act,\tthe learned Judge directed NIIL to make good
\nthat loss  which, according  to him, could have been avoided
\nby it  “by adopting  a fairer process of communication” with
\nthe Holding  Company and  “a  consequential  dialogue”\twith
\nthem, in  the matter  of the  issue of\trights shares  at  a
\npremium. The  learned Judge  directed NIIL  to\tpay  to\t the
\nHolding Company\t the aforesaid\tsum of\tRs. 8,54,550\/-\tas a
\n“solatium” in order to meet the ends of justice.\n<\/p>\n
     Being aggrieved  by the aforesaid judgment, the Holding
\nCompany filed  O.S. Appeal  No. 64  of 1978 while NIIL filed
\ncross objections  to  the  decree.  The\t appeal\t and  cross-
\nobjections were argued before the Division Bench of the High
\nCourt on  the basis  of affidavits,  the correspondence that
\nhad  passed  between  the  parties  and\t certain  additional
\ndocuments which\t were filed  before the\t Appellate Court  by
\nconsent of  parties. Though  the Company  Petition was filed
\nunder section 397 as also under section 398 of the Companies
\nAct and though the trial court had granted partial relief to
\nthe Holding  Company under section 398, it was stated in the
\nAppellate Court on its behalf that its entire case was based
\non section  397 and  that it  did not  want  to\t invoke\t the
\nprovisions of  section 398.  A similar\tstatement  was\tmade
\nbefore us also.\n<\/p>\n
     On a  consideration of  the matters and material before
\nit, the Division Bench formulated its view in the form of 18
\nconclusions on\tvarious aspects\t of the\t case. They  may  be
\nsummed up thus:\n<\/p>\n
     (a)  As soon  as Devagnanam  became involved in the far
\n\t  eastern ventures  of NEWEY, he decided to sell his
\n\t  share- holding  in NIIL  to an  Indian concern  or
\n\t  party from which he expected to receive at least a
\n\t  part of the consideration in a foreign country.\n<\/p><\/blockquote>\n
     (b)  Seeing that  Coats were  opposed to  his receiving
\n\t  any part  of the consideration for the sale of his
\n\t  shares in  a foreign\tcountry, Devagnanam  decided
\n\t  not to  part with  his shares\t but to\t obtain\t the
\n\t  control of the Company.\n<\/p><\/blockquote>\n
     (c)  The directives of the Reserve Bank of India on the
\n\t  question  of\t Indianisation\twere   exploited  by
\n\t  Devagnanam for  compelling the  Holding Company to
\n\t  part with  its shares\t in  favour  of\t the  Indian
\n\t  shareholders.\n<\/p><\/blockquote>\n
732<\/span><\/p>\n
     (d)  Coats were  willing to carry out the directives of
\n\t  the Reserve Bank but they did not want to transfer
\n\t  their shares\tto the\texisting Indian shareholders
\n\t  because thereby,  the latter would have acquired a
\n\t  controlling interest in NIIL which Coats wanted to
\n\t  prevent. Coats  were willing\tto part\t with  their
\n\t  excess shares in favour of other Indian residents.\n<\/p><\/blockquote>\n
     (e)  Though Coats\toriginally contemplated the transfer
\n\t  of 15% of their excess 20% shares to Madura Coats,
\n\t  or the  incorporation of  a company  to take\tover
\n\t  their excess\t20%  shares,  they  were  ultimately
\n\t  agreeable that  the existing\tIndian\tshareholders
\n\t  should get  9% out of that 20% so as to have a 49%
\n\t  holding in  the share capital of NIIL and that 11%
\n\t  should   go\t to   new,    independent,    Indian
\n\t  Institutional shareholders.  The object  of  Coats
\n\t  was that  any one group of shareholders should not
\n\t  have a dominating position in the affairs of NIIL.\n<\/p><\/blockquote>\n
     (f)  At the  Ketti meeting\t held on  October 20 and 21,
\n\t  1976, the issue of rights shares was considered as
\n\t  an alternative  to  disinvestment,  but  that\t was
\n\t  subject to  two conditions: one, that it should be
\n\t  shown that  there was\t a viable  development\tplan
\n\t  which required additional funds which the existing
\n\t  cash flow  of NIIL  could not\t meet, and two, that
\n\t  the value  of the U.K. equity interest required to
\n\t  be transferred  would be  no less  favourable than
\n\t  what would  be achieved  by a\t direct sale of that
\n\t  interest.\n<\/p><\/blockquote>\n
     (g)  Though by  his letters of December 11 and 14, 1976
\n\t  Devagananam had  informed Raeburn  of the decision
\n\t  of the  Indian shareholders  to acquire 60% shares
\n\t  for themselves, he did not ever say one word about
\n\t  the issue  of rights shares in any of the numerous
\n\t  communications  which\t  he  sent  to\tRaeburn.  No
\n\t  reference was\t made to  the issue of rights shares
\n\t  even in  the memorandum  of discussions which took
\n\t  place during\tthe visit of Devagnanam to U.K. from
\n\t  March 29-31,\t1977.  Thus,  the  issue  of  rights
\n\t  shares was  sprung  as  a  surprise  on  the\tU.K.
\n\t  shareholders.\n<\/p><\/blockquote>\n
733<\/span><\/p>\n
     (h)  The notice dated March 13, 1977 for the meeting of
\n\t  the Board  of Directors  held\t on  April  6,\t1977
\n\t  referred  to\tthe  main  item\t on  the  agenda  in
\n\t  ambiguous terms as: “Policy-Indianisation”. In the
\n\t  context of  the discussions  which had taken place
\n\t  until then  between the  parties, N.T. Sanders who
\n\t  represented the  Holding Company  on the Board had
\n\t  no  means  or\t opportunity  of  knowing  that\t the
\n\t  particular  item   on\t the   agenda  involved\t the
\n\t  question of the issue of rights shares.\n<\/p><\/blockquote>\n
     (i)  Since every  major decision was taken by the Board
\n\t  of Directors\tin  consultation  with\tthe  Holding
\n\t  Company and  since there  was no  agenda  for\t the
\n\t  appointment  of   an\tadditional   Director  under
\n\t  article 97 of Articles of Association of NIIL, the
\n\t  decision taken  by the  Board in  its\t meeting  of
\n\t  April 6  on the  issue of  rights shares  and\t the
\n\t  appointment  of   Silverston\tas   an\t  Additional
\n\t  Director constituted\ta departure from established
\n\t  practice and showed want of good faith and lack of
\n\t  fair play on the part of the Board of Directors of
\n\t  NIIL.\n<\/p><\/blockquote>\n
     (j)  The letter  dated April  12, the  letter of  offer
\n\t  dated April  14 and  the notice for meeting of the
\n\t  Board of  Directors to  be held on May 2, were all
\n\t  got posted  by Devagnanam  as late as on April 27,
\n\t  1977\tat  Madras,  so\t as  to\t ensure\t that  these
\n\t  important documents  should not  reach the Holding
\n\t  Company in time to enable it to participate in the
\n\t  all  important  meeting  of  the  2nd.  Davagnanam
\n\t  wanted to  present a\tfait accompli to the Holding
\n\t  Company so  as  to  prevent  it  from\t taking\t any
\n\t  preemptive action.\n<\/p><\/blockquote>\n
     (k)  Whenever NIIL\t wrote to  the Reserve Bank alleging
\n\t  that the  Holding Company was not willing to carry
\n\t  out the  directives of  the Bank or to comply with
\n\t  the  provisions   of\tFERA,\tits  object  was  to
\n\t  prejudice the\t Bank against the Holding Company by
\n\t  drawing a red-herring across the track.\n<\/p><\/blockquote>\n
     (l)  The directives  of the  Reserve Bank\tof India had
\n\t  the provisions of FERA were not concerned with who
\n\t  should be  the Indian\t shareholders of  NIIL.\t All
\n\t  that they  were concerned with was that 60% of the
\n\t  share-\n<\/p><\/blockquote>\n
734<\/span><\/p>\n
\t  holding must be with the Indian residents. For the
\n\t  purpose of  achieving that  result, three  courses
\n\t  were\tavailable  to  NIIL:  (1)  Disinvestment  by
\n\t  foreign   shareholders   in\tfavour\t of   Indian
\n\t  shareholders; (2)  Issue of rights shares pursuant
\n\t  to section 81 of the Companies Act, and (3) Action
\n\t  under section\t 81 (1-A)  of the  Companies Act for
\n\t  issuing  additional  shares  to  Indian  residents
\n\t  other than  the existing  Indian  shareholders  by
\n\t  passing an  appropriate special  resolution, or if
\n\t  no special  resolution  was  passed,\tthen,  by  a
\n\t  majority of  the  shareholders  approving  such  a
\n\t  course with the consent of the Central Government.
\n\t  The first  course was\t ruled out  since Coats\t had
\n\t  taken a  definite stand  that they  will not allow
\n\t  the existing\tIndian shareholders  to\t obtain\t the
\n\t  excess shares.  As far  as the  second alternative
\n\t  was concerned,  the Holding  Company had the right
\n\t  to renounce  shares offered to it in favour of any
\n\t  other person\tunder section  81  (1)\t(c)  of\t the
\n\t  Companies  Act,  which  right\t was  denied  to  it
\n\t  because, the\tletter of  offer dated\tApril 14 did
\n\t  not contain  a statement regarding renunciation of
\n\t  the right  to take  shares and  also because\tthat
\n\t  letter was  not posted  in time.  As\tregards\t the
\n\t  third course,\t if the\t Holding Company  were given
\n\t  adequate notice  of the  proposal to\tissue rights
\n\t  shares, it  might have  taken\t appropriate  action
\n\t  under section 81 (1-A) of the Companies Act.\n<\/p><\/blockquote>\n
     (m)  The object  of the  Directors of  NIIL in deciding
\n\t  upon the  issue of  rights shares, and that too in
\n\t  the manner  in which\tthey did  so, was clearly to
\n\t  obtain control  of the  Company and  to eschew and
\n\t  eliminate the\t controlling power which the Holding
\n\t  Company had  over  NIIL.  The\t conversion  of\t the
\n\t  existing minority  of Indian\tshareholders into  a
\n\t  majority, far\t from being  a matter  of  statutory
\n\t  compulsion, was  an act  of self-aggrandizement on
\n\t  the part of the existing Indian shareholders.\n<\/p><\/blockquote>\n
     (n)  The action  taken by\tthe Indian  shareholders was
\n\t  against the interest of the Company itself because
\n\t  the rights shares were issued at par which was far
\n\t  below their market price.\n<\/p><\/blockquote>\n
     (o)  The true  motivation of the various steps taken by
\n\t  the\tDevagnanam-NEWEY    Combination\t  was\t the
\n\t  furtherance
\n735<\/span>
\n\t  of   the    interest\t of    NEWEY’s\t Far-Eastern
\n\t  enterprises, coupled with the personal interest of
\n\t  Devagnanam himself.  Devagnanam was  receiving Rs.
\n\t  96,000\/- per\tannum  in  addition  to\t substantial
\n\t  fringe benefits  as the Managing Director of NIIL.
\n\t  He was  also getting\ta large\t salary\t from  NEWEY
\n\t  which was  $10,000 in\t 1075 $11,000  in  1976\t and
\n\t  $12,000 for the Year ending July 31, 1977.\n<\/p><\/blockquote>\n
     (p)  The fact that NIIL informed the Holding Company on
\n\t  May 21,  1977 which was after the Company Petition
\n\t  was filed,  that the\tHolding\t Company  could\t not
\n\t  exercise and\twill not  be allowed to exercise any
\n\t  rights in  respect of\t the whole  of 18,990 shares
\n\t  held by  it since its application under section 29
\n\t  (4) of  FERA was  not granted\t by the Reserve Bank
\n\t  shows that the object of the Board of Directors in
\n\t  taking the  impugned decision\t was to\t exclude the
\n\t  Holding Company  from all  control over NIIL. That
\n\t  is why  NIIL advised\tthe Reserve Bank of India by
\n\t  its letter  dated May 24, 1977 that no application
\n\t  for holding any shares by a non-resident should be
\n\t  allowed by  the Bank\twithout\t the  knowledge\t and
\n\t  consent of  NIIL. That also is the reason why NIIL
\n\t  conveyed to  the Reserve  Bank by  its  letter  of
\n\t  September 20,\t 1977 that  until such\ttime as\t the
\n\t  Company  Petition  was  finally  disposed  of,  no
\n\t  licence   should   be\t  issued   to\tnon-resident
\n\t  shareholders and  no remittance of dividend out of
\n\t  India\t should\t be  permitted\twith  out  the\tnon-
\n\t  resident share-holders  reducing their  holding in
\n\t  NIIL to less than 40%.<\/p><\/blockquote>\n
     The two  other conclusions\t are comprehended within the
\n16 set out above.\n<\/p>\n
     On\t the   basis  of  the  aforesaid  formulations,\t the
\nDivision Bench concluded that the affairs of NIIL were being
\nconducted  in\ta  manner   oppressive,\t that\tis  to\tsay,
\nburdensome, harsh and wrongful to the Holding Company. After
\nreferring to  certain passages from Palmer’s Company Law and
\nGore-Browne on\tCompanies, and the decisions of the House of
\nLords, this  Privy Council, and our own Courts including the
\nSupreme Court, the Division Bench held that since the action
\nof the Board of Directors of NIIL was not in the interest of
\nthe Company but was taken merely for the purpose of
\n736<\/span>
\nwelding the Company into NEWEY’s Far Eastern complex, it was
\njust and equitable to wind up the Company.\n<\/p>\n
     NIIL had  filed  cross-objections\tin  the\t High  Court
\nappeal contending  that, in  any event,\t the learned  Acting
\nChief Justice was in error in directing it to pay the sum of
\nRs. 8,\t54,550\/- to  the Holding Company. While dealing with
\nthe cross-objections,  the  Division  Bench  held  that\t the
\ninjury suffered\t by the\t Holding Company  on account  of the
\noppression practised by the Board of Directors of NIIL could
\nnot be remedied by the award of compensation and, therefore,
\nthe action  of the  Board of Directors in issuing the rights
\nshares had  to be  quashed. Having  found that\tthe  Holding
\nCompany was  entitled to  relief under\tsection 397  of\t the
\nCompanies Act  and the\taward of  solatium made by the trial
\nCourt was  not the appropriate relief to grant, the Division
\nBench allowed  the appeal  filed  by  the  Holding  Company,
\ndismissed the  cross-objections in  substance and  adjourned
\nthe appeal  for a fortnight for hearing further arguments on
\nthe nature of the relief to be granted in the case.\n<\/p>\n
     Eventually, by  its order\tdated October  26, 1978\t the
\nDivision Bench granted the following reliefs:\n<\/p>\n
     (a)  Devagnanam  was  removed  forthwith  both  as\t the
\n\t  Managing Director  and Director  of NIIL  and\t was
\n\t  asked to  vacate the\tbungalow occupied by him, by
\n\t  November  1,\t 1978.\tHe   was  paid\t one  Year’s
\n\t  remuneration as  compensation for  the termination
\n\t  of his appointment as the Managing Director.\n<\/p><\/blockquote>\n
     (b)  The Board  of\t Directors  was\t superseded  and  an
\n\t  interim  Board   consisting  of   nine   directors
\n\t  proposed by  the Holding  Company was constituted,
\n\t  with\tShri   M.M.  Sabharwal\t as  an\t independent
\n\t  Chairman.\n<\/p><\/blockquote>\n
     (c)  Harry\t Bridges,   an\texecutive   of\tCOATS,\t was
\n\t  appointed as the Managing Director for a period of
\n\t  four months.\n<\/p><\/blockquote>\n
     (d)  The rights  issue made  on 6th April, 1977 and the
\n\t  allotment of\tshares made  on 2nd May, 1977 at the
\n\t  Board meetings  were set  aside  and\tthe  Interim
\n\t  Board was directed to make a fresh issue of shares
\n\t  at  a\t  premium  to\tthe  existing  shareholders,
\n\t  including the\t Holding Company which was to have a
\n\t  right of  renunciation. The new Board was directed
\n\t  to apply to the Controller
\n737<\/span>
\n\t  of Capital  Issues for  determining the  amount of
\n\t  premium.\n<\/p><\/blockquote>\n
     (e)  The Articles\tof Association were to be altered by
\n\t  appropriate additions\t and deletions\tin order  to
\n\t  provide for  election of Directors by proportional
\n\t  representation; and\n<\/p><\/blockquote>\n
     (f)  Devagnanam was asked to pay to the Holding Company
\n\t  the\tcosts\tof   appeal   and   cross-objections
\n\t  quantified at\t Rs. 25,000\/-.\tHe  was\t also  asked
\n\t  personally to\t reimburse the\texpenses incurred by
\n\t  NIIL in the appeal and cross-objections.<\/p><\/blockquote>\n
     These appeals  were heard\tin  the\t first\tinstance  by
\nJustice\t Untwalia   and\t Justice  Pathak.  In  view  of\t the
\nimportance of  the questions  arising therein,\ton  some  of
\nwhich our  learned Brothers, it seems, were unable to agree,
\nthey desired  that the\tappeals be  heard by a larger Bench.
\nThat is how the appeals are now before us.\n<\/p>\n
     The petition  of the Holding Company out of which these
\nappeals arise  sought relief  under sections  397 and 398 of
\nthe Companies  Act, 1956.  The case  under section  398\t not
\nhaving been  pressed except  before the learned trial Judge,
\nwe are\tonly concerned with the question whether the Holding
\nCompany is  entitled to relief under section 397 which reads
\nthus:\n<\/p>\n
\t  “397(1)-Any members of a company who complain that
\n     the affairs  of the  company are  being conducted\tin a
\n     manner prejudicial\t to public  interest or\t in a manner
\n     oppressive to  any member or members (including any one
\n     or more  of themselves)  may apply\t to the Court for an
\n     order under  this section: provided such members have a
\n     right so to apply in virtue of section 399.
\n\t  (2) If,  on any  application under sub-section (1)
\n     the Court is of the opinion:\n<\/p><\/blockquote>\n
\t  (a)\t  that\tthe   company’s\t affairs  are  being
\n\t       conducted in  a manner  prejudicial to public
\n\t       interest or  in a  manner oppressive  to\t any
\n\t       member or members; and\n<\/p><\/blockquote>\n
\t  (b)\tthat to\t wind up  the company would unfairly
\n\t       prejudice such  member or  members, but\tthat
\n\t       other-\n<\/p><\/blockquote>\n
738<\/span><\/p>\n
\t       wise the\t facts would justify the making of a
\n\t       winding up  order on  the ground\t that it was
\n\t       just and equitable that the company should be
\n\t       wound up;  the Court  may,  with\t a  view  to
\n\t       bringing to an end the matters complained of,
\n\t       make such order as it thinks fit.”\n<\/p><\/blockquote>\n
Section 398  provides for  relief in cases of mismanagement.
\nSection 399(1)\trestricts the  right to apply under sections
\n397 and\t 398 to\t persons mentioned in clauses (a) and (b) of
\nsub-section (1)
\n     It is  necessary to  refer briefly to the relevant part
\nof the\tpleadings before  examining the charge of oppression
\nmade by\t the Holding Company against a group of the minority
\nshareholders of\t NIIL After tracing the history of formation
\nand composition\t of NIIL,  the company\tpetition states that
\nthe management\tof NIIL\t was in\t the hands  of the  Board of
\nDirectors in  which the\t Indian group  had a large majority.
\nThe Holding  Company had  implicit trust  in  them  and\t was
\ncontent to  leave  the\tmanagement  in\ttheir  hands.  After
\nreferring to the impact of section 43A of the Companies Act,
\nthe  company  petition\tsays  that  in\tthe  wake  of  FERA,
\ndiscussions  and   negotiations\t were\theld   between\t the
\nrepresentatives of the Holding Company and the Management of
\nNIIL amongst  themselves as well as with the Reserve Bank of
\nIndia, in  order to  enable NIIL  to  obtain  the  requisite
\npermission for carrying on its business. Paragraph 13 of the
\ncompany petition  states that  the Reserve  Bank of India by
\nits letter  dated May 11, 1976 granted to NIIL the necessary
\npermission subject  to the  condition, inter  alia, that  it
\nreduced non-resident  shareholding to  40  per\tcent  on  or
\nbefore May  17, 1977.  The case\t of the\t Holding Company  in
\nregard to its own attitude is stated succinctly in paragraph
\n14 of  the company  petition which  may\t with  advantage  be
\nreproduced:\n<\/p>\n
\t  “Discussions were  thereafter held  on a number of
\n     occasions between\tthe petitioner and the management of
\n     the  Company  to  effectuate  the\taforesaid  condition
\n     imposed  by   the\tReserve\t Bank  of  India  which\t the
\n     petitioner was at all times ready and willing to comply
\n     with. The petitioner did not, however, desire to dilute
\n     its holding of shares in the company by a further issue
\n     of\t capital   and\tpreferred  to  effectuate  the\tsaid
\n     intention by disinvesting or selling 20% of its holding
\n     in the company. The Reserve Bank of India was agreeable
\n     to such dilution taking place by the petitioner selling
\n     a part  of its  holding to an Indian resident or Indian
\n     residents. The Reserve Bank had indicated that
\n739<\/span>
\n     they would be willing for such dilution taking place by
\n     a further\tissue of  shares  provided  that  additional
\n     capital was  required for\tpurposes of  expansion.\t The
\n     petitioner was  not willing  to  sell  a  part  of\t its
\n     holding to the Indian group as such a sale would result
\n     in the  Indian group  acquiring  an  absolute  majority
\n     interest.\tFurther\t  more\t under\t the   Articles\t  of
\n     Association of  the Company the consent of the existing
\n     shareholders would be required (apart from the approval
\n     of the  Reserve Bank) before the petitioner sold any of
\n     its shares to an Indian party, other than to a member.”<\/p><\/blockquote>\n
     According to  the Holding\tCompany, the  various  steps
\nwhich culminated  in the  allotment of\trights shares to the
\nexisting Indian\t shareholders were  vitiated by\t mala  fide,
\ntheir dominant\tobject being to convert an existing minority
\ninto a\tmajority. The  decision taken  in the meeting of the
\nBoard on  April 6,  1977 was taken deliberately in haste and
\nhurry in order to pre-empt any action by the Holding Company
\nto restrain  the Board from taking the desired decision. The
\nReserve Bank,  according to  the company petition, would not
\nhave been  so unreasonable  as not  to extend  the time\t for
\ncomplying with\tits directive,\tespecially since the Holding
\nCompany had  agreed in\tprinciple to  dilute its holding and
\nthe only  difference between  the parties was as regards the
\nmethod by  which  such\tdilution  was  to  be  effected.  In
\nParagraph 27  of the  company petition it is stated that the
\nDevagnanam group  decided to  issue the rights shares with a
\nview to securing an illegal and unjust advantage for itself,
\nfor improving  its own\tposition in the Company and in order
\nto deprive  the Holding\t Company of  its  lawful  rights  as
\nmajority shareholders. In this behalf, reliance is placed on
\nthe following facts and circumstances, inter alia:\n<\/p>\n
     (a)  The Holding  Company was  never  informed  of\t any
\n\t  specific proposal to make the rights issue.\n<\/p><\/blockquote>\n
     (b)  The notice  of the  Board meeting of April 6, 1977
\n\t  did not refer to the said proposal.\n<\/p><\/blockquote>\n
     (c)  The notice  offering rights  shares to the Holding
\n\t  Company was not prepared till April 14 and was not
\n\t  posted till April 27, 1977. By the time the notice
\n\t  was received\tby the Holding Company, the Board of
\n\t  NIIL had met to allot the rights shares.\n<\/p><\/blockquote>\n
740<\/span><\/p>\n
     (d)  The time  given in  the notice  was much less than
\n\t  was customary.\n<\/p><\/blockquote>\n
     (e)  The notice did not contain a statement relating to
\n\t  the right  of the  shareholders  to  renounce\t the
\n\t  rights shares.\n<\/p><\/blockquote>\n
     (f)  The notice of the Board meeting of May 2, although
\n\t  dated 19th  April 1977,  was posted  to Sanders on
\n\t  27.4.1977, thereby  ensuring that  it would  reach
\n\t  him only after the date of the meeting.\n<\/p><\/blockquote>\n
     (g)  By issuing  shares at\t par, though their value was
\n\t  much higher  than Rs.\t 100\/- per  share,  existing
\n\t  Indian share\tholders were  enabled to acquire the
\n\t  shares at  a gross  undervalue and the Company was
\n\t  put to a heavy loss.\n<\/p><\/blockquote>\n
     (i)  The Reserve  Bank  of\t India\thad  indicated\tthat
\n\t  dilution of  the foreign holding by a rights issue
\n\t  could\t be   considered  if  the  Company  required
\n\t  further capital  for expansion. At the discussions
\n\t  and negotiations  held between the Holding Company
\n\t  and the Indian group it was inter alia agreed that
\n\t  the rights issue would be made only if there was a
\n\t  viable development  plan requiring  further funds.
\n\t  The rights issue was made even though no such need
\n\t  for  expansion   or  development  existed  or\t was
\n\t  referred to.\n<\/p><\/blockquote>\n
     (j)  Though the  Reserve Bank had inter alia stipulated
\n\t  that the said dilution should be effectuated on or
\n\t  before 17th  May, 1977, the time-schedule is never
\n\t  strictly insisted  upon. There  have been numerous
\n\t  instances  when   the\t Reserve  Bank\thas  granted
\n\t  reasonable extension\tof time\t to comply with such
\n\t  conditions. The  Board of NIIL never requested the
\n\t  Reserve Bank to grant further time. C. Doraiswamy,
\n\t  the 8th  respondent stated  in  his  letter  dated
\n\t  9.5.1977 to  Mackrael, a  Director of\t the Holding
\n\t  Company, that\t it would have been possible for the
\n\t  Company to  get further time from the Reserve Bank
\n\t  of India.\n<\/p><\/blockquote>\n
The Holding  Company contends  further that  M.J. Silverston
\nwas not\t a  disinterested  person,  that  his  vote  on\t the
\nresolution for the
\n741<\/span>
\nissue of  rights shares had therefore to be ignored in which
\ncase there  was no quorum of two disinterested directors and
\nthat his appointment as an Additional Director was not valid
\nsince the  notice for  the meeting of the Board of Directors
\nto be  held on\t6.4.1977 did  not contain  in the agenda any
\nsubject regarding  appointment\tof  an\tadditional  Director
\nunder Article 97 of the Company’s Articles of Association.\n<\/p>\n
     In answer\tto these  contentions, Devagnanam  filed  an
\nelaborate counter-affidavit  on his  behalf as\twell  as  on
\nbehalf of  NIIL. In that counter-affidavit, every one of the
\nmaterial contentions  put forward by the Holding Company has
\nbeen denied or disputed. Devagnanam contends that it was the
\nHolding Company which wanted to retain its control over NIIL
\ncontrary to  the directive of the Reserve Bank of India, the
\nnational policy of the Central Government and the provisions
\nof FERA.  According to Devagnanam, every action taken in the
\nBoard meetings of 6.4.1977 and 2.5.77 was in accordance with
\nlaw, that  Sanders never  used to attend the meetings of the
\nBoard, being  a non-resident  he was  not entitled  to\thave
\nnotice of the Board meetings, that there was no violation of
\nsection 81  of the Companies Act at all, that section 81 (c)
\nof the\tCompanies Act  did not apply to the present case and
\nthat, in  view of  the attitude\t adopted by  Coats, NIIL, in
\norder to comply with the restrictions imposed by the Reserve
\nBank and  to carry  out its  directive, had no option but to
\ndecide upon  the issue\tof rights  shares to bring about the
\nreduction  in\tthe  non-resident  shareholding.  Devagnanam
\nrepudiates emphatically\t the charge  of\t mala  fides  or  of
\nconduct in  breach of  the fiduciary duty of NIIL’s Board of
\nDirectors.\n<\/p>\n
     Having regard to these pleadings, the main question for
\nconsideration is whether the decisions taken in the meetings
\nof the Board of Directors of NIIL on April 6 and May 2, 1977
\nconstitute acts\t of oppression within the meaning of section
\n397 of Companies Act, 1956. The High Court has answered this
\nquestion in  the affirmative  and has  issued  consequential
\ndirections in  regard to  the management  of NIIL’s affairs.
\nThe findings  recorded by the High Court in appeal have been
\nchallenged before  us with vehemence and ability in an equal
\nmeasure, matched  equally in  both respects  on either side.
\nLearned counsel\t who led  the arguments\t on the rival sides,
\nShri F.S.  Nariman for\tthe appellants and Shri H.M. Seervai
\nfor the\t respondents, have  drawn our  attention in  copious
\ndetails to
\n742<\/span>
\nthe correspondence  that transpired between the parties, the
\ncorrespondence\twith   the  Reserve   Bank  of\t India,\t the
\ndiscussions at\tKetty  and  Birmingham\twhich  preceded\t the
\nimpugned decisions, the conduct of Devagnanam as a man and a
\nManaging Director, the attitude of Coats stated to arise out
\nof their  world-wide business  interests and the predicament
\nof NEWEY which was willing to strike but was afraid to wound
\nits partner  Coats. We\thave also been taken through several
\ndecisions and texts bearing particularly on:\n<\/p>\n
     (a)   The meaning\tof ‘oppression’\t of the members of a
\n\t  Company within  the terms  of section\t 397 and the
\n\t  circumstances in  which a  Company can be wound up
\n\t  under the  just and equitable clause under section
\n\t  433 (f) of the Companies Act, 1956;\n<\/p><\/blockquote>\n
     (b)  The approach which the court should adopt in cases
\n\t  wherein mala\tfides and abuse of power on the part
\n\t  of Directors\tare alleged  but no oral evidence is
\n\t  led;\n<\/p><\/blockquote>\n
     (c)   The fiduciary  powers  of  Directors\t in  issuing
\n\t  shares;\n<\/p><\/blockquote>\n
     (d)   The impact  of  the\tprovisions  of\tthe  Foreign
\n\t  Exchange  Regulation\tAct,  1973  with  particular
\n\t  reference to\tsection\t 2  (p),  (q)  and  (u)\t and
\n\t  section 29;\n<\/p><\/blockquote>\n
     (e)   The question\t as to\twhether it  is necessary  to
\n\t  issue a prospectus under section 81 (1) (c) of the
\n\t  Companies Act;\n<\/p><\/blockquote>\n
     (f)   The constraints  on public  and private companies
\n\t  under the  Companies Act,  and  their\t duties\t and
\n\t  obligations, with particular reference to sections
\n\t  2 (35),  2(37), 3  (1) (iii) and (iv) and sections
\n\t  43A and 81 of the Companies Act;\n<\/p><\/blockquote>\n
     (g)  The relationship of partnership between the Indian
\n\t  shareholders,\t  Coats\t   and\t NEWEY\t who   owned
\n\t  respectively 40%, 30%, and 30% of the shareholding
\n\t  in NIIL;\n<\/p><\/blockquote>\n
     (h)     The  question   whether   Silverston   was\t  an
\n\t  ‘interested’\tDirector   within  the\t meaning  of
\n\t  section 300 of the Companies Act; and\n<\/p><\/blockquote>\n
     (i)   Whether Silverston’s appointment as an Additional
\n\t  Director in the meeting of the Board held on April
\n\t  6, 1977 was, in the circumstances, valid.<\/p><\/blockquote>\n
743<\/span><\/p>\n
     Coming to\tthe law\t as to\tthe concept  of ‘oppression’
\nsection\t 397  of  our  Companies  Act  follows\tclosely\t the
\nlanguage of  section 210  of the  English Companies  Act  of
\n1948. Since  the decisions on section 210 have been followed
\nby our Court, the English decisions may be considered first.
\nThe leading  case on  ‘oppression’ under  section 210 is the
\ndecision of  the House of Lords in Scottish Co-op. Wholesale
\nSociety Ltd.  v. Meyer. (1) Taking the dictionary meaning of
\nthe word  ‘oppression’, Viscount  Simonds said\tat page\t 342
\nthat the  appellant society  could justly  be  described  as
\nhaving behaved\ttowards\t the  minority\tshareholders  in  an
\n‘oppressive’  manner,\tthat  is   to  say,   in  a   manner
\n“burdensome, harsh  and\t wrongful”.  The  learned  Law\tLord
\nadopted, as  difficult of  being bettered, the words of Lord
\nPresident Cooper  at the  first hearing\t of the\t case to the
\neffect that  section 210  “warrants the\t court in looking at
\nthe business realities of the situation and does not confine
\nthem to\t a narrow  legalistic view”.  Dealing with  the true
\ncharacter of  the company,  Lord Keith said at page 361 that
\nthe  company   was  in\tsubstance,  though  not\t in  law,  a
\npartnership, consisting\t of the\t society, Dr.  Meyer and Mr.
\nLucas  and   whatever  may  be\tthe  other  different  legal
\nconsequences following\ton one\tor other  of these  forms of
\ncombination, one  result followed  from the  method adopted,
\n“which is  common to  partnership, that\t there should be the
\nutmost good faith between the constituent members”. Finally,
\nit was\theld that  the court  ought not\t to allow  technical
\npleas to  defeat the  beneficent provisions  of section\t 210
\n(page 344 per Lord Keith; pages 368-369 per Lord Denning).\n<\/p>\n
     In Meyer  (supra) above referred to, the House of Lords
\nwas dealing  with a  case in which the appellant company was
\naccused of  having committed  acts of oppression against its
\nsubsidiary. In\tthat context  it was  held that\t the  parent
\ncompany must,  if  it  is  engaged  in\tthe  same  class  of
\nbusiness, accept  as  a\t result\t of  having  formed  such  a
\nsubsidiary an  obligation so to conduct, what are in a sense
\nits own\t affairs, as  to deal fairly with its subsidiary. In
\nRe Associated  Tool Industries\tLtd. (2) of which judgment a
\nphotographic copy was supplied to us, Joske J. held that the
\nrule in\t Meyer (supra)\tinvolved the  consequence  that\t the
\nsubsidiary companies  must also\t exercise good\tfaith to the
\nholding company and not merely that the latter should so act
\nto the former.\n<\/p>\n
744<\/span><\/p>\n
     In an  application under  section 210  of\tthe  English
\nCompanies Act,\tas under  section 397  of our Companies Act,
\nbefore granting relief the court has to satisfy that to wind
\nup  the\t  company  will\t  unfairly  prejudice\tthe  members
\ncomplaining of oppression, but that otherwise the facts will
\njustify the  making of a winding up order on the ground that
\nit is  just and\t equitable that\t the company should be wound
\nup. The\t rule as  regards the  duty of utmost good faith, on
\nwhich stress  was laid\tby  Lord  Keith\t in  Meyer,  (supra)
\nreceived further  and closer  consideration  in\t Ebrahim  v.
\nWestbourne  Galleries\tLtd.,(1)  wherein  Lord\t Wilberforce
\nconsidered the\tscope, nature  and extent  of the  ‘just and
\nequitable’ principle  as a  ground for winding up a company.
\nThe business of the respondent company was a very profitable
\none and\t profits used  to be distributed among the directors
\nin the\tshape of fees, no dividends being declared. On being
\nremoved as  a director\tby the votes of two other directors,
\nthe appellant  petitioned for  an order\t under section\t210.
\nAllowing an appeal from the judgment of the Court of Appeal,
\nit was\theld by\t the House of Lords that the words ‘just and
\nequitable’ which  occur in  section 222\t (f) of\t the English
\nAct, corresponding  to our  section 433\t (f), were not to be
\nconstrued ejusdem generis with clauses (a) to (e) of section
\n222 corresponding  to our clauses (a) to (e) of section 433.
\nLord  Wilberforce   observed  that   the  ‘words’  just\t and
\nequitable’ are\ta recognition  of the  fact that  a  limited
\ncompany is more than a mere legal entity, with a personality
\nin law of its own; and that there is room in company law for
\nrecognition of the fact that behind it, or amongst it, there
\nare individuals,  with rights,\texpectations and obligations
\ninter se  which are not necessarily submerged in the company
\nstructure:\n<\/p>\n
\t  “The ‘just  and equitable’  provision does not, as
\n     the respondents suggest, entitle one party to disregard
\n     the obligation  he assumes\t by entering  a company, nor
\n     the court\tto dispense  him from it. It does, as equity
\n     always does,  enable the  court to subject the exercise
\n     of\t  legal\t   rights   to\t equitable   considerations;<\/p><\/blockquote>\n
     considerations,  that   is,  of  a\t personal  character
\n     arising between  one individual  and another, which may
\n     make it  unjust or\t inequitable,  to  insist  on  legal
\n     rights, or\t to exercise  them in  a particular way”. (p\n<\/p>\n
     379)
\n745<\/span>
\nObserving that\tthe  description  of  companies\t as  “quasi-
\npartnerships” or  “in substance\t partnerships” is confusing,
\nthough convenient, Lord Wilberforce said:\n<\/p>\n
\t  “company, however  small, however  domestic, is  a
\n     company not  a partnership\t or even a quasi-partnership
\n     and it  is through\t the just  and equitable clause that
\n     obligations, common  to partnership relations, may come
\n     in”. (p 380)
\nFinally, it  was held  that it\twas  wrong  to\tconfine\t the
\napplication of the just and equitable clause to proved cases
\nof mala\t fides, because\t to do\tso would  be to negative the
\ngenerality of the words. As observed by the learned Law Lord
\nin the same judgment, though in another context:\n<\/p><\/blockquote>\n
\t  “Illustrations may  be  used,\t but  general  words
\n     should remain  general and not be reduced to the sum of
\n     particular instances.” (pp 374-375)
\n     In his judgment in Re Westbourne Galleries (supra) Lord
\nWilberforce has\t referred at  two places  to the decision in
\nBlissett v.  Daniel, (1)  which is recognised as the leading
\nauthority in  the Law  of Partnership  on the duty of utmost
\ngood faith  which partners  owe to  one another.  Lindley on
\nPartnership (14th  Edition, pages  194-95) cites Blissett v.\n<\/p><\/blockquote>\n
Daniel (1) as an authority for the proposition that:\n<\/p><\/blockquote>\n
\t  “The utmost good faith is due from every member of
\n     a partnership  towards every  other member;  and if any
\n     dispute arise between partners touching any transaction
\n     by which one seeks to benefit himself at the expense of
\n     the firm, he will be required to show, not only that he
\n     has the law on his side, but that his conduct will bear
\n     to be tried by the highest standard of honour”.<\/p><\/blockquote>\n
     The fact  that the\t company  is  prosperous  and  makes
\nsubstantial profits  is no obstacle to its being wound up if
\nit is  just and\t equitable  to\tdo  so.\t This  position\t was
\naccepted in  the decision  of the  Court  of  Appeal  in  Re
\nYenidge Tobacco\t Co. (2) and of the Privy Council in Loch v.\n<\/p><\/blockquote>\n
John Blackwood (3).\n<\/p>\n
746<\/span><\/p>\n
     The question  sometimes arises  as to whether an action
\nin contravention of law is per se oppressive. It is said, as
\nwas done by one of us, N.H. Bhagwati J. in a decision of the
\nGujarat High  Court in\tS.M.  Ganpatram\t v.  Sayaji  Jubilee
\nCotton &  Jute Mills  Co., (1)\tthat “a resolution passed by
\nthe directors may be perfectly legal and yet oppressive, and
\nconversely a resolution which is in contravention of the law
\nmay  be\t in  the  interests  of\t the  shareholders  and\t the
\ncompany”. On  this question,  Lord President Cooper observed
\nin Elder v. Elder (2):\n<\/p>\n
\t  “The decisions  indicate  that  conduct  which  is
\n     technically legal\tand correct may nevertheless be such
\n     as\t to   justify  the  application\t of  the  ‘just\t and
\n     equitable’ jurisdiction,  and, conversely, that conduct
\n     involving illegality  and contravention  of the Act may
\n     not suffice  to  warrant  the  remedy  of\twinding\t up,
\n     especially where  alternative remedies  are  available.
\n     Where the\t‘just and  equitable’ jurisdiction  has been
\n     applied in\t cases of  this type, the circumstances have
\n     always, I\tthink, been such as to warrant the inference
\n     that there\t has been,  at least,  an  unfair  abuse  of
\n     powers and\t an impairment\tof confidence in the probity
\n     with which\t the company’s\taffairs are being conducted,
\n     as distinguished  from mere resentment on the part of a
\n     minority at  being outvoted  on some  issue of domestic
\n     policy”.\n<\/p><\/blockquote>\n
Neither the  judgment of Bhagwati J. nor the observations in
\nElder are  capable of the construction that every illegality
\nis per\tse oppressive  or that\tthe illegality\tof an action
\ndoes not  bear upon its oppressiveness. In Elder a complaint
\nwas made that Elder had not received the notice of the Board
\nmeeting. It  was held  that since  it was not shown that any
\nprejudice was  occasioned thereby  or that  Elder could have
\nbought the  shares had\the been\t present,  no  complaint  of
\noppression could  be entertained  merely on  the ground that
\nthe failure  to give  notice of the Board meeting was an act
\nof illegality.\tThe true  position is  that an isolated act,
\nwhich is  contrary to law, may not necessarily and by itself
\nsupport the  inference that the law was violated with a mala
\nfide intention\tor that such violation was burdensome, harsh
\nand wrongful.  But a  series of\t illegal acts following upon
\none another  can, in  the context,  lead justifiably  to the
\nconclusion that\t they are a part of the same transaction, of
\nwhich
\n747<\/span>
\nthe object  is to  cause or commit the oppression of persons
\nagainst whom  those acts  are directed. This may usefully be
\nillustrated by reference to a familiar jurisdiction in which
\na litigant  asks for the transfer of his case from one Judge
\nto another.  An isolated  order passed\tby a  Judge which is
\ncontrary to law will not normally support the inference that
\nhe is  biassed; but  a series  of wrong or illegal orders to
\nthe  prejudice\t of  a\t party\tare  generally\taccepted  as
\nsupporting the\tinference of  a reasonable apprehension that
\nthe Judge  is biassed  and that the party complaining of the
\norders will not get justice at his hands.\n<\/p>\n
     In England, after the decision of the House of Lords in
\nMeyer, (supra) a restricted interpretation has been given to
\nsection 210  by the Court of Appeal in re Jermyn St. Turkish
\nBaths,(1) which\t has  adversely\t criticised  by\t writers  on
\nCompany Law  (see Palmer’s  Company Law, 22nd ed., page 613,
\nparas 57-06,  57-07; Gore Brown on Companies, 43rd ed., para
\n28-12). In India, this restrictive development has no place,
\nfor, in\t S.P. Jain v. Kalinga Tubes,<\/a> (2) Wanchoo J. accepted
\nthe broad  and liberal\tinterpretation given  to the Court’s
\npowers in Meyer.\n<\/p>\n
     In\t Kalinga  Tubes,  Wanchoo  J.  referred\t to  certain
\ndecisions under\t section 210  of the  English Companies\t Act
\nincluding Meyer (supra) and observed:\n<\/p>\n
\t  “These observations  from the\t four cases referred
\n     to above  apply to\t section 397 also which is almost in
\n     the same  words as\t section 210 of the English Act, and
\n     the question  in each  is whether\tthe conduct  of\t the
\n     affairs of\t the company,  by the  majority shareholders
\n     was oppressive  to the  minority shareholders  and that
\n     depends upon  the facts proved in a particular case. As
\n     has already  been indicated,  it is  not enough to show
\n     that there\t is just  and equitable cause for winding up
\n     the company,  though that\tmust be shown as preliminary
\n     to the  application of  section 397. It must further be
\n     shown that the conduct of the majority shareholders was
\n     oppressive to the minority as members and this requires
\n     that events  have to be considered not in isolation but
\n     as a  part\t of  a\tconsecutive  story.  There  must  be
\n     continuous\t acts\ton  the\t  part\t of   the   majority
\n     shareholders,
\n748<\/span>
\n     continuing upto  the date of petition, showing that the
\n     affairs of the company were being conducted in a manner
\n     oppressive to  some part  of the  members. The  conduct
\n     must be burdensome, harsh and wrongful and mere lack of
\n     confidence between\t the majority  shareholders and\t the
\n     minority shareholders  would not  be enough  unless the
\n     lack  of\tconfidence  springs  from  oppression  of  a
\n     minority  by  a  majority\tin  the\t management  of\t the
\n     company’s affairs,\t and such oppression must involve at
\n     least an  element of lack of probity of fair dealing to
\n     a member  in the  matter of his proprietary rights as a
\n     shareholder. It  is in  the light\tof these  principles
\n     that we  have to  consider the facts…..with reference
\n     to section 397″.<\/p><\/blockquote>\n
\t\t\t\t\t\t  (page 737)
\nAt pages  734-735 of  the judgment in Kalinga Tubes, Wanchoo
\nJ. has\treproduced from\t the judgment  in  Meyer,  the\tfive
\npoints which  were stressed  in Elder. The fifth point reads
\nthus:\n<\/p>\n
\t  “The power  conferred on  the\t Court\tto  grant  a
\n     remedy in\tan appropriate\tcase appears  to envisage  a
\n     reasonably wide  discretion  vested  in  the  Court  in
\n     relation to  the order  sought by\ta complainer  as the
\n     appropriate  equitable   alternative  to  a  winding-up
\n     order”.<\/p><\/blockquote>\n
     It is clear from these various decisions that on a true
\nconstruction of\t section  397,\tan  unwise,  inefficient  or
\ncareless conduct  of a\tDirector in  the performance  of his
\nduties cannot  give rise  to a\tclaim for  relief under that
\nsection. The person complaining of oppression must show that
\nhe has\tbeen constrained  to submit to a conduct which lacks
\nin probity,  conduct which is unfair to him and which causes
\nprejudice  to\thim  in\t  the  exercise\t of  his  legal\t and
\nproprietary rights  as shareholder. It may be mentioned that
\nthe Jenkins  Committee on  Company Law\tReform had suggested
\nthe substitution  of the word ‘Oppression’ in section 210 of
\nthe English Act by the words ‘unfairly prejudicial’ in order
\nto make\t it clear  that it is not necessary to show that the
\nact complained\tof is  illegal or  that\t it  constitutes  an
\ninvasion of legal rights (see Gower’s Company Law, 4th edn.,
\npage 668).  But that recommendation was not accepted and the
\nEnglish Law remains the same as in Meyer and in Re H.R.\n<\/p>\n
749<\/span><\/p>\n
Harmer Ltd., (1) as modified in Re Jermyn St. Turkish Baths.
\n(supra) We have not adopted that modification in India.\n<\/p>\n
     Having seen  the legal  position which obtains in cases
\nwhere a\t member or  members  of\t a  company  complain  under
\nsection 397  of the  Companies Act  that the  affairs of the
\ncompany are being conducted in a manner oppressive to him or
\nthem, we  can proceed  to consider  the catena\tof facts and
\ncircumstances on  which reliance  is placed  by the  Holding
\nCompany in support of its case that the conduct of the Board
\nof Directors  of  NIIL\tconstitutes  an\t act  of  oppression
\nagainst it.  There is,\thowever, one  matter which has to be
\ndealt with before adverting to facts, namely, the provisions
\nof FERA their impact on the working of NIIL and on the right
\nof the\tHolding Company\t to continue  to hold  its shares in
\nNIIL. This  we\tconsider  necessary  to\t discuss  before  an
\nappraisal of  the factual  situation since, without a proper
\nunderstanding of the working of FERA, it would be impossible
\nto appreciate  the turn\t of intertwined events. It is in the
\nsetting\t of  FERA  that\t the  significance  of\tthe  various
\nhappenings can properly be seen.\n<\/p>\n
     The Foreign Exchange Regulation Act, 46 of 1973, is “An
\nAct to\tconsolidate and\t amend the  law\t regulating  certain
\npayments,  dealings  in\t foreign  exchange  and\t securities,
\ntransactions indirectly\t affecting foreign  exchange and the
\nimport\tand   export  of   currency  and  bullion,  for\t the
\nconservation  of  the  foreign\texchange  resources  of\t the
\ncountry and  the proper utilisation thereof in the interests
\nof the economic development of the country”. It repealed the
\nearlier Act,  namely, The  Foreign Exchange  Regulation Act,
\n1947, and came into force on January 1, 1974.\n<\/p>\n
     “Person resident  in India” is defined in clause (p) of
\nsection 2 to mean:\n<\/p>\n
     (i)  a citizen of India, who has, at any time after the
\n\t  25th day of March 1947, been staying in India, but
\n\t  does not  include a  citizen of India who has gone
\n\t  out of, or stays outside, India, in either case-\n<\/p><\/blockquote>\n
\t  (a)  for or on taking up employment outside India,
\n\t       or\n<\/p><\/blockquote>\n
\t  (b)\tfor carrying  on outside India a business or
\n\t       vocation outside India, or
\n750<\/span>\n<\/p><\/blockquote>\n
\t  (c)\tfor any other purpose, in such circumstances
\n\t       as  would  indicate  his\t intention  to\tstay
\n\t       outside India for an uncertain period;\n<\/p><\/blockquote>\n
     (ii) a citizen of India, who having ceased by virtue of
\n\t  paragraph (a) or paragraph (b) or paragraph (c) of
\n\t  sub clause (i) to be resident in India, returns to
\n\t  or stays in India, in either case-\n<\/p><\/blockquote>\n
\t  (a)  for or on taking up employment in India, or\n<\/p><\/blockquote>\n
\t  (b)\tfor carrying  on  in  India  a\tbusiness  or
\n\t       vocation in India, or\n<\/p><\/blockquote>\n
\t  (c)\tfor any other purpose, in such circumstances
\n\t       as would\t indicate his  intention to  stay in
\n\t       India for an uncertain period.\n<\/p><\/blockquote>\n
\t  “Person  resident   outside  India”  according  to
\n     clause (q)\t means “a  person who  is  not\tresident  in
\n     India”. Under  clause  (u)\t “security”  means  “shares,
\n     stocks, bonds,” etc.
\n\t  Section 19 (1) provides:\n<\/p><\/blockquote>\n
\t  “Notwithstanding anything  contained in section 81
\n\t  of the  Companies  Act,  1956,  no  person  shall,
\n\t  except with  the general  or special permission of
\n\t  the Reserve Bank.\n<\/p><\/blockquote>\n
\t       ...\t      ...\t\t  ...\n\t  (a)\ttake or\t send  any  security  to  any  place\n\t       outside India;\n<\/pre>\n
\t  (b)\ttransfer any security, or create or transfer
\n\t       any interest  in a  security, to or in favour
\n\t       of a person resident outside India;\n<\/p><\/blockquote>\n
\t  (d)\tissue, whether\tin India  or elsewhere,\t any
\n\t       security\t which\t is  registered\t  or  to  be
\n\t       registered in  India, to\t a  person  resident
\n\t       outside India;”<\/p><\/blockquote>\n
     Section 29\t which is  directly relevant for our purpose
\nreads thus:\n<\/p>\n
751<\/span><\/p>\n
\t  “29. (1)  Without prejudice  to the  provisions of
\n     section 28\t and section 47 and notwithstanding anything
\n     contained in  any other  provision of  this Act  or the
\n     provisions\t of   the  Companies  Act,  1956,  a  person
\n     resident outside  India (whether  a citizen of India or
\n     not) or  a person\twho is not a citizen of India but is
\n     resident in  India, or  a company (other than a banking
\n     company) which  is not  incorporated under\t any law  in
\n     force in India or in which the non-resident interest is
\n     more than\tforty  per  cent,  or  any  branch  of\tsuch
\n     company, shall  not, except with the general or special
\n     permission of the Reserve Bank,-\n<\/p><\/blockquote>\n
\t  (a)\tcarry on  in India,  or establish in India a
\n\t       branch, office  or other\t or other  place  of
\n\t       business for  carrying on  any activity\tof a
\n\t       trading,\t commercial  or\t industrial  nature,
\n\t       other than an activity for the carrying on of
\n\t       which permission of the Reserve Bank has been
\n\t       obtained under section 28; or
\n\t  (2) (a) where any person or company (including its
\n     branch) referred  to in  sub-section (1) carries on any
\n     activity referred\tto in  clause(a) of that sub-section
\n     at the  commencement of  this Act\tor has established a
\n     branch, office  or other  place  of  business  for\t the
\n     carrying on  of such  activity  at\t such  commencement,
\n     then, such person or company (including its branch) may
\n     make an application to the Reserve Bank within a period
\n     of six  months from  such commencement  or such further
\n     period as the Reserve Bank may allow in this behalf for
\n     permission to  continue to carry on such activity or to
\n     continue the  establishment of  the branch,  office  or
\n     other place  of business  for the\tcarrying on  of such
\n     activity, as the case may be.\n<\/p><\/blockquote>\n
\t  (b)  Every application made under clause (a) shall
\n\t       be in  such form and contain such particulars
\n\t       as may be specified by the Reserve Bank.\n<\/p><\/blockquote>\n
\t  (c)\tWhere any  application has  been made  under
\n\t       clause  (a),  the  Reserve  Bank\t may,  after
\n\t       making such  inquiry  as\t it  may  deem\tfit,
\n\t       either allow  the application subject to such
\n\t       conditions, if any, as
\n752<\/span>
\n\t       the Reserve  Bank may  think fit to impose or
\n\t       reject the application:\n<\/p><\/blockquote>\n
\t       ...\t\t    ...\t\t\t...\n(4)    (a)  Where at the commencement of this Act any person\n<\/pre>\n
\t  or company  (including its  branch) referred to in
\n\t  sub-section (1)  holds any  shares in India of any
\n\t  company referred  to in  clause (b)  of that\tsub-
\n\t  section, then,  such person  or company (including
\n\t  its branch)  shall not  be entitled to continue to
\n\t  hold such  shares unless  before the\texpiry of  a
\n\t  period of  six months\t from such  commencement  or
\n\t  such further\tperiod as the Reserve Bank may allow
\n\t  in this  behalf such\tperson or company (including
\n\t  its branch) has made an application to the Reserve
\n\t  Bank in  such form and containing such particulars
\n\t  as may  be  specified\t by  the  Reserve  Bank\t for
\n\t  permission to continue to hold such shares.\n<\/p><\/blockquote>\n
     (b)   Where an  application has  been made under clause\n<\/p><\/blockquote>\n
\t  (a)  the  Reserve  Bank  may,\t after\tmaking\tsuch
\n\t  inquiry as  it may  deem  fit,  either  allow\t the
\n\t  application subject to such conditions, if any, as
\n\t  the Reserve Bank may think fit to impose or reject
\n\t  the application :”<\/p><\/blockquote>\n
     It is  clear from\tthese provisions  that NIIL, being a
\nCompany in  which the  non-resident interest  of the Holding
\nCompany was  more than\t40%, could not carry on its business
\nin India  except with  the permission  of  Reserve  Bank  of
\nIndia. An application for permission to continue to carry on
\nsuch business  had to be filed within a period of six months
\nfrom the  commencement of  the Act or such further period as
\nthe  Reserve  Bank  may\t allow.\t The  time  for\t filing\t the
\napplication was\t extended in  all cases\t by two\t months and,
\ntherefore, it  could be filed by August 31, 1974, NIIL filed
\nits application\t three days  late on  September 3, 1974, and
\nthe application\t was granted  by the Reserve Bank on certain
\nconditions, by\tits letter  dated May  10, 1976.  Under\t the
\nterms and  conditions imposed  by the Reserve Bank, the non-
\nresident interest  of the  Holding Company,  which  came  to
\nabout 60%,  had to be brought down to 40% within one year of
\nthe receipt of the letter dated May 10, 1976, that is to say
\nbefore May 17, 1977.\n<\/p>\n
753<\/span><\/p>\n
     By reason\tof section  29\t(4)  of\t FERA,\tthe  Holding
\nCompany too  had to  apply for permission to hold its shares
\nin NIIL.  It applied  to the  Reserve  Bank  for  a  Holding
\nlicence on  September 18,  1974. The  application which\t was
\nfiled late by 18 days is still pending with the Reserve Bank
\nand is\tlikely to  be disposed\tof  after  the\tnon-resident
\ninterest of the Holding Company in NIIL is reduced to 40%.\n<\/p>\n
     There is a sharp controversy between the parties on the
\nquestion as to whether May 17, 1977 was a rigid dead-line by
\nwhich the  reduction of\t the non-resident interest had to be
\nachieved or  whether NIIL  could have applied to the Reserve
\nBank before  that date\tfor extension of time to comply with
\nthe Bank’s  directive, in  which case, it is urged, no penal
\nconsequences would  have flown. We will deal later with this
\naspect of  the matter,\tincluding the  question of  business
\nprudence involved  in applying\tto the Reserve Bank for such
\nan extension of time.\n<\/p>\n
     Shri Nariman  raised at  the outset  an objection\tto a
\nfinding of  mala fides or abuse of the fiduciary position of
\nDirectors being\t recorded on  the basis merely of affidavits
\nand  the   correspondence,  against   the  NIIL’S  Board  of
\nDirectors or  against Devagnanam and his group. He contends.
\nUnder  the   Company  Court  Rules  framed  by\tthis  Court,
\npetitions, including  petitions under section 397, are to be
\nheard in  the open court (Rules 11 (12) and Rule 12 (1), and
\nthe practice  and procedure  of the  Court and\tof the Civil
\nProcedure Code\tare applicable\tto such\t petitions (Rule 6).
\nUnder Order XIX Rule 2 of the Code, it is open to a party to
\nrequest the  Court that\t the deponent of an affidavit should
\nbe asked to submit to cross-examination. No such request was
\nmade  in  the  Trial  Court  for  the  cross-examination  of
\nDevagnanam  who,   amongst  all\t  those\t who   filed   their
\naffidavits, was the only person having personal knowledge of
\neverything that\t happened at  every stage. Why he did or did
\nnot do\tcertain things\tand what was his attitude of mind on
\ncrucial\t issues\t ought\tto  have  been\telicited  in  cross-
\nexamination. It\t is not permissible to rely argumentively on
\ninferences  said  to  arise  from  statements  made  in\t the
\ncorrespondence, unless\tsuch inferences\t arise\tirresistibly
\nfrom admitted  or virtually admitted facts. The verification
\nclause of Mackrael’s affidavit shows that he had no personal
\nknowledge on  most of  the  material  points.  Raeburn\twho,
\naccording to Mackrael, was the Chief negotiator on behalf of
\nthe Holding  Company in\t the Birmingham meeting did not file
\nany affidavit at all. Whitehouse, the Secretary
\n754<\/span>
\nof the\tHolding Company\t and N.T.  Sanders who\twas the sole
\nrepresentative of  the Holding\tCompany on  NIIL’s Board  of
\nDirectors, did\tfile affidavits\t but they  are restricted to
\nthe question  of the  late receipt of the letter of offer of
\nshares and  the notice for the Board meeting of May 2, 1977.
\nTheir  affidavits  being  studiously  silent  on  all  other
\nimportant points  and the  affidavit filed  on behalf of the
\nHolding Company\t being utterly\tinadequate  to\tsupport\t the
\ncharge of  mala fides  or abuse\t of the Directors’ fiduciary
\npowers, it  was absolutely essential for the Holding Company
\nto adduce  oral evidence  in support of its case or at least
\nto ask\tthat Devagnanam\t should submit\thimself\t for  cross-
\nexamination.  This,   according\t to   Shri  Nariman,   is  a
\nfundamental infirmity  from which  the case  of the  Holding
\nCompany suffers\t and therefore,\t this  Court  ought  not  to
\nrecord a  finding of  mala fides  or  of  abuse\t of  powers,
\nespecially when\t such findings\tare likely  to involve grave
\nconsequences,  moral   and  material,\tto  Devagnanam\t and
\njeopardise the very functioning of NIIL itself.\n<\/p>\n
     In support\t of his\t submission, Shri Nariman has relied
\nupon many a case to show that issues of mala fides and abuse
\nof fiduciary  powers are  almost always\t decided not  on the
\nbasis of  affidavits but on oral evidence. Some of the cases
\nrelied upon  in this  connection are:  Re. Smith  &  Fawcett
\nLtd.,(1) Nanalal  Zaver v.  Bombay Life Assurance,<\/a>(2) Plexcy
\nv.  Mills,(3)\tHogg  v.  Cramphorn(4)\tMills  v.  Mills,(5)
\nHarlowe’s Nominees(6) and Howard Smith v. Amphol.(7)
\n     We appreciate  that it  is generally  unsatisfactory to
\nrecord a finding involving grave consequences to a person on
\nthe basis  of affidavits  and documents\t without asking that
\nperson to  submit to  cross-examination. It is true that men
\nmay lie\t but documents\twill not  and often, documents speak
\nlouder than words. But a total reliance on the written word,
\nwhen probity  and fairness of conduct are in issue, involves
\nthe risk  that the  person accused  of wrongful\t conduct  is
\ndenied an  opportunity to  controvert the inferences said to
\narise from the documents. But then, Shri Nariman’s objection
\nseems to us a belated attempt to avoid an inquiry into the
\n755<\/span>
\nconduct and  motives of Devagnanam. The Company Petition was
\nargued both in the Trial Court and in the Appellate Court on
\nthe  basis   of\t affidavits   filed  by\t  the  parties,\t the
\ncorrespondence and  the\t documents.  The  learned  Appellate
\nJudges of  the High  Court have\t observed in  their judgment
\nthat it\t was admitted,\tthat before the learned trial Judge,
\nboth sides  had agreed\tto proceed  with the  matter on\t the
\nbasis of  affidavits and  correspondence  only\tand  neither
\nparty asked  for a  trial in  the sense\t of  examination  of
\nwitnesses. In  these circumstances, the High Court was right
\nin holding that, having taken up the particular attitude, it
\nwas not open to Devagnanam and his group to contend that the
\nallegation of mala fides could not be examined, on the basis
\nof affidavits  and the\tcorrespondence only.  There is ample
\nmaterial  on  the  record  of  this  case  in  the  form  of
\naffidavits, correspondence and other documents, on the basis
\nof which  proper and  necessary inferences  can\t safely\t and
\nlegitimately be drawn.\n<\/p>\n
     Besides, the  cases on  which counsel relies do not all
\nsupport\t his   submission  that\t  from\tmere  affidavits  or
\ncorrespondence, mala  fides or\tbreach\tof  fiduciary  power
\nought not  to be  inferred. In\tRe  Smith  &  Fawcett  Ltd.,
\n(supra) Lord Greene, after stating that he strongly disliked
\nbeing  asked   on  affidavit   evidence\t alone\tto  draw  up
\ninferences as to the bona fides or mala fides of the actors,
\nadded that  this did  not mean\tthat it is illegitimate in a
\nproper case  to draw  inferences as  to bona  fides or\tmala
\nfides  in   cases,  where  there  is  on  the  face  of\t the
\naffidavits,  sufficient\t  justification\t for  doing  so.  In
\nNanalal Zaver, (supra) the judgment of Kania C.J. contains a
\nstatement at page 394 that ‘Considerable evidence was led in
\nthe trial Court on the question of hona fides’ but it is not
\nclear what kind of evidence was so led and besides, the fact
\nthat oral  evidence was led in some cases does not mean that
\nit must\t be led\t in all cases or that without it, the matter
\nin issue  cannot be  found upon. We may mention that in Punt
\nv. Symons,(1)  Fraser v.  Whalley(2) and  Hogg v. Cramphorn,
\n(supra) the  breach of\tfiduciary  duty\t was  inferred\tfrom
\naffidavit evidence.\n<\/p>\n
     We\t have  therefore  no  hesitation  in  rejecting\t the
\nsubmission that\t we ought  not to  record a  finding of mala
\nfides or  abuse of  fiduciary power  on\t the  basis  of\t the
\naffidavits, correspondence and the
\n756<\/span>
\nother documents\t which are on the record of the case. May it
\nbe said\t that these are on the record by consent of parties.
\nNot merely  that, but  more documents  were  placed  on\t the
\nrecord, mostly by consent of parties, as the case progressed
\nfrom stage  to stage.  A very  important  document,  namely,
\nDevagnanam’s telex  to Raeburn dated May 25, 1977 was put on
\nthe record  for the  first time before us since Shri Nariman
\nhimself desired it to be produced, waiving the protection of
\nthe caveat  “without prejudice”. That shows that the parties
\nadopted willingly  a mode  of trial  which they\t found to be
\nmost convenient and satisfactory.\n<\/p>\n
     That takes\t us to\tthe question  as to  whether on\t the
\nbasis of the material which is on the record of the case, it
\ncan be\tsaid that  the decision\t taken by  NIIL’s  Board  of
\nDirectors in  their meetings  of April\t6 and  May  2,\t1977
\nconstitute  acts   of  oppression  as  against\tthe  Holding
\nCompany. The  case of  the Holding Company as put forward by
\nShri Seervai is like this:\n<\/p>\n
     (i)   Devagnanam  kept  Raeburn  and  Coats  under\t the
\n\t  impression that  negotiations were  still going on
\n\t  and were  not to be treated as concluded while, in
\n\t  reality, he  had made\t up his\t mind to  treat\t the
\n\t  matter as at an end.\n<\/p><\/blockquote>\n
     (ii) He  kept the Holding Company in total ignorance of
\n\t  the steps  which he  was taking  in behalf  of the
\n\t  issuance and\tallotment of  the rights shares. The
\n\t  copy of the letter of the Reserve Bank dated March
\n\t  30,  1977  which  is\tsaid  to  have\tspurred\t the
\n\t  decision taken  in the meetings of April 6 was not
\n\t  sent to  the Holding Company though Devagnanam had
\n\t  stated in  his letters  dated April  12 to Raeburn
\n\t  that the  said copy  was being enclosed along with
\n\t  that\tletter.\t Deliberately  and  designedly,\t the
\n\t  letter of offer dated April 14, 1977 meant for the
\n\t  Holding Company  in England  was not\tposted until
\n\t  April 27.  Similarly, the notice calling a meeting
\n\t  of the  Board on  May 2  was not posted till April\n<\/p><\/blockquote>\n
\t  27. The notice to Manoharan too was posted as late
\n\t  as on April 27, since he was believed to be siding
\n\t  with Coats.  The letter of offer and the notice of
\n\t  meeting of  May 2  which were\t posted at Madras on
\n\t  April 27  were received  by the Holding Company on
\n\t  May 2,  after the Board’s meeting for allotment of
\n\t  rights shares was held.\n<\/p><\/blockquote>\n
757<\/span><\/p>\n
     (iii) The Reserve Bank of India was not informed of the
\n\t  proposal to  issue right  shares to  the  existing
\n\t  shareholders although\t it  was  the  most  obvious
\n\t  thing to do, in response to its letter dated March
\n\t  30, 1977, calling upon NIIL to submit its proposal
\n\t  for reducing\tits  non-resident  interest  without
\n\t  delay.\n<\/p><\/blockquote>\n
     (iv) No  application was  made  to\t the  Controller  of
\n\t  Capital Issues  for fixing  the premium  on rights
\n\t  shares, not withstanding that the Reserve Bank had
\n\t  informed NIIL,  that if  necessary, an application
\n\t  to that  effect may  be made\tto the Controller of
\n\t  Capital Issues.\n<\/p><\/blockquote>\n
     (v)   The whole  idea was\tto cut\toff all\t sources  of
\n\t  information from Raeburn and Coats and to confront
\n\t  them with  the fait  accompli of  the allotment of
\n\t  rights  shares   to\tthe   Indian   shareholders,
\n\t  including  the  shares  formally  offered  to\t the
\n\t  Holding Company  which were  not allotted to it on
\n\t  the ground  of its  non-compliance with the letter
\n\t  of offer.\n<\/p><\/blockquote>\n
     (vi) The  agenda of  the meetings of April 6 and May 2,
\n\t  1977\twas  purposely\texpressed  in  vague  terms:
\n\t  ‘Policy- Indianisation’, in order that the Holding
\n\t  Company should  not know that the reduction of the
\n\t  non-resident interest\t was proposed to be effected
\n\t  by the issue of rights shares. By suppressing from
\n\t  the knowledge\t of the Holding Company what was its
\n\t  right to  know, and  what  was  the  duty  of\t the
\n\t  Board’s Secretary  to\t convey\t to  it,  Devagnanam
\n\t  succeeded in\tachieving his purpose on the sly and
\n\t  pre-empted any  action by  the Holding  Company to
\n\t  restrain the\tholding of the meeting, the issue of
\n\t  rights   shares    and   the\t allotment   thereof
\n\t  exclusively to  the existing shareholders (barring
\n\t  Manoharan).\n<\/p><\/blockquote>\n
    (vii) Silverston was appointed as an additional Director
\n\t  in the meeting of April 6 to make up the quorum of
\n\t  two “disinterested”  directors even  though he was
\n\t  in the  true sense  not a  disinterested person in
\n\t  the  decision\t  taken\t  in   that   meeting.\t The
\n\t  appointment of  additional directors\twas not even
\n\t  an item on the agenda of the meeting.\n<\/p><\/blockquote>\n
758<\/span><\/p>\n
    (viii)  Devagnanam was  emboldened to  take this  course
\n\t  because he  believed that  no matter\thow wrongful
\n\t  his conduct,\the could  count upon  the support of
\n\t  NEWEY to  see that he was not brought to book in a
\n\t  court of justice for his wrongful conduct. He even
\n\t  attempted  to\t thwart\t the  Company  Petition\t and
\n\t  render  it  infructuous  by  persuading  NEWEY  to
\n\t  withdraw the\tpower of  attorney executed by them,
\n\t  authorizing the filing of the petition.\n<\/p><\/blockquote>\n
     (ix) In  these machinations, Devagnanam was actuated by
\n\t  the sole desire to acquire the control of NIIL for
\n\t  his  personal\t benefit,  by  ousting\tthe  Holding
\n\t  Company from its control over the affairs of NIIL.\n<\/p><\/blockquote>\n
     (x)   In fact,  the rights\t shares were  issued at par,
\n\t  though their\tmarket value  was far  greater, as a
\n\t  measure  of\tpersonal   aggrandisement   in\t the
\n\t  supposition and  forethought that such shares will
\n\t  inevitable go\t to Devagnanam\tand his\t group. This
\n\t  was  blatantly   in  breach\tof   the   fiduciary
\n\t  obligation of the Directors.\n<\/p><\/blockquote>\n
     (xi) By  these means  and methods, which totally lacked
\n\t  in probity, Devagnanam succeeded in converting the
\n\t  existing majority into a minority and the minority
\n\t  into a  majority, a  conduct which  is burdensome,
\n\t  harsh and unlawful, qua the existing majority.\n<\/p><\/blockquote>\n
According to  Shri Seervai, the question before the Court is
\nnot whether  the issue\tof rights  shares  to  the  existing
\nIndian\tshareholders   only,  amounted\t to  oppression\t but
\nwhether,  the\toffer  of  rights  shares  to  all  existing
\nshareholders of\t NIIL but  the issue  of  rights  shares  to
\nexisting Indian shareholders only, constituted oppression of
\nthe Holding Company on the facts and circumstances disclosed
\nin the\tcase. This  argument raises  questions regarding the
\ninterpretation of  sections 43A and 81 of the Companies Act,
\n1956.\n<\/p>\n
     These contentions\tof the\tHolding\t Company  have\tbeen
\ncontroverted  by   Shri\t Nariman,  according  to  whom,\t the
\nappellate Court\t has taken  a one-sided\t view of  the matter
\nwhich is  against the  weight of  evidence  on\tthe  record.
\nCounsel contends  that Devagnanam  had done  all that lay in
\nhis power to persuade the Holding Company to disinvest so as
\nto reduce its holding in NIIL to 40%, that the Direc-\n<\/p>\n
759<\/span><\/p>\n
tors of\t NIIL were  left with  no option save to decide upon
\nthe issue of rights shares, since disinvestment was a matter
\nof the\tHolding Company’s  volition, that the wording of the
\nagenda of  the meetings\t of April  6 and  May 2 conveyed all
\nthat  there  was  to  say  on  the  subject  since,  in\t the
\nbackground of the negotiations which had taken place between
\nthe parties,  it was  clear that  what was meant by ‘Policy-
\nIndianization’ and  ‘Allotment of  Shares’ was the allotment
\nof rights  shares in  order to\teffectuate the policy of the
\nReserve Bank that the Indianization of the Company should be
\nachieved by the reduction of the non-resident holding to 40%
\nthat  Coats   refused  persistently,   both   actively\t and
\npassively, either to disinvest or to consider the only other
\nalternative of\tthe issue  of rights  shares, and  that\t the
\nimpugned decisions  were taken\tby the\tBoard  of  Directors
\nobjectively  in\t  the  larger\tinterests  of  the  Company.
\nAccording to  Shri Nariman,  Coats left\t no doubt  by  their
\nattitude that  their real  interest lay\t in their  worldwide
\nbusiness and  they wanted  to bring the working of NIIL to a
\ngrinding halt  with a  view to\teliminating  an\t established
\ncompetitor from their business. It is denied by counsel that
\nimportant   facts   or\t circumstances\t were\tdeliberately
\nsuppressed from\t the Holding  Company or  that the letter of
\noffer and  the notice  of the  Board’s meeting of May 2 were
\ndeliberately posted  late on  April 27. It is contended that
\nneither by  the issue of rights shares nor by the failure to
\ngive the  right of  renunciation to  the Holding Company was
\nany injury caused to its proprietary rights as a shareholder
\nin  NIIL.  As  a  result  of  the  operation  of  FERA,\t the
\ndirectives issued by the Reserve Bank thereunder and because
\nof the\tfact that  NIIL had  retained its old Articles after
\nbecoming a public company under section 43A of the Companies
\nAct, the  Holding Company could neither have participated in
\nthe issue  of rights  shares nor could it have renounced the
\nrights shares  offered to  it in  favour of an outsider, not
\neven in\t favour of  a resident\tIndian Company\tlike  Madura
\nCoats. It  is denied that Silverston was not a disinterested
\nDirector or  that his  appointment as an additional Director
\nwas otherwise  invalid. Counsel\t sums  up  his\targument  by
\nsaying that  the Board of Directors of NIIL had in no manner
\nabused its  fiduciary  position\t and  that  far\t from  their
\nconduct being  burdensome, harsh  and wrongful,\t it was\t the
\nattitude of  Coats which was unfair, unjust and obstructive.
\nCoats  having  come  into  an  equitable  jurisdiction\twith
\nunclean hands,\tcontends Shri  Nariman, no  relief should be
\ngranted to  them assuming  for the  sake  of  argument\tthat
\nDevagnanam from\t the  position\tof  Managing  Director,\t are
\ncharacterised\tby   counsel   as   wholly   uncalled\tfor,
\ntranscending the exigencies of the situation.\n<\/p>\n
760<\/span><\/p>\n
     It seems  to us unquestionable that Devagnanam played a
\nkey role  in the  negotiations with  the Holding Company and
\nultimately master-minded  the issue  of\t rights\t shares.  He
\noccupied  a  pivotal  position\tin  NIIL,  having  been\t its
\nDirector for  over twenty years and a Managing Director over
\nfifteen years,\tin which capacity he held an undisputed sway
\nover the  affairs of NIIL. The Holding Company had nominated
\nonly one  Director  on\tthe  Board  of\tNIIL,  namely,\tN.T.
\nSanders, who resided in England and hardly ever attended the
\nBoard’s meetings.  Devagnanam was  thus a  little monarch of
\nall that he surveyed in Ketty. He had a large personal stake
\nin NIIL’s  future since\t he and\t his group  held nearly\t 30%
\nshares in  it, the  other Indian  shareholders owning a mere
\n10%. In\t the 60% share capital owned by the Holding Company,
\nCoats and  NEWEY were  equal sharers  with the\tresult\tthat
\nCoats, NEWEY  and Devagnanam  each held an approximately 30%
\nshare capital  in NIIL.\t This equal holding created tensions
\nand rivalries between Coats and Devagnanam, NEWEY preferring
\nto side\t with the  latter  in  a  silent,  unspoken  manner.
\nEventually. after  the filing of the Company Petition, Coats
\nbought over NEWEY’s interest in NIIL sometime in July 1977.\n<\/p>\n
     The picture  which Devagnanam has drawn of himself as a
\nperson deeply committed to Ketty, and as having built up the
\nbusiness with scrupulous regard to the observance of Foreign
\nExchange Regulations and Indian Laws in contradistinction to
\nCoats who,  he alleged,\t wanted to  contravene\tthe  Foreign
\nExchange Regulations  of our country is not borne out by the
\ncorrespondence. In fact, the letter which he wrote to Shread
\nof Newey-Goodman Ltd. on August 11, 1973 (which was filed by
\nconsent in the Appeal Court) shows that he wanted to dispose
\nof his shares at a large premium by officially receiving the
\npar value  in Rupees  in India\tand obtaining the balance in
\nforeign currency  outside India.  Nevertheless, he stated on
\noath in\t para 13  of his rejoinder affidavit that “it is not
\ntrue that  in selling  my shares,  I wanted  a part  of\t the
\nconsideration  in   foreign  exchange”.\t  The  said   letter
\ndiscloses that\tover and  above proposing  to make  a  large
\nprofit in  contravention of the Foreign Exchange Regulations
\nand the\t tax laws of India by receiving money outside India,
\nDevagnanam proposed  to take away from Ketty its “select key
\npersonnel and  technicians” to\tMalacca and  to\t manufacture
\ncompetitively, products\t which\twere  then  manufactured  by
\nNeedle Industries,  U.K. The  foot note\t to  the  letter  to
\nShread asked  him to  keep these  matters secret  from Coats
\ntill the  shares had  been sold,  and till the deed had been
\ndone.\n<\/p>\n
761<\/span><\/p>\n
     There is  another aspect  of  Devagnanam’s\t conduct  to
\nwhich reference\t must be  made. The statement made by him in
\npara 15\t of his\t reply affidavit  denying that he was a non-
\nresident is  not entirely  true\t because  at  least  between
\nAugust 26,  1974 and  June 9,  1976 he\twas  a\tnon-resident
\nwithin the  meaning of section 2 (p) (i) (a) of FERA. By his
\nletter dated  August 26, 1974 to the Reserve Bank, he asked,
\nthough out of abundant caution, for permission under section
\n29 (4)\tof FERA\t to hold  his shares in NIIL. He referred in
\nthat letter  to his  contract with  Newey and  Taylor  under
\nwhich he  was to  be a\tfull-time Managing  Director of that
\nCompany for  five years from August 1, 1974 to July 31, 1979
\nand asked  the Reserve\tBank to\t determine  his\t status.  On
\nSeptember 3,  1975 he  wrote to\t the Reserve Bank contending
\nthat he\t was a\t‘resident’, referring  this time  not to his
\ncontract with Newey-Taylor but to the agreement between NILL
\nand Newey  Goodman Ltd., a Company about to be formed, under
\nwhich he  was to  be on deputation with it as an employee of
\nNIIL.\n<\/p>\n
     Devagnanam’s letter  dated August 11, 1973 to Shread of
\nNewey-Goodman, the  gloss which\t he put\t on his\t status as a
\nresident in his letters to the Reserve Bank dated August 26,
\n1974 and September 3, 1975 and the clever manner in which he
\nhad his status determined as a resident, cast a cloud on his
\nconduct and  credibility. And  though, as  contended by Shri
\nSeervai,  we   do  not\tpropose\t to  apply  to\tDevagnanam’s
\naffidavit-evidence the\trule of\t ‘corroboration in  material
\nparticulars’ which  is generally  applied in criminal law to
\naccomplice evidence,  we shall\thave to\t submit Devagnanam’s
\nconduct to  the closet\tscrutiny and statements made by him,
\nfrom time to time, to the most careful examination. We shall
\nhave to\t look to something beyond his own assertion in order
\nto accept his claim or contention.\n<\/p>\n
     Shri Nariman  attacked the\t conduct of  Coats almost as
\nplausibly as  Shri  Seervai  attacked  that  of\t Devagnanam,
\nthough in  terms of  a saying in a local language we may say
\nthat ‘a\t brick is  softer than\ta stone’,  Coats  being\t the
\nbrick. Coats,  as will\tpresently  appear,  are\t not  to  be
\noutdone by  Devagnanam in  the matter  of lack\tof  business
\nethics. But  that is  no wonder\t because when  the  dominant
\nmotivation is  to acquire control of a company, the sparring
\ngroups of  shareholders try  to grab the maximum benefit for
\nthemselves. If one decides to stay on in a company, one must
\ncapture its control. If one decides to quit, one must obtain
\nthe best price for one’s
\n762<\/span>
\nholding, under\tand over  the table,  partly in\t rupees\t and
\npartly in  foreign exchange.  Then, the\t tax  laws  and\t the
\nforeign exchange regulations look on helplessly, because law
\ncannot operate\tin a vacuum and it is notorious that in such
\ncases evidence is not easy to obtain.\n<\/p>\n
     Alan  Mackrael  says  in  paragraph  20  of  his  reply
\naffidavit in  the Company Petition that it was made clear to
\nDevagnanam that\t neither Coats\tnor  the  Needle  Industries
\n(U.K.) would  ever be  a party\tto any transaction which was
\nillegal under the Indian law. In a letter dated May 24, 1976
\nto Devagnanam, A.D. Jackson of NEWEY has this to say:-\n<\/p>\n
\t  “In broad  terms  the\t proposition  is  that\tAlan
\n     Mackrael, Martin  Henry and myself should meet with you
\n     in Malacca\t during September  to  discuss\tarrangements
\n     whereby  an  Indian  gentleman  known  to\tCoats  would
\n     purchase both  your shares\t and our  own share  of\t the
\n     NINTH holding  in the manner which I outlined to you on
\n     the telephone.  In order  to provide  a  base  for\t the
\n     calculations, Kingsley  is to  be asked  to obtain\t the
\n     government approved  price but, of course, the basis of
\n     our discussions  has been\tthat the actual payment will
\n     be higher than this”.\n<\/p><\/blockquote>\n
In the\tsame letter Jackson, after warning that Coats\/Needle
\nIndustries (U.K.)  are “certainly  not going  to  relinquish
\ncontrol of  Ketty without  a major  struggle”,\tproceeds  to
\ndescribe the  helpless condition  of NEWEY by saying that in
\nthe financial  position in which they found themselves, they
\nwere “in  no state to do battle with this particular giant”.
\nLeaving aside  the determination  of Coats  to engage  in  a
\nmajor struggle\twith NIIL’s  Board of  Directors,  Jackson’s
\nletter leaves no doubt that Coats were willing to be a party
\nto the\tarrangement whereby  the shares\t of  Devagnanam\t and
\nNEWEY would  be sold  to an  ‘Indian gentleman’, under which
\nthe actual  payment would  be  higher  than  the  government
\napproved price\tascertained by\tKingsley, the  Secretary  of
\nNIIL. This is doubtful ethics which justifies Shri Nariman’s
\nargument that  he who comes into equity must come with clean
\nhands; if  he does  not, he  cannot ask\t for relief  on\t the
\nground that the other man’s hands are unclean. The “Notes on
\nfurther Indianization” made by Devagnanam on April 29, 1975,
\nat a  time when\t the relations\tbetween the parties were not
\nunder a\t strain, show that N.T. Sanders who was nominated by
\nthe Holding  Company as\t a Director of NIIL was “aware of an
\ninquiry from  a Mr. Khaitan”. This shows that Devagnanam was
\nnot trying
\n763<\/span>
\nto dispose  of his shares secretly to Khaitan and Coats were
\naware of that move.\n<\/p>\n
     In para  20 of  his reply affidavit, Alan Mackrael says
\nthat none  of the  proposals  put  forward  by\tthe  Holding
\nCompany for  achieving\tIndianization  to  comply  with\t the
\nrequirements of FERA would have given the control of NIIL to
\nthe Holding  Company. This  is falsified by Raeburn’s letter
\ndated October  25, 1976 to Devagnanam, in which he says that
\nthe idea  of an outside independent party holding 15% of the
\nshare capital of NIIL was raised, but this did not appear to
\nbe acceptable  to Coats since “they want to achieve not only
\nthat the  present Indian  shareholders hold  a minority\t but
\nthat they  (Coats) hold\t and influence\ta substantial block,
\nthereby hoping\tto influence  NEWEY to\ttheir views”.  Thus,
\nthere is  a wide  difference between  what  Coats  practised
\nearlier and  pleaded later. Towards the end of paragraph 21,
\nMackrael  asserts  that\t the  shareholders  of\tthe  Holding
\nCompany, namely,  Coats and  NEWEY, were  unanimous  in\t the
\nfiling of  the Company\tPetition and  the prosecution of the
\nproceedings following  upon it,\t which is  said to  be clear
\nfrom the  fact that  two powers of attorney were attested by
\nthe Directors  of the  Holding Company,\t both of  whom\twere
\nDirectors of  NEWEY also. The fact that Coats and NEWEY were
\nnot of\tone  mind  is  writ  large  on\tthe  face  of  these
\nproceedings and,  in fact,  the charge against NEWEY is that
\nbecause of  their Far-Eastern  interests in  which Devananam
\nwas a  great asset to them, they were supporting Devagnanam.
\nWe may\tin this\t connection draw attention to a letter dated
\nJune 8,\t 1977  by  Raeburn  to\tMackrael,  saying  that\t the
\ninsistence of  Coats (‘Glasgow’)  to  hold  on\tto  the\t 60%
\nshareholding in\t NIIL or at least to ensure that 60% did not
\nget into the hands of the Indian shareholders will involve a
\nlong and costly legal battle. Raeburn proceeds to say:\n<\/p>\n
\t  “We, as  Neweys, have\t neither the  will  nor\t the
\n     means to participate in that battle, nor do we think it
\n     right to  do so  bearing in  mind\tthe  legal  position
\n     regarding Indianisation,  the provision in the Articles
\n     and the  fact that substantially the modern business of
\n     N.I.I.L. has  been built  up  by  the  efforts  of\t the
\n     present Indian shareholders”.\n<\/p><\/blockquote>\n
In paragraph  5 of  the aforesaid  letter, Raeburn clarifies
\nthe attitude of NEWEY by saying that if Coats were unable to
\nagree to  the arrangement  suggested by\t NEWEY, then,  NEWEY
\nwill be compelled to notify to those concerned in India that
\nthey can  no longer  be parties\t to the\t power\tof  attorney
\ngranted by the Holding Company
\n764<\/span>
\nto Mackrael  or to  any\t other\tproceedings  in\t the  Indian
\nCourts. In  spite of  this letter  of Raeburn (dated June 8,
\n1977), Mackrael\t had the  temerity in  his  reply  affidavit
\ndated July  8, 1977,  to  say  that  Coats  and\t NEWEY\twere
\nunanimous in  the prosecution  of the proceedings consequent
\nupon the  filing of  the  Company  Petition.  There  was  no
\nagreement between  Coats  and  NEWEY  either  in  regard  to
\nIndianisation of  NIIL or in regard to the legal proceedings
\ninstituted to challenge the issue of rights shares.\n<\/p>\n
     There are\tmany other contradictions on material points
\nbetween\t the   actual  state   of  affairs  and\t what  Coats
\nrepresented them  to be,  but we  consider it unnecessary to
\ncover the whole of that field. We will refer to one of these
\nonly, in order to show how difficult it is to choose between
\nCoats  and  Devagnanam.\t In  paragraph\t19  of\tthe  Company
\nPetition, which\t is sworn  by Mackrael,\t it is\tstated\tthat
\nDevagnanam was\tin U.K.\t sometime towards  the end  of March
\n1977  and   that  he   held  several  discussions  with\t the
\nrepresentatives of  the Holding\t Company. In paragraph 40 of
\nhis reply  affidavit, Mackrael\tsays that as to the contents
\nof paragraph  19 of the Company Petition, he himself was not
\npresent at  such meeting,  since it  was a  meeting  between
\nDevagnanam and\tthe officials  of NEWEY\t for the  purpose of
\ndiscussing matters concerning NEWEY’s Far-Eastern interests.
\nThe verification  clause of  Mackrael’s affidavit in support
\nof the Company Petition shows that the contents of paragraph
\n19 are\tbased on information which he believed to be true. A
\nclearer contradiction  between the  parent petition  and the
\nreply affidavit\t is difficult  to imagine.  It would  appear
\nthat it\t was not  until quite  late that Coats realised that
\nthey had  to plead  all ignorance  of the  discussions which
\nwere held  in U.K.  towards the\t end of\t March 1977  between
\nDevagnanam and the representatives of the Holding Company.\n<\/p>\n
     We will  now shift\t our attention\tto another  scene in
\norder to show how unethical the Coats are. Coats’ subsidiary
\ncalled the Central Agency Ltd., who were sole-selling agents
\nof NIIL’s  products in\tvarious markets in the world, ceased
\nto be  so after\t NIIL put an end to the agreement with them.
\nThe Central  Agency never  applied during the time that they
\nwere sole-selling agents of NIIL’s products for registration
\nof the Indian Company’s Trade Marks as a protective measure.
\nThe learned  Trial  Judge,  Ramaprasada\t Rao,  Acting  C.J.,
\ndelivered the  judgment in the Company’s Petition on May 17,
\n1978. Immediately  thereafter, Application No. 34991 of 1978
\nwas filed  by the  Japanese Trade  Marks  Agents  of  Needle
\nIndustries,
\n765<\/span>
\nU.K.,  for  registration  of  the  Trade  Marks\t ‘Pony’\t and
\n‘Rathna’, which\t were the  registered Indian  Trade Marks of
\nNIIL. That  application was  made under\t the authority\tof a
\nPower of  Attorney signed  by Alan  Marckrael. In June 1978,
\nApplication No.\t 102987 was  filed in  Thailand on behalf of
\nthe Needle  Industries U.K.  as owners\tof  the\t Trade\tMark
\n‘Pony’ which  is clear from the Trade Mark Attorney’s letter
\ndated January  22, 1979. In October 1978, Coats Patons, Hong
\nKong, got the Indian Company’s Trade Mark ‘Pony’ registered.
\nIn November  1978, the\tTrade Mark  Agents and Solicitors of
\nNIIL in Hong Kong had to give a notice to Coats Patons, Hong
\nKong, that  the latter\thad registered the ‘Pony’ Trade Mark
\nin Hong Kong with the full knowledge that NIIL was the legal
\nowner of  that Trade Mark and threatening legal action. As a
\nresult of  that notice,\t the  Indian  Company’s\t Trade\tMark
\n‘Pony’ which  was registered by Coats Patons in Hong Kong as
\ntheir own  Trade Mark, was assigned to the Indian Company on
\nDecember 21,  1978 for\ta nominal sum of 10 dollars. Items 7
\nand 8  of the minutes dated March 28, 1979 of the meeting of
\nthe  interim  Board  of\t Directors  of\tNIIL  refer  to\t the
\nregistration in\t Hong Kong  by Coats  Patons of\t the  Indian
\nTrade Mark of NIIL and subsequent assignment thereof to NIIL
\nwhen legal  action was\tthreatened. Harry  Bridges, who\t was
\nappointed as  a temporary  Managing  Director  by  the\tHigh
\nCourt, has  stated in  his counter affidavit dated March 27,
\n1980 that  the application  for registration  of the  ‘Pony’
\nTrade Mark  was made  in Hong Kong and other places in order
\nto protect  that Trade\tMark from  its improper use by other
\ntraders. This  is a  lame explanation  of  an  act  of\tnear
\npiracy. Were  this explanation\ttrue,  the  application\t for
\nregistration of\t the Trade Mark would have mentioned that it
\nwas being  filed on  behalf of\tNIIL, and that ‘Pony’ was in
\nfact the  Trade Mark  of NIIL.\tIt is quite amazing that any
\none should claim that the registration of the Trade Mark was
\nbeing sought as a protective measure when a battle royal was
\nraging between\tthe Holding  Company and  NIIL and after the
\nTrial Court  had delivered its judgment. We may mention that
\nby a  letter dated  June  15,  1977  Mackrael  had  informed
\nDevagnanam that\t he was\t removed from the Board of Directors
\nof the Holding Company and M.D.P. Whiteford was appointed in
\nthe vacancy.  The fact\tthat Needle  Industries,  U.K.,\t had
\nsurreptitiously made  an application for the registration of
\nNIIL s\tTrade Mark  ‘Pony’ came\t to  light  fortuitously  in
\nJanuary 1979  when NIIL\t applied for the registration of the
\n‘Pony’ Trade  Mark in  Thailand and Japan. NIIL’s Trade Mark
\nAgents there  found, on\t inspection of\tthe registers,\tthat
\ncertain
\n766<\/span>
\napplications made  by Needle  Industries, U.K., claiming the
\nsame mark as their own pending consideration.\n<\/p>\n
     The decision,  in appeal,\tof the High Court appointing
\nHarry Bridges  as a  Managing  Director\t for  4\t months\t was
\npronounced on  October 26,  1978.  As  a  Managing  Director
\nappointed by  the Court,  Bridges called  a Board meeting of
\ntheir members of the Board appointed by the Appellate Court,
\nfor  November\t2,  1978.  Bridges  took  away\tmany  files,
\ndocuments and statements from the NIIL’s factory at Ketty on
\nOctober 28,  1978, his\texplanation being  that he wanted to
\ncarry these  documents to Madras where the Board meeting was
\nto be  held. A\tlittle before Bridges left Ketty for Madras,
\nhe was\tinformed that this Court had passed an interim order
\non November  1, 1978.  Consequently, the  meeting of the 2nd
\nNovember did  not take\tplace. Bridges\tsays  that  when  it
\nbecame clear  that he  was no  longer required\tto act\tas a
\nManaging Director  of NIIL, he took the earliest opportunity
\nof returning  the documents  which he  had  taken  from\t the
\noffice of the factory at Ketty.\n<\/p>\n
     It is  understandable that\t Bridges wanted to take with
\nhim certain documents to help him perform his functions as a
\nManaging Director in the meeting of November 2, 1978. But it
\nis surprising  that, in\t addition  to  the  documents  which
\nBridges returned  on November  8,  he  had  taken  with\t him
\nseveral other documents which he returned when pressed to do
\nso. He took away with him (1) Design drawing (2) Statistical
\nReturns\t (3)  the  Master  Budget  summary,  1978  (4)\tCash
\nforecast for  1978-79 (5)  Detailed Project Report with cash
\nflow forecast  (6) Details of Project Investment (7) Note on
\nactivity upto  October 1978  and one or two other documents.
\nThese were  eventually returned\t by  the  Holding  Company’s
\nAdvocate, Shri\tRaghavan. When\tNIIL wrote  on November\t 21,
\n1978 to\t Shri Raghavan\tasking him  to call  upon Bridges to
\nconfirm that  he had  not retained  copies  of\tany  of\t the
\ndocuments which\t he had\t removed from Ketty, Bridges replied
\nby his\tletter dated  November 29,  1978 that  he had  taken
\ncopies of  such documents  which he  considered relevant and
\nthat he proposed to retain such copies since “as director of
\nthe Company,  I am  entitled to\t peruse and  take copies  of
\nwhatever records  I choose”.  This is  a wee  bit  high\t and
\nmighty. The  Design drawing is not the drawing of a bungalow
\n(with a\t swimming pool) which was being built for Devagnanam
\nbut it\tis a  ‘Ring spring  fastener tool design’. The other
\ndocuments which\t Bridges had  taken away and of which he got
\ncopies made  in assertion  of his Directorial right, contain
\nimportant matters like details
\n767<\/span>
\nof production,\tsales and exports of NIIL’s products, orders
\noutstanding and\t sales, the proposed additional turnover and
\nthe working  capital requirements,  etc. The  fact of  Harry
\nBridges’s taking  away these  documents\t and  making  copies
\nthereof for  his own use leaves not the slightest doubt that
\nthe motivation\tof Coats  at all  times was to advance their
\nown  world   interests\tat  the\t expense  of  NIIL.  In\t the
\nbackground  of\t such  conduct,\t  it  becomes  difficult  to
\nappreciate the\tHolding Company’s  contention,\tso  strongly
\npressed upon  us, that\tCoats, NEWEY and Devagnanam being in
\nthe position  of  partners,  the  greatest  good  faith\t and
\nprobity\t were\texpected  to   be  displayed  by  them.\t The
\ncontention, as\ta bald proposition of law is sound. The snag
\nis: who should harp upon it ? Not Devagnanam, we agree. But,
\nnot Coats either, we think.\n<\/p>\n
     We\t have\tsaid,  while   discussing  the\t conduct  of
\nDevagnanam, that  it would  be difficult  to accept his word
\nunless\tthere  is  support  forthcoming\t to  it\t from  other
\ncircumstances on  the record.  We feel the same about Coats.
\nIt would  be equally  unsafe to\t accept their word unless it
\nfinds support  from the other facts and circumstances on the
\nrecord of  the case. It is true that in saying this, we have
\npartly taken  into account  facts which\t came into existence
\nafter the Company Petition was filed. But those facts do not
\nreflect a  new trend or a new thinking on the part of Coats,
\ngenerated by  success in  the litigation.  Finding that they
\nhad succeeded  in the  High Court,  Coats  took\t courage  to
\npursue relentlessly their old attitude with the added vigour
\nwhich success brings.\n<\/p>\n
     On the question of oppression, there is a large mass of
\ncorrespondence and  other documentary evidence on the record
\nbefore us. We shall have to concentrate on the essentials by
\nseparating the\tchaff from the grain. In the earlier part of
\nthis judgment  we have\talready referred  to the  course  of
\nevents generally, which culminated in the meetings of NIIL’s
\nBoard of  Directors, held  on April  6 and  May 2,  1977. We
\npropose now to refer to these events selectively.\n<\/p>\n
     FERA having  come into  force on  January 1, 1974, D.P.
\nKingsley,  the\t Secretary-Director  of\t  NIIL,\t applied  on
\nSeptember 3,  1974 to  the Reserve  Bank for  the  necessary
\npermission under  section 29  (2) of  that Act.\t The Reserve
\nBank intimated\tto NIIL by its letter dated November 5, 1975
\nthat permission\t would be  accorded to NIIL under section 29
\n(2) (a) read with section 29 (2) (c) of FERA to carry on its
\nactivities in India subject to the conditions enumerated
\n768<\/span>
\nin  paragraph  2  of  the  letter.  One\t of  the  conditions
\nmentioned in  the aforesaid  paragraph\twas  that  the\tnon-
\nresident interest in the equity capital must be reduced to a
\nlevel not  exceeding 40%,  within a  period of one year from
\nthe date  of receipt  of the  letter. The Reserve Bank asked
\nNIIL to\t submit a  scheme within  a period  of three months,
\nshowing how it proposed to achieve the required reduction in
\nthe non-resident  interest: “(a) whether by disinvestment by
\nnon-resident  shareholders,  or\t (b)  whether  by  issue  of
\nadditional equity  capital to Indian residents to the extent
\nnecessary   to\t  finance   any\t   scheme    of\t   expansion
\ndiversification, or (c) by both”. Kingsley wrote a letter to
\nMackrael on November 19, 1975, enclosing therewith a copy of
\nthe letter of the Reserve Bank dated November 5. On February
\n4, 1976\t Kingsley wrote\t to the\t Reserve Bank  that NIIL was
\nprepared to agree to reduce the non-resident interest in the
\nequity capital\tto a  level not\t exceeding 40%\tand that the
\nCompany was  proposing to  bring this about by disinvestment
\nthough, depending  upon\t future\t developments,\tthe  Company
\nreserved its  right to\treduce the  non-resident interest by
\nissue of  additional equity  capital to Indian shareholders.
\nKingsley requested  the Bank  to extend\t the stipulated time
\none year in case NIIL was not able to comply with the Bank’s
\ndirective by  reason of\t circumstances beyond its control. A
\ncopy of\t this letter  dated February  4, 1976  was  sent  by
\nKingsley  to   Whitehouse,  the\t Secretary  of\tthe  Holding
\nCompany. It  is significant  that there\t was no\t response as
\nsuch to this communication, from the Holding Company. On May
\n11, 1976  the Reserve  Bank of\tIndia sent  a letter to NIIL
\ngranting permission  to\t it  under  FERA  to  carry  on\t its
\nbusiness on  certain conditions,  one of them being that the
\nnon-resident interest  in  the\tequity\tcapital\t had  to  be
\nreduced to  a level not exceeding 40% within a period of one
\nyear from  the date  of receipt\t of the\t letter. The Reserve
\nBank stated  in the aforesaid letter that until such time as
\nthe non-resident  interest  was\t not  reduced  to  40%,\t the
\nmanufacturing activity\tof the Company shall not exceed such
\ncapacity as  was  validly  approved  or\t recognised  by\t the
\nappropriate authority  on December  31, 1973  and  that\t the
\nCompany shall not expand its manufacturing activities beyond
\nthe level  so approved\tor recognised. It is clear from this
\nletter that  all  developmental\t activities  of\t NIIL  stood
\nfrozen as  of the  date December  31, 1973,  until the\tnon-
\nresident interest  was reduced\tto  40%.  The  Reserve\tBank
\nstated\tfurther\t in  the  letter  that\tNIIL  should  submit
\nquarterly reports  to it  indicating the  progress  made  in
\nimplementing the  reduction of the non-resident interest and
\nthat the  transfer of  shares from  non-residents to  Indian
\nresidents would\t be required  to be confirmed by the Reserve
\nBank under section 19 (5) of FERA.\n<\/p>\n
769<\/span><\/p>\n
The letter  of the  Reserve Bank was received by NIIL on May
\n17, 1976, which meant that the reduction of the non-resident
\ninterest had to be achieved by May 17, 1977.\n<\/p>\n
     It shall have been seen that by the time the permission
\nwas granted  by the  Reserve Bank  to NIIL in May 1976, FERA
\nhad been  in force  for a  period of  about 2  1\/2 years.  A
\nperiod of  one year  and eight\tmonths had gone by since the
\nfiling by  NIIL of  the application for dilution of the non-
\nresident interest. Over and above that, the Reserve Bank had
\ngranted a  long period\tof one\tyear for  bringing about the
\ndilution of  the non-resident  interest.  It  is  true\tthat
\npublic authorities  are not  generally averse, in the proper
\nexercise of  their discretion,\tto extending  the time limit
\nfixed by  them, as  and when  necessary. But  an  elementary
\nsense of  business prudence  would  dictate  that  the\ttime
\nschedule fixed\tby the Reserve Bank had to be complied with.
\nThe firm  tone of the Reserve Bank’s letter conveyed that it
\nwould not  be easy  to\tobtain\tan  extension  of  time\t for
\ncomplying with its directive, while the stringent conditions
\nimposed\t by   it,   particularly   in\tregard\t to   future
\ndevelopmental activities,  dictated an early compliance with
\nthe directive.\n<\/p>\n
     Kingsley sent  a letter  to the Reserve Bank on May 18,
\n1976, confirming  the acceptance  of the  various conditions
\nunder which  permission was  granted to NIIL to carry on its
\nbusiness. Kingsley  pointed out\t a difficulty  in implenting
\none of\tthe  conditions\t regarding  the\t sale  of  petroleum
\nproducts, but  the Reserve  Bank by its letter dated May 29,
\n1976 informed  him that after a careful consideration of the
\nrequest, the  Bank regretted  its inability  to enhance\t the
\nceiling on the turnover from the Company’s trading activity,
\nas stipulated in the letter dated May 11, 1976.\n<\/p>\n
     In the  meeting of\t the Board  held on October 1, 1976,
\nDevagnanam’s appointment  as Managing  Director was  renewed
\nfor a  further period  of five\tyears. Raeburn,\t Chairman of
\nNEWEY who  was looking\tafter the  affairs  of\tthe  Holding
\nCompany, wrote to Devagnanam on October 4, 1976, complaining
\nthat it\t was necessary\tthat the  Holding Company  should be
\nkept informed  in ample\t time of  the  Board’s\tmeetings  on
\nimportant organisational matters.\n<\/p>\n
     Raeburn and  Mackrael came\t to  India  to\tdiscuss\t the
\nquestion of  dilution of the non-resident holding in NIIL. A
\nmeeting was  held at  Ketty on\tOctober 20  and 21,  1976 in
\nwhich the U.K. shareholders were represented by Mackrael and
\nRaeburn\t and  the  Indian  shareholders\t by  Devagnanam\t and
\nKingsley. Silverston took part
\n770<\/span>
\nin the\tmeeting as  an adviser\tto the\tIndian shareholders.
\nMartin Henry, the Managing Director of Madura Coats which is
\nan Indian  company in which the Needle Industries (U.K.) and
\nCotas have  substantial interest,  attended the\t meeting and
\ntook part  in the  discussions. A  note of  the\t discussions
\nwhich took  place at Ketty on October 20 and 21 was prepared
\nby Raeburn  and forwarded along with a letter dated November
\n10, 1976  to Devagnanam,  with copies  to  Mackrael,  Newey,
\nJackson and  Whitehouse. Paragraph  2 of this note, which is
\nimportant, says:\n<\/p>\n
\t  “It  was   agreed  that  Indianization  should  be
\n     brought about by May, 1977, as requested by Government,
\n     so\t as   to  achieve   a  40%   U.K.  and\t 60%  Indian
\n     shareholding”.\n<\/p><\/blockquote>\n
The main features of the discussions which took place in the
\nKetty meeting are these:\n<\/p>\n
     (1)   Mackrael and Martin Henry suggested acceptability
\n\t  of Madura  Cotas as holding part of the 60% of the
\n\t  equity to  be held  by  Indian  shareholders.\t The
\n\t  latter “saw  no reason  to give up the right which
\n\t  the Indianization  legislation, combined  with the
\n\t  Company’s  Articles,\t conferred  upon  them\tand,
\n\t  therefore they  insisted on taking up the whole of
\n\t  their\t entitlement   to  60%\t of   the   equity”.
\n\t  Silverston who  was an  Englishman by\t nationality
\n\t  and a\t Solicitor by  profession in  India and\t was
\n\t  acting as an Adviser to the Indian shareholders in
\n\t  the Ketty  meeting plainly and rightly pointed out
\n\t  that Government’s  approval of a holding by Madura
\n\t  Coats of  15% of  NIIL shares\t would be  unlikely,
\n\t  because by  that method Coats would indirectly and
\n\t  effectively\twith\tNEWEY\thold\tover\t40%,
\n\t  approximately 46%,  share in\tNIIL. It is apparent
\n\t  that this  would have\t been a\t clear violation  of
\n\t  FERA.\n<\/p><\/blockquote>\n
     (2)   To allay  the concern  of U.K.  shareholders when
\n\t  they became in minority by the Indian shareholders
\n\t  coming to hold 60%, some safeguards were suggested
\n\t  which, amongst  others, were,\t (i) the Articles of
\n\t  the Company  could be\t altered only  by a  special
\n\t  resolution which  requires a\t75% majority  of the
\n\t  members voting in person or by proxy. Thus, either
\n\t  group of  the shareholders  could prevent the sale
\n\t  of shares to any one not
\n771<\/span>
\n\t  approved, (ii) the Board could be reconstructed as
\n\t  mentioned in\tpara 4.3  of the  note to  give U.K.
\n\t  shareholders sufficient safeguards and hand in the
\n\t  management of the Indian Company.\n<\/p><\/blockquote>\n
     (3)   The preferred  method of  transferring 20% of the
\n\t  equity to Indian shareholders was thought to be by
\n\t  sale by  U.K. members of the appropriate number of
\n\t  shares at  the  price\t to  be\t determined  by\t the
\n\t  Government and  the advice  to be taken from Price
\n\t  Waterhouse in\t this regard.  As an  alternative it
\n\t  was suggested that a rights issue, with the Indian
\n\t  shareholders taking  up the  U.K. Members’  rights
\n\t  would\t also\tbe  considered,\t  provided  it\t was
\n\t  demonstrated by  Ketty that  there  was  a  viable
\n\t  development plan requiring funds that the expected
\n\t  NIIL cash  flow could\t not meet.  The value of the
\n\t  U.K. equity  interest thus  transferred was not to
\n\t  be less  favourable  than  by\t a  direct  sale  of
\n\t  shares.\n<\/p><\/blockquote>\n
     (4)   Approval was given in principle to the renewal of
\n\t  contract of  Devagnanam as  Managing\tDirector  of
\n\t  NIIL. Devagnanam agreed to devote adequate time to
\n\t  the  affairs\t of  Ketty  and\t was  authorised  to
\n\t  continue to  supervise the  NEWEY affairs  in Hong
\n\t  Kong and Malacca.\n<\/p><\/blockquote>\n
At the\tresumed discussion  on October\t21, 1976, both sides
\nstuck to  their stand. Devagnanam was insistent that he will
\n“not accept  on behalf\tof the\tIndian shareholders anything
\nless than  the full entitlement of 60% of the shares”, while
\nMackrael, equally  insistent, “could not accept on behalf of
\nNI\/Coats that  the full\t 60% be\t held by  the present Indian
\nshareholders,  even   with  the\t safeguards  and  assurances
\ndiscussed previously”.\n<\/p>\n
     The Ketty meeting thus ended in a stalemate, both sides
\ninsisting on  what, what  they considered  to be their right
\nand entitlement.  Raeburn attempted  to play  the role\tof a
\nmediator but  failed. In this situation, the parties decided
\nto give further consideration to the matter and to adhere to
\nthe following time-table:\n<\/p>\n
     “Mid-December
\n     TAD (Devagnanam) to submit to the U.K. shareholders
\n772<\/span>
\n     both the  decisions reached  by the Indian shareholders
\n     as regards\t the 60%  and the case, if any, for a Rights
\n     Issue.\n<\/p><\/blockquote>\n
     Mid-January
\n     U.K. shareholders\tto decide  on their  reaction to the
\n     Indian shareholders’ decision”.<\/p><\/blockquote>\n
     Silverston conveyed  to Kingsley  his regret  that\t the
\nKetty meeting  could  product  no  outcome  because  of\t the
\nattitude  of  Coats  who  wanted  to  put  pressure  on\t the
\nDirectors of  NIIL by  giving 15%  of  the  shareholding  to
\nMadura Coats  and thereby  avoiding the\t provisions of FERA.
\nThis reaction of Silverston finds support in the reaction of
\nRaeburn himself,  which he  described in  his  letter  dated
\nOctober 23,  1976 to Devagnanam. Raeburn says in that letter
\nthat he had learnt from Martin Henry that Coats were keen to
\nintroduce Prym\ttechnology in  India in\t their Madura  Coats
\nfactory. It  may be  mentioned that the Prym technology when
\nintroduced in  Madura Coats  would  have  created  a  direct
\ncompetition between  it and  NIIL. It would also appear from
\nDevagnanam’s letter  of October\t 21, 1976  to  Jackson\tthat
\nCoats were  intending to  start an  Engineering Division  at
\nBangalore for  the manufacture of Dynecast and Prym products
\nwith an\t investment of\tthe tune  of Rs. 3,00,00,000 (Rupees
\nthree crores).\tCompared with that, the interest of Coats in
\nNIIL was just about Rs. 10 lakhs, even if the shares of NIIL
\nwere to be valued at Rs. 190\/- per share.\n<\/p>\n
     Devagnanam wrote  a letter\t dated December\t 11, 1976 to
\nRaeburn, informing him that they had just closed the Board’s
\nmeeting in  which the  principal subject  of discussion\t was
\n“Indianization”. Devagnanam  expressed resentment of himself
\nand his colleagues that after they had faithfully served the
\nHolding Company for almost the whole of their working lives,
\nthe Holding  Company should  be unwilling  to accept them as
\npartners, especially  when they\t were legally entitled to be
\nso considered.\tDevagnanam made it clear in this letter that
\nany attempt  by Coats  to retain  an indirect control in the
\nmanagement of  NIIL will  not be  acceptable to\t the  Indian
\nshareholders.\n<\/p>\n
     Then comes\t the important\tletter of December 14, 1976,
\nwhich was  written  by\tDevagnanam  to\tRaeburn.  Devagnanam
\ninformed  Raeburn   by\tthat  letter  that  he\thad  further
\ndiscussions with  his colleagues  and was  able to  persuade
\nthem to\t agree to  a kind  of Package deal. The terms of the
\ndeal so suggested were: “(1)
\n773<\/span>
\nIndianization should  take place  with the  existing  Indian
\nshareholders acquiring\t60% of\tthe stock;  (2) Mackrael and
\nRaeburn should be taken on NIIL’s Board as Directors, but in
\nno event  Martin Henry\twho was\t connected with Madura Coats
\nwhich had a powerful plan of development of Prym technology;
\n(3) the\t Indian shareholders were prepared to take B.T. Lee,
\na senior executive of Needle Industries\/Coats, Studley, as a
\npermanent whole time Director of NIIL to be put specifically
\nin charge  of exports”.\t Some other suggestions were made by
\nDevagnanam to show the bona fides of the Indian shareholders
\nand to\talleviate the apprehensions in the minds of the U.K.
\nshareholders.  Devagnanam   asked  Raeburn   to\t convey\t his
\nreactions in  the  matter.  This  letter  has  been  gravely
\ncommented upon\tby the Holding Company on the ground that it
\ndid not\t contemplate the  issue of  rights  shares.  We\t are
\nunable to  see the  validity of this criticism. There is not
\nthe  slightest\tdoubt  that  the  Indian  shareholders\twere
\ninsisting all  along that  they should\tbecome the owners of
\n60% of\tthe equity  capital of\tNIIL.  A  simple  method  of
\nbringing this  about was the transfer by the Holding Company
\nof  20%\t  of  its   shareholding  to   the  existing  Indian
\nshareholders. It was only when this plain method of bringing
\nabout  reduction  in  the  equity  holding  failed  and\t the
\ndeadline fixed\tby the Reserve Bank was drawing nearer, that
\nthe Board  of NIIL  decided upon the issue of rights shares,
\nwhich was the only other alternative that could be conceived
\nof for\treducing the  non-resident interest. The issuance of
\nrights shares, after all, was not like a bolt from the blue.
\nIn any event, it was mentioned in the Ketty meeting.\n<\/p>\n
     On December  20, 1976  Silverston\twrote  a  letter  to
\nRaeburn saying\tthat he would be proceeding to U.K. early in
\nJanuary in  connection with his personal matters and that he
\nwould then visit Raeburn also. Silverston stated candidly in
\nthe letter  that the  situation which was developing between
\nthe  U.K.   and\t the  Indian  shareholders,  if\t allowed  to
\ncontinue, could\t do much damage to the British interests and
\n“as one who is still concerned with the interests of British
\nindustry, I  feel I  cannot sit\t by  and  allow\t matters  to
\ndeteriorate to\ttheir detriment, without making some attempt
\ntowards bringing  the issues  between the  parties to a fair
\nconclusion.” Raeburn  wrote to\tKingsley on  January 14,1977
\nstating that he had a discussion with Silverston a couple of
\ndays back,  during which  Silverston had  stated clearly the
\nlegal position\tand given  his advice  upon it.\t In the last
\nparagraph of this letter, Raeburn said:\n<\/p>\n
774<\/span><\/p>\n
\t  “We have  now put  our views\tquite clearly to Mr.
\n\t  Makrael and we are awaiting the reaction of Needle
\n\t  Industries and Coats. Therefore, I am hoping but I
\n\t  cannot be sure of this, to be able to let you know
\n\t  fairly soon  what the\t formal decision of the U.K.
\n\t  shareholders is.<\/p><\/blockquote>\n
     It\t needs\t to  be\t emphasised,  especially  since\t its
\nimportance was\tnot fully appreciated by the Appellate Bench
\nof the\tHigh Court,  that  the\tIndian\tpoint  of  view\t was
\ncommunicated  with   the  greatest  clarity  to\t Raeburn  in
\nDevagnanam’s letter  dated  December  14,  1976,  which\t was
\nwithin the  time schedule  which was agreed to be adhered to
\nin the\tKetty meeting.\tThe views  of the  U.K. shareholders
\nwere  most   certainly\tnot   communicated  to\t the  Indian
\nshareholders by\t the middle  of January\t 1977 as was clearly
\nagreed upon  in the  Ketty meeting. In fact, they were never
\ncommunicated.\n<\/p>\n
     On January\t 20, 1977,  the Reserve Bank sent a reminder
\nto NIIL.  After referring to the letter of May 11, 1976, the
\nReserve Bank  asked NIIL  to submit  at an  early  date\t the
\nprogress  report  regarding  dilution  of  the\tnon-resident
\ninterest. In  reply, a\tletter dated  February 21,  1977 was
\nsent by NIIL to the Bank, stating:\n<\/p>\n
\t  “We confirm  that we\tare following  up the matter
\n\t  regarding dilution of non-resident interest and we
\n\t  confirm our  commitment  to  achieve\tthe  desired
\n\t  Indianization by  the stipulated  date, i.e.\t17th
\n\t  May, 1977.”\n<\/p><\/blockquote>\n
It is  very important to note that a copy of this letter was
\nforwarded both to Whitehouse and Sanders. They must at least
\nbe assumed  to know  that not  only was\t Indianization to be
\nachieved by May 17, 1977, but that NIIL had committed itself
\nto do so by that date.\n<\/p>\n
     It is  contended by  Shri Seervai that the negotiations
\nwith Coats  had in  fact not  come to  an end and that Coats
\nwere never  told that  the compromise talks will be regarded
\nas having  failed. It  is urged\t that Coats  were all  along
\nlabouring  under  the  impression,  and\t rightly,  that\t the
\ncompromise proposals  which were  discussed with  Raeburn in
\nthe meeting  of March 29-31, 1977 in U.K. would be placed by
\nDevagnanam before the Indian shareholders, and the
\n775<\/span>
\nU.K. shareholders apprised whether or not the proposals were
\nacceptable.\n<\/p>\n
     Shri Seervai relies strongly on a letter dated March 9,
\n1977 written  by Raeburn to Devagnanam. After saying that on
\nthe Friday  preceding the 9th March, he had discussions with
\nMackrael and  three high-ranking personnel of Coats, Raeburn
\nsays in that letter that Coats had refused to agree that the
\nIndian shareholders  should acquire  a 60%  shareholding  in
\nNIIL that  this had  created a new situation and that he was
\nappending to  the letter an outline of what he believed, but
\ncould not  be  sure,  would  be\t agreeable  to\tCoats\/Needle
\nIndustries. Raeburn stated further in that letter:\n<\/p>\n
\t  “I know  that all  this will\tbe difficult for you
\n\t  and your  fellow Indian  shareholders, but  I urge
\n\t  you to support this view and get their acceptance,
\n\t  and to come here to be able to negotiate. If these
\n\t  or similar  principles can  be agreed\t during your
\n\t  visit, I  have no  doubt that\t the detailed method
\n\t  can be quickly arranged.”\n<\/p><\/blockquote>\n
Raeburn stated\tthat the  proposal annexed to the letter had
\nnot been agreed with Coats but he, on his own part, believed
\nthat Coats  could  be  persuaded  to  agree  to\t it.  Stated
\nbriefly, the  proposal annexed\tby  Raeburn  to\t his  letter
\naforesaid involved  (i)\t the  existing\tIndian\tshareholders
\nholding 49%  of the  shares,  (ii)  new\t Indian\t independent
\ninstitutional shareholders  holding 11%\t of the\t shares, and\n<\/p>\n
(iii) the  existing U.K.  shareholders, either\tdirectly  or
\nindirectly, holding 40% of the shares. The proposed Board of
\nDirectors  was\t to  consist   of  representatives   of\t the
\nshareholders appointed by them thus:\n<\/p>\n
\t  “Existing Indian  shareholders 3,  New independent
\n\t  Indian shareholders  1, existing U.K. shareholders
\n\t  2, and  an independent  Indian Chairman acceptable
\n\t  to all parties.”<\/p><\/blockquote>\n
     It is  contended by  Shri Seervai\tthat these proposals
\nare crucial  for more  than one\t reason since,\tin the first
\nplace, the  proposal to increase the holding of the existing
\nIndian shareholders  to 49%  and the  offer of\t11%  to\t new
\nIndian\t independent\tinstitutional\t shareholders\t was
\ninconsistent with  the charge  that Coats  wanted to  retain
\ncontrol over NIIL, directly or indirectly. The second reason
\nwhy it\tis  said  that\tthe  proposal  is  crucial  is\tthat
\nRaeburn’s letter of
\n776<\/span>
\nMarch 9\t must have  been received by Devagnanam before March
\n14 since  it was replied to on the 14th. Therefore, contends
\nShri Seervai,  the negotiations\t between  the  parties\twere
\nstill not  at an  end. Counsel\tsays that  it  was  open  to
\nDevagnanam to refuse to negotiate on the terms suggested and
\ninsist that  the Indian\t shareholders must  have 60%  of the
\nshares. Instead\t of conveying  his reactions to the proposal
\nDevagnanam, it\tis contended,  went to the United Kingdom to
\ndiscuss the  question. The minutes of discussions which took
\nplace in  U.K., Mackrael  and Sanders  not taking  any\tpart
\ntherein, show  that NEWEY continued to plead that the Indian
\nshareholders  and   Coats  should  consider  the  compromise
\nformula and  that Devagnanam  undertook to put to the Indian
\nshareholders  further\tproposals  for\t compromise  and  to
\nconsider what  other  proposals\t or  safeguards\t they  might
\nsuggest. Reliance  is also  placed by  counsel on  a  letter
\nwhich Devagnanam  wrote to Raeburn on April 5, in support of
\nthe submission\tthat the  negotiations were  still not at an
\nend. The last but one paragraph of that letter reads thus:\n<\/p>\n
\t  “As  undertaken,  I  shall  place  the  compromise
\n\t  formula, very\t kindly suggested  by you, before my
\n\t  colleagues later  today. We shall discuss it fully
\n\t  at  the   Board  Meeting   tomorrow  and  I  shall
\n\t  communicate\tthe    outcome\t to    you   shortly
\n\t  thereafter.”<\/p><\/blockquote>\n
     We are  unable to\tagree that  the proposal  annexed to
\nRaeburn’s letter of March 9 1977 was either a proposal by or
\non behalf  of Coats  or one  made with\ttheir knowledge\t and
\napproval. Were\tit so,\tit is  difficult to  understand\t how
\nRaeburn could  write to\t Mackrael on June 8, 1977 that Coats
\nwere still  insistent on the entire 20% of the excess equity
\nholding not going to the existing Indian shareholders. There
\nis also no explanation as to why, if the proposal annexed to
\nRaeburn’s letter  of March  9 was a proposal by or on behalf
\nof Coats,  Raeburn said\t at the U.K. meeting of March 29-31,
\n1977 that  it was  better to ‘let Coats declare their hand’.
\nIt is  indeed impossible  to understand\t why Coats, on their
\nown  part,  did\t not  at  time\tcommunicate  any  compromise
\nproposal of theirs to the Indian shareholders directly. They
\nnow seem to take shelter behind the proposal made by Raeburn
\nin his\tletter of  March 9 adopting it as their own. Even in
\nthe letter  which Crawford  Bayley &  Co., wrote on June 21,
\n1977 on\t behalf of  Sanders to the Reserve Bank of India, no
\nreference was at all made to any proposal by or on behalf of
\nCoats to the Indian shareholders. The vague statement
\n777<\/span>
\nmade in\t that letter  is that ‘certain proposals’ were being
\nconsidered and\twould  be  submitted  ‘shortly’\t before\t the
\nauthorities.  No  such\tproposals  were\t ever  made  by\t the
\nSolicitor or their client to anyone.\n<\/p>\n
     These letters  and events\tleave no  doubt in  our mind
\nthat the  negotiations between\tthe parties  were at  an end
\nthat there  were no  concrete proposals\t by or\ton behalf of
\nCoats which  remained outstanding  to be  discussed  by\t the
\nIndian shareholders. To repeat, Devagnanam declared his hand
\nin his letter of December 14,1976 by reiterating, beyond the
\nmanner of  doubt, that\tnothing less  than 60%\tshare in the
\nequity capital\tof NIIL\t would be  acceptable to  the Indian
\nshareholders. Coats  never replied to that letter nor indeed
\ndid they  convey their\treaction to  it in any other form or
\nmanner at  any time.  In fact,\tit would be more true to say
\nthat Coats themselves treated the matter as at an end since,
\nthey  were  wholly  opposed  to\t the  stand  of\t the  Indian
\nshareholders that  they must  have 60%\tshare in  the equity
\ncapital of  NIIL. What\thappened in  the meeting of April 6,
\n1977 has  to be\t approached in the light of the finding that
\nthe negotiations  between the  parties had  fallen  through,
\nthat Coats  had refused\t to declare  their hand and that all
\nthat could  be inferred\t from their  attitude  with  a\tfair
\namount\tof   certainty\twas  that  they\t were  unwilling  to
\ndisinvest.\n<\/p>\n
     On March 18, 1977 NIIL’s Secretary gave a notice of the
\nBoard meeting  for April  6, 1977. The notice was admittedly
\nreceived by Sanders in U.K., well in time but did not attend
\nthe meeting.  The explanation  for his failure to attend the
\nmeeting is  said to  be that  the item\ton the agenda of the
\nmeeting, ‘Policy-Indianisation’ was vague and did not convey
\nthat any  matter of  importance was going to be discussed in
\nthe meeting,  like for\texample, the issue of rights shares.
\nWe find\t it quite difficult to accept this explanation. Just
\nas a  notice to\t quit in  landlord-tenant matters  cannot be
\nallowed to  split on  a straw,\tnotices of Board meetings of
\ncompanies have\tto be  construed reasonably,  by considering
\nwhat they  mean to  those to  whom  they  are  given.  To  a
\nstranger, ‘Policy-Indianisation’  may not convey much but to
\nSanders and the U.K. shareholders it would speak volumes. By
\nthe time that Sanders received the notice, the warring camps
\nwere clearly  drawn on\ttwo sides  of the  battle-line,\t the
\nIndian group insisting that they will have nothing less than
\na 60%  share in\t the equity  capital of\t NIIL and  the\tU.K.
\nshareholders insisting\twith equal  determination that\tthey
\nwill not allow the existing Indian
\n778<\/span>
\nshareholders to have anything more than 49%. In pursuance of
\na resolution  passed by the Board, a letter had already been
\nwritten to  the Reserve\t Bank confirming  the commitment  of
\nNIIL to\t achieve the required Indianisation by May 17, 1977.
\nA copy\tof NIIL’s  letter to  the Reserve  Bank was  sent to
\nSanders and  Whitehouse. In  view of  the fact\tthat to\t the
\ncommon knowledge  of the  two  sides  there  were  only\t two
\nmethods\t by   which  the   desired  Indianisation  could  be
\nachieved,  namely,   either  disinvestment  by\tthe  Holding
\nCompany in  favour of  the existing Indian shareholders or a
\nrights issue,  the particular item on the agenda should have
\nleft no\t doubt in  the mind  of the  U.K. shareholders as to
\nwhat the  Board was  likely to\tdiscuss and  decide  in\t the
\nmeeting\t of  the  6th.\tDisinvestment  stood  ruled  out  of
\nconsideration, a fact which was within the special knowledge
\nof the\tHolding Company,  since whether\t to disinvest or not
\nwas a matter of their volition.\n<\/p>\n
     After the\tdespatch of  the notice\t dated March 18,1977
\ntwo important  events happend.\tFirstly, Devagnanam  went to
\nBirmingham, where  discus ions\twere held  from March 29-31,
\n1977 in\t which Indianisation of NIIL was discussed, as shown
\nby the\tminutes of  that discussion.  NEWEY were  willing to
\naccept Indianisation,  by the  existing Indian\tshareholders
\nacquiring a  60% interest in the share capital of NIIL while
\n“COATS\twere   adamantly  opposed”   to\t that  view.  It  is
\nsurprising that\t during the  time  that\t Devagnanam  was  in
\nBirmingham, Sanders  did not meet him to seek an explanation
\nof what\t the particular item on the agenda of the meeting of
\nApril 6\t meant Sanders\thad received  the notice of March 18
\nbefore\tthe   Birmingham   discussions\t took\tplace,\t and
\nsignificantly he  has  made  no\t affidavit  at\tall  on\t the
\nquestion as to why he did not meet Devagnanam in Birmingham,
\nor why\the did not attend the meeting of April 6 or what the
\nparticular item on the agenda meant to him.\n<\/p>\n
     The second\t important event  which happened  after\t the
\nnotice of March 18 was issued was that on April 4, 1977 NIIL
\nreceived a  letter dated  March 30,  1977 from\tthe  Reserve
\nBank. The letter which was in the nature of a stern reminder
\nleft  no  option  to  NIIL’s  Board  except  to\t honour\t the
\ncommitment which  it had  made to  the Reserve\tBank. By the
\nletter the  Reserve Bank  warned NIIL:\t“Please note that if
\nyou fail  to comply with our directive regarding dilution of
\nforeign equity\twithin the  stipulated period,\twe shall  be
\nconstrained to view the matter seriously.”\n<\/p>\n
779<\/span><\/p>\n
     We do  not see  any substance  in the contention of the
\nHolding Company\t that despite  the commitment which NIIL had
\nmade to the Reserve Bank, the long time which had elapsed in
\nthe meanwhile  and the virtual freezing of its developmental
\nactivities as  of December  31, 1973, NIIL should have asked
\nfor an extension of time from the Reserve Bank. In the first
\nplace, it  could not  be assumed or predicated that the Bank
\nwould grant  extension, and  secondly, it  was\tnot  in\t the
\ninterest of NIIL to ask for such an extension.\n<\/p>\n
     The Board\tmeeting was  held as  scheduled on  April 6,
\n1977. The  minutes of  the meeting  show that two directors,
\nSanders and  M.S.P. Rajes,  asked for leave of absence which
\nwas granted  to them.  Sanders,\t as  representing  the\tU.K.
\nshareholders on NIIL’s Board, did not make a request for the
\nadjournment of\tthe meeting  on the ground that negotiations
\nfor a  compromise had  not yet\tcome to\t an end\t or that the
\nIndian shareholders  had not  yet conveyed their response to
\nthe “Coats’  compromise formula”.  Nor did he communicate to
\nthe Board  his views  on ‘Policy-Indianisation’, whatever it
\nmay have  meant to  him. Seven Directors were present in the
\nmeeting, with Devagnanam in the chair at the commencement of
\nthe meeting.  C. Doraiswamy,  a Solicitor  by profession and
\nadmittedly an  independent Director,  was amongst the seven.
\nIn  order  to  complete\t the  quorum  of  two  “independent”
\ndirectors, other  directors being interested in the issue of
\nrights shares,\tSilverston was\tappointed to the Board as an
\nAdditional Director  under article  97 of NIIL’s Articles of
\nAssociation. Silverston\t then  chaired\tthe  meeting,  which
\nresolved that the issued capital of the Company be increased
\nto Rs.\t48,00,000\/- by\tthe issue of 16,000 equity shares of
\nRs. 100\/-  each to  be\toffered\t as  rights  shares  to\t the
\nexisting shareholders  in proportion  to the  shares held by
\nthem.  The  offer  was\tdecided\t to  be\t made  by  a  notice
\nspecifying the\tnumber of shares which each shareholders was
\nentitled to,  and in  case the offer was not accepted within
\n16 days\t from the  date of the offer, it was to be deemed to
\nhave been declined by the shareholder concerned.\n<\/p>\n
     The aforesaid  resolution of  the\tBoard  raises  three
\nimportant questions, inter alia, which have been passed upon
\nus by  Shri Seervai  on behalf\tof the\tHolding Company: (1)
\nWhether the Directors of NIIL, in issuing the rights shares,
\nabused the fiduciary power which they possessed as directors
\nto issue shares; (2) Whether Silverston was a ‘disinterested
\nDirector’; and\t(3)  Whether  Silverston’s  appointment\t was
\notherwise invalid, since there was no item on the agenda
\n780<\/span>
\nof  the\t  meeting  for\tthe  appointment  of  an  Additional
\nDirector.  If  Silverston’s  appointment  as  an  Additional
\nDirector is  bad either\t because he  was not a disinterested
\ndirector or  because there  was no  item on the agenda under
\nwhich his  appointment could be made, the resolution for the
\nissue of  rights shares\t which was  passed  in\tthe  Board’s
\nmeeting of  April 6  must fall\tbecause then,  the necessary
\nquorum of two disinterested directors would be lacking.\n<\/p>\n
     On the  first of these three questions, it is contended
\nby Shri\t Seervai that  notwithstanding that  the  issues  of
\nshares is intra vires the Directors, the Directors’ power is
\na fiduciary  power, and\t although an  exercise of such power
\nmay be formally valid, it may be attacked on the ground that
\nit was\tnot exercised  for the\tpurpose\t for  which  it\t was
\ngranted. It  is urged  that the issue of shares by Directors
\nwhich is directed to affect the right of the majority of the
\nshareholders or\t to defeat that majority and convert it into
\na minority  is unconstitutional,  void and  in breach of the
\nfiduciary duty of Directors, though in certain situations it
\nmay be\tratified by  the Company in the General Meeting. Any
\nreference by the Company to a general meeting in the present
\ncase, it  is said, would have been futile since, without the
\nimpugned issue\tof rights  shares, the\tmajority was against
\nthe issue.  It was finally argued that good faith and honest
\nbelief that in fact the course proposed by the Directors was
\nfor the\t benefit  of  the  shareholders\t or  was  bona\tfide
\nbelieved to  be for  their benefit is irrelevant because, it
\nis for the majority of the shareholders to decide as to what
\nis for\ttheir benefit,\tso long as the majority does not act
\noppressively or\t illegally. Counsel  relies  in\t support  of
\nthese and  allied contentions  on the  decision of the Privy
\nCouncil in  Howard Smith  Ltd. and  of the English Courts in
\nFraser, Punt, Piercy and Hogg. (supra)
\n     In Punt  v. Symons, (supra) which applied the principle
\nof Fraser v. Whallcy, (supra) it was held that:\n<\/p>\n
\t  Where shares had been issued by the Directors. not
\n\t  for the  general benefit  of the  company, but for
\n\t  the purpose  of controlling  the  holders  of\t the
\n\t  greater number  of shares  by obtaining a majority
\n\t  of voting  power, they ought to be restrained from
\n\t  holding the  meeting at which the votes of the new
\n\t  shareholders were to have been used.
\n\t  But Byrne J. stated:\n<\/p><\/blockquote>\n
781<\/span><\/p>\n
\t  There may  be occasions  when Directors may fairly
\n\t  and properly issue shares in the case of a Company
\n\t  constituted like  the present\t for other  reasons.
\n\t  For  instance\t  it  would   not  be\tat  all\t  an
\n\t  unreasonable thing  to create\t a sufficient number
\n\t  of shareholders  to enable  statutory powers to be
\n\t  exercised.\n<\/p><\/blockquote>\n
In the\tinstant case, the issue of rights shares was made by
\nthe  Directors\t for  the  purpose  of\tcomplying  with\t the
\nrequirements of\t FERA  and  the\t directives  issued  by\t the
\nReserve Bank  under that  Act. The  Reserve Bank had fixed a
\ndeadline and  NIIL. had\t committed itself  to complying with
\nthe Bank’s directive before that deadline.\n<\/p>\n
     Peterson J.  applied the principle enunciated in Fraser
\nand in\tPunt in\t the case  of Piercy  v. S. Mills & (Company
\nLtd. (supra) The learned Judge observed at page 84:\n<\/p>\n
\t  “The basis of both cases is, as I understand, that
\n\t  Directors are\t not entitled to use their powers of
\n\t  issuing  shares   merely  for\t  the\tpurpose\t  of
\n\t  maintaining  their   control\tor  the\t control  of
\n\t  themselves and  their friends\t over the affairs of
\n\t  the  company,\t  or  merely   for  the\t purpose  of
\n\t  defeating the\t wishes of  the existing majority of
\n\t  shareholders.”\n<\/p><\/blockquote>\n
The fact  that by the issue of shares the Directors succeed,
\nalso or\t incidentally, in maintaining their control over the
\nCompany or  in newly  acquiring it,  does not  amount to  an
\nabuse  of   their  fiduciary   power.  What   is  considered
\nobjectionable is  the use  of  such  powers  merely  for  an
\nextraneous  purpose   like  maintenance\t or  acquisition  of
\ncontrol over the affairs of the Company.\n<\/p>\n
     In Hogg  v. Cramphorn Ltd., (supra) it was held that if
\nthe power  to issue  shares was\t exercised from\t an improper
\nmotive, the  issue was\tliable to  be set  aside and  it was
\nimmaterial that\t the issue  was made  in a  bona fide belief
\nthat it\t was in\t the interest  of the  Company.\t Buckley  J.
\nreiterated the\tprinciple in Punt and in Piercy, (Supra) and
\nobserved:\n<\/p>\n
\t  “Unless  a   majority\t in   a\t company  is  acting
\n\t  oppressively\ttowards\t the  minority,\t this  Court
\n\t  should not  and will not itself interfere with the
\n\t  exercise by  the majority  of\t its  constitutional
\n\t  rights  or   embark  upon   an  inquiry  into\t the
\n\t  respective merits of the views held or policies
\n782<\/span>
\n\t  favoured by  the majority  and the  minority.\t Nor
\n\t  will\tthis  Court  permit  directors\tto  exercise
\n\t  powers, which\t have been  delegated to them by the
\n\t  company in  circumstances which  put the directors
\n\t  in a\tfiduciary  position  when  exercising  those
\n\t  powers, in  such a  way as  to interfere  with the
\n\t  exercise by  the majority  of\t its  constitutional
\n\t  rights; and  in a  case of  this kind\t also, in my
\n\t  judgment, the\t court should  not  investigate\t the
\n\t  rival merits\tof the\tviews  or  policies  of\t the
\n\t  parties.” (p. 268)
\nApplying this  principle, it  seems to\tus difficult to hold
\nthat by\t the issue  of rights  shares the  Directors of NIIL
\ninterfered in  any manner  with\t the  legal  rights  of\t the
\nmajority. The majority had to disinvest or else to submit to
\nthe issue  of rights  shares in\t order to  comply  with\t the
\nstatutory  requirement\t of  FERA  and\tthe  Reserve  Bank’s
\ndirectives. Having  chosen not to disinvest, an option which
\nwas open  to them, they did not any longer possess the legal
\nright to  insist that  the Directors  shall  not  issue\t the
\nrights shares.\tWhat the  Directors did\t was clearly  in the
\nlarger interests  of the  Company and  in obedience to their
\nduty to comply with the law of the land. The fact that while
\ndischarging that  duty they  incidentally trenched  upon the
\ninterests of  the majority  cannot invalidate  their action.\n<\/p><\/blockquote>\n
The conversion\tof the existing majority into a majority was
\na consequence of what the Directors were obliged lawfully to
\ndo. Such  conversion was  not  the  motive  force  of  their
\naction.\n<\/p>\n
     Before we\tadvert to  the decision of the Privy Chuncil
\nin Howard  Smith Ltd.  v. Ampol\t Petroleum Ltd.,  (supra) we
\nwould like  to refer  to the  decision of  the High Court of
\nAustralia in  Harlowe’s Nominees Pty. Ltd v. Woodside (Lakes
\nEntrance) oil  Company No Liability and another, (supra) and
\nto the\tCanadian decision  of Berger J. of the Supreme Court
\nof British Columbia, in the case of Teck Corporation Ltd. v.
\nMiller et  al(1), both\tof which  were\tconsidered  by\tLord
\nWilberfore in  Howard  Smith.  On  a  consideration  of\t the
\nEnglish decisions,  including  those  in  Punt\tand  Plercy,
\nBarwick C.J. said in Harlowe’s Nominees (supra):\n<\/p>\n
\t  “The principle  is  that  although  primarily\t the
\n\t  power is given to enable capital to be raised when
\n\t  required for\tthe purposes  of the  company, there
\n\t  may be occasions when the directors may fairly and
\n\t  properly issue  shares for  other reasons, so long
\n\t  as those reasons relate to a
\n783<\/span>
\n\t  purpose of  benefiting the  company as a whole, as
\n\t  distinguished from  a\t purpose,  for\texample,  of
\n\t  maintaining control of the company in the hands of
\n\t  the directors\t themselves  or\t their\tfriends.  An
\n\t  inquiry  as  to  whether  additional\tcapital\t was
\n\t  presently required  is often\tmost relevant to the
\n\t  ultimate question  upon which\t the validity or the
\n\t  invalidity of the issue depends; but that ultimate
\n\t  question must always be whether in truth the issue
\n\t  was  made   honestly\tin   the  interests  of\t the
\n\t  company.” (p. 493)
\nWe agree with the principle so stated by the Australian High
\nCourt and,  in our  opinion, it\t applies with great force to
\nthe situation  in the  present case.  In  Teck\tCorporation,
\n(supra) the  Court examined several decisions of the English
\nCourts and  of other  Courts, including\t the  one  in  Hogg.\n<\/p><\/blockquote>\n
(supra) The  last headnote  of the  report at page 289 reads
\nthus:\n<\/p>\n
\t  “Where directors  of a  company seek,\t by entering
\n     into an  agreement to  issue new  shares, to  prevent a
\n     majority shareholder  from exercising  control  of\t the
\n     company, they  will not be held to have failed in their
\n     fiduciary duty to the company if they act in good faith
\n     in what  they believe. on reasonable grounds, to be the
\n     interests of  the company.\t If the\t directors’  primary
\n     purpose is to act in the interests of the company, they
\n     are acting\t in good faith even though they also benefit
\n     as a result”.\n<\/p><\/blockquote>\n
In Howard  Smith, no  new  principle  was  evolved  by\tLord
\nWilberforce  who,   distinguishing  the\t decisions  in\tTeck
\nCorporation and Harlowe’s Nominees, (supra) said:\n<\/p>\n
\t  “By contrast to the cases of Harlowe and Teck, the
\n     present  case,  on\t the  evidence,\t does  not,  on\t the
\n     findings of  the trial judge, involve any consideration
\n     of\t management,   within  the   proper  sphere  of\t the
\n     directors. The purpose found by the judge is simply and
\n     solely to\tdilute the  majority voting  power  held  by
\n     Ampol and\tBulkships so as to enable a then minority of
\n     shareholders to  sell their shares more advantageously.<\/p><\/blockquote>\n
     So far as authority goes, an issue of shares purely for
\n     the purpose  of creating  voting power  has  repeatedly
\n     been condemned”. (page 837)
\n784<\/span>
\nThe dictum  of Byrne  J. in  Punt (supra) that “there may be
\nreasons other  than to raise capital for which shares may be
\nissued” was approved at page 836 and it was observed at page
\n837<\/span>
\n\t  “Just as  it is established that directors, within
\n     their management powers, may take decisions against the
\n     wishes of the majority of shareholders, and indeed that
\n     the majority of shareholders cannot control them in the
\n     exercise of  these powers\twhile they  remain in office
\n     (Automatic Self  Cleansing Filter Syndicate Co. Ltd. v.
\n     Cuninghams,  (1906)   2  Ch.   34),  so   it  must\t  be
\n     unconstitutional for  directors to\t use their fiduciary
\n     powers over  the shares  in the  company purely for the
\n     purpose of destroying an existing majority, or creating
\n     a new majority which did not previously exist. To do so
\n     is to  interfere with  that element  of  the  company’s
\n     constitution which\t is separate  from and\tset  against
\n     their powers.  If there  is added,\t moreover,  to\tthis
\n     immediate purpose,\t an ulterior  purpose to  enable  an
\n     offer for shares to proceed which the existing majority
\n     was in  a position\t to block,  the departure  from\t the
\n     legitimate use of the fiduciary power becomes not less,
\n     but all  the greater. The right to dispose of shares at
\n     a given  price is essentially an individual right to be
\n     exercised\ton   individual\t decision  and\ton  which  a
\n     majority, in  the\tabsence\t of  oppression\t or  similar
\n     impropriety, is entitled to prevail”.\n<\/p>\n
In our judgment, the decision of the Privy Council in Howard
\nSmith, (supra) instead of helping the Holding Company goes a
\nlong way  in favour  of the appellants. The Directors in the
\ninstant case  did not  exercise their  fiduciary powers over
\nthe shares merely or solely for the purpose of destroying an
\nexisting majority  or for  creating a new majority which did
\nnot previously\texist. The  expressions ‘merely’,  ‘purely’,
\n‘simply’ and ‘solely’ virtually lie strewn all over page 837
\nof the\treport in Howard Smith. The Directors here exercised
\ntheir power for the purpose of preventing the affairs of the
\nCompany\t from\tbeing  brought\t to  a\t grinding  halt,   a
\nconsummation devoutly wished for by Coats in the interest of
\ntheir extensive world-wide business.\n<\/p>\n
     In Nanalala  Zaver and another v. Bombay Life Assurnnce
\nCo. Ltd.,  (supra) Das\tJ., in\this separate  but concurring
\njudgment deduced the following principle on the basis of the
\nEnglish decisions:\n<\/p>\n
785<\/span><\/p>\n
\t  “It  is  well\t established  that  directors  of  a
\n     company are  in  a\t fiduciary  position  vis-a-vis\t the
\n     company and  must exercise\t their power for the benefit
\n     of the company. If the power to issue further shares is
\n     exercised by  the directors  not for the benefit of the
\n     company  but  simply  and\tsolely\tfor  their  personal
\n     aggrandisement and to the detriment of the company, the
\n     Court will\t interfere and\tprevent the  directors\tfrom
\n     doing so. The very basis of the Court’s interference in
\n     such a  case is  the existence of the relationship of a
\n     trustee  and   of\tcestui\tque  trust  as\tbetween\t the
\n     directors and the company”.<\/p><\/blockquote>\n
\t\t\t\t\t       (pp. 419-420)
\nIt is  true that  Das J.  held that Singhanias were complete
\nstrangers to the company and consequently the Directors owed
\nno duty,  much less  a fiduciary  duty, to  them. But we are
\nunable to  agree with  the contention  that the observations
\nextracted above\t from the judgment of Das J. are obiter. The
\nlearned Judge  has set\tforth  the  plaintiffs’\t contentions
\nunder three sub-heads at page 415. At the bottom of page 419
\nhe finished  discussion of  the 2nd sub-head and said: “This
\nleads me  to a\tconsideration of  the third  sub-head on the
\nassumption  that…..\tthe  additional\t motive\t was  a\t bad
\nmotive”. The  question was  thus argued before the Court and
\nwas squarely dealt with.\n<\/p>\n
     Before we\tleave this  topic, we  would like to mention
\nthat the mere circumstance that the Directors derive benefit
\nas shareholders by reason of the exercise of their fiduciary
\npower to issue shares, will not vitiate the exercise of that
\npower. As  observed by Gower in Principles of Modern Company
\nLaw, 4th edn., p. 578:\n<\/p>\n
\t  “As it  was happily put in an Australian case they
\n     are ‘not  required by  the law  to live  in  an  unreal
\n     region of\tdetached altruism and to act in a vague mood
\n     of ideal  abstraction from\t obvious facts which must be
\n     present to\t the mind  of any honest and intelligent man
\n     when he exercises his power as a director”.\n<\/p><\/blockquote>\n
The Australian\tcase referred to above by the learned author
\nis Mills  v. Mills,  (supra) which was specifically approved
\nby Lord Wilberforce in Howard Smith. In Manala Zaver (supra)
\ntoo, Das  J. stated  at page 425 that the true principle was
\nlaid down  by the Judicial Committee of the Privy Council in
\nHirsche v. Sims(1), thus:\n<\/p>\n
786<\/span><\/p>\n
\t  “If the true effect of the whole evidence is, that
\n     the defendants  truly and\treasonably believed  at\t the
\n     time that\twhat they  did was  for the  interest of the
\n     company they  are not  chargeable with  dolus malus  or
\n     breach  of\t  trust\t merely\t because  in  promoting\t the
\n     interest of  the company they were also promoting their
\n     own, or  because the  afterwards sold  shares at prices
\n     which gave them large profits”.<\/p><\/blockquote>\n
     Whether one  looks at the matter from the point of view
\nexpressed by this Court in Nanala Zaver or from the point of
\nview expressed by the Privy Council in Howard Smith, (supra)
\nthe test is the same, namely, whether the issue of shares is
\nsimply or  solely for  the benefit  of the Directors. If the
\nshares are issued in the larger interest of the Company, the
\ndecision to issue shares cannot be struck down on the ground
\nthat it\t has incidentally  benefited the  Directors in their
\ncapacity as  shareholders. We  must, therefore,\t reject Shri
\nSeervai’s argument  that in  the instant  case, the Board of
\nDirectors abused  its fiduciary\t power in  deciding upon the
\nissue of rights shares.\n<\/p>\n
     The second\t of the\t three questions  arising out of the
\nproceedings of\tthe Board’s  meeting  dated  April  6,\t1977
\nconcerns the validity of the appointment of Silverston as an
\nAdditional Director.  Under section  287(2) of the Companies
\nAct, 1956  the quorum  for the said meeting of Directors was
\ntwo. There  can be  no doubt  that a quorum of two Directors
\nmeans a\t quorum\t of  two  directors  who  are  competent  to
\ntransact and  vote on  the business  before the\t Board. (see
\nGreymouth v.  Greymouth and  Palmer’s Company Precedents.(1)
\n17th Edn.:  p. 579,  f.n.3). The  contention of\t the Holding
\nCompany is  that Silverston  was  a  Director  “directly  or
\nindirectly concerned  or interested”  in the  arrangement or
\ncontract arising  from the  resolutions to  offer and  allot
\nrights\tshares\t and  consequently,   the  resolutions\twere
\ninvalid: firstly  on the  ground that  they were passed by a
\nvote of\t an interested director without which there would be
\nno quorum  and secondly because, Silverston’s appointment as
\nan Additional  Director was  for the purpose of enabling the
\nsaid resolution\t to be\tpassed for the benefit of interested
\ndirectors. Relying  upon a decision of the Bombay High Court
\nin Firestone  Tyre &  Rubber Co.  v. Synthetics\t & Chemicals
\nLtd.,(2) Shri  Seervai contends\t that  section\t300  of\t the
\nCompanies Act  embodies the  general rule  of equity that no
\nperson who  has to discharge duties on behalf of a corporate
\nbody shall be
\n787<\/span>
\nallowed to enter into engagements in which he has a personal
\ninterest conflicting,  or which\t may possibly conflict, with
\nthe interests of those whom he is bound to protect.\n<\/p>\n
     The  reason   why\tit   is\t said  that  Silverston\t was
\ninterested in  or concerned with the allotment of the rights
\nshares to  the existing\t shareholders is, firstly because at
\nthe Ketty  meeting held\t in October  1976 he had acted as an
\n‘Advisor to  the Indian\t shareholders’ and secondly, because
\non October  25, 1976  he had  written a\t letter to  Kingsley
\npurporting to  convey his  advice to the Board of Directors.
\nThat  letter   contains\t allegations   against\tthe   Needle
\nIndustries, U.K.  and  of  Coats.  In  other  words,  it  is
\ncontended, Silverston  was  hostile  to\t Needle\t Industries,
\nU.K., and  to Coats,  and no  person in\t his position  could
\npossibly bring to bear an unbiased or disinterested judgment
\non the\tquestion which arose between the Holding Company and
\nthe Indian  shareholders as  regards  the  issue  of  rights
\nshares. It  is also  said  that\t certain  other\t aspects  of
\nSilverston’s conduct,  including his attitude in the meeting
\nof the 6th April, show that he was an interested director.\n<\/p>\n
     We are  unable to accept the contention that Silverston
\nis an  ‘interested’ director  within the  meaning of section
\n300 of the Companies Act. In the first place, it is wrong to
\nattribute any  bias to\tSilverston for\thaving acted  as  an
\nadviser to  the Indian\tshareholders in\t the Ketty  meeting.
\nSilverston is  by profession a solicitor and we suppose that
\nlegal advisers do not necessarily have a biassed attitude to
\nquestions on  which their  advice is sought or tendered. The
\nfact that  Silverston was received cordially in U.K. both by
\nRaeburn and  Mackrael when  he went  there in  January\t1977
\nshows that  even after\the had\tacted as  an adviser  to the
\nIndian shareholders  it was  not thought  that he was in any
\nsense biassed in their favour. Silverston’s alleged personal
\nhostility to  Coats cannot,  within the\t meaning of  section
\n300(1) of  the Companies Act, make him a person “directly or
\nindirectly, concerned  or  interested  in  the\tcontract  or
\narrangement”  in   the\tdiscussion   of\t which\t he  had  to
\nparticipate or\tupon which  he had  to vote.  Section 300(1)
\ndisqualifies a\tDirector from  taking part in the discussion
\nof or  voting on any contract or arrangement entered into or
\non behalf  of the  company, if he is in any way concerned or
\ninterested in  that contract  or arrangement.  Under section
\n299(1) of  the Companies  Act, “Every  director of a Company
\nwho is in any way, whether directly or indirectly, concerned
\nor interested  in a  contract  or  arrangement\tor  proposed
\ncontract or arrangement, entered into or to be entered into,
\nby or on behalf of the company, shall disclose the nature of
\nhis concern or interest at a meeting of the Board
\n788<\/span>
\nof Directors.” The concern or interest of the Director which
\nhas to be disclosed at the Board meeting must be in relation
\nto the contract or arrangement entered into or to be entered
\ninto by or on behalf of the company. The interest or concern
\nspoken of  by sections\t299(1) and 300(1) cannot be a merely
\nsentimental interest  or ideological  concern. Therefore,  a
\nrelationship of\t friendliness with  the\t Directors  who\t are
\ninterested in  the contract  or arrangement or even the mere
\nfact of\t a lawyer-client  relationship with  such  directors
\nwill not  disqualify a\tperson from  acting as a Director on
\nthe  ground   of  his\tbeing,\tunder\tsection\t 300(1),  an
\n“interested” Director.\tThus, howsoever\t one may stretch the
\nlanguage of  section 300(1)  in the  interest of  purity  of
\ncompany administration,\t it is\tnext to\t impossible to bring
\nSilverston’s  appointment   within  the\t framework  of\tthat
\nprovision. In  the Firestone  (supra) the Solicitor-Director
\nwas held  to be concerned or interested in the agreement for
\nthe appointment of Kilachands as selling agents, as he had a
\nsubstantial shareholding  in a\tprivate limited\t company  of
\nKilachands. Besides,  he was  also a shareholder director in
\nvarious other concerns of Kilachands.\n<\/p>\n
     We\t must,\t accordingly,  reject\tthe  argument\tthat
\nSilverston  was\t  an  interested   director,  therefore\t his
\nappointment as\ta Additional  Director was  invalid and that
\nconsequently, the  resolution for the issue of rights shares
\nwas passed without the necessary quorum of two disinterested
\ndirectors. We  have already held that the resolution was not
\npassed for  the benefit of the Directors. There is therefore
\nno question of Silverston’s appointment having been made for
\nthe purpose of enabling such a resolution to be passed.\n<\/p>\n
     The third contention, arising out of the proceedings of
\nthe meeting  of 6th  April, to\tthe effect that Silverston’s
\nappointment as an Additional Director is invalid since there
\nwas no item on the agenda of the meeting for the appointment
\nof an  Additional Director  is\tequally\t without  substance.
\nSection 260  of the Companies Act preserves the power of the
\nBoard of Directors to appoint additional Directors if such a
\npower  is   conferred  on  the\tBoard  by  the\tArticles  of
\nAssociation of\tthe Company.  We are  not concerned with the
\nother conditions  laid down  in the  section, to  which\t the
\nappointment is\tsubject. It  is\t sufficient  to\t state\tthat
\nArticle 97  of NIIL’s  Articles of  Association confers\t the
\nrequisite  power   on  the   Board  to\t appoint  additional
\nDirectors.\n<\/p>\n
     We do  not see  how the  appointment of  an  additional
\nDirector could\thave been  foreseen before the 6th April, on
\nwhich date  the meeting of the Board was due to be held. The
\noccasion to
\n789<\/span>
\nappoint Silverston  as an Additional Director arose when the
\nBoard met  on 6th  April, with\tDevagnanam in chair. Sanders
\nwas absent  and no  communication was  received from  or  on
\nbehalf of  the Holding Company that they had decided finally
\nnot to\tdisinvest. They always had the right to such a locus
\npenitentia. Were  they to  intimate that  they were ready to
\ndisinvest, there  would have  been no occasion to appoint an
\nadditional Director.  That  occasion  arose  only  when\t the
\npicture\t emerged  clearly  that\t the  Board  would  have  to
\nconsider the  only other  alternative for  reduction of\t the
\nnon-resident holding, namely, the issue of rights shares. It
\nis for\tthis reason  that the  subject of  appointment of an
\nadditional Director  could not\thave, in  the then  state of
\nfacts, formed a part of the Agenda. Silverston’s appointment
\nis, therefore,\tnot open  to challenge on the ground of want
\nof agenda on that subject.\n<\/p>\n
     It is  necessary to  clear a misunderstanding in regard
\nto the Directors to issue shares. It is not the law that the
\npower to  shares can  be used only if there is need to raise
\nadditional capital.  It is  true that  the  power  to  issue
\nshares is  given primarily  to enable  capital to  be raised
\nwhen it is required for the purposes of the company but that
\npower is  not conditioned  by such  need. That\tpower can be
\nused  for  other  reasons  as,\tfor  example,  to  create  a
\nsufficient number  of share-holders to enable the company to
\nexercise statutory  powers (Punt v. Symons and Co.), (Supra)
\nor to  enable it to comply with legal requirements as in the
\ninstant case.  In Hogg\tv. Cramphorn  (supra). Buckley J. (p\n<\/p>\n
267) agreed with the law of Byrne J. in Punt And so did Lord
\nWilberforce (pp\t 835-836) in  Howard Smith  (supra) where he
\nsaid:\n<\/p>\n
\t  “It is, in their Lordships’ opinion, too narrow an
\n     approach to  say that  the only valid purpose for which
\n     shares may\t be issued  is\tto  raise  capital  for\t the
\n     company. The discretion is not in terms limited in this
\n     way: the  law should  not impose  such a  limitation on
\n     Directors’ powers.\t To define  in advance\texact limits
\n     beyond which  directors must  not\tpass  is,  in  their
\n     Lordships’ view,  impossible. This\t clearly  cannot  be
\n     done by  enumeration, since  the variety  of  different
\n     types of  Company in  different  situations  cannot  be
\n     anticipated”.\n<\/p><\/blockquote>\n
The Australian decision in Harlowe Nominees (supra) took the
\nsame view  of the  directors’ power  to issue shares. It was
\nsaid therein:\n<\/p>\n
\t  “The principle  is  that  although  primarily\t the
\n     power is  given to\t enable capital\t to be\traised\twhen
\n     required for the
\n790<\/span>
\n     purposes of  the company,\tthere may  be occasions when
\n     the directors  may fairly and properly issue shares for
\n     other reasons,  so long  as those\treasons relate\tto a
\n     purpose of\t benefiting  the  company  as  a  whole,  as
\n     distinguished  from   a  purpose,\t for   example,\t  of
\n     maintaining control  of the  company in the hand of the
\n     directors themselves or their friends”.<\/p><\/blockquote>\n
     We have  already expressed\t our view  that\t the  rights
\nshare were  issued in  the instant  case in  order to comply
\nwith  the   legal  requirements,  which,  apart\t from  being
\nobligatory as  the only viable course open to the Directors,
\nwas for\t the benefit  of the  company since,  otherwise, its
\ndevelopmental activities  would\t have  stood  frozen  as  of
\nDecember 31,  1973. The\t shares were not issued as a part of
\ntakeover war between the rival groups of shareholders.\n<\/p>\n
     The decision to issue rights shares was assailed on the
\nground also  that the  company did  not, as  required by the
\nReserve Bank’s\tletter dated  May 11, 1975 submit any scheme
\nindicating  whether   the  reduction   in  the\tnon-resident
\ninterest was  proposed to  be  brought\tabout  by  issue  of
\nadditional equity  capital to Indian residents to the extent
\nnecessary  to\tfinance\t  any\tscheme\t of   expansion\t  or
\ndiversification. It  is true  that by  the aforesaid letter,
\nthe Reserve  Bank had  asked NIIL  to report to it as to how
\nthe Company  proposed to  reduce the  non-resident interest:
\nwhether by disinvestment by non-resident shareholders, or by
\nissue of  additional equity  capital to\t Indian residents to
\nthe   extent\tnecessary   to\t finance   any\t scheme\t  of
\nexpansion\/diversification, or  by  both.  We  are,  however,
\nunable to  read the Bank’s letter as requiring or asking the
\nCompany not  to issue  the additional  capital unless it was
\nnecessary to  do so  for financing  a scheme of expansion or
\ndiversification. The Reserve Bank could not have intended to
\nimpose any  such condition  by way of a general direction in
\nface of\t the legal  position, which  we have  set out above,
\nthat the  power of  the Directors  to issue  shares  is\t not
\nconditioned by\tthe need  for additional capital. We are not
\nsuggesting that\t the Reserve  Bank, in\tthe exercise  of its
\nstatutory functions,  cannot ever  impose such conditions as
\nit deems appropriate, subject to which alone a new issue may
\nbe made.  But neither  the wording  of the Bank’s letter nor
\nthe true  legal position  justifies the stand of the Holding
\nCompany. The  minutes of the Ketty meeting of October 20-21,
\n1976 saying  that it  was agreed that the rights issue, with
\nthe Indian share-holders taking up the U.K. members’ rights,
\nwould be  considered provided  it was  demonstrated by\tNIIL
\nthat “there  is a  viable development  plan requiring  funds
\nthat the expected NIIL cash flow
\n791<\/span>
\ncannot meet”,  cannot also  justify the\t argument  that\t the
\npower  of  the\tcompany\t to  issue  rights  shares  was,  by
\nagreement, conditioned\tby  the\t need  to  raise  additional
\ncapital for  a development  plan. In  fact, the occasion for
\nconsideration by  the Holding  Company of NIIL’s proposal to
\nissue rights shares did not arise, since the Holding Company
\nvirtually boycotted the meeting of April 6. Assuming for the
\nsake of\t argument that\tthere  was  any\t such  understanding
\nbetween the  parties, the  minutes of the meeting of April 6
\nshow that  the Company\tneeded additional  capital  for\t its
\nexpansion. The minutes say:\n<\/p>\n
\t  “As per  the final  budget for  the year 1977, the
\n     working capital requirements amounted to nearly Rs. 100
\n     lakhs and\teven after  tapping the\t facilities that  we
\n     will be  entitled to obtain from the Banking sector, we
\n     will be left with a gap of about Rs. 25 lakhs which can
\n     be met by only increasing equity capital and attracting
\n     deposits from public”.<\/p><\/blockquote>\n
     There is  no reason to believe that this statement does
\nnot accord  with the  economic realities of the situation as
\nassessed by the Directors of the Company.\n<\/p>\n
     Finally, it  is also not true to say, as a statement of
\nlaw, that Directors have no power to issue shares at par, if
\ntheir market price is above par. These are primarily matters
\nof policy  for the  Directors to  decide in  the exercise of
\ntheir discretion  and no hard and fast rule can be laid down
\nto fetter  that discretion.  As observed  by Lord  Davey  in
\nHilder and others v. Dexter(1).\n<\/p>\n
\t  “I am not aware of any law which obliges a company
\n     to issue its shares above par because they are saleable
\n     at\t a   premium  in  the  market.\tIt  depends  on\t the
\n     circumstances of  each case  whether it will be prudent
\n     or even possible to do so, and it is a question for the
\n     directors to decide”.\n<\/p><\/blockquote>\n
What is necessary to bear in mind is that such discretionary
\npowers in  company  administration  are\t in  the  nature  of
\nfiduciary powers  and must, for that reason, be exercised in
\ngood  faith.   Mala  fides  vitiate  the  exercise  of\tsuch
\ndiscretion. We\tmay mention  that in  the past, whenever the
\nneed for  additional capital was felt, or for other reasons,
\nNIIL issued shares to its members at par.\n<\/p>\n
792<\/span><\/p>\n
     We are therefore of the opinion that Devagnanam and his
\ngroup acted  in the  best interests of NIIL in the matter of
\nthe  issue  of\trights\tshares\tand  indeed,  the  Board  of
\nDirectors followed  in the meeting of the 6th April a course
\nwhich they  had no  option but\tto adopt and in doing which,
\nthey were  solely actuated  by the  consideration as to what
\nwas  in\t the  interest\tof  the\t company.  The\tshareholder-
\nDirectors who  were interested in the issue of rights shares
\nneither participated  in the discussion of that question nor
\nvoted upon  it. The two Directors who, forming the requisite
\nquorum, resolved  upon\tthe  issue  of\trights\tshares\twere
\nSilverston who, in our opinion, was a disinterested Director
\nand  Doraiswamy,  who  unquestionably  was  a  disinterested
\nDirector. The  latter has  been referred  to in\t the company
\npetition, Mackrael’s  reply affidavit  and  in\tthe  Holding
\nCompany’s  Memorandum\tof  Appeal  in\tthe  High  Court  as
\n“uninterested”,\t “disinterested”  and  “independent”.  At  a
\ncrucial time when Devagnanam was proposing to dispose of his
\nshares to  Khaitan, Sanders asked for Doraiswamy’s advice by
\nhis letter  dated August  6,  1975  in\twhich  he  expressed
\n“complete confidence” in Doraisway in the knowledge that the
\nHolding Company\t could count  on his guidance. Disinvestment
\nby the\tHolding Company,  as one  of the  two courses  which
\ncould be  adopted for  reducing the non-resident interest in
\nNIIL to\t 40% stood  ruled  out,\t on  account  of  the  rigid
\nattitude of  Coats who,\t during the period between the Ketty
\nmeeting\t of   October  20-21,\t1976  and   the\t  Birmingham
\ndiscussions of\tMarch  29-31,  1977  clung  to\ttheir  self-
\ninterest, regardless  of the pressure of FERA, the directive
\nof the Reserve Bank of India and their transparent impact on
\nthe  future   of  NIIL.\t Devagnanam  and  the  disinterested
\nDirectors, having acted out of legal compulsion precipitated
\nby the\tobstructive attitude of Coats and their action being
\nin the\tlarger interests of the company, it is impossible to
\nhold that  the resolution  passed in  the meeting of April 6
\nfor the\t issue of  rights shares  at  par  to  the  existing
\nshareholders  of  NIIL\tconstituted  an\t act  of  oppression
\nagainst the  Holding Company. That cannot, however, mark the
\nend of\tthe case  because 2nd May has still to come and Shri
\nSeervai’s argument  is that  the true  question\t before\t the
\nCourt is  whether the offer of rights shares to all existing
\nshareholders of\t NIIL but  the issue  of  rights  shares  to
\nexisting Indian shareholders only, constitutes oppression of
\nthe Holding Company.\n<\/p>\n
     That takes us to the significant, and if we may so call
\nthem, sordid,  happenings between  April 6  and May 2, 1977.
\nDevagnanam wrote  a letter  to Raeburn\ton  April  12,\t1977
\nstating that a copy of
\n793<\/span>
\nthe Reserve  Bank’s letter dated March 30, 1977 was enclosed
\ntherewith. It  was in  fact not\t enclosed. Pursuant  to\t the
\ndecision taken\tin the\tBoard’s meeting of April 6, a letter
\nof offer  dated April  14 was prepared by NIIL. Devagnanam’s
\nletter to  Raeburn dated  April 12,  (without a\t copy of the
\nReserve Bank’s\tletter dated  March 30)\t and the  letter  of
\noffer dated April 14 were received by Raeburn on May 2, 1977
\nin an envelope bearing the postal mark of Madras dated April
\n27, 1977.  The letter  of offer\t which\twas  posted  to\t the
\nHolding Company\t also bore  the postal\tmark of Madras dated
\nApril 27, 1977 and that to was received in Birmingham on May
\n2, 1977.  The letter of offer which was posted to one of the
\nIndian shareholders,  Manoharan, who  was siding with Coats,
\nwas also posted in an envelope which bore the postal mark of
\nMadras dated  April 27, 1977. On April 19, 1977, a notice of
\nthe Board’s meeting for May 2, 1977 was prepared. One of the
\nitems on  the Agenda of the meeting was stated in the notice
\nas “Policy-(a)\tIndianisation (b)  Allotment of shares”. The
\nnotice dated  April 19\tof the Board’s meeting for May 2 was
\nposted to  Sanders in an envelope which bore the postal mark
\nof Madras  dated April\t27, 1977  and was received by him in
\nBirmingham on  May 2,  1977, after the Board’s meeting fixed
\nfor that date had already taken place.\n<\/p>\n
     It puts  a severe\tstrain on one’s credulity to believe
\nthat the  letters of  offer dated  April 14  to the  Holding
\nCompany, to  Raeburn and  to Manoharan\twere posted  on\t the
\n14thitse If  but that somehow they rotted in the post office
\nuntil the  27th, on  which date they took off simultaneously
\nfor  their   respective\t destinations.\t The  affidavit\t  of
\nSelvaraj, NIIL’s senior clerk in the despatch Department and
\nthe  relevant  entry  in  the  outward\tregister  are  quite
\ndifficult to  accept on\t this point since they do not accord
\nwith the  ordinary course  of human  affairs. Not  only\t the
\nthree letters of offer above said, but even the notice dated
\nApril 19,  of the  Board meeting  for May 2, was received by
\nSanders at  Birmingham in  an envelope\tbearing\t the  Madras
\npostal mark  of April  27. Selvaraj’s  affidavit, apparently
\nsupported by  an entry\tin the\toutward register,  that\t the
\nenvelope addressed  to Sanders containing the notice of 19th
\nApril was posted on the 22nd is also difficult to accept. It
\ntakes all kinds to make the world and we do not know whether
\nthe NIIL’s  staff was advised astrologically that 27th April
\nwas an auspicious date for posting letters. But if only they
\nhad sought  a little  legal  advice  which,  at\t least\tfrom
\nDoraiswamy and\tSilverston, was\t readily available  to them,
\nthey  would  have  seen\t the  folly  of\t indulging  in\tsuch
\nbehaviour. Add\tto that\t the circumstance  that Devagnanam’s
\nletter to  Raeburn dated  April\t 12  was  put  in  the\tsame
\nenvelope in which the letter of
\n794<\/span>
\noffer  dated   April  14   was\tenclosed  and  the  envelope
\ncontaining these  two important\t documents bore\t the  postal
\nmark of\t Madras dated 27th April. These coincidences are too
\ntell-tale to  admit of\tany doubt that someone or the other,
\nnot  necessarily   Devagnanam,\tunduly\t solicitous  of\t the
\ninterest of  NIIL and of the Indian shareholders manipulated
\nto delay  the posting of the letters of offer and the notice
\nof the Board meeting for 2nd May, until the 27th April. What
\nis naively  sought to  be explained  as a  mere\t coincidence
\nreminds one  of the ‘Brides in the Bath Tub’ case: The death
\nof the\tfirst bride  in the  bath tub  may pass\t off  as  an
\naccident  and  of  the\tsecond\tas  suicider  but  when,  in
\nidentical circumstances, the third bride dies of asphyxia in
\nthe  bath  tub,\t the  conclusion  becomes  compelling,\teven
\napplying the  rule of circumstantial evidence, that she died
\na homicidal death.\n<\/p>\n
     The purpose  behind the  planned delay  in posting\t the
\nletters of  offer to Raeburn and to the Holding Company, and
\nin posting  the notice\tof the\tBoard’s meeting for May 2 to
\nSanders, was palpably to ensure that no legal proceeding was
\ntaken to  injunct the  holding of the meeting. The object of
\nwithholding these  important documents,\t until it  was quite
\nlate to act upon them, was to present to the Holding Company
\na fait\taccompli in  the shape\tof the\tBoard’s decision for
\nallotment  of\trights\tshares\t to  the   existing   Indian
\nshareholders.\n<\/p>\n
     We are,  however, unable to share the view expressed in
\nthe ’12th  Conclusion’ in the appellate judgment of the High
\nCourt that  Devagnanam and  “his colleagues  in the Board of
\nDirectors” arranged  to\t ensure\t the  late  posting  of\t the
\nletters of  offer and  the notice  of the meeting. We do not
\naccept Shri  Nariman’s\targument  that\tDevagnanam  must  be
\nexonerated from all responsibility in this behalf because he
\nwas away in Malacca from April 13 to 26. In the first place,
\nto be in a place on two dates is not necessarily to be there
\nall along  between those dates and therefore we cannot infer
\nthat Devagnanam\t was in\t Malacca from  13th to 26th since he
\nwas there on the 13th and the 26th. Besides, it was easy for
\na man  of Devagnanam’s\timportance and\tability to  pull the
\nstrings from  a distance  and his  physical presence was not
\nnecessary to achieve the desired result. That is how puppets
\nare moved. But there is no evidence, at least not enough, to
\njustify the  categorical finding  recorded by  the appellate
\nBench of  the High  Court. The fact that Devagnanam stood to
\ngain by\t the machination  is a\trelevant factor\t to be taken
\ninto account but even that is not the whole truth: NIIL, not
\nDevangnanam was the real beneficiary, a thesis
\n795<\/span>
\nwhich we  have expounded  over the  last many pages. And the
\ninvolvement  of\t  the  other   Directors  by   calling\tthem
\nDevagnanam’s colleagues\t is less than just to them. There is
\nnot a  shred of\t evidence to  justify the  grave charge that
\nthey were willing tools in Devagnanam’s hands and lent their
\nhelp to\t concoct evidence. We clear their conduct, expressly
\nand categorically.\n<\/p>\n
     In so  far as Devagnanam himself is concerned, there is
\nroom enough  to suspect\t that he  was the part-author of the
\nlate postings  of important  documents, especially  since he
\nwas the\t prime actor in the play of NIIL’s Indiansation. But
\neven in\t regard to  him, it  is difficult  to carry the case
\nbeyond the  realm of  suspicion and ‘room enough’ is not the
\nsame thing  as ‘reason\tenough’. Section  15 of the Evidence
\nAct which  carries  the\t famous\t illustration  of  a  person
\nobtaining insurance  money on  his houses  which caught fire
\nsuccessively,  the  question  being  whether  the  fire\t was
\naccidental or intentional or whether the act was done with a
\nparticular knowledge  or intention,  will not help to fasten
\nthe blame on Devagnanam because, it is not shown that he was
\ninstrumental or\t concerned  in\tany  of\t the  late  postings
\ncomplained of. Were his complicity shown in any of these, it
\nwould have been easy to implicate him in all of them.\n<\/p>\n
     On the contrary, there is an admitted act, described as
\na lapse,  on Devagnanam’s part which shows that he failed to
\ndo what\t was to his advantage to do. It may be recalled that
\nin his\tletter dated  April 12 to Raeburn, Devagnanam stated
\nthat he was enclosing therewith a copy of the Reserve Bank’s
\nletter dated  March 30,\t 1977 but  that\t was  not  enclosed.
\nNothing was  to be  gained by suppressing the Reserve Bank’s
\nletter from Raeburn who was always sympathetic to the Indian
\nshareholders. If  anything, there  was something  to gain by
\napprising Raeburn  of the  urgency of  the matter in view of
\nthe Reserve  Bank’s letter. The strongest point in favour of
\nthe Indian  shareholders was  the last\tpara of\t the Reserve
\nBank’s\tletter\t which\tthey   would  have  liked  the\tU.K.
\nshareholders to\t know. Raeburn’s  response  of\t2nd  May  to
\nDevagnanam’s letter  of 12 April and the letter of offer was
\nwithout the  knowledge of Reserve Bank’s letter of March 30.
\nWhen the  Bank’s letter\t was  sent  to\tRacburn\t along\twith
\nDevagnanam’s  letter   of  May\t 11,  Raeburn\tcategorially
\nsupported the  stand of the Indian shareholders, as is clear
\nfrom paragraph 4 of the letter dated June 8, 1977 by Raeburn
\nto Mackrael,  a\t copy  of  which  was  sent  by\t Raeburn  to
\nDevagnanam along with his letter dated June 17, 1977.\n<\/p>\n
796<\/span><\/p>\n
     The inferences  arising from  the late  posting of\t the
\nletter of offer to the Holding Company as also of the notice
\nof meeting for May 2 to Sanders and the impact of inferences
\non the\tconduct and  intentions of Devagnanam are one thing:
\nwe have\t already dealt with that aspect of the matter. Their
\nimpact on  the legality of the offer and the validity of the
\nmeeting of  May 2  is quite another matter, which we propose
\nnow  to\t examine.  In  doing  this,  we\t will  keep  out  of
\nconsideration  all   questions\trelating   to  the  personal
\ninvolvement of\tDevagnanam and his group in the delay caused
\nin sending  the letters\t of offer  and the notice of meeting
\nfor May 2.\n<\/p>\n
     First, as\tto the\tletter of offer: The letter of offer
\ndated  April  14,  1977\t sent  to  the\tHolding\t Company  at
\nBirmingham, like all other letters of offer, mentions, inter
\nalia that  it was  resolved in\tthe meeting  of April  6  to
\nincrease the  issued capital  of  the  company\tfrom  32,000
\nshares of  Rs. 100  each to 48,000 shares of Rs. 100 each by
\nissuing Rights\tShares to  the existing\t shareholders on the
\nfive  conditions   mentioned  in   the\tletter.\t The  second
\ncondition reads\t thus: “If  the offer is not accepted within
\n16 days\t from the  date of offer, it shall be deemed to have
\nbeen declined  by the  shareholder”. The Holding Company was
\ninformed by  the last  paragraph of the letter of offer that
\nin respect  of its holding of 18,990 shares, it was entitled
\nto 9495\t rights shares\tand that its acceptance of the offer
\ntogether with  the application money (at Rs. 50\/- per share)
\nshould be  forwarded so as to reach the registered office of
\nNIIL on\t or before April 30, 1977. A postal communication by
\nair between  U.K. and  Madras, which  is the  normal mode of
\ncommunication,\tgenerally  takes  five\tdays  to  reach\t its
\ndestination. If the letter of offer were to be posted on the
\n14th itself  in Mardas,\t it would  have reached\t the Holding
\nCompany in Birimingham, say, on the 19th. Even assuming that
\nthe 16 days’ period allowed for communicating the acceptance
\nof offer  is to\t be counted  from the  14th and not from the
\n19th, it would expire on 30th April, To that has to be added
\nthe period  of five  days which the Holding Company’s letter
\nwould take  to reach  Madras. That  means that\tthe  Holding
\nCompany would be within its rights if its acceptance reached
\nNIIL on\t or before  May 5, 1977. The Board of Directors had,
\nhowever, met  in Madras\t three\tdays  before  that  and\t had
\nallotted the entire issue of the rights shares to the Indian
\nshareholders, on  the ground  that Holding  Company had\t not
\napplied for  the allotment of the shares due to it. In these
\ncircumstances, it  is quite  clear that\t the  rights  shares
\noffered to  the Holding Company could not have been allotted
\nto anyone  in the meeting of May 2, for the supposed failure
\nof the\tHolding Company to communicate its acceptance before
\nApril 30. The meeting of May 2, of which the
\n797<\/span>
\nmain purpose  was to  consider\t‘Allotment’  of\t the  rights
\nshares must,  therefore, be  held to be abortive which could
\nproduce no  tangible result.  The matter  would be  worse if
\nApril 27,  and much  worse if May 2, were to be taken as the
\nstarting point\tfor counting  the period  of 16 days. Except
\nfor circumstances,  hereinafter appearing  the allotment  to
\nIndian shareholders  of the rights shares which were offered
\nto the\tHolding Company\t would have been difficult to accept
\nand act upon.\n<\/p>\n
     The objection  arising out\t of the\t late posting of the
\nnotice dated April 19 for the meeting of 2nd May goes to the
\nvery root of the matter. That notice is alleged to have been
\nposted to N.T. Sanders, Studley, Warwickshire, U.K. on April\n<\/p>\n
22. But\t we have  already held that in view of the fact that
\nthe envelope  in which\tthe notice was sent bears the postal
\nmark of\t Madras dated  April 27, 1977, this latter date must
\nbe taken  to be the date on which the notice was posted. The
\nnotice was  received by\t Sanders on May 2, on which date the
\nBoard’s meeting for allotment of rights shares was due to be
\nheld and  was, in  fact, held.\tThe utter  inadequacy of the
\nnotice to  Sanders in  terms of\t time stares in the face and
\nneeds no  further argument  to justify\tthe finding that the
\nholding of  the meeting\t was illegal,  at least in so far as
\nthe Holding  Company is\t concerned. It\tis self-evident that
\nSanders could  not possibly have attended the meeting. There
\nis, therefore, no alternative save to hold that the decision
\ntaken in  the  meeting\tof  May\t 2  cannot,  in\t the  normal
\ncircumstances,\taffect\tthe  legal  rights  of\tthe  Holding
\nCompany or create any legal obligations against it.\n<\/p>\n
     The next  question, and a very important one at that on
\nwhich there  is a  sharp controversy between the parties, is
\nas to  what is\tthe consequence of the finding which we have
\nrecorded that the objection arising out of the late position
\nof the notice of the meeting for 2nd May goes to the root of
\nthe matter. The answer to this question depends upon whether
\nthe Holding  Company could  have accepted  the offer  of the
\nrights shares  and if,\teither for reasons of volition or of
\nlegal compulsion,  it could  not have  accepted\t the  offer,
\nwhether it could have at least renounced its right under the
\noffer to  a resident  Indian, other than the existing Indian
\nshareholders. The decision of this question depends upon the
\ntrue construction  of the provisions of FERA and of sections
\n43A and 81 of the Companies Act, 1956.\n<\/p>\n
     We have  already reproduced  the relevant provisions of
\nFERA, namely,  section 2(p),  (q) and (u); section 19(1)(a),\n<\/p>\n
(b) and (d);\n<\/p>\n
798<\/span><\/p>\n
section 29(1)(a); section 29(2)(a), (b) and (c); and section
\n29(4)(a) and (b). Section 29(1) provides that:\n<\/p>\n
\t  …  notwithstanding\tanything  contained  in\t the
\n     provisions of  the Companies  Act, 1956 a company which
\n     is not  incorporated under any law in force in India or
\n     in which  the non-resident\t interest is more than forty
\n     per cent  shall not, except with the general or special
\n     permission of  the Reserve\t Bank carry  on in India any
\n     trading, commercial  or industrial\t activity other than
\n     the one  for which\t permission of\tthe Reserve Bank has
\n     been obtained under section 28.\n<\/p><\/blockquote>\n
The other  provisions are  of  ancillary  and  consequential
\nnature, following upon the main provision summarised above.\n<\/p>\n
     NIIL had  applied for  the necessary  permission, since
\nthe non\t resident interest  therein was\t more than  40%\t the
\nHolding Company\t owing nearly 60% of its share capital. That
\npermission was\taccorded by  the  Reserve  Bank\t on  certain
\nconditions which,  inter alia, stipulated that the reduction
\nin the\tnon-resident holding  must be  brought down  to\t 40%
\nwithin one  year of  the receipt  of its  letter,  that\t is,
\nbefore May  17, 1977  and that until then, the manufacturing
\nand business activities of the Company shall not be extended
\nbeyond the approved level as of December 31, 1973.\n<\/p>\n
     It is  contended by  Shri Seervai\tthat  non-compliance
\nwith the  condition regarding  the dilution  of non-resident
\ninterest  within   the\tstipulated  period  could  not\thave
\nresulted in  the  RBI  directing  NIIL\tto  close  down\t its
\nbusiness or  not to carry on its business. It is also argued
\nthat  noncompliance   with  the\t  conditions   imposed\t for
\npermission to  carry on\t its business would not have exposed
\nthe Indian  directors to  any penalties\t or liabilities\t and
\nthat, in  the absence  of a  power to  revoke the permission
\nalready granted\t (as in\t other sections\t like sections 6 and\n<\/p>\n
32), the  RBI had  no power to revoke the permission granted
\nto  NIIL  even\tif  the\t conditions  subject  to  which\t the
\npermission was\tgranted were breached. According to counsel,
\nclosing down  a business  which the  RBI had  allowed to  be
\ncontinued by  granting\tpermission  would  have\t such  grave
\nconsequences-public and private-that the power to direct the
\nbusiness to  be discontinued  was advisably  not  conferred,
\neven if the conditions are breached. Section 29(4)(c), it is
\nurged, which enables the RBI to direct non residents to sell
\ntheir shares  or cause\tthem to be sold where an application
\nunder section 29(4)(a), for permission to continue to
\n799<\/span>
\nhold shares,  was rejected  is the  only power\tgiven to the
\nReserve Bank  where a  condition imposed under section 29(2)
\nis breached.\n<\/p>\n
     We are  unable to accept these contentions. The Reserve
\nBank granted  permission to  NIIL to  carry on its business,
\n“subject to  the conditions”  mentioned in the letter of May
\n11, 1976.  It may be that each of those conditions is not of
\nthe  same   rigour  or\timportance  as\te.g.  the  condition
\nregarding  the\tprogress  made\tin  implementing  the  other
\nconditions, which could reasonably be relaxed by condonation
\nof the\tlate filing  of any particular quarterly report. But
\nthe dilution  of the  non-resident interest  in\t the  equity
\ncapital of  the Company to a level not exceeding 40% “within
\n‘a period  of 1(one)  year from\t the date of the receipt of”
\nthe letter  was\t of  the  very\tessence\t of  the  matter.  A
\npermission  granted  subject  to  the  condition  that\tsuch
\ndilution shall\tbe effected would cease automatically on the
\nnon-compliance\twith   the  condition  at  the\tend  of\t the
\nstipulated period  or the  extended period,  as the case may
\nbe. The\t argument of  the Holding  Company  would  make\t the
\ngranting of  a conditional permission an empty ritual since,
\nwhether or not the company performs the conditions, it would
\nbe  free  to  carry  on\t its  business,\t the  only  sanction
\navailable to  the Bank\tbeing, as argued, that it can compel
\nor cause the sale of the excess non-resident interest in the
\nequity holding\tof the\tCompany, under\tsection 29(4)(c)  of
\nFERA. This  particular provision,  in our  opinion, is not a
\nsanction for  the enforcement  of conditions  imposed  on  a
\nCompany under  clause (c) of section 29(2). Section 29(4)(c)
\nprovides for a situation in which an application for holding
\nshares in a Company is not made or is rejected. The sanction
\nfor enforcement\t of a  conditional permission  to  carry  on
\nbusiness, where\t conditions are\t breached, is the cessation,
\nipso facto,  of the permission itself on the non-performance
\nof the\tconditions at  the time\t appointed or  agreed.\tThis
\ninvolves no  element of\t surprise or  of unjustness  because
\npermission is  granted, as  was done  here, only  after\t the
\napplicant  agrees  to  perform\tthe  conditions\t within\t the
\nstipulated period.  When NIIL  wrote to the Bank on February
\n4,  1976  binding  itself  to  the  performance\t of  certain
\nconditions, it could not be heard to say that the permission
\nwill remain  in force  despite its  non-performance  of\t the
\nconditions. Having  regard to  the provisions  of section 29
\nread with sections 49, 56(1) and (3) and section 68 of FERA,
\nthe continuance of business after May 17, 1977 by NIIL would
\nhave been  illegal, unless the condition of dilution of non-
\nresident equity was duly complied with. It is needless, once
\nagain, to  dwell upon  the impracticability of NIIL applying
\nfor extension of the period of one year allowed to it by the
\n800<\/span>
\nBank. Coats  could be  optimistic about\t such  an  extension
\nbeing granted  especially, since thereby they could postpone
\nthe evil  day. For  NIIL, the wise thing to do, and the only
\ncourse open to it, was to comply with the obligation imposed
\nupon it by law, without delay or demur.\n<\/p>\n
     It seems  to us  quite clear,  that by  reason  of\t the
\nprovisions  of\tsection\t 29(1)\tand  (2)  of  FERA  and\t the
\nconditional permission\tgranted by  the RBI  by\t its  letter
\ndated May  11, 1976, the offer of rights shares made by NIIL
\nto the Holding Company could not possibly have been accepted
\nby it.\tThe object  of section\t29, inter alia, is to ensure
\nthat a\tcompany (other\tthan a banking company) in which the
\nnon-resident interest  is more than 40% must reduce its to a
\nlevel not  exceeding 40%.  The RBI  allowed NIIL to carry on
\nits business  subject to the express condition that it shall
\nreduce its  non-resident holding  to a\tlevel not  exceeding
\n40%. The  offer of  rights shares  was made  to the existing
\nshareholders, including\t the Holding  Company, in proportion
\nto the\tshares held by them. Since the issued capital of the
\nCompany which  consisted of  32,000 shares  was increased by
\nthe issue of 16,000 rights shares, the Holding Company which
\nheld 18,990  shares was\t offered 9495 shares. The acceptance
\nof the\toffer of  rights shares by the Holding Company would
\nhave resulted  in a  violation of the provisions of FERA and
\nthe directive  of the Reserve Bank. Were the Holding Company
\nto  accept  the\t offer\tof  rights  shares,  it\t would\thave
\ncontinued to  hold 60%\tshare capital in NIIL and the Indian
\nshareholders would  have continued  to hold  their 40% share
\ncapital in the Company. It would indeed be ironical that the
\nmeasure which was taken by NIIL’s Board of Directors for the
\npurpose of  reducing the non-resident holding to a level not
\nexceeding  40%\t should\t itself\t  become  an  instrument  of
\nperpetuating the  ownership by the Holding Company of 60% of
\nthe equity  capital of\tNIIL. We are not suggesting that the
\noffer of  rights shares\t need not  have\t been  made  to\t the
\nHolding Company\t at all.  But the  question is\twhether\t the
\noffer when  made could\thave been  accepted by it. Since the
\nanswer to  this question  has to  be  in  the  negative,  no
\ngrievance can  be made by the Holding Company that, since it
\ndid not\t receive the  offer in\ttime, it  was deprived of an
\nopportunity to accept it.\n<\/p>\n
     We see  no substance  in Shri Nariman’s contention that
\nthe letter  of offer could not have been sent to the Holding
\nCompany without\t first obtaining  the RBI  s approval  under
\nsection 19  of FERA.  Counsel contends\tthat  under  section
\n19(1)(b), notwithstanding  anything contained  in section 81
\nof the Companies Act, no person can, except with
\n801<\/span>
\nthe general  or special\t permission  of\t the  Reserve  Bank,
\ncreate `any  interest in  a security’  in favour of a person
\nresident outside  India. The  word “security”  is defined by
\nsection 2(u) to shares, stocks, bonds, etc. We are unable to
\nappreciate how\tan offer  of shares  by itself\tcreates\t any
\ninterest in  the shares\t in favour of the person to whom the
\noffer is made. An offer of shares undoubtedly creates “fresh
\nrights” as  said by  this Court\t in Mathalone v. Bombay Life
\nAssurance Co.<\/a>(1)  but, the  right which it creates is either
\nto accept  the offer  or to  renounce it, it does not create
\nany interest  in the shares in respect of which the offer is
\nmade.\n<\/p>\n
     But though\t it could  not have  been possible  for\t the
\nHolding Company to accept the offer of rights shares made to
\nit, the\t question still\t remains whether it had the right to
\nrenounce the  offer in\tfavour of any resident Indian person
\nor company of its choice, be it an existing shareholder like
\nManoharan or  an outsider  like Madura\tCoats. The answer to
\nthis question depends on the effect of section 43A and 81 of
\nthe Companies Act, 1956.\n<\/p>\n
     We will  first notice the relevant parts of sections 3,
\n43A and 81 of the Companies Act. Section 3(1)(iii) defines a
\n“private company” thus :\n<\/p>\n
\t  “private company”  means a  company which,  by its
\n     articles :-\n<\/p><\/blockquote>\n
\t  (a)\trestricts the  right to transfer its shares,
\n\t       if any;\n<\/p><\/blockquote>\n
\t  (b)  limits the number of its members to fifty and\n<\/p><\/blockquote>\n
\t  (c)\tprohibits any  invitation to  the public  to
\n\t       subscribe for  any shares  in, or  debentures
\n\t       of, the company.\n<\/p><\/blockquote>\n
Clause (iv)  of section\t 3(1) define  a “public\t company” to
\nmean a company which is not a private company.\n<\/p>\n
     Section 43A of the Companies Act, which was inserted by
\nAct 65 of 1960, reads thus :\n<\/p>\n
     43A. (1)\tSave  as otherwise provided in this section,
\n\t       where not  less than  twenty-five per cent of
\n\t       the  paid-up   share  capital  of  a  private
\n\t       company having  a share\tcapital, is  held by
\n\t       one or  more bodies  corporate, the  private,
\n\t       company shall……\n<\/p><\/blockquote>\n
802<\/span><\/p>\n
\t       become by  virtue of  this section  a  public
\n\t       company :\n<\/p><\/blockquote>\n
\t\t    Provided that  even\t after\tthe  private
\n\t       company has  so become  a public company, its
\n\t       articles\t  of\tassociation   may    include
\n\t       provisions relating  to the  matter specified
\n\t       in clause (iii) of sub-section (1) of section
\n\t       3 and  the number  of its  members may be, or
\n\t       may at any time be reduced, below seven :
\n\t  (2)\tWithin three months from the date on which a
\n\t       private company\tbecomes a  public company by
\n\t       virtue of  this section,\t the  company  shall
\n\t       inform the  Registrar that  it has  become  a
\n\t       public company  as aforesaid,  and  thereupon
\n\t       the Registrar shall delete the word “Private”
\n\t       before the  word “Limited” in the name of the
\n\t       company upon the register and shall also make
\n\t       the necessary  alterations in the certificate
\n\t       of incorporation issued to the company and in
\n\t       its memorandum of association.\n<\/p><\/blockquote>\n
\t       …     …     …\n<\/p><\/blockquote>\n
\t  (4)\tA private  company which has become a public
\n\t       company\tby  virtue  of\tthis  section  shall
\n\t       continue to be a public company until it has,
\n\t       with the\t approval of  the Central Government
\n\t       and in accordance with the provisions of this
\n\t       Act, again become a private company.
\n     Section 81 of the Companies Act reads thus :\n<\/p><\/blockquote>\n
     81. (1)\t Where ………. it is proposed to increase
\n\t       the subscribed  capital\tof  the\t company  by
\n\t       allotment of further shares, then,\n<\/p><\/blockquote>\n
\t       (a)  such further shares, shall be offered to
\n\t\t    the persons\t who  at  the  date  of\t the
\n\t\t    offer, are\tholders of the equity shares
\n\t\t    of the  company in proportion, as nearly
\n\t\t    as circumstances  admit, to\t the capital
\n\t\t    paid up on those shares at that date ;\n<\/p><\/blockquote>\n
803<\/span><\/p>\n
\t       (b)   the offer\taforesaid shall\t be made  by
\n\t\t    notice specifying  the number  of shares
\n\t\t    offered and\t limiting a  time not  being
\n\t\t    less than  fifteen days from the date of
\n\t\t    the offer within which the offer, if not
\n\t\t    accepted, will  be deemed  to have\tbeen
\n\t\t    declined ;\n<\/p><\/blockquote>\n
\t       (c)   unless  the  articles  of\tthe  company
\n\t\t    otherwise provide,\tthe offer  aforesaid
\n\t\t    shall  be  deemed  to  include  a  right
\n\t\t    exercisable by  the person\tconcerned to
\n\t\t    renounce the  shares offered  to him  or
\n\t\t    any of  them  in  favour  of  any  other
\n\t\t    person, and\t the notice  referred to  in
\n\t\t    clause (b)\tshall contain a statement of
\n\t\t    this right ;\n<\/p><\/blockquote>\n
\t       (d)   after the\texpiry of the time specified
\n\t\t    in the  notice aforesaid,  or on receipt
\n\t\t    of earlier intimation from the person to
\n\t\t    whom  such\t notice\t is  given  that  he
\n\t\t    declines to\t accept the  shares offered,
\n\t\t    the Board  of directors  may dispose  of
\n\t\t    them in  such manner  as they think most
\n\t\t    beneficial to the company.\n<\/p><\/blockquote>\n
\t\t\t …\t …\t …\n<\/p><\/blockquote>\n
\t  (1A) Notwithstanding\tanything contained  in\tsub-\n<\/p><\/blockquote>\n
\t       section (1)  the further shares aforesaid may
\n\t       be offered  to any  persons (whether  or\t not
\n\t       those persons include the persons referred to
\n\t       in clause  (a) of  sub-section (1)  ) in\t any
\n\t       manner whatsoever-\n<\/p><\/blockquote>\n
\t       (a)   if a  special resolution to that effect
\n\t\t    is passed  by  the\tcompany\t in  general
\n\t\t    meeting, or\n<\/p><\/blockquote>\n
\t       (b)   where no  such  special  resolution  is
\n\t\t    passed  if\t the  votes  cast………in
\n\t\t    favour of  the proposal ……… exceed
\n\t\t    the votes,\tif  any,  cast\tagainst\t the
\n\t\t    proposal  ………\t  and  the   Central
\n\t\t    Government\t is    satisfied,   on\t  an
\n\t\t    application\t made\tby  the\t  Board\t  of
\n\t\t    directors  in   this  behalf   that\t the
\n\t\t    proposal  is   most\t beneficial  to\t the
\n\t\t    company.\n<\/p><\/blockquote>\n
\t\t\t …\t  …\t  …\n<\/p><\/blockquote>\n
\t  (3) Nothing in this section shall apply –\n<\/p><\/blockquote>\n
\t       (a) to a private company.\n<\/p><\/blockquote>\n<\/blockquote>\n
\t\t    …\t    …\t    …
\n804<\/span><\/p>\n
     While interpreting\t these and  allied provisions of the
\nCompanies Act,\tit would  be necessary to have regard to the
\nrelevant Articles  of Association  of NIIL, especially since
\nSection 81(1)(c)  of that  Act, which is extracted above, is
\nsubject to  the qualification  : “Unless the articles of the
\nCompany\t otherwise   provide”.\tThe  relevant  Articles\t are
\nArticles 11, 32, 38 and 50 and they read thus :\n<\/p><\/blockquote>\n
Article 11:\t In  order that the Company may be a private
\n\t       Company within  the  meaning  of\t the  Indian
\n\t       Companies Act, 1913, the following provisions
\n\t       shall have effect, namely :-\n<\/p>\n
\t       (i)   No invitation  shall be  issued to\t the
\n\t\t    public  to\tsubscribe  for\tany  shares,
\n\t\t    debentures, or  debenture stock  of\t the
\n\t\t    Company.\n<\/p>\n
\t       (ii) The number of the members of the Company
\n\t\t    (Exclusive of  persons in the employment
\n\t\t    of the  Company)  shall  be\t limited  to
\n\t\t    fifty, provided that for the purposes of
\n\t\t    this Article  where two  or more persons
\n\t\t    hold one  or more  shares in the Company
\n\t\t    jointly, they  shall  be  treated  as  a
\n\t\t    single member.<\/p>\n
\t\t(iii) The  right to  transfer shares  of the
\n\t\t    Company   is    restricted\t in   manner
\n\t\t    hereinafter provided.\n<\/p>\n
\t       (iv) If\tthere  shall  be  any  inconsistency
\n\t\t    between the\t provisions of\tthis Article
\n\t\t    and the  provisions of any other Article
\n\t\t    the provisions  of\tthis  Article  shall
\n\t\t    prevail.\n<\/p>\n
Article 32  :\t A  share  may\tsubject\t to  article  38  be
\n\t       transferred  by\ta  member  or  other  person
\n\t       entitled to  transfer to\t any member selected
\n\t       by the transferor; but, save as aforesaid, no
\n\t       share shall be transferred to a person who is
\n\t       not a member so long as any member is willing
\n\t       to purchase  the same at the fair value. Such
\n\t       value to be ascertained in manner hereinafter
\n\t       mentioned.\n<\/p>\n
Article 38  :\t The  Directors may  refuse to\tregister any
\n\t       transfer of a share (a) where the Company has
\n\t       a lien on the share, or (b) in case of shares
\n\t       not fully  paid-up, where it is not proved to
\n\t       their satisfaction
\n805<\/span>
\n\t       that the proposed transferee is a responsible
\n\t       person, or  (c) where  the Directors  are  of
\n\t       opinion that  the  proposed  transferee\t(not
\n\t       being already  a member)\t is not\t a desirable
\n\t       person to  admit to  membership, or (d) where
\n\t       the result  of such  registration would be to
\n\t       make the\t number of  members exceed the above
\n\t       mentioned limit.\t But clauses  (b) and (c) of
\n\t       this  Article   shall  not  apply  where\t the
\n\t       proposed transferee is already a member.\n<\/p>\n
Article 50  :\t When  the Directors  decide to increase the
\n\t       capital of  the Company\tby the\tissue of new
\n\t       shares such  shares shall  be offered  to the
\n\t       shareholders in\tproportion to  the  existing
\n\t       shares to  which they are entitled. The offer
\n\t       shall be made by notice specifying the number
\n\t       of shares  offered and limiting a time within
\n\t       which the  offer, if  not accepted,  will  be
\n\t       deemed  to   be\tdeclined   and\t after\t the
\n\t       expiration of such time, or on the receipt of
\n\t       an intimation  from the\tperson to  whom\t the
\n\t       offer is\t made that he declines to accept the
\n\t       shares offered,\tthe Directors may dispose of
\n\t       the same\t in such  manner as  they think most
\n\t       beneficial to  the Company. The Directors may
\n\t       likewise so  dispose of\tany new shares which
\n\t       (by reason  of the ratio which the new shares
\n\t       bear to\tthe shares  held by persons entitled
\n\t       to an  offer of\tnew shares)  cannot, in\t the
\n\t       opinion of  the\tDirectors,  be\tconveniently
\n\t       offered under this Article.\n<\/p>\n
     It is  contended by  Shri Nariman that by reason of the
\narticles of  the Company  and on  a true  interpretation  of
\nsection 81,  the right of renunciation of the shares offered
\nby NIIL\t was not available to the Holding Company since NIIL
\nwas not\t a full-fledged public company in the sense of being
\nincorporated as\t a public  company but\thad become  a public
\ncompany under  section\t43A(1)\tand  had,  under  the  first
\nproviso to  that section,  retained its articles relating to
\nmatters specified  in section  3(1) (iii). According to Shri
\nNariman,  section  81(1A)  can\thave  no  application  to  a
\n`section 43A  (1) proviso  company’ (for short, the `proviso
\ncompany’) because  it contemplates  issue of  shares to\t the
\npublic and  to persons\tother than  members of\tthe company,
\nwhich cannot  be done  in the  case of a company which falls
\nunder the proviso to section 43A(1).\n<\/p>\n
806<\/span><\/p>\n
Section 81(1A),\t it is urged, is complementary to section 81
\nand since  the latter cannot apply to the `proviso company’,
\nthe former  too cannot\tapply to it. In any event, according
\nto counsel,  section 81\t (1) (c) cannot apply in the instant
\ncase since  the\t articles  of  NIIL  provide,  by  necessary
\nimplication at\tany rate,  that the members of company shall
\nhave no\t right to  renounce the\t shares in  favour of  “any”
\nother person,  because such  a right would include the right
\nto renounce  in favour of persons who are not members of the
\ncompany, and  NIIL had\tretained its  articles under  which,
\nshares could  not be  transferred or  renounced in favour of
\noutsiders.\n<\/p>\n
     Shri Seervai  has refuted\tthese contentions,  his main
\nargument being\tthat the definitions of `public company’ and
\n`private company’  are mutually exclusive and, between them,
\nare exhaustive\tof all\tcategories of  companies. There\t is,
\naccording to  the  learned  counsel  no\t third\tcategory  of
\ncompanies recognised by the Companies Act, like the `proviso
\ncompany’. Shri Seervai further contends :\n<\/p>\n
     (a)   The right of renunciation is not a `transfer’ and
\n\t  therefore  the   directors’  power  to  refuse  to
\n\t  register the\tshares under  the articles  does not
\n\t  extend to renunciation ;\n<\/p><\/blockquote>\n
     (b)  Before considering Section 43A, which was inserted
\n\t  for the  first time  in the  Act of  1956  by\t the
\n\t  amending Act\tof 1960,  it should  be\t noted\tthat
\n\t  Section 81 as enacted in the Act of 1956 contained
\n\t  three sub-sections (1), 2 and 3, and sub-section 3
\n\t  provided that “nothing in this section shall apply
\n\t  to  a\t private  company”.  The  opening  words  of
\n\t  Section 81, as they now stand, were substituted by
\n\t  the Amending Act of 1960, and sub-section (1A) was
\n\t  inserted by the said Amending Act, and sub-section
\n\t  (3) was  substituted by  the Amending Act of 1963.
\n\t  But subsection 3 (a) reproduced sub-section (3) of
\n\t  the Act  of 1956, namely, “nothing in this section
\n\t  shall apply  to a  private company”.\tIt is  clear
\n\t  therefore that  the rights conferred by Section 81
\n\t  (1) and (2) do not apply to a private company, and
\n\t  this\tprovision   in\tthe  Act  of  1956  was\t not
\n\t  connected with  the insertion\t Section 43A for the
\n\t  first time in 1960.\n<\/p><\/blockquote>\n
     (c)  The provisos to Section 43A (1), (1A) and (1B) are
\n\t  very important  in connection\t with Section  81 of
\n\t  the
\n807<\/span>
\n\t  Act of  1956. Just as the crucial words in Section
\n\t  27(3) are  “shall contain”,  the crucial  words in
\n\t  the provisos\tare “may  include” (or\tmay retain).
\n\t  The words  “shall contain” are mandatory and go to
\n\t  the constitution  of a  private company. The words
\n\t  “may include” are permissive and they do not go to
\n\t  the constitution  of a  company which has become a
\n\t  public company  by virtue  of Section\t 43A because
\n\t  whether the  articles include\t (or  retain)  those
\n\t  requirements or do not include those requirements,
\n\t  the  constitution  of\t the  company  as  a  public
\n\t  company remains unaffected;\n<\/p><\/blockquote>\n
     (d)   No  statutory  consequence  follows,\t as  to\t the
\n\t  company being\t a public  company, on the retention
\n\t  of the  three requirements or one or more of them,
\n\t  or in\t not complying\twith those requirements. But
\n\t  in the  case of  a private  company which does not
\n\t  comply with the requirements of Section 3 (1)(iii)
\n\t  serious consequences\tfollow under Section 43, and
\n\t  in the  case of  a private  company  altering\t its
\n\t  articles so  as not  to include  all\tthe  matters
\n\t  referred  to\t in  Section  3\t (1)  (iii)  serious
\n\t  consequences follow  under Section  43, and in the
\n\t  case of a private company altering its articles so
\n\t  as not  to include  all the matters referred to in
\n\t  Section 3  (1) (iii)\tserious consequences  follow
\n\t  under Section\t 44. In\t short,\t the  inclusion,  or
\n\t  retention, of\t all  the  matters  referred  to  in
\n\t  Section 3(1)\t(iii) has a radically different part
\n\t  of function  in a  private company which becomes a
\n\t  public company  by virtue of Section 43A from that
\n\t  which\t it   has  in\ta  private   company.\tMore
\n\t  particularly the  non-compliance  with  the  three
\n\t  requirements of  Section 3  (1)(iii) included,  or
\n\t  retained, in\tthe articles  of a  private  company
\n\t  which has  become a  public company  by virtue  of
\n\t  Section 43A, involves no statutory consequences or
\n\t  disabilities, since  such a  company is  a  public
\n\t  company and Section 43 is not attracted.\n<\/p><\/blockquote>\n
     (e)   It is  wrong to contend that the whole of Section
\n\t  81(1)\t does  not  apply  to  a  `proviso  company’
\n\t  because it  is a  private company  entitled to the
\n\t  protection of\t subsection 3 (a). Section 81(3) (a)
\n\t  applies to a private
\n808<\/span>
\n\t  company; a  `proviso company’\t is  one  which\t has
\n\t  become, and continues to remain, a public company;\n<\/p><\/blockquote>\n
     (f)   Section 81 (1) (c) applies to all companies other
\n\t  than private\tcompanies. The\tarticles of a public
\n\t  company may include all of the matters referred to
\n\t  in Section  3 (1) (iii), or may include one or two
\n\t  of the matters referred to therein without ceasing
\n\t  to be a public company. A public company which has
\n\t  become such  by virtue  of Section  43A can delete
\n\t  all the matters referred to in Section 3 (1) (iii)
\n\t  or may  delete one  or two  of them or may include
\n\t  (or retains)\tall the three matters referred to in
\n\t  Section 3  (1) (iii).\t The retention\tof the three
\n\t  matters mentioned  in Section\t 3(1) (iii) does not
\n\t  in any  way affect the constitution of the company
\n\t  because it has become and continues to be a public
\n\t  company ;\n<\/p><\/blockquote>\n
     (g)   Section 81  when enacted  in 1956  consisted of 3
\n\t  subsections. The  need to exempt private companies
\n\t  arose\t from\tSection\t 81(c),\t for  the  right  to
\n\t  renounce in  favour  of  any\tperson\tmight,\t(not
\n\t  must), conflict  with the limitation on the number
\n\t  of members  to 50  and since\tthat was  one of the
\n\t  matters  which  went\tto  the\t constitution  of  a
\n\t  company as  a private\t company, private  companies
\n\t  were expressly  exempted. No\tsuch  exemption\t was
\n\t  necessary in the case of a `proviso company’ which
\n\t  retains in  its articles  all\t the  three  matters
\n\t  referred to  in Section  3(1)\t (iii),\t because  an
\n\t  increase in  the number  of its  members above  50
\n\t  will not  affect the\tconstitution of\t the company
\n\t  which remains that of a public company;\n<\/p><\/blockquote>\n
     (h)   Section 81  as enacted  in 1956  did not  contain
\n\t  subsection (1A)  which was  inserted for the first
\n\t  time by  the Amending\t Act of 1960, which Amending
\n\t  Act also inserted Section 43A. After the insertion
\n\t  of subsection\t (1A) the effect of the exemption of
\n\t  private companies from the operation of section 81
\n\t  became even  more necessary  for the provisions of
\n\t  sub-section (1A) (a) and (b) override the whole of
\n\t  Section 81  (1) and  shares need not be offered to
\n\t  existing  shareholders.   Section  81\t  (1A)\talso
\n\t  overrides Article 50 of NIIL;\n<\/p><\/blockquote>\n
809<\/span><\/p>\n
     (i)   The Articles\t of NIIL provide for the transfer of
\n\t  shares, and  Article 38 sets out the circumstances
\n\t  under which  the directors  may refuse to transfer
\n\t  the shares.  However, since renunciation of shares
\n\t  is not  a transfer,  the  restriction\t in  Article
\n\t  11(iii) is  not violated  by an existing member of
\n\t  NIIL renouncing  his share  in favour of any other
\n\t  person;\n<\/p><\/blockquote>\n
     (j)   The opening\twords of  Sections 81  (1)  (c)\t are
\n\t  “unless the  articles\t of  the  company  otherwise
\n\t  provide”. Section 81 (1) (c) contains no reference
\n\t  to  “expressly   provide”  or\t  “expressly  or  by
\n\t  necessary implication\t provide”. According  to the
\n\t  plain meaning\t of the\t words “other wise provide”,
\n\t  there must  be a  provision in  the Articles which
\n\t  says that  the offer of shares to existing members
\n\t  does not  entitle them  to renounce  the shares in
\n\t  favour of  any person.  Article 11  of NIIL merely
\n\t  states  the  matters\tnecessary  to  constitute  a
\n\t  company a  private  company.\tSuch  companies\t are
\n\t  exempt from  Section 81  and so,  the questions of
\n\t  its `otherwise  providing’ does not arise. Article
\n\t  50 refers  to the  rights shares  but it  makes no
\n\t  other\t provision  with  regard  to  the  right  of
\n\t  renunciation than  is made  in  Section  81(1)(c).
\n\t  Unless such  other provision\tis made, the opening
\n\t  words\t of  Section  81(1)(c)\tare  not  attracted.
\n\t  Secondly, Section  81(1)(c) provides\tthat  unless
\n\t  the  articles\t  otherwise   provide\t“the   offer
\n\t  aforesaid shall  be  deemed  to  include  a  right
\n\t  exercisable by  the person  concerned to  renounce
\n\t  the shares offered to him or any of them in favour
\n\t  of any person”. The right conferred by the deeming
\n\t  clause  can\tbe  taken  away\t only  by  making  a
\n\t  provision in\tthe Articles  to prevent the deeming
\n\t  provision  from   taking   effect.   The   deeming
\n\t  provision cannot be avoided by implications; and\n<\/p><\/blockquote>\n
     (k)   The Holding\tCompany\t could\thave  renounced\t the
\n\t  rights shares\t offered to it at least in favour of
\n\t  the Manoharan\t group and  the fact  that after the
\n\t  shares were  allotted, the  Manoharans stated that
\n\t  they were  not interested  in subscribing  to\t the
\n\t  shares offered does not affect the question of the
\n\t  legal right.\tBesides, it  was one thing to refuse
\n\t  to subscribe to the shares offered; it was another
\n\t  thing to  accept the\trenunciation of merely 6,190
\n\t  shares
\n810<\/span>
\n\t  which\t would\t have\tgiven\tthe   Manoharans   a
\n\t  substantial stake in the affairs of the company.<\/p><\/blockquote>\n
     Shri Seervai  relies upon\tmany a text and authority in
\nsupport\t of  the  proposition  that  the  classification  of
\ncompanies into\tprivate and public is mutually exclusive and
\ncollectively exhaustive.  He relies  upon a decision in Park
\nv. Royalty  Syndicates(1) in  which Hamilton  J. (later Lord
\nSummer) observed  that a  public company is simply one which
\nis not\ta private company and that there is no “intermediate
\nstate or  terbium quid”.  In support of the proposition that
\nthe right  to renunciation  of shares  is  not\ta  transfer,
\ncounsel relies\tupon a\tdecision in  Re\t Pool  Shipping\t Co.
\nLtd.(2). Reliance  is also  placed in  this  behalf  on\t the
\nstatement of  law in Halsbury (Vol. 7, 4th edition, p. 218),
\nPalmer’s Company  Law Vol. 1, 22nd edition p. 393), Palmer’s
\nCompany Precedents  (Part 1,  17th edition,  p. 688),  Gore-
\nBrown on  Companies (43rd edition, para 16.3) and Buckley on
\nCompanies Act  (13th edition,  p. 815). While indicating his
\nown reasons  as to  why the  legislature  enacted  identical
\nprovisos to  sub-sections (1),(1A)  and (1B) of section 43A,
\ncounsel mentioned that no light is thrown for enacting these
\nprovisos, either  by the  Shastri Committee Report which led
\nto the\tCompanies (Amendment)  Act, 1960  or by the Notes on
\nclauses, or  by the Report of the Joint Select Committee. In
\nregard to  the opening\twords of  section 81 (1)(c); “Unless
\nthe articles  of the  company  otherwise  provide”,  counsel
\ncited the  Collins  English  Dictionary,  the  Random  House
\nDictionary and the Oxford English Dictionary. An interesting
\ninstance of  the use of the word “provide’ is to be found in
\nthe Random House Dictionary, 1967, p. 1157, to this effect :
\n“The Mayor’s  wife of the city provided in her will that she
\nwould be buried without any pomp or noise”.\n<\/p>\n
     It\t shall\t have\tbeen   noticed\t that\tthe   entire
\nsuperstructure of  Shri\t Seervai’s  argument  rests  on\t the
\nfoundation that\t the definitions  of  `public  company’\t and
\n`private company’  are mutually\t exclusive and\tcollectively
\nexhaustive of  all categories  of companies, that is to say,
\nthat there  is no  third kind  of company  recognised by the
\nCompanies Act,\t1956. The argument merits close examinations
\nsince it  finds support,  to an appreciable extent, from the
\nvery text  of the  Companies Act. The definition of `private
\ncompany’ and  the manner  in which  a  `public\tcompany’  is
\ndefined (“public  company means\t a company  which is  not  a
\nprivate company”) bear out the argument that these
\n811<\/span>
\ntwo categories of companies are mutually exclusive. If it is
\nthis it\t cannot be that and if it is that it cannot be this.
\nBut, it\t is not\t true to say that between them, they exhaust
\nthe universe  of companies.  A\tprivate\t company  which\t has
\nbecome a  public company  by  reason  of  section  43A,\t may
\ninclude, that  is to  say, may\tcontinue to  retain  in\t its
\narticles, matters  which are specified in section 3 (1)(ii),
\nand the\t number of  its members\t may at\t any time be reduced
\nbelow  7.   This  provision   itself  highlights  the  basic
\ndistinction  between,  on  one\thand,  a  company  which  is
\nincorporated as\t a public company or a private company which
\nis converted  into a public company under section 44, and on
\nthe other  hand, a private company which has become a public
\ncompany by reason of the operation of section 43A.\n<\/p>\n
     In the  first place,  a section-43A company may include
\nin its\tarticles,  as  part  of\t its  structure,  provisions
\nrelating to restrictions on transfer of shares, limiting the
\nnumber of  its members\tto 50, and prohibiting an invitation
\nto the\tpublic to  subscribe for  shares, which\t are typical
\ncharacteristics of  a  private\tcompany.  A  public  company
\ncannot possibly do so because, by the very definition, it is
\nthat which  is not  a private company, that is to say, which
\nis  not\t a  company  which  by\tits  articles  contains\t the
\nrestrictions mentioned in section 3 (1)(iii). Therefore, the
\nexpression `public  company’ in\t section 3(1) (iv) cannot be
\nequated with  a `private  company which\t has become a public
\ncompany by virtue of section 43A’.\n<\/p>\n
     Secondly, the  number of  members of  a public  company
\ncannot\tfall   below  7\t  without  attracting\tthe  serious
\nconsequences provided  for by section 45 (personal liability
\nof members  for the  company’s\tdebts)\tand  section  433(d)
\n(winding up  in case  the number  of its members falls below\n<\/p>\n
7). A  section 43A  company can\t still maintain its separate
\ncorporate identity  qua debts  even if\tthe  number  of\t its
\nmembers is reduced below seven and is not liable to be wound
\nup for that reason.\n<\/p>\n
     Thirdly,  a   section  43A,   company  can\t  never\t  be
\nincorporated and registered as such under the Companies Act.
\nIt is  registered as  a\t private  company  and\tbecomes,  by
\noperation of law, a public company.\n<\/p>\n
     Fourthly, the  three contingencies\t in which  a private
\ncompany becomes\t a public  company by  virtue of section 43A
\n(mentioned in  sub-sections (1), (1A) and (1B) read with the
\nprovisions of  subsection (4)  of the  section) show that it
\nbecomes and  continues to be a public company so long as the
\nconditions in sub-sections (1), (1A) or (1B) are applicable.
\nThe provisos to each of these sub-sections
\n812<\/span>
\nclarify the  legislative intent\t that companies\t may  retain
\ntheir registered  corporate shell  of a\t private company but
\nwill be\t subjected to  the discipline  of public  companies.
\nWhen the necessary conditions do not obtain, the legislative
\ndevice in  section 43A\tis to  permit them  to go  back into
\ntheir corporate\t shell and  function once  again as  private
\ncompanies, with all the privileges and exemptions applicable
\nto private companies. The proviso to each of the subsections
\nof section  43A clearly\t indicates that although the private
\ncompany has  become a  public  company\tby  virtue  of\tthat
\nsection,  it   is  permitted   to  retain   the\t  structural
\ncharacteristics of  its origin,\t its birth marks, so to say.
\nAny provision  of the Companies Act which would endanger the
\ncorporate shell\t of a `proviso company’ cannot be applied to
\nit because,  that would\t constitute an\tinfraction of one or
\nmore of\t the characteristics  of the `proviso company’ which
\nare statutorily\t allowed to  be preserved and retained under
\neach of\t the three  provisos to\t the three  sub-sections  of
\nsection 43A.  A right of renunciation in favour of any other
\nperson, as  a statutory\t term of  an offer of rights shares,
\nwould be  repugnant to\tthe integrity of the Company and the
\ncontinued retention by it of the basic characteristics under
\nsection 3(1)(iii).\n<\/p>\n
     Fifthly, section  43A, when  introduced by\t Act  65  of
\n1960, did  not adopt the language either of section 43 or of
\nsection 44.  Under section  43\twhere  default\tis  made  in
\ncomplying  with\t the  provisions  of  section  3(1)(iii),  a
\nprivate\t company   “shall  cease   to  be  entitled  to\t the
\nprivileges and\texemptions conferred on private companies by
\nor under  this Act,  and this Act shall apply to the company
\nas if  it were\tnot a  private company”. Under section 44 of
\nthe Act, where a private company alters its Articles in such
\na manner  that they  no longer\tinclude the provisions which
\nunder, section\t3(1)(iii) are required to be included in the
\nArticles in  order to  constitute it  a private company, the
\ncompany “shall\tas on the date of the alteration cease to be
\na private  company”. Neither  of  the  expressions,  namely,
\n“This Act  shall apply\tto the\tcompany as  if it were not a
\nprivate company” (section 43) or that the company “shall …
\ncease to  be a\tprivate company\t (section  44)\tis  used  in
\nsection 43A.  If a section 43A company were to be equated in
\nall respects  with a public company, that is a company which
\ndoes  not  have\t the  characteristics  of  private  company,
\nParliament would  have used  language similar  to the one in
\nsection 43  or\tsection\t 44,  between  which  two  sections,
\nsection 43A was inserted. If the intention was that the rest
\nof the\tAct was\t to apply to a section 43A company “as if it
\nwere not a private company” nothing would have been easier
\n813<\/span>
\nthan to\t adopt that  language in  section 43A,\tand  if\t the
\nintention was  that a  section 43A  company  would  for\t all
\npurposes “cease to be a private company”, nothing would have
\nbeen easier than to adopt that language in section 43A.\n<\/p>\n
     Sixthly, the  fact that a private company which becomes
\na public  company by virtue of section 43A does not cease to
\nbe for\tall purposes  a “private company” becomes clear when
\none compares  and contrasts  the provisions  of section\t 43A
\nwith section  44 : when the Articles of a private company no
\nlonger include\tmatters\t under\tsection\t 3(1)(iii),  such  a
\ncompany shall as on the date of the alteration cease to be a
\nprivate company (section 44(1)(a)). It has then to file with
\nthe Registrar  a  prospectus  or  a  statement\tin  lieu  of
\nprospectus under  section 44(2).  A  private  company  which
\nbecomes a  public company  by virtue  of section  43A is not
\nrequired to  file a  prospectus or  a statement in lieu of a
\nprospectus.\n<\/p>\n
     These considerations  show that, after the Amending Act
\n65 of  1960, three  distinct types  of\tcompanies  occupy  a
\ndistinct place\tin the\tscheme of  our Companies  Act :\t (1)
\nprivate companies  (2)\tpublic\tcompanies  and\t(3)  private
\ncompanies which\t have become  public companies\tby virtue of
\nsection 43A,  but which\t continue to  include or  retain the
\nthree characteristics of a private company. Sections 174 and
\n252 of the Companies Act which deal respectively with quorum
\nfor meetings  and minimum  number  of  directors,  recognise
\nexpressly, by  their  parenthetical  clauses,  the  separate
\nexistence of  public companies\twhich have  become  such  by
\nvirtue of section 43A. We may also mention that while making
\nan amendment  in sub-clause  (ix) of Rule 2 of the Companies
\n(Acceptance of\tDeposits) Rules,  1975, the Amendment Rules,
\n1978 added  the expression  : “Any amount received….. by a
\nprivate company\t which has  become a  public  company  under
\nsection 43A  of the  Act and  continues to  include  in\t its
\nArticles of  Association provisions  relating to the matters
\nspecified in clause (iii) of sub-section (1) of section 3 of
\nthe Act”,  in order  to\t bring\tdeposits  received  by\tsuch
\ncompanies within the Rules.\n<\/p>\n
     The various  points discussed  above will\tfacilitate a
\nclearer perception  of the position that under the Companies
\nAct, there  are three  kinds of\t companies whose  rights and
\nobligations  fall   for\t  consideration,   namely,   private
\ncompanies, public  companies and companies which have become
\npublic companies under section 43(1) but which retain, under
\nthe first proviso to that section, the three characteristics
\nof private companies mentioned in section 3(1)(iii)
\n814<\/span>
\nof the\tAct, private  companies enjoy certain exemptions and
\nprivileges which  are peculiar\tto  their  constitution\t and
\nnature. Public\tcompanies  are\tsubjected  severely  to\t the
\ndiscipline of  the Act.\t Companies of  the third  kind\tlike
\nNIIL, which  become public  companies but  which continue to
\ninclude in  their articles  the three  matters mentioned  in
\nclauses (a)  to (c)  of section\t 3(1)(iii) are also, broadly
\nand generally,\tsubjected to  the rigorous discipline of the
\nAct. They  cannot claim\t the privileges\t and  exemptions  to
\nwhich private  companies which\tare outside  section 43A are
\nentitled. And  yet, there  are certain provisions of the Act
\nwhich would apply to public companies but not to section 43A
\ncompanies. Is  section 81  of the  Companies  Act  one\tsuch
\nprovision ?  and if  so, does the whole of it not apply to a
\nsection 43A  company or\t only some  particular part  of it ?
\nThese are the questions which we have now to consider.\n<\/p>\n
     On these  two questions,  both the learned counsel have
\ntaken up  extreme positions  which, if\taccepted, may create
\nconfusion and  avoidable inconvenience in the administration
\nof section  43A companies  like NIIL.  Shri Nariman contends
\nthat a\tsection 43A company becomes a public company qua the
\noutside\t world,\t as  e.g.  in  matters\tof  remuneration  of
\ndirectors, disclosure, commencement of business, information
\nto be  supplied but it remains a private company qua its own
\nshareholders. Therefore,  says counsel,\t no provision of the
\nCompanies  Act\t can  apply  to\t such  companies,  which  is
\ninconsistent with  or destructive  of the  retention of\t the
\nthree essential\t features of  private companies as mentioned
\nin section  3(1)(iii). Section\t81, it\tis said, is one such
\nprovision and  in so  far as  private companies\t go, it\t can
\napply  only  to\t (a)  such  companies  which  become  public
\ncompanies under\t section 43A  but which\t do not\t retain\t the
\nthree essential\t features and to (b) private companies which
\nare duly  converted into  public companies. It is urged that
\neven  assuming\t that  the   expression\t “private   company”
\noccurring in  the various  provisions of  the Companies\t Act
\n(including section  81(3)(a)) does not include a section 43A
\nproviso Company,  that does  mean that\tsection 81  would be
\napplicable to  a 43A  Proviso Company,\tbecause\t :  (a)\t The
\nproviso\t to   section  43A(1)\tand  section   81  are\tboth
\nsubstantive provisions\tand neither  is subordinate  to\t the
\nother ;\t in fact  section 43A  was introduced later in 1960;
\nand (b)\t An offer  of rights shares to a member in a section
\n43A proviso  company cannot  include a right to renounce the
\nshares in  favour of  any other person, because such a right
\nwould be  inconsistent\twith  the  article  of\tthe  company
\nlimiting the  number of\t its members  to  50  and  with\t the
\narticle prohibiting  invitation to  the public\tto subscribe
\nfor shares  in\tthe  company.  The  fact  that\tthe  statute
\noverrides the
\n815<\/span>
\narticles is  not  a  sufficient\t ground\t for  rendering\t the
\nprovisions of  section 81  applicable to  a  section  43A(1)
\nproviso company\t since the  right  to  continue\t to  include
\nprovisions in its articles specified in section 3(1)(iii) is
\nitself\ta  statutory  right.  Counsel  says  that  in  these
\ncircumstances-and this\tis without  taking the assistance of
\nthe words  “unless the\tarticles of  the  company  otherwise
\nprovide” in  section 81(1)(c)-the  provision  regarding\t the
\nright of  renunciation cannot  apply to\t section 43A proviso
\ncompany.\n<\/p>\n
     The answer\t of Shri  Seervai to  this contention  flows
\nfrom what truly is the sheet anchor of his argument, namely,
\nthat  the  definitions\tof  `public  company’  and  `private
\ncompany’ are  mutually exclusive  and between them, they are
\nexhaustive of  all categoric  of companies. Counsel contends
\nthat section  81(1A) overrides section 81(1); that by reason
\nof  sub-section\t (3)  of  section  81,\tsection\t 81  is\t not
\napplicable to a “private company” but NIIL is not a “private
\ncompany’ since\tit became  a public  company  by  virtue  of
\nsection 43A; and that, therefore, the offer of rights shares
\nmade by\t NIIL can  be renounced by the offerees in favour of
\nany other person.\n<\/p>\n
     Neither of\t the two  extreme positions  for  which\t the
\ncounsel contend\t commends itself  to us.  The acceptance  of
\nShri Nariman’s\targument involves  tinkering with clause (a)
\nof section 81(3), which shall have to be read as saying that
\n“Nothing in  section 81\t shall apply  to a `private company’
\nand to a company which becomes a public company by virtue of
\nsection\t 43A  and  whose  Articles  of\tAssociation  include
\nprovisions relating to the matters specified in clause (iii)
\nof sub-section\t(1) of\tsection 3”.  Section 81(1)  does not
\ncontain a  non obstante\t clause. But,  if  Shri\t Nariman  is
\nright, there  would be\tno alternative\tsave to\t exclude the
\napplicability of  all of  its provisions  to a\tcompany like
\nNIIL, by reading into it an overriding provision which alone
\ncan achieve  such result.  On  the  other  hand,  to  accept
\nwholesale the  argument of  Shri Seervai  would\t render\t the
\nfirst proviso  to section  43A(1)  nugatory.  The  right  to
\nretain\tin   the  Articles   the  provision   regarding\t the
\nrestriction on\tthe right to transfer shares, the limitation
\non the number of members to fifty and the prohibition of any
\ninvitation to  the public  to subscribe\t for the  shares  or
\ndebentures of the Company will then be washed off. The truth
\nseems to  us to\t lie in\t between the  extreme stands  of the
\nlearned counsel for the two sides.\n<\/p>\n
     There is no difficulty in giving full effect to clauses\n<\/p>\n
(a) and\t (b) of section 81 (1) in the case of a company like
\nNIIL, even after it
\n816<\/span>
\nbecomes a  public company  under  section  43A.\t Clause\t (a)
\nrequires that  further shares must be offered to the holders
\nof equity shares of the Company in proporation, as nearly as
\ncircumstances admit, to the capital paid up on those shares,
\nwhile clause  (b) requires  that the offer of further shares
\nmust be\t made by  a notice  specifying the  number of shares
\noffered and  limiting the  time, not being less than fifteen
\ndays from  the date of the offer, within which the offer, if
\nnot accepted, will be deemed to have been declined. The real
\ndifficulty arises  when one  reaches clause (c) according to
\nwhich, the  offer shall\t be deemed  to include\tthe right of
\nrenunciation of shares or any of them in favour of any other
\nperson. We  will keep  aside for  the time being the opening
\nwords of  clause (c)  : “unless\t the articles of the company
\notherwise provide”.  Clause (c)\t further requires  that\t the
\nnotice referred to in clause (b) must contain a statement as
\nto the\tright of  renunciation provided\t for by\t clause (c).
\nHaving given  to the  matter our most anxious consideration,
\nwe are\tof the\topinion that  clause (c)  of  section  81(1)
\ncannot apply to the earth while private companies which have
\nbecome public companies under section 43A and which include,
\nthat is to say which retain or continue to include, in their
\narticles of  association the  matters specified\t in  section
\n3(1)(iii) of  the Act,\tas specified in the first proviso to
\nsection 43A. If clause (c) were to apply to the section 43A-
\nproviso companies,  it would  be open  to  the\tofferees  to
\nrenounce the  shares offered  to them in favour of any other
\nperson\tor   persons.  That   may  result  directly  in\t the
\ninfringement of the article relating to the matter specified
\nin section  3(1)(iii)  (b)  because,  under  clause  (c)  of
\nsection 81(1),\tthe offeree  is entitled  to spilt the offer
\nand renounce  the shares  in favour of as many persons as he
\nchooses, depending partly on the number of shares offered by
\nthe company  to him.  The right\t to renounce  the shares  in
\nfavour of  any other  person is\t also bound to result in the
\ninfringement of the article relating to the matter specified
\nin section 3(1)(iii)(c), because an offer which gives to the
\nofferee the right to renounce the shares in favour of a non-
\nmember is,  in truth  and substance,  an invitation  to\t the
\npublic to subscribe for the shares in the company. As stated
\nin Palmer’s Company Law (22nd Ed., Vol. I, para 21-18) :\n<\/p>\n
\t  “Where the  Company issues renounceable letters of
\n     allotment the  circle of  original allottees can easily
\n     be broken\tby renunciation of those rights and complete
\n     strangers may become the allottees; here the offer will
\n     normally be held to be made to the public.”\n<\/p><\/blockquote>\n
There is statement to the same effect in Gower’s Company Law
\n4th Ed., page 351) :\n<\/p>\n
817<\/span><\/p>\n
\t  “It is therefore clear that an invitation by or on
\n     behalf of\ta private company to a few of the promoter’s
\n     friends and relations will not be deemed to be an offer
\n     to the  public. Nor, generally, will an offer which can
\n     only be  accepted by  the shareholder  of a  particular
\n     company. On  the other hand it is equally clear that an
\n     offer of  securities in  a public\tcompany\t even  to  a
\n     handful people  may be  an offer to the public if it is
\n     calculated (which presumably means “Likely” rather than
\n     “intended”) to  lead to the securities being subscribed
\n     (i.e. applied  for on  original allotment) or purchased
\n     (i.e. bought after original allotment) by persons other
\n     than those\t receiving the initial offer. In particular,
\n     if securities to be issued under renounceable allotment
\n     letter or\tletter of  right the invitation to take them
\n     up must be deemed to be made to the public, since these
\n     securities are  obviously liable  to be  subscribed  or
\n     purchased by others.”\n<\/p><\/blockquote>\n
The learned  author says  at page  430 that in the case of a
\nprivate placing-an  issue  by  a  private  company-allotment
\nletters will  probably be  dispensed with, “in any case they
\ncannot be freely renounceable”. In foot-note (22) the author
\npoints out  that the  real danger  is that  if\trenounceable
\nallotment letters are issued, the company may be regarded as
\nhaving made  an offer  to the public. We cannot construe the
\nprovision contained  in clause\t(c) in\ta manner  which will
\nlead to\t the negation of the option exercised by the company
\nto retain in its articles the matters referred to in section
\n3 (1)(iii). Both these are statutory provisions and they are
\ncontained in  the same\tstatute.  We  must  harmonise  them,
\nunless the words of the statute are so plain and unambiguous
\nand the\t policy of  the statute\t so clear  that to harmonise
\nwill be\t doing violence\t to those  words and to that policy.
\nWords of  the statute,\twe have\t dealt with.  Its policy, if
\nanything, points  in the  direction that  the integrity\t and
\nstructure of  the section  43A provisio companies should, as
\nfar as possible, not be broken up.\n<\/p>\n
     The exemption  in favour  of  private  companies  would
\nappear to  have been inserted in section 81(3)(a) because of
\nthe right  of renunciation  conferred by  section  81(1)(c).
\nSection 105C  of the  Companies\t Act  1973  which  contained
\nsubstantially all  the provisions  that are  to be  found in
\nsection 81(1)(a),  (b) and (d) applied to all companies. The
\nright of  renunciation in  favour of  any other\t person\t was
\nconferred for the first time by the Act of 1956. That led to
\nthe  insertion\t of  the  exception  in\t favour\t of  private
\ncompanies since,  a right of renunciation in favour of other
\npersons is wholly inconsistent
\n818<\/span>
\nwith the  structure of\ta  private  company,  which  has  to
\ncontain\t the  three  characteristics  mentioned\t in  section
\n3(1)(iii). When\t section 43A  was introduced  by Act  65  of
\n1960, the  legislature apparently  overlooked  the  need  to
\nexempt companies  falling under\t it,  read  with  its  first
\nproviso, from  the operation of clause (c) of section 81(1).
\nThat the legislature has overlooked such a need in regard to
\nother  matters,\t  in  respect  of  which  there\t can  be  no
\ncontroversy, is\t clear from  the provisions  of sections 45,
\nand 433\t (d) of\t the Companies\tAct. Under section 45, if at
\nany time  the number  of members of a company is reduced, in
\nthe case  of a public Company below seven, or in the case of
\na Private  Company below  two, every  member of\t the company
\nbecomes severally  liable, under  the stated  circumstances,
\nfor the\t payment of the whole debt of the company and can be
\nseverally sued\ttherefor. No exception has yet been provided
\nfor in\tsection 45  in favour  of  the\tsection\t 43A-proviso
\ncompanies, with\t the result  that a  private company having,
\nsay, three  members which  becomes a  public  company  under
\nsection 43A  and continues  to function with the same number
\nof  members,   will  attract   the  rigour  of\tsection\t 45.
\nSimilarly,  under  section  433(d),  such  a  company  would
\nautomatically incur  the liability of being wound up for the
\nsame  reason.\tIf  and\t  when\tthese  provisions  fall\t for
\nconsideration, due  regard may\thave  to  be  given  to\t the
\nprinciple of  harmonious construction,\tin order  to exclude
\nsection 43A  proviso companies from the application of those
\nprovisions. We\thope that  before such\tand occasion arises,
\nthe Legislature\t will make  appropriate\t amendments  in\t the
\nrelevant provisions  of the  Companies Act.  Such amendments
\nhave been  made in  sections 174(1),  clause  (iii)  of\t the
\nsecond proviso\tto  sub-section\t (1)  of  section  220,\t and
\nsection 252(1)\tin order  to accord  separate  treatment  to
\nprivate companies which become public companies by virtue of
\nsection 43A,  as distinguished\tfrom public companies of the
\ngeneral kind.\n<\/p>\n
     In coming\tto the conclusion that clause (c) of section
\n81(1) cannot apply to section 43A-proviso companies, we have
\nnot taken into consideration the impact of the opening words
\nof  clause  (c)\t :  “Unless  the  articles  of\tthe  company
\notherwise  provide”.   The  effect  of\tthese  words  is  to
\nsubordinate the\t provisions of\tclause (c) to the provisions
\nof the\tarticles of  association of  the company.  In  other
\nwords, the provisions that the offer of further shares shall
\nbe deemed  to include the right of renunciation in favour of
\nany other  person will\tnot apply  if the  articles  of\t the
\ncompany “otherwise  provide”. Similarly the requirement that
\nthe notice of offer must contain a statement of the right of
\nrenunciation will not apply if the articles of
\n819<\/span>
\nthe company otherwise provide. The question which we have to
\nconsider  under\t  this\thead  is  whether  the\tarticles  of
\nassociation of\tNIIL provide otherwise than what is provided
\nby clause  (c) of  section 81(1).  We have already extracted
\nthe relevant  articles, namely,\t articles 11, 32, 38 and 50.
\nTo recapitulate,  article 11, which has an important bearing
\non the\tsubject now under discussion, provides that in order
\nthat the company may be a private company, (i) no invitation
\nshall be  issued to  the public to subscribe for any shares,
\ndebentures, etc;  (ii) the  number of members of the company
\nshall be  limited to  50; and  (iii) the  right to  transfer
\nshares of  the company\twill be\t restricted  in\t the  manner
\nprovided in  the articles.  By article\t32, a  share may  be
\ntransferred, subject  to article  38, by  a  member  to\t any
\nmember\tselected  by  the  transferor  but  no\tshare  shall
\notherwise be  transferred to a person who is not a member so
\nlong as any member is willing to purchase the same at a fair
\nvalue. Article\t38 confers  upon the  directors the power to
\nrefuse to register the transfer of a share for four reasons,
\nthe last  of which is that the transfer will make the number
\nof members  exceed the\tlimit of 50. Article 50, which also,
\nis important, provides that the offer of new shares shall be
\nmade by a notice specifying the number of shares offered and
\nlimiting the  time within  which the offer, if not accepted,
\nwill be\t deemed to  have been  declined.  If  the  offer  is
\ndeclined or  is not  accepted, before  the expiration of the
\ntime fixed  for its  acceptance, the directors have power to
\ndispose of  the shares\tin such\t manner as  they think\tmost
\nbeneficial to the company.\n<\/p>\n
     It is  urged by  Shri Seervai that none of the articles
\nof the\tcompany provides  otherwise than what is provided in
\nclause (c)  of section\t81(1) and therefore, clause (c) must
\nhave its  full play  in the case of NIIL. On the other hand,
\nit is  contended by  Shri Nariman that the opening words, of
\nclause (c)  do not require or postulate that the articles of
\nthe company must contain an “express” provision, contrary to
\nwhat is\t contained in  clause (c).  The contention, in other
\nwords, is  that if  the articles  of  a\t company  contain  a
\nprovision which, by necessary implication, is otherwise than
\nwhat is\t provided in  clause (c);  that clause\tcan have  no
\napplication. In\t view of  our finding that keeping aside the
\nopening words  of clause  (c), the provisions of that clause
\ncannot\tapply\tto  section  43A-proviso  companies,  it  is
\nacademic to  consider whether  the  word  “provide”  in\t the
\nopening part  of clause\t (c) postulates an express provision
\non the\tsubject of  renunciation or whether it is sufficient
\ncompliance with\t the opening  words, if the articles contain
\nby necessary implication a provision which is otherwise than
\nwhat is provided in clause
\n820<\/span>\n<\/p>\n
(c). We\t would, however,  like\tto  express  our  considered
\nconclusion on  this point  since the  point has\t been argued
\nfully by both the counsel and needs to be examined, as it is
\nlikely to arise in other cases.\n<\/p>\n
     In the  first place, while construing the opening words
\nof section  81(1)(c), it  has to  be remembered that section
\n43A companies are entitled under the proviso to that section
\nto include  provisions in their Articles relating to matters
\nspecified in section 3(1)(iii). The right of renunciation in
\nfavour of  any other  person is wholly inconsistent with the
\nArticles of  a private company. If a private company becomes
\na public  company by  virtue of\t section 43A  and retains or
\ncontinues to  include in its Articles matters referred to in
\nsection 3(1)(iii),  it is difficult to say that the Articles
\ndo not\tprovide something  which is  otherwise than  what is
\nprovided in  clause (c). The right of renunciation in favour
\nof any\tother person is of the essence of clause (c). On the
\nother hand,  the absence  of that right is of the essence of
\nthe structure  of a private company. It must follow, that in
\nall cases in which erstwhile private companies become public
\ncompanies by  virtue of\t section 43A  and retain  their\t old
\nArticles, there\t would of  necessity be a provision in their
\nArticles which is otherwise than what is contained in clause\n<\/p>\n
(c). Considered\t from this  point of  view, argument  as  to
\nwhether the  word “provide”  in the  opening words of clause\n<\/p>\n
(c) means “provide expressly” loses its significance.\n<\/p>\n
     On\t the  question\twhether\t the  word  “provide”  means
\n“provide expressly”,  we are unable to accept Shri Seervai’s
\nsubmission that\t the Articles must contain a provision which
\nis expressly  otherwise than what is provided in clause (c).
\nIn the\tcontext in  which a private company becomes a public
\ncompany under  section 43A  and\t by  reason  of\t the  option
\navailable to  it under\tthe proviso, the word “provide” must
\nbe understood  to mean\t“provide expressly  or by  necessary
\nimplication”. The  necessary implication  of a provision has
\nthe same effect and relevance in law as an express provision
\nhas, unless  the relevance of what is necessarily implied is
\nexcluded by  the use  of clear words. Considering the matter
\nfrom all reasonable points of view, particularly the genesis
\nof section 43A-proviso companies, we are of the opinion that
\nin order  to attract  the opening  words of  clause  (c)  of
\nsection 81(1),\tit is not necessary that the Articles of the
\nCompany must  contain an  express provision  otherwise\tthan
\nwhat is contained in clause (c).\n<\/p>\n
     We do  not think  it necessary to consider the decision
\nof the\tPrivy  Council\tin  Shanmugam  v.  Commissioner\t for
\nRegistration,
\n821<\/span>
\ncited by  Shri Nariman,\t which says  that to  be an “express
\nprovision” with regard to something it is not necessary that
\nthe thing  should be  specially mentioned;  it is sufficient
\nthat it\t is directly  covered by the language, however broad
\nthe language  may  be  which  covers  it,  so  long  as\t the
\napplicability arises directly from the language used and not
\nby inference  therefrom. We  may only  mention\tthat  though
\nArticles of  NIIL do  not contain  an express provision that
\nthere shall be no right of renunciation, the right is wholly
\ninconsistent with the Articles. We have already stated above
\nthat  the   right  of\trenunciation  is  tantamount  to  an
\ninvitation to  the public to subscribe for the shares in the
\ncompany and  can violate  the provision\t in  regard  to\t the
\nlimitation on  the number  of members. Article 11, by reason
\nof its\tclause (iv),  prevails over  the provisions  of\t all
\nother Articles\tif there is inconsistency between it and any
\nother Article.\n<\/p>\n
     For these reasons we are of the opinion that clause (c)
\nof section  81(1) of  the  Companies  Act,  apart  from\t the
\nconsideration arising  out of  the  opening  words  of\tthat
\nclause, can  have no  application to private companies which
\nhave become  public companies  by virtue  of section 43A and
\nwhich retain in their Articles the three matters referred to
\nin section  3(1)(iii) of  the Act.  In so for as the opening
\nwords of clause(c) are concerned, we are of the opinion that
\nthey do\t not require an express provision in the Articles of
\nthe Company  which is otherwise than what is provided for in
\nclause (c).  It is  enough, in\torder  to  comply  with\t the
\nopening words  of clause  (c),\tthat  the  Articles  of\t the
\nCompany contain\t by necessary  implication a provision which
\nis otherwise  than what\t is provided in clause (c). Articles
\n11 and 50 of NIIL’s Articles of Association negate the right
\nof renunciation.\n<\/p>\n
     The question  immediately arises,\twhich  is  of  great
\npractical importance  in this case, as to whether members of
\na section  43A-proviso\tcompany\t have  a  limited  right  of
\nrenunciation, under  which  they  can  renounce\t the  shares
\noffered to  them in favour of any other member or members of
\nthe company.  Consistently with the view which we have taken
\nof clause  (c) of  section 81(1) our answer to this question
\nhas to\tbe in  the negative. The right to renounce shares in
\nfavour of any other person, which is conferred by clause (c)
\nhas no application to a company like NIIL and therefore, its
\nmembers cannot claim the right to renounce shares offered to
\nthem in\t favour of any other member or members. The Articles
\nof a  company may  well provide\t for a\tright of transfer of
\nshares by one member to another, but that right is very much
\ndifferent from the right or
\n822<\/span>
\nrenunciation, properly\tso called.  In fact, learned counsel
\nfor the\t Holding Company  has cited  the decision in Re Pool
\nShipping Co.  Ltd., (supra)  in which  it was  held that the
\nright of  renunciation is  not the  same  as  the  right  of
\ntransfer of shares.\n<\/p>\n
     Coming to\tsub-section (1A) of section 81, it provides,
\nstated briefly,\t that notwithstanding  anything contained in
\nsub-section (1),  the further  shares may  be offered to any
\npersons in  any manner\twhatsoever,  whether  or  not  those
\npersons include\t a person  referred to in clause (a) of sub-
\nsection (1).  That can\tbe done\t under clause  (a)  of\tsub-
\nsection (1A)  by passing a special resolution in the General
\nMeeting of  the company\t or under  clause (b), where no such
\nspecial resolution is passed, if the votes cast in favour of
\nthe proposal  exceed the  votes\t cast  against\tit  and\t the
\nCentral Government  is satisfied  that the  proposal is most
\nbeneficial to  the company.  For reasons  similar  to  those
\nwhich we  have come  to the  conclusion that  clause (c)  of
\nsection 81 cannot apply to a section 43A-proviso company, we
\nmust hold that sub-section (1A) can also have no application
\nto such\t companies. To\tpermit\tthe  further  shares  to  be
\noffered to  the persons\t who are  not members of the company
\nwill be clearly contrary to the Articles of Association of a
\nsection 43A-proviso  company, in regard to the three matters
\nwhich bear  on the  structure  of  such\t companies.  At\t the
\nhighest, the  method provided  for in clauses (a) and (b) of
\nsub-section (1A) may be resorted to by a section 43A-proviso
\ncompany for  the limited  purpose of offering the net shares
\nto its\tmembers otherwise  than in proportion to the capital
\npaid up on the equity shares of the company. That course may
\nbe open\t for the  reason that  sub-section (1A)\t permits the
\nfurther shares\tto be  offered “in any manner whatsoever”. A
\nchange in  the pro rata method of offer of new shares is not
\nnecessarily violative  of the  basic  characteristics  of  a
\nprivate company\t which becomes a public company by virtue of
\nsection 43A. To this limited extent only, but not beyond it,
\nthe provisions\tof sub-section\t(1A) of section 81 can apply
\nto such companies.\n<\/p>\n
     The following  proposition emerge out of the discussion
\nof the\tprovisions of  FERA, sections  43A  and\t 81  of\t the
\nCompanies Act and of the articles of association of NIIL:\n<\/p>\n
     (1)  The Holding  Company had  to part  with 20% out of
\n\t  the 60% equity capital held by it in NIIL;
\n     (2)   The offer  of Rights\t Shares made  to the Holding
\n\t  Company as a result of the decision taken by Board
\n\t  of
\n823<\/span>
\n\t  Directors in\ttheir meeting of April 6, 1977 could
\n\t  not have been accepted by the Holding Company;
\n     (3)   The Holding\tCompany had no right to renounce the
\n\t  Right Shares\toffered to it in favour of any other
\n\t  person, member or non-member; and
\n     (4)   Since the  offer of\tRights Shares could not have
\n\t  been either  accepted or  renounced by the Holding
\n\t  Company, the\tformer for one reason and the latter
\n\t  for another, the shares offered to it could, under
\n\t  article SO  of the  articles\tof  association,  be
\n\t  disposed of  by the  directors, consistently\twith
\n\t  the articles\tof NIIL, particularly article 11, in
\n\t  such manner as they thought most beneficial to the
\n\t  Company.\n<\/p><\/blockquote>\n
These proposition afford a complete answer to Shri Seervai’s
\ncontention that\t what truly  constitutes oppression  of\t the
\nHolding Company\t is not\t the issue  of Rights  Shares to the
\nexisting Indian\t shareholders only  but the  offer of Rights
\nShares to all existing shareholders and the issue thereof to
\nexisting Indian shareholders only.\n<\/p>\n
     The meeting of 2nd May, 1977 was unquestionably illegal
\nfor reasons already stated. It must follow that the decision
\ntaken by  the Board  of Directors in that meeting could not,
\nin  the\t normal\t circumstances,\t create\t mutual\t rights\t and
\nobligations between  the parties. But we will not treat that
\ndecision  as  non-est  because\ta  point  of  preponderating
\nImportance is  that the\t issue of  Rights Shares to existing
\nIndian shareholders  only and  the non-allotment  thereof to
\nthe  Holding  Company  did  not\t cause\tany  injury  to\t the
\nproprietary rights  of the  Holding Company as shareholders,
\nfor the\t simple reason\tthat they  could not  have  possibly
\naccepted  the\toffer  of   rights  shares  because  of\t the
\nprovisions of FERA and the conditions imposed by the Reserve
\nBank in its letter dated May 11, 1976, nor indeed could they
\nhave renounced\tthe shares  offered to them in favour of any
\nother  person\tat  all\t because  section  81(1)(c)  has  no
\napplication to\tcompanies like\tNIIL which were once private
\ncompanies but  which become  public companies  by virtue  of
\nsection 43A  and retain\t in their articles the three matters
\nreferred to in section 3(1)(iii) of the Act.\n<\/p>\n
     It was  neither fair  nor proper  on the part of NIIL’s
\nofficers not  to ensure\t the timely posting of the notice of
\nthe meeting  for 2nd  May so  as to enable Sanders to attend
\nthat meeting. But there the
\n824<\/span>
\nmatter rests. Even if Sanders were to attend the meeting, he
\ncould not  have asked either that the Holding Company should
\nbe allotted  the rights\t shares or  alternatively,  that  it
\nshould be  allowed to “renounce” the shares in favour of any
\nother person,  including the  Manoharan group. The charge of
\noppression arising  out of  the central\t accusation of\tnon-
\nallotment of  the rights shares to the Holding Company must,
\ntherefore, fail.\n<\/p>\n
     We must  mention that  we have  rejected the  charge of
\noppression after  applying to  the conduct of Devagnanam and
\nhis group  the standard\t of probity  and fairplay  which  is
\nexpected of partners in a business venture. And this we have
\ndone without  being influenced\tby the consideration pressed
\nupon us\t by Shri  Nariman that Coats and NEWEY, who were two
\nof the\tthree main  partners, were  not of one mind and that
\nNEWEY never  complained of  oppression. They may or they may
\nnot. That is beside the point. Such technicalities cannot be
\npermitted  to\tdefeat\tthe   exercise\tof   the   equitable
\njurisdiction conferred\tby section 397 of the Companies Act.
\nShri Seervai  drew our attention to the decision in Blissett
\nv. Daniel  (supra) the\tfacts of  which as they appear at pp
\n1036-37, bear,\taccording to  him, great  resemblance to the
\nfacts before us. The following observations in that case are
\nof striking relevance;\n<\/p>\n
\t  “As has  been well  observed during  the course of
\n     the argument,  the view taken by this Court with regard
\n     to\t morality   of\tconduct\t  amongst  all\tparties-most
\n     especially amongst\t those who  are bound by the ties of
\n     partnership is  one of the highest degree. The standard
\n     by which  parties are tried here, either as trustees or
\n     as co-partners, or in various other relations which may
\n     be suggested,  is a  standard, I am thankful to say so,
\n     far higher\t than the  standard of the world; and, tried
\n     by the standard, I hold it to be impossible to sanction
\n     the   removal    of   this\t   gentleman   under   these
\n     circumstances”. (p 1040)
\nNot only  is the  law on  the side  of\tDevagnanam  but\t his
\nconduct cannot\tbe  characterised  as  lacking\tin  probity,
\nconsidering the\t extremely rigid  attitude adopted by Coats.\n<\/p><\/blockquote>\n
They drove  him into  a tight  corner from  which  the\tonly
\nescape was to allow the law to have its full play.\n<\/p>\n
     Even though  the company petition fails and the appeals
\nsucceed on  the finding\t that the Holding Company has failed
\nto make out a case of oppression, the court is not powerless
\nto do  substantial justice  between the\t parties  and  place
\nthem, as nearly as it may, in the same
\n825<\/span>
\nposition in  which they\t would have  been, if the meeting of
\n2nd May\t were held in accordance with law. The notice of the
\nmeeting was  received by Sanders in U.K. On the 2nd May when
\neverything was\tover, bar  the\tpost-meeting  recriminations
\nwhich eventually  led to  this expensive  litigation. If the
\nnotice of  the meeting\thad reached  the Holding  Company in
\ntime, it  is reasonable\t to suppose  that  they\t would\thave
\nattended the  meeting, since  one of the items on the Agenda
\nwas “Policy-(a)\t Indianisation, (b)  allotment\tof  shares”.
\nDevagnanam and\this group  were always\tready and willing to
\nbuy the excess shares of the Holding Company at a fair price
\nas clear  from the correspondence to which our attention has
\nbeen drawn.  In the affidavit dated May 25, 1977, Devagnanam
\nstated\tcategorically  that  the  Indian  shareholders\twere
\nalways ready  and  willing  to\tpurchase  one-third  of\t the
\nshareholding of the non-resident shareholders, at a price to
\nbe fixed  in accordance\t with the articles of Association by
\nthe Reserve  Bank of  India. On\t May 27,  he sent  a  cable,
\nthough ‘without\t prejudice’, offering  to pay premium if the
\nHolding Company\t were to  adopt disinvestment as a method of
\ndilution of  their interest. In the Trial Court, counsel for
\nthe Indian  shareholders to  whom  the\trights\tshares\twere
\nallotted offered to pay premium on the 16,000 rights shares.
\nThe cable  and the  offer were\tmentioned before  us by Shri
\nNariman and  were not  disputed by Shri Seervai. There is no
\nreason why  we should  not call upon the Indian shareholders
\nto do what they were always willing to do, namely, to pay to
\nthe Holding  Company a fair premium on the shares which were
\noffered to  it, which it could neither take nor renounce and
\nwhich were  taken up  by  the  Indian  shareholders  in\t the
\nenforced absence  of the Holding Company. The willingness of
\nthe Indian  shareholders to  pay a  premium  on\t the  excess
\nholding or  the rights\tshares is  a factor  which, to\tsome
\nextent,\t has  gone  in\ttheir  favour  on  the\tquestion  of
\noppression. Having had the benefit of that stance, they must
\nnow make it good. Besides, it is only meet and just that the
\nIndian shareholders,  who took the rights shares at par when
\nthe value  of those  shares was\t much above  par, should  be
\nasked to  pay the  difference in  order\t to  nullify  unjust
\nunjustifiable enrichment at the cost of the Holding Company.
\nWe must\t make it  clear that  we are  not asking  the Indian
\nshareholders to pay the premium as a price of oppression. We
\nhave rejected the plea of oppression and the course which we
\nare now\t adopting is  intended primarily  to set  right\t the
\ncourse of justice, in so far as we may.\n<\/p>\n
     The question  then is  as to what should be taken to be
\nthe reasonable value of the shares which were offered to the
\nHolding Company\t but taken  over by  the bulk  of the Indian
\nshareholders. In
\n826<\/span>
\nhis letter  dated December  17, 1975  to M.M.C.\t Newey, D.P.
\nKingsley, the  Secretary of  NIIL, had assessed the value of
\nNIIL’s shares  at Rs.  175 per share. That value was arrived
\nat by  averaging the  break-up\tvalue,\tthe  yield  and\t the
\naverage market\tprice in the case of quoted shares. Citing a
\nparagraph from\ta book\ton the\tForeign Exchange  Regulation
\nAct, Kingsley  says in\this letter that the method which was
\nadopted by  him far  valuing the shares was also followed by
\nthe Controller\tof  Capital  Issues.  Copies  of  Kingsley’s
\nletter were sent to Alan Mackrael and Devagnanam. On June 9,
\n1976 Price  Waterhouse, Peat  & Co.,  Chartered Accountants,
\nCalcutta wrote\ta letter  to Mackrael  in  response  to\t the
\nlatter’s cable,\t valuing the  shares of\t NIIL at Rs. 204 per
\nshare. That letter shows that while valuing the shares, they
\nhad  taken  into  account  various  factors  including\t“the
\naverage of  the net  asset value  and the  earnings  basis”,
\nwhich, according to them, are considered as relevant factors
\nby the Controller of Capital Issues while valuing the shares
\nof companies.  The Chartered  Accountants applied  “the\t CCI
\nformula” and after making necessary adjustments to the fixed
\nassets, the  proposed dividend\tand the gratuity liabilities
\nfor 1975, they valued NIIL’s business, on a net asset basis,
\nat Rs.\t50 lakhs. On an earnings basis, the valuation of the
\nCompany\t based\t on  the   past\t three\tyears’\tnet  profits
\ncapitalized at\t15% was\t Rs. 80 lakhs. That gives an average
\nvaluation of  Rs. 65  lakhs for\t the business or Rs. 204 per
\nshare. The  purported offer  to\t Devagnanam  by\t Khaitan  “a
\nsewing needle competitor to Ketti”, at 3.6 times par, cannot
\nafford any  criterion for  valuing NIIL’s  shares.  Khaitan,
\npurportedly, had  competitive  business\t interests  and\t was
\ntherefore prepared to “pay the earth to acquire NIIL”.\n<\/p>\n
     According to  the learned\ttrial Judge, one thing which
\nappeared to  be certain\t was that  the market  value of\t the
\nshares of  NIIL at  or about  the time\twhen disputes  arose
\nbetween the parties, and particularly during the period when
\nthe controversial  meetings of\tthe Board  of Directors were
\nheld, ranged  between Rs. 175 and Rs. 204. We agree with the
\nlearned Judge  and hold that it would be just and reasonable
\nto take the average market value of the rights shares on the
\ncrucial date  at Rs.  190 per share. The learned trial Judge
\nawarded a  sum of  Rs. 90  per share  on 9495  shares to the
\nHolding Company\t by way\t of “solatium”, which, with respect,
\nis not an accurate description of the award and is likely to
\nconfuse the  basis and\treasons for directing the payment to
\nbe made.  Since the average market price of NIIL’s shares in
\nApril-May 1977\tcan be\ttaken to  be Rs.  190 per share, the
\nHolding Company,  which was offered 9495 rights shares, will
\nbe entitled to receive from the Indian shareholders
\n827<\/span>
\nan amount  equivalent to  that by  which they  unjustifiably
\nenriched themselves,  namely, Rs. 90×9495 which comes to Rs.
\n8,54,550. We direct that Devagnanam, his group and the other
\nIndian shareholders  who took  the rights  shares offered to
\nthe Holding  Company shall  pay, pro  rata, the\t sum of\t Rs.
\n8,54,550 to the Holding Company. The amount shall be paid by
\nthem to\t the Holding  Company from  their own  funds and not
\nfrom the funds or assets of NIIL.\n<\/p>\n
     As a  further measure  of neutralisation of the benefit
\nwhich the Indian shareholders received in the meeting of 2nd
\nMay, 1977,  we direct  that the\t 16,000 rights\tshares which
\nwere allotted  in that\tmeeting to  the Indian\tshareholders
\nwill be\t treated  as  not  qualifying  for  the\t payment  of
\ndividend for a period of one year commencing from January 1,
\n1977, the  Company’s  year  being  the\tCalendar  year.\t The
\ninterim dividend  or any  further dividend  received by\t the
\nIndian shareholders on the 16,000 rights shares for the year
\nending December\t 31, 1977  shall be  repaid by them to NIIL,
\nwhich  shall  distribute  the  same  as\t if  the  issue\t and
\nallotment of  the rights  shares was  not made\tuntil  after
\nDecember 31,  1977. This  direction will  not be  deemed  to
\naffect or  ever to  have affected  the exercise of any other
\nrights by  the Indian  shareholders in respect of the 16,000
\nrights shares allotted to them.\n<\/p>\n
     We have  not considered  the possibility  of Manoharans
\ntaking up  the rights  shares offered  to them because, by a
\nletter dated  May 11, 1977 to NIIL’s Secretary, N. Manoharan
\nhad declined  the offer\t on the ground that he was “not in a
\nposition to take those shares”.\n<\/p>\n
     Finally, in  order to  ensure the smooth functioning of
\nNIIL, and  with a  view to  ensuring that our directions are
\ncomplied  with\texpeditiously,\twe  direct  that  Shri\tM.M.
\nSabharwal who  was appointed  as a  Director and Chairman of
\nthe Board  of Directors under the orders of this Court dated
\nNovember 6,  1978 will\tcontinue to  function as  such until
\nDecember 31, 1982.\n<\/p>\n
     The Company will take all effective steps to obtain the
\nsanction or  permission of  the Reserve Bank of India or the
\nController of  Capital Issues,\tas the case may be; if it is
\nnecessary to  obtain such  sanction or permission for giving
\neffect to the directions given by us in this judgment.\n<\/p>\n
     In\t the  result,  the  appeals  are  allowed  with\t the
\ndirections above  mentioned and the judgments of the learned
\nsingle Judge and of the Division Bench of the High Court are
\nset aside. We make no order as to costs since both the sides
\nare, more or less, equally to
\n828<\/span>
\nblame, one  for creating  an impasse  and the  other for its
\nunjust enrichment.  All parties\t shall bear  their own costs
\nthroughout.\n<\/p>\n
     The interim orders passed by this Court are vacated.
\n     The  amount   of  Rs.   8,54,550\twhich\tthe   Indian
\nshareholders have  been\t directed  to  pay  to\tthe  Holding
\nCompany shall be paid in two instalments, the first of which
\nshall be  paid before  August 31, 1981 and the second before
\nNovember 30, 1981.\n<\/p>\n
     The interim  Board of  Directors shall  forthwith\thand
\nover charge to the Board which was superseded, but with Shri
\nM.M. Sabharwal\tas a  Director and  Chairman of the Board of
\nDirectors. After  taking the  charge from the interim Board,
\nthe Board  of Directors\t will  take  expeditious  steps\t for
\nconvening an Annual General Meeting for the year 1976-77 and
\nthe  years   thereafter\t for  the  purpose  of\tpassing\t the
\naccounts, declaring dividends electing all Directors and for
\ndealing with other necessary or incidental matters.
\nN.V.K.\t  Appeals allowed.\n<\/p>\n
829<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"
Supreme Court of India Needle Industries (India) Ltd., & … vs Needle Industries Newey (India) … on 7 May, 1981 Equivalent citations: 1981 AIR 1298, 1981 SCR (3) 698 Author: Y Chandrachud Bench: Chandrachud, Y.V. ((Cj) PETITIONER: NEEDLE INDUSTRIES (INDIA) LTD., & ORS. Vs. RESPONDENT: NEEDLE INDUSTRIES NEWEY (INDIA) HOLDING LTD. & ORS. DATE OF […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_lmt_disableupdate":"","_lmt_disable":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[30],"tags":[],"class_list":["post-230797","post","type-post","status-publish","format-standard","hentry","category-supreme-court-of-india"],"yoast_head":"\nNeedle Industries (India) Ltd., & ... vs Needle Industries Newey (India) ... on 7 May, 1981 - Free Judgements of Supreme Court & High Court | Legal India<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.legalindia.com\/judgments\/needle-industries-india-ltd-vs-needle-industries-newey-india-on-7-may-1981\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Needle Industries (India) Ltd., & ... vs Needle Industries Newey (India) ... on 7 May, 1981 - 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