Needle Industries (India) Ltd., & Ors Vs. Needle Industries Newey (India) Holding Ltd. & Ors [1981] INSC 111 (7 May 1981)
1981 Latest Caselaw 111 SC

Needle Industries (India) Ltd., & Ors Vs. Needle Industries Newey (India) Holding Ltd. & Ors [1981] INSC 111 (7 May 1981)

CHANDRACHUD, Y.V. ((CJ) CHANDRACHUD, Y.V. ((CJ) BHAGWATI, P.N.

VENKATARAMIAH, E.S. (J)

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

CITATOR INFO :

MV 1983 SC 75 (61)

ACT:

Companies Act 1956, Ss.3(1)(iii), 43A,45, 81, 299(1), 397(1), 397 and 398 and Foreign Exchange Regulation Act 1973, Ss. 29(1), (2) and 4(a)-Scope and effect of.

Private company becoming a public company by S.43A- Reserve Bank directive that holding of the foreign company should be reduced-Reduction effected by issue of new rights shares-Such shares to be offered to all shareholders Indian as well as the holding company-Shares however allotted to only Indian shareholders-Notice of meeting at which allotment made not properly given to holding company-Holding company whether could renounce the offer in favour of the person of its choice-Allotment to Indian shareholder-Whether amounts to oppression.

`Directly or indirectly, concerned in the contract or arrangement'-Effect of-Relationship of friendliness with Director-Lawyer-client relationship with Director-Whether will disqualify a person from acting as Director.

Public company-Private company-What are-When does a private company become a public company-No exception provided in S.45 in favour of S.43A proviso companies-Need for legislative amendment.

Practice and Procedure Allegation of a mala fide- Examination of-Whether can be on the basis of affidavits and correspondence only.

HEADNOTE:

M/s. Needle Industries (India) Ltd. (NIIL), the appellant was incorporated under the Indian Companies Act 1913 as a Private Company on 20.7.1949 with its Registered office at Madras and at the time of its incorporation it was a wholly owned subsidiary of Needle Industries (India) Ltd., Studley, England (NI-Studley). In 1961, NI-Studley entered into an agreement with Newey Bros. Ltd., Birmingham, England (Newey) to invest in the Indian Company. In 1963, NI-Studley and Newey combined to form the Holding Company in England M/s Needle Industries-Newey (India) Holding Ltd., the respondent. The entire share capital of NIIL held by NI Studley and Newey was transferred to the Holding Company in which NI-Studley and Newey became equal shares.

699 As a result of this arrangement, the Holding Company came to acquire 99.95 per cent of the issued and paid up capital of NIIL. The balance of 0.05 cent, which consisted of six shares being the original nominal shares, was held by Devagnanam the managing director of NIIL.

By virtue of the introduction of section 43A in the Companies Act in 1961, NIIL became a public company, since not less than twenty-five per cent of its paid-up share capital was held by a body corporate, the Holding Company.

However, under the first proviso to section 43(1) it had the option to retain its articles relating to matters specified in section 3(1)(iii) of the Companies Act.

NIIL did not alter the relevant provisions of its articles after its became a public company within the meaning of section 43A. By 1971 about 40 per cent of the share capital of NIIL came to be held by the Indian employees of the company and their relatives and the balance of about 60 per cent remained in the hands of the Holding Company NINIH Ltd.

In 1972 Coats Paton Ltd. became an almost 100% owner of NI-Studley. The position at the beginning of the year 1973 was that 60% (to be exact 59.3%) of the share capital of NIIL came to be owned half and half by Coats and NEWEY, the remaining 40% being in the hands of the Indian Group of which 28.5% was held by the Devagnanam's group.

Though NIIL was at one time wholly owned by NI-Studley and later by NI Studley and Newey, the affairs were managed ever since 1956 by an entirely Indian Management with Devagnanam as its Chief Executive and Managing Director with effect from the year 1961. The Holding Company which was formed in 1963 had only one representative on the Board of Directors of NIIL. He was N.T. Sanders, who resided in England and hardly ever attended the Board Meetings. The holding company reposed great confidence in the Indian management which was under the direction and control of Devagnanam In July 1972 Mr. Devagnanam was offered by the office of Managing Director of group of four companies in Hong Kong and Taiwan and his family began to reside in Hong Kong and he cogitated over resigning from his position in NIIL.

Coats, on their part were clear that Devagnanam should relinquish his responsibilities in NIIL. in view of the time his role in Newey's Far Eastern interests was consuming.

The Foreign Exchange Regulation Act 1973, came into force on Junuary 1, 1974. S.29(1) prohibited non-residents, non-citizens and non-banking companies not incorporated under any Indian law or in which the non-resident interest was more than 40 per cent, from carrying on any activity in India of a trading, commercial or Industrial nature except with the general or special permission of the Reserve Bank of India. By section 29(2)(a) if such person was engaged in any such activity at the commencement of the Act, he or it had to apply to the Reserve Bank of India, for permission to carry on that activity, within six months of the commencement of the Act or such further period the Reserve Bank may allow. S. 29 (4) (a) imposed a similar restriction on such person or company from holding shares in India, of any company referred to cause (b) of section 29(1), without the permission of the Reserve Bank. The 700 time for making the application for the requisite permission under section 29 was extended by the Reserve Bank until August 31, 1974.

Since the Holding Company was a non-resident and its interest in NIIL exceeded 40% NIIL had to apply for the permission of the Reserve Bank under S. 29 (1) FERA for continuing to carry on its business. The Holding Company had also to apply for the permission of the Reserve Bank under S. 29 (4) (a) FERA for continuing to hold its shares in NIIL.

NIIL applied to the Reserve Bank for the necessary permission on September 3, 1974. By its letter dated May 11, 1976 the Reserve Bank condoned the delay and allowed the application and imposed conditions on NIIL that it must bring down the non-resident interest from 60% to 40% within one year of the receipt of its letter. The Holding Company applied to the Reserve Bank for a Holding Licence under section 29 (4) (a) of FERA, on September 18, 1974; which application was late by 18 days and was still pending with the Reserve Bank Devagnanam who was residing in Hong Kong obtained a holding licence dated March 5, 1975 from the Reserve Bank in respect of his shares in NIIL.

On receipt of the letter of the Reserve Bank dated March 11,1976 NIIL's secretary sent a reply on May 18, 1976 to the Bank confirming the acceptance of the various conditions under which permission was granted to NIIL to continue its business. On August 11, 1976 the term of Devagnanam's appointment as the Managing Director of NIIL came to an end but in the meeting dated October 1, 1976 of NIIL's Board of Directors his appointment was renewed for a further period of 5 years. On October 20th and 21st, 1976 a meeting took place between the U.K. shareholders and the Indian shareholders of NIIL. But the meeting ended in a stalemate because whereas the Holding Company wanted a substantial part of the share capital held by it in excess of 40 per cent to be transferred to Madura Coats an Indian company in which the Holding Company had substantial interest as an Indian shareholder. Devagnanam insisted that the existing Indian shareholders of NIIL alone had the right under its Articles of Association to take up the shares which the Holding Company was no longer in a position to hold because of the directives issued by the Reserve Bank pursuant to FERA.

As negotiations were going on between the competing groups regarding the Indianisation of NIIL, on April 4, 1977 NIIL received a reminder letter dated March 30, 1977 from the Reserve Bank which pointed out that the company had not submitted any concrete proposal for reduction of the non- resident interest and asked it to submit its proposal in that behalf without any further delay and that failure to comply with the directive regarding dilution of foreign equity within the stipulated period would be viewed seriously.

A meeting of NIIL's Board of Directors was held on April 6, 1977. All the directors were present in the meeting with Devagnanam in the chair at the commencement of the proceedings. Mr. C. Doraiswamy, solicitor-partner of 701 King and Partridge was one of the directors present at the meeting. He had no interest in the proposal of Indianisation which the meeting was to discuss. In order to complete the quorum of two independent directors, the other directors apart from C. Doraiswamy being interested in the business of the meeting, Silverston an ex-partner of Doraiswamy's firm of solicitors, was appointed to the board as an additional director under article 97 of the Articles of Association.

Silverston chaired the meeting after his appointment as additional director.

The meeting resolved that the issued capital of NIIL be increased by a new issue of 16,000 equity shares of Rs. 100 each to be offered as rights shares to the existing shareholders in proportion to the shares held by them. The offer was to be made by a notice specifying the number of shares which each shareholder was entitled to and in case the offer was not accepted within 16 days from the date on which it was made it was to be deemed to have been declined by the concerned shareholder.

In pursuance to the aforesaid resolution a letter of offer dated April 14, 1977 was prepared. The envelope containing Devagnanam's explanatory letter dated April 12 (without the copy of the letter of the Reserve Bank dated March 30, 1977) and the letter of offer dated April 14 were received by the Holding Company on May 2, 1977 in an envelope bearing the Indian postal mark of April 27, 1977.

The letter of offer which was sent to one of the Indian shareholders, Manoharan was posted in an envelope which also bore the postal mark of 27th April. The next meeting of the Board was due to be held on May 2, 1977. The Holding Company was thus denied an opportunity to exercise its option whether or not to accept the offer of right shares, assuming that any such option was open to it.

The meeting of the Board of Directors was held an May 2, 1977 as scheduled and in the meeting the whole of the new issue consisting of 16,000 rights share was allotted to the Indian shareholders including members of the Manoharan group. Out of these the Devagnanam group was allotted 11,734 shares. After marking the allotment of shares a letter was sent to the Reserve Bank by NIIL reporting compliance with the requirements of F.E.R.A. by the issue of 16,000 rights shares and the allotment thereof to the Indian shareholders which resulted in the reduction of the foreign holding to approximately 40% and increased that of the Indian shareholders to almost 60%.

The Holding Company filed a company petition in the High Court under section 397 and 398 of the Indian Companies Act, 1956 alleging that the Indian Directors abused their fiduciary position in the Company by deciding in the meeting of April 6 to issue the rights shares at par and by allotting them exclusively to the Indian shareholders in the meeting of 2nd May, 1977. In doing so, they acted mala fide and in order to gain an illegal advantage for themselves. By deciding to issue the rights shares at par, they conferred a tremendous and illegitimate advantage on the Indian shareholders. Devagnanam delayed deliberately the intimation of the proceedings of the 6th April to the Holding Company.

By that means and by the late giving of the notice of the 702 meeting of the 2nd May, the Devagnanam group presented a fait uccompli to the Holding Company in order to prevent it from exercising its lawful rights. The conduct of the Indian directors lacked in probity and fair dealing which the Holding Company was entitled to expect.

The acting Chief Justice who tried the Company Petition, found several defects and infirmities in the Board's meeting dated May 2, 1977 and being of the view that the average market value of the rights shares was about Rs.

190 per share on the crucial date and that, since the rights shares were issued at par, the Holding Company was deprived unjustly of a sum Rs. 8,54,550 at the rate of Rs. 90 per share on the 9,495 rights shares to which it was entitled.

Exercising the power under section 398 (2) of the Companies Act, the learned Judge directed NIIL to make good that loss which, could have been avoided by adopting a fairer process of communication with the Holding Company and 'a consequential dialogue' with them in the matter of the issue of rights shares at a premium.

The Holding Company being aggrieved by the aforesaid judgment filed an appeal and NIIL filed cross-objections to the decree. The appeal and cross objections were argued before the Division Bench of the High Court on the basis of affidavits, the correspondence that had passed between the parties and certain additional documents which were filed before the Appellate Court. The Division Bench concluded that the affairs of NIIL were being conducted in a manner oppressive, that is to say burdensome, harsh and wrongful to the Holding Company and held that since the action of the Board of Directors of NIIL was taken merely for the purpose of welding the Company into Newey's Far Eastern complex it was just and equitable to wind up the Company. With regard to the cross-objections, the Division Bench held that the injuries suffered by the Holding Company could not be remedied by the award of compensation and, therefore, the action of the Board of Directors in issuing the rights shares had to be quashed. It accordingly allowed the appeal filed by the Holding Company and dismissed the cross- objections of the appellant and directed that the Board of Directors be suspended and an interim Board consisting of nine directors proposed by the Holding Company be constituted and that the rights issue made on 6th April, 1977 and the allotment of shares made on 2nd May, 1977 at the Board Meeting be set aside and the Interim Board be directed to make a fresh issue of shares at a premium to the existing shareholders including the Holding Company which was to have a right of renunciation.

In the appeals to this Court, on the question whether the decisions taken at the meetings of the Boards of Directors of NIIL on April 6 and May 2, 1977 constitute acts of oppression within the meaning of S. 397 of the Companies Act 1956.

Allowing the appeals

HELD: 1. The charge of oppression rejected after applying to the conduct of Devagnanam and his group the standard of probity and fairplay, which is expected of partners in a business venture. Not only is the law on his side, but his conduct cannot be characterised as lacking in probity, considering the extremely rigid attitude by Coats.

He was driven into a tight corner from which the only escape was to allow the law to have its full play.

[824 B-C; G-H] 703

2. Even though the company petition falls and the appeals succeed on the finding that the Holding Company has failed to make out a case of oppression, the court is not powerless to do substantial justice between the parties and place them, as nearly as it may, in the same position in which they would have been, if the meeting of 2nd May were held in accordance with law. [824 H-825 A]

3. The willingness of the Indian shareholders to pay a premium on the excess holding or the rights shares is a factor which, to some extent, has gone in their favour on the question of oppression. Having had the benefit of that stance, they must now make it good. Besides, it is only meet and just that the Indian shareholders, who took the rights shares at par when the value of those shares was much above par, should be asked to pay the difference in order to nullify their unjust and unjustifiable enrichment at the cost of the Holding Company. The Indian shareholders are not asked to pay the premium as a price of oppression. The plea of oppression having been rejected the course being adopted is intended primarily to set right the course of justice.

[825 F-G]

4. Devagnanam, his group and the other Indian share- holders who took the rights shares offered to the Holding Company shall pay, pro rata, the sum of Rs. 8,54,550 to the Holding Company. The amount shall be paid by them to the holding company from their own funds and not from the funds or assets of NIIL. [827 A-B]

5. As a further measure of neutralisation of the benefit which the Indian shareholders received in the meeting of 2nd May, 1977, it is directed that the 16,000 rights shares which were allotted in that meeting to the Indian shareholders will be treated as not qualifying for the payment of dividend for a period of one year commencing from January 1, 1977 the Company's year being the Calendar year. The interim dividend or any further dividend received by the Indian shareholders on the 16,000 rights shares for the year ending December 31, 1977 shall be repaid by them to NIIL, which shall distribute the same as if the issue and allotment of the rights shares was not made until after December 31, 1977. This direction will not be deemed to affect or ever to have affected the exercise of any other rights by the Indian shareholders in respect of the 16,000 rights shares allotted to them. [827 B-D]

6. In order to ensure the smooth functioning of NIIL and with a view to ensuring that the directions are complied with expeditiously, it is directed that Shri M.M. Sabharwal who was appointed as a Director and Chairman of the Board of Directors under the orders of this Court dated November 6, 1978 will continue to function as such until December 31, 1982. [827 F]

7. The Company will take all effective steps to obtain the sanction or permission of the Reserve Bank of India or the Controller of Capital Issues, as the case may be, if it is necessary to obtain such sanction or permission for giving effect to the directions. [827 G]

8. Devagnanam and his group acted in the best interests of NIIL, in the matter of the issue of rights shares and indeed, the Board of Directors followed in the meeting of the 6th April a course which they had no option but to adopt and in doing which, they were solely actuated by the consideration as to what 704 was in the interest of the company. The shareholder Directors who were interested in the issue of rights shares neither participated in the discussion of that question nor voted upon it. The two Directors who, forming the requisite quorum, received upon the issue of rights shares were Silverston who, was a disinterested Director and Doraiswamy who, unquestionably, was so.

[792 A-C]

9. Disinvestment by the Holding Company, as one of the two courses which could be adopted for reducing the non- resident interest in NIIL to 40% stood ruled out, on account of the rigid attitude of Coats who, during the period between the Ketty meeting of October 20-21, 1976 and the Birmingham discussions of March 29-31, 1977 clung to their self interest, regardless of the pressure of FERA, the directive of the Reserve Bank of India and their transparent impact on the future of NIIL. [792 D-E]

10. Devagnanam and the disinterested Directors, having acted out of legal compulsion precipitated by the obstructive attitude of Coats and their action it being in the larger interest of the company, it is impossible to hold that the resolution passed in the meeting of April 6 for the issue of rights shares at par to the existing shareholders of NIIL constituted an act of oppression against the Holding Company. [792 E-F]

11. It puts a severe strain on ones credulity to believe that the letters of offer dated April 14 to the Holding Company, to Raeburn and to Manoharan were posted on the 14th itself but that somehow they rotted in the post office until the 27th on which date they took off simultaneously for their respective destinations. [793 E]

12. The purpose behind the planned delay in posting the letters of offer to Raeburn and to the Holding Company, and in posting the notice of the Board's meeting for May 2 to Sanders, was palpably to ensure that no legal proceeding was taken to injunct the holding of the meeting. The object of withholding these important documents, until it was quite late to act upon them, was to present to the Holding Company a fait accompli in the shape of the Board's decision for allotment of rights shares to the existing Indian shareholders.

[794 C-E]

13. In so far as Devagnanam himself is concerned, there is room enough to suspect that he was the part-author of the late postings of important documents, especially since he was the prime actor in the play of NILL's Indianisation. But even in regard to him, it is difficult to carry the case beyond the realm of suspicion and 'room enough' is not the same thing as 'reason enough'.

[795 B-C] 13A. With regard to the impact on the legality of the offer and the validity of the meeting of May 2, (i) It is quite clear from the circumstances that the rights shares offered to the Holding Company could not have been allotted to anyone in the meeting of May 2, for the supposed failure of the Holding Company to communicate its acceptance before April

30. The meeting of May 2, of which the main purpose was to consider 'Allotment' of the rights shares must, therefore, be held to be abortive, [796 H-797 A] 705 (ii) The utter inadequacy of the notice to Sanders in terms of time stares in the face and needs no further argument to justify the finding that the holding of the meeting was illegal, at least in so far as the Holding Company is concerned. It is self-evident that Sanders could not possibly have attended the meeting. There is, therefore, no alternative save to hold that the decision taken in the meeting of May 2 cannot, in the normal circumstances, affect the legal rights of the Holding Company or create any legal obligations against it. [797 D-E] 13B. The dilution of the non-resident interest in the equity capital of the Company to a level not exceeding 40% "within a period of 1 (one) year from the date of receipt of" the letter was of the very essence of the matter. The sanction for enforcement of a conditional permission to carry on business, where conditions are breached, is the cessation, ipso facto, of the permission itself on the non- performance of the conditions at the time appointed or agreed. When NIIL wrote to the Bank on February 4, 1976 binding itself to the performance of certain conditions, it could not be heard to say that the permission will remain in force despite its non-performance of the conditions. Having regard to the provisions of section 29 read with sections 49, 56(1) and (3) and section 68 of FERA, the continuance of business after May 17, 1977 by NIIL would have been illegal, unless the condition of dilution of non-resident equity was duly complied with. [799 B; F-H]

14. By reason of the provisions of section 29(1) and (2) of FERA and the conditional permission granted by the RBI by its letter dated May 11, 1976 the offer of rights shares made by NIIL to the Holding Company could not possibly have been accepted by it. [800 B] The acceptance of the offer of rights shares by the Holding Company would have resulted in a violation of the provisions of FERA and the directive of the Reserve Bank. No grievance can be made by the Holding Company that since it did not receive the offer in time, it was deprived of an opportunity to accept it. [800 D-G] 14A. An offer of shares undoubtedly creates "fresh rights" but, the right which it creates is either to accept the offer or to renounce it; it does not create any interest in the shares in respect of which the offer is made. [801 B] Mathalone v. Bombay Life Assurance Co. [1954] SCR 117 referred to.

15(i) Before granting relief in an application under section 210 of the English Companies Act as under section 397 of the Indian Companies Act the Court has to satisfy itself that to wind up the company will unfairly prejudice the members complaining of oppression, but that otherwise the facts will justify the making of a winding up order on the ground that it is just and equitable that the company should be wound up. The fact that the company is prosperous and makes substantial profits is no obstacle to its being wound up if it is just and equitable to do so. [744 A-B; 775 G] Scottish Co-op. Wholesale Society Ltd. v. Meyer [1959] A.C. 324, Re Associated Tool Industries Ltd. [1964] Argus Law Reports, 75, Ebrahimi v. Westbourne 706 Galleries LTd. [1973] A. C. 360 (H.L.), Blissett v. Daniel [68] E.R. 1024. Re Yenidge Tobacco Co. [1916] 2 Ch. 426 & Loch v. John Blackwood [1924] A.C. 783 referred to.

(ii) On a true construction of section 397, an unwise, inefficient or careless conduct of a Director in the performance of his duties cannot give rise to a claim for relief under that section. The person complaining of oppression must show that he has been constrained to submit to a conduct which lacks in probity, conduct which is unfair to him and which causes prejudice to him in the exercise of his legal and proprietary rights as a shareholder. [748 E-G] (iii) Technicalities cannot be permitted to defeat the exercise of the equitable jurisdiction conferred by section 397 of the Companies Act.

Blissett v. Daniel 68 E.R. 1024 referred to.

16. An isolated act which is contrary to law, may not necessarily and by itself support the inference that the law was violated with a mala fide intention or that such violation was burdensome, harsh and wrongful. But a series of illegal acts following upon one another can, in the context, lead justifiably to the conclusion that they are a part of the same transaction, of which the object is to cause or commit the oppression of persons against whom those acts are directed. [746 G-747 A]

17. An isolated order passed by a Judge which is contrary to law will not normally support the inference that he is biased, but a series of wrong or illegal orders to the prejudice of a party are generally accepted as supporting the inference of a reasonable apprehension that the Judge is biased and that the party complaining of the orders will not get justice at his hands. [747 B-C] S.M. Ganpatram v. Sayaji Jubilee Cotton and Jute Mills Co. [1964] 34 Company Cases 830-31 & Elder v. Elder [1952] S.C. 49 referred to.

18. It is generally unsatisfactory to record a finding involving grave consequences to a person on the basis of affidavits and documents without asking that person to submit to cross-examination. Men may lie but documents will not and often, documents speak louder than words. But a total reliance on the written word, when probity and fairness of conduct are in issue, involves the risk that the person accused of wrongful conduct is denied an opportunity to controvert the inferences said to arise from the documents.

[754 E-G] Re Smith and Fowcett Ltd. [1942} 1 All ER 542, 545; Nana Lal Zaver v. Bombay Life Assurance [1950] SCR 390, 394 Piercy v. Mills [1920] (1) Chancery 77, Hogg v. Cramphorn, [1967] 1, Chancery 254, 260; Mills v. Mills [60] CLR 150, 160, Harlowe's Hominees [121] CLR 483, 485 & Howard Smith v. Amphol [1974] A.C. 821, 831 Punt v. Symons [1903] 2 Ch. 506;

Franzer v. Whalley 71 E.R. 361 referred to.

In the instant case the High Court was right in holding that, having taken up a particular attitude, it was not open to Devagnanam and his group to con- 707 end that the allegation of mala fides could not be examined, on the basis of affidavits and the correspondence only.

There is ample material on the record in the form of affidavits correspondence and other documents, on the basis of which proper and necessary inferences can safely and legitimately be drawn.

[755B-C] These documents and many more documents were placed on the record mostly by consent of parties, as the case progressed from stage to stage. That shows that the parties adopted willingly a mode of trial which they found to be most convenient and satisfactory. [756 A-B]

19. When the dominant motivation is to acquire control of a company, the sparring groups of shareholders try to grab the maximum benefit for themselves. If one decides to stay on in such a company, one must capture its control. If one decides to quit, one must obtain the best price for one's holding, under and over the table, partly in rupees and partly in foreign exchange. Then, the tax laws and the foreign exchange regulations look on helplessly, because law cannot operate in a vacuum and it is notorious that in such cases evidence is not easy to obtain. [761 G-H; 762A]

20. It is difficult to hold that by the issue of rights shares the Directors of NIIL interfered in any manner with the legal rights of the majority. The majority had to disinvest or else to submit to the issue of rights shares in order to comply with the statutory requirements of FERA and the Reserve Bank's directives. Having chosen not to disinvest, an option which was open to them, they did not any longer possess the legal rights to insist that the Directors shall not issue the rights shares. What the Directors did was clearly in the larger interests of the Company and in obedience to their duty to comply with the law of the land. The fact that while discharging that duty they incidentally trenched upon the interests of the majority cannot invalidate their action. The conversion of the existing majority into a minority was a consequence of what the Directors were obliged lawfully to do. Such conversion was not the motive force of their action. [782 A- E] Howard Smith Ltd. v. Ampol Petroleum Ltd. [1974] A.C. 821, 874, Punt v. Symons [1903] 2 Ch. 506 & Fraser v. Whalley [71] E.R. 361 Piercy v. Mills [1920] 1 Ch. 77, Hogg v. Cramphorn [1967] 1 Ch. 254, 260 referred to

21. (i) The Directors have exercised their power for the purpose of preventing the affairs of the company from being brought to a grinding halt, a consumption devoutly wished for by Coats in the interest of their extensive world-wide business.

[784 C] (ii) The mere circumstance that the Directors derive benefit as shareholders by reasons of the exercise of their fiduciary power to issue shares, will not vitiate the exercise of that power. [785 E] (iii) The test is whether the issue of shares is simply or solely for the benefit of the Directors. If the shares are issued in the larger interest of the 708 company that decision cannot be struck down on the ground that it has incidentally benefited the Directors in their capacity as share holders, [786 C] In the instant case the Board of Directors did not abuse its fiduciary power in deciding upon the issue of rights shares. [786 D] Harlowe's Nominess Pvt. Ltd. v. Woodside (Lakes Entrance) Oil Company No. Liability & Anr. (121) CLR 483, 485, Trek Corporation Ltd. v. Miller et al (33) DLR 3d. 288;

Nanalal Zaver & Anr. v. Bombay Life Assurance Co. Ltd.

[1950] SCR 390, 419-429; Hirsche v. Sims [1894] A.C. 654, 660-661; Gower in Principles of Modern Company Law, 4th Edn.

578 referred to.

22. Under section 287 (2) of the Companies Act, 1956 the quorum for the meeting of the Board of Director was two.

There can be no doubt that a quorum of two directors means a quorum of two directors who are competent to transact and vote on the business before the Board. [786 E]

23. (i) It is wrong to attribute any bias to Silverston for having acted as an adviser to the Indian shareholders in the Ketty meeting. Silverston is by profession a solicitor and legal advisers do not necessarily have a biased attitude to questions on which their advice is sought or tendered. Silverston's alleged personal hostility to Coats cannot, within the meaning of section 300 (1) of the Companies Act, make him person "directly or indirectly, concerned or interested in the contract or arrangement" in the discussion of which he had to participate or upon which he had to vote. [787 E-G] (ii) The concern or interest of the Director which has to be disclosed at the Board meeting must be in relation to the contract entered or to be entered into by or on behalf of the company. The interest or concern spoken of by sections 299 (1) and 300 (1) cannot be a merely sentimental interest or ideological concern. Therefore, a relationship of friendliness with the Directors who are interested in the contract or arrangement or even the mere fact of a lawyer-client relationship with such directors will not disqualify a person from acting as a Director on the ground of his being, under section 300 (1) as "interested" Director.

Howsoever one may stretch the language of section 300 (1) in the interest of purity of company administration, it is next to impossible to bring Silverston's appointment within the framework of that provision. [788 A-C] The argument that Silverston was an interested Director, that therefore his appointment as an Additional Director was invalid and that consequently the resolution for the issue of rights shares was passed without the necessary quorum of two disinterested Directors has no force. [788 D-E] 709 Firestone Tyre and Rubber Co. v. Synthetics and Chemicals Ltd., [1971] 41 Company Case 377 distinguished.

24. Silverston's appointment as an Additional Director is not open to challenge on the ground of want of agenda on that subject. Section 260 of the Companies Act preserves the power of the Board of Directors to appoint additional Directors if such a power is conferred on the Board by the Articles of Association of the Company. Article 97 of NIIL's Articles of Association confers the requisite power on the Board to appoint additional Directors. The occasion to appoint Silverston as an Additional Director arose only when the picture emerged clearly that the Board would have to consider the only other alternative for reduction of the non-resident holding, namely, the issue of rights shares. It is for this reason that the subject of appointment of an Additional Director could not have, in the state of facts, formed a part of the agenda.

[788 F.G; 789 A- C]

25. (i) The power to issue shares is given primarily to enable capital to be raised when it is required for the purposes of the company but that power is not conditioned by such need.

That power can be used for other reasons as for example to create a sufficient number of shareholders to enable the company to exercise statutory powers or to enable it to comply with legal requirements. [789 D-E] Punt v. Symons and Co., [1903] 2 Ch. 506;

Hogg v. Cramphorn, [1967] 1 Ch. 254; Howard Smith v. Amphol, [1974] A.C. 821.

(ii) The minutes of the Ketty meeting of October 20-21, 1976 saying that it was agreed that the rights issues, with the Indian shareholders taking up the U.K. members' rights, would be considered provided it was demonstrated by NIIL that "there is a viable development plan requiring funds that the expected NIIL cash flow cannot meet", cannot also justify the argument that the power of the Company to issue rights shares was, by agreement conditioned by the need to raise additional capital for a development plan.

[790 H; 791 A] (iii) In the instant case the rights shares were issued in order to comply with legal requirements which apart from being obligatory as the only viable course open to the Directors, was for the benefit of the company since, otherwise, its developmental activities would have stood frozen as of December 31, 1973. The shares were not issued as a part of takeover war between the rival groups of shareholders. [790 B-C]

26. It is not true to say, as a statement of law, that Directors have no power to issue shares at par, if their market price is above par. These are primarily matters of policy for the Directors to decide in the exercise of their discretion and no hard and fast rule can be laid down to fetter that discretion. Such discretionary powers in company administration are in the nature of fiduciary powers and must be exercised in faith. Mala fides vitiate the exercise of such discretion. [791 E & G] Hilder and Others v. Dexter [1902] A.C. 474, 480 referred to.

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

[811 H-812 A-B] (v) Section 43A when introduced by Act 65 of 1960 did not adopt the language either of section 43 or of section 44. Under section 43 where default is made in complying with the provisions of section 3(1)(iii) a private company shall cease to be entitled to the privileges and exemptions conferred on private companies by or under this Act, and this Act shall apply to the company as if it were not a private company. Under section 44 of the Act, where a private company alters its Articles in such manner that they no longer include the provisions, which under section 3(1)(iii) are required to be included in the Articles in order to constitute it a private company, the company "shall as on the date of the alteration cease to be a private company". Neither of the 711 expression, namely, "This Act shall apply to the company as if it were not a private company" (section 43) nor that the company "shall... cease to be a private company (section 44) is used in section 43A. If a section 43-A company were to be equated in all respects with a public company, that is a company which does not have the characteristics of a private company, Parliament would have used language similar to the one in section 43 or section 44, between which two sections, section 43A was inserted. If the intention was that the rest of the Act was to apply to a section 43A company "as if it were not a private company", nothing would have been easier than to adopt that language in section 43A; and if the intention was that a section 43A company would for all purposes "cease to be a private company", nothing would have been easier than to adopt that language in section 43A. [812 E-H; 813 A] (vi) A private company which becomes a public company by virtue of section 43A is not required to file a prospectus or a statement in lieu of a prospectus.

[813 C] After the Amending Act 65 of 1960 these distinct types of companies occupy a distinct place in the scheme of our Companies Act: (1) private companies (2) public companies and (3) private companies which have become public companies by virtue of section 43A, but which continue to include or retain the three characteristics of a private company.

Private companies enjoy certain exemptions and privileges which are peculiar to their constitution and nature. Public companies are subjected severely to the discipline of the Act. Companies of the third kind like NIIL, which become public companies but which continue to include in their articles the three matters mentioned in clauses (a) to (c) of section 3(1)(iii) are also, broadly and generally, subjected to the rigorous discipline of the Act. They cannot claim the privileges and exemptions to which private companies which are outside section 43A are entitled. And yet, there are certain provisions of the Act which would apply to public companies but not to section 43A companies.

[813 D; 814 A-C] There is no difficulty in giving full effect to clauses (a) and (b) of section 81(1) in the case of a company like NIIL, even after it becomes a public company under section 43A. Clause (a) requires that further shares must be offered to the holders of equity shares of the Company in proportion, as nearly as circumstances admit, to the capital paid up on these shares, while clause (b) requires that the offer further shares must be made by a notice specifying the number of shares offered and limiting the time, not being less than fifteen days from the date of the offer, within which the offer, if not accepted will be deemed to have been declined. [815 H; 816 A-B] The provision contained in clause (c) cannot be construed in a manner which will lead to the negation of the option exercised by the company to retain in its articles the three matters referred to in section 3(1)(iii). Both these are statutory provisions and they are contained in the same statute. They must be harmonised, unless the words of the statute are so plain and unambiguous and the policy of the statute so clear that to harmonise will be doing violence to those words and to that policy. The policy of the statute if any- 712 thing, points in the direction that the integrity and structure of the section 43-A proviso companies should, as far as possible not be broken up. [817 E-F] Park v. Royalty Syndicates [1912] 1 K.B. 330 and Re Pool Shipping Co. Ltd. [1920] 1 Ch. 251 referred to.

Palmer's Company Law 22nd. Vol. I para 12-18 Gower's Company Law 4th End p. 351 referred to.

27. When section 43A was introduced by Act 65 of 1960, the legislature apparently overlooked the need to exempt companies falling under it, read with its first proviso, from the operation of clause (c) of sec. 81(1). That the legislature has overlooked such a need in regard to other matters, in respect of which there can be no controversy, is clear from the provisions of sections 45 and 433(d) of the Companies Act. Undar section 45, if at any time the number of members of a company is reduced, in the case of a public company below seven, or in the case of a private company below two, every member of the company becomes severally liable, under the stated circumstances, for the payment of the whole debt of the company and can be severally sued therefor. No exception has yet been provided for in section 45 in favour of the section 43A-proviso companies, with the result that a private company having, say, three members which becomes a public company under section 43A and continues to function with the same number of members, will attract the rigour of section 45. Similarly, under section 433(d) such a company would automatically incur the liability of being wound up for the same reason.

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

28. Clause (c) of section 81(1) of the Companies Act apart from the consideration arising out of the opening words of that clause, can have no application to private companies which have become public companies by virtue of section 43A and which retain in their Articles the three matters referred to in section 3(1)(iii) of the Act. In so far as the opening words of clause (c) are concerned they do not require an express provision in the Articles of the Company which otherwise than what is provided for in clause (c). It is enough, in order to comply with the opening words of clause (c). that the Articles of the Company contain by necessary implication a provision which is otherwise than what is provided in clause (c). Articles 11 and 50 of NIIL's Articles of Association negate the right of renunciation.

[821 D-F]

29. The right to renounce shares in favour of any other person, which is conferred by clause (c) has no application to a company like NIIL and, therefore, its members cannot claim the right to renounce shares offered to them in favour of any other member or members. The Articles of a company may well provide for a right of transfer of shares by one member to another, but that right is very much different from the right of renunciation, properly so called. [821 G- H] Re Poal Shipping Co. Ltd. [1920] 1 Ch. 251 referred to.

30. A change in the pro rata method of offer of new shares is necessarily violative of the basic characteristics of a private company which becomes a public company by virtue of section 43A. To this limited extent only, but not beyond it, the provisions of sub-section (1A) of section 81 can apply to such companies. [822 F]

31. The following propositions emerge out of the discussions of the provisions of FERA, Sections 43A and 81 of the Companies Act and of the Articles of association of NIIL:

(1) The Holding Company had to part with 20% out of the 60% equity capital held by it in NIIL; [822 H] (2) The offer of Rights shares made to the Holding Company as a result of the decision taken by Board of Directors in their meeting of April 6, 1977 could not have been accepted by the Holding Company;

[822 H; 823 A] (3) The Holding Company had no right to renounce the Rights shares offered to it in favour of any other person, member or non-member; and [823 B] (4) Since the offer of Rights Shares could not have been either accepted or renounced by the Holding Company, the former for one reason and 714 the latter for another, the shares offered to it could, under article 50 of the articles of association, be disposed of by the directors, consistently with the articles of NIIL, particularly article 11, in such manner as they thought most beneficial to the Company. [822 B-C]

32. These propositions afford a complete answer to the respondents' contention that what truly constitutes oppression of the Holding Company is not the issue of Rights Shares to the existing Indian shareholders only but the offer of Rights Shares to all existing shareholders and the issue thereof to existing Indian shareholders only. [823 D]

33. It was neither fair nor proper on the part of NIIL's officers not to ensure the timely posting of the notice of the meeting for 2nd May so as to enable Sanders to attend that meeting. But there the matter rests. Even if Sanders were to attend the meeting, he could not have asked either that the Holding Company should be allotted the rights shares or alternatively, that it should be allowed to "renounce" the shares in favour of any other person, including the Manoharan group. The charge of oppression arising out of the central accusation of non-allotment of the rights shares to the Holding Company must, therefore fail. [823 H; 824 A-B]

CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 2139, 2483 and 2484 of 1978.

Appeals by Special Leave from the judgment and order dated the 6th October, 1978 of the Madras High Court in O.S.A. No. 64 of 1978.