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Needle Industries (India) Ltd., & ... vs Needle Industries Newey (India) ... on 7 May, 1981

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 JUDGMENT07/05/1981
 
BENCH:
CHANDRACHUD, Y.V. ((CJ)
BENCH:
CHANDRACHUD, Y.V. ((CJ)
BHAGWATI, P.N.
VENKATARAMIAH, E.S. (J)
 
CITATION:
 1981 AIR 1298  1981 SCR  (3) 698
 1981 SCC  (3) 333
 CITATOR INFO :
 MV1983 SC  75(61)
 
 
ACT:
Companies Act  1956, Ss.3(1)(iii),43A,45, 81, 299(1), 397(1), 397  and 398  and Foreign  Exchange  RegulationAct 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 wellas theholding company-Shareshowever allotted to only  Indian   shareholders-Notice  ofmeeting  at   which allotment made not properly given to holding company-Holding company whethercould renouncethe 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  friendlinesswith Director-Lawyer-clientrelationship  with  Director-Whether will disqualify a person from acting as Director.  Public company-Private  company-What  are-When  does  a privatecompany   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  amala  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 asa 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 toform the  Holding Company in England M/s  Needle   Industries-Newey(India)Holding  Ltd.,the respondent. Theentire 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 toacquire 99.95per 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 virtueof theintroduction ofsection 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  relevantprovisions  ofits articles afterits  became  apubliccompanywithinthe meaning of  section 43A.  By 1971  about 40  per cent of the share capital  of  NIILcame  to  be  held  bythe  Indian employees of the company and their relatives and the balance of about  60 per  cent remainedin the hands of the Holding Company NINIH Ltd.
 
In 1972 Coats Paton Ltd. became an almost 100% owner of NI-Studley. Theposition at  the beginning of the year 1973 was that  60% (to  be exact  59.3%) ofthe share capital of NIIL came  to be owned half and half by Coats and NEWEY, the remaining 40%  being inthe 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  Managementwith 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. Hewas N.T.  Sanders,  whoresided  in England and  hardly ever  attended theBoard Meetings.The holding company reposed  greatconfidence  inthe  Indian management which  was under  the direction  andcontrol  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  hisposition  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,  cameinto force on  Junuary 1, 1974. S.29(1) prohibited non-residents, non-citizens  and  non-bankingcompanies  notincorporated 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  ofthe commencement ofthe Act  or such further period the Reserve
 
Bank may  allow. S. 29 (4) (a) imposed a similar restriction on suchperson 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 ReserveBank  until August 31, 1974.
 
Since theHolding Companywas anon-resident and its interest in  NIIL exceeded  40% NIIL  had to  apply forthe permission of  the Reserve  Bank underS. 29  (1) FERAfor continuing to carry on its business. The Holding Company had also toapply for  the permission of the Reserve Bank under S. 29  (4) (a)FERA for  continuing tohold its  shares in NIIL.
 
NIIL applied  to the  Reserve Bankfor  the  necessary permission on September 3, 1974. By its letter dated May 11, 1976 the  Reserve Bankcondoned the  delay andallowed the application andimposed conditions  on NIIL  that  itmust 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 ReserveBank for  a Holding  Licence  under section 29  (4) (a)  of FERA,  on September  18, 1974; which application waslate 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 receiptof theletter of  the ReserveBank  dated March 11,1976  NIIL's secretary sent a reply on May 18, 1976 to  theBank  confirming  theacceptance  ofthe  various conditions under  which permission  was grantedto NIIL  to continue its  business. On  August  11,1976  the  term  of Devagnanam's appointment  as the  Managing Director  of NIIL came toan endbut in the meeting dated October 1, 1976 of NIIL's Board  of Directors his appointment was renewed for a further periodof 5 years. On October 20th and 21st, 1976 a meeting took  place between  the U.K.  shareholders andthe Indian shareholders  of NIIL.  But themeeting ended  in  a stalemate because  whereas  theHolding  Company  wanted  a substantial part  of the  share capital held by it in excess of 40  per centto be transferred to Madura Coats an Indian companyin   which  the  Holding  Company  hadsubstantial interest as  an Indian shareholder. Devagnanam insisted that the existing Indian shareholders of NIIL alone had the riright under its  Articles ofAssociation totake upthe  shares which the  Holding Company  was no  longer in  a position to hold because  of the  directives issuedby 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 datedMarch 30, 1977 from the Reserve  Bank which pointed out that the company had not submitted any  concrete proposal  for reductionof the non- resident interest  and asked  it to  submit itsproposal in that behalf  without any  further delayand that failure to comply with  the directive  regarding  dilutionof  foreign equitywithinthe  stipulated   period  would  be  viewed seriously.
 
A meetingof NIIL's  Board of  Directors was  held  on April 6, 1977. All the directors were present in the meeting with Devagnanamin thechair at  the commencement  ofthe proceedings. Mr. C. Doraiswamy, solicitor-partner of 701 King and  Partridge wasone of the directors present at the meeting. He had no interest in the proposal of Indianisation which the  meeting wasto 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 underarticle 97  of the  Articles of Association. Silverston chaired  the meetingafterhis  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 inproportion tothe shares held by them. The offer was  to be  made by  a notice specifying the number of shares which  each shareholderwas 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 resolutiona letter of offer dated  April  14,1977  was  prepared.  The  envelope containing Devagnanam'sexplanatory 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 wassent 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  exerciseits  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 Indianshareholders  includingmembers  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 tothe 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 resultedin thereduction of  the foreign holding to approximately  40%   and  increased   that  ofthe  Indian shareholders to almost 60%.
 
The Holding  Company fileda company  petition inthe 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 toissue  the  rights  shares  atpar  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 illegitimateadvantage   onthe   Indian shareholders. Devagnanam delayed deliberately the intimation of theproceedings 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 grouppresented 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  fairdealing  which the Holding Company was entitled to expect.
 
The  acting   Chief  Justice   whotriedthe  Company Petition, foundseveral  defects  andinfirmities  inthe 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 thepower 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  theHolding Company   and 'a consequential dialogue' with them in the matter of the issue of rights shares at a premium.
 
The Holding  Company beingaggrieved by  the aforesaid judgment filedan appeal and NIIL filed cross-objections to the decree.  The appealand cross  objectionswere  argued before the  Division Bench of the High Court on the basis of affidavits, thecorrespondence that  had passed between the parties and  certain additionaldocuments which  were filed before the  Appellate Court.  The Division  Bench  concluded that the  affairs of  NIIL werebeing 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 Companyinto Newey's Far Eastern complex it was just  and equitableto wind up the Company. With regard to thecross-objections, the  Division Bench  held that the injuries suffered  by  the  Holding  Company  could  not  be remedied by  the awardof compensationand, therefore, the action of  the Board  of Directors  inissuingthe  rights shares had  to be quashed. It accordingly allowed the appeal filed by  the  HoldingCompanyand  dismissedthe  cross- objections of  the appellant  and directed that the Board of Directors be  suspended and  an interimBoard consisting of nine  directors proposed  bythe  HoldingCompany be constituted andthat the  rights issuemade on  6th April, 1977 and  the allotmentof 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 tothis Court, on the question whether the decisions  taken  at  the  meetingsof  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  ofoppression  rejected  after applying to  the conduct  of Devagnanamand his  groupthe standard of  probity and  fairplay,  which  isexpected  of partners in  a businessventure. 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  andthe appeals succeedon 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 nearlyas it  may, inthe same position in which they  would havebeen, 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 excessholding or  the rightsshares is  a factor which,  to someextent, 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  atthe 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 groupand theother 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 bepaid bythem to the holding companyfrom their own funds and not from the funds or assets of NIIL. [827 A-B]
 
5. As  a  furthermeasureof  neutralisation  ofthe benefitwhichthe  Indian  shareholders  received  inthe meeting of  2nd May,  1977, itis directed  that the 16,000 rights shares  which were  allotted inthat 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 theIndian 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 sameas if the issue and allotment of  the rights  shares was  not madeuntil  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 underthe orders  of this Court dated November 6, 1978 will  continue tofunction 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 Controllerof Capital Issues, as the case may be, if it is necessary  to obtainsuch  sanctionor  permissionfor giving effect to the directions. [827 G]
 
8. Devagnanam and his group acted in the best interests of NIIL,  in the  matter of  the issueof rights shares and indeed, the  Board of  Directors followed  in the meeting ofthe 6th April a course which they had no option but to adopt and indoing  which,  they  were  solely  actuated  bythe consideration as to what 704 was  in the  interestof  the  company.  Theshareholder 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  uponthe  issue  ofrightsshareswere 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 therigid attitudeof  Coats  who,duringthe  period between the  Ketty meeting  of October20-21, 1976  and the Birmingham discussionsof 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   oflegalcompulsion  precipitated   bythe obstructive attitude  of Coatsand 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 sharesat 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  onones  credulity  to believe that  the letters  of offer  dated April  14 tothe Holding Company,  to Raeburn and to Manoharan were posted on the 14th  itself but  that somehow  they rottedin the post officeuntilthe  27th   onwhich  date  they  tookoff 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 noticeof theBoard'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 faitaccompli in  the shapeof theBoard's decision for allotment  ofrightssharesto  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 inregard 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. Withregard to  the impact on the legality of the offer and the validity of the meeting of May 2,
(i)  It isquite 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  themain  purpose was  to consider 'Allotment' of the rights  shares must,therefore, be  held tobe abortive,  [796 H-797 A] 705
(ii) The utter  inadequacy of  the notice to Sanders in terms of  time staresin theface and  needs  no  further argument  to justifythe 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 themeeting.  Thereis,  therefore,  no  alternative save  to hold  that the decision taken  in the  meeting of  May 2  cannot, inthe  normal  circumstances, affectthe  legal  rights  ofthe  Holding Company  or create  any legalobligations  against it. [797 D-E]
13B. The  dilution of  the non-resident interest in the equity capitalof theCompany to a level not exceeding 40% "within a  period of  1 (one)  year from the date of receipt of" theletter was  of the  very essence of the matter. The sanction for  enforcement of  aconditional  permission  to carry on  business, where  conditions are  breached, isthe cessation, ipsofacto, of the permission itself on the non- performance ofthe conditionsat  thetime  appointed  or agreed. When  NIIL wrote  to the  Bank on  February 4,1976 binding itselfto 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 ofthe provisionsof section 29(1) and (2) ofFERA and  the conditional  permission granted by the RBI byits letter  dated May  11, 1976the offer of rights shares made  byNIIL  to  theHoldingCompany  couldnot possibly have been accepted by it. [800 B]
The acceptance  of the  offer of  rights shares  by the Holding Companywould have  resulted in  a violation of the provisions of FERA and the directive of the Reserve Bank. No grievance can  be madeby the Holding Company that since it did notreceive the  offer intime, it  was deprived of an opportunity to accept it. [800 D-G]
14A. An  offer ofsharesundoubtedly  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 LifeAssurance Co. [1954] SCR 117 referred to.
 
15(i) Before  granting relief  in an  application under section 210  of the  English CompaniesAct as under section 397 ofthe 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 justifythe 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 profitsis no  obstacle to its being wound up if it is just and equitable to do so. [744 A-B; 775G]
 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  orcareless  conduct  ofa  Director  inthe performance ofhis duties  cannot giverise to a claim for reliefunderthat  section.The  person  complaining  of oppression mustshow that he has been constrained to submit to a conduct which lacks in probity, conduct which is unfair to himand 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  thatsuch violation was  burdensome, harsh  and wrongful. But a series of illegal  acts following  upon one  another  can,  inthe context, lead  justifiably to the conclusion that they are a part ofthe 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  bya  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 CompanyCases 830-31 & Elder v. Elder [1952] S.C. 49 referred to.
 
18. It  is generally unsatisfactory to record a finding involving graveconsequences to  a person  on the  basis of affidavits anddocuments  without  asking  that  person  to submit to  cross-examination. Men may lie but documents will not andoften, documents  speak louderthan words.  But  a total  relianceon  the  written  word,  whenprobityand fairness of conduct are in issue, involves the risk that the person accusedof wrongful conduct is denied an opportunity to  controvertthe  inferences  saidto  arise  fromthe 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 thebasis 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  cansafelyand legitimately be drawn. [755B-C]
 These documents  and many more documents were placed on the record  mostly  byconsentof  parties,  as  thecase progressed fromstage to stage. That shows that the parties adopted willingly  a mode  of trial  which theyfound 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 onin such a company, one must capture its control. If one decides  to quit,  one mustobtain the  best pricefor one's holding,under and  over the  table, partly in rupees and partly  in foreignexchange. Then, the tax laws and the foreign exchange regulations look on helplessly, because law cannot operatein 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 thelegal rights  to  insist  thatthe Directors shallnot  issue  the  rights  shares.  Whatthe Directors did  was clearly  in the  larger interests  of the Company and  in obedience  to their  duty to comply with the law ofthe land.  The fact that while discharging that duty they  incidentally   trenched  upon  the  interests  ofthe majority cannotinvalidate 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 actio n. [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 Directorshave exercisedtheir power for the purpose of  preventing the  affairs of the company frombeingbroughtto   agrinding   halt,  a consumption devoutlywished for  by Coats  in the interest of  their extensiveworld-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  hasincidentally  benefitedthe  Directors in their capacity as share holders, [786 C] In the  instant case  the Board  of Directors  didnot abuse its  fiduciary power  in decidingupon the  issue  of rights shares. [786 D]  Harlowe'sNominess   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  LifeAssurance  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. Undersection 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 iswrong to  attribute any  bias to Silverston  for having  acted asan  adviser  tothe  Indian  shareholders in  the Ketty  meeting. Silverston is  by professiona solicitor  and legaladvisers do not  necessarily   have  a   biased  attitude to questions onwhich  their  advice  is  sought  or tendered. Silverston's  alleged personal hostility to Coats cannot, within the meaning of section 300 (1)  of   theCompanies   Act,  makehim  person "directly orindirectly, 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 bedisclosed 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 ofby sections 299 (1) and 300 (1) cannot  be a  merely sentimentalinterest  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  withsuch directors will not disqualify a person from acting as aDirector on  the groundof his being, under section  300(1)   as   "interested"   Director. Howsoever onemay stretch the language of section 300 (1)  in the  interest  ofpurityof  company administration, it  is next to impossible to bring Silverston's appointment  within theframework of
 that provision. [788 A-C] The  argument   that  Silverstonwas  an interested Director, thattherefore his  appointment as  an Additional Director was  invalid and  that consequently  the resolution for theissue of  rights  shares  waspassedwithoutthe necessary quorum  of  two  disinterested  Directors  has  no force. [788 D-E] 709 FirestoneTyre   and  Rubber  Co.v.  Syntheticsand Chemicals Ltd., [1971] 41 Company Case 377 distinguished.
 
24. Silverston's  appointment as an Additional Director is notopen 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  toappoint  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.  Theoccasion  to appoint Silverston as an Additional Director arose only when the picture  emerged clearly  that theBoard would  have to consider the  only other  alternative for  reduction ofthe non-resident holding, namely, the issue of rights shares. It is forthis reason  that the  subject of  appointment of an Additional Director  could nothave, 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  thecompany 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 thatit wasagreed that    the   rights issues,withthe   Indian    shareholders  taking  upthe  U.K.  members'    rights, would  be considered  provided it was    demonstrated byNIIL that "there is a viable    development planrequiring  funds  thatthe    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  tocomplywith   legal    requirements   which apart   from being    obligatory as  the only viable course open to    the Directors,  was forthe benefit  ofthe    company since,  otherwise, its  developmental    activities wouldhave  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 haveno power  to issue  shares at  par, if their market price  is abovepar. These  are primarily matters of policy for  the Directors to decide in the exercise of their discretion andno hardand fast  rule can  be laid down to fetter that discretion. Such discretionary powers in company administration are  in the  nature of  fiduciary powersand must beexercised in faith. Mala fides vitiate the exercise of such discretion. [791 E & G]
 Hilder andOthersv.  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 companywhich has become a public company by reason of S.  43A, maycontinue to retain in its articles, matters which are  specified inS. 3(1)(iii)  and the number of its members may  be or  may at any time be reduced below 7. [810H; 811 A-B]
(i)  A section  43A company may include in its articles as part  of its  structure, provisions relating to restrictions on  transfer ofshares, limiting the number of  its members  to 50,  and prohibiting an invitation tothe public to subscribe for shares, which are  typical characteristics  of  a  private company.  The expression  'publiccompany'  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  canstill  maintainits 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)  ofthat section) showthat 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 ofthese sectionsclarifythe legislative intent  that such companies may retain their registered  corporate  shell  of  a  private company but  will besubjected 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 withthe  provisionsof  section  3(1)(iii) a  private companyshall  cease  to  be  entitled  tothe   privileges   and exemptions  conferred onprivate 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  privatecompanyaltersits  Articles  insuch  manner  that  they  no  longer  include  theprovisions,  which   under  section  3(1)(iii) arerequired  to  be  included  inthe  Articles in  order  to  constitute  it  a  private company, thecompany "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  nota  private  company"  (section 43)nor that the company "shall... cease  to bea 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,  thatis   acompanywhichdoes  not  havethe  characteristics of  a privatecompany, Parliament  would have  used language  similar tothe one  in  section  43  or  section  44,between  whichtwo  sections,  section   43A  was inserted.  Ifthe  intention wasthat 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 wouldhave 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 theAmending Act 65 of 1960 these distinct types  of companies  occupy adistinct placein 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  ofa  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. Companiesof thethird 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   privilegesand  exemptions  to  which  private companies whichare outside  section 43A  are entitled. And yet, there  are certainprovisions ofthe Actwhich 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) ofsection 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  ofequitysharesof  theCompany  in proportion, as nearly as circumstances admit, to the capital paid upon these shares, while clause (b) requires that the offer further shares must be made by a notice specifying the number of  shares offered  and limitingthe time, not being less than  fifteen daysfrom 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   containedin  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  soclearthat  to  harmonise  will  be  doing violence to  those words  and to  that policy. The policy of the statute if any- 712 thing, points  in  thedirection  thatthe  integrityand 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 legislatureapparently overlookedthe need  to  exempt companies falling  under it,  read withits first  proviso, from the  operation ofclause (c)  of sec.  81(1). That the legislature hasoverlooked 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 companyand can  be severallysued therefor. No  exception has yet been provided for in section 45 in  favour of the section 43A-proviso companies, with the result that  a privatecompany having,say, three  members which  becomesa  public  company  under  section  43Aan continues to  function with the same number of members, will attract the  rigour ofsection 45. Similarly, under section 433(d)such   a  company   would  automatically  incurthe liability of being wound up for the same reason.   [818 A-D]
While construing  the opening words of section 81(1)(c) it hasto be  remembered thatsection43A  companiesare entitled underthe  proviso  to  thatsectionto  include provision in their Articles relating to matters specified in section 3(1)(iii).  The right  of renunciationin favour of any other person is wholly inconsistent with the Articles of a private  company. Ifa private  company becomes  a public company by virtue of section 43A and retains or continues to include in  its Articles  matters  referred  toin  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 ofsection 43A  and retain  theirold Articles, therewould of  necessity be a provision in their Articles which is otherwise than what is contained in clause (c). Consideredfrom 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. [820B-D]
 
In the  context inwhich 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  tomean  "provideexpressly  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   istentamount   to  an invitation to  the public to subscribe for the shares in thecompany and  can violate  the provisionin  regard  tothe 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) ofsection 81(1)of the Companies Act apart from  the consideration  arising out  ofthe  opening words of  that clause,can have  no application  to private companies whichhave become  public companiesby virtue of section 43A  and whichretain in  their Articles  the three matters referred  to insection 3(1)(iii) of the Act. In so far as the opening words of clause (c) are concerned they do not require  an expressprovision in  the Articles  ofthe 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 negatethe 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 anyother member  or members.  The Articles of a company may well  provide for  a rightof transfer of shares by one member to  another, butthat 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 prorata method  of offer of new shares is necessarily violative of the basic characteristics of a  private company  which becomes  apubliccompany  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  propositionsemergeout  ofthe discussions ofthe provisionsof FERA, Sections 43A and 81 of theCompanies 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 Rightsshares made  to the  Holding Company as a result of the decision taken by Board of Directorsin their  meeting of  April 6,1977 couldnot  have  been  accepted  bythe  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  thearticles  of  association, be  disposed  ofby  the  directors, consistentlywiththe   articles of   NIIL, particularly article11, insuch manner  as they thought most beneficial to the Company. [822 B-C]
 
32. These propositions afford a complete answer to the respondents'  contention   that whattruly constitutes oppression of the Holding Company is not the issue of Rights Shares to  the existingIndian shareholders  only  butthe 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 officersnot toensure 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  allottedthe rights shares or alternatively, that it should be allowed to "renounce"  thesharesin  favour  ofany  other  person, including the  Manoharan group.The  charge  of  oppression arising out  of the  central accusationof non-allotment of the rights  shares to  the Holding  Company must,  therefore fail. [823 H; 824 A-B] 
 

 

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