When it is necessary to permit a person to cross examine person who has submitted his affidavit

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

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.

 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-

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.

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. 

it is generally unsatisfactory to record a finding involving grave consequences with respect to a person, on the basis of affidavits and documents alone, without asking that person to submit to cross-examination. However, the conduct of the parties may be an important factor, with regard to determining whether they showed their willingness to get the said issue determined on the basis of affidavits, correspondence and other documents, on the basis of which proper and necessary inferences can safely and legitimately be drawn. -

Supreme Court of India

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

BENCH:
CHANDRACHUD, Y.V. ((CJ)
BHAGWATI, P.N.
VENKATARAMIAH, E.S. (J)
CITATION:
1981 AIR 1298 1981 SCR (3) 698
1981 SCC (3) 333

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

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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-

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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

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the latter for another, the shares offered to it could, under article 50 of the articles of association, be disposed of by the directors, consistently with the articles of NIIL, particularly article 11, in such manner as they thought most beneficial to the Company. [822 B-C]

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

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

JUDGMENT:

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

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

F.S. Nariman, A.K. Sen, Dr. Y.S. Chitaley, S.N. Kackar, T. Dalip Singh, K.J. John, Ravinder Narain, A.G. Menses and R. Narain for the Appellants.

H.M. Seervai, Anil B. Divan, A.R. Wadia, S.N. Talwar, I.N. Shroff and H.S. Parihar for Respondent No. 1. D.N. Gupta for Respondents Nos. 2-7, 10- 12, 15, 16, 18-22, 26 and 28-33.

The Judgment of the Court was delivered by CHANDRACHUD, C. J. These three appeals by special leave arise out of a judgment of a Division Bench of the High Court of Madras dated October 6, 1978 allowing an appeal against the judgment of a learned Single Judge, dated May 17, 1978 in Company Petition No. 39 of 1977. The main contending parties in these appeals are: (i) the Needle Industries (India) Limited and (ii) the

715

Needle Industries-Newey (Indian Holdings) Limited. These two companies have often been referred to in the proceedings as the Indian Company and the English Company respectively, but it would be convenient for us to refer to the former as 'NIIL' and to the latter as the 'Holding Company'. The Holding Company has been referred to in a part of the proceedings as 'NINIH'.

In Civil Appeal 2139 of 1978, which was argued as the main appeal, NIIL is appellant No. 1 while one T.A. Devagnanam is appellant No. 2. The latter figures very prominently in these proceedings and is indeed one of the moving spirits of this acrimonious litigation. He was appointed as a Director of NIIL in 1956 and as its Managing Director in 1961. He is referred to in the correspondence as 'TAD' or 'Theo' but we prefer to call him 'Devagnanam'. The Holding Company is Respondent 1 to the main appeal, the other respondents being some of the Directors and shareholders of NIIL. Civil Appeal 2483 of 1978 is filed by some of the shareholders of NIIL while Civil Appeal 2484 of 1978 is filed by some of its directors and officers. The Holding Company is the contesting respondent to these two appeals. We will deal with the main appeal and our judgment therein will dispose of all the three appeals. The NIIL was incorporated as a Private Company under the Indian Companies Act, 1913 on July 20, 1949 with its Registered Office at Madras. Its factory is situated at Ketty, Nilgiris. At the time of its incorporation, NIIL was a wholly owned subsidiary of Needle Industries (India) Ltd., Studley, England (hereinafter called 'NI-Studley'). The authorised capital of NIIL was Rs. 50,00,000 divided into 50,000 equity shares of Rs. 100 each. Its issued and paid up capital prior to 1961 was Rs. 6,75,600 divided into 6,756 equity shares of Rs. 100 each. The issued and paid up capital was increased to Rs. 11,09,000/- in 1961. In that year, NI-Studley entered into an agreement with NEWEY BROS. LIMITED, Birmingham, England, (hereinafter called NEWEY), under which NEWEY agreed to participate in the equity capital of NIIL to the extent of Rs. 4,33,400/-, consisting of 4,334 equity shares of Rs. 100/- each. Thus, in 1961, the position of the share holding in NIIL was that NI-Studley held approximately 60.85% of the issued capital and NEWEY held the balance of 39.14%. In 1963, NIIL increased its share capital by issuing 2,450 additional shares to NI- Studley, as a result of which the latter became the holder of about 68% shares in NIIL, the rest of the 716

32% belonging to NEWEY. Later in the same year, NI-Studley and NEWEY combined to form the Holding Company, of which the full official name. as stated earlier is the Needle Industries-Newey (Indian Holding) Ltd. The Holding Company was incorporated in the United Kingdom under the English Companies Act, 1948 with its Registered Office at Birmingham, England. The entire share capital of NIIL, held by NI-Studley and NEWEY, was transferred to the Holding Company in which NI-Studley and NEWEY became equal sharers. As a result of this arrangement, the Holding Company came to acquire 99.95% of the issued and paid up capital of NIIL. The balance of 0.05%, which consisted of 6 shares being the original nominal shares, was held by Devagnanam. The NIIL, it shall have been noticed, was incorporated about two years after India attained independence. As a result of an undertaking given by it to the Government of India at the time of its incorporation and pursuant to the subsequent directives given by the said Government for achieving Indianisation of the share capital of foreign companies, three issues of shares were made by NIIL in the years 1968, 1969 and 1971, all at par. There was also an issue of Bonus shares in 1971. As a result of these issues, about 40% of the share Capital of NIIL came to be held by the Indian employees of the Company and their relatives while the balance of about 60% remained in the hands of the Holding Company. In terms of the number of shares, by 1971- 72 the Holding Company owned 18, 990 shares and the Indian shareholders owned 13,010 shares. Out of the latter block of shares, Devagnanam and his relatives held 9,140 shares while the remaining 3,870 shares were held by other employees and their relatives, amongst whom were N. Manoharan and his group who held 900 shares and D.P. Kingsley and his group who held 530 shares. The total share capital of NIIL thus came to consist of 32,000 equity shares of Rs. 100 each. In or about 1972, a company called Coats Paton Limited, Glasgow, U.K. (hereinafter called 'Coats') became an almost 100% owner of NI-Studley. The position at the beginning of the year 1973 thus was that 60% (to be exact 59.3%) of the share capital of NIIL came to be owned half and half by Coats and NEWEY, the remaining 40% being in the hands of the Indian group. The bulk of this 40% block of shares was held by Devagnanam's group, which came to about 28.5% of the total number of shares.

717

Though NIIL was at one time wholly owned by NI-Studley and later, by NI-Studley and NEWEY, the affairs of NIIL were managed ever since 1956 by an entirely Indian management, with Devagnanam as its Chief Executive and Managing Director with effect from the year 1961. The Holding Company which was formed in 1963, had only one representative on the Board of Directors of NIIL. He was N.T. Sanders. He resided in England and hardly ever attended the Board meetings. The Holding Company reposed great confidence in the Indian management which was under the direction and control of Devagnanam.

But the acquisition of NI-Studley by Coats in 1972 and their consequent entry in NIIL created in its wake a sense of uneasy quiet between the Coats on one hand, which came to own half of the 60% share capital held by the Holding Company, that is to say, 30% of the total share capital of NIIL, and the Devagnanam group on the other hand, which owned 28.5% of that share capital. By the mere size of their almost equal holding in NIIL, Coats and Devagnanam developed competing interests in the affairs of NIIL. Coats were in the same line of business as NIIL, namely, manufacture and sale of needles for various uses, fish-hooks etc., and they had established trading centres far and wide, all over the world. It is plain business, involving no moral turpitude as far as business ethics go, that Coats could not have welcomed competition from NIIL with their world interests. Devagnanam was a man of considerable ability and foresight and in NIIL he saw an opportunity of controlling and dominating as industrial enterprise of enormous potential in a rapidly growing market. The turnover of NIIL had increased from 2.80 lakhs in 1953 to 149.93 lakhs in 1972 and the profits ran as high as 19.4% of the turnover. Implicit confidence in the Indian management which was the order of the day almost till 1974 gradually gave way to an atmosphere of suspicion and distrust between Coats and Devagnanam. NEWEY apparently kept away from the differences which were gradually mounting up between the two but, evidently, they nursed a preference for Devagnanam. Coats are a giant multinational organization. NEWEY, comparatively, are small fish though, they too had their own independent business interests to protect and foster.

NEWEY owned a flourishing business in Malaysia, Hong Kong, Taiwan, Japan and Australia and from 1972 onwards they drew Devagnanam increasingly into the orbit of their Far Eastern

718

interests. In July, 1972 he was offered the office of Managing Director of a group of four companies in Hong Kong and Taiwan on a five year contract, with an annual salary of six thousand pounds. He had already been appointed to the Board of the NEWEY joint venture company in Osaka and Japan and acted as the liaison Director for that company. He had also been asked to coordinate sales with NEWEY Brothers, Australia. Willing to accept these manifold responsibilities, Devagnanam became strenuously involved therein. He and his wife began to reside in Hong Kong and he cogitated over resigning from his position in NIIL. Coats, on their part, were clear that Devagnanam should relinquish his responsibilities in NIIL, in view of the time his role in NEWEY's Far Eastern interests was consuming. The question of appointing his successor as Managing Director in NIIL then began to be discussed, the Holding Company wanting to have Manoharan as a substitute. Devagnanam carried the feeling that he was already persona non grata with Coats, because of certain incidents which had taken place some years ago.

The Foreign Exchange Regulation Act, ('FERA'), 46 of 1973, which came into force on January 1, 1974 provided to Coats and Devagnanam a legal matrix for fighting out their differences. The provisions of FERA, which was passed, inter alia, for the conservation of foreign exchange resources of the country and the proper utilisation thereof in the interests of the economic development of the country are stringent beyond words. Putting it broadly and briefly, section 29 (1) of FERA prohibits non-residents, non-citizens and non-banking companies not incorporated under any Indian Law or in which the non-resident interest is more than 40%, from carrying on any activity in India of a trading, commercial or industrial nature except with the general or special permission of the Reserve Bank of India. By section 29 (2) (a), if such a person or company is engaged in any such activity at the commencement of the Act, he or it has to apply to the Reserve Bank of India, for permission to carry on that activity, within six months of the commencement of the Act or such further period as the Reserve Bank may allow. Since the Holding Company is a non- resident and its interest in NIIL exceeded 40%, NIIL had to apply for the permission of the Reserve Bank for continuing to carry on its business. Section 29 (4) (a) imposes a similar restriction on such person or company from holding shares in India of any company referred to in clause (b) of section 29 (1), without the permission of the Reserve Bank. Therefore, the Holding Company also had to apply for the permission of

719

the Reserve Bank for continuing to hold its shares in NIIL. The time for making application for the requisite permission under section 29 was extended by the Reserve Bank by two months generally, that is to say, until August 31, 1974. The need to comply with the provisions of section 29 of FERA is the pivot round which the whole case revolves. NIIL applied to the Reserve Bank for the necessary permission through its Director and Secretary, D.P. Kingsley, on September 3, 1974 By its letter dated May 11, 1976, the Reserve Bank allowed that application on certain conditions. NIIL's application was late by three days but the delay was evidently ignored or condoned. One of the conditions imposed by the Reserve Bank on NIIL was that it must bring down the non-resident interest from 60% to 40% within one year of the receipt of its letter. That letter having been received by NIIL on May 17, 1976, the dead-line for reducing the non-resident interest to 40% was May 17, 1977.

The Holding Company applied to the Reserve Bank for a 'Holding Licence' under section 29(4)(a) of FERA, on September 18, 1974. That application which was late by 18 days is, we are informed, still pending with the Reserve Bank. Perhaps, it will be disposed of after the non-resident interest in NIIL is reduced to 40% in terms of section 29 (1) of FERA.

Devagnanam was residing in Hong Kong to fulfil his commitment to NEWEY's far-eastern business interests. FERA had its implications for him too, especially since he could be regarded as a nonresident and did consider himself as such. He obtained a holding licence dated March 4, 1975 from the Reserve Bank in respect of his shares in NIIL. But, his interest in the affairs of NIIL began to flag for one reason or another and he started looking out for a purchaser who would buy his shares on convenient and attractive terms. In a note dated April 29, 1975 which he prepared on "further Indianisation-Needle Industries (India) Ltd." he pointed out that Indianisation should be considered on the footing that the non-resident interest should be reduced to 40% and that, as between the two feasible methods of Indianisation, namely, (1) Going to public and (2) placement of shares, the latter was preferable.

He said:

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There can be no question of my becoming in any way involved with Ketti and its future as I am committed to NEWEY. There appears to be no possibility of returning to India in what is left of my working life. I therefore have little choice but to sell my shares. ('Ketty' in Nilgiris, is the place where NIIL's factory is situated and is treated as synonymous with NIIL). Devagnanam referred in his note to an inquiry from a Mr. Khaitan, the head of a powerful group with diverse interests and investment in industry, who was already involved in the manufacture of products allied to NIIL's. Coats were alarmed that Devagnanam was negotiating the sale of his shares "to a Marwari, one Khaitan of Shalimar, a sewing needle competitor to Ketti". In a letter dated August 6, 1975 addressed to Doraiswamy, a partner in a Madras firm of solicitors called 'King and Partridge' who was a Director of NIIL, Sanders, a Director of the Holding Company on NIIL's Board, expressed his grave concern at the proposed deal thus: No doubt Mr. Khaitan would pay the earth to acquire NIIL and judging by what Theo (Devagnanam) had said about him in the past, he may be prepared to arrange or facilitate payment abroad, a most attractive possibility from Theo's point of view, since he has said clearly that he intends leaving India for good, finally settling in Australia.

Sanders added that the deal was so dangerous from the point of view of NIIL that the Holding Company "would feel obliged to prevent it by whatever means were open" to it. By his reply dated August 12, 1975, Doraiswamy said that the news of the proposed sale came as no surprise to him and that he had heard that Silverston, a former Solicitor-partner of his, was acting as a "go-between" in Devagnanam's deal with Khaitan.

On September 16, 1975 Devagnanam wrote to M.M.C. NEWEY of NEWEY, Birmingham. pointing out the advantages that would accrue by the sale of the shares to Khaitan. Devagnanam reiterated his total identification with NEWEY's Far Eastern interests and expressed his anxiety to free himself from all commitments to or involvement with NIIL, as early as possible.

On October 22, 1975 an important meeting was held in which Alan Machrael, a Director of the Holding Company, made it clear

721

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

"I do not think any of us want to see Coats dominate Ketti. Hence there can be no question of selling any part of my shares to their nominee. As they in turn will not approve of anyone we choose, there is no way of solving the problem...The best thing to do, therefore, is for me to revert to the original basis and they should have no cause to complain. This will of course include effectively managing the Indian company. Let me however assure you that it will not be at the expense of Newey."

And so did Devagnanam remain in NIIL, with the stage set for a battle between him and Coats for acquisition of control over the affairs of NIIL.

Yet another statutory provision which has an important bearing on the issues arising in these appeals is the one contained

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in section 43 A of the Indian Companies Act, 1956, which was introduced in 1961 by Act 65 of 1960. NIIL was incorporated as a Private Company in 1949 under the Indian Companies Act, 1913. It was a Private Company as defined in section 3 (1) (iii) of that Act since, by its Articles of Association, it restricted the right to transfer its shares, limited the number of its members to fifty and prohibited any invitation to the public to subscribe to any of its shares or debentures. By section 43 A, it became a Public Company, since not less than twenty-five per cent of its paid-up share capital was held by a body corporate, namely, the Holding Company. But, under the first proviso to section 43A (1), it had the option to retain its Articles relating to matters specified in section 3 (1) (iii) of the Companies Act. NIIL did not alter the relevant provisions of its Articles after it became a Public Company within the meaning of section 43A. One of the points in controversy between the parties is whether, in the absence of any positive step taken by NIIL for exercising the option to retain its Articles relating to matters specified in section 3 (1) (iii) of the Companies Act, it can be held that NIIL had in fact exercised the option, which was available to it under the 1st proviso to section 43A, to include provisions relating to those matters in its Articles. To resume the thread of events, on receipt of the letter of the Reserve Bank dated May 11, 1976 Kingsley, as NIIL's Secretary, sent a reply on May 18, 1976 to the Bank confirming the acceptance of the various conditions under which permission was granted to NIIL to continue its business. On August 11, 1976 the term of Devagnanam's appointment as the Managing Director of NIIL came to an end but in the meeting dated October 1, 1976 of NIIL's Board of Directors, that appointment was renewed for a further period of five years. On being informed of the renewal of Devagnanam's appointment, NEWEY's Chairman, C. Raeburn, who used to attend to the affairs of the Holding Company, did not object as such to the Board's decision ("It may well be that the reappointment in itself is right") but he demurred to the modality by which the decision was taken since, according to him, questions relating to appointments to senior positions in the Company ought to be decided in consultation with the U.K. Shareholders so that they could have an opportunity to express their views. Sanders, it may be mentioned, had received the notice of the meeting duly. On October 20 and 21, 1976, a meeting took place at Ketti between the U.K. shareholders and the Indian shareholders of NIIL. The former were represented by Alan Mackrael, the Managing Director

723

of the Holding Company, and C. Raeburn, the Chairman of NEWEY the latter by Devagnanam and Kingsley. One Martin Henry, the Managing Director of 'Madura Coats', an Indian Company in which the Holding Company had substantial interest, also attended that meeting and took part in its deliberations. Silverston, an Englishman who was practising in India asa Solicitor, attended the meeting as an advisor to the Indian shareholders. C. Raeburn chaired the meeting. Para 2 of the note prepared by him of the discussions held at the meeting says that it was agreed that Indianisation should be brought about by May 1977, as requested by the Government, so as to achieve 40% U.K. and 60% Indian shareholding. But the meeting virtually ended in a stalemate because whereas the Holding Company wanted a substantial part of the share capital held by it in excess of 40% to be transferred to Madura Coats as an Indian shareholder, Devagnanam insisted that the existing Indian share-holders of NIIL alone had the right, under its Articles of Association, to take up the shares which the Holding Company was no longer in a position to hold because of the directives issued by the Reserve Bank pursuant to FERA. Thus, the difference between the two groups who were fast falling out was not, as it could not be, whether the Holding Company had to reduce its share holding in NIIL from 60% to 40%, but as regards the mode by which that reduction was to be brought about. The bone of contention was as to which Indian Party should take up the excess of 20%-the existing Indian shareholders of NIIL or an outside Indian Company, the Madura Coats. Raeburn played the role of a mediator but did not succeed. On the conclusion of the Ketty meeting, Silverston wrote a letter to Kingsley conveying his appreciation of the efforts made by Raeburn to bring the parties together and his distress at the attitude of Coats which, according to Silverston, showed that they were trying to circumvent the provisions of FERA. Raeburn too wrote a letter on October 23, 1976 to Devagnanam saying that Coats were not really interested in any independent Indians taking their excess share-holding. On December 11, 1976 Devagnanam wrote to Raeburn expressing the resentment of himself and his group at the attempts made by Coats to maintain their control over NIIL by indirect means. On December 14, Devagnanam offered a package deal under which the existing Indian shareholders would augment their holding to 60%, Mackrael and Raeburn would be on the Board of Directors but not Martin Henry, and even B.T. Lee, a Senior Executive of NI-Studley, could be appointed as a wholetime Director of NIIL to be in charge of its export programme. On January 20, 1977 the Reserve Bank sent a reminder to NIIL asking 724

it to submit at an early date the progress report regarding dilution non-resident interest. By its reply dated February 21, 1977 NIIL confirmed its commitment to achieve the desired Indianisation by the stipulated date, viz., May 17, 1977. On March 9, 1977 Raeburn wrote to Devagnanam, saying that after a discussion with Mackrael and three other high- ranking persons of Coats, it was clear that Coats were not agreeable to allowing the present Indian shareholders to acquire 60% of the equity capital of NIIL, since such a course carried in the long run too great a risk to their world trade. Raeburn made certain fresh proposals by his letter in the hope that they would be acceptable to Coats and invited Devagnanam to come to Birmingham for negotiations.

On March 18, 1977 a notice was issued by NIIL's Secretary, D.P. Kingsley, intimating that a meeting of the Board of Directors will be held on April 6, 1977. One of the items on the agenda of the meeting was shown as "Policy- Indianisation". Sanders received the notice of the meeting duly but did not attend the meeting.

Devagnanam went to Birmingham in the last week of March 1977. Between 29th and 31st March, he held discussions with four out of the six Directors of the Holding Company, namely NEWEY, Jackson, White-house and Raeburn. The other two Directors, Mackrael and Sanders, did not take any part in those discussions. During his visit to Birmingham, Devagnanam expended considerable time in discussing various matters with NEWEY, pertaining to their Far-Eastern business.

On April 4, 1977 NIIL received a reminder letter dated March 30, 1977 from the Reserve Bank which pointed out that the Company had not yet submitted any concrete proposal for reduction of the non-resident interest and asked it to submit its proposal in that behalf without any further delay. The letter warned the Company that if it failed to comply with the directive regarding dilution of foreign equity within the stipulated period, the Bank would be constrained to view the matter seriously.

Raeburn had written a letter to Devagnanam on 4th April on the question of the compromise formula and Devagnanam too had written a letter to Raeburn on the 5th, saying that he would place the formula before his colleagues. These letters evidently crossed each other. The 6th April was then just at hand.

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The meeting of NIIL's Board of Directors was held on April 6, 1977 as scheduled. Seven Directors were present at the meeting, with Devagnanam in the chair at the commencement of the proceedings. C. Doraiswamy, solicitor- partner of 'King and Partridge', was one of the Directors present at the meeting. He had no interest in the proposal of "Indianisation" which the meeting was to discuss and was, therefore, considered to be an independent Director. In order to complete the quorum of two independent Directors, the other Directors apart from C. Doraiswamy being interested in the business of the meeting, Silverston, an ex-partner of Doraiswamy's firm of solicitors, was appointed to the Board as an additional Director under article 97 of the Articles of Association. Silverston chaired the meeting after his appointment as an additional Director. The meeting resolved that the issued capital of NIIL be increased to Rs. 48,00,000/- by a new issue of 16,000 equity shares of Rs. 100/- each, to be offered as rights shares to the existing shareholders in proportion to the shares held by them. The offer was to be made by a notice specifying the number of shares which each shareholder was entitled to, and in case the offer was not accepted within 16 days from the date on which it was made, it was to be deemed to have been declined by the concerned shareholder. The minutes of the meeting recorded that as a matter of abundant caution, the Directors who were holding shares in NIIL did not take part either in the discussions which took place in the meeting or in the voting on the resolution.

After the aforesaid meeting of the Board dated April 6, 1977, Devagnanam wrote a letter bearing the date April 12 to Raeburn, explaining that every alternative proposal was discussed in the meeting and setting out the compelling circumstances arising out of the requirements of FERA which led to the passing of the particular resolution. It was stated in the letter that a copy of the Reserve Bank's letter of March 30, 1977 to NIIL was enclosed therewith, but in fact it was not so enclosed. The letter of offer dated April 14, 1977 was prepared pursuant to the resolution passed in the meeting of 6th April. The envelope containing Devagnanam's letter dated April 12 (without the copy of the letter of the Reserve Bank dated March 30, 1977) and the letter of offer dated April 14 were received by Raeburn on May 2, 1977 in an envelope bearing the Indian postal mark of April 27, 1977, The letter of offer which was sent to one of the Indian shareholders, Manoharan, was posted in an envelope which also bore the postal mark of 27th April. The next meeting of the Board was due to be

726

held on May 2, 1977 and it is on that date that Raeburn received the letter of offer dated April 14, which evidently, was posted at Madras on April 27, 1977. The Holding Company was thereby denied an opportunity to exercise its option whether or not to accept the offer of rights shares, assuming that any such option was open to it. Whether such an option was open to it and whether, if it could not or did not want to take the rights shares, it could transfer its rights, under NIIL's letter offering the rights shares, to a person of its choice depends upon the provisions of FERA, the necessity to Comply with the directives of the Reserve Bank the terms of NIIL's Articles of Association and the provisions of the Indian Companies Act.

On April 19, 1977 a notice was issued by NIIL's Secretary intimating that a meeting of the Board of Directors will be held on May 2, 1977. One of the items of agenda mentioned in the notice was "Policy-(a) Indianisation, (b) Allotment of shares". The notice of the meeting was sent to the Holding Company in an envelope which also bore the Indian postal mark of April 27, 1977. The notice was received by Sanders in England on May 2, 1977 i.e. on the date when the meeting was due to be held in India. Even the fastest and the most modern means of transport could not have enabled Sanders to attend the meeting.

In between, on April 26, 1977 Raeburn had written a letter to Devagnanam at Malacca, following a telex message which said:

HAD HELPFUL DISCUSSIONS COATS YESTERDAY PLEASE MAKE NO DECISIONS RE INDIANISATION PENDING LETTER" By his letter of 26th April, which is said to have been received by Devagnanam on May 4, 1977, Raeburn stated that Coats were still unwilling to grant majority shareholding control to the existing Indian shareholders, but that they were equally not keen to do any thing which would be regarded as circumventing the proposal for Indianisation or the law bearing on the subject, since that would undermine the position of the Indian shareholders.

A meeting of the Board of Directors was held on May 2, 1977 as scheduled. The minutes of that meeting show that Kingsley, the Secretary of NIIL, pointed out in the meeting that applications for allotment of the rights shares offered as also the amounts payable

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along with the acceptance of the offer had been received from all the shareholders except the U.K. shareholders and the Manoharan group. The offer to Manoharan was sent at Virudh Nagar but Silverston pointed out to the meeting that Manoharan was working in Jaipur and that therefore, he should be given further time to participate in the rights issue. The Manoharan group was accordingly allowed twenty days' time from the date of the allotment letter for payment of the allotment amount. In the meeting of 2nd May, the whole of the new issue consisting of 16,000 rights shares was allotted to the Indian shareholders, including members of the Manoharan group. Out of these, the Devagnanam group was allotted 11, 734 shares. A dividend of 30%, subject to tax, amounting to Rs. 9,60,000/-was recommended by the Board, and it was resolved that the Annual General meeting of the Company be held on 4th June, 1977. Silverstone was appointed as an additional Director of the Company and his election as such at the Annual General meeting was recommended by the Board. Further, it was resolved that deposits be invited from the public. On the same day i.e. 2nd May, Devagnanam wrote a letter to Raeburn intimating to him that in a meeting held that morning the formalities relating to allotment of shares were completed, bringing the Company under the control of the Indian shareholders. Devagnanam reiterated by his letter the hope of a closer association with the NEWEY group.

Raeburn reacted sharply to Devagnanam's letter of April 12 and to the letter of offer dated April 14. As stated earlier, he had received both of these on May 2 in an envelope which bears the postal mark of Madras dated April,

27. Raeburn sent a telex, message to Devagnanam on 2nd May and another to Kingsley on 3rd May. By the first telex, he complained about the inadequacy of the notice of the meeting and by the second, he conveyed that there was considerable doubt on the question whether the necessary disinterested quorum was available at the meeting of the Directors held on April 6. On receipt of the telex message, Devagnanam wrote a letter to Raeburn on May 4 explaining the pressure of circumstances which compelled the Board to take the decision which it did in the meeting of May 2, 1977. Raeburn followed up his telex messages by a letter to Devagnanam on May 3. While expressing his distress and displeasure at the manner in which the decision regarding the issue of rights shares was taken and the allotment of the shares was made, Raeburn stated in his letter that the rights issue at par, which was considerably less than the fair value

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of the shares, was most unfair to the shareholders who could not take up the rights issue.

After making the allotment of shares in the meeting of May 2, NIIL sent a letter to the Reserve Bank reporting compliance with the requirements of FERA by the issue of 16,000 rights shares and the allotment thereof the Indian shareholders which resulted in the reduction of the foreign holding to approximately 40% and increased that of the Indian shareholders to almost 60%. Reference was made in the letter to the fact that the allotment money of Rs. 1,10,700/- had yet to be received, which was obviously in reference to the amount due on the 1,107 rights shares which were allotted to the Manoharan group in the meeting of 2nd May. The Manoharan group did not evidence any interest even later in taking up those shares. Manoharan, it may be stated, who was a Director and General Manager of NIIL had resigned his post in April 1976, after serving the Company for nearly 17 years.

Between the 2nd and 9th May, there was an exchange of cables between Mackrael and Doraiswamy which led to the latter writing a letter on the 9th to the former. Doraiswamy stated in that letter that he had thoroughly investigated the position by perusing all available records placed before him by Devagnanam and Kingsley and that he was of the opinion that, in the meeting of the 6th April, there was the required quorum of two disinterested Directors consisting of Silverston and himself and, therefore, there could be no doubt whatsoever about the legality of the resolution passed in that meeting. He admitted that although the time-limit fixed by the Reserve Bank had expired on 17th May, 1977, "it may have been possible for the Company to get further time from the Reserve Bank of India". As regards the decision to issue the additional shares at par, he explained that if the issue had been made at a premium, it would have necessitated an approach to the Controller of Capital Issues, a process which was time-consuming and complicated. He pointed out that the authorities would not have allowed the Company to issue the rights shares at a premium and that even if they were to allow such a course, the premium permissible would have been only nominal. He asserted that the delay caused in the offer of new shares being received by the U.K. shareholders was of little consequence because they would not have been able to take up the shares in any event. He expressed the hope that Mackrael would agree that the decision regarding the issue of rights shares taken at the Board meeting on April 6, 1977 was bona fide and in the best interests

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of the Company. He concluded his letter by an assurance that as regards the late despatch of the notice of the Board Meeting of 2nd May, further enquiries were being made. On May 11, Devagnanam wrote to Raeburn apologising for the manner in which the foreign shareholding had been reduced and for good measure, he projected the various advantages which the NEWEY group would enjoy under the new Indian management and control of NIIL. As if to illustrate that it is better late than never, he enclosed with his letter a copy of the Reserve Bank's letter dated 30th March, 1977 which was to have been sent along with the letter dated April 12 but was in fact not so sent.

On May 17, 1977 Mackrael, acting on behalf of the Holding Company, filed a Company Petition in the Madras High Court under sections 397 and 398 of the Indian Companies Act, 1956 out of which the present appeals arise. It is alleged in the petition that the Indian Directors abused their fiduciary position in the Company by deciding in the meeting of April 6 to issue the rights shares at par and by allotting them exclusively to the Indian shares holders in the meeting of 2nd May, 1977. In so doing, they acted mala fide and in order to gain an illegal advantage for themselves. The Indian Directors, according to the company petition, either knew or ought to have known that the fair value of the shares of the Company was about Rs. 204 per share. By deciding to issue the rights shares at par, they conferred a tremendous and illegitimate advantage on the Indian shareholders. Devagnanam delayed deliberately the intimation of the proceedings of the 6th April to the Holding Company. By that means and by the late giving of the notice of the meeting of the 2nd May, the Devagnanam group presented a fait accompli to the Holding Company in order to prevent it from exercising its lawful rights. Thus, according to the petition the conduct of the Indian Directors lacked in probity and fair dealing which the Holding Company was entitled to expect. By the Petition, the Holding Company asked for the following reliefs:- (a) That the Board of Directors of the Company be superseded and one or more Administrators be appointed to administer the affairs of the Company or, in the alternative, the Board of Directors be reconstituted so as to ensure that the Holding Company had adequate representation on it; 730

(b) That the proceeding of the meeting of the Board of Directors held on April 6 and May 2, 1977 be declared illegal, void and inoperative;

(c) That Silverston's appointment as an Additional Director of the Company be declared as void and inoperative and he be restrained from functioning as a Director of the Company;

(d) That the purported allotment of 16,000 shares pursuant to the impugned resolution of the Board of May 2, 1977 be declared void;

(e) That the Indian group of shareholders to whom the rights shares were allotted be restrained from exercising any voting rights in regard to any part of those shares;

(f) That the Company be restrained from giving effect to the allotment of the 16,000 rights shares and from making any payment of dividend on those shares;

(g) That the Articles of Association of the Company be amended so as to permit the transfer of the shares to persons other than the existing members of the Company in order to enable the Holding Company to comply with the requirement of disinvestments without prejudice to its interest as a shareholder; and

(h) That a special majority for decisions of the Board be prescribed in regard to all important matters and provision be made for the appointment of Directors by proportional representation.

The learned Acting Chief Justice who tried the Company Petition, found several defects and infirmities in the Board's meeting dated May 2, 1977 and concluded that appropriate relief should be granted to the Holding Company under section 398 of the Companies Act. The learned Judge was of the view that the average market value of the rights shares was about Rs. 190 per share on the crucial date and that, since the rights shares were issued at par, the Holding Company was deprived unjustly of a sum of Rs, 8,54,550/- at the rate of Rs. 90/- per share on the 9,495 rights shares to which it was

731

entitled. Exercising the power under section 398(2) of the Companies Act, the learned Judge directed NIIL to make good that loss which, according to him, could have been avoided by it "by adopting a fairer process of communication" with the Holding Company and "a consequential dialogue" with them, in the matter of the issue of rights shares at a premium. The learned Judge directed NIIL to pay to the Holding Company the aforesaid sum of Rs. 8,54,550/- as a "solatium" in order to meet the ends of justice. Being aggrieved by the aforesaid judgment, the Holding Company filed O.S. Appeal No. 64 of 1978 while NIIL filed cross objections to the decree. The appeal and cross- objections were argued before the Division Bench of the High Court on the basis of affidavits, the correspondence that had passed between the parties and certain additional documents which were filed before the Appellate Court by consent of parties. Though the Company Petition was filed under section 397 as also under section 398 of the Companies Act and though the trial court had granted partial relief to the Holding Company under section 398, it was stated in the Appellate Court on its behalf that its entire case was based on section 397 and that it did not want to invoke the provisions of section 398. A similar statement was made before us also.

On a consideration of the matters and material before it, the Division Bench formulated its view in the form of 18 conclusions on various aspects of the case. They may be summed up thus:

(a) As soon as Devagnanam became involved in the far eastern ventures of NEWEY, he decided to sell his share- holding in NIIL to an Indian concern or party from which he expected to receive at least a part of the consideration in a foreign country. (b) Seeing that Coats were opposed to his receiving any part of the consideration for the sale of his shares in a foreign country, Devagnanam decided not to part with his shares but to obtain the control of the Company.

(c) The directives of the Reserve Bank of India on the question of Indianisation were exploited by Devagnanam for compelling the Holding Company to part with its shares in favour of the Indian shareholders.

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(d) Coats were willing to carry out the directives of the Reserve Bank but they did not want to transfer their shares to the existing Indian shareholders because thereby, the latter would have acquired a controlling interest in NIIL which Coats wanted to prevent. Coats were willing to part with their excess shares in favour of other Indian residents. (e) Though Coats originally contemplated the transfer of 15% of their excess 20% shares to Madura Coats, or the incorporation of a company to take over their excess 20% shares, they were ultimately agreeable that the existing Indian shareholders should get 9% out of that 20% so as to have a 49% holding in the share capital of NIIL and that 11% should go to new, independent, Indian Institutional shareholders. The object of Coats was that any one group of shareholders should not have a dominating position in the affairs of NIIL. (f) At the Ketti meeting held on October 20 and 21, 1976, the issue of rights shares was considered as an alternative to disinvestment, but that was subject to two conditions: one, that it should be shown that there was a viable development plan which required additional funds which the existing cash flow of NIIL could not meet, and two, that the value of the U.K. equity interest required to be transferred would be no less favourable than what would be achieved by a direct sale of that interest.

(g) Though by his letters of December 11 and 14, 1976 Devagananam had informed Raeburn of the decision of the Indian shareholders to acquire 60% shares for themselves, he did not ever say one word about the issue of rights shares in any of the numerous communications which he sent to Raeburn. No reference was made to the issue of rights shares even in the memorandum of discussions which took place during the visit of Devagnanam to U.K. from March 29-31, 1977. Thus, the issue of rights shares was sprung as a surprise on the U.K. shareholders.

733

(h) The notice dated March 13, 1977 for the meeting of the Board of Directors held on April 6, 1977 referred to the main item on the agenda in ambiguous terms as: "Policy-Indianisation". In the context of the discussions which had taken place until then between the parties, N.T. Sanders who represented the Holding Company on the Board had no means or opportunity of knowing that the particular item on the agenda involved the question of the issue of rights shares.

(i) Since every major decision was taken by the Board of Directors in consultation with the Holding Company and since there was no agenda for the appointment of an additional Director under article 97 of Articles of Association of NIIL, the decision taken by the Board in its meeting of April 6 on the issue of rights shares and the appointment of Silverston as an Additional Director constituted a departure from established practice and showed want of good faith and lack of fair play on the part of the Board of Directors of NIIL.

(j) The letter dated April 12, the letter of offer dated April 14 and the notice for meeting of the Board of Directors to be held on May 2, were all got posted by Devagnanam as late as on April 27, 1977 at Madras, so as to ensure that these important documents should not reach the Holding Company in time to enable it to participate in the all important meeting of the 2nd. Davagnanam wanted to present a fait accompli to the Holding Company so as to prevent it from taking any preemptive action.

(k) Whenever NIIL wrote to the Reserve Bank alleging that the Holding Company was not willing to carry out the directives of the Bank or to comply with the provisions of FERA, its object was to prejudice the Bank against the Holding Company by drawing a red-herring across the track.

(l) The directives of the Reserve Bank of India had the provisions of FERA were not concerned with who should be the Indian shareholders of NIIL. All that they were concerned with was that 60% of the share-

734

holding must be with the Indian residents. For the purpose of achieving that result, three courses were available to NIIL: (1) Disinvestment by foreign shareholders in favour of Indian shareholders; (2) Issue of rights shares pursuant to section 81 of the Companies Act, and (3) Action under section 81 (1-A) of the Companies Act for issuing additional shares to Indian residents other than the existing Indian shareholders by passing an appropriate special resolution, or if no special resolution was passed, then, by a majority of the shareholders approving such a course with the consent of the Central Government. The first course was ruled out since Coats had taken a definite stand that they will not allow the existing Indian shareholders to obtain the excess shares. As far as the second alternative was concerned, the Holding Company had the right to renounce shares offered to it in favour of any other person under section 81 (1) (c) of the Companies Act, which right was denied to it because, the letter of offer dated April 14 did not contain a statement regarding renunciation of the right to take shares and also because that letter was not posted in time. As regards the third course, if the Holding Company were given adequate notice of the proposal to issue rights shares, it might have taken appropriate action under section 81 (1-A) of the Companies Act. (m) The object of the Directors of NIIL in deciding upon the issue of rights shares, and that too in the manner in which they did so, was clearly to obtain control of the Company and to eschew and eliminate the controlling power which the Holding Company had over NIIL. The conversion of the existing minority of Indian shareholders into a majority, far from being a matter of statutory compulsion, was an act of self-aggrandizement on the part of the existing Indian shareholders. (n) The action taken by the Indian shareholders was against the interest of the Company itself because the rights shares were issued at par which was far below their market price.

(o) The true motivation of the various steps taken by the Devagnanam-NEWEY Combination was the furtherance

735

of the interest of NEWEY's Far-Eastern enterprises, coupled with the personal interest of Devagnanam himself. Devagnanam was receiving Rs. 96,000/- per annum in addition to substantial fringe benefits as the Managing Director of NIIL. He was also getting a large salary from NEWEY which was $10,000 in 1075 $11,000 in 1976 and $12,000 for the Year ending July 31, 1977. (p) The fact that NIIL informed the Holding Company on May 21, 1977 which was after the Company Petition was filed, that the Holding Company could not exercise and will not be allowed to exercise any rights in respect of the whole of 18,990 shares held by it since its application under section 29 (4) of FERA was not granted by the Reserve Bank shows that the object of the Board of Directors in taking the impugned decision was to exclude the Holding Company from all control over NIIL. That is why NIIL advised the Reserve Bank of India by its letter dated May 24, 1977 that no application for holding any shares by a non-resident should be allowed by the Bank without the knowledge and consent of NIIL. That also is the reason why NIIL conveyed to the Reserve Bank by its letter of September 20, 1977 that until such time as the Company Petition was finally disposed of, no licence should be issued to non-resident shareholders and no remittance of dividend out of India should be permitted with out the non- resident share-holders reducing their holding in NIIL to less than 40%.

The two other conclusions are comprehended within the 16 set out above.

On the basis of the aforesaid formulations, the Division Bench concluded that the affairs of NIIL were being conducted in a manner oppressive, that is to say, burdensome, harsh and wrongful to the Holding Company. After referring to certain passages from Palmer's Company Law and Gore-Browne on Companies, and the decisions of the House of Lords, this Privy Council, and our own Courts including the Supreme Court, the Division Bench held that since the action of the Board of Directors of NIIL was not in the interest of the Company but was taken merely for the purpose of 736

welding the Company into NEWEY's Far Eastern complex, it was just and equitable to wind up the Company. NIIL had filed cross-objections in the High Court appeal contending that, in any event, the learned Acting Chief Justice was in error in directing it to pay the sum of Rs. 8, 54,550/- to the Holding Company. While dealing with the cross-objections, the Division Bench held that the injury suffered by the Holding Company on account of the oppression practised by the Board of Directors of NIIL could not be remedied by the award of compensation and, therefore, the action of the Board of Directors in issuing the rights shares had to be quashed. Having found that the Holding Company was entitled to relief under section 397 of the Companies Act and the award of solatium made by the trial Court was not the appropriate relief to grant, the Division Bench allowed the appeal filed by the Holding Company, dismissed the cross-objections in substance and adjourned the appeal for a fortnight for hearing further arguments on the nature of the relief to be granted in the case. Eventually, by its order dated October 26, 1978 the Division Bench granted the following reliefs: (a) Devagnanam was removed forthwith both as the Managing Director and Director of NIIL and was asked to vacate the bungalow occupied by him, by November 1, 1978. He was paid one Year's remuneration as compensation for the termination of his appointment as the Managing Director. (b) The Board of Directors was superseded and an interim Board consisting of nine directors proposed by the Holding Company was constituted, with Shri M.M. Sabharwal as an independent Chairman.

(c) Harry Bridges, an executive of COATS, was appointed as the Managing Director for a period of four months.

(d) The rights issue made on 6th April, 1977 and the allotment of shares made on 2nd May, 1977 at the Board meetings were set aside and the Interim Board was directed to make a fresh issue of shares at a premium to the existing shareholders, including the Holding Company which was to have a right of renunciation. The new Board was directed to apply to the Controller

737

of Capital Issues for determining the amount of premium.

(e) The Articles of Association were to be altered by appropriate additions and deletions in order to provide for election of Directors by proportional representation; and

(f) Devagnanam was asked to pay to the Holding Company the costs of appeal and cross-objections quantified at Rs. 25,000/-. He was also asked personally to reimburse the expenses incurred by NIIL in the appeal and cross-objections.

These appeals were heard in the first instance by Justice Untwalia and Justice Pathak. In view of the importance of the questions arising therein, on some of which our learned Brothers, it seems, were unable to agree, they desired that the appeals be heard by a larger Bench. That is how the appeals are now before us. The petition of the Holding Company out of which these appeals arise sought relief under sections 397 and 398 of the Companies Act, 1956. The case under section 398 not having been pressed except before the learned trial Judge, we are only concerned with the question whether the Holding Company is entitled to relief under section 397 which reads thus:

"397(1)-Any members of a company who complain that the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members (including any one or more of themselves) may apply to the Court for an order under this section: provided such members have a right so to apply in virtue of section 399. (2) If, on any application under sub-section (1) the Court is of the opinion:

(a) that the company's affairs are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members; and

(b) that to wind up the company would unfairly prejudice such member or members, but that other-

738

wise the facts would justify the making of a winding up order on the ground that it was just and equitable that the company should be wound up; the Court may, with a view to bringing to an end the matters complained of, make such order as it thinks fit."

Section 398 provides for relief in cases of mismanagement. Section 399(1) restricts the right to apply under sections 397 and 398 to persons mentioned in clauses (a) and (b) of sub-section (1)

It is necessary to refer briefly to the relevant part of the pleadings before examining the charge of oppression made by the Holding Company against a group of the minority shareholders of NIIL After tracing the history of formation and composition of NIIL, the company petition states that the management of NIIL was in the hands of the Board of Directors in which the Indian group had a large majority. The Holding Company had implicit trust in them and was content to leave the management in their hands. After referring to the impact of section 43A of the Companies Act, the company petition says that in the wake of FERA, discussions and negotiations were held between the representatives of the Holding Company and the Management of NIIL amongst themselves as well as with the Reserve Bank of India, in order to enable NIIL to obtain the requisite permission for carrying on its business. Paragraph 13 of the company petition states that the Reserve Bank of India by its letter dated May 11, 1976 granted to NIIL the necessary permission subject to the condition, inter alia, that it reduced non-resident shareholding to 40 per cent on or before May 17, 1977. The case of the Holding Company in regard to its own attitude is stated succinctly in paragraph 14 of the company petition which may with advantage be reproduced:

"Discussions were thereafter held on a number of occasions between the petitioner and the management of the Company to effectuate the aforesaid condition imposed by the Reserve Bank of India which the petitioner was at all times ready and willing to comply with. The petitioner did not, however, desire to dilute its holding of shares in the company by a further issue of capital and preferred to effectuate the said intention by disinvesting or selling 20% of its holding in the company. The Reserve Bank of India was agreeable to such dilution taking place by the petitioner selling a part of its holding to an Indian resident or Indian residents. The Reserve Bank had indicated that 739

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

(c) The notice offering rights shares to the Holding Company was not prepared till April 14 and was not posted till April 27, 1977. By the time the notice was received by the Holding Company, the Board of NIIL had met to allot the rights shares.

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(d) The time given in the notice was much less than was customary.

(e) The notice did not contain a statement relating to the right of the shareholders to renounce the rights shares.

(f) The notice of the Board meeting of May 2, although dated 19th April 1977, was posted to Sanders on 27.4.1977, thereby ensuring that it would reach him only after the date of the meeting.

(g) By issuing shares at par, though their value was much higher than Rs. 100/- per share, existing Indian share holders were enabled to acquire the shares at a gross undervalue and the Company was put to a heavy loss.

(i) The Reserve Bank of India had indicated that dilution of the foreign holding by a rights issue could be considered if the Company required further capital for expansion. At the discussions and negotiations held between the Holding Company and the Indian group it was inter alia agreed that the rights issue would be made only if there was a viable development plan requiring further funds. The rights issue was made even though no such need for expansion or development existed or was referred to.

(j) Though the Reserve Bank had inter alia stipulated that the said dilution should be effectuated on or before 17th May, 1977, the time-schedule is never strictly insisted upon. There have been numerous instances when the Reserve Bank has granted reasonable extension of time to comply with such conditions. The Board of NIIL never requested the Reserve Bank to grant further time. C. Doraiswamy, the 8th respondent stated in his letter dated 9.5.1977 to Mackrael, a Director of the Holding Company, that it would have been possible for the Company to get further time from the Reserve Bank of India.

The Holding Company contends further that M.J. Silverston was not a disinterested person, that his vote on the resolution for the

741

issue of rights shares had therefore to be ignored in which case there was no quorum of two disinterested directors and that his appointment as an Additional Director was not valid since the notice for the meeting of the Board of Directors to be held on 6.4.1977 did not contain in the agenda any subject regarding appointment of an additional Director under Article 97 of the Company's Articles of Association. In answer to these contentions, Devagnanam filed an elaborate counter-affidavit on his behalf as well as on behalf of NIIL. In that counter-affidavit, every one of the material contentions put forward by the Holding Company has been denied or disputed. Devagnanam contends that it was the Holding Company which wanted to retain its control over NIIL contrary to the directive of the Reserve Bank of India, the national policy of the Central Government and the provisions of FERA. According to Devagnanam, every action taken in the Board meetings of 6.4.1977 and 2.5.77 was in accordance with law, that Sanders never used to attend the meetings of the Board, being a non-resident he was not entitled to have notice of the Board meetings, that there was no violation of section 81 of the Companies Act at all, that section 81 (c) of the Companies Act did not apply to the present case and that, in view of the attitude adopted by Coats, NIIL, in order to comply with the restrictions imposed by the Reserve Bank and to carry out its directive, had no option but to decide upon the issue of rights shares to bring about the reduction in the non-resident shareholding. Devagnanam repudiates emphatically the charge of mala fides or of conduct in breach of the fiduciary duty of NIIL's Board of Directors.

Having regard to these pleadings, the main question for consideration is whether the decisions taken in the meetings of the Board of Directors of NIIL on April 6 and May 2, 1977 constitute acts of oppression within the meaning of section 397 of Companies Act, 1956. The High Court has answered this question in the affirmative and has issued consequential directions in regard to the management of NIIL's affairs. The findings recorded by the High Court in appeal have been challenged before us with vehemence and ability in an equal measure, matched equally in both respects on either side. Learned counsel who led the arguments on the rival sides, Shri F.S. Nariman for the appellants and Shri H.M. Seervai for the respondents, have drawn our attention in copious details to

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the correspondence that transpired between the parties, the correspondence with the Reserve Bank of India, the discussions at Ketty and Birmingham which preceded the impugned decisions, the conduct of Devagnanam as a man and a Managing Director, the attitude of Coats stated to arise out of their world-wide business interests and the predicament of NEWEY which was willing to strike but was afraid to wound its partner Coats. We have also been taken through several decisions and texts bearing particularly on: (a) The meaning of 'oppression' of the members of a Company within the terms of section 397 and the circumstances in which a Company can be wound up under the just and equitable clause under section 433 (f) of the Companies Act, 1956;

(b) The approach which the court should adopt in cases wherein mala fides and abuse of power on the part of Directors are alleged but no oral evidence is led;

(c) The fiduciary powers of Directors in issuing shares;

(d) The impact of the provisions of the Foreign Exchange Regulation Act, 1973 with particular reference to section 2 (p), (q) and (u) and section 29;

(e) The question as to whether it is necessary to issue a prospectus under section 81 (1) (c) of the Companies Act;

(f) The constraints on public and private companies under the Companies Act, and their duties and obligations, with particular reference to sections 2 (35), 2(37), 3 (1) (iii) and (iv) and sections 43A and 81 of the Companies Act;

(g) The relationship of partnership between the Indian shareholders, Coats and NEWEY who owned respectively 40%, 30%, and 30% of the shareholding in NIIL;

(h) The question whether Silverston was an 'interested' Director within the meaning of section 300 of the Companies Act; and

(i) Whether Silverston's appointment as an Additional Director in the meeting of the Board held on April 6, 1977 was, in the circumstances, valid.

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Coming to the law as to the concept of 'oppression' section 397 of our Companies Act follows closely the language of section 210 of the English Companies Act of 1948. Since the decisions on section 210 have been followed by our Court, the English decisions may be considered first. The leading case on 'oppression' under section 210 is the decision of the House of Lords in Scottish Co-op. Wholesale Society Ltd. v. Meyer. (1) Taking the dictionary meaning of the word 'oppression', Viscount Simonds said at page 342 that the appellant society could justly be described as having behaved towards the minority shareholders in an 'oppressive' manner, that is to say, in a manner "burdensome, harsh and wrongful". The learned Law Lord adopted, as difficult of being bettered, the words of Lord President Cooper at the first hearing of the case to the effect that section 210 "warrants the court in looking at the business realities of the situation and does not confine them to a narrow legalistic view". Dealing with the true character of the company, Lord Keith said at page 361 that the company was in substance, though not in law, a partnership, consisting of the society, Dr. Meyer and Mr. Lucas and whatever may be the other different legal consequences following on one or other of these forms of combination, one result followed from the method adopted, "which is common to partnership, that there should be the utmost good faith between the constituent members". Finally, it was held that the court ought not to allow technical pleas to defeat the beneficent provisions of section 210 (page 344 per Lord Keith; pages 368-369 per Lord Denning). In Meyer (supra) above referred to, the House of Lords was dealing with a case in which the appellant company was accused of having committed acts of oppression against its subsidiary. In that context it was held that the parent company must, if it is engaged in the same class of business, accept as a result of having formed such a subsidiary an obligation so to conduct, what are in a sense its own affairs, as to deal fairly with its subsidiary. In Re Associated Tool Industries Ltd. (2) of which judgment a photographic copy was supplied to us, Joske J. held that the rule in Meyer (supra) involved the consequence that the subsidiary companies must also exercise good faith to the holding company and not merely that the latter should so act to the former.

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In an application under section 210 of the English Companies Act, as under section 397 of our Companies Act, before granting relief the court has to satisfy that to wind up the company will unfairly prejudice the members complaining of oppression, but that otherwise the facts will justify the making of a winding up order on the ground that it is just and equitable that the company should be wound up. The rule as regards the duty of utmost good faith, on which stress was laid by Lord Keith in Meyer, (supra) received further and closer consideration in Ebrahim v. Westbourne Galleries Ltd.,(1) wherein Lord Wilberforce considered the scope, nature and extent of the 'just and equitable' principle as a ground for winding up a company. The business of the respondent company was a very profitable one and profits used to be distributed among the directors in the shape of fees, no dividends being declared. On being removed as a director by the votes of two other directors, the appellant petitioned for an order under section 210. Allowing an appeal from the judgment of the Court of Appeal, it was held by the House of Lords that the words 'just and equitable' which occur in section 222 (f) of the English Act, corresponding to our section 433 (f), were not to be construed ejusdem generis with clauses (a) to (e) of section 222 corresponding to our clauses (a) to (e) of section 433. Lord Wilberforce observed that the 'words' just and equitable' are a recognition of the fact that a limited company is more than a mere legal entity, with a personality in law of its own; and that there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals, with rights, expectations and obligations inter se which are not necessarily submerged in the company structure:

"The 'just and equitable' provision does not, as the respondents suggest, entitle one party to disregard the obligation he assumes by entering a company, nor the court to dispense him from it. It does, as equity always does, enable the court to subject the exercise of legal rights to equitable considerations; considerations, that is, of a personal character arising between one individual and another, which may make it unjust or inequitable, to insist on legal rights, or to exercise them in a particular way". (p 379)

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Observing that the description of companies as "quasi- partnerships" or "in substance partnerships" is confusing, though convenient, Lord Wilberforce said:

"company, however small, however domestic, is a company not a partnership or even a quasi-partnership and it is through the just and equitable clause that obligations, common to partnership relations, may come in". (p 380)

Finally, it was held that it was wrong to confine the application of the just and equitable clause to proved cases of mala fides, because to do so would be to negative the generality of the words. As observed by the learned Law Lord in the same judgment, though in another context: "Illustrations may be used, but general words should remain general and not be reduced to the sum of particular instances." (pp 374-375)

In his judgment in Re Westbourne Galleries (supra) Lord Wilberforce has referred at two places to the decision in Blissett v. Daniel, (1) which is recognised as the leading authority in the Law of Partnership on the duty of utmost good faith which partners owe to one another. Lindley on Partnership (14th Edition, pages 194-95) cites Blissett v. Daniel (1) as an authority for the proposition that: "The utmost good faith is due from every member of a partnership towards every other member; and if any dispute arise between partners touching any transaction by which one seeks to benefit himself at the expense of the firm, he will be required to show, not only that he has the law on his side, but that his conduct will bear to be tried by the highest standard of honour". The fact that the company is prosperous and makes substantial profits is no obstacle to its being wound up if it is just and equitable to do so. This position was accepted in the decision of the Court of Appeal in Re Yenidge Tobacco Co. (2) and of the Privy Council in Loch v. John Blackwood (3).

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The question sometimes arises as to whether an action in contravention of law is per se oppressive. It is said, as was done by one of us, N.H. Bhagwati J. in a decision of the Gujarat High Court in S.M. Ganpatram v. Sayaji Jubilee Cotton & Jute Mills Co., (1) that "a resolution passed by the directors may be perfectly legal and yet oppressive, and conversely a resolution which is in contravention of the law may be in the interests of the shareholders and the company". On this question, Lord President Cooper observed in Elder v. Elder (2):

"The decisions indicate that conduct which is technically legal and correct may nevertheless be such as to justify the application of the 'just and equitable' jurisdiction, and, conversely, that conduct involving illegality and contravention of the Act may not suffice to warrant the remedy of winding up, especially where alternative remedies are available. Where the 'just and equitable' jurisdiction has been applied in cases of this type, the circumstances have always, I think, been such as to warrant the inference that there has been, at least, an unfair abuse of powers and an impairment of confidence in the probity with which the company's affairs are being conducted, as distinguished from mere resentment on the part of a minority at being outvoted on some issue of domestic policy".

Neither the judgment of Bhagwati J. nor the observations in Elder are capable of the construction that every illegality is per se oppressive or that the illegality of an action does not bear upon its oppressiveness. In Elder a complaint was made that Elder had not received the notice of the Board meeting. It was held that since it was not shown that any prejudice was occasioned thereby or that Elder could have bought the shares had he been present, no complaint of oppression could be entertained merely on the ground that the failure to give notice of the Board meeting was an act of illegality. The true position is that an isolated act, which is contrary to law, may not necessarily and by itself support the inference that the law was violated with a mala fide intention or that such violation was burdensome, harsh and wrongful. But a series of illegal acts following upon one another can, in the context, lead justifiably to the conclusion that they are a part of the same transaction, of which

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the object is to cause or commit the oppression of persons against whom those acts are directed. This may usefully be illustrated by reference to a familiar jurisdiction in which a litigant asks for the transfer of his case from one Judge to another. An isolated order passed by a Judge which is contrary to law will not normally support the inference that he is biassed; but a series of wrong or illegal orders to the prejudice of a party are generally accepted as supporting the inference of a reasonable apprehension that the Judge is biassed and that the party complaining of the orders will not get justice at his hands.

In England, after the decision of the House of Lords in Meyer, (supra) a restricted interpretation has been given to section 210 by the Court of Appeal in re Jermyn St. Turkish Baths,(1) which has adversely criticised by writers on Company Law (see Palmer's Company Law, 22nd ed., page 613, paras 57-06, 57-07; Gore Brown on Companies, 43rd ed., para 28-12). In India, this restrictive development has no place, for, in S.P. Jain v. Kalinga Tubes, (2) Wanchoo J. accepted the broad and liberal interpretation given to the Court's powers in Meyer.

In Kalinga Tubes, Wanchoo J. referred to certain decisions under section 210 of the English Companies Act including Meyer (supra) and observed:

"These observations from the four cases referred to above apply to section 397 also which is almost in the same words as section 210 of the English Act, and the question in each is whether the conduct of the affairs of the company, by the majority shareholders was oppressive to the minority shareholders and that depends upon the facts proved in a particular case. As has already been indicated, it is not enough to show that there is just and equitable cause for winding up the company, though that must be shown as preliminary to the application of section 397. It must further be shown that the conduct of the majority shareholders was oppressive to the minority as members and this requires that events have to be considered not in isolation but as a part of a consecutive story. There must be continuous acts on the part of the majority shareholders,

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continuing upto the date of petition, showing that the affairs of the company were being conducted in a manner oppressive to some part of the members. The conduct must be burdensome, harsh and wrongful and mere lack of confidence between the majority shareholders and the minority shareholders would not be enough unless the lack of confidence springs from oppression of a minority by a majority in the management of the company's affairs, and such oppression must involve at least an element of lack of probity of fair dealing to a member in the matter of his proprietary rights as a shareholder. It is in the light of these principles that we have to consider the facts.....with reference to section 397".

(page 737)

At pages 734-735 of the judgment in Kalinga Tubes, Wanchoo J. has reproduced from the judgment in Meyer, the five points which were stressed in Elder. The fifth point reads thus:

"The power conferred on the Court to grant a remedy in an appropriate case appears to envisage a reasonably wide discretion vested in the Court in relation to the order sought by a complainer as the appropriate equitable alternative to a winding-up order".

It is clear from these various decisions that on a true construction of section 397, an unwise, inefficient or careless conduct of a Director in the performance of his duties cannot give rise to a claim for relief under that section. The person complaining of oppression must show that he has been constrained to submit to a conduct which lacks in probity, conduct which is unfair to him and which causes prejudice to him in the exercise of his legal and proprietary rights as shareholder. It may be mentioned that the Jenkins Committee on Company Law Reform had suggested the substitution of the word 'Oppression' in section 210 of the English Act by the words 'unfairly prejudicial' in order to make it clear that it is not necessary to show that the act complained of is illegal or that it constitutes an invasion of legal rights (see Gower's Company Law, 4th edn., page 668). But that recommendation was not accepted and the English Law remains the same as in Meyer and in Re H.R. 749

Harmer Ltd., (1) as modified in Re Jermyn St. Turkish Baths. (supra) We have not adopted that modification in India. Having seen the legal position which obtains in cases where a member or members of a company complain under section 397 of the Companies Act that the affairs of the company are being conducted in a manner oppressive to him or them, we can proceed to consider the catena of facts and circumstances on which reliance is placed by the Holding Company in support of its case that the conduct of the Board of Directors of NIIL constitutes an act of oppression against it. There is, however, one matter which has to be dealt with before adverting to facts, namely, the provisions of FERA their impact on the working of NIIL and on the right of the Holding Company to continue to hold its shares in NIIL. This we consider necessary to discuss before an appraisal of the factual situation since, without a proper understanding of the working of FERA, it would be impossible to appreciate the turn of intertwined events. It is in the setting of FERA that the significance of the various happenings can properly be seen.

The Foreign Exchange Regulation Act, 46 of 1973, is "An Act to consolidate and amend the law regulating certain payments, dealings in foreign exchange and securities, transactions indirectly affecting foreign exchange and the import and export of currency and bullion, for the conservation of the foreign exchange resources of the country and the proper utilisation thereof in the interests of the economic development of the country". It repealed the earlier Act, namely, The Foreign Exchange Regulation Act, 1947, and came into force on January 1, 1974. "Person resident in India" is defined in clause (p) of section 2 to mean:

(i) a citizen of India, who has, at any time after the 25th day of March 1947, been staying in India, but does not include a citizen of India who has gone out of, or stays outside, India, in either case- (a) for or on taking up employment outside India, or

(b) for carrying on outside India a business or vocation outside India, or

750

(c) for any other purpose, in such circumstances as would indicate his intention to stay outside India for an uncertain period;

(ii) a citizen of India, who having ceased by virtue of paragraph (a) or paragraph (b) or paragraph (c) of sub clause (i) to be resident in India, returns to or stays in India, in either case-

(a) for or on taking up employment in India, or (b) for carrying on in India a business or vocation in India, or

(c) for any other purpose, in such circumstances as would indicate his intention to stay in India for an uncertain period.

"Person resident outside India" according to clause (q) means "a person who is not resident in India". Under clause (u) "security" means "shares, stocks, bonds," etc.

Section 19 (1) provides:

"Notwithstanding anything contained in section 81 of the Companies Act, 1956, no person shall, except with the general or special permission of the Reserve Bank.

... ... ...

(a) take or send any security to any place outside India;

(b) transfer any security, or create or transfer any interest in a security, to or in favour of a person resident outside India;

(d) issue, whether in India or elsewhere, any security which is registered or to be registered in India, to a person resident outside India;"

Section 29 which is directly relevant for our purpose reads thus:

751

"29. (1) Without prejudice to the provisions of section 28 and section 47 and notwithstanding anything contained in any other provision of this Act or the provisions of the Companies Act, 1956, a person resident outside India (whether a citizen of India or not) or a person who is not a citizen of India but is resident in India, or a company (other than a banking company) which is not incorporated under any law in force in India or in which the non-resident interest is more than forty per cent, or any branch of such company, shall not, except with the general or special permission of the Reserve Bank,-

(a) carry on in India, or establish in India a branch, office or other or other place of business for carrying on any activity of a trading, commercial or industrial nature, other than an activity for the carrying on of which permission of the Reserve Bank has been obtained under section 28; or

(2) (a) where any person or company (including its branch) referred to in sub-section (1) carries on any activity referred to in clause(a) of that sub-section at the commencement of this Act or has established a branch, office or other place of business for the carrying on of such activity at such commencement, then, such person or company (including its branch) may make an application to the Reserve Bank within a period of six months from such commencement or such further period as the Reserve Bank may allow in this behalf for permission to continue to carry on such activity or to continue the establishment of the branch, office or other place of business for the carrying on of such activity, as the case may be.

(b) Every application made under clause (a) shall be in such form and contain such particulars as may be specified by the Reserve Bank.

(c) Where any application has been made under clause (a), the Reserve Bank may, after making such inquiry as it may deem fit, either allow the application subject to such conditions, if any, as

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the Reserve Bank may think fit to impose or reject the application:

... ... ...

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

It is clear from these provisions that NIIL, being a Company in which the non-resident interest of the Holding Company was more than 40%, could not carry on its business in India except with the permission of Reserve Bank of India. An application for permission to continue to carry on such business had to be filed within a period of six months from the commencement of the Act or such further period as the Reserve Bank may allow. The time for filing the application was extended in all cases by two months and, therefore, it could be filed by August 31, 1974, NIIL filed its application three days late on September 3, 1974, and the application was granted by the Reserve Bank on certain conditions, by its letter dated May 10, 1976. Under the terms and conditions imposed by the Reserve Bank, the non- resident interest of the Holding Company, which came to about 60%, had to be brought down to 40% within one year of the receipt of the letter dated May 10, 1976, that is to say before May 17, 1977.

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By reason of section 29 (4) of FERA, the Holding Company too had to apply for permission to hold its shares in NIIL. It applied to the Reserve Bank for a Holding licence on September 18, 1974. The application which was filed late by 18 days is still pending with the Reserve Bank and is likely to be disposed of after the non-resident interest of the Holding Company in NIIL is reduced to 40%. There is a sharp controversy between the parties on the question as to whether May 17, 1977 was a rigid dead-line by which the reduction of the non-resident interest had to be achieved or whether NIIL could have applied to the Reserve Bank before that date for extension of time to comply with the Bank's directive, in which case, it is urged, no penal consequences would have flown. We will deal later with this aspect of the matter, including the question of business prudence involved in applying to the Reserve Bank for such an extension of time.

Shri Nariman raised at the outset an objection to a finding of mala fides or abuse of the fiduciary position of Directors being recorded on the basis merely of affidavits and the correspondence, against the NIIL'S Board of Directors or against Devagnanam and his group. He contends. Under the Company Court Rules framed by this Court, petitions, including petitions under section 397, are to be heard in the open court (Rules 11 (12) and Rule 12 (1), and the practice and procedure of the Court and of the Civil Procedure Code are applicable to such petitions (Rule 6). Under Order XIX Rule 2 of the Code, it is open to a party to request the Court that the deponent of an affidavit should be asked to submit to cross-examination. No such request was made in the Trial Court for the cross-examination of Devagnanam who, amongst all those who filed their affidavits, was the only person having personal knowledge of everything that happened at every stage. Why he did or did not do certain things and what was his attitude of mind on crucial issues ought to have been elicited in cross- examination. It is not permissible to rely argumentively on inferences said to arise from statements made in the correspondence, unless such inferences arise irresistibly from admitted or virtually admitted facts. The verification clause of Mackrael's affidavit shows that he had no personal knowledge on most of the material points. Raeburn who, according to Mackrael, was the Chief negotiator on behalf of the Holding Company in the Birmingham meeting did not file any affidavit at all. Whitehouse, the Secretary 754

of the Holding Company and N.T. Sanders who was the sole representative of the Holding Company on NIIL's Board of Directors, did file affidavits but they are restricted to the question of the late receipt of the letter of offer of shares and the notice for the Board meeting of May 2, 1977. Their affidavits being studiously silent on all other important points and the affidavit filed on behalf of the Holding Company being utterly inadequate to support the charge of mala fides or abuse of the Directors' fiduciary powers, it was absolutely essential for the Holding Company to adduce oral evidence in support of its case or at least to ask that Devagnanam should submit himself for cross- examination. This, according to Shri Nariman, is a fundamental infirmity from which the case of the Holding Company suffers and therefore, this Court ought not to record a finding of mala fides or of abuse of powers, especially when such findings are likely to involve grave consequences, moral and material, to Devagnanam and jeopardise the very functioning of NIIL itself. In support of his submission, Shri Nariman has relied upon many a case to show that issues of mala fides and abuse of fiduciary powers are almost always decided not on the basis of affidavits but on oral evidence. Some of the cases relied upon in this connection are: Re. Smith & Fawcett Ltd.,(1) Nanalal Zaver v. Bombay Life Assurance,(2) Plexcy v. Mills,(3) Hogg v. Cramphorn(4) Mills v. Mills,(5) Harlowe's Nominees(6) and Howard Smith v. Amphol.(7) We appreciate that it is generally unsatisfactory to record a finding involving grave consequences to a person on the basis of affidavits and documents without asking that person to submit to cross-examination. It is true that men may lie but documents will not and often, documents speak louder than words. But a total reliance on the written word, when probity and fairness of conduct are in issue, involves the risk that the person accused of wrongful conduct is denied an opportunity to controvert the inferences said to arise from the documents. But then, Shri Nariman's objection seems to us a belated attempt to avoid an inquiry into the 755

conduct and motives of Devagnanam. The Company Petition was argued both in the Trial Court and in the Appellate Court on the basis of affidavits filed by the parties, the correspondence and the documents. The learned Appellate Judges of the High Court have observed in their judgment that it was admitted, that before the learned trial Judge, both sides had agreed to proceed with the matter on the basis of affidavits and correspondence only and neither party asked for a trial in the sense of examination of witnesses. In these circumstances, the High Court was right in holding that, having taken up the particular attitude, it was not open to Devagnanam and his group to contend that the allegation of mala fides could not be examined, on the basis of affidavits and the correspondence only. There is ample material on the record of this case in the form of affidavits, correspondence and other documents, on the basis of which proper and necessary inferences can safely and legitimately be drawn.

Besides, the cases on which counsel relies do not all support his submission that from mere affidavits or correspondence, mala fides or breach of fiduciary power ought not to be inferred. In Re Smith & Fawcett Ltd., (supra) Lord Greene, after stating that he strongly disliked being asked on affidavit evidence alone to draw up inferences as to the bona fides or mala fides of the actors, added that this did not mean that it is illegitimate in a proper case to draw inferences as to bona fides or mala fides in cases, where there is on the face of the affidavits, sufficient justification for doing so. In Nanalal Zaver, (supra) the judgment of Kania C.J. contains a statement at page 394 that 'Considerable evidence was led in the trial Court on the question of hona fides' but it is not clear what kind of evidence was so led and besides, the fact that oral evidence was led in some cases does not mean that it must be led in all cases or that without it, the matter in issue cannot be found upon. We may mention that in Punt v. Symons,(1) Fraser v. Whalley(2) and Hogg v. Cramphorn, (supra) the breach of fiduciary

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