TaxTMI 
TaxTMI 
1981 (5) TMI 89
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....en 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 No. 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 No. 1 to the main appeal, the other respondents being some of the directors and shareholders of NIIL. Civil Appeal No.2483 of 1978 is filed by some of the shareholders of NIIL while Civil Appeal No. 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 th....
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....IL 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 Ltd., 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 b....
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....t business interests to protect and foster. NEWEY owned a nourishing business in Malaysia, Hong Kong, Taiwan, Japan and Australia and from 1972 onwards they drew Devagnanam increasingly into the orbit of their Far Eastern 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, Japan, and acted as the liaison director for that company. He had also been asked to co-ordinate 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 carrie....
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....he 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 the 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 the FERA. Devagnanam was residing in Hong Kong to fulfil his commitment to NEWEY's Far Eastern business interests. The FERA had its implications for him too, especially since he could be regarded as a non-resident 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. I....
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....h 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 Mackrael, a director of the Holding Company, made it clear 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 a 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 the date, Sanders wrote a letter to Manoharan stating that the Holding Company was not prepared for 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....
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....in 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 first 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 NILL'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 ....
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....reciation 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 the 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 shareholding. 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 whole time director of NIIL to be in charge of its export programme. On January 20, 1977, the Reserve Bank sent a reminder to NIIL asking it to submit at an early date the progress report regarding the dilution of the nonresident interest. By its reply dated February 21, 1977, NIIL confirmed its commitment to achieve the desired Indianisation ....
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....artner 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 C. 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....
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....77. 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 anything 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 NHL, pointed out in the meeting that applications for allotment of the rights shares offered as also the amounts payable along with the acce....
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....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 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 the FERA 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%. 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 evince any interest even later in taking up those shares. Manoharan. it may be stated, who was a director and general manager of NHL, had resigned his post in April, 1976, after serving the company for nearly 17 years. ....
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....ed a company petition in the Madras High Court under sections 397 and 398 of the 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 shareholders 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 ....
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.... learned judge directed NII 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 the 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....
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....med 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. (h)The notice dated March 18, 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 the articles of association of NIIL, the decision....
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....s and also because the 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(1A) 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 any controling power which the Holding Company had over NIIL. The conversion of the existing minority of the Indian shareholders into a majority, far from being a matter of statutory compulsion, was an act of self-aggrandisement 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 furtherence 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....
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.... 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 indep....
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....inding-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, 1956, the company petition says that in the wake of the FERA, discussions and negotiations were held between the representatives of the Holding Company and the management of NIIL, amongst themselves, as well as ....
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....he 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 para. 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, 1977, 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. (d)The time given in the notice was much less than was customary. (e)The notice did not contain a statement ....
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....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 Govt. and the provisions of the FERA. According to Devagnanam, every action taken in the board meetings of April 6, 1977, and May 2, 1977, 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 bo....
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....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. 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-operative Wholesale Society Ltd. v. Meyer [1959] AC 324; 29 Comp. Cas. 1 (HL). 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....
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....es, 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 (p. 379 of [1973] AC 360): "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 co....
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....f the Gujarat High Court in Sheth Mohanlal Ganpatram v. Shri Sayaji Jubilee Cotton & Jute Mills Co. [1964] 34 Comp. Cas. 777 , 830-31, 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 & Watson [1952] SC 49, 55: "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 outv....
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....linga Tubes, Wanchoo J. referred to certain decisions under section 210 of the English Companies Act including Meyer and observed (p. 366): "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 case is whether the conduct of the affairs of a 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, continuing up to 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 wron....
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....rs 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 the 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 the FERA, it would be impossible to appreciate the turn of intertwined events. It is in the setting of the 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 t....
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....der 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 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 ac....
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....By reason of section 29(4) of the 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 deadline 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 flowed. 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 D....
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....ng 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: In re Smith S Fawcett Ltd. [1942] 1 All ER 542, 545 (CA), Nanalal Zaver v. Bombay Life Assurance Co. Ltd. [1950] SCR 391, 394; 20 Comp. Cas. 179, Piercy v. S. Mills & Co. Ltd. [1920] 1 Ch 77 (Ch D), Hogg v. Cramhorn Ltd. [1967] 1 Ch 254, 260; 37 Comp. Cas. 157 (Ch D), Mills v. Mills [1938] 60 CLR 150, 160, Harlowe's Nominees [1968] 121 CLR 483, 485 and Howard Smith Ltd. v. Ampol Petroleum Ltd. [1974] AC 821, 831 (PC). 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 opportuni....
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....ciary duty was inferred from affidavit evidence. We have, therefore, no hesitation in rejecting the submission that we ought not to record a finding of mala fides or abuse of fiduciary power on the basis of the affidavits, correspondence and the other documents which are on the record of the case. May it be said that these are on the record by consent of parties. Not merely that, but more and mare documents were placed on the record, mostly by consent of parties, as the case progressed from stage to stage. A very important document, namely, Devag-nanam's telex to Raeburn dated May 25, 1977, was put on the record for the first time before us since Shri Nariman himself desired it to be produced, waiving the protection of the caveat "without prejudice". That shows that the parties adopted willingly a mode of trial which they found to be most convenient and satisfactory. That takes us to the question as to whether, on the basis of the material which is on the record of the case, it can be said that the decision taken by NIIL's board of directors in their meetings of April 6, and May 2, 1977, constitute acts of oppression as against the Holding Company. The case of the Holding Com....
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....e nonresident interest was proposed to be effected by the issue of rights shares. By suppressing from the knowledge of the Holding Company what was its right to know, and what was the duty of the board's secretary to convey to it, Devagnanam succeeded in achieving his purpose on the sly and preempted any action by the Holding Company to restrain the holding of the meeting, the issue of rights shares and the allotment thereof exclusively to the existing shareholders (barring Manoharan). (vii)Silverston was appointed as an additional director in the meeting of April 6, to make up the quorum of two "disinterested" directors even though he was in the true sense not a disinterested person in the decision taken in that meeting. The appointment of additional directors was not even an item on the agenda of the meeting. (viii)Devagnanam was emboldened to take this course because he believed that no matter how wrongful his conduct, he could count upon the support of NEWEY to see that he was not brought to book in a court of justice for his wrongful conduct. He even attempted to thwart the company petition and render it infructuous by persuading NEWEY to withdraw the power-of-attorney e....
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.... persistently, both actively and passively, either to disinvest or to consider the only other alternative of the issue of rights shares, and that the impugned decisions were taken by the board of directors objectively in the larger interests of the company. According to Shri Nariman, Coats left no doubt by their attitude that their real interest lay in their worldwide business and that they wanted to bring the working of NIIL to a grinding halt with a view to eliminating an established competitor from their business. It is denied by counsel that important facts or circumstances were deliberately suppressed from the Holding Company or that the letter of offer and the notice of the board's meeting of May 2 were deliberately posted late on April 27. It is contended that neither by the issue of rights shares nor by the failure to give the right of renunciation to the Holding Company was any injury caused to its proprietary rights as a shareholder in NIIL. As a result of the operation of the FERA, the directives issued by the Reserve Bank thereunder and because of the fact that NIIL had retained its old articles after becoming a public company under section 43A of the Companies Act, the....
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....ness with scrupulous regard to the observance of foreign exchange regulations and Indian laws in contradistinction to Coats who, he alleged, wanted to contravene the foreign exchange regulations of our country is not borne out by the correspondence. In fact, the letter which he wrote to Shread of Newey-Goodman Ltd. on August 11, 1973, (which was filed by consent in the appeal court) shows that he wanted to dispose of his shares at a large premium by officially receiving the par value in rupees in India and obtaining the balance in foreign currency outside India. Nevertheless, he stated on oath in para. 13 of his rejoinder affidavit that "it is not true that in selling my shares, I wanted a part of the consideration in foreign exchange". The said letter discloses that over and above proposing to make a large profit in contravention of the foreign exchange regulations and the tax laws of India by receiving money outside India, Devagnanam proposed to take away from Ketty its "select key personnel and technicians" to Malacca and to manufacture competitively, products which were then manufactured by Needle Industries, U. K. The footnote to the letter to Shread asked him to keep these ma....
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....parring groups of shareholders try to grab the maximum benefit for themselves. If one decides to stay on in a company, one must capture its control. If one decides to quit, one must obtain the best price for one's holding, under and over the table, partly in rupees and partly in foreign exchange. Then, the tax laws and the foreign exchange regulations look on helplessly, because law cannot operate in a vacuum and it is notorious that in such cases evidence is not easy to obtain. Alan Mackrael says in para. 20 of his reply affidavit in the company petition that it was made clear to Devagnanam that neither Coats nor the Needle Industries (U. K.) would ever be a party to any transaction which was illegal under the Indian law. In a letter dated May 24, 1976, to Devagnanam, A. D. Jackson of NEWEY has this to say: "In broad terms the proposition is that Alan Mackrael, Martin Henry and myself should meet with you in Malacca during September to discuss arrangements whereby an Indian gentleman known to Coats would purchase both your shares and our own share of the NINH holding in the manner which I outlined to you on the telephone. In order to provide a base for the calculations, King....
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....s of the Holding Company, namely, Coats and NEWEY, were unanimous in the filing of the company petition and the prosecution of the proceedings following upon it, which is said to be clear from the fact that two powers of attorney were attested by the directors of the Holding Company, both of whom were directors of NEWEY also. The fact that Coats and NEWEY were not of one mind is writ large on the face of these proceedings and, in fact, the charge against NEWEY is that because of their Far-Eastern interests in which Devagnanam was a great asset to them, they were supporting Devagnanam. We may in this connection draw attention to a letter dated June 8, 1977, by Raeburn to Mackrael, saying that the insistence of Coats ("Glasgow") to hold on to the 60% shareholding in NIIL or at least to ensure that 60% did not get into the hands of the Indian shareholders will involve a long and costly legal battle. Raeburn proceeds to say: "We, as Neweys, have neither the will nor the means to participate in that battle, nor do we think it right to do so bearing in mind the legal position regarding Indianisation, the provision in the articles and the fact that substantially the modern business of ....
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....he Central Agency Ltd., who were sole selling agents of NIIL's products in various markets in the world, ceased to be so after NIIL put an end to the agreement with them. The Central Agency never applied during the time that they were sole selling agents of NIIL's products, for the registration of the Indian company's trade-marks as a protective measure. The learned trial judge, Ratnaprasada Rao, Acting C.J., delivered the judgment in the company's petition on May 17, 1978. Immediately, thereafter, Application No. 34991 of 1978 was filed by the Japanese trade-marks agents of Needle Industries, U.K., for registration of the trade-marks "Pony" and "Rathna", which were the registered Indian trade-marks of NIIL. That application was made under the authority of a power-of-attorney signed by Alan Mackrael. In June, 1978, Application No. 102987 was filed in Thailand on behalf of the Needle Industries, U.K. as owners of the trade-mark "Pony" which is clear from the trade-mark attorney's letter dated January 22, 1979. In October, 1978, Coats Patons, Hong Kong, got the Indian company's trademark "Pony" registered. In November, 1978, the trade-mark agents and solicitors of NIIL in Hong Kong h....
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.... called a board meeting of the other members of the board appointed by the appellate court, for November 2, 1978. Bridges took away many files, documents and statements from the NIIL's factory at Ketty on October 28, 1978, his explanation being that he wanted to carry these documents to Madras where the board meeting was to be held. A little before Bridges left Ketty for Madras, he was informed that this court had passed an interim order on November 1, 1978. Consequently, the meeting of the 2nd November did not take place. Bridges says that when it became clear that he was no longer required to act as a managing director of NIIL, he took the earliest opportunity of returning the documents which he had taken from the office of the factory at Ketty. It is understandable that Bridges wanted to take with him certain documents to help him perform his functions as a managing director in the meeting of November 2, 1978. But it is surprising that, in addition to the documents which Bridges returned on November 8, he had taken with him several other documents which he returned when pressed to do so. He took away with him, (1) design drawing, (2) statistical returns, (3) the master budget....
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....ompany petition was filed. But those facts do not reflect a new trend or a new thinking on the part of Coats, generated by success in the litigation. Finding that they had succeeded in the High Court, Coats took courage to pursue relentlessly their old attitude with the added vigour which success brings. On the question of oppression, there is a large mass of correspondence and other documentary evidence on the record before us. We shall have to concentrate on the essentials by separating the chaff from the grain. In the earlier part of this judgment we have already referred to the course of events generally, which culminated in the meetings of NIIL's board of directors, held on April 6, and May 2, 1977. We propose now to refer to these events selectively. The FERA having come into force on January 1, 1974, D. P. Kingsley, the secretary-director of NIIL, applied on September 3, 1974, to the Reserve Bank for the necessary permission under section 29(2) of that Act. The Reserve Bank intimated to NIIL by its letter dated November 5, 1975, that permission would be accorded to NIIL under section 29(2)(a) read with section 29(2)(c) of the FERA to carry on its activities in India su....
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....letter that all developmental activities of NIIL stood frozen as of the date December 31, 1973, until the non-resident interest was reduced to 40%. The Reserve Bank stated further in the letter that NIIL should submit quarterly reports to it indicating the progress made in implementing the reduction of the non-resident interest and that the transfer of shares from non-residents to Indian residents would be required to be confirmed by the Reserve Bank under section 19(5) of the FERA. The letter of the Reserve Bank was received by NIIL on May 17, 1976, which meant that the reduction of the non-resident interest had to be achieved by May 17, 1977. It shall have been seen that by the time the permission was granted by the Reserve Bank to NIIL in May 1976, the FERA had been in force for a period of about 2½ years. A period of one year and eight months had gone by since the filing by NIIL of the application for dilution of the non-resident interest. Over and above that, the Reserve Bank had granted a long period of one year for bringing about the dilution of the non-resident interest. It is true that public authorities are hot generally averse, in the proper exercise of their d....
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....ndianization should be brought about by May, 1977, as requested by Government, so as to achieve a 40% U.K. and 60% Indian shareholding". The main features of the discussions which took place in the Ketty meeting are these: (1)Mackrael and Martin Henry suggested acceptability of Madura Coats as holding part of the 60% of the equity to be held by Indian share-holders. The latter "saw no reason to give up the right which the Indianization legislation, combined with the company's articles, conferred upon them and, therefore, they insisted on taking up the whole of their entitlement to 60% of the equity". Silverston, who. was an Englishman by nationality and a solicitor by profession in India and was acting as an adviser to the Indian shareholders in the Ketty meeting, plainly and rightly pointed out that the Government's approval of a holding by Madura Coats of 15% of NIIL shares would be unlikely, because by that method Coats would, indirectly and effectively with NEWEY, hold over 40%, approximately 46%, share in NIIL. It is apparent that this would have been a clear violation of the FERA. (2)To allay the concern of U.K. shareholders when they became in minority, by the India....
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....issue. Mid-January U.K. shareholders to decide on their reaction to the Indian shareholders' decision". Silverston conveyed to Kingsley his regret that the Ketty meeting could produce no outcome because of the attitude of Coats who wanted to put pressure on the directors of NIIL by giving 15% of the shareholding to Madura Coats and thereby avoiding the provisions of the FERA. This reaction of Silverston finds support in the reaction of Raeburn himself, which he described in his letter dated October 23, 1976, to Devagnanam. Raeburn says in that letter that he had learnt from Martin Henry that Coats were keen to introduce Prym technology in India in their Madura Coats factory. It may be mentioned that the Prym technology when introduced in Madura Coats would have created a direct competition between it and NIIL. It would also appear from Devagnanam's letter of October 21, 1976, to Jackson that Coats were intending to start an Engineering Division at Bangalore for the manufacture of Dynecast and Prym products with an investment to the tune of Rs. 3,00,00,000 (rupees three crores). Compared with that, the interest of Coats in NIIL was just about Rs. 10 lakhs even if the shares....
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....earer, that the Board of NIIL decided upon the issue of rights shares, which was the only other alternative that could be conceived of for reducing the non-resident interest. The issuance of rights shares, after all, was not like a bolt from the blue. In any event, it was mentioned in the Ketty meeting. On December 20, 1976, Silverston wrote a letter to Raeburn saying that he would be proceeding to the U.K. early in January in connection with his personal matters and that he would then visit Raeburn also. Silverston stated candidly in the letter that the situation which was developing between the U.K. and the Indian shareholders, if allowed to continue, could do much damage to the British interest and "as one who is still concerned with the interests of British industry, I feel I cannot sit by and allow matters to deteriorate to their detriment, without making some attempt towards bringing the issues between the parties to a fair conclusion". Raeburn wrote to Kingsley on January 14, 1977, stating that he had a discussion with Silverston a couple of days back, during which Silverston had stated clearly the legal position and given his advice upon it. In the last para, of this let....
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....sonnel of Coats, Raeburn says in that letter that Coats had refused to agree that the Indian shareholders should acquire a 60% shareholding in NIIL, that this had created a new situation and that he was appending to the letter an outline of what he believed, but could not be sure, would be agreeable to Coats/Needle Industries. Raeburn stated further in that letter: "I know that all this will be difficult for you and your fellow Indian shareholders, but I urge you to support this view and get their acceptance, and to come here to be able to negotiate. If these or similar principles can be agreed during your visit, I have no doubt that the detailed method can be quickly arranged". Raeburn stated that the proposal annexed to the letter had not been agreed with Coats but he, on his own part, believed that Coats could be persuaded to agree to it. Stated briefly, the proposal annexed by Raeburn to his letter aforesaid involved: (i) the existing Indian shareholders holding 49% of the shares, (ii) new Indian independent institutional shareholders holding 11% of the shares, and (iii) the existing U.K. shareholders either directly or indirectly, holding 40% of the shares. The proposed ....
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....f the excess equity holding not going to the existing Indian shareholders. There is also no explanation as to why, if the proposal annexed to Raeburn's letter of March 9, was a proposal by or on behalf of Coats, Raeburn said at the U.K. meeting of March 29-31, 1977, that it was better to "let Coats declare their hand". It is indeed impossible to understand why Coats, on their own part, did not at any time communicate any compromise proposal of theirs to the Indian shareholders directly. They now seem to take shelter behind the proposal made by Raeburn in his letter of March 9, adopting it as their own. Even in the letter which Crawford Bayley & Co., wrote on June 21, 1977, on behalf of Sanders to the Reserve Bank of India, no reference was at all made to any proposal by or on behalf of Coats to the Indian shareholders. The vague statement made in that letter is that "certain proposals" were being considered and would be submitted "shortly" before the authorities. No such proposals were ever made by the solicitors or their client to anyone. These letters and events leave no doubt in our mind that the negotiations between the parties were at an end and that there were no concrete ....
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....eserve Bank confirming the commitment of NIIL to achieve the required Indianisation by May 17, 1977. A copy of NIIL's letter to the Reserve Bank was sent to Sanders and Whitehouse. In view of the fact that to the common knowledge of the two sides there were only two methods by which the desired Indianisation could be achieved, namely, either disinvestment by the Holding Company in favour of the existing Indian shareholders or a rights issue, the particular item on the agenda should have left no doubt in the mind of the U.K. shareholders as to what the board was likely to discuss and decide in the meeting of the 6th. Disinvestment stood ruled out of consideration, a fact which was within the special knowledge of the Holding Company, since whether to disinvest or not was a matter of their volition. After the dispatch of the notice dated March 18, 1977, two important events happened. Firstly, Devagnanam went to Birmingham, where discussions were held from March 29-31, 1977, in which Indianisation of NIIL was discussed, as shown by the minutes of that discussion. NEWEY were willing to accept Indianisation, by the existing Indian shareholders acquiring a 60% interest in the share cap....
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....by profession and, admittedly, an independent director, was amongst the seven. In order to complete the quorum of two "independent" directors, other directors being interested in the issue of the rights shares, Silverston was appointed to the board as an additional director under article 97 of NIIL's articles of association. Silverston then chaired the meeting, which resolved that the issued capital of the company be increased to Rs. 48,00,000 by the issue of 16,000 equity shares of Rs. 100 each to be offered as rights shares to the existing shareholders in proportion to the shares held by them. The offer was decided to be made by a notice specifying the number of shares which each shareholder was entitled to, and in case, the offer was not accepted within 16 days from the date of the offer, it was to be deemed to have been declined by the shareholder concerned. The aforesaid resolution of the board raises three important questions, inter alia, which have been pressed upon us by Shri Seervai on behalf of the Holding Company: (1) Whether the directors of NIIL, in issuing the rights shares, abused the fiduciary power which they possessed as directors to issue shares; (2) Whether S....
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....rolling the holders of the greater number of shares by obtaining a majority of voting power they ought to be restrained from holding the meeting at which the votes of the new shareholders were to have been used". But Byrne J. stated: "There may be occasions when directors may fairly and properly issue shares in the case of a company constituted like the present for other reasons. For instance it would not be at all an unreasonable thing to create a sufficient number of shareholders to enable statutory powers to be exercised". In the instant case, the issue of rights shares was made by the directors for the purpose of complying with the requirements of the FERA and the directives issued by the Reserve Bank under that Act. The Reserve Bank had fixed a deadline and NIIL had committed itself to complying with the bank's directive before that deadline. Peterson J. applied the principle enunciated in Fraser [1864] 71 ER 361 and in Punt [1903] 2 Ch 506 (Ch D) in the case of Piercy v. S. Mills & Company Ltd. [1920] 1 Ch 77 (Ch D). The learned judge observed at page 84: "The basis of both cases is, as I understand, that directors are not entitled to use their powers of issuin....
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....er 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. Before we advert to the decision of the Privy Council in Howard Smith Ltd. v. Ampol Petroleum Ltd. [1974] AC 821 (PC), we would like to refer to the decision of the High Court of Australia in Harlowe's Nominees Pvt. Ltd. v. Woodside ( Lakes Entrance) Oil Company No Liability [1968] 121 CLR 483 and to the Canadian decision of Berger J. of the Supreme Court of British Columbia, in the case of Teck Corporation Ltd. v. Millar [1972] 33 DLR (3d) 288, both of which were considered by Lord Wilber-force in Howard Smith [1974] AC 821 (PC). On a consideration of the English decisions, including those in Punt [1903] 2 Ch 506 (Ch D) and Piercy [1920] 1 Ch 77 (Ch D), Barwick C. J. said in Harlowe's Nominees (p. 493 of 121 CLR): "The principle is that although primarily the power is ....
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.... The dictum of Byrne J. in Punt [1903] 2 Ch 506 (Ch D) that "there may be reasons other than to raise capital for which shares may be issued" was approved at p. 836 and it was observed at p. 837: "Just as it is established that directors, within their management powers, may take decisions against the wishes of the majority of shareholders, and indeed that the majority of shareholders cannot control them in the exercise of these powers while they remain in office (Automatic Self-Cleansing Filter Syndicate Co. Ltd. v. Cuningham [1906] 2 Ch 34 (CA)), so it must be unconstitutional for directors to use their fiduciary powers over the shares in the company purely for the purpose of destroying an existing majority, or creating a new majority which did not previously exist. To do so is to interfere with that element of the company's constitution which is separate from and set against their powers. If there is added, moreover, to this immediate purpose, an ulterior purpose to enable an offer for shares to proceed, which the existing majority was in a position to block, the departure from the legitimate use of the fiduciary power becomes hot less, but all the greater. The right to dispos....
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....t...the additional motive was a bad motive". The question was thus argued before the court and was squarely dealt with. Before we leave this topic, we would like to mention that the mere circumstance that the directors derive benefit as shareholders by reason of the exercise of their fiduciary power to issue shares, will not vitiate the exercise of that power. As observed by Gower in Principles of Modern Company Law, 4th Edn., p. 578 : "As it was happily put in an Australian case they are 'not required by the law to live in an unreal region of detached altruism and to act in a vague mood of ideal abstraction from obvious facts which must be present to the mind of any honest and intelligent man when he exercises his powers as a director'". The Australian case referred to above by the learned author is Mills v. Mills [1938] 60 CLR 150, which was specifically approved by Lord Wilber-force in Howard Smith [1974] AC 821 (PC). In Nanalal Zaver [1950] SCR 391 20 Comp. Cas. 179 too, Das J. stated at p. 425, that the true principle was laid down by the Judicial Committee of the Privy Council in Hirsche v. Sims [1894] AC 654, 660-661 thus (p. 207 of 20 Comp. Cas.): " 'If the true....
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.... [1971] 41 Comp. Cas. 377, Shri Seervai contends that section 300 of the Companies Act embodies the general rule of equity that no person who has to discharge duties on behalf of a corporate body shall be allowed to enter into engagements in which he has a personal interest conflicting, or which may possibly conflict, with the interests of those whom he is bound to protect. The reason why it is said that Silverston was interested in or concerned with the allotment of the rights shares to the existing shareholders is, firstly, because at the Ketty meeting held in October, 1976, he had acted as an "adviser to the Indian shareholders", and, secondly, because on October 25, 1976, he had written a letter to Kingsley purporting to convey his advice to the board of directors. That letter contains allegations against the directors of Needle Industries, U.K. and of Coats. In other words, it is contended, Silverston was hostile to Needle Industries, U.K., and to Coats, and no person in his position could possibly bring to bear an unbiassed or disinterested judgment on the question which arose between the Holding Company and the Indian shareholders as regards the issue of rights shares. It....
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....rector on the ground of his being, under section 300(1), an "interested" director. Thus, howsoever, one may stretch the language of section 300(1) in the interest of purity of company administration, it is next to impossible to bring Silverston's appointment within the framework of that provision. In the Firestone [1971] 41 Comp. Cas. 377 (Bom.), the solicitor-director was held to be concerned or interested in the agreement for the appointment of Kilachands as selling agents as he had a substantial shareholding in a private limited company of Kilachands. Besides, he was also a shareholder-director in various other concerns of Kilachands. We must, accordingly, reject the argument that Silverston was an interested director, 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. We have already held that the resolution was not passed for the benefit of the directors. There is, therefore, no question of Silverston's appointment having been made for the purpose of enabling such a resolution to be passed. The third contention,....
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....& Co. [1903] 2 Ch 506 (Ch.D), or to enable it to comply with legal requirements as in the instant case. In Hogg v. Cramphorn [1967] 37 Comp. Cas. 157 (Ch D), Buckley J. (p. 267) agreed with the statement of law by Byrne J. in Punt. And so did Lord Wilberforce (p. 835) in Howard Smith [1974] AC 821 (PC) where he said : "...it is, in their Lordships' opinion, too narrow an approach to say that the only valid purpose for which shares may be issued is to raise capital for the company. The discretion is not in terms limited in this way: the law should not impose such a limitation on directors' powers. To define in advance exact limits beyond which directors must not pass is, in their Lordships' view, impossible. This clearly cannot be done by enumeration, since the variety of situations facing directors of different types of company in different situations cannot be anticipated". The Australian decision in Harlowe Nominees [1968] 121 CLR 483, 493 took the same view of the directors' power to issue shares. It was said therein: "The principle is that although primarily the power is given to enable capital to be raised when required for the purposes of the company, there may be oc....
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....s agreed that the rights issue, 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. In fact, the occasion for consideration by the Holding Company of NIIL's proposal to issue rights shares did not arise, since the Holding Company virtually boycotted the meeting of April 6. Assuming for the sake of argument that there was any such understanding between the parties, the minutes of the meeting of April 6 show that the company needed additional capital for its expansion. The minutes say: "As per the final budget for the year 1977, the working capital requirements amounted to nearly Rs. 100 lakhs and even after tapping the facilities that we will be entitled to obtain from the banking sector, we will be left with a gap of about Rs. 25 lakhs which can be met by only increasing equity capital and attracting deposits from public". Ther....
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...." in Doraiswamy in the knowledge that the Holding Company could count on his guidance. Disinvestment by the Holding Company, as one of the two courses which could be adopted for reducing the non-resident interest in NIIL to 40% stood ruled out, on account of the rigid attitude of Coats who, during the period between the Ketty meeting of October 20-21, 1976, and the Birmingham discussions of March 29-31, 1977, clung to their self-interest, regardless of the pressure of the FERA, the directive of the Reserve Bank of India and their transparent impact on the future of NIIL. Devagnanam and the disinterested directors, having acted out of legal compulsion precipitated by the obstructive attitude of Coats and their action being in the larger 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 the NIIL constituted an act of oppression against the Holding Company. That cannot, however, mark the end of the case because 2nd May has still to come and Shri Seervai's argument is that the true question before the court is whether the offer of rights shares to all existing shar....
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....bearing the Madras postal mark of April 27. Selvaraj's affidavit, apparently, supported by an entry in the outward register, that the envelope addressed to Sanders containing the notice of 19th April was posted on the 22nd is also difficult to accept. It takes all kinds to make the world and we do not know whether the NIIL's staff was advised astrologically that 27th April was an auspicious date for posting letters. But if only they had sought a little legal advice which, at least from Doraiswamy and Silverston, was readily available to them, they would have seen the folly of indulging in such behaviour. Add to that the circumstance that Devagnanam's letter to Raeburn dated April 12 was put in the same envelope in which the letter of offer dated April 14 was enclosed and the envelope containing these two important documents bore the postal mark of Madras dated 27th April. These coincidences are too tell-tale to admit of any doubt that someone or the other, not necessarily Devagnanam, unduly solicitous of the interest of NIIL and of the Indian shareholders manipulated to delay the posting of the letters of offer and the notice of the board meeting for 2nd May, until the 27th April. ....
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....harge that they were willing tools in Devagnanam's hands and lent their help to concoct evidence. We clear their conduct, expressly and categorically. In so far as Devagnanam himself is concerned, there is room enough to suspect that he was the part-author of the late postings of important documents, especially since he was the prime actor in the play of NIIL's 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". Section 15 of the Evidence Act which carries the famous illustration of a person obtaining insurance money on his houses which caught fire successively, the question being whether the fire was accidental or intentional or whether the act was done with a particular knowledge or intention, will not help to fasten the blame on Devagnanam because it is not shown that he was instrumental or concerned in any of the late postings complained of. Were his complicity shown in any of these, it would have been easy to implicate him in all of them. On the contrary, there is an admitted act, described as a lapse, on Devagnanam's part which shows that he failed to do wha....
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....e shareholder". The Holding Company was informed by the last para. of the letter of offer that in respect of its holding of 18,990 shares, it was entitled to 9,495 rights shares and that its acceptance of the offer together with the application money (at Rs. 50 per share) should be forwarded so as to reach the registered office of NIIL on or before April 30, 1977. A postal communication by air between the U.K. and Madras, which is the normal mode of communication, generally takes five days to reach its destination. If the letter of offer were to be posted on the 14th itself in Madras, it would have reached the Holding Company in Birmingham, say, on the 19th. Even assuming that the 16 days' period allowed for communicating the acceptance of offer is to be counted from the 14th and not from the 19th, it would expire on 30th April. To that has to be added the period of five days which the Holding Company's letter would take to reach Madras. That means that the Holding Company would be within its rights if its acceptance reached NIIL on or before May 5, 1977. The board of directors had, however, met in Madras three days before that and had allotted the entire issue of the rights shares....
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....stion depends upon whether the Holding Company could have accepted the offer of rights shares and if, either for reasons of volition or of legal compulsion, it could not have accepted the offer, whether it could have at least renounced its right under the offer to a resident Indian, other than the existing Indian shareholders. The decision of this question depends upon the true construction of the provisions of the FERA and of sections 43A and 81 of the Companies Act, 1956. We have already reproduced the relevant provisions of the FERA, namely, section 2(p). (q ) and (u); section 19(1)(a), ( b) and (d); section 29(1)(a);section 29(2)(a), (b ) and (c); and section 29(4)( a) and (b). Section 29(1) provides thus: "...notwithstanding anything contained the provisions of the Companies Act, 1956 .a company which is not incorporated under any law in force in India or in which the non-resident interest is more than forty per cent shall not, except with the general or special permission of the Reserve Bank carry on in India any trading, commercial or industrial...other than an activity for the carrying on of which permission of the Reserve Bank has been obtained under section 28;.".. ....
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....enting the other conditions, which could reasonably be relaxed by condonation of the late filing of any particular quarterly report. But the dilution of the non-resident interest in the equity capital of the company to a level not exceeding 40% "within a period of 1 (one) year from the date of the receipt of" the letter was of the very essence of the matter. A permission granted subject to the condition that such dilution shall be effected would cease automatically on the non-compliance with the condition at the end of the stipulated period or the extended period, as the case may be. The argument of the Holding Company would make the granting of a conditional permission an empty ritual since, whether or not the company performs the conditions, it would be free to carry on its business, the only sanction available to the bank being, as argued, that it can compel or cause the sale of the excess non-resident interest in the equity holding of the company, under section 29(4)(c) of the FERA. This particular provision, in our opinion, is not a sanction for the enforcement of conditions imposed on a company under clause (c) of section 29(2). Section 29(4)(c) provides for a situation in wh....
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....s. The acceptance of the offer of rights shares by the Holding Company would have resulted in a violation of the provisions of the FERA and the directive of the Reserve Bank. Were the Holding Company to accept the offer of rights shares, it would have continued to hold 60% share capital in NIIL and the Indian shareholders would have continued to hold their 40% share capital in the company. It would indeed be ironical that the measure which was taken by NIIL's board of directors for the purpose of reducing the non-resident holding to a level not exceeding 40%, should itself become an instrument of perpetuating the ownership by the Holding Company of 60% of the equity capital pf NIIL. We are not suggesting that the offer of rights shares need not have been made to the Holding Company at all. But the question is, whether the offer, when made, could have been accepted by it. Since the answer to this question has to be in the negative, no grievance can be made by the Holding Company that, since it did not receive the offer in time, it was deprived of an opportunity to accept it. We see no substance in Shri Nariman's contention that the letter of offer could not have been sent to the ....
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....rovisions relating to the matters specified in clause (iii ) of sub-section (1) of section 3 and the number of its members may be, or may at any time be reduced, below seven:... (2) Within three months from the date on which a private company becomes a public company by virtue of this section, the company shall inform the Registrar that it has become a public company as aforesaid, and thereupon the Registrar shall delete the word 'private' before the word 'Limited' in the name of the company upon the register and shall also make the necessary alterations in the certificate of incorporation issued to the company and in its memorandum of association...... (4) A private company which has become a public company by virtue of this section shall continue to be a public company until it has, with the approval of the Central Government and in accordance with the provisions of this Act, again become a private company. Section 81 of the Companies Act reads thus: "81. (1) Where......it is proposed to increase the subscribed capital of the company by allotment of further shares, then,- (a)such further shares, shall be offered to the persons who, at the date of the offer, are hol....
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....any shares, debentures, or debenture stock of the company. (ii)The number of the members of the company (exclusive of persons in the employment of the company) shall be limited to fifty, provided that for the purposes of this article where two or more persons hold one or more shares in the company jointly, they shall be treated as a single member. (iii)The right to transfer shares of the company is restricted in the manner hereinafter provided. (iv)If there shall be any inconsistency between the provisions of this article and the provisions of any other article the provisions of this article shall prevail". Article 32 "A share may, subject to article 38, be transferred by a member or other person entitled to transfer to any member selected by the transferor; but, save as aforesaid, no share shall be transferred to a person who is not a member so long as any member is willing to purchase the same at the fair value. Such value to be ascertained in manner hereinafter mentioned". Article 38 "The directors may refuse to register any transfer of a share, ( a) where the company has a lien on the share, or (b) in case of shares not fully paid-up, where it is not proved....
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.... section 81(1)(c) cannot apply in the instant case, since the articles of NIIL provide by necessary implication at any rate, that the members of the company shall have no right to renounce the shares in favour of "any" other person, because such a right would include the right to renounce in favour of persons who are not members of the company, and NIIL had retained its articles under which shares could not be transferred or renounced in favour of outsiders. Shri Seervai has refuted these contentions, his main argument being that the definitions of "public company" and "private company" are mutually exclusive and, between them, are exhaustive of all categories of companies. There is, according to the learned counsel, no third category of companies recognised by the Companies Act, like the "proviso company". Shri Seervai further contends: (a)The right of renunciation is not a "transfer" and, therefore, the directors' power to refuse to register the shares under the articles does not extend to a renunciation. (b)Before considering section 43A, which was inserted for the first time in the Act of 1956 by the Amending Act of 1960, it should be noted that section 81 as enacted i....
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....A, involves no statutory consequences or disabilities, since such a company is a public company and section 43 is not attracted. (e)It is wrong to contend that the whole of section 81(1) does not apply to a "proviso company" because it is a private company entitled to the protection of sub-section 3(a). Section 81(3)(a) applies to a private company; a "proviso company" is one which has become, and continues to remain a public company. (f)Section 81(1)(c) applies to all companies other than private companies. The articles of a public company may include all of the matters referred to in section 3(1)(iii), or may include one or two of the matters referred to therein without ceasing to be a public company. A public company which has become such by virtue of section 43A can delete all the matters referred to in section 3(1)(iii) or may delete one or two of them or may include (or retain) all the three matters referred to in section 3(1)(iii). The retention of the three matters mentioned in section 3(1)(iii) does not in any way affect the constitution of the company because it has become and continues to be a public company. (g)Section 81 when enacted in 1956 consisted of 3 sub....
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.... section 81(1)(c) are not attracted. Secondly, section 81(1)(c) provides that unless the articles otherwise provide "the offer aforesaid shall be deemed to include a right exercisable by the person concerned to renounce the shares offered to him or any of them in favour of any person". The right conferred by the deeming clause can be taken away only by making a provision in the articles to prevent the deeming provision from taking effect. The deeming provision cannot be avoided by implication; and (k)The Holding Company could have renounced the rights shares offered to it at least in favour of the Manoharan group and the fact that after the shares were allotted, the Manoharan group stated that they were not interested in subscribing to the shares offered does not affect the question of the legal right. Besides, it was one thing to refuse to subscribe to the shares offered; it was another thing to accept the renunciation of merely 6,190 shares which would have given the Manoharans a substantial stake in the affairs of the company. Shri Seervai relies upon many a text and authority in support of the proposition that the classification of companies into private and public is mut....
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....t be this. But, it is not true to say that between them, they exhaust the universe of companies. A private company which has become a public company by reason of section 43A may include, that is to say, may continue to retain in its articles, matters which are specified in section 3(1)(ii ), and the number of its members may be or may at any time be reduced below 7. This provision itself highlights the basic distinction between, on one hand, a company which is incorporated as a public company or a private company which is converted into a public company under section 44, and on the other hand, a private company which has become a public company by reason of the operation of section 43A. In the first place, a section 43A-company may include in its articles, as part of its structure, provisions relating to restrictions on transfer of shares, limiting the number of its members to 50, and prohibiting an invitation to the public to subscribe for shares, which are the typical characteristics of a private company. A public company cannot possibly do so because, by the very definition, it is that which is not a private company, that is to say, which is not a company which by its article....
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.... person, as a statutory term of an offer of rights shares, would be repugnant to the integrity of the company and the continued retention by it of the basic characteristics under section 3(1)(iii ). Fifthly, section 43A, when introduced by Act 65 of 1960, did not adopt the language either of section 43 or of section 44. Under section 43 where default is made in complying with the provisions of section (3)(1)(iii), a private company "shall cease to be entitled to the privileges and exemptions conferred on private companies by or under this Act, and this Act shall apply to the company as if it were not a private company". Under section 44 of the Act, where a private company alters its articles in such a manner that they no longer include the provisions, which under section 3(1)(iii ), are required to be included in the articles in order to constitute it a private company, the company "shall as on the date of the alteration cease to be a private company". Neither of the expressions, namely. "This Act shall apply to the company as if it were not a private company" (section 43) or that the company "shall......cease to be a private company" (section 44) is used in section 43A. If a se....
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....ng to the matters specified in clause (iii) of sub-section (1) of section 3 of the Act", in order to bring deposits received by such companies within the Rules. The various points discussed above will facilitate a clearer perception of the position that under the Companies Act, there are three kinds of companies whose rights and obligations fall for consideration, namely, private companies, public companies and private companies which have become public companies under section 43A(1) but which retain, under the first proviso to that section, the three characteristics of private companies mentioned in section 3(1)(iii ) of the Act. Private companies enjoy certain exemptions and privileges which are peculiar to their constitution and nature. Public companies are subjected severely to the discipline of the Act. Companies of the third kind like NIIL, which become public companies but which continue to include in their articles the three matters mentioned in clauses (a) to (c) of section 3(1)( iii) are also, broadly and generally, subjected to the rigorous discipline of the Act. They cannot claim the privileges and exemptions to which private companies which are outside section 43A a....
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....to continue to include provisions in its articles specified in section 3(1)(iii) is itself a statutory right. Counsel says that in these circumstances-and this is without taking the assistance of the words "unless the articles of the company otherwise provide" in section 81(1)(c)-the provision regarding the right of renunciation cannot apply to a section 43A-proviso-company. The answer of Shri Seervai to this contention flows from what truly is the sheet anchor of his argument, namely, that the definitions of "public company" and "private company" are mutually exclusive and between them, they are exhaustive of all categories of companies. Counsel contends that section 81(1A) overrides section 81(1); that by reason of sub-section (3) of section 81, section 81 is not applicable to a "private company" but NIIL is not a "private company" since it became a public company by virtue of section 43A; and that, therefore, the offer of rights shares made by NIIL can be renounced by the offerees in favour of any other person. Neither of the two extreme positions for which the counsel contend commends itself to us. The acceptance of Shri Nariman's argument involves tinkering with clause (....
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....y to the erstwhile private companies which have become public companies under section 43A and which include, that is to say which retain or continue to include, in their articles of association the matters specified in section 3(1)(iii ) of the Act, as specified in the first proviso to section 43A. If clause (c) were to apply to the section 43A-proviso-companies, it would be open to the offerees to renounce the shares offered to them in favour of any other person or persons. That may result directly in the infringement of the article relating to the matter specified in section 3(1)(iii)( b) because, under clause (c) of section 81(1), the offeree is entitled to split the offer and renounce the shares in favour of as many persons as he chooses, depending partly on the number of shares offered by the company to him. The right to renounce the shares in favour of any other person is also bound to result in the infringement of the article relating to the matter specified in section 3(1)(iii)( c), because an offer which gives to the offeree the right to renounce the shares in favour of a non-member is, in truth and substance, an invitation to the public to subscribe for the shares in the ....
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....f the section 43A-proviso-com-panies should, as far as possible, not be broken up. The exemption in favour of private companies would appear to have been inserted in section 81(3)(a) because of the right of renunciation conferred by section 81(1)(c). Section 105C of the Indian Companies Act, 1913, which contained substantially all the provisions that are to be found in section 81(1)(a), (b ) and (d) applied to all companies. The right of renunciation in favour of any other person was conferred for the first time by the Act of 1956. That led to the insertion of the exception in favour of private companies since, a right of renunciation in favour of other persons is wholly inconsistent with the structure of a private company, which has to contain the three characteristics mentioned in section 3(1)(iii). When section 43A was introduced by Act 65 of 1960, the Legislature apparently overlooked the need to exempt companies falling under it, read with its first proviso, from the operation of clause (c) of section 81(1). That the Legislature has overlooked such a need in regard to other matters, in respect of which there can be no controversy, is clear from the provisions of sections 45....
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....at is provided by clause (c) of section 81(1). We have already extracted the relevant articles, namely, arts. 11, 32, 38 and 50. To recapitulate, article 11, which has an important bearing on the subject now under discussion, provides that in order that the company may be a private company, ( i) no invitation shall be issued to the public to subscribe for any shares, debentures, etc; (ii ) the number of members of the company shall be limited to 50; and (iii) the right to transfer shares of the company will be restricted in the manner provided in the articles. By article 32, a share may be transferred, subject to article 38, by a member to any member selected by the transferor but no share shall otherwise be transferred to a person who is not a member so long as any member is willing to purchase the same at a fair value. Article 38 confers upon the directors the power to refuse to register the transfer of a share for four reasons, the last of which is that the transfer will make the number of members exceed the limit of 50. Article 50, which also is important, provides that the offer of new shares shall be made by a notice specifying the number of shares offered and limiting the ti....
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....e (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. On the question whether the word "provide" means "provide expressly", we are unable to accept Shri Seervai's submission that the articles must contain a provision which is expressly otherwise than what is provided in clause (c). In the context, in which a private company becomes a public company under section 43A and by reason of the option available to it under the proviso, the word "provide" must be understood to mean "provide expressly or by necessary implication". The necessary implication of a provision has the same effect and relevance in law as an express provision has, unless the relevance of what is necessarily implied is excluded by the ....
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.... great practical importance in this case, as to whether the members of a section 43A-proviso-company have a limited right of renunciation, under which they can renounce the shares offered to them in favour of any other member or members of the company. Consistently with the view which we have taken of clause (c) of section 81(1), our answer to this question has to be in the negative. The right to renounce shares in favour of any other person, which is conferred by clause (c) has no application to a company like NIIL and, therefore, its members cannot claim the right to renounce shares offered to them in favour of any other member or members. The articles of a company may well provide for a right of transfer of shares by one member to another, but that right is very much different from the right of renunciation, properly so called. In fact, learned counsel for the Holding Company has cited the decision in Re Pool Skipping Co. Ltd. [1920] 1 Ch 251 (Ch D), in which it was held that the right of renunciation is not the same as the right of transfer of shares. Coming to sub-section (1A) of section 81, it provides, stated briefly, that notwithstanding anything contained in sub-section....
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....r of rights shares could not have been either accepted or renounced by the Holding Company, the former for one reason and the latter for another, the shares offered to it could, under article 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. These propositions afford a complete answer to Shri Seervai's contention that what truly constitutes oppression of the Holding Company is not the issue of rights shares to the existing Indian shareholders only but the offer of rights shares to all the existing shareholders and the issue thereof to the existing Indian shareholders only. The meeting of 2nd May, 1977, was unquestionably illegal for reasons already stated. It must follow that the decision taken by the board of directors in that meeting could not, in the normal circumstances, create mutual rights and obligations between the parties. But we will not treat that decision as non est because a point of preponderating importance is that the issue of rights shares to existing Indian shareholders only and the non-allotment thereof to the Hol....
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.... all parties-most especially amongst those who are bound by the ties of partnership-is one of the highest degree. The standard by which parties are tried here, either as trustees or as co-partners, or in various other relations which may be suggested, is a standard, I am thankful to say so, far higher than the standard of the world; and, tried by that standard, I hold it to be impossible to sanction the removal of this gentleman under these circumstances". Not only is the law on the side of Devagnanam but his conduct cannot be characterised as lacking in probity, considering the extremely rigid attitude adopted by Coats. They drove him into a tight corner from which the only escape was to allow the law to have its full play. Even though, the company petition fails and the appeals succeed on the finding that the Holding Company has failed to make out a case of oppression, the court is not powerless to do substantial justice between the parties and place them, as nearly as it may, in the same position in which they would have been, if the meeting of 2nd May were held in accordance with law. The notice of the meeting was received by Sanders in U.K. on the 2nd May, when everythin....
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....tice, in so far as we may. The question then is as to what should be taken to be the reasonable value of the shares which were offered to the Holding Company but taken over by the bulk of the Indian shareholders. In his letter dated December 17, 1975, to M.M.C. Newey, D. P. Kingsley, the secretary of NIIL, had assessed the value of NIIL's shares at Rs. 175 per share. That value was arrived at by averaging the break-up value, the yield value and the average market price in the case of quoted shares. Citing a paragraph from a book on the Foreign Exchange Regulation Act, Kingsley says in his letter that the method which was adopted by him for valuing the shares was also followed by the Controller of Capital Issues. Copies of Kingsley's letter were sent to Alan Mackrael and Devagnanam. On June 9, 1976, Price Waterhouse, Peat & Co., Chartered Accountants, Calcutta, wrote a letter to Mackrael in response to the letter's cable, valuing the shares of NIIL at Rs. 204 per share. That letter shows that while valuing the shares, they had taken into account various factors including "the average of the net asset value and the earnings basis", which, according to them, are considered as relev....
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....we direct that the 16,000 rights shares which were allotted in that meeting to the Indian shareholders will be treated as not qualifying for the payment of dividend for a period of one year commencing from January 1, 1977, the company's year being the calendar year. The interim dividend or any further dividend received by the Indian shareholders on the 16,000 rights shares for the year ending December 31, 1977, shall be repaid by them to NIIL, which shall distribute the same as if the issue and allotment of the rights shares was not made until after December 31, 1977. This direction will not be deemed to affect or ever to have affected the exercise of any other rights by the Indian shareholders in respect of the 16,000 rights shares allotted to them. We have not considered the possibility of Manoharans taking up the rights shares offered to them because, by a letter dated May 11, 1977, to NIIL's secretary, N. Manoharan had declined the offer on the ground that he was "not in a position to take those shares". Finally, in order to ensure the smooth functioning of NIIL and with a view to ensuring that our directions are complied with expeditiously, we direct that Shri M. M. Sabh....