NEEDLE INDUSTRIES (INDIA) LTD., & ORS. v. NEEDLE INDUSTRIES NEWEY (INDIA) HOLDING LTD. & ORS

Citation: [1981] 3 S.C.R. 698

Court: Supreme Court of India

Bench: Y.V. CHANDRACHUD, P.N. BHAGWATI, E.S. VENKATARAMIAH

Case summary

These three appeals by special leave arise out of a judgment of a Division Bench of the mgh Court of Madras dated October 6, 1978 allowing an appeal against the judgment of a learned Single Judge, dated May 17, 1978 in Company Petition No....

Judgment text

NEEDLE INDUSTRIES (INDIA) LTD. , & ORS. v. NEEDLE INDUSTRIES NEWEY (INDIA) HOLDING LTD. & ORS. May 7, 1981 [ Y. V. CHANDRACHUD, C. J. , P. N. BHAGWATI AND E. S. VENKATARAMIAH, JJ. ] Companies Act 1956, Ss. 3(1) (iii), 43A, 45, 81, 299(1), 300(1), 397 and _.. 398and Foreign Exchange Regulation Act 1973, Ss. 29(1), (2) and4(a)-Scope and effect of Private company becoming a public company by S. 43A-Reserve Bank directive that holding of the foreign company should be reduced-Reduction effected by issue ofnew rights shares-Such shares to be offered to all shareholders Indian as well as the holding company-Shares however allotted to on~v Indian shareholders-Notice of meeting'at which allotment made not properly given to holding company-Ho/ding company whether could renounce the offer in favour of the person of its choice-Allotment to Indian shareholder-Whether amounts to oppression.

'Directly or indirectly, concerned in the contract or arrangement'-Effect of- Relationship of friendliness with Director-Lawyer-client relationship with Director-Whether will disqualify a person from acting as Director. Public company-Private company-What are-When does a private company become a public company-No exception provided in S. 45 in favour ofS. 43A pro- ~viso companies-Need for legislative amendment. Practice and Procedure-Allegation ofa mafaji. ie-Examination of-Whether can be on the basis ofaffidavits and correspondence only. M/s. Needle Industries (fndia) Ltd. (NHL), the appellant was incorporated under the Indian Companies Act 1913 as a Private Company on 20. 7. 1949 with its Registered office at Madras and at the time of its incorporation it was a wholly owned subsidiary of Needle Industries {India) Ltd. , Studley, England {NI-Studley). In 1961, NI-Studley entered into an agreement with Newey Bros. ' Ltd. , Birmingham, England (Newey) to invest in the Indian Company.

In 1963, NI-Studley and Newey combined to form the Holding Company in England M/s Needle Industries-Newey (India) Holding Ltd. , the respondent. The entire share capital of NHL held by NI Studley and Newey was transferred to the Holding Company in which NI-Studley and Newey became equal shares. N. I. l. L. V. N. I. N. H. L. 699 As a result of this arrangement, the Holding Company came to acquire 99. 95 per cent of the issued and paid up capital of NIIL. The balance of 0. 05 cent, which consisted of six share& being the original nominal shares, was held by Devagnanam the managing director of NHL. By virtue of the introduction of section 43A in the Companies Act in 1961, NHL became a public company, since not less than twenty-five per cent of its paid-up share capital was held by a body corporate, the Holding Company. However, under the first proviso to section 43(1) it had the option to retain its articles relating to matters specified in section 3(1)(iii) of the Companies Act.

NIIL did not alter the relevant provisions of its articles after it became a public company within the meaning of section 43A. By 1971 about 40 per cent of the share capital of NHL came to be held by the Indian employees of the company and their relatives and the balance of about 60 per cent remained in the hands of the Holding Company NINIH Ltd. In 1972 Coats Paton Ltd. became an almost 100% owner of NI-Studley. The position at the beginning of the year 1973 was that 60% (to be exact 59. 3%) of the share capital of NHL came to be owned half and half by Coats and NEWEY, the remaining 40% being in the hands of the Indian Group of which 28. 5% was held by the Devagnanam's group. Though NHL was at one time wholly owned by NI-Studley and later by NI Studley and Newey, the affairs were managed ever since 1956 by an entirely Indian Management with Devagnanam as its Chief Executive and Managing Director with effect from the year 1961.

The Holding Company which was fomied in 1963 had only one representative on the Board of Directors of NHL. He was N. T. Sanders, who resided in England and hardly ever attended the Board Meetings. The holding company reposed great confidence in the Indian management which was under the direction and control of Devagnanam. In July 1972 Mr. Devagnanam was offered by the office of Managing Director of group of four companies in Hong Kong and Taiwan and his family began to reside in Hong Kong and he cogitated over resigning from his position in NIIL. Coats, on their part were clear that Devagnanam should relinquish his responsibilities in NHL. in view of the time his role in Newey's Far Eastern interests was consuming. The Foreign Exchange Regulation Act 1973, came into force on Junuary 1, 1974. S.

29(1) prohibited non-residents, non-citizens and non-banking companies not incorporated under any Indian law or in which the non-resident interest was more than 40 per cent, from carrying on any activity in Indill of a trading, commercial or Industrial nature except with the general or special permission of the Rese1ve Bank of India. By section 29(2) (a) if such person was engaged in :. any such activity at the commencement of the Act, he or it had to apply to the Reserve Bank of India, for permission to ·carry on that activity, within six months of the commencement of the Act or such further period the Reserve Bank may allow. S. 29 (4) (a) imposed a simiiar restriction on such person or company from holding shares in India, of any company referred to lcni ause (b) of section 29(1), without the permission of the Reserve Bank. The time for making the application for the requisite permission under section 29 was extended by the Reserve Bank until August 31, 1974.

Since the Holding Company was a non-resident and its interest in NHL exceeded 40% NHL had to apply for the permission of the Reserve Bank under S. 29 (I) FERA for continuing to carry on its business. The Holding Company had also to apply for the permission of the Reserve Bank under S. 29 (4) (a) FERA for continuing to hold its shares in NHL. · NHL appplied to the Re~erve Bank for the necessary perm1ss1on on September 3, 1974. By its letter dated May 11, 1976 the Reserve Bank condoned the delay and allowed the application and imposed conditions on NITL that it must bring down the non-r~sident interest from 60% to 40% within one year of the receipt of its letter. The Holding Company applied to the Reserve Bank for a Holding Licence under section 29 (4) (a) of FERA, on September 18, 1974; which application was late by 18 days and was still pending with the • Reser. ve Bank.

Devagnanam who was residing in Hong Kong obtained a holding licence dated March 5, 1975 from the Reserve Bank in respect of his shares in NHL. On receipt of the letter of the Reserve Bank dated March 11, 1976 NIIL's secretary sent a reply on May 18, 1976 to the Bank confirming the acceptance of the various conditions under which permission was granted to NHL to continue its business. On Angust 11, 1976 the term of Devagnanam's appointment as the Managing Director of NlIL came to an end but in the meeting dated October I, 1976 of NIIL's Board of Directors bis appointment was renewed for a further period of 5 years. On October 20th and 21st, 1976 a meeting took place between the U. K.

shareholders and the Indian shareholders of NHL; But the meeting ended in a stalemate because whereas the Holding Company wanted a substantial part of the share capital held by it in excess of 40 per cent to be transferred to Madura Coats an Indian company in which the Holding Company had substantial interest as an Indian shareholder. Devagnanam. insisted that the existing Indian shareholders of NHL alone had the right under its Articles of Association to take up the shares which the Holding Company was no longer in a position to hold because of the directives issued by the Reserve Bank pursuant to FERA.

As negotiations were going on between the competing groups regarding the Indianisation of NHL, on April 4, 1977 NHL received a reminder letter dated March 30, 1977 from the Reserve Bank which pointed out that the com· pany had not submitted any concrete proposal for reduction of the non-resident interest and asked it to submit its proposal in that behalf without any l further delay and that failure to comply with the directive regarding dilution or foreign equity within the stipulated period would be viewed seriously. A meeting of NIIL's Board of Directors was held on April 6, 1977. All the directors were present in the meeting with Devagnanam in the chair at the commencement of the proceedings. Mr. C. Doraiswamy, solicitor-partner of N. I. L. V. N. J. N. I. L. 701 King and Partridge was one of the directors present at the meeting. He had no interest in the proposal of lndianisation which the meeting was to discuss.

In order to complete the quorum of two independent directors, the other directors apart from C. Doraiswamy being interested in the business of the meeting, Silverston an ex-partner of Doraiswamy's firm of solicitors, was appointed to the board as an additional director under article 97 of the Articles of Association. Silverston chaired the meeting after his appointment as additional director. The meeting resolved that the issued capital of NHL be increased by a new issue of 16,000 equity shares of Rs. 100 each to be offered as rights shares to the exising shareholders in proportion to the shares held by them. The offer was to be made by a notice specifying the number of shares which each shareholder was entitled to and in case the offer was not accepted within 16 days from the date on which it was made it was to be deemed to have been declined by the concerned shareholder. In pursuance to the aforesaid resolution a letter or offer dated April 14, 1977 was prepared.

The envelope containing Devagnanam's explanatory' letter dated April 12 (without the copy of the letter of the Reserve Bank dated March 30, 1977) and the letter of offer dated April 14 were received by the Holding Company on May 2, 1977 in an envelope bearing the Indian postal mark of April 27, 1977. The letter of offer which was sent to one of the Indian shareholders, Manoharan was posted in an envelope which also bore the postal mark of 27th April. The next meeting of the Board was due to be held on May 2, 1977. The Holding Company was thus denied an opportunity to exercise its option whether or not to accept the offer of right shares, assuming that any such option was open to it. The meeting of the Boaard of Directors was held an May 2, 1977 as scheduled and in the me~ting the whole of the new issue consisting of 16,000 rights share was allotted to the Indian shareholders including members of the Manoharan group. Out of these the Devagnanam group was allotted 11,734 shares.

After marking the allotment of shares a letter was sent to the Reserve Bank by NHL reporting compliance with the requirements of F. E. R. A. by the issue of 16,000 rights shares and the allotment thereof to the Indian shareholders which resulted in the reduction of the foreign holding to approximately 40% and increased that of the Indian shareholders to almost 60%. The Holding Company filed a company petition in the High Court under section 397 and 398 of the Indian Companies Act, 1956 alleging that the Indian Directors abused their fiduciary position in the Company by deciding in the meeting of April 6 to issue the rights shares at par and by allotting them exclusively to the Indian shareholders in the meeting of 2nd May, 1977. In doing so, they acted ma/a fide and in order to gain an illegal advantage for themselves. By deciding to issue the rights shares at par, they conferred a tremendous and illegitimate advantage on the Indian shareholders.

Devagnanam delayed deliberately the intimation of the proceedings of the 6th April to the Holding Company. By that means and by the late giving of the notice of the meeting of the 2nd May, the Devagnanam group presented a fail uccomp/i to the Holding Company in order to prevent it from exercising its lawful rights. The conduct of the Indian directors lacked in probity and fair dealing which the Holding Company was entitled to expect. The acting Chief Justice who tried the Company Petition, found several defects and infirmities in the Board's meeting dated May 2, 1977 and being of the view that the average market value of the rights shares was about Rs. 190 per share on the crucial date and that, since the rights shares were issued at par, the Holding Company was deprived unjustly of a sum Rs. 8,54,550 at the rate of Rs. 90 per share on the 9,495 rights shares to which it wa:s entitled.

Exercising the power under section 398 (2) of the Companies Act, the learned Judge directed NHL to make good that loss which, could have been avoided by adopting a fairer process of communication with the Holding Company and 'a consequential dialogue' with them in the matter of the issue of rights '. shares at a premium. The Holding Company being aggrieved by the aforesaid judgment filed an appeal and NHL filed cross-objections to the decree. The appeal and crossobjections were argued before the Division Bench of the High Court on the basis of affidavits, the correspondence that bad passed between the parties and certain additional documents which were filed before the Appellate Court.

The Division Bench concluded that the affairs of NIIL were being conducted in a manner oppressive, that is to say burdensome, harsh and wrongful to the Holding Company and held that since the action of the Board of Directors of NHL was taken merely for the purpose of welding the Company into Newey's Far Eastern complex it was just and equitable to wind up the Company. With regard to the cross-objections, the Division Bench held that the injuries suffered by the Holding Company could not be remedied by the award of compensa· tion and, therefore, the action of the Board of Directors in issuing the rights ~bares bad to be quashed. It accordingly allowed the appeal filed by the Holding Company and dismissed the cross-objections of the appellant and directed that the Board of Directors be suspended and an interim Board consisting of nine directors proposed by the Holding Company be constituted and that the rights issue made on 6th April, 1977 and the.

allotment of shares made on 2nd May, 1977 at the Board Meeting be set aside and the Interim Board be directed to make a fresh issue of shares at a premium to the: existing shareholders including the Holding Company which was to have a right of renunciation. Jn the appeals to this Court, on the question whether the decisions taken at the meetings of the Boards of Directors of NIIL on April 6 and May 2, 1977 constitute acts of oppression within the meaning of S. 397 of the Companies Act 1956. Allowing the appeals. HELD : I. The charge of oppression rejected after applying to the con• duct of Devagnanam and his group the standard of probity and fairplay, which is expected of partners in a business venture. Not only is the law on his side, but his conduct cannot be characterised as lacking in probity, considering the extremely rigid attitude by Coats. He was driven into a tight corner from which the only escape was to allow the law to have its full play, . [824 lB-C;G-H] N. I. l. L. V. N.

l. N. H. L. 703 2. Even though the company petition falls and the appeals succeed on the finding that the Holding Company has failed to make out a case of oppression, the court is not powerless to do substantial justice. between the parties and place them, as nearly as it may, in the same position in which they would have been, if the meeting of 2nd May were held in accordance with law. [824 H-825 A] 3. The willingness of the Indian shareholders to pay a premium on the excess holding or the rights shares is a -factor which, to some extent, has gone in their favour on. the question of oppression. Having had the benefit of that stance, they must now make it good. Besides, it is only meet and just that the Indian shareholders, who took the rights shares at par when the value of those shares was much above par, should be asked to pay the difference in order to nullify their unjust and unju~tifiable enrichment at the cost of the Holding Company.

The Indian shareholders are not asked to pay the premium as a price of oppression. The plea of oppression having been rejected the course being adopted is intended primarily to set right the course of justice. [825 F-G] 4. Devagnanam, his group and the other Indian share-holders who took the rights shares offered to the Holding Company shall pay, pro rata, the sum of Rs. 8,54,550 to the Holding Company. The amount shall be paid by them to the holding company from their own funds and not from the funds or assets of NIIL. [827 A-Bl 5. As a further measure of neutralisation of the benefit which the Indian shareholders received in the meeting of 2nd May, 1977, it is directed that the 16,000 rights shares which were allotted in that meeting to the Indian shareholders will be treated as not qualifying for the payment of dividend for a period of one year commencing from January 1, 1977 the Company's year being the Calendar year.

The interim dividend or any further dividend received by the Indian shareholders on the 16,000 rights shares for the year ending December 31, 1977 shall be repaid by them to NHL, which shall distribute the same as if the issue and allotment of the rights shares was not made untill 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 shar~s alloted to them. [827 B-D] 6. In order to ensure the smooth functioning of NHL and with a view to ensuring that the directions are complied with expeditiously, it is directed that Shri M. M. Sabharwal who was appointed as a Director and Chairman of the Board of Directors under the orders of this Court dated November 6, 1978 will continue to function as such until December 31, 1982. [827 Fl 7.

The Company will take all effective steps to obtain the sanction or permission of the Reserve Bank of India or the Controller of Capital Issues, as the case may be, if it is necessary to obtain such sanction or permission for giving effect to the directions. (827 Gl 8. Devagnanam and his group acted in the best interests of NHL, in the matter of the issue of rights shares and indeed, the Board of Directors followed in the meeting of the 6th April a course which they had no option but to adopt and in doing which, they were solely actuated by the consideration as to what was in the interest of the company. The shareholder Directors who were interested in the issue of rights shares neither participated in the discussion of that question nor voted upon it. The two Directors who, forming the requisite quorum, received upon the issue of rights shares were Silverston who, was a disinterested Director and Doraiswamy who, unquestionably, was so. L792 A-CJ 9.

Disinvestment by the Holding Company, as one of the two courses which could be adopted for reducing the non-resident interest in NHL to 40% stood ruled out, on account of the rigid attitude of Coats who, during the period between the Ketty meeting of October 20-21, 1976 and the Birmingham discussions of March 29-31, 1977 clung to their self interest, regardless of the pressure of FERA, the directive of the Reserve Bank of India and their transparent impact on the future of NHL. [792 D-E] ' , .. , 10. Devagnanam and the disinterested Directors, having acted out of legal compulsion precipipated by the obstructive attitude of Coats and their action it being in the larger interest of the company, it is impossible to hold that the resolution passed in the meeting of April 6 for the issue of rights shares at par to the existing shareholders of NHL constituted an act of oppression against the Holding Company. [792 E-F] 11.

It puts a severe strain on ones credulity to believe that the letters of offer dated April 14 to the Holding Company, to Raeburn and to M anoharan were posted on the 14th itself but that somehow they rotted in the post office until the 27th on which date they took off simultaneously for their respective destinations. [793 El 12. The purpose behind the planned delay in posting the letters of offer to Raeburn and to the Holding Company, and in posting the notice of the Board's meeting for May 2 to Sanders, was palpably to ensure that no legal proceeding was taken to injunct the holding of the meeting. The object of withholding these important documents, until it was quite late to act upon them, was to present to the Holding Company a fait accompli in the shape of the Board's decision for allotment of rights shares to the existing Indian shareholders. [794 C-E] 13.

In so far as Devagnanam himself is concerned, there is room enough to suspect that he was the part-author of the late postings of important documents, especially since he was the prime actor in the play of NILL's Indianisation. But even in regard to him, it is difficult to carry the case beyond the realm of suspicion and 'room enough' is not the same thing as 'reason enough'. [795 B-C] 13A. With regard to the impact on the legality of the offer and tht: validity of the meeting of May 2, (i) It is quite clear from the circumstances that the rights shares offered to the Holding Company could not have been allotted to anyone in the meeting of May 2, for the supposed failure of the Holding Company to communicate its acceptance before April 30. The meeting of May 2, of which the main purpose was to consider 'Allotment' of the rights shares must, therefore, be held to be abortive, [796 H-797 A] N. I. I. L. V, N. I. N. H. L.

705 (ii) The utter inadequacy of the notice to Sanders in terms of time stares in the face and needs no further argument to justify the finding that the holding of the meeting was illegal, at least in so far as the Holding Company is concerned. It is self-evident that Sanders could not possibly have attended the meeting. There is, therefore, no alternative save to hold that the decision taken in the meeting of May 2 cannot, in the normal circumstances, affect the legal rights of the Holding Company or create any legal obligations against it. [797 D-EJ 13B. The dilution of the non-resident interest in the equity capital of the Company to a level not exceeding 40% "within a period of 1 (one) year from the date of receipt of" the letter was of the very essence of the matter.

The sane· ti on for enforcement of a c,onditional permission to carry on business, where conditions are breached, is the cessation, ipso facto, of the permission itself on the non-performance of the conditions at the time appointed or agreed. When NHL wrote to the Bank on February 4, 1976 binding itself to the performance of certain conditions, it could not be heard to say that the permission will remain in force despite its non-performance of the conditions. Having regard to the provisions of section 29 read with sections 49, 56(1) and (3) and secHon 68 of FERA, the continuance of business after May 17, 1977 by NHL would have been illegal, unles5 the condition of dilution of no11. -resident equity was duly complied with. [799 B; F-HJ 14.

By reason of the provisions of section 29(1) and (2) of FERA and the conditional permission granted by the RBI by its letter dated May 11, 1976 the offer of rights shares made by NHL to the Holding Company could riot possibly have been accepted by it. [800 BJ The acceptance of the offer of rights shares by the Holding Company would have resulted in a violation of the provisions of FERA and the directive of the Reserve Bank. No grievance can be made by the Holding Company that since it did not receive the offer in time, it was deprived of an opportunity to accept it. [800 D-GJ 14A. An offer of shares undoubtedly creates "fresh rights" but, the right which it creates is either to accept the offer or to renounce it; it does not create any interest in the shares in respect of which the offer is made. [801 BJ Matha/one v. Bombay Life Assurance Co. [1954] SCR IJ7 referred to. 15(i) Before granting relief in an application under section.

210 of the English Companies Act as under 5ection 397 of the Indian Companies Act the Court has to satisfy itself that to wind up the company will unfairly prejudice the members complaining of oppression, but that otherwise the facts will justify the making of a winding up order on the ground that it is just and equitable that the company should be wound up. The fact that the company is prosperous and makes substantial profits is no obstacle to its being wound up if it is just and equitable to do so. [744 A-B; 775 GJ Seo/fish Co-op. Wholesale Society Ltd. v. Meyer [1959J A. C. 324, Re Associated Tool lndusiries Ltd. [1964] Argus Law Reports, 75, Ebrahimi v. Westbourne Galleries Ltd. [1973] A. C. 360 (H. L. ), Blissett v. Daniel [68] E. R. 1024. Re Yenidge Tobacco Co. [1916] 2 Ch. 426 & Loch v. John Blackwood [1924] A. C. 783 referred to.

(ii) On a true construction of section 397, an unwise, inefficient or careless conduct of a Director in the performance of his duties cannot give rise' to a claim for relief under that section. The person complaining of oppression must show that he has been constrained to submit to a conduct which lacks in probity, conduct which is unfair to him and which causes prejudice to him in the exercise of his legal and proprietary rights as a shareholder. [748 E-G] (iii) Technicalities cannot be permitted to defeat the exercise of the equitable jurisdiction conferred by section 397 of the Companies Act. Blissett v. Daniel 68 E. R. 1024 referred to. 16. An isolated act which is contrary to law, may not necessarily and by itself support the inference that the law was violated with a ma/a fide intention or ihat such violation was burdensome, harsh and wrongful.

But a series of illegal acts following upon one another can, in the context, lead justifiably to the conclusion that they are a part of the same transaction, of which the object is to cause or commit the oppression of persons against whom those acts are directed. [746 G-747 A] 17. An isolated order passed by a Judge which is contrary to law will not normally sbpport the inference that he is biased, but a series of wrong or illegal orders to the prejudioe of a party are generally accepted as supporting the inferenc~ of a reasonable apprehension that the Judge is biased and that the party complaining of the orders will not get justice at his hands. [747 B-C] S. M. Ganpatram v. Sayaji Jubilee Cotton and Jute Mills Co. [1964] 34 Company Cases 830-31 & Elder v. Elder (1952] S. C. 49 referred to. 18. It is generally unsatisfactory to record a finding involving grave consequences to a per son on the basis of affidavits and documents without asking ---. ,,.

that person to submit to cross-examination. Men may lie but documents will not and often, documents speak louder than words. But a total reliance on the written word, when probity and fairness of conduct are in issue, involves the risk that the person accused of wrongful conduct is denied an opportunity to controvert the inferences _said to arise from the documents. (754 E-G] Re Smith and Fawcett Ltd. (1942] l All ER 542, 545; Nana Lal Zaver v. Bombay Life Assurance (1950] SCR 390, 394 Piercy v. Mills (1920] (I) Chancery 77, Hogg v. Cramphorn, (1967] I, Chancery 254. 260; Mills v. Mills [60] CLR 150, 160, Har/owe's Hominees (121] CLR 483, 485 & Howard Smith v. Amphol [1974] A. C. 821, 831 Punt v. Symons (1903] 2 Ch. 506; Franzer v. Whall11y 71 E. R. 361 referred to. In the instant case the High Court was right in holding that, having taken up a particular attitude, it was not open to Devagnanam and his group to con- N. 1. 1. L. v. N. I. N,H,L.

707 tend that the allegation of ma/a fides could not be examined, on the basis of affidavits and the correspondence only. There is ample material on the record in the form of affidavits correspendence and other documents, on the basis of which proper and necessary inferences can safely and legitimat~ly be drawn. [755B-Cl These docucuments and many more documents were placed on the record mosdy by consent of parties, as the case progressed from stage to stage. That shows· that the parties adopted willingly a mode of trial which they found to be most convenient and satisfactory. [756 A-Bl 19. When the dominant motivation is to acquire control of a company, the sparring groups of shareholders try to grab the maximum benefit for themselves. If one decides to stay on in such a company, one must capture its control. If one decides to quit, one must obtain the best price for one's holding, under and over the table, partly in rupees and partly in foreign exchange.

Then, the tax laws and the foreign exchange regulations look on helplessly, because law cannot operate in a vaccum and it is notorious that in such cases evidence is not easy to obtain. [761 G-H; 762Al 20. It is difficult to hold that by the issue of rights shares the Directors of NHL interfered in any manner with the legal rights of the majority. The majority had to disinvest or else to submit to the issue of rights shares in order to comply with the statutory requirements of FERA and the Reserve Bank's directives. Having chosen not to disinvest, an option which was open to them, they did not any longer possess the legal rights to insist that the Directors shall not issue the rights shares. What the Directors did was clearly in the larger interests of the Company and in obedience to their duty to comply with the law of the land. The fact that while discharging that duty they incidentally trenched upon the interests of tbe majority cannot invalidate their action.

The conversion of the existing majority into a minority was a consequence of what the Directors were obliged lawfully to do. Such conversion was not the motive force of their action. [782 A-El Howard Smith Ltd. v. Ampo/ Petroleum Ltd. [1974] A. C. 821, 874, Punt v. Symons [1903] 2 Ch. 506 & Fraser v. Whalley [71] E. R. 361 Piercy v. Mills [1920] I Ch. 77, Hogg v. Cramphorn [1967] 1 Ch. 254, 260 referred to 21. (i) The Directors have exercised their power for the purpose of preventing the affairs of the company from being brought to a grinding halt, a consumption devoutly wished for by Coats in the interest ~f their extensive world-wide business. [784 CJ (ii) The mere circumstance that the Directors derive benefit as shareholders by reasons of the exercise of their fiduciary power to issue shares, will not vitiate the exercise of that power. [785 El (iii) The test is whether the issue of shares is simply or solely for the benefit ff ·of the Directors.

If the shares are issued in the largar interest of the 708 SUPREME COURT EPORTS [1981] 3 S. C. R. company that decision cannot be struck down on the ground that it has incidentally benefited the Directors in their capacity as shareholders, [786 CJ In the instant case the Board of Directors did not abuse its fiduciary power in deciding upon the issue of rights shares. [786 DJ Har/awe's Nominess Pvt. Lid. v, Woodside (Lakes Entrance) Oil Company No. Liability & Anr. (121) CLR 483, 485, Trek Corporal/on Ltd. v. Miller et al (33) DLR 3d. 288; Nana/al Zaver & Anr. v. Bombay Life Assurance Co. Ltd. [1950J SCR 390, 419-429; Hirsche v. Sims [1894) A. C. 654, 660-66! ; Gower in Principles of Modern Company Law, 4th Edn. 578 referred to. 22. Under section 287 (2) of the Companies Act, 1956 the quorum for the meeting of the Board of Director was two.

There can be no doubt ·that a quorum of two directors means a quorum of two directors who are competent to transact and vote on the business before the Board. [786 EJ 23. (i) It is wrong to attribute any bias to Silverston for having acted as an adviser to the Indian shareholders in the Ketty meeting. Silverston is by profession a solicitor and legal advisers do not necessarily have a biased attitude to questions on which their advice is sought or tendered. Silverston's alleged personal hostility to Coats cannot, within the meaning of section 300 (I) of the Companies Act, make him person "directly or indirectly, concerned or interested in the contract or arrangement" in the discussion of which he had to participate or upon which he had to vote. [787 E-G] (ii) The concern or interest of the Director which has to be disclosed at the Board meeting must be in relation to the contract entered or to be entered into by or on behalf of the company.

The interest or concern spoken of by sections 299 (1) and 300 (l) cannot be a merely sentimental interest or ideological concern. Therefore, a relationship of friendliness with the Directors who are interested in the contract or arrangement or even the mere fact of a lawyer-client relationship with such directors will not disqualify a person from acting as a Director on the ground of his being, under section 300 (I) as "interested" Director. Howsoever one may stretch the language of section 300 (! ) in the interest of purity of company administration, it is next to impossible to bring Silverston's appointment within the framework of that provision. [788 A-CJ The argument that Silverston was an interested Director, that therefore his appointment as an Additional Director was invalid and that consequently the resolution for the issue of rights shares was passed without the necessary quorum of two disinterested Directors has no force. [788 D-E) N. 1. 1. L. V. N. I. N. H. L.

709 Firestone Tyre and Rubber Co. v. Synthetics and Chemicals Ltd. , [1971] 41 Company Case 377 distinguished. 24. Silverston's appointment as an Additional Dire;tor is not open to challenge on the ground of want of agenda on that subject. Section 260 of the Companies Act preserves the power of the Board of Directors to appoint addi· tional Directors if such a power is conferred on the Board by the Articles of Association of the Company. Article 97 of NIIL's Articles of Association confers the requiste power on the Board to appoint additional Dire;tors. The occasion to appoint Silverston as an. Additional Director arose only when the picture emerged clearly that the Board would have to consider the only other alternative for reduction of the non-resident holding, namely, the issue of rights shares. It is for this reason that the subject of appointment of an Additional Director could not have, in the state of facts, formed a part of the agenda. [788 F. G; 789 A-Cl 25.

(i) The power to issue shares is given primarily to enable capital to bo raised when it is required for the purposes of the company but that power is not conditioned by such need. That power can be used for other reasons as for example to create a sufficient number of share· holders to enable the company to e:tercise statutory powors or to enable it to comply with legal requirements. [789 D-E] Punt v. Sym1ns and Co. , [1903] 2 Ch. 506 ; Hogg v. Cramphorn, [1967] 1 Ch. 254; Howard Smith v. Amphol, [1974] A. C. 821•. (ii) The minutes of the Ketty meeting of October 20-21, 1976 saying that it was agreed that the rights issues, with the Indian shareholders taking up the U. K.

members' rights, would be considered provided it was demonstrated by NIIL that "there is a viable development plan requiring funds that the expected NHL cash flow cannot meet", cannot also justify the argument that the power of the Company to issue rights shares was, by fagreemont conditioned by the need to raise additional capital for a developm~nt plan. (790 H; 791 A] (iii) In the instant case the rights shares were issued in order to comply with legal requirements which1 apart from being obligatory as the only viable course open to the Directors, was for the benefit of the company since, otherwise, its developmental activities ,would have stood frozen as of December 31, 1973. The shares were not issuo d as a part of takeover war between the rival groups of shareholders. [79J B·C] 26. It is not true to say, as a statement of law, that Directors have no power to issue shares at par, if their market price is above par.

These are primarily matters of policy for the Directors to decide in the exercise of their discretion and no hard and fast rule can be laid down to fetter that discretion. Such discretionary powers in company administration are in the nature of fidu· ciary powers and must be exercised in faith. Mala fides vitiate the exercise of such discretion. [791 E & G] Hilder and Others v. Dexter [1902] A. C. 474, 480 referred to. 27. The definition of 'private company' and the manner in which a 'public company' is defined ("public company meami a company which is not a private company") bear out the argument that these two categories of companies are mutually exclusive. But it is not true to say that between them, they exhaust the universe of companies. A private company which has become a . public company by reason of S. 43A, may continue to retain in its articles, matters which are specified in S. 3(1)(iii) and the number of its members may be or may at any time be reduced below 7.

(810 H; 811 A-Bl [(i) A section 43A company may include in its articles as part of its structure, provisions relating to restrictions on transfer of shares, limiting the number of its members to 50, and prohibiting an invitatiun to the public to subscribe for shares, which are typical characteristics of a private company. The expression 'public company' in section 3(i)(iv) cannot therefore be equated with a 'private company' which has become a public company by virtue of section 43A. (811 D-E] (ii) A section 43A company can still maintain its separate corporate indentity qua debts even if the number of its members is reduced below seven and is not liable to be wound up for that reason. (811 Fl (iii) A section 43A company can never be incorporated and registered as such under the Companies Act. It is registered as a private company and becomes, by operation of law, a public company.

(811 G] (iv) The three contingencies in which a private company becomes a public company bY virtue of section 43A (mentioned in sub-sections (I), (I A) and (IB) read with the provisions of sub-section (4) of that section) show that it becomes and continues to be a public company so long as the conditions in sub-sections (l), (IA) or (IB) are applicable. The provisos to each of these sections clarify the legislative intent that such companies may retain their registered corporate shell of a private com· pany but will be subjected to discipline of public companies. When necessary conditions do not obtain, the legislative device in S. 43A is to permit them to go back into their corporate shell and function once again as private companies, with all the privileges anJ exemptions applicable to private companies. The proviso to each of the sub-sections of S.

43A clearly indicates that although the private company has become a public company by virtue of that section, it is pr~rmitted to retain the structural characteristics of its origin, its birthmark. [811 H-812 A-BJ (v) Section 43A when introduced by Act 65 of 1960 did not adopt the language either of section 43 or of section 44. Under section 43 where default is made in complying with the provisions of section 3(l)(iii) a private company shall cease to be entitled to the privileges and . ,,.... exemptions conferred on private companies by or under this Act, and ihis Act shall apply to the company as if it were not a private com- , pany. Under section 44 of the Act, where a private company alters its Articles in such manner that they no longer include the provisions, which under section 3(1)(iii) are required to be included in the Articles in order to constitute it a private company, the company "shall as on the date of the alteration cease· to be a private company". Neither of the N.

1. 1. L. V. N. I. N. H. L. 711 expresson, namely, "This Act shall apply to the company as if it were not a private company" (section 43) nor that the company "shall... cease to _be a private company (section 44) is used in section 43A. If section 43-A company were to be equated in all respects with public company, that is a company which does not have the characteristics of a private company, Parliament would have used language similar to the one in section 43 or section 44, between which two sections, section 43A was inserted. If the intention was that the rest of the Act was to apply to a section 43A company "as if it were not a private company", nothing would have been easier than to adopt that language in section 43A; and if the intention was that a section 43A company would for all purposes "cease to be a private company'', nothing would have been easier than to adopt that clabguage in section 43A.

[812 E-H; 813 A] (vi) A private company· which becomes a public company by virtue of section 43A is not required (o file a prospectus or a statement in lieu of a prospectus. [813 C] After the Amending Act 65 of 1960 these distinct types of companies occupy a distinct place in the scheme of our Companies Act : (1) private companies (2) public companies and (3) private companies which have become public companies by virtue of section 43A, but which continue to include or retain the three characteristics of a private company. Private companies enjoy certain expemptions 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 NHL, which become public companies but which continue to include in their articles the three matters mentioned in clauses (a) to (c) of section 3(1)(iii) are also, broadly and generally, subjected to the rigorous discipline of the Act.

They cannot claim the privileges and· exemptions to which private companies which are outside section 43A are entitled. And yet, there are certain provisions of the Act which would apply to public companies but not to section 43A companies. [813 D; 814 A-C] There is no difficulty in giving full effect to clauses (a) and (b) of section 81(1) in the case of a company like NIIL, even after it becomes a public company under section 43A. Clause (a) requires that further shares must be offered to the holders of equity shares of the Company in proportion, as nearly as circumstances admit, to the capital paid up on these shares, while clause (b) requires that the offer further shares must be made by a notice sp~cifying t! rn number of shares offered and limiting the time, not being less than fifteen days from the date of the offer, within which the offer, if not accepted will be deemed to have been declined.

[815 H; 816 A-Bl y The provision contained in clause (c) cannot be construed in a manner which will lead to the negation of the option exercised by the company to retain in its articles the three matters referred to in section 3(1)(iii). Both these are statutory provisions and they are contained in the same statute. They must be harmonised, unless the words of the statute are so plain and unambiguous and the policy of the statute so clear that to harmonise will be doing violence to those wotds and to that policy. The policy of the statute if any- thing, points in the direction that the integrity and structure of the section 43-A proviso companies should, as far as possible not be broken up. [817 E-F] Park v. Royalty Syndicates [191211 K. B. 330 and Re Pool Shipping Co. Ltd. '[1920] 1 Ch. 251 referred to. Palmer's Company Law 22nd. Vol. I para 12-18 Gower's Company Law 4th End p. 351 referred to. 27.

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

the result that a private company having, say, three members which becomes a public company under section 43A and continues to function with the same number of members, will attract the rigour of section 45. Similarly, under section 433(d) such a company woul d automatically incur the liability of being wound up for the same reason. [818 A-D] While construing the opening words of section 81(1)(c) it has to be remembered that section 43A companies are entitled under the proviso to that section to include provision in their Articles relating to matters specified in section 3(1)(iii). The right of renunciation in favour of any other person is wholly inconsistent with the Articles of a private company. If a private company becomes a public company by virtue of section 43A and retains or continues to include in its Articles matters referred to in section 3(1)(iii) it is difficult to say that the Articles do not provide something which is otherwise than what is provided in clause (c).

The right of renunciation in favour of any other person is of the essence of clause (c). On the other hand, the absence of that right is of the essence of the structure of a private company, It must follow, that in all cases in which erstwhile private companies become public companies by virtue of section 43A and retain their old Articles, there would of necessity be a provision in their Articles which is otherwise than what is contained in clause (c). Considered from this point of view, the argument as to whether the word '·provide" in the opening words of clause (c) means "provide expressly" loses its significance. [820 B-D] In the context in which a private company becomes a public company under , section 43A and by reason of the option available to it under the proviso the word "provide" must be understood to mean "provide expressly or by necessary implication".

The necessary implication of a provision has the same effect and relevance in Jaw as an express provision has, unless the relevance of what is necessarily implied is el\cluded by the use of clear words. [820 E-F] . ' N. I. l. L. V. N. I. N. H. L. 713 The right of renunciation is tentamount to an invitation to the public to subscribe for the shares in the company and can violate the provision in regard to the limitation on number of members. Article 11, by reason of its clause (iv) prevails over the provisions of all other Articles if there is inconsistency between it and any other Article. (821 CJ 28. Clause (c) of section 81(1) of the Companies Act apart from the consideration arising out of the opening words of that clause, can have no application to private companies which have become public companies by virtue of section 43A and which retain in their Articles the three matters referred to in section 3(1)(iii) of the Act.

In so far as the opening words of clause (c) are concerned they do not require an express provision in the Articles of the Company which otherwise than what is provided for in clause (c). It is enough, in order to comply with the opening words of clause (c). that the Articles of the Company contain by necessary implication a provision which is otherwise than what is provided in clause (c). Articles 11 and 50 of NIIL's Articles of Associa· tion negate the right of renunciation. (821 D-F] 29. The right to renounce shares in favour of any other person, which is conferred by clause (c) has no application to a company like NHL and, therefore, its members cannot claim the right to renounce shares offered to them in favour of any other member or members. The Articles of a company may well provide for a right of transfer of shares by one member to another, but that right is very much different from the right of renunciation, properly so called. (821 G-H] Re Poat Shipping Co. Ltd. [1920] I Ch.

251 referred to. 30. A change in the pro rata method of offer of new shares is necessarily violative of the basic characteristics of a private company which becomes public company by virtue of section 43A. To this limited extent only, but not beyond it, the provisions of sub-section (IA) of section 81 can apply to such companies. (822 Fl 31.

The following propositions emerge out of the discussions of the provisions of FERA, Sections 43A and 81 of the Companies Act and of the Articles of association of NHL: (I) The Holding Company had to part with 20% out of the 60% equity capital held by it in NHL; [822 H] (2) The offer of Rights shares made to the Holding Company as a result of the decision taken by;Board of Directors in their meeting of April 6, 1977 could not have been accepted by the Holding Company ; [822 H; 823 A] (3) The Holding Company had no right to renounce the Rights shares offered to it in favour of any other person, member or non-mem· ber; and (823 BJ (4) Since the offer of Rights Shares could not have been either accepted or renounced by the Holding Company, the former for one reason and the latter for another, the shares offered to it could, under artick 50 of the articles of association, be disposed of by the directors, consistently with the articles of NHL, particularly article 11, in such manner as they thought most beneficial to the Company.

(822 B-CJ 32. These propositions afford a complete answer to the respondents' contention that what truly constitutes oppression of the Holding Company is not the issue of Rights Shares to the existing Indian shareholders only but ! he offer of Rights Shares to all existing shareholders and the issue thereof to existing Indian shareholders only. (823 DJ 33. It was neither fair nor proper on the part of NIIL's officers not to ensure the timely posting of the notice of the meeting for 2nd May so as to enable Sanders to attend that meeting. But there the matter rests. Even if Sanders were to attend the meeting, he could not have asked either that the Holding Company should be allotted the rights shares or alternatively, that it should be allowed to "renounce" the shares in favour of any other person, including the Manoharan group. The charge of oppression arising out of the central accusation of non-allotment of the right> shares to the Holding Company must, therefore fail.

[823 H; 824 A-BJ CIVIL APHLLATE JURISDICTION: Civil Appeals Nos. 2139, 2483 and 2484 of 1978. Appeals by Special Leave from the judgment and order dated the 6th October, 1978 of the Madras High Court in 0. S. A. No. 64 of 1978. F. S. Nariman, A. K. Sen, Dr. Y. S. Chita! ey, S. N. Kackar, ,. _ T. Dalip Singh, K. J. John, Ravinder Narain, A. G. Menses and R. Narain for the Appellants. H. M. Seervai, Anil B. Divan, A. R. Wadia, S. N. Ta/war, I. N. Shrojj and H. S. Parihar for Respondent No. I. D. N. Gupta for Respondents Nos. 2-7, 10-12, 15, 16, 18-22, 26 and 28·33. The Judgment of the Court was delivered by CHANDRACHUD, C. J. These three appeals by special leave arise out of a judgment of a Division Bench of the mgh Court of Madras dated October 6, 1978 allowing an appeal against the judgment of a learned Single Judge, dated May 17, 1978 in Company Petition No. 39 of 1977. The main contending parties in these appeals are : (i) the Needle Industries (India) Limited and (ii) the N. 1. 1.

L. v. N. l. N H. L. (Chandrachud C. J. ) 715 Needle Industries-Newey (Indian Holdings) Limited. These two companies have often been referred to . in the proceedings as the Indian Company and the English Company respectively, but it would be convenient for us to refer to the former as 'NHL' and to the latter as the 'Holding Company'. The Holding Company has been referred to in a part of the proceedings as 'NINIH'. In Civil Appeal 2139 of 1978, which was argued as the main appeal, NHL 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 NHL in 1956 and as its Managing Director in 1961. He is referred to in the •. correspondence as 'TAD' or 'Theo' but we prefer to call him 'Devagnanam'. The Holding Company is Respondent 1 to the main appeal, the other respondents being some of the Directors and shareholders of NHL.

Civil Appeal 2483 of 1978 is filed by some of the shareholders of NHL while Civil Appeal 2484 of 1978 is filed by some of its directors and-officers. The Holding Company is the contesting respondent to these two appeals. We wilL deal with the main appeal and our judgment therein will dispose of all the three appeals. The NIIL was incorporated as a Private Company under the Indian Companies Act, 1913 on July 20, 1949 with its Registered Office at Madras. Its factory is situated at Ketty, Nilgiris. At the time of its incorporation, NIIL was a wholly owned subsidiary of Needle Industries (India) Ltd. , Studley, England (hereinafter called 'NI-Studley'). The authorised capital of NHL was Rs. 50,00,000 divided into 50,000 equity shares of -........... --- Rs. 100 each. Its issued and paid up capital prior to 1961 was Rs. 6,75,600 divided into 6,756 equity shares of Rs. 100 each. The issued and paid up capital was increased to Rs. I 1,09,000/- in 1961.

In that year, NI-Studley entered into an agreement with NEWEY BROS. LIMITED, Birmingham, England, (hereinafter called NEWEY), undef which NEWEY agreed to participate in the equity capital of NIIL to the extent of Rs. 4,33,400/-, consisting of 4,334 equity shares of Rs. 100/- each. Thus, fo 1961, the position of the share holding in NHL was that NI-Studley held approximately 60. 85% of the issued capital and NEWEY held the balance of 39. 14%. In 1963, NHL increased its share capital by issuing 2,450 additional shares to NI-Studley, as a result of which the latter became the holder of about 68% shares in NHL, the rest of the 32% belonging to NEWEY. Later in the same year, NI-Studley and NEWEY combined to _form the Holding Company, of which the full official name. as stated earlier is the Needle Industries- Newey (Indian Holding) Ltd. The Holding Company was incorporated in the United Kingdom under the English Companies Ac:t, 1948 with its Registered Office at Birmingham, England.

The entire share capital of NHL, held by NI-Studley and NEWEY, was transferred to the Holding Company in which NI-Studley and NEWEY became equal sharers. As a result of this arrangement, the Holding Company came to acquire 99. 95% of the issued and paid up capital of NHL. The balance of 0. 05%, which consisted of 6 shares being the original nominal shares, was held by Devagnanam. The NIIL, it shall have been noticed, was incorporated about two years after India attained independence. As a result of an undertaking given by it to the Government of India at thei time of its incorporation and pursuant to the subsequent directives given by the said Government for achieving Indianisation of the share capital of foreign companies, three issues of shares were made by NHL in the years 1968, 1969 and 1971, all at par.

There was also an issue of Bonus shares in 1971: As a result of thesf: issues, about 40% of the share Capital of NHL came to be held by the Indian employees of the Company and their relatives while the balance of about 60% remained in the hands of the Holding Company. In terms of the number of shares, by 1971-72 the Holding Company owned 18, 990 shares and the Indian shareholders owned 13,010 shares. Out of the latter block of shares, Devagnanam and his relatives held 9,140 shares while the remaining 3,870 shares were held by other employees and their relatives, amongst whom were N. Manoharan and his group who held 900 shares and D. P. Kingsley and his group who held 530 shares. The total share capital of NIIL thus came to consist of 32,000 equity shares of Rs. 100 each. In or about 1972, a company called Coats Paton Limited, Glasgow, U. K. (hereinafter called 'Coats') became- an almost 100% ' owner of NI-Studley.

The position at the beginning of the year 1973 thus was that 60% (to be exact 59. 3%) of the share capital of NIIL came to be owned half and half by Coats and NEWEY, the remaining 40% being in the hands of the Indian group. The bulk of this 40% block of shares was held by Devagnanam's group, which came to about 28. 5% of the total number of shares. N. I. I. L. v. N. I. N. H. L. (Chandrachud, C. J. ) 717 Though NHL was at one time wholly owned by NI-Studley and later, by NI-Studley and NEWEY, the affairs of NHL were managed ever since 1956 by an entirely Indian management, with Devagnanam as its Chief Executive and Managing Director with effect from the year 1961. The Holding Company which was formed in 1963, had only one representative on the Board of Directors of NIIL. He was N. T. Sanders. He resided in England and hardly ever attended the Board meetings. The Holding Company reposed great confidence in the Indian management which was under the direction and control of Devagnanam.

But the acquisition of NI-Studley by Coats in 1972 and their consequent entry in NHL created in its wake a sense of uneasy quiet between the Coats on one hand, which came to own half of the 60% share capital held by the Holding Company, that is to say, 30% of the total share capital of NHL, and the Devagnanam group on the other hand, which owned 28. 5% of that share capital. By the mere size of their almost equal holding in NIIL, Coats and Devagnanam developed competing interests in the affairs of NHL. Coats were in the same line of business as NHL, namely, manufacture and sale of needles for various uses, fish-hooks etc. , and they had established trading centres far and wide, all over the world. It is plain business, involving no moral turpitude as far as business ethics go, that Coats could not have welcomed competition from NIIL with their world interests.

Devagnanam was a man of considerable ability and foresight and in NIIL he saw an opportunity of controlling and dominating as industrial enterprise of enormous potential in a rapidly growing market. The turnover of NIIL had increased from 2. 80 lakhs in 1953 to 149. 93 lakhs in 1972 and the profits ran as high as 19. 4% of the turnover. Implicit confidence in the Indian management which was the order of the day almost till 1974 gradually gave way to an atmosphere of suspicion and cjistrust between Coats and Devagnanam. NEWEY apparently kept away from the differences which were gradually mounting up between the two but, evidently, they nursed a preference for Devagnanam. Coats are a giant multinational organization. NEWEY, comparatively, are small fish though, they too had their own independent business interests to protect and foster.

NEWEY owned a flourishing business in Malaysia, Hong Kong, Taiwan, Japan and Australia and from 1972 onwards they drew Devagnanam increasingly into the orbit of their Far Eastern 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 y pounds. He had already been appointed to the Board of the NEWEY joint venture company in Osaka and Japan and acted as the liaison Director for that company. He had also been asked to coordinate sales with NEWEY Brothers, Australia. Willing to accept these manifold responsibilities, Devagnanam became strenuously involved therein. He and his wife began to reside in Hong Kong and he cogitated over resigning from his position in NIIL. Coats, on their part, were clear that Devagnanam should relinquish his responsibilities in NIIL, in view of the time his role in NEWEY's Far Eastern interests was consuming.

The question of appointing his successor as Managing Director in NIIL then began to be discussed, the Holding Company wanting to have Manoharan as a substitute. Devagnanam carried the feeling that he was already persona non grata with Coats, because of certain incidents which had taken place some years ago. The Foreign Exchange Regulation Act, ('FERA'), 46 of 1973, which came into force on January I, 1974 provided to Coats and Devagnanam a legal matrix for fighting out their differences. The provisions of FERA, which was passed, inter alia, for the conservation of foreign exchange resources of the country and the proper utilisation thereof in the interests of the economic development of the country are stringent beyond words.

Putting it broadly and briefly, section 29 (I) of FERA prohibits non-residents, non-citizens _and non-banking companies not incorporated under any Indian Law or in which the non-resident interest is more than 40%, from carrying on any activity in India of a trading, commercial or industrial nature except with the general or special permission of the Reserve Bank of India. By section 29 (2) (a), if such a person or company is engaged in any such activity at the commencement of the Act, he or it has to apply to the Reserve Bank of India, for permission to carry on that activity, within six months of the commencement of the Act or such further period as the Reserve Bank may allow. Since the Holding Company is a non-resident and its interest in NIIL exceeded 40%, NIIL had to apply for the permission of the Rs:serve Bank for continuing to carry on its business.

Section 29 (4) (a) imposes a similar restriction on such person or company from holding shares in India of any company referre~ to in clause (b) of section 29 (1), without the permission of the Reserve Bank. Therefore, the Holding Company also had to apply for the permission of N. 1. 1. L. v. N. I. N. H. L. (Chandrachud, C. J. ) 719 the Reserve Bank for continuing to hold its shares in NHL. The time for making application for the requisite permission under section 29 was extended by the Reserve Bank by two months generally, that is to say, until August 31, 1974. The need to comply with the provisions of section 29 of FERA is the pivot round which the whole case revolves. NHL applied to the Reserve Bank for the necessary permission through its Director and Secretary, D. P. Kingsley, on September 3, 1974 By its letter dated May 11, 1976, the Reserve Bank allowed that application on certain conditions.

NIIL's application was late by three days but the delay was evidently ignored or condoned. One of the conditions imposed by the Reserve Bank on NHL 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 NHL on May 17, 1976, the dead-line for reducing the non-resident interest to 40% was M~y 17, 1977. The Holding Company applied to the Reserve Bank for a 'Holding Licence' under section 29(4)(a) of FERA, on September 18, 1974. That application which was late by 18 days is, we are informed, still pending with the Reserve Bank. Perhaps, it will be disposed of after the non-resident interest in NHL is reduced to 40% in terms of section 29 (I) of FERA. Devagnanam was residing in Hong Kong to fulfil his commitment to NEWEY's far-eastern business interests. FERA had its implications for him too, especially since he could be regarded as a noaresident and did consider himself as such.

He obtained a holdin. :; licence dated March 4, 1975 from the Reserve Bank in respect of his shares in NJIL. But, his interest in the affairs of NHL began to flag for one reason or another and he started looking out for a purchaser who would buy his shares on convenient and attractive terms. In a note dated April 29, 1975 which he prepared 0:1 "further Indianisation - Needle Industries (India) Ltd. " he pointed out that Indianisation should be considered on the footing that the non-resident interest should be reduced to 40% and that, as between • the two feasible methods of Indianisation, namely, (I) Going to public and (2) placement of shares, the latter was preferable. He said: There can be no question of my becoming in any way involved with Ketti and its future as I am committed to NEWEY. There appears to be no possibility of returning to India in what is left of my working life. I therefore have little choice but to sell my shares.

('Ketty' in Nilgiris, is the place where NIIL' s factory is situated and is treated as synonymous with NHL). Devagnanam referred in his note to an inquiry from a Mr. Khaitan, the head of a powerful group with diverse interests and investment in industry, who was already involved in the manufacture of products allied to NIIL's. Coats were alarmed that Devagnanam was negotiating the sale of his shares "to a Marwari, one Khaitan of Shalimar, a sewing needle C()mpetitor to Ketti". In a letter dated August 6, 1975 addressed to Doraiswamy, a partner in a Madras firm of solicitors called 'King and Partridge' who was a Director of NHL, Sanders, a Director of the Holding Company on NIIL's Board, expressed his grave concern at the proposed deal thus : No doubt Mr.

Khaitan would pay the earth to acquire NHL and judging by what Theo (Devagnanam) had said about him in the past, he may be prepared to arrange or facilitate payment abroad, a most attractive possibility from Theo's point of view, since he has said clearly that he intends leaving India for good, finally settling in I Australia. Sanders added that the deal was so dangerous from the point of view of NIIL that the Holding Company "would feel obliged to prevent it by whatever means were open" to it. By his reply dated August 12, 1975, Doraiswamy said that the news of the proposed sale came as no surprise to him and that he had heard that Silverston, a former Solicitor-partner of his, was acting as a "go-between" in Devagnanam's deal with Khaitan. On September 16, 1975 Devagnanam wrote to M. M. C. NEWEY of NEWEY, Birmingham. pointing out the advantages that would accrue by the sale of the shares to Khaitan.

Devagnanam reiterated his total identification with NEWEY' s Far Eastern interests and expressed his anxiety to free himself from all commitments to or involvement with NIIL, as early as possible. On October 22, 1975 an important meeting was held in which Alan Machrael, a Director of the Holding Company, mad relied upon in this connection are : Re. Smith & Fawcett Ltd. ,(1) Nana/al Zaver v. Bombay Life Assurance,(') Plexcy v. Mitis(') Hogg v. Cramphorn(4) Mills 5 6 v. Mills, ( ) Harlowe's Nominees( ) and Howard Smith v. Amphol. C) We appreciate thatit is generally unsatisfac_tory to record a finding involving grave consequences to a person on the basis of affidavits and documents without asking that person to submit to cross-examination. It is true that men may lie but documents will not and often, documents speak louder than words.

But a total reliance on the written word, when probity and fairness of conduct are in issue, involves the risk that the person accused of wrongful conduct is denied an opportunity to controvert the inferences said to arise from the documents. But then, Shri Nariman's objection seems to us a belated attempt to avoid an inquiry into· the (1) [1942] l All ER 542, 545. (2) [1950) S. C. R. 390, 394. (3) [1920) l Chancery 77. (4) [1967) l Chancery 254, 260. (5) 60 C. L. R. 150, 160. (6) 121 CLR . 483, 485. (7) [1974) A. C. 821, 831. N. 1. 1. L. v. N. I. N. H. L. (Chandrachud, C. J. ) 755 conduct and motives of Devagnanam. The Company Petition was argued both in the Trial Court and in the Appellate Court on the basis of affidavits filed by the parties, the correspondence and the documents.

The learned Appellate Judges of the High Court have observed in their judgment that it was admitted, that before the learned trial Judge, both sides had agreed to proceed with the matter on the basis of affidavits and correspondence only and neither party asked for a trial in the sense of examination of witnesses. In these circumstances, the High Court was right in holding that, having taken up the particular attitude, it was not open to Devagnanam and his group to cont'i:nd that the allegation of ma/a fides could not be examined, on the basis of affidavits and the correspondence only. There is ample material on the record of this case in the form of affidavits, correspondence and other documents, on the basis of which proper and necessary inferences can safely and legitimately be drawn. Besides, the cases on which counsel relies do not all support n his submission that from mere affidavits or correspondence, ma/a fides or breach of fiduciary poVI er ought not to be inferred.

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

We have therefore no hesitation in rejecting the submission that we ought not to record a finding of ma/a jides or abuse of fiduciary power on the basis of the affidavits, correspondence and the · (1) [1903) 2 Ch. 506. (2) 71 E. R. 361. 756 SUl'REME COURT REPORTS (1981] 3 s. c. R. 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 documents were placed on the record, mostly by consent of parties, as the case progressed from stage to stage. A very important document, namely, Devagnanam'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 Company as put forward by Shri Seervai is like this : (i) Devagnanam kept Raebum and Coats under the impressiqn that negotiations were still going on and were not to be treated as concluded while, in reality, he had made up his mind to treat the matter as at an end. (ii) He kept the Holding Company in total ignorance of the steps which he was taking in behalf of the issuance and allotment of the rights shares.

The copy of the letter of the Reserve Bank dated March 30, 1977 which is said to have spurred the decision taken in the meetings of April 6 was not sent to the Holding Company though Devagnanam had stated in his letters dated April 12 to Raeburn that the said copy was being enclosed along with that letter. Deliberately and designedly, the letter of offer dated April 14, 1977 meant for the Holding Company in England was not posted until April 27. Similarly, the notice calling a meeting of the Board on May 2 was not posted till April 27. The notice to Manoharan too was posted as late as on April 27, since he was believed to be: siding with Coats. The letter of offer and the notice of meeting of May 2 which were posted at Madras on April 27 were received by the Holding Company on May 2, after the Board's meeting for allotment of rights shares was held. N. J. I. L. v. N. I. N. H. L. (Chandrachud, C. J.

) 757 (iii) The Reserve Bank of India was not informed of the proposal to issue right shares to the existing shareholders although it was the most obvious thing to do, in response to its Jetter dated March 30, 1977, calling upon NHL to submit its proposal for reducing its non-resident interest without delay. (iv) No application was made to the Controller of Capital Issues for fixing the premium on rights shares, notwithstanding that the Reserve Bank had informed NHL, that if necessary, an application to that effect may be made to the Cont-roller of Capital Issues. (v) The whole idea was to cut off all sources of information from Raeburn and Coats and to confront them with the fait accompli of the allotment of rights shares to the Indian shareholders, including the shares formally offered to the Holding Company which were not allotted to it on the ground of its non-compliance with the letter of offer.

(vi) The agenda of the meetings of April 6 and May 2, 1977 was purposely expressed in vague terms : 'Policylndianisation', in order that the Holding Company should not know that the reduction of the non-resident 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 pre-empted 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 thaf meeting.

The appointment of additional directors was not even an item on the agenda of the meeting. [1981] 3 S. C. R. (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 persu_adiug NEWEY to withdraw the power of attorney executed by them, authorizing the filing of the petition. (ix) In these machinations, Devagnanam was actuated by the sole desire to acquire the control of NHL for his personal benefit, by ousting the Holding Company from its control over the affairs of NHL.

(x) In fact, the rights shares were issued at par, though their market value was far greater, as a measure of personal aggrandisement in the supposition and forethought that such shares will inevitable go,to Devagnanam and his group, This was blantantly in breach of the fiduciary obligation of the Directors. (xi) By these means and methods, which totally lacked in probity, Devagnanam succeeded in converting the existing majority into a minority and the minority into a majority, a conduct which is burdensome, harsh and unlawful, qua the existing majority. According to Shri Seervai, the question before the Com:t is not whether the issue of rights shares to the existing Indian shareholders only, amounted to oppression but whether, the offer of rights shares to all existing shareholders of NIIL but the issue of rights shares to existing Indian shareholders only, constituted oppression of the Holding Company on the facts and circumstances disclosed in the case.

This argument raises questions regarding the interpretation of sections 43A and 81 of the Companies Act, 1956. These contentions of the Holding Company have been controverted by Shri Nariman, according to whom, the appellate Court has taken a one-sided view of the matter which is against the weight of evidence on the record. Counsel contends that Devagnanam had done all that lay in his power to persuade the Holding Company to disinvest so as to reduce its holding in NIIL to 40%, that the Direc- N. I. N. L. v. N. I. N. H. L. (Chandrachud, C. J.

) 759 tors of NIIL were left with no option save to decide upon the issue of rights shares, since disinvestment was a matter of the Holding Company's volition, that the wording of the agenda of the meetings of April 6 and May 2 conveyed all that there was to say on the subject since, in the background of the negotiations which had taken place between the parties, it was clear that what was meant by 'Policy-Indianization' and 'Allotment of Shares' was the allotment of rights shares in order to effectuate the policy of the Reserve Bank that the Indianization of the Company should be achieved by the reduction of the non-resident holding to 40%, that Coats refused 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 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 oJer 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 shareholder in NHL.

As a result of the operation of 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 Holding Company could neither have participated in the issue of rights shares nor could it have renounced the rights shares offered to it in favour or'an outsider, not even in favour of a resident Indian Company like Madura Coats. It is denied that Silverston was not a disinterested Director or that his appointmant as an additional Director was otherwise invalid. Counsel sums up his argument by saying that the Board of Directors of NHL had in no manner abused its fiduciary position and that far from their conduct being burdensome, harsh and wrongful, it was the attitude of Coats which was unfair, unjust and obstructive.

Coats having come into an equitable jurisdiction with unclean hands, contends Shri Nariman, no relief should be granted to them assuming for the sake of argument that Devagnanam from the position of Managing Director, are characterised by counsel as wholly uncalled for, transcending the exigencies of the situation. It seems to us unquestionable that Devagnanam played a key role in the negotiations with the Holding Company and ultimately master-minded the issue of rights shares. He occupied a pivotal position in NIIL, having been its Director for over twenty years and a Managing Director over fifteen years, in which capacity he held an undisputed sway over, the affairs of NHL. The Holding Company had nominated only one Director on the· Board of NIIL, namely, N. T. Sanders, who resided in England and hardly ever attended the Board's meetings. Devagnanam was thus a little monarch of all that he surveyed in Ketty.

He had a large personal stake in NIIL's future since he and his group held neady 30% shares in it, the other Indian shareholders owning a mere 10%. In the 60% share capital owned by the Holding Company, Coats and NEWEY were equal sharers with the result that Coats, NEWEY and Devagnanam each held an approximately 30% share capital in NIIL. This equal holding created tensions and rivalries betwee11 Coats and Devagnanam,