Section 43A
DEEMED
PUBLIC COMPANY
[1981] 51 COMP. CAS. 743 (SC)
SUPREME COURT OF
Needle Industries (
v.
Needle Industries Newey (
Y.V. CHANDRACHUD, C.J.
P.N. BHAGWATI AND E.S. VENKATARAMIAH, JJ.
Civil Appeal Nos. 2139, 2483 &
2484 of 1978.
MAY 7, 1981
F.S. Nariman, A.K.
Sen, Dalip Singh, K.J. John, Ravinder Narain, O.C. Mathur, T.A. Devagnanam, Dr.
Y.S. Chitale, A.G. Menzes, S.N. Kackar, R. Narain, for the Appellants.
H.M. Seervai, Anil B.
Divan, A.R. Wadia, S.N. Talwar, I.N. Shroff, H.S. Parihar and D.N. Gupta for
the Respondents.
JUDGMENT
Chandrachud, C.J.—These three appeals by special leave arise out of a
judgment of a Division Bench of the High Court of Madras dated October 6, 1978,
allowing an appeal against the judgment of a learned single judge, dated May
17, 1978, in Company Petition No. 39 of 1977. The main contending parties in these
appeals are: (i) the Needle Industries (
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 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
The NIIL, it shall have
been noticed, was incorporated about two years after
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 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.
Though
NIIL was at one time wholly owned by NI-Studley and later, by NI-Studley and
NEWEY, the affairs of NIIL were managed ever since 1956 by an entirely Indian
management, with Devagnanam as its chief executive and managing director with
effect from the year 1961. The Holding Company which was formed in 1963, had
only one representative on the board of directors of NIIL. He was N. T.
Sanders. He resided in
But
the acquisition of NI-Studley by Coats in 1972 and their consequent entry in
NIIL created in its wake a sense of uneasy quiet between Coats on one hand,
which came to own half of the 60% share capital held by the Holding Company,
that is to say, 30% of the total share capital of NIIL, and the Devagnanam
group on the other hand, which owned 28.5% of that share capital. By the mere
size of their almost equal holding in NIIL, Coats and Devagnanam developed
competing interests in the affairs of NIIL. Coats were in the same line of
business as NIIL, namely, manufacture and sale of needles for various uses,
fish-hooks, etc., and they had established trading centres far and wide, all
over the world. It is plain business, involving no moral turpitude as far as
business ethics go, that Coats could not have welcomed competition from NIIL
with their world interests. Devagnanam was a man of considerable ability and
foresight and in NIIL he saw an opportunity of controlling and dominating an
industrial enterprise of enormous potential in a rapidly growing market. The
turnover of NIIL had increased from Rs. 2.80 lakhs in 1953 to Rs. 149.93 lakhs
in 1972 and the profits ran as high as 19.4% of the turnover. Implicit
confidence in the Indian management which was the order of the day almost till
1974 gradually gave way to an atmosphere of suspicion and distrust between
Coats and Devagnanam. NEWEY apparently kept away from the differences which
were gradually mounting up between the two,
but, evidently, they nursed a preference for Devagnanam. Coats are a giant
multi-national organization. NEWEY, comparatively, are small fish, though they
too had their own independent business interests to protect and foster.
NEWEY owned a nourishing
business in
The Foreign Exchange
Regulation Act ("FERA"), 46 of 1973, which came into force on January
1, 1974, provided to Coats and Devagnanam a legal matrix for fighting out their
differences. The provisions of the 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, s. 29(1)
of the 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 s. 29(2)(a), if such a person or company is engaged in any
such activity at the commencement of the Act, he or it has to apply to the
Reserve Bank of India, for permission to carry on that activity, within six
months of the commencement of the Act or such further period as the Reserve
Bank may allow. Since the Holding Company is a non-resident and its interest in
NIIL exceeded 40%, NIIL had to apply for the permission of the Reserve Bank for
continuing to carry on its business. Section 29(4)(a) imposes a similar
restriction on such person or company from holding shares in India of any
company referred to in cl. (b) of s. 29(1), without the permission of the Reserve Bank. Therefore, the Holding Company also had
to apply for the permission of the Reserve Bank for continuing to hold its
shares in NIIL. The time for making an application for the requisite permission
under s. 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 s. 29
of the FERA is the pivot round which the whole case revolves.
NIIL applied to the Reserve
Bank for the necessary permission through its director and secretary, D. P.
Kingsley, on September 3, 1974. By its letter dated May 11, 1976, the Reserve
Bank allowed that application on certain conditions. NIIL's application was
late by three days but the delay was evidently ignored or condoned. One of the
conditions imposed by the Reserve Bank on NIIL was that it must bring down the
non-resident interest from 60% to 40% within one year of the receipt of its
letter. That letter having been received by NIIL on May 17, 1976, the dead-line
for reducing the non-resident interest to 40% was May 17, 1977.
The Holding Company applied
to the Reserve Bank for a "holding licence" under s. 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 s.
29(1) of the FERA.
Devagnanam was residing in
"There can be no question
of my becoming in any way involved with Ketty and its future as I am committed
to NEWEY. There appears to be no possibility of returning to
("Ketty" in
Nilgiris, is the place where NIIL's factory is situated and is treated as
synonymous with NIIL). Devagnanam referred in his note to an inquiry from Mr.
Khaitan, the head of a powerful group with diverse interests and investment in
industry, who was already involved in the manufacture of products allied to
NIIL's. Coats were alarmed that Devagnanam was
negotiating the sale of his shares "to a Marwari, one Khaitan of Shalimar,
a sewing needle competitor to Ketty". In a letter dated August 6, 1975, addressed
to Doraiswamy, a partner in a
"No doubt Mr. Khaitan
would pay the earth to acquire NIIL and judging by what Theo (Devagnanam) had
said about him in the past, he may be prepared to arrange or facilitate payment
abroad, a most attractive possibility from Theo's point of view, since he has
said clearly that he intends leaving India for good, finally settling in
Australia".
Sanders added that the deal
was so dangerous from the point of view of NIIL that the Holding Company
"would feel obliged to prevent it by whatever means were open" to it.
By his reply dated August 12, 1975, Doraiswamy said that the news of the
proposed sale came as no surprise to him and that he had heard that Silverston,
a former solicitor-partner of his, was acting as a "go-between" in
Devagnanam's deal with Khaitan.
On September 16, 1975,
Devagnanam wrote to M.M.C. Newey of NEWEY,
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 Devagnanam to acquire a holding of nearly that
proportion. On November 7, 1975, M.M.C. Newey wrote to Devagnanam making it
clear beyond the manner of any doubt that Coats will not accept Khaitan and
that, accord-ing to Bannatyne of Coats, they were put to considerable trouble
in finding Indian residents who would match Khaitan's offer of 3.6 times par.
Newey made it clear that in any event, the sale price would have to be paid in
"I do not think any of
us want to see Coats dominate Ketty. Hence there can be no question of selling
any part of my shares to their nominee. As they in turn will not approve of
anyone we choose, there is no way of solving the problem...The best thing to
do, therefore, is for me to revert to the original basis and they should have
no cause to complain. This will of course include effectively managing the
Indian company. Let me however assure you that it will not be at the expense of
Newey".
And so did Devagnanam
remain in NIIL, with the stage set for a battle between him and Coats for the
acquisition of control over the affairs of NIIL.
Yet another statutory
provision which has an important bearing on the issues arising in these appeals
is the one contained in s. 43A of the Companies Act, 1956, which was introduced
in 1961 by Act 65 of 1960. NIIL was incorporated as a private company in 1949
under the Indian Companies Act, 1913. It was a private company as defined in s.
3(1)(iii) of that Act, since by its articles of association it restricted the
right to transfer its shares, limited the number of its members to fifty and
prohibited any invitation to the public to subscribe to any of its shares or debentures.
By s. 43A, it became a public company, since not less than twenty-five per
cent. of its paid-up share capital was held by a body corporate, namely, the
Holding Company. But, under the first proviso to s. 43A(1), it had the option
to retain its articles relating to matters specified in s. 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 s. 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 s. 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 s. 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 well be that the
reappointment in itself is right"), but he demurred to the modality by
which the decision was taken since, according to him, questions relating to
appointments to senior positions in the company ought to be decided in
consultation with the U. K. shareholders so that they could have an opportunity
to express their views. Sanders, it may be mentioned, had received the notice
of the meeting duly. On October 20 and 21, 1976, a meeting took place at Ketty
between the U. K. shareholders and the Indian shareholders of NIIL. The former
were represented by Alan Mackrael, the managing director of the Holding
Company, and C. Raeburn, the Chairman of NEWEY, the latter by Devagnanam and
Kingsley. One Martin Henry, the managing director of "Madura Coats",
an Indian company in which the Holding Company had substantial interest, also
attended that meeting and took part in its deliberations. Silverston, an
Englishman who was practising in India as a solicitor, attended the meeting as
an adviser to the Indian shareholders. C. Raeburn chaired the meeting. Para. 2
of the note prepared by him of the discussions held at the meeting says that it
was agreed that Indianisation should be brought about by May, 1977, as
requested by the Government, so as to achieve a 40% U.K. and 60% Indian
shareholding. But the meeting virtually ended in a stalemate because, whereas
the Holding Company wanted a substantial part of the share capital held by it
in excess of 40% to be transferred to Madura Coats as an Indian shareholder,
Devagnanam insisted that the existing Indian shareholders of NIIL alone had the
right, under its articles of association, to take up the shares Which the
Holding Company was no longer in a position to hold because, of the directives
issued by the Reserve Bank pursuant to the FERA. Thus, the difference between
the two groups, who were fast falling out, was not, as it could not be, whether
the Holding Company had to reduce its share holding NIIL from 60% to 40%, but
as regards the mode by which that reduction was to be brought about. The bone
of contention was as to which Indian party should take up the excess of 20%—the
existing Indian shareholders of NIIL or an outside Indian company, the Madura
Coats. Raeburn played the role of a mediator but did not succeed. On the
conclusion of the Ketty meeting, Silverston wrote a letter to Kingsley
conveying his appreciation of the efforts made by Raeburn to bring the parties
together and his distress at the attitude of Coats which, according to
Silverston, showed that they were trying to circumvent the provisions of 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 wholetime director of NIIL to be in charge of its export
programme. On January 20, 1977, the Reserve Bank sent a reminder to NIIL asking
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 by the stipulated date, viz.,
May 17, 1977. On March 9, 1977, Raeburn wrote to Devagnanam, saying that after
a discussion with Mackrael and three other high-ranking persons of Coats, it
was clear that Coats were not agreeable to allowing the present Indian
shareholders to acquire 60% of the equity capital of NIIL, since such a course
carried in the long run too great a risk to their world trade. Raeburn made
certain fresh proposals by his letter in the hope that they would be acceptable
to Coats and invited Devagnanam to come to Birmingham for negotiations.
On March 18, 1977, a notice
was issued by NIIL's secretary, D. P. Kingsley, intimating that a meeting of
the board of directors will be held on April 6, 1977. One of the items on the
agenda of the meeting was shown as "policy—Indianisation". Sanders
received the notice of the meeting duly but did not attend the meeting.
Devagnanam went to
Birmingham in the last week of March 1977. Between 29th and 31st March, he held
discussions with four out of the six directors of the Holding Company, namely
Newey, Jackson, Whitehouse and Kaeburn. The other two directors, Mackrael and
Sanders, did not take any part in those discussions. During his visit to
Birmingham, Devagnanam expended considerable time in discussing various matters
with NEWEY, pertaining to their Far Eastern business.
On April 4, 1977, NIIL
received a reminder letter dated March 30, 1977, from the Reserve Bank which pointed
out that the company had not yet submitted any concrete proposal for the
reduction of the non-resident interest and asked it to submit its proposal in
that behalf without any further delay. The letter warned the company that if it
failed to comply with the directive regarding the dilution of the foreign
equity within the stipulated period, the Bank
would be constrained to view the mattter seriously.
Raeburn had written a
letter to Devagnanam on 4th April on the question of the compromise formula and
Devagnanam too had written a letter to Raeburn on the 5th, saying that he would
place the formula before his colleagues. These letters evidently crossed each
other. The 6th April was then just at hand.
The meeting of NIIL's board
of directors was held on April 6, 1977, as scheduled. Seven directors were
present at the meeting, with Devagnanam in the chair at the commencement of the
proceedings. C. Doraiswamy, solicitor-partner of "King and
Partridge", was one of the directors present at the meeting. He had no
interest in the proposal of "Indianisation" which the meeting was to
discuss and was, therefore, considered to be an independent director. In order
to complete the quorum of two independent directors, the other directors apart
from C. Doraiswamy being interested in the business of the meeting, Silverston,
an ex-partner of C. Doraiswamy's firm of solicitors, was appointed to the board
as an additional director under art. 97 of the articles of association.
Silverston chaired the meeting after his appointment as an additional director.
The meeting resolved that the issued capital of NIIL be increased to Rs.
48.00,000 by a new issue of 16,000 equity shares of Rs. 100 each, to be offered
as rights shares to the existing shareholders in proportion to the shares held
by them. The offer was to be made by a notice specifying the number of shares
which each shareholder was entitled to, and in case the offer was not accepted
within 16 days from the date on which it was made, it was to be deemed to have
been declined by the concerned shareholder. The minutes of the meeting recorded
that as a matter of abundant caution, the directors who were holding shares in
NIIL did not take part either in the discussions which took place in the
meeting or in the voting on the resolution.
After the aforesaid meeting
of the board dated April 6, 1977, Devagnanam wrote a letter bearing the date
April 12, to Raeburn, explaining that every alternative proposal was discussed
in the meeting and setting out the compelling circumstances arising out of the
requirements of the FERA which led to the passing of the particular resolution.
It was stated in the letter that a copy of the Reserve Bank's letter of March
30, 1977, to NIIL was enclosed therewith, but in fact it was not so enclosed.
The letter of offer dated April 14, 1977, was prepared pursuant to the
resolution passed in the meeting of 6th April. The envelope containing
Devagnanam's letter dated April 12 (without the copy of the letter of the
Reserve Bank dated March 30, 1977), and the letter of offer dated April 14 were
received by Raeburn on May 2, 1977, in an envelope bearing the Indian postal
mark of April 27,
1977. The letter of offer which was sent to one of the Indian shareholders,
Manoharan, was posted in an envelope which also bore the postal mark of 27th
April. The next meeting of the board was due to be held on May 2, 1977, and it
is on that date that Reaburn received the letter of offer dated April 14,
which, evidently, was posted at Madras on April 27, 1977. The Holding Company was
thereby denied an opportunity to exercise its option whether or not to accept
the offer of rights shares, assuming that any such option was open to it.
Whether such an option was open to it and whether, if it could not or did not
want to take the rights shares, it could transfer its rights, under NIIL's
letter offering the rights shares, to a person of its choice depends upon the
provisions of the FERA, the necessity to comply with the directives of the
Reserve Bank, the terms of NIIL's articles of association and the provisions of
the Indian Companies Act.
On
April 19, 1977, a notice was issued by NIIL's secretary intimating that a
meeting of the board of directors will be held on May 2, 1977. One of the items
of agenda mentioned in the notice was "policy—(a) Indianisation, (b)
Allotment of shares". The notice of the meeting was sent to the Holding
Company in an envelope which also bore the Indian postal mark of April 27,
1977. The notice was received by Sanders in England on May 2, 1977, i.e., on the
date when the meeting was due to be held in India. Even the fastest and the
most modern means of transport could not have enabled Sanders to attend the
meeting.
In
between, on April 26, 1977, Raeburn had written a letter to Devagnanam at
Malacca, following a telex message which said:
"HAD HELPFUL DISCUSSIONS COATS YESTERDAY PLEASE
MAKE NO DECISIONS RE INDIANISATION PENDING LETTER".
By
his letter of 26th April, which is said to have been received by Devagnanam on May
4, 1977, Raeburn stated that Coats were still unwilling to grant majority
shareholding control to the existing Indian shareholders, but that they were
equally not keen to do 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 acceptance of the offer had been
received from all the shareholders except the U.K. shareholders and the
Manoharan group. The offer to Manoharan was sent at Virudhunagar but Silverston
pointed out to the meeting that Manoharan was working in Jaipur and that,
therefore, he should be given further time to
participate in the rights issue. The Manoharan group was accordingly allowed
twenty days' time from the date of the allotment letter for payment of the
allotment amount. In the meeting of 2nd May the whole of the new issue
consisting of 16,000 rights shares was allotted to the Indian shareholders,
including members of the Manoharan group. Out of these, the Devagnanam group
was allotted 11,734 shares. A dividend of 30%, subject to tax, amounting to Rs.
9,60,000 was recommended by the board, and it was resolved that the annual
general meeting of the company be held on 4th June, 1977. Silverston was
appointed as an additional director of the company and his election as such at
the annual general meeting was recommended by the board. Further, it was
resolved that deposits be invited from the public. On the same day, i.e., 2nd
May, Devagnanam wrote a letter to Raeburn intimating to him that in a meeting
held that morning the formalities relating to allotment of shares were
completed, bringing the company under the control of the Indian shareholders.
Devagnanam reiterated by his, letter the hope of a closer association with the
NEWEY group.
Raeburn reacted sharply to
Devagnanam's letter of April 12, and to the letter of offer dated April 14. As
stated earlier, he had received both of these on May 2, in an envelope which
bears the postal mark of Madras dated April 27. Raeburn sent a telex message to
Devagnanam on 2nd May, and another to Kingsley on 3rd May. By the first telex,
he complained about the inadequacy of the notice of the meeting and by the
second, he conveyed that there was considerable doubt on the question whether
the necessary disinterested quorum was available at the meeting of the
directors held on April 6. On receipt of the telex message, Devagnanam wrote a
letter to Raeburn on May 4, explaining the pressure of circumstances which compelled
the board to take the decision which it did in the meeting of May 2, 1977.
Raeburn followed up his telex messages by a letter to Devagnanam on May 3.
While expressing his distress and displeasure at the manner in which the
decision regarding the issue of rights shares was taken and the allotment of
the shares was made, Raeburn stated in his letter that the rights issue at par,
which was considerably less than the fair value 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.
Between
the 2nd and 9th May, there was an exchange of cables between Mackrael and
Doraiswamy which led to the latter writing a letter on the 9th to the former.
Doraiswamy stated in that letter that he had thoroughly investigated the
position by perusing all available records placed before him by Devagnanam and
Kingsley and that he was of the opinion that, in the meeting of the 6th April,
there was the required quorum of two disinterested directors consisting of
Silverston and himself and, therefore, there could be no doubt whatsoever about
the legality of the resolution passed in that meeting. He admitted that
although the time-limit fixed by the Reserve Bank had expired on 17th May,
1977, "it may have been possible for the company to get further time from
the Reserve Bank of India". As regards the decision to issue the
additional shares at par, he explained that if the issue had been made at a
premium, it would have necessitated an approach to the Controller of Capital
Issues, a process which was time-consuming and complicated. He pointed out that
the authorities would not have allowed the company to issue the rights shares at
a premium and that even if they were to allow such a course, the premium
permissible would have been only nominal. He asserted that the delay caused in
the offer of new shares being received by the U. K. shareholders was of little
consequence because they would not have been able to take up the shares in any
event. He expressed the hope that Mackrael would agree that the decision
regarding the issue of rights shares taken at the board meeting on April 6,
1977, was bona fide and in the best interests of the company. He concluded his
letter by an assurance that as regards the late despatch of the notice of the
board meeting of 2nd May, further enquiries were being made.
On
May 11, Devagnanam wrote to Raeburn apologising for the manner in which the
foreign shareholding had been reduced and, for good measure, he projected the
various advantages which the NEWEY group would enjoy under the new Indian
management and control of NIIL. As if to illustrate that it was better late
than never, he enclosed with his letter a copy of the Reserve Bank's letter
dated 30th March, 1977, which was to have been sent along with the letter dated
April 12 but was in fact not so sent.
On May 17, 1977 Mackrael,
acting on behalf of the Holding Company, filed a company petition in the Madras
High Court under ss. 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 in probity and fair dealing which the Holding
Company was entitled to expect. By the petition, the Holding Company asked for
the following reliefs:—
(a) That the board of directors of the company be superseded
and one or more administrators be appointed to administer the affairs of the
company or, in the alternative, the board of directors be reconstit-uted so as
to ensure that the Holding Company had adequate representation on it.
(b) That the proceedings of the meeting of the board of
directors held on April 6 and May 2, 1977, be declared illegal, void and
inoperative.
(c) That Silverston's appointment as an additional director
of the company be declared as void and inoperative and he be restrained from
functioning as a director of the company.
(d) That the purported allotment of 16,000 shares pursuant to
the impugned resolution of the board of May 2, 1977 be declared void.
(e) That the Indian group of shareholders to whom the rights
shares were allotted be restrained from exercising any voting rights in regard
to any part of those shares.
(f) That the company be restrained from giving effect to the
allotment of the 16,000 rights shares and from making any payment of dividend
on those shares.
(g) That the articles of association of the company be
amended so as to permit the transfer of the shares to persons other than the
existing members of the company in order to enable the Holding Company to
comply with the requirement of disinvestment without prejudice to its interest
as a shareholder. And
(h) That a special majority for decisions of the board be
prescribed in regard to all important matters and provision be made for the
appointment of directors by proportional representation.
The learned Acting Chief
Justice who tried the company petition, found several defects and infirmities
in the board's meeting dated May 2, 1977, and concluded that appropriate relief
should be granted to the Holding Company under s. 398 of the Companies Act. The
learned judge was of the view that the average market value of the rights
shares was about Rs. 190 per share on the crucial date and that, since the
rights share were issued at par, the Holding Company was deprived unjustly of a
sum of Rs. 8,54,550 at the rate of Rs. 90 per share on the 9,495 rights shares
to which it was entitled. Exercising the power under s. 398(2) of the Companies
Act, the 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 s. 397 as also under s.
398 of the Companies Act and though the trial court had granted partial relief
to the Holding Company under s. 398, it was stated in the appellate court on its
behalf that its entire case was based on s. 397 and that it did not want to
invoke the provisions of s. 398. A similar statement was made before us also.
On a consideration of the
matters and material before it, the Division Bench formulated its view in the
form of 18 conclusions on various aspects of the case. They may be summed up
thus:
(a) As soon as Devagnanam became involved in the Far Eastern
ventures of NEWEY, he decided to sell his shareholding in NIIL to an Indian
concern or party from which he expected to receive at least a part of the con
sideration in a foreign country.
(b) Seeing that Coats were opposed to his receiving any part
of the consideration for the sale of his shares in a foreign country,
Devagnanam decided not
to part with his shares but to obtain the control of the company.
(c) The directives of the Reserve Bank
of India on the question of Indianisation were exploited by Devagnanam for
compelling the Holding Company to part with its shares in favour of the Indian
shareholders.
(d) Coats were willing to carry out the
directives of the Reserve Bank but they did not want to transfer their shares
to the existing Indian share-holders because thereby, the latter would have
acquired a controlling interest in NIIL which Coats wanted to prevent. Coats
were willing to part with their excess shares in favour of other Indian
residents.
(e) Though Coats originally contemplated
the transfer of 15% of their excess 20% shares to Madura Coats, or the
incorporation of a company to take over their excess 20% shares, they were
ultimately agreeable that the existing Indian shareholders should get 9% out of
that 20% so as to have a 49% holding in the share capital of NIIL and that 11%
should go to new, independent, Indian institutional shareholders. The object of
Coats was that any one group of shareholders should not have a dominating
position in the affairs of NIIL.
(f) At the Ketty meeting held on October
20 and 21, 1976, the issue of rights shares was considered as an alternative to
disinvestment, but that was subject to two conditions: one, that it should be
shown that there was a viable development plan which required additional funds
which the existing cash flow of NIIL could not meet, and two, that the value of
the U.K. equity interest required to be transferred would be no less favourable
than what would be achieved by a direct sale of that interest.
(g) Though by his letters of December 11
and 14, 1976, Devagnanam had informed Raeburn of the decision of the Indian
shareholders to acquire 60% shares for themselves, he did not ever say one word
about the issue of rights shares in any of the numerous communications which he
sent to Raeburn. No reference was made to the issue of rights shares even in
the memorandum of discussions which took place during the visit of Devagnanam
to U.K. from March 29-31, 1977. Thus, the issue of rights shares was sprung as
a surprise on the U.K. shareholders.
(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 art. 97 of the articles of
association of NIIL, the decision taken by the board in its meeting of April 6
on the issue of rights shares and the appointment of Silverston as an
additional director constituted a departure from established practice and
showed want of good faith and lack of fair play on the part of the board of
directors of NIIL.
(j) The letter dated April 12, the letter of offer dated
April 14 and the notice for the meeting of the board of directors to be held on
May 2, were all got posted by Devagnanam as late as on April 27, 1977, at
Madras, so as to ensure that these important documents should not reach the
Holding Company in time to enable it to participate in the all important meeting
of the 2nd. Devagnanam wanted to present a fait accompli to the Holding Company
so as to prevent it from taking any pre-emptive action.
(k) Whenever NIIL wrote to the Reserve Bank alleging that the
Holding Company was not willing to carry out the directives of the Bank or to
comply with the provisions of the FERA, its object was to prejudice the bank
against the Holding Company by drawing a red-herring across the track.
(1) The directives of the Reserve Bank of India and the
provisions of the FERA were not concerned with who should be the Indian
shareholders of NIIL. All that they were concerned with was that 60% of the
shareholding must be with the Indian residents. For the purpose of achieving
that result, three courses were available to NIIL: (1) Disinvestment by foreign
shareholders in favour of Indian shareholders. (2) Issue of rights shares
pursuant to s. 81 of the Companies Act. and (3) Action under s. 81(1A) of the
Companies Act for issuing additional shares to Indian residents other than the
existing Indian shareholders by passing an appropriate special resolution, or
if no special resolution was passed, then, by a majority of the shareholders
approving such a course with the consent of the Central Govt. The first course
was ruled out since Coats had taken a definite stand that they will not allow
the existing Indian shareholders to obtain the excess shares. As far as the
second, alternative was concerned, the Holding Company had the right to
renounce shares offered to it in favour of any other person under s. 81(1)(c)
of the Companies Act, which right was denied to it because, the letter of offer
dated April 14 did not contain a statement regarding renunciation of the right
to take shares and also because 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 s. 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 to substantial fringe
benefits as the managing director of NIIL. He was also getting a large salary
from NEWEY which was Ł10,000 in 1975, Ł11,000 in 1976 and Ł12,000 for the year
ending July 31, 1977.
(p) The fact that NIIL informed the Holding Company on May
21, 1977, which was will not be allowed
to exercise any rights in respect of the whole of Rs. 18,990 shares held by it
since its application under s. 29(4) of the FERA was not granted by the Reserve
Bank, shows that the object of the board of directors in taking the impugned
decision was to exclude the Holding Company from all control over NIIL. That is
why NIIL advised the Reserve Bank of India by its letter dated May 24, 1977,
that no application for holding any shares by a non-resident should be allowed
by the bank without the knowledge and consent of NIIL. That also is the reason
why NIIL conveyed to the Reserve Bank by its letter of September 20, 1977, that
until such time as the company petition was finally disposed of, no licence
should be issued to the non-resident shareholders and no remittance of dividend
out of India should be permitted without the non-resident shareholders reducing
their holding in NIIL to less than 40%.
The two other conclusions
are comprehended within the 16 set out above.
On the basis of the
aforesaid formulations, the Division Bench concluded that the affairs of NIIL
were being conducted in a manner oppressive, that is to say, burdensome, harsh
and wrongful to the Holding Company. After referring to certain passages from
Palmer's Company Law and Gore-Browne on Companies, and the decisions of the
House of Lords, the Privy Council, and our own courts including the Supreme
Court, the Division Bench held that since the action of the board of directors
of NIIL was not in the interest of the company but was taken merely for the
purpose of welding the company into NEWEY's Far Eastern complex, it was just
and equitable to wind up the company.
NIIL had filed
cross-objections in the High Court appeal contending that, in any event, the
learned Acting Chief Justice was in error in directing it to pay the sum of Rs.
8,54,550 to the Holding Company. While dealing with the cross-objections, the
Division Bench held that the injury suffered by the Holding Company on account
of the oppression practised by the board of directors of NIIL could not be
remedied by the award of compensation and, therefore, the action of the board
of directors in issuing the rights shares had to be quashed. Having found that
the Holding Company was entitled to relief under s. 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 con-sisting of nine directors proposed by the Holding Company was
constituted with Shri M. M. Sabharwal as an independent chairman.
(c) Harry Bridges, an executive of Coats, was appointed as
the managing director for a period of four months.
(d) The rights issue made on 6th April, 1977, and the
allotment of shares made on 2nd May, 1977, at the board meetings were set aside
and the interim board was directed to make a fresh issue of shares at a
pre-mium to the existing shareholders, including the Holding Company which was
to have a right of renunciation. The new board was directed to apply to the
Controller of Capital Issues for determining the amount of premium.
(e) The articles of association were to be altered by
appropriate additions and deletions in order to provide for the election of
directors by proportional representation, and
(f) Devagnanam was asked to pay to the Holding company, the
costs of the appeal and cross-objections quantified at Rs. 25,000. He was also
asked personally to reimburse the expenses incurred by NIIL in the appeal and
cross-objections.
These appeals were heard in
the first instance by Justice Untwalia and Justice Pathak. In view of the
importance of the questions arising therein, on some of which our learned
brothers, it seems, were unable to agree, they devised that the appeals be
heard by a larger Bench. That is how the appeals are now before us.
The petition of the Holding
Company, out of which these appeals arise, sought relief under ss. 397 and 398
of the Companies Act, 1956. The case under s. 398 not having been pressed
except before the learned trial judge, we are only concerned with the question
whether the Holding Company is entitled to relief under s. 397 which reads
thus:
"397. (1) any members
of a company who complain that the affairs of the company are being conducted
in a manner prejudicial to public interest or in a manner oppressive to any
member or members (including any one or more of themselves) may apply to the
court for an order under this section, provided such members have a right so to
apply in virtue of section 399.
(2) If, on any application
under sub-section (1), the court is of the opinion—
(a) that the company's affairs are being conducted in a manner
prejudicial to public interest or in a manner oppressive to any member or
members; and
(b) that to wind up the company would unfairly prejudice such member
or members, but that otherwise the facts would justify the making of a
winding-up order on the ground that it was just and equitable that the company
should be wound up;
the court may, with a view-
to bringing to an end the matters complained of, make such order as it thinks
fit".
Section 398 provides for
relief in cases of mismanagement. Section 399(1) restricts the right to apply
under ss. 397 and 398 to persons mentioned in cls. (a) and (b) of sub-s. (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 s. 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
with the Reserve Bank of India, in order to enable NIIL to obtain the requisite
permission for carrying on its business. Paragraph 13 of the company petition
states that the Reserve Bank of India by its letter dated May 11, 1976, granted
to NIIL the necessary permission subject to the condition, inter alia, that it
reduce its non-resident shareholding to 40 per cent. on or before May 17, 1977.
The case of the Holding Company in regard to its own attitude is stated
succinctly in para. 14 of the company petition which may with advantage be
reproduced:
"Discussions were
thereafter held on a number of occasions between the petitioner and the
management of the company to effectuate the aforesaid condition imposed by the
Reserve Bank of India which the petitioner was at all times ready and willing
to comply with. The petitioner did not, however, desire to dilute its holding
of shares in the company by a further issue of capital and preferred to
effectuate the said intention by disinvesting or selling 20% of its holding in
the company. The Reserve Bank of India was agreeable to such dilution taking
place by the petitioner selling a part of its holding to an Indian resident or
Indian residents. The Reserve Bank had indicated that they would be willing for
such dilution taking place by a further issue of shares provided that
additional capital was required for purposes of expansion. The petitioner was
not willing to sell a part of its holding to the Indian group as such a sale
would result in the Indian group acquiring an absolute majority interest.
Further more under the articles of association of the company the consent of
the existing shareholders would be required (apart from the approval of the
Reserve Bank) before the petitioner sold any of its shares to an Indian party,
other than to a member".
According to the Holding
Company, the various steps which culminated in the allotment of rights shares
to the existing Indian shareholders were vitiated by mala fides, their dominant
object being to convert an existing minority into a majority. The decision
taken in the meeting of the board on April 6, 1077, was taken deliberately in
haste and hurry in order to pre-empt any action by the Holding Company to
restrain the board from taking the desired decision. The Reserve Bank,
according to the company petition, would not have been so unreasonable as not
to extend the time for complying with its directive, especially since the
Holding Company had agreed in principle to dilute its holding and the only
difference between the parties was as regards the method by which such dilution
was to be effected. In 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 relating to the right of the shareholders to
renounce the rights shares.
(f) The notice of the board meeting of
May 2, 1977, although dated 19th April, 1977, was posted to Sanders on
27-4-1977, thereby ensuring that it would reach him only after the date of the
meeting.
(g) By issuing shares at par, though
their value was much higher than Rs. 100 per share, the existing Indian
shareholders were enabled to acquire the shares at a gross undervalue and the
company was put to a heavy loss.
(h) The Reserve Bank of India had
indicated that dilution of the foreign holding by a issue could be considered if the company
required further capital for expansion. At the discussions and negotiations
held between the Holding Company and the Indian group it was, inter alia,
agreed that the rights issue would be made only if there was a viable
development plan requiring further funds. The rights issue was made even though
no such need for expansion or development existed or was referred to.
(i) Though the Reserve Bank had, inter
alia, stipulated that the said dilution should be effectuated on or before 17th
May, 1977, the time schedule is never strictly insisted upon. There have been
numerous instances when the Reserve Bank has granted reasonable extension of
time to comply with such conditions. The board of NIIL never requested the
Reserve Bank to grant further time. C. Doraiswamy, the 8th respondent, stated
in his letter dated 9-5-1977 to Mackrael, a director of the Holding Company,
that it would have been possible for the company to get further time from the
Reserve Bank of India.
The
Holding Company contends further that M. J. Silverston was not a disinterested
person, that his vote on the resolution for the issue of rights shares had, therefore, to be ignored, in which case there
was no quorum of two disinterested directors and that his appointment as an
additional director was not valid since the notice for the meeting of the board
of directors to be held on 6-4-1977 did not contain in the agenda any subject
regarding appointment of an additional director under art. 97 of the company's
articles of association.
In answer to these
contentions, Devagnanam filed an elaborate counter-affidavit on his behalf as
well as on behalf of NIIL. In that counter-affidavit, every one of the material
contentions put forward by the Holding Company has been denied or disputed.
Devagnanam contends that it was the Holding Company which wanted to retain its
control over NIIL contrary to the directive of the Reserve Bank of India, the
national policy of the Central 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 s. 81 of the Companies
Act at all, that s. 81(c) of the Companies Act did not apply to the present
case and that, in view of the attitude adopted by Coats, NIIL, in order to
comply with the restrictions imposed by the Reserve Bank and to carry out its
directive, had no option but to decide upon the issue of rights shares to bring
about the reduction in the non-resident shareholding. Devagnanam repudiates
emphatically the charge of mala fides or of conduct in breach of the fiduciary
duty of NIIL's board of directors.
Having regard to these
pleadings, the main question for consideration is whether the decisions taken
in the meetings of the board of directors of NIIL on April 6, and May 2, 1977,
constitute acts of oppression within the meaning of s. 397 of the Companies
Act, 1956. The High Court has answered this question in the affirmative and has
issued consequential directions in regard to the management of NIIL's affairs.
The findings recorded by the High Court in appeal have been challenged before
us with vehemence and ability in an equal measure, matched equally in both
respects on either side. Learned counsel who led the arguments on the rival
sides, Shri F.S. Nariman for the appellants and Shri H. M. Seervai for the
respondents have drawn our attention in copious details to the correspondence
that transpired between the parties, the correspondence with the Reserve Bank
of India, the discussions at Ketty and Birmingham which preceded the impugned
decisions, the conduct of Devagnanam as a man and a managing director, the
attitude of Coats stated to arise out of their world-wide business interests
and the predicament of NEWEY which was willing to strike but was afraid to
wound its partner Coats. We have also been taken through several decisions and
texts bearing particularly on:
(a) The meaning of "oppression" of the members of a
company within the terms of s. 397 and the circumstances in which a company can
be wound up under the just and equitable clause under s. 433(f) of the
Companies Act, 1956.
(b) The approach which the court should adopt in cases
wherein mala fides and abuse of power on the part of directors are alleged but
no oral evidence is led.
(c) The
fiduciary powers of directors in issuing shares.
(d) The
impact of the provisions of the Foreign Exchange Regulation Act, 1973, with
particular reference to s. 2(p), (q) and (u) and s. 29.
(e) The question as to whether it is necessary to issue a
prospectus under s. 81(1)(c) of the Companies Act.
(f) The constraints on public and private companies under the
Companies Act, and their duties and obligations, with particular reference to
ss. 2(35), 2(37), 3(1)(iii) and (iv) and ss. 43A and 81 of the Companies Act.
(g) The relationship of partnership between the Indian
shareholders, Coats and Newey who owned respectively 40%, 30% and 30% of the
shareholding in NIIL.
(h) The question whether Silverston was an
"interested" director within the meaning of s. 300 of the Companies
Act, and
(i) Whether Silverston's appointment as an additional
director in the meeting of the board held on April 6, 1977, was, in the
circumstances, valid.
Coming to the law as to the
concept of "oppression", s. 397 of our Companies Act follows closely
the language of s. 210 of the English Companies Act of 1948. Since the
decisions on s. 210 have been followed by our court, the English decisions may
be considered first. The leading case on "oppression" under s. 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 s. 210
"warrants the court in looking at the business realities of the situation
and does not confine them to a narrow legalistic view". Dealing with the
true character of the company, Lord Keith said at page 361 that the company was
in substance, though not in law, a partnership consisting of the society, Dr.
Meyer and Mr. Lucas and whatever may be the other different legal consequences
following on one or other of these forms of combination, one result followed
from the method adopted, "which is common to partnership, that there
should be the utmost good faith between the constituent members". Finally,
it was held that the court ought not to allow technical pleas to defeat the
beneficent provisions of s. 210 (p. 344 per Lord Keith; pp. 368-369 per Lord
Denning).
In Meyer [1959] AC 324; 29
Comp Cas 1(HL) above referred to, the House of Lords was dealing with a case in
which the appellant-company was accused of having committed acts of oppression against
its subsidiary. In that context, it was held that the parent company must, if
it is engaged in the same class of business, accept, as a result of having
formed such a subsidiary, an obligation so to conduct, what are in a sense its
own affairs, as to deal fairly with its subsidiary. In Re Associated Tool
Industries Ltd. [1964] Argus L R 73, of which judgment a photographic copy was
supplied to us, Joske J. held that the rule in Meyer [1959] 29 Comp Cas 1 (HL)
involved the consequence that the subsidiary companies must also exercise good
faith to the holding company and not merely that the latter should so act to
the former.
In an application under s.
210 of the English Companies Act, as under s. 397 of our Companies Act, before
granting relief 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 rule as
regards the duty of utmost good faith, on which stress was laid by Lord Keith
in Meyer [1959] 29 Comp Cas 1, received further and closer consideration in
Ebrahimi v. Westbourne Galleries Ltd. [1973] AC 360 (HL), wherein Lord Wilberforce
considered the scope, nature and extent of the "just and equitable"
principle as a ground for winding up a company. The business of the
respondent-company was a very profitable one and profits used to be distributed
among the directors in the shape of fees, no dividends being declared. On being
removed as a director by the votes of two other directors, the appellant
petitioned for an order under s. 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 s. 222(f) of the English Act,
corresponding to our s. 433(f), were not to be construed ejusdem generis with
cls. (a) to (e) of s. 222 corresponding to our cls. (a) to (e) of s. 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 court to
subject the exercise of legal rights to equitable considerations, that is, of a
personal character arising between one individual and another, which may make
it unjust, or inequitable, to insist on legal rights, or to exercise them in a
particular way".
Observing that the
description of companies as "quasi-partnerships" or "in
substance partnerships" is confusing, though convenient, Lord Wilberforce
said (Ibid p. 380):
"A company, however
small, however domestic, is a company not a partnership or even a
quasi-partnership and it is through the just and equitable clause that
obligations, common to partnership relations, may come in".
Finally, it was held that
it was wrong to confine the application of the just and equitable clause to
proved cases of mala fides, because to do so would be to negative the
generality of the words. As observed by the learned law lord in the same
judgment, though in another context (Ibid p. 374):
"Illustrations may be
used, but general words should remain general and not be reduced to the sum of
particular instances".
In his judgment in
Westbourne Galleries, In re [1973] AC 360 (HL), Lord Wilberforce has referred
at two places to the decision in Blisset v. Daniel [1853] 68 ER 1022; [1853] 10
Hare 493, which is recognised as the leading authority in the Law of
Partnership on the duty of utmost good faith which partners owe to one another.
Lindley on Partnership (14th Edn., pp. 194-95) cites Blisset v. Daniel as an
authority for the proposition that:
"The utmost good faith
is due from every member of a partnership towards every other member; and if
any dispute arise between partners touching any transaction by which one seeks
to benefit himself at the expense of the firm, he will be required to show, not
only that he has the law on his side, but that his conduct will bear to be
tried by the highest standard of honour".
The fact that the company
is prosperous and makes substantial profits is no obstacle to its being wound
up if it is just and equitable to do so. This position was accepted in the
decision of the Court of Appeal in Yenidje Tobacco Co., In re [1916] 2 Ch 426
and of the Privy Council in Loch v. John Blackwood Ltd. [1924] AC 783.
The question sometimes
arises as to whether an action in contravention of law is per se oppressive. It
is said, as was done by one of us, Bhagwati J., in a decision of 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 outvoted on some issue of domestic
policy".
Neither the judgment of
Bhagwati J. nor the observations in Elder [1952] SC 49, are capable of the
construction that every illegality is per se oppressive or that the illegality
of an action does not bear upon its oppressiveness. In Elder a complaint was
made that Elder had not received the notice of the board meeting. It was held
that since it was not shown that any prejudice was occasioned thereby or that
Elder could have bought the shares had he been present, no complaint of
oppression could be entertained merely on the ground that the failure to give
notice of the board meeting was an act of illegality. The true position is that
an isolated act, which is contrary to law, may not necessarily and by itself
support the inference that the law was violated with a mala fide intention or
that such violation was burdensome, harsh and wrongful. But a series of illegal
acts following upon one another can, in the context, lead justifiably to the
conclusion that they are a part of the same transaction, of which the object is
to cause or commit the oppression of persons against whom those acts are
directed. This may usefully be illustrated by reference to a familiar
jurisdiction in which a litigant asks for the transfer of his case from one
judge to another. An isolated order passed by a judge which is contrary to law
will not normally support the inference that he is biassed; but a series of
wrong or illegal orders to the prejudice of a party are generally accepted as
supporting the inference of a reasonable apprehension that the judge is biassed and that the party complaining of the orders will
not get justice at his hands.
In England, after the
decision of the House of Lords in Meyer [1959] 29 Comp Cas 1 (HL) a restricted
interpretation has been given to s. 210 by the Court of Appeal in Jermyn Street
Turkish Baths Ltd., In re [1971] 3 All ER 184; 41 Comp Cas 999 which has been
adversely criticised by writers on company law (see Palmer's Company Law, 22nd
Edn., p. 613, paras. 57-06, 57-07. Gore-Browne on Companies, 43rd Edn., para.
28-12). In India, this restrictive development has no place, for, in Shanti
Prasad Jain v. Kalinga Tubes Ltd. [1965] 2 SCR 720, 737; AIR 1965 SC 1535; 35 Comp Cas 351,
366, 367. Wanchoo J. accepted the broad and
liberal interpretation given to the court's powers in Meyer.
In Kalinga Tubes, Wanchoo J.
referred to certain decisions under s. 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 wrongful and mere lack of confidence between the majority
shareholders and the minority shareholders would not be enough unless the lack
of confidence springs from oppression of a minority by a majority in the
management of the company's affairs, and such oppression must involve at least
an element of lack of probity or fair dealing to a member in (the matter of his
proprietary rights as a shareholder. It is in the light of these principles
that we have to consider the facts......with reference to section 397".
At pages 734-735 of the
judgment in Kalinga Tubes [1965] 2 SCR 720; 35 Comp Cas 351, 365, Wanchoo J.
has reproduced from the judgment in Meyer [1959] 29 Comp Cas 1 (HL), the five
points which were stressed in Elder [1952] SC 49. The fifth point reads thus:
"The power conferred
on the court to grant a remedy in an appropriate case appears to envisage a
reasonably wide discretion vested in the court in relation to the order sought
by a complainer as the appropriate equitable alternative to a winding-up
order".
It is clear from these
various decisions that on a true construction of s. 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. It
may be mentioned that the Jenkins Committee on Company Law Reform had suggested
the substitution of the word "oppression" in s. 210 of the English
Act by the words "unfairly prejudicial" in order to make it clear
that it is not necessary to show that the act complained of is illegal or that
it constitutes an invasion of legal rights (see Gower's Company Law, 4th Edn.,
p. 668). But that recommendation was not accepted and the English law remains
the same as in Meyer [1959] 29 Comp Cas 1 (HL) and in H. R. Harmer Ltd., In re
[1959] 1 WLR 62; 29 Comp Cas 305 (CA) as modified in Re Jermyn St. Turkish
Baths [1971] 3 All ER 184; 41 Comp Cas 999. We have not adopted that
modification in India.
Having seen the legal
position which obtains in cases where a member or members of a company complain
under s. 397 of the Companies Act that the affairs of the company are being
conducted in a manner oppressive to him or them, we can proceed to consider the
catena of facts and circumstances on which reliance is placed by the Holding
Company in support of its case that the conduct of the board of directors of
NIIL constitutes an act of oppression against it. There is, however, one matter
which has to be dealt with before adverting to facts, namely, the provisions of
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
the country and the proper utilisation thereof in the interests of the economic
development of the
country". It repealed the earlier Act, namely, the Foreign Exchange
Regulation Act, 1947, and came into force on January 1, 1974.
"Person
resident in India" is defined in cl. (p) of s. 2 to mean:
"(i) A
citizen of India, who has, at any time after the 25th day of March, 1947, been
staying in India, but does not include a citizen of India who has gone out of,
or stays outside, India, in either case—
(a) for
or on taking up employment outside India, or
(b) for
carrying on outside India a business or vocation outside India, or
(c) for
any other purpose, in such circumstances as would indicate his intention to
stay outside India for an uncertain period;
(ii) a citizen of
India, who having ceased by virtue of paragraph (a) or paragraph (b) or
paragraph (c) of sub-clause (i) to be resident in India, returns to or stays in
India, in either case—
(a) for
or on taking up employment in India, or
(b) for
carrying on in India a business or vocation in India, or
(c) for
any other purpose, in such circumstances as would indicate his intention to
stay in India for an uncertain period".
"Person
resident outside India" according to cl. (q) means "a person who is
not resident in India". Under cl. (u) "security" means
"shares, stocks, bonds", etc.
Section 19(1) provides:
"Notwithstanding
anything contained in section 81 of the Companies Act, 1956, no person shall,
except with the general or special permission of the Reserve Bank,—
(a) take
or send any security to any place outside India;
(b) transfer any security, or create or transfer
any interest in a security, to or in favour of a person resident outside
India;......
(c) issue, whether in India or elsewhere, any
security which is registered or to be registered in India, to a person resident
outside India;."..
Section
29, which is directly relevant for our purpose, reads thus:
"29.
(1) Without prejudice to the provisions
of section 28 and section 47 and notwithstanding anything contained in any
other provision of this Act or the provisions of the Companies Act, 1956, a person
resident outside India (whether a citizen of India or not) or a person who is
not a citizen of India but is resident in India, or a company (other than a
banking company) which is not incorporated under any law in force in India or
in which the non-resident interest is more than forty per cent. or any branch
of such company, shall not, except with the general or special permission of
the Reserve Bank,—
(a) carry on in India, or establish in India a
branch, office or other place of business for carrying on any activity of a
trading, commercial or industrial nature,
other than an activity for the carrying on of which permission of the Reserve
Bank has been obtained under section 28, or......
(2) (a) Where any person or company (including its
branch) referred to in sub-section (1) carries on any activity referred to in
clause (a) of that sub-section at the commencement of this Act or has
established a branch, office or other place of business for the carrying on of
such activity at such commencement, then, such person or company (including its
branch) may make an application to the Reserve Bank within a period of six
months from such commencement or such further period as the Reserve Bank may
allow in this behalf for permission to continue to carry on such activity or to
continue the establishment of the branch, office or other place of business for
the carrying on of such activity, as the case may be.
(b) Every application made under clause (a) shall be in such form
and contain such particulars as may be specified by the Reserve Bank.
(c) Where any application has been made under clause (a), the
Reserve Bank may, after making such inquiry as it may deem fit, either allow
the application subject to such conditions, if any, as the Reserve Bank may
think fit to impose or reject the application......
(4)(a) Where at the commencement of this Act any
person or company (including its branch) referred to in sub-section (1) holds
any shares in India of any company referred to in clause (b) of that
subsection, then, such person or company (including its branch) shall not be
entitled to continue to hold such shares unless before the expiry of a period
of six months from such commencement or such further period as the Reserve Bank
may allow in this behalf such person or company (including its branch) has made
an application to the Reserve Bank in such form and containing such particulars
as may be specified by the Reserve Bank for permission to continue to hold such
shares.
(b) where an application has been made under clause (a), the Reserve
Bank may, after making such inquiry as it may deem fit, either allow the
application subject to such conditions, if any, as the Reserve Bank may think
fit to impose or reject the application...."..
It is clear from these
provisions that NIIL, being a company in which the non-resident interest of the
Holding Company was more than 40%, could not carry on its business in India
except with the permission of the Reserve Bank of India. An application for
permission to continue to carry on such business had to be filed within a
period of six months from the commencement of the Act or such further period as
the Reserve Bank may allow. The time for filing the application was extended in
all cases by two months and, therefore, it could be filed by August 31, 1974.
NIIL filed its application three days late on September 3, 1974, and the
application was granted by the Reserve Bank on certain conditions, by its
letter dated May 10, 1976. Under the terms and conditions imposed by the
Reserve Bank, the non-resident interest of the Holding Company, which came to
about 60%, had to be brought down to 40% within one year of the receipt of the
letter dated May 10, 1976, that is to say, before May 17, 1977.
By reason of s. 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 Devagnanam and
his group. He contends: Under the company court rules framed by this court,
petitions, including petitions under s. 397, are to be heard in the open court
(rr. 11(12) and 12(1)), and the practice and procedure of the court and of the
Civil Procedure Code are applicable to such petitions (r. 6). Under O. XIX, r.
2 of the Code, it is open to a party to request the court that the deponent of
an affidavit should be asked to submit to cross-examination. No such request
was made in the trial court for the cross-examination of Devagnanam who,
amongst all those who filed their affidavits, was the only person having
personal knowledge of everything that happened at every stage. Why he did or
did not do certain things and what was his attitute of mind on crucial issues
ought to have been elicited in cross-examination. It is not permissible to rely
argumentatively on inferences said to arise from statements made in the
correspondence, unless such inferences arise irresistibly from admitted or
virtually admitted facts. The verification clause of Mackrael's affidavit shows
that he had no personal knowledge on most of the material points. Raeburn. who,
according to Mackrael, was the chief negotiator on behalf of the Holding
Company in the Birmingham meeting did not file any
affidavit at all. Whitehouse, the secretary of the Holding Company, and N.T.
Sanders, who was the sole representative of the Holding Company on NIIL's board
of directors, did file affidavits but they are restricted to the question of
the late receipt of the letter of offer of shares and the notice for the board
meeting of May 2, 1977. Their affidavits being studiously silent on all other
important points and the affidavit filed on behalf of the Holding Company being
utterly inadequate to support the charge of mala fides or abuse of the
directors' fiduciary powers, it was absolutely essential for the Holding
Company to adduce oral evidence in support of its case or at least to ask that
Devagnanam should submit himself for cross-examination. This, according to Shri
Nariman, is a fundamental infirmity from which the case of the Holding Company
suffers and, therefore, this court ought not to record a finding of mala fides
or of abuse of powers, especially when such findings are likely to involve
grave consequences, moral and material, to Devagnanam and jeopardise the very
functioning of NIIL itself.
In support of his
submission, Shri Nariman has relied upon many a case to show that issues of
mala fides and abuse of fiduciary powers are almost always decided not on the
basis of affidavits but on oral evidence. Some of the cases relied upon in this
connection are: 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 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
conduct and motives of Devagnanam. The company petition was argued both in the
trial court and in the appellate court on the basis of affidavits filed by the
parties, the correspondence and the documents. The learned appellate judges of
the High Court have observed in their judgment that it was admitted that before
the learned trial judge both sides had agreed to proceed with the matter on the
basis of affidavits and correspondence only and neither party asked for a trial
in the sense of examination of witnesses.
In these circumstances, the
High Court was right in holding that, having taken up the particular attitude,
it was not open to Devagnanam and his group to contend that the allegation of
mala fides could not be examined on the basis of affidavits and the
correspondence only. There is ample material on the record of this case in the
form of affidavits, correspondence and other documents, on the basis of which
proper and necessary inferences can safely and legitimately be drawn.
Besides, the cases on which
counsel relies do not all support his submission that from mere affidavits or
correspondence, mala fides or breach of fiduciary power ought not to be
inferred. In In re Smith & Fawcett Ltd. [1942] 1 All ER 542 (CA), Lord
Greene, after stating that he strongly disliked being asked on affidavit
evidence alone to draw up inferences as to the bona fides or mala fides of the
actors, added that this did not mean that it is illegitimate in a proper case
to draw inferences as to bona fides or mala fides in cases where there is on
the face of the affidavits sufficient justification for doing so. In Nanalal
Zaver [1950] SCR 391 at page 394; 20 Comp Cas 179, the judgment of Kania C.J.
contains a statement that "considerable evidence was led in the trial 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 matters in
issue cannot be found upon. We may mention that in Punt v. Symons & Co.
[1903] 2 Ch 506 (Ch D), Fraser v. Whalley [1864] 71 ER 361 and Hogg v.
Cramphorn Ltd. [1967] 1 Ch 254; 37 Comp Cas 157 (Ch D), 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
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 Company as put forward by
Shri Seervai is like this:
(i) Devagnanam kept Raeburn and Coats under the impression
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 on 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 letter 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 the
allotment of rights shares was held.
(iii) The Reserve Bank of India was not
informed of the proposal to issue rights shares to the existing shareholders
although it was the most obvious thing to do, in response to its letter dated
March 30, 1977, calling upon NIIL 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 NIIL that, if necessary, an application to that
effect may be made to the Controller 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: "Policy—Indianisation", in order
that the Holding Company should not know that the reduction of the 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 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 NIIL for his personal benefit, by ousting the
Holding Company from its control over the affairs of NIIL.
(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 inevitably 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 court 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 ss. 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 directors 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 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 s. 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 of 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 appointment as an
additional director was otherwise invalid. Counsel sums up his argument by
saying that the board of directors of NIIL 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 is guilty of any lapse. The reliefs
awarded by the appeal court, particularly the removal of 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 masterminded the issue of rights shares. He
occupied a pivotal position in NIIL, having been its director for over twenty
years and a managing director for over fifteen years, in which capacity he held
an undisputed sway over the affairs of NIIL. 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 nearly 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 between Coats and Devagnanam, NEWEY preferring to side with the
latter in a silent, unspoken banner. Eventually, after the filing of the
company petition, Coats bought over NEWEY's interest in NIIL sometime in July,
1977.
The picture which
Devagnanam has drawn of himself as a person deeply committed to Ketty, and as
having built up the business 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 matters secret from Coats till the shares had been sold, and till the
deed had been done.
There is another aspect of
Devagnanam's conduct to which reference must be made. The statement made by him
in para. 15 of his reply affidavit, denying that he was a non-resident, is not
entirely true because at least between August 26, 1974, and June 9, 1976, he
was a non-resident within the meaning of s. 2 (p)(i)(a) of the FERA. By his
letter dated August 26, 1974, to the Reserve Bank, he asked, though out of
abundant caution, for permission under s. 29(4) of the FERA to hold his shares
in NIIL. He referred in that letter to his contract with Newey and Taylor under
which he was to be a full-time managing director of that company for five years
from August 1, 1974, to July 31, 1979, and asked the Reserve Bank to determine his status. On September 3, 1975, he wrote to the
Reserve Bank contending that he was a "resident", referring this,
time not to his contract with Newey-Taylor but to the agreement between NIIL
and Newey Goodman Ltd., a company about to be formed, under which he was to be
on deputation with it as an employee of NIIL.
Devagnanam's letter dated
August 11, 1973, to Shread of Newey-Goodman, the gloss which he put on his
status as a resident in his letters to the Reserve Bank dated August 26, 1974,
and September 3, 1975, and the clever manner in which he had his status
determined as a resident, cast a cloud on his conduct and credibility. And
though, as contended by Shri Seervai, we do not propose to apply to
Devagnanam's affidavit-evidence the rule of "corroboration in material
particulars", which is generally applied in criminal law to accomplice
evidence, we shall have to submit Devagnanam's conduct to the closest scrutiny
and statements made by him, from time to time, to the most careful examination.
We shall have to look to something beyond his own assertion in order to accept
his claim or contention.
Shri Nariman attacked the
conduct of Coats almost as plausibly as Shri Seervai attacked that of
Devagnanam, though in terms of a saying in a local language we may say that
"a brick is softer than a stone", Coats being the brick. Coats, as
will presently appear, are not to be outdone by Devagnanam in the matter of
lack of business ethics. But that is no wonder, because 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 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, Kingsley is to be asked to obtain
the government approved price but, of course, the
basis of our discussions has been that the actual payment will be higher than
this".
In the same letter,
Jackson, after warning that Coats/Needle Industries (U. K.) are "certainly
not going to relinquish control of Ketty without a major struggle",
proceeds to describe the helpless condition of NEWEY by saying that in the
financial position in which they found themselves, they were "in no state
to do battle with this particular giant". Leaving aside the determination
of Coats to engage in a major struggle with NIIL's board of directors, Jackson's
letter leaves no doubt that Coats were willing to be a party to the arrangement
whereby the shares of Devagnanam and NEWEY would be sold to an "Indian
gentleman", under which the actual payment would be higher than the
Government approved price ascertained by Kingsley, the secretary of NIIL. This
is doubtful ethics which justifies Shri Nariman's argument that he who comes
into equity must come with clean hands; if he does not, he cannot ask for
relief on the ground that the other man's hands are unclean. The "Notes on
further Indianization" made by Devagnanam on April 29, 1975, at a time
when the relations between the parties were not under a strain, show that N. T.
Sanders who was nominated by the Holding Company as a director of NIIL was "aware
of an inquiry from a Mr. Khaitan". This shows that Devagnanam was not
trying to dispose of his shares secretly to Khaitan and Coats were aware of
that move.
In para. 20 of his reply
affidavit, Alan Mackrael says that none of the proposals put forward by the
Holding Company for achieving Indianization to comply with the requirements of
the FERA would have given the control of NIIL to the Holding Company. This is
falsified by Raeburn's letter dated October 25, 1976, to Devagnanam, in which
he says that the idea of an outside independent party holding 15% of the share
capital of NIIL was raised, but this did not appear to be acceptable to Coats
since "they want to achieve not only that the present Indian shareholders
hold a minority but that they (Coats) hold and influence a substantial block,
thereby hoping to influence NEWEY, to their views". Thus, there is a wide
difference between what Coats practised earlier and pleaded later. Towards the
end of para. 21, Mackrael asserts that the shareholders 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 N.I.I.L. has been built up by the efforts of the present Indian
shareholders".
In para. 5 of the
aforesaid; letter, Raeburn clarifies the attitude of NEWEY by saying that if
Coats were unable to agree to the arrangement suggested by NEWEY, then, NEWEY
will be compelled to notify to those concerned in India that they can no longer
be parties to the power-of-attorney granted by the Holding Company to Mackrael
or to any other proceedings in the Indian courts. In spite of this letter of
Raeburn (dated June 8, 1977), Mackrael had the temerity in his reply affidavit
dated July 8, 1977, to say that Coats and NEWEY were unanimous in the
prosecution of the proceedings consequent upon the filing of the company
petition. There was no agreement between Coats and NEWEY either in regard to
Indianisation of NIIL or in regard to the legal proceedings instituted to challenge
the issue of rights shares.
There are many other
contradictions on material points between the actual state of affairs and what
Coats represented them to be, but we consider it unnecessary to cover the whole
of that field. We will refer to one of these only, in order to show how
difficult it is to choose between Coats and Devagnanam. In para. 19 of the
company petition, which is sworn to by Mackrael, it is stated that Devagnanam
was in U.K. some time towards the end of March, 1977, and that he held several
discussions with the representatives of the Holding Company. In para 40 of his
reply affidavit, Mackrael says that as to the contents of para. 19 of the
company petition, he himself was not present at such meeting, since it was a
meeting between Devagnanam and the officials of NEWEY for the purpose of
discussing matters concerning NEWEY's Far-Eastern interests. The verification
clause of Mackrael's affidavit in support of the company petition shows that
the contents of para. 19 are based on information which he believed to be true.
A clearer contradiction between the parent petition and the reply affidavit is
difficult to imagine. It would appear that it was not until quite late that
Coats realised that they had to plead all ignorance of the discussions which
were held in U.K. towards the end of March, 1977,
between Devagnanam and the representatives of the Holding Company.
We will now shift our
attention to another scene in order to show how unethical the Coats are. Coats'
subsidiary called the 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 had to give a notice to Coats Patons, Hong
Kong, that the latter had registered the "Pony" trade-mark in Hong
Kong with the full knowledge that NIIL was the legal owner of that trademark
and threatening legal action. As a result of that notice, the Indian company's
trade-mark "Pony" which was registered by Coats Patons in Hong Kong
as their own trade-mark, was assigned to the Indian company on December 21,
1978, for a nominal sum of 10 dollars. Items 7 and 8 of the minutes dated March
28, 1979, of the meeting of the interim board of directors of NIIL refer to the
registration in Hong Kong by Coats Patons of the Indian trade-mark of NIIL and
the subsequent assignment thereof to NIIL when legal action was threatened.
Harry Bridges, who was appointed as a temporary managing director by the High
Court, has stated in his counter-affidavit dated March 27, 1980, that the
application for registration of the "Pony" trade-mark was made in
Hong Kong and other places in order to protect that trade-mark from its
improper use by other traders. This is a lame explanation of an act of near
piracy. Were this explanation true, the application for registration of the
trade-mark would have mentioned that it was being filed on behalf of NIIL, and
that "Pony" was in fact the trade-mark of NIIL. It is quite amazing
that anyone should claim that the registration of the trade-mark was being
sought as a protective measure when a battle royal was raging between the
Holding Company and NIIL and after the trial court had delivered its judgment. We may mention that by a letter dated June 15,
1977, Mackrael had informed Devagnanam that he was removed from the board of
directors of the Holding Company and M.D.P. Whiteford was appointed in the
vacancy. The fact that Needle Industries, U.K., had surreptitiously made an
application for the registration of NIIL's trade-mark "Pony" came to
light fortuitously in January, 1979, when NIIL applied for the registration of
the "Pony" trade-mark in Thailand and Japan. NIIL's trade-mark agents
there found, on inspection of the registers, that certain applications made by
Needle Industries, U.K., claiming the same mark as their own, were pending
consideration.
The decision, in appeal, of
the High Court appointing Harry Bridges as a managing director for 4 months was
pronounced on October 26, 1978. As a managing director appointed by the court, Bridges
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 summary, 1978, (4) cash forecast for 1978-79, (5)
detailed project report with cash flow forecast, (6) details of project
investment, and (7) note on activity up to October, 1978, and one or two other
documents. These were eventually returned by the Holding Company's advocate,
Shri Raghavan. When NIIL wrote on November 21, 1978, to Shri Raghavan asking
him to call upon Bridges to confirm that he had not retained copies of any of
the documents which he had removed from Ketty, Bridges replied by his letter
dated November 29, 1978, that he had taken copies of such documents which he considered
relevant and that he proposed to retain such copies since "as director of
the company, I am entitled to peruse and take copies of whatever records I
choose". This is a wee bit high and mighty. The design drawing is not the
drawing of a bungalow (with a swimming pool)
which was being built for Devagnanam but it is a "ring spring fastener
tool design". The other documents which Bridges had taken away and of
which he got copies made in assertion of his directorial right, contain
important matters like details of production, sales and exports of NIIL's
products, orders outstanding and sales, the proposed additional turnover and
the working capital requirements, etc. The fact of Harry Bridge's taking away
these documents and making copies thereof for his own use leaves not the
slightest doubt that the motivation of Coats at all times was to advance their
own world interests at the expense of NIIL. In the background of such conduct,
it becomes difficult to appreciate the Holding Company's contention, so strongly
pressed upon us, that Coats, NEWEY and Devagnanam being in the position of
partners, the greatest good faith and probity were expected to be displayed by
them. The contention, as a bald proposition of law, is sound. The snag is: who
should harp upon it? Not Devagnanam, we agree. But, not Coats either, we think.
We have said, while
discussing the conduct of Devagnanam, that it would be difficult to accept his
word unless there is support forthcoming to it from other circumstances on the
record. We feel the same about Coats. It would be equally unsafe to accept
their word unless it finds support from the other facts and circumstances on
the record of the case. It is true that in saying this, we have partly taken
into account facts which came into existence after the company 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 s. 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 s.
29(2)(a) read with s. 29(2)(c) of the FERA to carry on its activities in India
subject to the conditions enumerated in para. 2 of the letter. One of the
conditions mentioned in the aforesaid paragraph was that the non-resident
interest in the equity capital must be reduced to a level not exceeding 40%,
within a period of one year from the date of receipt of the letter. The Reserve
Bank asked NIIL to submit a scheme within a period of three months, showing how
it proposed to achieve the required reduction in the non-resident interest;
"(a) whether by disinvestment by non-resident shareholders, or (b) whether
by issue of additional equity capital to Indian residents to the extent
necessary to finance any scheme of expansion/diversification, or (c) by
both". Kingsley wrote a letter to Mackrael on November 19, 1975, enclosing
therewith a copy of the letter of the Reserve Bank dated November 5. On
February 4, 1976, Kingsley wrote to the Reserve Bank that NIIL was prepared to
agree to reduce the non-resident interest in the equity capital to a level not
exceeding 40% and that the company was proposing to bring this about by
disinvestment though, depending upon future developments, the company reserved
its right to reduce the nonresident interest by issue of additional equity
capital to Indian shareholders. Kingsley requested the bank to extend the
stipulated time of one year in case NIIL was not able to comply with the bank's
directive by reason of circumstances beyond its control. A copy of this letter
dated February 4, 1976, was sent by Kingsley to Whitehouse, the secretary of
the Holding Company. It is significant that there was no response as such to
this communication, from the Holding Company. On May 11, 1976, the Reserve Bank
of India sent a letter to NIIL granting permission to it under the FERA to
carry on its business on certainconditions, one of them being that the
non-resident interest in the equity capital had to be reduced to a level not
exceeding 40% within a period of one year from the date of receipt of the
letter. The Reserve Bank stated in the aforesaid letter that until such time as
the non-resident interest was not reduced to 40%, the manufacturing activity of
the company shall not exceed such capacity as was validly approved or
recognised by the appropriate authority on December 31, 1973, and that the
company shall not expand its manufacturing activities beyond the level so
approved or recognised. It is clear from this 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 s. 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 2˝ 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
discretion, to extending the time limit fixed by them, as and when necessary.
But an elementary sense of business prudence would dictate that the time
schedule fixed by the Reserve Bank had to be complied with. The firm tone of
the Reserve Bank's letter conveyed that it would not be easy to obtain an
extension of time for complying with its directive, while the stringent
conditions imposed by it, particularly in regard to future developmental
activities, dictated an early compliance with the directive.
Kingsley sent a letter to
the Reserve Bank on May 18, 1976, confirming the acceptance of the various
conditions under which permission was granted to NIIL to carry on its business.
Kingsley pointed out a difficulty in implementing one of the conditions
regarding the sale of petroleum products, but the Reserve Bank by its letter
dated May 29, 1976, informed him that after a careful consideration of the
request, the bank regretted its inability to enhance the ceiling on the
turnover from the company's trading activity, as stipulated in the letter dated
May 11, 1976.
In the meeting of the board
held on October 1, 1976, Devagnanam's appointment as managing director was
renewed for a further period of five years. Raeburn, Chairman of NEWEY, who was
looking after the affairs of the Holding Company, wrote to Devagnanam on
October 4, 1976, complaining that it was necessary that the Holding Company
should be kept informed in ample time of the board's meetings on important
organisational matters.
Raeburn and Mackrael came
to India to discuss the question of dilution of the non-resident holding in
NIIL. A meeting was held at Ketty on October 20 and 21, 1976, in which the U.K.
shareholders were represented by Mackrael and Raeburn and the Indian
shareholders by Devagnanam and Kingsley. Silverston took part in the meeting as
an adviser to the Indian shareholders. Martin Henry, the managing director of
Madura Coats which is an Indian company in which the Needle Industries (U.K.)
and Coats have substantial interest, attended the meeting and took part in the
discussions. A note of the discussions which took place at Ketty on October 20
and 21 was prepared by Raeburn and forwarded along with a letter dated November
10, 1976, to Devagnanam, with copies to Mackrael, Newey, Jackson and
Whitehouse. Paragraph 2 of this note, which is important, says:
"It was agreed that Indianization
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 Indian shareholders coming to hold 60%, some safe
guards were suggested which, amongst others, were: (i) the articles of the
company could be altered only by a special resolution which requires a 75%
majority of the members voting in person or by proxy. Thus, either group of the
shareholders could prevent the sale of shares to any one not approved; (ii) the
board could be reconstructed as mentioned in para. 4.3 of the note to give the
U.K. shareholders sufficient safeguards and hand in the management of the
Indian company.
(3) The preferred method of transferring 20% of the equity to
Indian shareholders was thought to be by sale by U.K. members of the
appropriate number of shares at the price to be determined by the Government
and the advice to be taken from Price Waterhouse in this regard. As an
alternative it was suggested that a rights issue, with the Indian share holders
taking up the U.K. members' rights would also be considered, provided it was
demonstrated by Ketty that there was a viable development plan requiring funds
that the expected NIIL cash flow could not meet. The value of the U.K. equity
interest thus transferred was not to be less favourable than by a direct sale
of shares.
(4) Approval was given in principle to the renewal of the
contract of Devagnanam as managing director of NIIL. Devagnanam agreed to
devote adequate time to the affairs of Ketty and was authorised to continue to
supervise the NEWEY affairs in Hong Kong and Malacca.
At the resumed discussion
on October 21, 1976, both sides stuck to their stand. Devagnanam was insistent
that he will "not accept on behalf of the Indian shareholders anything
less than the full entitlement of 60% of the shares", while Mackrael,
equally insistent, "could not accept on behalf of NI/Coats that the full
60% be held by the present Indian shareholders, even with the safeguards and assurances
discussed previously".
The Ketty meeting thus
ended in stalemate, both sides insisting on what they considered to be their
right and entitlement. Raeburn attempted to play the role of a mediator but
failed. In this situation, the parties decided to give further consideration to
the matter and to adhere to the following time-table:
"Mid-December
TAD (Devagnanam) to submit
to the U.K. shareholders the decision reached by the Indian shareholders both
as regards the 60% and the case, if any, for a rights 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 of NIIL were to
be valued at Rs. 190 per share.
Devagnanam wrote a letter
dated December 11, 1976, to Raeburn, informing him that they had just closed
the board's meeting in which the principal subject of discussion was
"Indianization". Devagnanam expressed resentment of himself and his
colleagues that after they had faithfully served the Holding Company for almost
the whole of their working lives, the Holding Company should be unwilling to
accept them as partners, especially when they
were legally entitled to be so considered. Devag-nanam made it clear in this
letter that any attempt by Coats to retain an indirect control in the
management of NIIL will not be acceptable to the Indian shareholders.
Then comes the important
letter of December 14, 1976, which was written by Devagnanam to Raeburn.
Devagnanam informed Raeburn by that letter that he had further discussions with
his colleagues and was able to persuade them to agree to a kind of package
deal. The terms of the deal so suggested were: "(1) Indianization should
take place with the existing Indian shareholders acquiring 60% of the stock; (2)
Mackrael and Raeburn should be taken on NIIL's board as directors, but in no
event Martin Henry who was connected with Madura Coats which had a powerful
plan of development of Prym technology; (3) the Indian shareholders were
prepared to take B. T. Lee, a senior executive of Needle' Industries/ Coats,
Studley, as a permanent wholetime director of NIIL to be put specifically in
charge of exports". Some other suggestions were made by Devagnanam to show
the bona fides of the Indian shareholders and to alleviate the apprehensions in
the minds of the U.K. shareholders. Devagnanam asked Raeburn to convey his
reactions in the matter. This letter has been gravely commented upon by the
Holding Company on the ground that it did not comtemplate the issue of rights
shares. We are unable to see the validity of this criticism. There is not the
slightest doubt that the Indian shareholders were insisting all along that they
should become the owners of 60% of the equity capital of NIIL. A simple method
of bringing this about was thetransfer by the Holding Company of 20% of its
shareholding to the existing Indian shareholders. It was only when this plain
method of bringing about a reduction in the equity holding failed and the
deadline fixed by the Reserve Bank was drawing nearer, 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 letter, Raeburn said:
"We have now put our
views quite clearly to Mr. Mackrael and we are awaiting the reaction of Needle
Industries and Coats. Therefore, I am hoping, but I cannot be sure of this, to
be able to let you know fairly soon what the formal decision of the U.K.
shareholders is".
It needs to be emphasised,
especially since its importance was not fully appreciated by the appellate
bench of the High Court, that the Indian point of view was communicated with
the greatest clarity to Raeburn in Devagnanam's letter dated December 14, 1976,
which was within the time schedule which was agreed to be adhered to in the
Ketty meeting. The views of the U.K. shareholders were most certainly not
communicated to the Indian shareholders by the middle of January, 1977, as was
clearly agreed upon in the Ketty meeting. In fact, they were never communicated.
On January 20, 1977, the
Reserve Bank sent a reminder to NIIL. After referring to the letter of May 11,
1976, the Reserve Bank asked NIIL to submit at an early date the progress
report regarding dilution of the non-resident interest. In reply, a letter dated
February 21, 1977, was sent by NIIL to the bank, stating:
"We confirm that we
are following up the matter regarding dilution of non-resident interest and we
confirm our commitment to achieve the desired Indianisation by the stipulated
date, i. e., 17th May, 1977".
It is very important to
note that a copy of this letter was forwarded both to Whitehouse and Sanders.
They must at least be assumed to know that not only was Indianisation to be
achieved by May 17, 1977, but that NIIL had committed itself to do so by that
date.
It is contended by Shri
Seervai that the negotiations with Coats had in fact not come to an end and
that Coats were never told that the compromise talks will be regarded as having
failed. It is urged that Coats were all along labouring under the impression,
and rightly, that the compromise proposals which were discussed with Raeburn in
the meeting of March 29-31, 1977 in U.K., would be placed by Devagnanam before
the Indian shareholders, and the U.K. shareholders apprised whether or not the
proposals were acceptable.
Shri Seervai relies
strongly on a letter dated March 9, 1977, written by Raeburn to Devagnanam.
After saying that on the Friday preceding the 9th March, he had discussions with
Mackrael and three high-ranking personnel 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 board of directors was to consist of representatives of
the shareholders appointed by them thus:
"Existing Indian
shareholders 3, New independent Indian shareholders 1, existing U.K.
shareholders 2, and an independent Indian Chairman acceptable to all
parties".
It is contended by Shri
Seervai that these proposals are crucial for more than one reason, since, in
the first place the proposal to increase the holding of the existing Indian
shareholders to 49% and the offer of 11% to new Indian independent
institutional shareholders was inconsistent with the charge that Coats wanted
to retain control over NIIL, directly or indirectly. The second reason, why it
is said that the proposal is crucial is that Raeburn's letter of March 9, must
have been received by Devagnanam before March 14 since it was replied to on the
14th. Therefore, contends Shri Seervai, the negotiations between the parties
were still not at an end. Counsel says that it was open to Devagnanam to refuse
to negotiate on the terms suggested and insist that the Indian shareholders
must have 60% of the shares. Instead of conveying his reactions to the proposal
Devagnanam, it is contended, went to the United Kingdom to discuss the
question. The minutes of the discussions which took place in U.K., Mackrael and
Sanders not taking any part therein, show that NEWEY continued to plead that
the Indian shareholders and Coats should consider the compromise formula and
that Devagnanam undertook to put to the Indian shareholders further proposals
for compromise and to consider what other proposals or safeguards they might
suggest. Reliance is also placed by counsel on a letter which Devagnanam wrote
to Raeburn on April 5, in support of the submission that the negotiations were
still not at an end. The last but one para of that letter reads thus:
"As undertaken, I
shall place the compromise formula, very kindly suggested by you, before my
colleagues later today. We shall discuss it fully at the board meeting tomorrow
and I shall communicate the outcome to you shortly thereafter".
We are unable to agree that
the proposal annexed to Raeburn's letter of March 9, 1977, was either a
proposal by or on behalf of Coats or one made with their knowledge and
approval. Were it so, it is difficult to understand how Raeburn could write to
Mackrael on June 8, 1977, that Coats were still insistent on the entire 20% of
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 proposals by or on behalf of Coats which
remained outstanding, to be discussed by the Indian shareholders. To repeat,
Devagnanam declared his hand in his letter of December 14, 1976, by reiterating
beyond any manner of doubt, that nothing less than 60% share in the equity
capital of NIIL would be acceptable to the Indian shareholders. Coats never
replied to that letter nor indeed did they convey their reaction to it in any
other form or manner at any time. In fact, it would be more true to say that
Coats themselves treated the matter as at an end, since, they were wholly
opposed to the stand of the Indian shareholders that they (the Indian share
holders) must have 60% share in equity capital of NIIL. What happened in the
meeting of April 6, 1977, has to be approached in the light of the finding that
the negotiations between the parties had fallen through, that Coats had refused
to declare their hand and that all that could be inferred from their attitude
with a fair amount of certainty was that they were unwilling to disinvest.
On March 18, 1977, NIIL's
secretary gave a notice of the board meeting for April 6, 1977. The notice was
admittedly received by Sanders in U.K., well in time but he did not attend the
meeting. The explanation for his failure to attend the meeting is said to be
that the item on the agenda of the meeting, "policy—Indianisation"
was vague and did not convey that any matter of importance was going to be
discussed in the meeting, like for example, the issue of rights shares. We find
it quite difficult to accept this explanation. Just as a notice to quit in
landlord-tenant matters cannot be allowed to be split on a straw, notices of
board meetings of companies have to be construed reasonably, by considering
what they mean to those to whom they are given. To a stranger,
"policy—Indianisation" may not convey much but to Sanders and the
U.K. shareholders it would speak volumes. By the time that Sanders received the
notice, the warrings camps were clearly drawn on the two sides of the
battle-line, the Indian group insisting that they will have nothing less than a
60% share in the equity capital of NIIL and the U.K. shareholders insisting
with equal determination that they will not allow the existing Indian
shareholders to have anything more than 49%. In pursuance of a resolution
passed by the board, a letter had already been written to the Reserve 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 despatch 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 capital of NIIL while
"COATS were adamantly opposed" to that view. It is surprising that
during the time that Devagnanam was in Birmingham, Sanders did not meet him to
seek an explanation of what the particular item on the agenda of the meeting of
April 6 meant. Sanders had received the notice of March 18, before the
Birmingham discussions took place, and significantly, he has made no affi-davit
at all on the question as to why he did not meet Devagnanam in Birmingham, or
why he did not attend the meeting of April 6, or what the particular item on
the agenda meant to him.
The second important event
which happened after the notice of March 18, was issued was that on April 4,
1977, NIIL received a letter dated March 30, 1977, from the Reserve Bank. The
letter which was in the nature of a stern reminder left no option to NIIL's
board except to honour the commitment which it had made to the Reserve Bank. By
the letter the Reserve Bank warned NIIL: "Please note that if you fail to
comply with our directive regarding dilution of foreign equity within the
stipulated period, we shall be constrained to view the matter seriously".
We do not see any substance
in the contention of the Holding Company that despite the commitment which NIIL
had made to the Reserve Bank, the long time which had elapsed in the meanwhile
and the virtual freezing of its developmental activities as of December 31,
1973, NIIL should have asked for an extention of time from the Reserve Bank. In
the first place, it could not be assumed or predicated that the bank would
grant extension; and, secondly, it was not in the interest of NIIL to ask for
such an extension.
The board meeting was held
as scheduled on April 6, 1977. The minutes of the meeting show that two
directors, Sanders and M. S. P. Rajes, asked for leave of absence which was granted
to them. Sanders, as representing the U.K. shareholders on NIIL's board, did
not make a request for the adjournment of the meeting on the ground that
negotiations for a compromise had not yet come to an end or that the Indian
shareholders had not yet conveyed their response to the "Coats' compromise
formula". Nor did he communicate to the Board his views on "policy—
Indianisation", whatever it may have meant to him. Seven directors were
present in the meeting, with Devagnanam in the chair at the commencement of the
meeting. C. Doraiswamy, a solicitor 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 art. 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 Silverston was a
"disinterested director"; and (3) Whether Silverston's appointment
was otherwise invalid, since there was no item on the agenda of the meeting for
the appointment of an additional director. If Silverston's appointment as an
additional director is bad, either because he was not a distinterested director
or because there was no item on the agenda under which his appointment could be
made, the resolution for the issue of rights shares which was passed in the
board's, meeting of April 6 must fall because then, the necessary quorum of two
disinterested directors would be lacking.
On the first of these three
questions, it is contended by Shri Seervai that notwithstanding that the issue
of shares is intra vires the directors, the directors' power is a fiduciary
power, and although an exercise of such power may be formally valid, it may be
attacked on the ground that it was not exercised for the purpose for which it
was granted. It is urged that the issue of shares by the directors which is
directed to affect the right of the majority of the shareholders or to defeat
that majority and convert it into a minority is unconstitutional, void and in
breach of the fiduciary duty of directors, though in certain situations it may
be ratified by the company in the general meeting. Any reference by the company
to a general meeting in the present case, it is said, would have been futile
since, without the impugned issue of rights shares, the majority was against
the issue. It was finally argued that good faith and honest belief that in fact
the course proposed by the directors was for the benefit of the shareholders or
was bona fide believed to be for their benefit is irrelevant because, it is for
the majority of the shareholders to decide as to what is for their benefit, so
long as the majority does not act oppressively or illegally. Counsel relies in
support of these and allied contentions on the decision of the Privy Council in
Howard Smith Ltd. [1974] AC 821 (PC) and of the English courts in Fraser [1864]
71 ER 361, Punt [1903] 2 Ch 506 (Ch D), Piercy [1920] 1 Ch 77 (Ch D) and Hogg
[l967] 1 Ch 254; 37 Comp Cas 157 (Ch D).
In Punt v. Symons [1903] 2
Ch 506 (Ch D), which applied the principle of Fraser v. Whalley, it was held that:
"Where shares had been
issued by the directors, not for the general benefit of the company, but for
the purpose of controlling 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 issuing shares merely for the purpose of maintaining their control or the
control of themselves and their friends over the affairs 6f the company, or
merely for the purpose of defeating the wishes of the existing majority of
shareholders".
The fact that by the issue
of shares the directors succeed, also or incidentally, in maintaining their
control over the company or in newly acquiring it, does not amount to an abuse
of their fiduciary power. What is considered objectionable is the use of such
powers merely for an extraneous purpose like maintenance or acquisition of
control over the affairs of the company.
In Hogg v. Cramphorn Ltd.
[1967] 37 Comp Cas 157 (Ch D), it was held that if the power to issue shares
was exercised from an improper motive, the issue was liable to be set aside and
it was immaterial that the issue was made in a bona fide belief that it was in
the interest of the company. Buckley J. reiterated the principle in Punt [1903]
2 Ch 506 (Ch D) and in Piercy [1920] 1 Ch 77 (Ch D) and observed (p. 167 of 37
Comp Cas):
"Unless a majority in
a company is acting oppressively towards the minority, this court should not
and will not itself interfere with the exercise by the majority of its
constitutional rights or embark upon an inquiry into the respective merits of
the views held or policies favoured by the majority and the minority. Nor will
this court permit directors to exercise powers, which have been delegated to
them by the company in circumstances which put the directors in a fiduciary
position when exercising those powers, in such a way as to interfere with the
exercise by the majority of its constitutional rights; and in a case of this
kind also, in my judgment, the court should
not investigate the rival merits of the views or policies of the parties".
(p. 268)
Applying this principle, it
seems to as difficult to hold that by the issue of rights shares the directors
of NIIL interfered in any manner with the legal rights of the majority. The
majority had to disinvest or else to submit to the issue of rights shares in
order to comply with the statutory requirements of the 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 right to insist that the
directors shall not issue the rights shares. What the directors did was clearly
in the larger interests of the company and in obedience to their duty to comply
with the law of the land. The fact that while discharging that duty they incidentally
trenched upon the interests of the majority cannot invalidate their action. The
conversion of the existing majority into a minority was a consequence of what
the directors were obliged lawfully to do. Such conversion was not the motive
force of their action.
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 given to enable capital to be raised when
required for the purposes of the company, there may be occasions when the
directors may fairly and properly issue shares for other reasons, so rang as
those reasons relate to a purpose of benefiting the company as a whole, as
distinguished from a purpose, for example, of maintaining control of the
company in the hands of the directors themselves or their friends. An inquiry
as to whether additional capital was presently required is often most relevant
to the ultimate question upon which the validity or the invalidity of the issue
depends; but that ultimate question must always be whether in truth the issue
was made honestly in the interests of the company".
We agree with the principle
so stated by the Australian High Court and, in our opinion, it applies with
great force to the situation in the present case. In Teck Corporation [1972] 33
DLR (3d) 288, the court examined several decisions of the English courts and of
other courts, including the one in Hogg. [1967] 37 Comp Cas 157 (Ch D). The headnote of the last report (33 DLR (3d) 288) at page
289 reads thus:
"Where directors of a
company seek, by entering into an agreement to issue new shares, to prevent a
majority shareholder from exercising control of the company, they will not be
held to have failed in their fiduciary duty to the company if they act in good
faith in what they believe, on reasonable grounds, to be the interests of the
company. If the directors' primary purpose is to act in the interests of the
company, they are acting in good faith even though they also benefit as a
result".
In Howard Smith [1974] AC
821 (PC), no new principle was evolved by Lord Wilberforce who, distinguishing
the decisions in Teck Corporation [1972] 33 DLR (3rd) 288 and Harlowe's
Nominees (121 CLR 483) said (p. 837 of [1974] AC):
"By contrast to the
cases of Harlowe and Teck, the present case, on the evidence, does not, on the
findings of the trial judge, involve any consideration of management, within
the proper sphere of the directors. The purpose found by the judge is simply
and solely to dilute the majority voting power held by Ampol and Bulkships so
as to enable a then minority of shareholders to sell their shares more
advantageously. So far as authority goes, an issue of shares purely for the
purpose of creating voting power has repeatedly been condemned".
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 dispose
of shares at a given price is essentially an individual right to be exercised
on individual decision and on which a majority, in the absence of oppression or
similar impropriety, is entitled to prevail".
In our judgment, the
decision of the Privy Council in Howard Smith [1974] AC 821 (PC), instead of
helping the Holding Company, goes a long way in favour of the appellants. The
directors in the instant case did not exercise their fiduciary powers over the
shares merely or solely for the purpose of destroying an existing majority or
for creating a new majority which did not previously exist. The expressions
"merely", "purely", "simply" and
"solely" virtually lie strewn all over (p. 837 of the report in
Howard Smith). The directors here exercised their power for the purpose of
preventing the affairs of the company from being brought to a grinding halt, a
consummation devoutly wished for by Coats in the interest of their extensive
world-wide business.
In
Nanalal Zaver v. Bombay Life Assurance Co. Ltd. [1950] SCR 391; 20 Comp Cas 179, Das J., in his separate but concurring
judgment deduced the following principle on the basis of the English decisions
(p. 203 of 20 Comp Cas):
"It is well
established that directors of a company are in a fiduciary position vis-a-vis
the company and must exercise their power for the benefit of the company. If
the power to issue further shares is exercised by the directors not for the
benefit of the company but simply and solely for their personal aggrandisement
and to the detriment of the company, the court will interfere and prevent the
directors from doing so. The very basis of the court's interference in such a
case is the existence of the relationship of a trustee and of cestui que trust
as between the directors and the company". (pp. 419-420 of [1950] SCR)).
It is true that Das J. held
that the Singhanias were complete strangers to the company and, consequently,
the directors owed no duty, much less a fiduciary duty, to them. But we are
unable to agree with the contention that the observations extracted above from
the judgment of Das J. are obiter. The learned judge has set forth the
plaintiffs' contentions under three sub-heads at p. 415 of 1950 SCR. At the
bottom of p. 419, he finished the discussion of the 2nd sub-head and
said:
"This leads me to a
consideration of the third sub-head on the assumption that...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 effect
of the whole evidence is, that the defendants truly and reasonably believed at
the time that what they did was for the interest of the company, they are not
chargeable with dolus malus or breach of trust merely because in promoting the
interest of the company they were also promoting their own, or because they
afterwards sold shares at prices which gave them large profits' ".
Whether one looks at the
matter from the point of view expressed by this court in Nanalal Zaver [1950]
20 Comp Cas 179 (SC), or from the point of view expressed by the Privy Council
in Howard Smith [1974] AC 821, the test is the same, namely, whether the issue
of shares is simply or solely for the benefit of the directors. If the shares
are issued in the larger interest of the company, the decision to issue the
shares cannot be struck down on the ground that it has incidentally benefited
the directors in their capacity as shareholders. We must, therefore, reject
Shri Seervai's argument that, in the instant case, the board of directors
abused its fiduciary power in deciding upon the issue of rights shares.
The second of the three
questions arising out of the proceedings of the board's meeting dated April 6,
1977, concerns the validity of the appointment of Silverston as an additional
director. Under s. 287(2) of the Companies Act, 1956, the quorum for the said
meeting of the board of directors 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. (See Greymouth Point Elizabeth-Railway & Coal Co. Ltd.,
In re [1904] 1 Ch 32 (Ch D) and Palmer's Company Precedents, 17th Edn., p. 579, f.n. 3). The contention of the Holding
Company is that Silverston was a director "directly or indirectly
concerned or interested" in the arrangement or contract arising from the
resolutions to offer and allot rights shares and, consequently, the resolutions
were invalid: firstly, on the ground, that they were passed by a vote of an
interested director without which there would be no quorum and, secondly,
because, Silvers-ton's appointment as an additional director was for the
purpose of enabling the said resolution to be passed for the benefit of the
interested directors. Relying upon a decision of the Bombay High Court in
Firestone Tyre & Rubber
Co. v. Synthetics & Chemicals Ltd. [1971] 41 Comp Cas 377, Shri Seervai contends that s. 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 is also said that certain other aspects of
Silverston's conduct, including his attitude in the meeting of the 6th April,
show that he was an interested director.
We are unable to accept the
contention that Silverston is an "interested" director within the
meaning of s. 300 of the Companies Act. In the first place, 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
we suppose that legal advisers do not necessarily have a biassed attitude to
questions on which their advice is sought or tendered. The fact that Silverston
was received cordially in U.K. both by Raeburn and Mackrael when he went there
in January, 1977, shows that even after he had acted as an adviser to the
Indian shareholders it was not thought that he was in any sense biassed in
their favour. Silverston's alleged personal hostility to Coats cannot, within
the meaning of s. 300(1) of the Companies Act, make him a 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.
Section 300(1) disqualifies a director from taking part in the discussion of or
voting on any contract or arrangement entered into or to be entered into by or
on behalf of the company, if he is in any way concerned or interested in that
contract or arrangement. Under s. 299(1) of the Companies Act:
"Every director of a
company who is in any way, whether directly or indirectly, concerned or
interested in a contract or arrangement, or proposed contract or arrangement,
entered into or to be entered into, by or on behalf of the company, shall
disclose the nature of his concern or interest at a metting of the board of
directors".
The concern or interest of
the director which has to be disclosed at the board meeting must be in relation
to the contract or arrangement entered into or to be entered into by or on
behalf of the company. The interest or concern spoken of by ss. 299(1) and
300(1) cannot be a merely sentimental interest of 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 s. 300(1), an "interested" director.
Thus, howsoever, one may stretch the language of s. 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,
arising out of the proceedings of the meeting of 6th April, to the effect that
Silverston's appointment as an additional director was invalid since there was
no item on the agenda of the meeting for the appointment of an additional
director is equally without substance. Section 260 of the Companies Act
preserves the power of the board of directors to appoint additional directors
if such a power is conferred on the board by the articles of association of the
company. We are not concerned with the other conditions laid down in the
section, to which the appointment is subject. It is sufficient to state that
art. 97 of NIIL's articles of association confers the requisite power on the
Board to appoint additional directors.
We do not see how the
appointment of an additional director could have been foreseen before the 6th
April, on which date the meeting of the board was due to be held. The occasion
to appoint Silverston as an additional director arose when the board met on 6th
April, with Devagnanam in the chair. Sanders was absent and no communication
was received from or on behalf of the Holding Company that they had decided
finally not to disinvest. They always had the right to such a locus
poenitentiae. Were they to intimate that they were ready to disinvest, there
would have been no occasion to appoint an additional director. That occasion
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 then state of
facts, formed a part of the agenda. Silverston's appointment is, therefore, not
open to challenge on the ground of want of agenda on that subject.
It is necessary to clear a
misunderstanding in regard to the power of directors to issue shares. It is not
the law that the power to issue shares can be used only if there is need to
raise additional capital. It is true that the power to issue shares is given
primarily to enable capital to be raised when it is required for the purposes
of the company but that power is not conditioned by such need. That power can
be used for other reasons as, for example, to create a sufficient number of
shareholders to enable the company to exercise statutory powers [See Punt v.
Symons & 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 s
"...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 occasions when the
directors may fairly and properly issue shares for other reasons, so long as
those reasons relate to a purpose of benefiting the company as a whole, as
distinguished from a purpose, for example, of maintaining control of the
company in the hands of the directors themselves or their friends".
We have already expressed
our view that the rights shares were issued in the instant case in order to
comply with the legal requirements, which, apart
from being obligatory as the only viable course open to the directors, was for
the benefit of the company since, otherwise, its developmental activities would
have stood frozen as of December 31, 1973. The shares were not issued as a part
of a take-over war between the rival groups of shareholders.
The decision to issue
rights shares was assailed on the ground also that the company did not, as
required by the, Reserve Bank's letter dated May 11, 1975, submit any scheme
indicating whether the reduction in the non-resident interest was proposed to
be brought about by issue of additional equity capital to Indian residents to
the extent necessary to finance any scheme of expansion or diversification. It
is true that by the aforesaid letter, the Reserve Bank had asked NIIL to report
to it as to how the company proposed to reduce the non-resident interest:
whether by disinvestment by non-resident shareholders, or by issue of
additional equity capital to Indian residents to the extent necessary to
finance any scheme of expansion/diversification, or by both. We are, however,
unable to read the bank's letter as requiring or asking the company not to
issue the additional capital unless it was necessary to do so for financing a
scheme of expansion or diversification. The Reserve Bank could not have
intended to impose any such condition by way of a general direction in the face
of the legal position, which we have set out above, that the power of the
directors to issue shares is not conditioned by the need for additional
capital. We are not suggesting that the Reserve Bank, in the exercise of its
statutory functions, cannot ever impose such conditions as it deems
appropriate, subject to which alone a new issue may be made. But, neither the
wording of the bank's letter nor the true legal position justifies the stand of
the Holding Company. The minutes of the Ketty meeting of October 20-21, 1976,
saying that it was 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".
There is no reason to believe
that this statement does not accord with the economic realities of the
situation as assessed by the directors of the company.
Finally, it is also not
true to say, as a statement of law, that the 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. As observed
by Lord Davey in Hilder v. Dexter [1902] AC 474, 480 (HL):
"I am not aware of any
law which obliges a company to issue its shares above par because they are
saleable at a premium in the market. It depends on the circumstances of each
case whether it will be prudent or even possible to do so, and it is a question
for the directors to decide".
What is necessary to bear
in mind is that such discretionary powers in company administration are in the
nature of fiduciary powers and must, for that reason, be exercised in good
faith. Mala fides vitiate the exercise of such discretion. We may mention that,
in the past, whenever the need for additional capital was felt, or for other
reasons, NIIL issued shares to its members at par.
We are, therefore, of the opinion
that Devagnanam and his group acted in the best interests of NIIL in the matter
of the issue of rights shares and, indeed, the board of directors followed in
the meeting of the 6th April a course which they had no option but to adopt and
in doing which, they were solely actuated by the consideration as to what 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, resolved upon the issue of rights shares were Silverston who, in our
opinion, was a disinterested director and Doraiswamy, who unquestionably was a
disinterested director. The latter has been referred to in the company
petition, Mackrael's reply affidavit and in the Holding Company's memorandum of
appeal in the High Court as "uninterested", "disinterested"
and "independent". At a crucial time, when Devagnanam was proposing
to dispose of his shares to Khaitan, Sanders asked for Doraiswamy's advice by
his letter dated August 6, 1975, in which he expressed "complete
confidence" 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 shareholders of
NIIL but the issue of rights shares to existing Indian shareholders only,
constitutes oppression of the Holding Company.
That takes us to the
significant, and if we may so call them, sordid happenings between April 6 and
May 2, 1977. Devagnanam wrote a letter to Raeburn on April 12, 1977, stating
that a copy of the Reserve Bank's letter dated March 30, 1977, was enclosed
therewith. It was in fact not enclosed. Pursuant to the decision taken in the
board's meeting of April 6, a letter of offer dated April 14 was prepared by
NIIL. Devagnanam's letter to Raeburn dated April 12, (without a copy of the
Reserve Bank's letter dated March 30) and the letter of offer dated April 14,
were received by Raeburn on May 2, 1977, in an envelope bearing the postal mark
of Madras dated April 27, 1977. The letter of offer which was posted to the
Holding Company also bore the postal mark of Madras dated April 27, 1977, and
that too was received in Birmingham on May 2, 1977. The letter of offer which
was posted to one of the Indian shareholders, Manoharan, who was siding with
Coats, was also posted in an envelope which bore the postal mark of Madras
dated April 27, 1977. On April 19, 1977, a notice of the board's meeting for
May 2, 1977, was prepared. One of the items of the agenda of the meeting was
stated in the notice as "policy—(a) Indianisation, (b) Allotment of
shares". The notice dated April 19, of the board's meeting for May 2, was
posted to Sanders in an envelope which bore the postal mark of Madras dated
April 27, 1977, and was received by him in Birmingham on May 2, 1977, after the
board's meeting fixed for that date had already taken place.
It puts a severe strain on
one's credulity to believe that the letters of offer dated April 14 to the
Holding Company, to Raeburn and to Manoharan were posted on the 14th itself but
that somehow they rotted in the post office
until the 27th, on which date they took off simultaneously for their respective
destinations. The affidavit of Selvaraj, NIIL's senior clerk in the despatch
department, and the relevant entry in the outward register are quite difficult
to accept on this point since they do not accord with the ordinary course of
human affairs. Not only the three letters of offer abovesaid, but even the
notice dated April 19, of the board meeting for May 2, was received by Sanders
at Birmingham in an envelope 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
Devagna-n'am'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. What is naively sought to be explained as a mere
coincidence reminds one of the "Brides in the Bath Tub" case: The
death of the first bride in the bath tub may pass off as an accident and of the
second as suicide but when, in identical circumstances, the third bride dies of
asphyxia in the bath tub, the conclusion becomes compelling, even applying the
rule of circumstantial evidence, that she died a homicidal death.
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 the allotment of
rights shares to the existing Indian shareholders.
We are, however, unable to
share the view expressed in the "12th conclusion" in the appellate
judgment of the High Court, that Devagnanam and "his colleagues in the
board of directors" arranged to ensure the late posting of the letters of
offer and the notice of the meeting. We do not
accept Shri Nariman's argument that Devagnanam must be exonerated from all
responsibility in. this behalf because he was away in Malacca from April 13 to
26. In the first place, to be in a place on two dates is not necessarily to be
there all along between those dates and, therefore, we cannot infer that
Devagnanam was in Malacca from 13th to 26th, since he was there on the 13th and
the 26th. Besides, it was easy for a man of Devagnanam's importance and ability
to pull the strings from a distance and his physical presence was not necessary
to achieve the desired result. That is how puppets are moved. But there is no
evidence, at least not enough, to justify the categorical finding recorded by
the appellate Bench of the High Court. The fact that Devagnanam stood to gain
by the machination is a relevant factor to be taken into account but even that
is not the whole truth: NIIL, not Devagnanam was the real beneficiary, a thesis
which we have expounded over the last many pages. And the involvement of the other
directors by calling them Devagnanam's colleagues is less than just to them.
There is not a shred of evidence to justify the grave charge 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 what was to his advantage to do. It may be recalled that in his
letter dated April 12 to Raeburn, Devagnanam had stated that he was enclosing
therewith a copy of the Reserve Bank's letter dated March 30, 1977, but that
copy was not enclosed. Nothing was to be gained by suppressing the Reserve
Bank's letter from Raeburn who was always sympathetic to the Indian
shareholders. If anything, there was something to gain by apprising Raeburn of
the urgency of the matter in view of the Reserve Bank's letter. The strongest
point in favour of the Indian shareholders was the last para. of the Reserve Bank's letter which they would
have liked the U.K. shareholders to know. Raeburn's response of 2nd May to
Devagnanam's letter of 12th April and the letter of offer was without the
knowledge of the Reserve Bank's letter of March 30. When the bank's letter was
sent to Raeburn along with Devagnanam's letter of May 11, Raeburn categorically
supported the stand of the Indian shareholders, as is clear from para. 4 of the
letter dated June 8, 1977, by Raeburn to Mackrael, a copy of which was sent by
Raeburn to Devagnanam along with his letter dated June 17, 1977.
The inferences arising from
the late posting of the letter of offer to the Holding Company as also of the
notice of meeting for May 2 to Sanders and the impact of those inferences on
the conduct and intentions of Devagnanam are one thing; we have already dealt
with that aspect of the matter. Their impact on the legality of the offer and
the validity of the meeting of May 2, is quite another matter, which we propose
now to examine. In doing this, we will keep out of consideration all questions
relating to the personal involvement of Devagnanam and his group in the delay
caused in sending the letters of offer and the notice of meeting for May 2.
First, as to the letter of
offer: The letter of offer dated April 14, 1977, sent to the Holding Company at
Birmingham, like all other letters of offer, mentions, inter alia, that it was
resolved in the meeting of April 6, to increase the issued capital of the
company from 32,000 shares of Rs. 100 each to 48,000 shares of Rs. 100 each by
issuing rights shares to the existing shareholders on the five conditions
mentioned in the letter. The second condition reads thus: "If the offer is
not accepted within 16 days from the date of offer, it shall be deemed to have
been declined by the 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 to the Indian shareholders, on the ground
that the Holding Company had not applied for the allotment of the shares due to
it. In these circumstances, it is quite clear that the rights shares offerred
to the Holding company could not have been allotted to any one 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 which could produce no tangible result. The matter would be
worse if April 27 and much worse if May 2 were to be taken as the starting
point for counting the period of 16 days. Except for circumstances hereinafter
appearing, the allotment to Indian shareholders of the rights shares which were
offered to the Holding Company would have been difficult to accept and act
upon.
The objection arising out
of the late posting of the notice dated April 19 for the meeting of 2nd May
goes to the very root of the matter. That notice is alleged to have been posted
to N. T. Sanders, Studley, Warwickshire, U.K., on April 22. But we have already
held that in view of the fact that the envelope in which the notice was sent
bears the postal mark of Madras dated April 27, 1977, this latter date must be
taken to be the date on which the notice was posted. The notice was received by
Sanders on May 2, on which date the Board's meeting for the allotment of rights
shares was due to be held and was, in fact, held. 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.
The next question, and a
very important one at that, on which there is a sharp controversy between the
parties, is as to what is the consequence of the finding, which we have recorded,
that the objection arising out of the late posting of the notice of the meeting
for 2nd May goes to the root of the matter. The answer to this question 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 ss. 43A and 81 of the Companies Act, 1956.
We have already reproduced
the relevant provisions of the FERA, namely, s. 2(p). (q) and (u); s. 19(1)(a),
(b) and (d); s. 29(1)(a);s. 29(2)(a), (b) and (c); and s. 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;."..
The other provisions are of
an ancillary and consequential nature, following upon the main provision
summarised above.
NIIL had applied for the
necessary permission, since the non-resident interest therein was more than 40%,
the Holding Company owning nearly 60% of its share capital. That permission was
accorded by the Reserve Bank on certain conditions which, inter alia,
stipulated that the reduction in the non-resident holding must be brought down
to 40% within one year of the receipt of its letter, that is, before May 17,
1977, and that until then, the manufacturing and business activities of the
company shall not be extended beyond the approved level as of December 31,
1973.
It is contended by Shri
Seervai that non-compliance with the condition regarding the dilution of
non-resident interest within the stipulated period could not have resulted in
the RBI directing NIIL to close down its business or not to carry on its
business. It is also argued that non-compliance with the conditions imposed for
permission to carry on its business would not have exposed the Indian directors
to any penalties or liabilities and that, in the absence of a power to revoke
the permission already granted (as in other sections like ss. 6 and 32), the
RBI had no power to revoke the permission granted to NIIL even if the
conditions subject to which the permission was granted were breached. According
to the counsel, closing down a business which the RBI had allowed to be
continued by granting permission would have such grave consequences—public and
private—that the power to direct the business to be discontinued was advisably
not conferred, even if the conditions are breached. Section 29(4)(c), it is
urged, which enables the RBI to direct non-residents to sell their shares or
cause them to be sold where an application under s. 29(4)(a), for permission to
continue to hold shares, was rejected, is the only power given to the Reserve
Bank where a condition imposed under s. 29(2) is breached.
We are unable to accept
these contentions. The Reserve Bank granted permission to NIIL to carry on its
business, "subject to the conditions" mentioned in the letter of May
11, 1976. It may be that each of those conditions
is not of the same rigour or importance as, e. g., the condition regarding the
submission of quarterly reports indicating the progress made in implementing
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 s. 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 cl. (c) of s. 29(2).
Section 29(4)(c) provides for a situation in which an application for holding
shares in a company is not made or is rejected. The sanction for the
enforcement of a conditional permission to carry on business, where the
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. This
involves no element of surprise or of unjustness because permission is granted,
as was done here, only after the applicant agrees to perform the conditions
within the stipulated period. When NIIL wrote to the bank on February 4, 1976,
binding itself to the performance of certain conditions, it could not be heard
to say that the permission will remain in force despite its non-performance of
the conditions. Having regard to the provisions of s. 29 read with ss. 49,
56(1) and (3) and s. 68 of the FERA, the continuance of business after May 17,
1977, by NIIL would have been illegal, unless the condition of dilution of
nonresident equity was duly complied with. It is needless, once again, to dwell
upon the impracticability of NIIL applying for extension of the period of one
year allowed to it by the bank. Coats could be optimistic about such an
extension being granted especially since thereby they could postpone the evil
day. For NIIL, the wise thing to do, and the only course open to it, was to
comply with the obligation imposed upon it by law, without delay or demur.
It seems to us quite clear
that by reason of the provisions of s. 29(1) and (2) of the FERA and the
conditional permission granted by the RBI by its letter dated May 11, 1976, the
offer of rights shares made by NIIL to the
Holding Company could not possibly have been accepted by it. The object of s.
29, inter alia, is to ensure that a company (other than a banking company) in
which the non-resident interest is more than 40% must reduce it to a level not
exceeding 40%. The RBI allowed NIIL to carry on its business subject to the
express condition that it shall reduce its nonresident holding to a level not
exceeding 40%. The offer of rights shares was made to the existing
shareholders, including the Holding Company, in proportion to the shares held
by them. Since the issued capital of the company which consisted of 32,000
shares was increased by the issue of 16,000 rights shares, the Holding Company
which held 18,990 shares, was offered 9,495 shares. 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
Holding Company without first obtaining the RBI's approval under s. 19 of the
FERA. Counsel contends that under s. 19(1)(b), notwithstanding anything
contained in s. 81 of the Companies Act, no person can, except with the general
or special permission of the Reserve Bank, create "any interest in a
security" in favour of a person resident outside India. The word
"security" is defined by s. 2(u) to mean shares, stocks, bonds, etc.
We are unable to appreciate how an offer of shares by itself creates any
interest in the shares in favour of the person to whom the offer is made. An
offer of shares undoubtedly creates "fresh rights" as said by this
court in Mathalone v. Bombay Life Assurance Co. Ltd. [1954] SCR 117; 24 Comp
Cas 1, 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.
But though it could not
have been possible for the Holding Company to accept the offer of rights shares
made to it, the question still remains whether
it had the right to renounce the offer in favour of any resident Indian person
or company of its choice, be it an existing shareholder like Manoharan or an
outsider like Madura Coats. The answer to this question depends on the effect of
ss. 43A and 81 of the Companies Act, 1956.
We will first notice the
relevant parts of ss. 3, 43A and 81 of the Companies Act. Section 3(1)(iii)
defines a "private company" thus:
" 'Private company '
means a company which, by its articles,—
(a) restricts
the right to transfer its shares, if any;
(b) limits
the number of its members to fifty...and
(c) prohibits any invitation to the public to
subscribe for any shares in, or debentures of, the company".
Clause (iv) of s. 3(1)
defines a "public company" to mean a company which is not a private
company.
Section 43A of the
Companies Act, which was inserted by Act 65 of 1960, reads thus:
"43A.
(1) Save as otherwise provided in this
section, where not less than twenty-five per cent. of the paid-up share capital
of a private company having a share capital, is held by one or more bodies
corporate the private company shall......become by virtue of this section a
public company:
Provided that even after
the private company has so become a public company, its articles of association
may include provisions 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 holders of the equity shares of the
company, in proportion, as nearly as
circumstances admit, to the capital paid up on those shares at that date;
(b) the offer aforesaid shall be made by notice
specifying the number of shares offered and limiting a 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;
(c) unless the articles of the company 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 other person; and the notice referred to in clause (b) shall contain a
statement of this right;
(d) after the expiry of the time specified in
the notice aforesaid or on receipt of earlier intimation from the person to
whom such notice is given that he declines to accept the shares offered, the
board of directors may dispose of them in such manner as they think most
beneficial to the company.......
(1A) Notwithstanding
anything contained in sub-section (1), the further shares aforesaid may be
offered to any persons (whether or not those persons include the persons
referred to in clause (a) of sub-section (1)) in any manner whatsoever—
(a) if a special resolution to that effect is
passed by the company in general meeting, or
(b) where no such special resolution is passed
if the votes cast..... in favour of the proposal.........exceed the votes, if
any, cast against the proposal.........and the Central Government is satisfied
on an application made by the board of directors in this behalf, that the
proposal is most beneficial to the company. ......
(3) Nothing in this section shall apply—
(a) to
a private company....."..
While interpreting these
and allied provisions of the Companies Act, it would be necessary to have
regard to the relevant articles of association of NIIL, especially since s.
81(1)(c) of that Act, which is extracted above, is subject to the
qualification: "Unless the articles of the company otherwise provide".
The relevant articles are arts. 11, 32, 38 and 50 and they read thus:
Article 11
"In order that the
company may be a private company within the meaning of the Indian Companies
Act, 1913, the following provisions shall have effect, namely:—
(i) No invitation shall be issued to the public
to subscribe for 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
to their satisfaction that the proposed transferee is a responsible person, or
(c) where the directors are of opinion that the proposed transferee (not being
already a member) is not a desirable person to admit to membership, or (d)
where the result of such registration would be to make the number of members
exceed the above-mentioned limit. But clauses (b) and (c) of this article shall
not apply where the proposed transferee is already a member".
Article 50
"When the directors
decide to increase the capital of the company by the issue of new shares such
shares shall be offered to the shareholders in proportion to the existing
shares to which they are entitled. The offer shall be made by notice specifying
the number of shares offered and limiting a time within which the offer, if not
accepted, will be deemed to be declined and after the expiration of such time,
or on the receipt of an intimation from the person to whom the offer is made
that he declines to accept the shares offered, the directors may dispose of the
same in such manner as they think most beneficial to the company. The directors
may likewise so dispose of any new shares which (by reason of the ratio which
the new shares bear to the shares held by persons entitled to an offer of new
shares) cannot, in the opinion of the directors, be conveniently offered under
this article".
It is contended by Shri
Nariman that by reason of the articles of the company and on a true
interpretation of s. 81, the right of renunciation of the shares offered by NIIL
was not available to the Holding Company since NIIL was not a full-fledged
public company in the sense of being incorporated as a public company but had
become a public company under s. 43A(1) and had, under the first proviso to
that section, retained its articles relating to matters specified in s.
3(1)(iii). According to Shri Nariman, s. 81(1A) can have no application to a
"section 43A(1) proviso company" (for short, the "proviso
company") because, it contemplates issue of shares to the public and to
persons other than members of the company, which cannot be done in the case of
a company which falls under the proviso to s. 43A(1). Section 81(1A), it is
urged, is complementary to s. 81 and since the latter cannot apply to the
"proviso company", the former too cannot apply to it. In any event,
according to counsel, s. 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 s. 43A, which was
inserted for the first time in the Act of 1956 by the Amending Act of 1960, it
should be noted that s. 81 as enacted in the Act of 1956 contained three sub-ss.
(1), (2) and (3), and sub-s. (3) provided that "nothing in this section
shall apply to a private company". The opening words of s. 81, as they now
stand, were substituted by the Amending Act of 1960, and sub-s. (1A) was
inserted by the said Amendment Act, and sub-s. (3) was substituted by the
Amendment Act of 1963. But sub-s. 3(a) reproduced sub-s. (3) of the Act of
1956, namely, "nothing in this section shall apply to a private
company". It is clear, therefore, that the rights conferred by s. 81(1)
and (2) do not apply to a private company, and this provision in the Act of
1956 was not connected with the insertion of s. 43A for the first time in 1960.
(c) The provisos to s. 43A(1), (1A) and (1B) are very
important in connection with s. 81 of the Act 1 of 1956. Just as the crucial
words in s. 27(3) are "shall contain", the crucial words in the
provisos are "may include" (or may retain). The words "shall
contain" are mandatory and go to the constitution of a private company. The
words "may include" are permissive and they do not go to the
constitution of a company which has become a public company by virtue of s. 43A
because whether the articles include (or retain) those requirements, or do not
include those requirements the constitution of the company as a public company
remains unaffected.
(d) No statutory consequence follows, as
to the company being a public company, on the retention of the three
requirements or one or more of them, or in not complying with those
requirements. But in the case of a private company which does not comply with
the requirements of s. 3(1)(iii) serious consequences follow under s. 43, and
in the case of a private company altering its articles so as not to include all
the matters referred to in s. 3(1)(iii) serious consequences follow under s.
44. In short, the inclusion, or retention, of all the matters referred to in s.
3(1)(iii) has a radically different part or function in a private company which
becomes a public company by virtue of s. 43A from that which it has in a
private company. More particularly the non-compliance with the three
requirements of s. 3(1)(iii) included, or retained, in the articles of a
private company which has become a public company by virtue of s. 43A, involves
no statutory consequences or disabilities, since such a company is a public
company and s. 43 is not attracted.
(e) It is wrong to contend that the
whole of s. 81(1) does not apply to a "proviso company" because it is
a private company entitled to the pro-tection of sub-s. 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 com-panies. The articles of a public company may
include all of the matters referred to in s. 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 s. 3(1)(iii) or may delete one or two of them or may
include (or retain) all the three matters referred to in s. 3(1)(iii). The
retention of the three matters mentioned in s. 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-sections. The need to exempt private companies arose from s.
81(1)(c), for the right to renounce in favour of any person might (not must),
conflict with the limitation on the number of members to 50 and since that was
one of the matters which went to the constitution of a company as a private
company, private companies were expressly exempted. No such exemption was
necessary in the case of a "proviso company" which retains in its
articles all the three matters referred to in s. 3(1)(iii), because an increase
in the number of its members above 50 will not affect the constitution of the
company which remains that of a public company.
(h) Section 81, as enacted in 1956, did
not contain sub-s. (1A) which was inserted for the first time by the Amending
Act of 1960, which Amending Act also inserted s. 43A. After the insertion of
sub-s. (1A) the effect of the exemption of private companies from the operation
of s. 81 became even more necessary, for, the provisions of sub-s. (1A)(a) and
(b) override the whole of s. 81(1) and shares need not be offered to existing
shareholders. Section 81(1A) also overrides art. 50 of NIIL.
(i) The articles of NIIL provide for
the transfer of shares, and art. 38 sets out the circumstances under which the
directors may refuse to transfer the shares. However, since a renunciation of
shares is not a transfer, the restriction in art. 11(iii) is not violated by an
existing member of NIIL renouncing his share in favour of any other person.
(j) The opening words of s. 81(1)(c) are
"unless the articles of the company otherwise provide". Section
81(1)(c) contains no reference to "expressly provide" or
"expressly or by necessary implication provide". According to the
plain meaning of the words "otherwise provide", there must be a
provision in the articles which says that an offer of shares to the existing
members does not entitle them to renounce the shares in favour of any person.
Article 11 of NIIL merely states the matters necessary to constitute a company,
a private company. Such companies are exempt from s. 81 and so, the question of
"otherwise providing" does not arise. Article 50 refers to the rights
shares but it makes no other provision with regard to the right of renunciation
than is made in s. 81(1)(c). Unless such other provision is made, the opening
words of s. 81(1)(c) are not attracted. Secondly, s. 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 mutually exclusive and collectively
exhaustive. He relies upon a decision in Park v. Royalty Syndicates Ltd. [1912]
1 KB 330 (KB) in which Hamilton J. (Later Lord Sumner) observed that a public
company is simply one which is not a private company and that there is no
"intermediate state or tertium quid". In support of the proposition
that the right to renunciation of shares is not a transfer, counsel relies upon
a decision in Pool Shipping Co. Ltd., In re [1920] 1 Ch 251 (Ch D). Reliance is
also placed in this behalf on the statement of law in Halsbury (Vol. 7, 4th
Edn., p. 218), Palmer's
Company Law (Vol. 1, 22nd Edn., p. 393), Palmer's Company Precedents (Part 1, 17th Edn., p. 688), Gore-Brown on
Companies (43rd Edn., para. 16.3) and Buckley on Compnies Act (13th Edn,, p.
815). While indicating his own reasons as to why the Legislature enacted
identical provisos to sub-ss. (1), (1A) and (1B) of s. 43A, counsel mentioned
that no light is thrown for enacting these provisos, either by the Shastri
Committee Report which led to the Companies (Amendment) Act, 1960 or by the
Notes on Clauses, or by the Report of the Joint Select Committee. In regard to
the opening words of s. 81(1)(c): "unless the articles of the company otherwise
provide", counsel cited the Collins English Dictionary, the Random House
Dictionary and the Oxford English Dictionary. An interesting instance of the
use of the word "provide" is to be found in the Random House
Dictionary, 1967, p. 1157, to this effect: "The Mayor's wife of the city
provided in her will that she would be buried without any pomp or noise'".
It shall have been noticed
that the entire superstructure of Shri Seer-vai's argument rests on the
foundation that the definitions of "public company" and "private
company" are mutually exclusive and collectively exhaustive of all
categories of companies, that is to say, that there is no third kind of company
recognised by the Companies Act, 1956. The argument merits close examination
since it finds support, to an appreciable extent, from the very text of the
Companies Act. The definition of "private company" and the manner in
which a "public company" is defined ("public company means a
company which is not a private company") bear out the argument that these
two categories of companies are mutually exclusive. If it is this, it cannot be
that and if it is that it cannot 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 s. 43A may include, that is to say,
may continue to retain in its articles,
matters which are specified in s. 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 s. 44, and on the other hand, a private company which has become a public
company by reason of the operation of s. 43A.
In the first place, a s.
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
articles contains the restrictions mentioned in s. 3(1)(iii). Therefore, the
expression "public company" in s. 3(1)(iv) cannot be equated with a
"private company which has become a public company by virtue of section
43A".
Secondly, the number of
members of a public company cannot fall below 7 without attracting the serious
consequences provided for by s. 45 (personal liability of members for the
company's debts) an s. 433(d) (winding up in case the number of its members
falls below 7). A s. 43A-company can still maintain its separate corporate
identity qua debts even if the number of its members is reduced below seven and
is not liable to be wound up for that reason.
Thirdly, a s. 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.
Fourthly, the three
contingencies in which a private company becomes a public company by virtue of
s. 43A (mentioned in sub-ss. (1), (1A) and (1B) read with the provisions of
sub-s. (4) of that section) show that it becomes and continues to be a public
company so long as the conditions in sub-ss. (1), (1A) or (1B) are applicable.
The provisos to each of these sub-sections clarify the legislative intent that
such companies may retain their registered corporate shell of a private company
but will be subjected to the discipline of public companies. When the necessary
conditions do not obtain, the legislative device in s. 43A is to permit them to
go back into their corporate shell and function once again as private
companies, with all the privileges and exemptions applicable to private
companies. The proviso to each of the sub-sections of s. 43A clearly indicates
that although the private company has become a public company by virtue of that
section, it is permitted to retain the structural characteristics of its
origin, its birth marks, so to say. Any provision of the Companies Act which
would endanger the corporate shell of a "proviso company" cannot be applied to it because, that would constitute an
infraction of one or more of the characteristics of the "proviso
company" which are statutorily allowed to be preserved and retained under
each of the three provisos to the three sub-sections of s. 43A A right of renunciation
in favour of any other 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 s. 3(1)(iii).
Fifthly, s. 43A, when
introduced by Act 65 of 1960, did not adopt the language either of s. 43 or of
s. 44. Under s. 43 where default is made in complying with the provisions of s.
(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 s. 44 of the Act, where a private company alters its
articles in such a manner that they no longer include the provisions, which under
s. 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" (s. 43) or that the company "shall......cease to be a
private company" (s. 44) is used in section 43A. If a s. 43A-company were
to be equated in all respects with a public company, that is a company which
does not have the characteristics of a private company, Parliament would have
used language similar to the one in s. 43 or s. 44, between which two sections,
s. 43A was inserted. If the intention was that the rest of the Act was to apply
to a s.43A-company "as if it were not a private company", nothing
would have been easier than to adopt that language in s. 43A, and if the
intention was that a s.43A-company would for all purposes "cease to be a
private company", nothing would have been easier than to adopt that language
in s. 43A.
Sixthly, the fact that a
private company which becomes a public company by virtue of s. 43A does not
cease to be for all purposes a "private company" becomes clear when
one compares and contrasts the provisions of s. 43A with s. 44: when the
articles of a private company no longer include matters under s. 3(1)(iii),
such a company shall on the date of the alteration cease to be a private
company (s. 44(1)(a)). It has then to file with the Registrar a prospectus or a
statement in lieu of the prospectus under s. 44(2). A private company which
becomes 1 public company by virtue of s. 43A is not required to file a
prospectus or a statement in lieu of a prospectus.
These considerations show
that, after the Amending Act 65 of 1960, three 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 s. 43A, but
which continue to include or retain the three characteristics of a private
company. Sections 174 and 252 of the Companies Act which deal respectively with
quorum for meetings and minimum number of directors, recognise expressly, by
their paranthetical clauses, the separate existence of public companies which
have become such by virtue of s. 43A. We may also mention that while making an
amendment in sub-cl. (ix) of r. 2 of the Companies (Acceptance of Deposits)
Rules, 1975, the Amendment Rules, 1978, added the expression:
"Any amount received
by a private company which has become a public company under section 43A of the
Act and continues to include in its articles of association provisions relating
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 s. 43A(1) but
which retain, under the first proviso to that section, the three
characteristics of private companies mentioned in s. 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 s. 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 s.
43A are entitled. And yet, there are certain provisions of the Act which would
apply to public companies but not to s. 43A-companies. Is s. 81 of the
Companies Act one such provision? and if so, does the whole of it not apply to
a s. 43A company or only to some particular part of it? These are the questions
which we have now to consider.
On these two questions,
both the learned counsel have taken up extreme positions which, if accepted,
may create confusion and avoidable inconvenience in the administration of s.
43A-companies like NIIL. Shri Nariman contends that a s. 43A-company becomes a
public company qua the outside world, as, e.g., in matters of remuneration of
directors, disclosure, commencement of business, information to be supplied but
it remains a private company qua its own shareholders. Therefore, says counsel,
no provision of the Companies Act can apply to such companies, which is
inconsistent with or destructive of the retention of the three essential features
of private companies as mentioned in s. 3(1)(iii). Section 81, it is said, is
one such provision and in so far as private companies go, it can apply only to, (a) such companies which become
public companies under s. 43A but which do not retain the three essential
features, and to (b) private companies which are duly converted into public
companies. It is urged that even assuming that the expression "private
company" occurring in the various provisions of the Companies Act
(including s. 81(3)(a)) does not include a s. 43A-proviso-company, that does
not mean that s. 81 would be applicable to a s. 43A-proviso-company, because:
(a) The proviso to s. 43A(1) and s. 81 are both substantive provisions and
neither is subordinate to the other; in fact s. 43 A was introduced later in
1960. and (b) An offer of rights shares to a member in a s. 43A-proviso-company
cannot include a right to renounce the shares in favour of any other person,
because such a right would be inconsistent with the article of the company limiting
the number of its members to 50 and with the article prohibiting invitation to
the public to subscribe for shares in the company. The fact that the statute
overrides the articles is not a sufficient ground for rendering the provisions
of s. 81 applicable to a s.43A(1) proviso company since the right to continue
to include provisions in its articles specified in s. 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 s. 81(1)(c)—the provision regarding the right of
renunciation cannot apply to a s. 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 s. 81(1A) overrides s.
81(1); that by reason of sub-s. (3) of s. 81, s. 81 is not applicable to a
"private company" but NIIL is not a "private company" since
it became a public company by virtue of s. 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 cl. (a) of s. 81(3), which
shall have to be read as saying that "Nothing in section 81 shall apply to
a 'private company' and to a company which becomes a public company by virtue
of s. 43A and whose articles of association include provisions relating to the
matters specified in cl. (iii) of sub-s. (1) of s. 3". Section 81(1) does
not contain a non obstante clause. But, if Shri Nariman is right, there would
be no alternative save to exclude the applicability of all of its provisions to
a company like NIIL, by reading into it an overriding provision which alone can
achieve such a result. On the other hand, to accept wholesale the argument of
Shri Seervai would render the first proviso to s. 43A(1) nugatory. The right to
retain in the articles the provision regarding the restriction on the right to
transfer shares, the limitation on the number of members to fifty and the
prohibition of any invitation to the public to subscribe for the shares or
debentures of the company will then be washed off. The truth seems to us to lie
in between the extreme stands of the learned counsel for the two sides.
There is no difficulty in
giving full effect to cls. (a) and (b) of s. 81(1) in the case of a company
like NIIL, even after it becomes a public company under s. 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 those shares, while cl. (b) requires that the offer of further
shares must be made by a notice specifying the number of shares offered and
limiting the time, not being less than fifteen days from the date of the offer,
within which the offer, if not accepted, will be deemed to have been declined.
The real difficulty arises when one reaches cl. (c) according to which, the
offer shall be deemed to include the right of renunciation of shares or any of
of them in favour of any other person. We will keep aside for the time being
the opening words of cl. (c): "unless the articles of the company
otherwise provide". Clause (c) further requires that the notice referred
to in cl. (b) must contain a statement as to the right of renunciation provided
for by cl. (c). Having given to the matter our most anxious consideration, we
are of the opinion that cl. (c) of s. 81(1) cannot apply 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 s. 3(1)(iii) of the Act, as
specified in the first proviso to s. 43A. If cl. (c) were to apply to the s.
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
s. 3(1)(iii)(b) because, under cl. (c) of s. 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 s. 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
company. As stated in Palmer's Company Law (22nd Edn., Vol. I, para. 21-18, p.
182):
"Where the company
issues renounceable letters of allotment the circle of original allottees can
easily be broken by renunciation of those rights
and complete strangers may become the allottees; here the offer will normally
be held to be made to the public".
There is a statement to the
same effect in Gower's Company Law (4th Edn., p. 351):
"It is therefore,
clear that an invitation by or on behalf of a private company to a few of the
promoter's friends and relations will not be deemed to be an offer to the
public. Nor, generally, will an offer which can only be accepted by the
shareholders of a particular company. On the other hand it is equally clear
that an offer of securities in a public company even to a handful of people may
be an offer to the public if it is calculated (which presumably means 'likely'
rather than 'intended') to lead to the securities being subscribed (i.e.,
applied for on original allotment) or purchased (i.e., bought after original
allotment) by persons other than those receiving the initial offer. In
particular, if securities are to be issued under renounceable allotment letter
or letters of right the invitation to take them up must be deemed to be made to
the public, since these securities are obviously liable to be subscribed or
purchased by others".
The learned author says at
page 430 that in the case of a private placing—an issue by a private
company—allotment letters will probably be dispensed with, "in any case
they cannot be freely renounceable". In footnote (22) the author points
out that the real danger is that if renounceable allotment letters are issued,
the company may be regarded as having made an offer to the public. We cannot
construe the provision contained in cl. (c) 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 s. 3(1)(iii). Both these are statutory provisions
and they are contained in the same statute. We must harmonise them, unless the
words of the statute are so plain and unambiguous and the policy of statute so
clear that to harmonise will be doing violence to those words and to that
policy. Words of the statute, we have dealt with. Its policy, if anything,
points in the direction that the integrity and structure of the s.
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 s. 81(3)(a) because of
the right of renunciation conferred by s. 81(1)(c). Section 105C of the Indian
Companies Act, 1913, which contained substantially all the provisions that are
to be found in s. 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 s. 3(1)(iii). When s. 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 cl. (c) of s. 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 ss. 45 and 433(d)
of the Companies Act. Under s. 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 s. 45 in favour of the s. 43A-proviso-companies, with the
result that a private company having say, three members which becomes a public
company under s. 43A and continues to function with the same number of members,
will attract the rigour of s. 45. Similarly, under s. 433(d), such a company
would automatically incur the liability of being wound up for the same reason.
If and when these provisions fall for consideration, due regard may have to be
given to the principle of harmonious construction, in order to exclude the s.
43A-proviso-companies from the application of those provisions. We hope that
before such an occasion arises, the Legislature will make appropriate
amendments in the relevant provisions of the Companies Act. Such amendments
have been made in s. 174(1), cl. (iii) of the second proviso to sub-s. (1) of
s. 220 and s. 252(1) in order to accord separate treatement to private
companies which become public companies by virtue of s. 43A, as distinguished
from public companies of the general kind.
In coming to the conclusion
that cl. (c) of s. 81(1) cannot apply to s. 41A-proviso-companies, we have not
taken into consideration the impact of the opening words of cl. (c):
"Unless the articles of the company otherwise provide". The effect of
these words is to subordinate the provisions of cl. (c) to the provisions of
the articles of association of the company. In other words, the provision that
the offer of further shares shall be deemed to include the right of
renunciation in favour of any other person will not apply if the articles of
the company "otherwise provide". Similarly, the requirement that the
notice of offer must contain a statement of the right of renunciation will not
apply if the articles of the company otherwise provide. The question which we
have to consider under this head is whether the articles of association of NIIL
provide otherwise than what is provided by cl. (c) of s. 81(1). We have already
extracted the relevant articles, namely, arts. 11, 32, 38 and 50. To
recapitulate, art. 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 art. 32, a share may be transferred,
subject to art. 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 time within which the offer, if not accepted,
will be deemed to have been declined. If the offer is declined or is not
accepted before the expiration of the time fixed for its acceptance, the
directors have the power to dispose of the shares in such manner as they think
most beneficial to the company.
It is urged by Shri Seervai
that none of the articles of the company provides otherwise than what is
provided in cl. (c) of s. 81(1) and, therefore, cl. (c) must have its full play
in the case of NIIL. On the other hand, it is contended by Shri Nariman that
the opening words of cl. (c) do not require or postulate that the articles of
the company must contain an "express" provision, contrary to what is
contained in cl. (c). The contention, in other words, is that if the articles
of a company contain a provision which, by necessary implication, is otherwise
than what is provided in cl. (c), that clause can have no application. In view
of our finding that keeping aside the opening words of cl. (c), the provisions
of that clause cannot apply to s. 43A-proviso-companies, it is academic to
consider whether the word "provide" in the opening part of cl. (c)
postulates an express provision on the subject of renunciation or whether it is
sufficient compliance with the opening words, if the articles contain by
necessary implication a provision which is otherwise than what is provided in
cl. (c). We would, however, like to express our considered conclusion on this
point since the point has been argued fully by both the counsel and needs to be
examined, as it is likely to arise in other cases.
In the first place, while
construing the opening words of s. 81(1)(c), it has to be remembered that s.
43A-companies are entitled under the proviso to that section to include
provisions in their articles relating to matters specified in s. 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 s. 43A and retains or continues to include in its articles
matters referred to in s. 3(1)(iii), it is difficult to say that the articles
do not provide something which is otherwise than what is provided in cl. (c).
The right of renunciation in favour of any other person is of the essence of
cl. (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 s. 43A and retain their old articles, there would of
necessity be a provision in their articles which is otherwise than what is
contained in cl. (c). Considered from this point of view, the argument as to
whether the word "provide" in the opening words of cl. (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 cl. (c). In the context,
in which a private company becomes a public company under s. 43A and by reason
of the option available to it under the proviso, the word "provide"
must be understood to mean "provide expressly or by necessary
implication". The necessary implication of a provision has the same effect
and relevance in law as an express provision has, unless the relevance of what
is necessarily implied is excluded by the use of clear words. Considering the
matter from all reasonable points of view, particularly the genesis of s.
43A-proviso-companies, we are of the opinion that in order to attract the
opening words of cl. (c) of s. 81(1), it is not necessary that the articles of
the company must contain an express provision otherwise than what is contained
in cl. (c).
We do not think it necessary
to consider the decision of the Privy Council in Shanmugham v. Commissioner for Registration [1962]
AC 515 (PC), cited by Shri Nariman, which says
that to be an "express provision" with regard to something it is not
necessary that the thing should be specially mentioned; it is sufficient that
it is directly covered by the language, however broad the language may be which
covers it, so long as the applicability arises directly from the language used
and not by inference therefrom. We may only mention that though the articles of
NIIL do not contain an express provision that there shall be no right of
renunciation, that right is wholly inconsistent with the articles. We have
already stated above that the right of renunciation is tantamount 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 the number of members. Article 11, by
reason of its cl. (iv), prevails over the provisions of all other articles if
there is inconsistency between it and any other article.
For these reasons, we are
of the opinion that cl. (c) of s. 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 s. 43A and which retain in their articles the three matters referred to in
s. 3(1)(iii) of the Act. In so far as the opening words of cl. (c) are
concerned, we are of the opinion that they do not require an express provision
in the articles of the company which is otherwise than what is provided for in
cl. (c). It is enough, in order to comply with the opening words of cl. (c),
that the articles of the company contain by
necessary implication a provision which is otherwise than what is provided in
cl. (c). Articles 11 and 50 of NIIL's articles of association negate the right
of renunciation.
The question immediately
arises, which is of great practical importance in this case, as to whether the
members of a s. 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 cl. (c) of s. 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 cl. (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-s. (1A) of s.
81, it provides, stated briefly, that notwithstanding anything contained in
sub-s. (1), the further shares may be offered to any persons in any manner
whatsoever, whether or not those persons include a person referred to in cl.
(a) of sub-s. (1). That can be done under cl. (a) of sub-s. (1A) by passing a
special resolution in the general meeting of the company or under cl. (b),
where no such special resolution is passed, if the votes cast in favour of the
proposal exceed the votes cast against it and the Central Govt. is satisfied
that the proposal is most beneficial to the company. For reasons similar to
those for which we have come to the conclusion that cl. (c) of s. 81 cannot
apply to a s. 43A-proviso-company, we must hold that sub-s. (1A) can also have
no application to such companies. To permit the further shares to be offered to
the persons who are not members of the company will be clearly contrary to the
articles of association of a s. 43A-proviso-company, in regard to the three
matters which bear on the structure of such companies. At the highest, the
method provided for in cls. (a) and (b) of sub-s. (1A) may be resorted to by a
s. 43A-proviso-com-pany for the limited purpose of offering the new shares to
its members otherwise than in proportion to the capital paid up on the equity
shares of the company. That course may be open for the reason that sub-s. (1A)
permits the further shares to be offered "in any manner whatsoever".
A change in the pro rata method of offer of new shares is not necessarily
violative of the basic characteristics of a private company which becomes a
public company by virtue of s. 43A. To this limited extent only, but not beyond
it, the provisions of sub-s. (1A) of s. 81 can apply to such companies.
The
following propositions emerge out of the discussion of the provisions of the
FERA, ss. 43A and 81 of the Companies Act and of the articles of association of
NIIL:
(1) The Holding Company had to part with
20% out of the 60% equity capital held by it in NIIL.
(2) The offer of rights shares made to the Holding Company as a result of the decision taken by the board of directors in their meeting of April 6, 1977, could not have been accepted by the Holding Company.
(3) The
Holding Company had no right to renounce the rights shares ffered to it in
favour of any other person, member or non-member, and
(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 art. 50 of the articles of association, be
disposed of by the directors, consistently with the articles of NIIL,
particularly art. 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
Holding Company did not cause any injury to the proprietary rights of the
Holding Company as shareholders, for the simple reason that they could not have
possibly accepted the offer of rights shares because of the provisions of the
FERA and the conditions imposed by the Reserve Bank in its letter dated May 11,
1976, nor indeed could they have renounced the shares offered to them in favour
of any other person at all because s. 81(1)(c) has no application to companies
like NIIL which were once private companies but which become public companies
by virtue of s. 43A and retain in their articles the three matters referred to
in s. 3(1)(iii) of the Act.
It
was neither fair nor proper on the part of the NIIL's officers not to ensure
the timely posting of the notice of the meeting for 2nd May so as to enable
Sanders to attend that meeting. But, there the matter rests. Even if Sanders
were to attend the meeting, he could not have asked either that the Holding
Company should be allotted the rights shares or alternatively, that it should
be allowed to "renounce" the shares in favour of any other person, including the Manoharan group. The charge of
oppression arising out of the central accusation of non-allotment of the rights
shares to the Holding Company must, therefore, fail.
We must mention that we have
rejected the charge of oppression after applying to the conduct of Devagnanam
and his group the standard of probity and fairplay which is expected of
partners in a business venture. And this we have done without being influenced
by the consideration pressed upon us by Shri Nariman that Coats and NEWEY, who
were two of the three main partners, were not of one mind and that NEWEY never
complained of oppression. They may or they may not. That is beside the point.
Such technicalities cannot be permitted to defeat the exercise of the equitable
jurisdiction conferred by s. 397 of the Companies Act. Shri Seervai drew our
attention to the decision in Blissett v. Daniel [1853] 68 ER 1022, 10 Hare 493,
the facts of which, as they appear at pp. 1036-37, bear, according to him,
great resemblance to the facts before us. The following observations in that
case are of striking relevance (at p. 1040 of 68 ER; 536 of 10 Hare):
"As has been well
observed during the course of the argument, the view taken by this court with
regard to morality of conduct amongst 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 everything was over, bar the post-meeting
recriminations which eventually led to this expensive litigation. If the notice
of the meeting had reached the Holding Company in time, it is reasonable to
suppose that they would have attended the meeting, since one of the items on
the agenda was "Policy—(a) Indianisation, (b) allotment of shares".
Devagnanam and his group were always ready and willing to buy the excess shares
of the Holding Company at a fair price, as is
clear from the correspondence to which our attention has been drawn. In the
affidavit dated May 25, 1977, Devagnanam stated categorically that the Indian
shareholders were always ready and willing to purchase one-third of the
shareholding of the non-resident shareholders, at a price to be fixed in
accordance with the articles of association by the Reserve Bank of India. On
May 27, he sent a cable, though 'without prejudice', offering to pay premium if
the Holding Company were to adopt disinvestment as a method of dilution of
their interest. In the trial court, counsel for the Indian shareholders to whom
the rights shares were allotted offered to pay premium on the 16,000 rights
shares. The cable and the offer were mentioned before us by Shri Nariman and
were not disputed by Shri Seervai. There is no reason why we should not call
upon the Indian shareholders to do what they were always willing to do, namely,
to pay to the Holding Company a fair premium on the shares which were offered
to it, which it could neither take nor renounce and which were taken up by the
Indian shareholders in the enforced absence of the Holding Company. The
willingness of the Indian shareholders to pay a premium on the excess holding
or the rights shares is a factor which, to some extent, has gone in their
favour on the question of oppression. Having had the benefit of that stance, they
must now make it good. Besides, it is only meet and just that the Indian
shareholders, who took the rights shares at par, when the value of those shares
was much above par, should be asked to pay the difference in order to nullify
their unjust and unjustifiable enrichment at the cost of the Holding Company.
We must make it clear that we are not asking the Indian shareholders to pay the
premium as a price of oppression. We have rejected the plea of oppression and
the course which we are now adopting is intended primarily to set right the
course of justice, 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 relevant factors by the Controller of Capital Issues while
valuing the shares of companies. The chartered accountants applied "the
CCI formula" and after making necessary adjustments to the fixed assets,
the proposed dividend and the gratuity liabilities for 1975, they valued NIIL's
business, on a net asset basis, at Rs. 50 lakhs. On an earnings basis, the
valuation of the company based on the past three years' net profits,
capitalized at 15%, was Rs. 80 lakhs. That gives an average valuation of Rs. 65
lakhs for the business or Rs. 204 per share. The purported offer to Devagnanam
by Khaitan "a sewing needle competitor to Ketti", at 3.6 times par,
cannot afford any criterion for valuing NIIL's shares. Khaitan, purportedly,
had competitive business interests and was, therefore, prepared to "pay
the earth to acquire NIIL".
According to the learned
trial judge, one thing which appeared to be certain was that the market value
of the shares of NIIL at or about the time when disputes arose between the parties,
and particularly during the period when the controversial meetings of the board
of directors were held, ranged between Rs. 175 and Rs. 204. We agree with the
learned judge and hold that it would be just and reasonable to take the average
market value of the rights shares on the crucial date at Rs. 190 per share. The
learned trial judge awarded a sum of Rs. 90 per share on 9,495 shares to the
Holding Company by way of "solatium", which, with respect, is not an
accurate description of the award and is likely to confuse the basis and
reasons for directing the payment to be made. Since, the average market price
of NIIL's shares in April-May 1977, can be taken to be Rs. 190 per share, the
Holding Company which was offered 9,495 rights shares, will be entitled to
receive from the Indian shareholders an amount equivalent to that by which they
unjustifiably enriched themselves, namely, Rs. 90 X 9,495 which comes to Rs.
8,54,550. We direct that Devagnanam, his group and the other Indian
shareholders, 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.
As a further measure of
neutralisation of the benefit which the Indian shareholders received in the
meeting of 2nd May, 1977, 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. 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.
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 given by us in this judgment.
In the result, the appeals
are allowed with the directions above mentioned and the judgments of the
learned single judge and of the Division Bench of the High Court are set aside.
We make no order as to costs since both the sides are, more or less, equally to
blame, one for creating an impasse and the other for its unjust enrichment. All
parties shall bear their own costs throughout.
The interim orders passed
by this court are vacated.
Further directions
The amount of Rs. 8,54,550
which the Indian shareholders have been directed to pay to the Holding Company
shall be paid in two instalments, the first of which shall be paid before
August 31, 1981, and the second before November 30, 1981.
The interim board of
directors shall forthwith hand over charge to the board which was superseded,
but with Shri M. M. Sabharwal as a director and chairman of the board of
directors. After taking charge from the interim board, the board of directors
will take expeditious steps for convening an annual general meeting for the
year 1976-77, and the years thereafter for the purpose of passing the accounts,
declaring dividends, electing all directors and for dealing; with other
necessary or incidental matters.
[1978] 48 COMP. CAS. 260 (P&H)
HIGH COURT OF PUNJAB AND HARYANA
v.
Bhandari Cros-Fields (P.) Ltd.
S.P. GOYAL J.
CIVIL REVISION NO. 772 OF 1977.
DECEMBER 20, 1977
Vinod Jain for the petitioner.
H.L.
Sarin with M.L. Sarin and S.K. Goveri for the Respondent.
S.P.
Goyal J.—The suit
giving rise to this petition under section 115 of the Code of Civil Procedure
(hereinafter called the Code) was filed by Bhandari Cros-fields Pvt. Ltd.
through Chandan Singh Bhandari, its secretary, against the petitioner for
recovery of Rs. 2,24,100. During the pendency of the suit, the business of the
company exceeded rupees one crore and it was, therefore, converted into a
public company by operation of law. To meet this situation, the plaintiff moved
an application under Order 6, rule 17 of the Code, to make the following
amendments in the plaint :
(A) In the light of the plaint, the word
"Pvt." occurring in the name of the plaintiff company be kindly
allowed to be deleted. In place of the words, "No. 27,
(B) In para. No. 1 of the plaint, the
following change may kindly be allowed to be made, i.e., at the end of the said
para., the following be allowed to be added :
"The said
certificate relates to the plaintiff company before it was converted into a
public limited concern. After that plaintiff company became a public limited
concern during the pendency of this suit, necessary change in this respect was
made by the Registrar of Companies in his relevant records. The aforesaid
officer had also made the necessary change under his own signature in the
original certificate of incorporation dated October 8, 1963. The necessary
change has been made by him on June 3, 1975, under his signatures. A photostat
copy of the duly corrected certificate of incorporation is attached
herewith."
(C) In
the certification of the plaint, the word 'Pvt.' be kindly allowed to be
deleted.
The
application was opposed by the defendant-petitioner on a number of grounds but
the same was allowed by the learned senior Sub-Judge, Karnal, vide order dated
April 5, 1977. Aggrieved by that order, the defendant has come up in this
revision.
The
only ground urged by the learned counsel for the petitioner before me was that
the authority of Chandan Singh Bhandari, Secretary of the private company, and
of the counsel had come to an end the moment the company became a public
limited company and the application for amend-ment,
therefore, has not been filed by a competent person entitled to act on behalf
of the company. The contention of the learned counsel, however, is devoid of
any merit. Sub-section (3) of section 43A of the Companies Act provides that
the provisions of section 23(3) shall apply to a change of name under
sub-section (2) as it applies to change of name under section 21. Further,
sub-section (3) of section 23 provides that a change of name under section 21
does not affect the rights and obligations of the company or render defective
any legal proceedings by or against it, and any legal proceedings which might
have been continued or commenced by or against the company by its former name
may be continued by or against the company by its new name. A combined reading
of the provisions of sections 43A, 21 and 23 leaves no manner of doubt that
when a company is converted into a public company, apart from the change in its
name, the constitution and the entity of the company is not affected in any
other manner and the legal proceedings instituted by its former name can be
continued by its new name.
Consequently, this petition
has no merit and is accordingly dismissed but without any order as to costs.
[2005]
57 scl 29 (bom.)
v.
KHANDEPARKAR
R.M.S., J.
CONTEMPT
PETITION NO. 54 OF 2002
IN
WRIT PETITION NO. 2592 OF 2001
FEBRUARY
20, 2004
Section 43A of the Companies Act, 1956, read
with section 16 of the Contempt of Court Act, 1971 - Deemed Company -
Respondent-collector granted a lease of land in favour of petitioner-company -
Since average annual turnover of petitioner during relevant years had exceeded
a sum of Rs. 10 crores, word ‘Private’ from name of petitioner was deleted in
terms of section 43A(1A) - Respondent issued a notice demanding 50 per cent of
unearned profits as stipulated in said lease agreement - Pending appeal before
respondent, petitioner filed a writ petition and High Court held that change in
name was not on account of any voluntary act but was purely by virtue of
operation of law - At time of hearing of appeal, copy of order of High Court
was placed before respondent, but he rejected appeal on ground that petitioner
did not take prior permission of Collector before change in its name and upheld
demand - Whether order passed by respondent was in contravention of order
passed by High Court in writ petition and it apparently disclosed a wilful
disobedience of order of High Court by respondent - Held, yes - Whether
respondent, therefore, was guilty of contempt of court in relation to said
order - Held, yes
The respondent,
who was the District Collector, granted a lease of land in favour of the
petitioner, a private limited company. Since the average annual turnover of the
petitioner-company during the financial years 1995-96 to 1997-98 had exceeded a
sum of Rs. 10 crores, in terms of section 43A(1A), the petitioner-company
intimated to the Registrar of Companies and requested for deletion of the word
‘Private’ from its name. Since the petitioner deleted the word ‘Private’, it
informed the same to the respondent to carry out necessary changes in its
records. The respondent informed the petitioner that since there was a change,
it was liable to pay 50 per cent of the unearned profit as per the terms of the
lease agreement. The petitioner requested to record the changes without demand
of 50 per cent of unearned profit on the ground that the change was on account
of operation of law. The respondent, however, issued a notice demanding certain
amount. The petitioner preferred appeal and pending the hearing and final
disposal of the said appeal, filed a stay application and being aggrieved by
the order of rejection of the stay application, preferred a writ petition. The
Single Judge of the High Court, while disposing of the said petition, held that
the change in the name of the petitioner was not by any voluntary act on part
of the petitioner but was purely by virtue of operation of law under the provisions
of section 43A(1A). At the time of final hearing of the said appeal, the order
of the Single Judge was placed before him, but the respondent rejected the
appeal on the ground that the petitioner did not take prior permission from the
respondent collector before the change in its name as per the conditions
mentioned in the original lease, which was still binding upon the petitioner
and held that the demand of unearned profit by the Collector was perfectly
justified.
On petition:
It is well-settled
that any law laid down by the High Court is binding upon all the parties and
authorities within the territory of the State in which the High Court is
situated. The finding as regards the change in the name of the petitioner being
by operation of law and not by any voluntary act having been pronounced by the
High Court and having attained finality, was binding upon the parties including
the respondent. The said finding ruled out the voluntary act on the part of the
petitioner-company in the process of change in the name. Simultaneously, it
could not be disputed that, for invoking the powers under the lease deed, there
necessarily be a voluntary act on the part of the petitioner-company in the
form of assignment or under-letting or transfer of its right in favour of
another company. There was no reference to any material on record by the
respondent in his order in that regard, leaving aside any finding in that
regard. Being so, taking into consideration all those facts, merely because
there was no specific direction to do any particular act or to refrain from
doing any particular act, the respondent who was exercising quasi-judicial
powers under the Land Revenue Code at the time of disposing of the appeal, was
not empowered to ignore the declaration given by the High Court and contrary to
the said declaration he could not have held that the petitioner was required to
take prior permission of the Collector for the change in the name of the
petitioner-company. The order of the High Court was amply clear that the
deletion of the word ‘Private’ from the company’s name was on account of
operation of law, and, therefore, there was neither any action nor any
necessity for the petitioner to obtain any prior permission from the Collector
for deletion of the word ‘Private’ from the name of the petitioner-company.
Obviously, the order passed by the respondent was, therefore, in contravention
of the order passed by the High Court in writ petition and it apparently
disclosed a wilful disobedience of the order of the High Court by the
respondent. [
The respondent,
therefore, was guilty of contempt of Court in relation to the said order of the
High Court. [
Asstt. CCE v.
Dunlop India Ltd. 1985 (19) ELT 22 (SC) (para 5) and East India Commercial Co.
Ltd. v. Collector of Customs AIR 1962 SC 1893 (para 15).
Bipin Shukla
for the Petitioner. K.R. Belosey for the Respondent.
1. Heard the learned Advocates for the
parties. Perused the records.
2. The grievance of
the petitioner relates to the wilful disobedience of the order of this Court
dated 1st November, 2001 in Writ Petition No. 2592 of 2001 by the respondent
No. 1, inasmuch as, that while disposing of the appeal under section 247 of the
Maharashtra Land Revenue Code, 1966, on 25th February, 2002 in
Appeal/Desk/LNA/131/2001, the respondent No. 1 decided the matter contrary to
the judicial pronouncement in the said writ petition to the effect that the
change of name of the petitioner- company was not an voluntary act but purely
by virtue of operation of law under the provisions of section 43A(1A) of the
Companies Act, 1956.
3. The facts relevant
for the decision in the matter are that, on 7th June, 1972, the Collector of Mumbai
Suburban District granted a lease of land bearing Plot No. 101, C & D
admeasuring about 923 sq. metres in area in favour of one Acme Rayon Doubling
Mills Pvt. Ltd. The constitution and the name of Acme Rayon Doubling Mills Pvt.
Ltd. were change to Lana Printer Pvt. Ltd. on 19th November, 1982, and since
the change of name and structure of the Acme Rayon Doubling Mills Pvt. Ltd. was
an voluntary act on the part of the company, M/s. Lana Printer Pvt. Ltd. had to
pay 75% of the unearned profit to the Collector on 10th September, 1987. On
12th April, 1994, M/s. Lana Printers Pvt. Ltd. changed its name to Magna
Graphics Pvt. Ltd. and accordingly intimated the same to the Collector for the
purpose of carrying out required changes in their records in relation to the
said company. By letter dated 25th May, 1995, while consenting for the change
and without making any demand for 75% for the unearned profit subjected to the
company to the certain terms and conditions to be followed by Magna Graphics (
“In my considered view, the change in name of
the petitioner was not by any voluntary act on behalf of the petitioner but was
purely by virtue of operation of law under the provisions of section 43A(1A) of
Companies Act. It is also not in dispute that the petitioner has not committed
any breach of conditions or ground because change of name was not at his
instance but merely due to operation of law.”
Thereafter,
the appeal before the respondent No. 1 came up for final disposal and the copy
of the order in the said writ petition passed on 1st November, 2001 was placed
before the respondent No. 1 in the course of hearing on 8th January, 2002. By
the order dated 25th February, 2002 respondent No. 1 rejected the appeal on the
ground that the petitioner did not take prior permission from the Collector
before the change in its name as per the conditions mentioned in the original
lease which was still binding upon the petitioner company, and therefore, held
that the demand of unearned profit by the Collector was perfectly justified.
While challenging the said decision of the respondent No. 1, in the said
appeal, the petitioner has filed the present contempt petition.
4. Being prima facie
satisfied about the grievance made by the petitioner, a show-cause notice came
to be issued to the respondents on 30th September, 2002, and consequent to the
service thereof, the respondent No. 1 filed affidavit in reply on 16th October,
2002. According to the said respondent No. 1, he has not committed any Contempt
of Court nor has wilfully disobeyed the order dated 1st November, 2001 passed
in Writ Petition No. 2592 of 2001. It is his case that there was no specific
order to do or to act or to refrain from or not to act which has been wilfully
and intentionally disobeyed or not complied with by him. He has further
submitted that he has considered the facts of the case in accordance with the
law and has passed the said order in accordance with the interpretation of the
terms and conditions of the original lease deed dated 7th June, 1972. According
to him, the Clause X of the Lease Deed prohibits any transfer of right or
interest in the lease by the original lessee in favour of anybody without the
previous consent in writing of the Collector and it would be open to the
Collector while granting such consent to impose a condition requiring the
lessee to pay to the Government half the unearned increment in the event of any
assignment under-letting or transfer. According to him, the objectives of the
said Clause X are to avoid direct sale/transfer of lease without prior consent
in writing. It is his further case that at the time of change in the name from
M/s. Acme Rayon Doubling Mills Pvt. Ltd. to M/s. Lana Printers Pvt. Ltd., the
later was asked to pay 75% of the unearned profit and accordingly, M/s. Lana
Printers Pvt. Ltd. had deposited the sum of Rs. 30,074 on 10th September, 1987
with the undertaking to pay amount to be fixed by the Government along with 8%
interest thereon and the same was clarified by the Collector to the company
M/s. Lana Printers Pvt. Ltd. by its letter dated 10th August, 1993. However,
the said company M/s. Lana Printers Pvt. Ltd. now required to pay 75% of the
unearned income to the Government. There was no restrain imposed upon the
respondent No. 1 in the matter of adjudication of the issue in appeal while
disposing the writ petition by this Court, and therefore, he has not committed
any contempt of Court as such by passing the said order.
5. The matter being
related to the accusation of violation of the order, it will be primarily
necessary to ascertain what was the order of this Court which is said to be
violated by the respondent No. 1. As already observed above, the order spoken
of is dated 1st November, 2001 in Writ Petition No. 2592 of 2001. Undoubtedly,
the matter has come before this Court on the basis of the claim put forth by
the petitioner for the change in name from Magna Graphics (India) Pvt. Ltd. to
Magna Graphic (India) Ltd. was on account of operation of law in terms of
section 43A(1A) of the Companies Act, 1956, and that therefore, the petitioner
was not liable to pay any percentage out of the unearned profit to the
respondents. In fact, the grievance of the petitioner in the said petition as
transcribed in the order dated 1st November, 2001 reads thus :-
“The petitioner informed the respondent No. 1
about their becoming deemed public limited company as per section 43A(1A) of
the Companies Act and requested the respondent No. 1 to change the name of the petitioner
in the records of the respondent No. 1. Thereupon the respondent No. 1 called
upon the petitioners to furnish a copy of the Memorandum of Articles of
Association which was furnished to the respondent No. 1. Thereupon the
respondent No. 1. vide letter bearing No. C/off/7-B/62 informed the petitioner
that the respondent No. 1 had come to the conclusion that there was change in
the Constitution of the petitioner company and, therefore, the petitioners were
liable to pay 50% of “Unearned Profit” of Rs. 19,30,988.50 to the respondent
No. 1. The respondent No. 1 also called upon the petitioner to pay the
aforesaid sum within 15 days from the date of the letter.
Thereupon the petitioner tried to clarify the
position that there was no change in the constitution to the petitioner and,
therefore, demand of 50% of the “Unearned Profit” was uncalled for, however,
the request was rejected and the demand was renewed.”
Taking note of
the appeal filed by the petitioner against the order demanding the money and
the refusal of stay granted to such demand, it was noted by the learned Single
Judge, thus :-
“At the outset, it may be noted that the
appeal filed by the petitioner before the respondent No. 2 is pending and it is
submitted at the bar that it is due for hearing. The limited scope of this writ
petition, therefore, is the impugned order dated 9-10-2001. The said order
reads thus:-
Heard learned Advocate for appellants
regarding stay matter, Exhibit ‘G’ at page 30. Additional Registrar of
Companies issued Fresh Certificate of Incorporation consequent on change of
name. Appellant company changed their name without prior permission from
Collector (ASD). Hence stay rejected. Next date of hearing is 1st November,
2001.
Therefore, it is clear that the order is
passed by the respondent No. 2 presupposing that prior permission of the
respondent No. 1, i.e., Collector is required for change of name of the said
company, and on that basis that stay is rejected.”
After considering the arguments of the parties, the learned Single Judge
held that:-
“In my considered view, that change of name of
the petitioner was not by any voluntary act on behalf of the petitioner but was
purely by virtue of operation of law under the provisions of section 43A(1A) of
the Companies Act. It is also not in dispute that the petitioner has not
committed any breach of condition or ground because change of name was not at
his instance but merely due to operation of law.”
Referring to
the point regarding refusal of stay, taking note of the decisions of the Apex
Court in the matter of Asstt. CCE v. Dunlop India Ltd. 1985(19) ELT 22 (SC), it
was held thus:—
“However, in the present case, this principle
clearly is not applicable. Here is the case wherein the petitioner has not
committed any default but the change has occurred only due to operation of law
and, therefore, respondent No. 2 - The Divisional Commissioner should have
stayed the recovery and expedited the hearing of the appeal under the
circumstances involved in this case.”
With the above
ruling, the petition was disposed of in terms of prayer Clause (a) in the
petition, which reads thus:-
“(a) that this Hon’ble Court be pleased to issue a writ of certiorari
or any other appropriate writ, order or direction in the nature of writ of
certiorari calling for the records relating to the present case and after
examining the legality, validity and propriety thereof, this Hon’ble Court be
pleased to quash and set aside the impugned order dated 9th October, 2001 being
Exhibit “A” hereto, passed by 2nd respondent herein and grant stay application
till the hearing and final disposal of the appeal in terms of prayer Clause
(d).”
6. Plain reading of
the order dated 1st November, 2001 in the said writ petition, therefore,
reveals that the petition, undoubtedly, related to the order dated 9th October,
2001 under which the stay to the demand of 50% of the unearned profit was
rejected by the Appellate Authority, i.e., the respondent No. 1 herein, who was
the respondent No. 2 in the said writ petition, while setting aside the said
rejection order of stay, this Court had granted the stay till disposal of the
appeal before the respondent No. 2. At the same time, it discloses that the
said order of rejection of stay was interfered with and the stay during the
pendency of the appeal was granted on the basis of certain findings given in
the order and the said findings included the finding that the rejection of stay
was on pre-supposition that prior permission of the Collector was required for
the purpose of change in the name of the company. While considering the
provisions of section 43-A(1-A) of the Companies Act, 1956, the change of name
on the part of the petitioner company was held as purely by virtue of operation
of law under the said provision. While arriving at the said finding, the
learned Single Judge has also taken note of an undisputed fact in the matter
that the annual turn over of the petitioner company had exceeded Rs. 10 crores
entitling the company to be a deemed public limited with in the following
observation:-
“Now, it is not in dispute that the provision
of section 43A of the Companies Act stipulates that the Private Limited Company
whose annual turnover exceeds Rs. 10 crores would automatically assume the
entity as a deemed Public Limited Company, which was happened in the case of
the petitioner and, therefore, the petitioner approached the Collector after
obtaining necessary certificate from the Registrar of Companies.”
Apparently,
therefore, the decision to grant stay to the demand in relation to 50% of the
unearned profit passed by this Court on 1st November, 2001 in Writ Petition No.
2592 of 2001 was on the basis that the change in the name of the petitioner was
not by any voluntary act on behalf of the petitioner company but was purely by
virtue of operation of law under the provisions of section 431(1A) of the
Companies Act, 1956. Therefore, it cannot be disputed that this Court, in no
uncertain terms, had made it clear, by the order dated 1st November, 2001, that
the change in the name of the company was merely by operation of law and not on
account of voluntary acts on the part of the company.
7. No doubt that the
rule was made absolute under the said order, however, the said order nowhere
comments or requires the respondent No. 1 to do any particular act as such or
to refrain him from doing any act as such, as sought to be submitted on behalf
of the said respondent. Nevertheless, the order in clear terms declares the
change in the name from Magna Graphic (India) Pvt. Ltd. to Magna Graphic
(India) Ltd. and that the same had not been on account of any voluntary act on
behalf of the petitioner company but was purely by virtue of operation of law
in terms of the provisions contained in section 43A(1A) of the Companies Act,
1956. Undoubtedly, it is a declaratory order in that regard. It is undisputed
fact that such declaration was never challenged by the respondents, and it had
attained finality for all purposes. In other words, even though there was no
specific direction either to the respondent No. 1 or for that matter to any
other officer dealing with any judicial or quasi- judicial matters on behalf of
the respondent No. 1 to do a specific act or to refrain from doing any specific
act, there was clear declaration by this Court regarding the change in the name
of the petitioner and that the said change was on account of operation of law
and it was not on account of any voluntary act on behalf of the petitioner and
such declaration had attained finality and was binding upon both the parties.
8. The fact that the
Divisional Commissioner, Konkan Division, Commissioner, Konkan Division,
Mumbai, as well as State of Maharashtra, through the Collector of Mumbai, were
the parties to the Writ Petition No. 2592 of 2001 is not in dispute, apart from
the fact that the said order was placed before the respondent No. 1 at the time
of hearing of the appeal. There is categorical statement on oath by the
petitioner in the petition that “during the course of argument the Advocate
appearing for the petitioners handed over a certified copy of the order dated
1st November, 2001 to the respondents for assistance.” The affidavit filed by
the respondent No. 1 also clearly discloses thorough knowledge of the said
order to the said respondent before disposal of the appeal. It is, therefore,
evident that the order of the High Court clearly declared the change in the
name of the petitioner to be by virtue of operation of law in terms of the
provisions of section 43A(1A) of the Companies Act, 1956. It is also clear from
the records that the said order was known to the respondent No. 1 before the
disposal of the appeal before him.
9. The relevant
portion of the order passed by the respondent No. 1 on25-2-2002, which is said
to be in violation of the said order of this Court, reads thus:—
“Now Magna Graphics (India) Ltd. vide their
letter of 23rd February, 1999 communicate to the Collector, BSD that with
effect from 1st July, 1998, the company has become a deemed public limited
company under section 43A of the Companies Act, 1956 hence the word “Private”
in the name of company therefore, has been deleted and the name of the company
will be “Magna Graphics (India) Limited”. This was only informed by the company
to the Collector. Advocate for the appellant argued repeatedly along with
citing case law that pursuant to the provisions under section 43A of the
Companies Act, 1956, various private companies were to be treated as deemed
public company on fulfilment of certain criteria. Appellant company here have
turnover above 10 crores Rs. for the years 1995-96,1996-97 and 1997-98 and by
virtues fulfilling one of the criteria, the said company automatically become a
public limited company. From Ex. F, it is clear that company applied to
Registrar of Companies on 14th Nov. 1998 to delete the word “Private” but
company did not take any care to get it first changed from Collector, MSD as it
done in earlier occasion, and after deleting the word “Private” informs the
Collector, MSD that the word “Private” is deleted. The appellant company should
have taken previous permission from Collector, MSD first before any change as
per the conditions mentioned in original lease, which are still binding on the
appellant company. Appellant Company has changed from Private Limited Company
to Public Limited Company and Constitution of a Public Limited company and
private limited company cannot remain same, hence Collector, MSD has rightly
asked appellant company to pay unearned income.”
10. Though there is no
specific reference to any clause from the lease deed, which is said to be
binding upon the parties, the same is sought to be referred to in the affidavit
in reply filed by the respondent No. 1 and the Clause X of the said Lease Deed
dated 7th June, 1972 between the Collector and the Original Lessee viz., Acme
Rayon Doubling Pvt. Ltd. reads thus:-
“X. The Lessee shall not at any time, assign
under-let the said plot or any part thereof of otherwise transfer his rights or
interest under this lease to anybody without the previous consent in writing of
the Collector and it shall be open to the Collector while granting such consent
to impose a condition requiring the lessee to pay to the Government half the
unearned increment in the event of any assignment under-letting or transfer as
above whether outright or as a result of an unredeemed mortgage, and every such
assignee, under-lessee or transferee shall use the said plot only for the
purpose for which it has been let out under the terms hereof.”
11. As
already seen above, the learned Single Judge of this Court in the Writ Petition
No. 2592 of 2001, while disposing the said writ petition and while declaring
that the change in the name was on account of operation of law in terms of the
provisions of section 43A(1A) of the Companies Act, 1956 and not on account of
the voluntary act on behalf of the petitioner company, had also observed that
the annual turnover of the petitioner company had exceeded the required limit
to qualify to be public limited company in terms of section 43A of the
Companies Act during the required period, and on that count, due to the
operation of law, there was change in the name of the company. In other words,
there was a clear finding given by this Court that the change in name was on
account of increment in the annual turnover of the petitioner-company for the
required period, and consequently, there was a change in the name. There was no
finding regarding any transfer or assignment or under-letting of the property
which was subject-matter of the lease in favour of the lessee under the Lease
Deed dated 7th June, 1972, and which came into the possession of the petitioner
company as a Private Limited Company. Similarly, in the order dated 25th
February, 2002, the respondent No. 1 has also not arrived at any finding that
there has been any assignment or under-letting or otherwise transfer of
property or interest in the leased property by the petitioner company in favour
of any other company on account of change in the name from Magna Graphics
(India) Private Limited to Magna Graphics (India) Limited. The only finding
which has been arrived at in the order dated 25th February, 2002 by the
respondent No. 1 is in relation to the deletion of the word ‘Private’ and that,
therefore, it has been concluded that there has been change in the constitution
of the company, and hence, the Collector, MSD was justified in asking the
petitioner to pay percentage of the unearned profit. In other words, on one
hand, the respondent No. 1 clearly took note of the order of this Court holding
that the deletion of the word ‘Private’ from the name of the petitioner was on
account of operation of law, and on the other hand, instead of the said order
of this Court, the respondent No. 1 held that the petitioner was required to
take consent of the Collector prior to such change. Whether on merits, the said
finding is sound one or not, it is for the appellate authorities to deal with
the same in the appeal filed by the petitioner against the said order. However,
the fact remains that in spite of the order of this Court, the deletion of the
word ‘Private’ was on account of operation of law, the respondent No. 1
proceeded to hold that the petitioner ought to have taken permission of the
Collector prior to the change in the name. The ruling in that regard has been
given clearly in contravention of the declaration by this Court in its order
dated 1st November, 2001. Hence, it is apparent that the order dated 25th
February, 2002 passed by the respondent No. 1 is in contravention of the
specific ruling given by this Court in its order dated 1st November, 2001.
12. The
point that arises for consideration is whether the decision in that regard by
the respondent No. 1 for 50% of the
unearned profit, in the facts and circumstances of the case, amounts to wilful
disobedience of the said order or not, so as to hold the respondent No. 1 being
guilty of contempt of Court.
13. In
terms of section 16(1) of the Contempt of Courts Act, 1971, a Judge, Magistrate
or other person acting judicially shall also be liable for contempt of his own
Court or of any other Court in the same manner as any other individual is
liable and the provisions of the said Act are to be applied accordingly.
Obviously, therefore, any authority exercising judicial or quasi judicial
function can be held liable for contempt of his Court when, in exercise of
discharge of the duties, the authority acts in violation of the order of this
Court. It cannot be disputed that the respondent No. 1 while disposing of the
appeal under reference was exercising his quasi judicial power. It also cannot be
disputed that the respondent No. 1 was bound by the declaration given by this
Court under order dated 1st November, 2001 in the said writ petition in
relation to the change of name of the petitioner- company to be on account of
operation of law and not on account of voluntary act on behalf of the
petitioner. There is no finding arrived at by the respondent No. 1 that there
has been any act on the part of the petitioner company by which the leasehold
rights in the land in question were either assigned or under-let or transferred
in favour of any other company so as to warrant application of the Clause X of
the said lease Deed and empower the Collector to make demand in terms of the
said provisions contained in the Lease Deed dated 7th June, 1972. A judicial or
quasi judicial authority having brought to his or her notice any order of this
Court, refuses to act in compliance with the order of this Court, it would per
se amount to wilful disobedience of the order of this Court. No judicial or
quasi judicial authority can be heard to contend that it lacked mala fide while
not complying with the order of this Court or that there was no deliberate
attempt on the part of such authority in not complying with the order of this
Court. When an act of non-compliance of the order of the this Court by any
judicial or quasi judicial authority is brought to the notice of such authority
and explanation in that regard is sought for, it is primarily for such lower
authority to justify and explain as to how and in what basis, it could be said
to have acted bona fide in not complying with the order of the this Court, and
in the absence thereof, for all purposes, such non-compliance will have to be
treated as wilful disobedience of the order of this Court.
14. As already observed
above, the explanation given by the respondent No. 1 on the point of service of
the show-cause notice is that (i) there was no specific direction to do any
particular act or to refrain from doing any particular act or not to act under
the order dated 1st November, 2001; and (ii) the Clause X of the Lease Deed
dated 7th June, 1972 empowered the Collector to demand the said monies
consequent to the assignment, under-letting or otherwise transfer of right or
leasehold interest in the property which was leased by the Lease Deed dated 7th
June, 1972.
15. It is well-settled
that any law laid down by the High Court is binding upon all the parties and
authorities within the territory of the State in which the High Court is
situated. In East India Commercial Co. Ltd. v. Collector of Customs AIR 1962 SC
1893, it was clearly held that the law laid down by the High Court is binding
upon all the subordinate courts within the State. The finding as regards the
change in the name of the petitioner being by operation of law and not by any
voluntary act having pronounced by this Court under its order dated 1st
November, 2001 and having attained finality, is binding upon the parties
including the respondent No. 1. The said finding rules out the voluntary act on
the part of the petitioner company in the process of change in the name.
Simultaneously, it cannot be disputed that, for invoking the powers under
Clause X of the Lease Deed dated 7th June, 1972, there necessarily to be a
voluntary act on the part of the petitioner company in the form of assignment
or under-letting or transfer of its right in favour of another company. There
is no reference to any material on record by the respondent No. 1 in his order
dated 25th February, 2002 in that regard, leave aside any finding in that
regard. Being so, taking into consideration all these facts merely because
there was no specific direction to do any particular act or to refrain from
doing any particular act, the respondent No. 1 who was exercising quasi-
judicial powers under the Land Revenue Code at the time of disposing the
appeal, was not empowered to ignore the declaration given by this Court in the
order dated 1st November, 2001 and contrary to the said declaration he could
not have held that the petitioner was required to take prior permission of the
Collector for the change in the name of the petitioner-company. The order of
this Court was amply clear that the deletion of the word ‘Private’ from the
company’s name was on account of operation of law, and, therefore, there was neither
any action nor any necessity for the petitioner to obtain any prior permission
from the Collector for deletion of the word “Private” from the name of the
petitioner company. Obviously, the order dated 25th February, 2002 is,
therefore, as rightly submitted by the learned Advocate for the petitioner
company, in contravention of the order dated 1st November, 2001 passed by this
Court in Writ Petition No. 2592 of 2001, and it apparently discloses a wilful
disobedience of the order of this Court by the respondent No. 1.
16. The respondent No.
1, therefore, is guilty of Contempt of Court in relation to the said order
dated 1st November, 2001.
17. After pronouncement
of the above order, the respondent No. 1 was personally heard on the point of
punishment in the matter, and was asked him whether he wanted to submit his say
on the point of punishment as he was found guilty of contempt of Court for the
reasons stated above. He submitted that he may be pardoned in the matter. He
has further stated that he is M.Sc. LL.B and his family consists of his wife,
two daughters and son and he has completed 50 years of age. He had been the
Additional Commissioner for 2 and ˝ years and now posted as Collector since
11th June, 2003 at Jalgaon. The respondent No. 1 also craved leave to place on
record unconditional written apology. For that purpose, the matter is kept in
the 2nd session.
18. At this stage, the
respondent No. 1 has tendered unconditional apology in writing. The same is
taken on record. Though it is well-settled that the apology, if any, has to be
tendered right in the beginning of the proceedings and belated apology cannot
help the contemner to avoid the punishment, taking into consideration the fact
of unblamish service rendered by the respondent No. 1 till this date and the
statement made by him personally in the course of hearing that henceforth he
will ensure that the orders of this Court are not violated in any manner, I
accept the unconditional apology tendered by him. In the course of personal
hearing, the respondent No. 1 has also disclosed repentance for the manner in
which the order was passed by him on 25th February, 2002.
19. In the result,
while holding the act on the part of the respondent No. 1 in passing the order
dated 25th February, 2002 to be in contravention of the order of this Court
dated 1st November, 2001 passed in Writ Petition No. 2592 of 2001,
unconditional apology tendered by the respondent No. 1 is hereby accepted. It
is needless to say that the Appellate Authority dealing with the appeal on
merits against the order passed on 25th February, 2002 will have to bear in
mind the judgment delivered by this Court on 1st November, 2001 in Writ
Petition No. 2592 of 2001 till the disposal of the appeal. The demand by the
Collector under order dated 17th March, 2001 shall remain suspended. However,
in view of the fact that the unconditional apology has come at late stage,
though revealed repentance on the part of the respondent No. 1, it is necessary
to dispose of the proceedings by awarding costs in favour of the
petitioner-company payable by the said respondent. The respondent No. 1 to pay
the costs of Rs. 1,000 to the petitioner-company. The proceedings are hereby
closed. Notice stands discharged. The contempt petition accordingly stands disposed
of.