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

- **Citation:** [1981] 3 S.C.R. 698
- **Court:** Supreme Court of India
- **Decided:** 1981-05-07
- **Bench:** Y.V. Chandrachud, P.N. Bhagwati, E.S. Venkataramiah
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/needle-industries-india-ltd-ors-v-needle-industries-newey-india-holding-ltd-ors-8246
- **Pages:** 131

## Headnote

Companies Act 1956, Ss. 3(1) (iii), 43A, 45, 81, 299(1), 300(1), 397 and
_..
398and Foreign Exchange Regulation Act 1973, Ss. 29(1), (2) and4(a)-Scope
and effect of
Private company becoming a public company by S. 43A-Reserve Bank directive that holding of the foreign company should be reduced-Reduction effected by
issue of new rights shares-Such shares to be offered to all shareholders Indian as
well as the holding company-Shares however allotted to on~v Indian shareholders-Notice of meeting 'at which allotment made not properly given to holding
company-Ho/ding company whether could renounce the offer in favour of the
person of its choice-Allotment to Indian shareholder-Whether amounts to
oppression.
'Directly or indirectly, concerned in the contract or arrangement'-Effect ofRelationship of friendliness with Director-Lawyer-client relationship with
Director-Whether will disqualify a person from acting as Director.
Public company-Private company-What are-When does a private company
become a public company-No exception provided in S. 45 in favour of S. 43A proviso companies-Need for legislative amendment.
Practice and Procedure-Allegation of a mafaji.ie-Examination of-Whether
can be on the basis of affidavits and correspondence only.
M/s. Needle Industries (fndia) Ltd. (NHL), the appellant was incorporated
under the Indian Companies Act 1913 as a Private Company on 20.7.1949 with
its Registered office at Madras and at the time of its incorporation it was a
wholly owned subsidiary of Needle Industries {India) Ltd., Studley, England
{NI-Studley). In 1961, NI-Studley entered into an agreement with Newey Bros.
Ltd., Birmingham, England (Newey) to invest in the Indian Company. In 1963,
NI-Studley and Newey combined to form the Holding Company in England
M/s Needle Industries-Newey (India) Holding Ltd., the respondent. The entire
share capital of NHL held by NI Studley and Newey was transferred to the
Holding Company in which NI-Studley and Newey became equal shares.
~-
'
:.
N.I.l.L. V. N.I.N.H.L.
699
As a result of this arrangement, the Holding Company came to acquire
A
99.95 per cent of the issued and paid up capital of NIIL. The balance of
0.05 cent, which consisted of six share& being the original nominal shares, was
held by Devagnanam the managing director of NHL.
By virtue of the introduction of section 43A in the Companies Act in 1961,
NHL became a public company, since not less than twenty-five per cent of its
paid-up share capital was held by a body corporate, the Holding Company.
However, under the first proviso to section 43(1) it had the option to retain its
articles relating to matters specified in section 3(1)(iii) of the Companies Act.
NIIL did not alter the relevant provisions of its articles after it became
a public company within the meaning of section 43A. By 1971 about 40 per
cent of the share capital of NHL came to be held by the Indian employees of
the company and their relatives and the balance of about 60 per cent remained
in the hands of the Holding Company NINIH Ltd.
In 1972 Coats Paton Ltd. became an almost 100% owner of NI-Studley.
The position at the beginning of the year 1973 was that 60% (to be exact
59.3%) of the share capital of NHL came to be owned half and half by Coats
and NEWEY, the remaining 40% being in the hands of the Indian Group of
which 28.5% was held by the Devagnanam's group.
Though NHL was at one time wholly owned by NI-Studley and later by
NI Studley and Newey, the affairs were managed ever since 1956 by an entirely
Indian Management with Devagnanam as its Chief Executive and Managing
Director with effect from the year 1961. The Holding Company which was
fomied in 1963 had only one representative on the Board of Directors of
B
c
D
NHL. He was N.T. Sanders, who resided in England and hardly ever attended
E
the Board Meetings.
The holding company reposed great confidence in the
Indian management which was under the direction and control of Devagnanam.
In July 1972 Mr. Devagnanam was offer

## Text

_Characters 0–39,805 of 329,195. This is a partial read: ask again with offset=39805 for what follows._

A
698
B
c
D
E
F
G
H
NEEDLE INDUSTRIES (INDIA) LTD.,
& ORS.
v.
NEEDLE INDUSTRIES NEWEY (INDIA)
HOLDING LTD. & ORS.
May 7, 1981
[ Y.V. CHANDRACHUD, C. J., P.N. BHAGWATI AND
E.S. VENKATARAMIAH, JJ. ]
Companies Act 1956, Ss. 3(1) (iii), 43A, 45, 81, 299(1), 300(1), 397 and
_..
398and Foreign Exchange Regulation Act 1973, Ss. 29(1), (2) and4(a)-Scope
and effect of
Private company becoming a public company by S. 43A-Reserve Bank directive that holding of the foreign company should be reduced-Reduction effected by
issue of new rights shares-Such shares to be offered to all shareholders Indian as
well as the holding company-Shares however allotted to on~v Indian shareholders-Notice of meeting 'at which allotment made not properly given to holding
company-Ho/ding company whether could renounce the offer in favour of the
person of its choice-Allotment to Indian shareholder-Whether amounts to
oppression.
'Directly or indirectly, concerned in the contract or arrangement'-Effect ofRelationship of friendliness with Director-Lawyer-client relationship with
Director-Whether will disqualify a person from acting as Director.
Public company-Private company-What are-When does a private company
become a public company-No exception provided in S. 45 in favour of S. 43A proviso companies-Need for legislative amendment.
Practice and Procedure-Allegation of a mafaji.ie-Examination of-Whether
can be on the basis of affidavits and correspondence only.
M/s. Needle Industries (fndia) Ltd. (NHL), the appellant was incorporated
under the Indian Companies Act 1913 as a Private Company on 20.7.1949 with
its Registered office at Madras and at the time of its incorporation it was a
wholly owned subsidiary of Needle Industries {India) Ltd., Studley, England
{NI-Studley). In 1961, NI-Studley entered into an agreement with Newey Bros.
Ltd., Birmingham, England (Newey) to invest in the Indian Company. In 1963,
NI-Studley and Newey combined to form the Holding Company in England
M/s Needle Industries-Newey (India) Holding Ltd., the respondent. The entire
share capital of NHL held by NI Studley and Newey was transferred to the
Holding Company in which NI-Studley and Newey became equal shares.
~-
'
:.
N.I.l.L. V. N.I.N.H.L.
699
As a result of this arrangement, the Holding Company came to acquire
A
99.95 per cent of the issued and paid up capital of NIIL. The balance of
0.05 cent, which consisted of six share& being the original nominal shares, was
held by Devagnanam the managing director of NHL.
By virtue of the introduction of section 43A in the Companies Act in 1961,
NHL became a public company, since not less than twenty-five per cent of its
paid-up share capital was held by a body corporate, the Holding Company.
However, under the first proviso to section 43(1) it had the option to retain its
articles relating to matters specified in section 3(1)(iii) of the Companies Act.
NIIL did not alter the relevant provisions of its articles after it became
a public company within the meaning of section 43A. By 1971 about 40 per
cent of the share capital of NHL came to be held by the Indian employees of
the company and their relatives and the balance of about 60 per cent remained
in the hands of the Holding Company NINIH Ltd.
In 1972 Coats Paton Ltd. became an almost 100% owner of NI-Studley.
The position at the beginning of the year 1973 was that 60% (to be exact
59.3%) of the share capital of NHL came to be owned half and half by Coats
and NEWEY, the remaining 40% being in the hands of the Indian Group of
which 28.5% was held by the Devagnanam's group.
Though NHL was at one time wholly owned by NI-Studley and later by
NI Studley and Newey, the affairs were managed ever since 1956 by an entirely
Indian Management with Devagnanam as its Chief Executive and Managing
Director with effect from the year 1961. The Holding Company which was
fomied in 1963 had only one representative on the Board of Directors of
B
c
D
NHL. He was N.T. Sanders, who resided in England and hardly ever attended
E
the Board Meetings.
The holding company reposed great confidence in the
Indian management which was under the direction and control of Devagnanam.
In July 1972 Mr. Devagnanam was offered by the office of Managing
Director of group of four companies in Hong Kong and Taiwan and his
family began to reside in Hong Kong and he cogitated over resigning
from his position in NIIL. Coats, on their part were clear that Devagnanam
should relinquish his responsibilities in NHL. in view of the time his role in
Newey's Far Eastern interests was consuming.
The Foreign Exchange Regulation Act 1973, came into force on Junuary 1,
1974. S. 29(1) prohibited non-residents, non-citizens and non-banking companies
not incorporated under any Indian law or in which the non-resident interest was
more than 40 per cent, from carrying on any activity in Indill of a trading,
commercial or Industrial nature except with the general or special permission of
the Rese1ve Bank of India. By section 29(2) (a) if such person was engaged in
any such activity at the commencement of the Act, he or it had to apply to the
Reserve Bank of India, for permission to ·carry on that activity, within six
months of the commencement of the Act
or such further period the Reserve
Bank may
allow. S. 29 (4) (a) imposed a simiiar restriction on such
person or company from holding shares in India, of any company referred to
lcni ause (b) of section 29(1), without the permission of the Reserve Bank. The
F
G
H
700
SUPREME COURT REPORTS
[1981] 3 S.C.R.
A
time for making the application for the requisite permission under section 29
was extended by the Reserve Bank until August 31, 1974.
B
D
E
F
G
Since the Holding Company was a non-resident and its interest in NHL
exceeded 40% NHL had to apply for the permission of the Reserve Bank under
S. 29 (I) FERA for continuing to carry on its business. The Holding Company had also to apply for the permission of the Reserve Bank under S. 29 (4)
(a) FERA for continuing to hold its shares in NHL. ·
NHL appplied to the
Re~erve Bank for the necessary perm1ss1on on
September 3, 1974. By its letter dated May 11, 1976 the Reserve Bank condoned the delay and allowed the application and imposed conditions on NITL
that it must bring down the non-r~sident interest from 60% to 40% within one
year of the receipt of its letter. The Holding Company applied to the Reserve
Bank for a Holding Licence under section 29 (4) (a) of FERA, on September 18,
1974; which application was late by 18 days and was still pending with the
Reser.ve Bank.
Devagnanam who was residing in Hong Kong obtained a
holding
licence dated March 5, 1975 from the Reserve Bank in respect of his shares
in NHL.
On receipt of the letter of the Reserve Bank dated March 11, 1976 NIIL's
secretary sent a reply on May 18, 1976 to the Bank confirming the acceptance of
the various conditions under which permission was granted to NHL to continue its business. On Angust 11, 1976 the term of Devagnanam's appointment
as the Managing Director of NlIL came to an end but in the meeting dated
October I, 1976 of NIIL's Board of Directors bis appointment was renewed
for a further period of 5 years. On October 20th and 21st, 1976 a meeting
took place between the U.K. shareholders and the Indian shareholders of NHL;
But the meeting ended in a stalemate because whereas the Holding Company
wanted a substantial part of the share capital held by it in excess of 40 per cent
to be transferred to Madura Coats an Indian company in which the Holding
Company had substantial interest as an Indian shareholder.
Devagnanam.
insisted that the existing Indian shareholders of NHL alone had the right under
its Articles of Association to take up the shares which the Holding Company
was no longer in a position to hold because of the directives issued by the
Reserve Bank pursuant to FERA.
As negotiations were going on between the competing groups regarding
the Indianisation of NHL, on April 4, 1977 NHL received a reminder letter
dated March 30, 1977 from the Reserve Bank which pointed out that the com·
pany had not submitted any concrete proposal for reduction of the non-resident interest and asked it to submit its proposal in that behalf without any
further delay and that failure to comply with the directive regarding dilution or
foreign equity within the stipulated period would be viewed seriously.
H
A meeting of NIIL's Board of Directors was held on April 6, 1977. All
the directors were present in the meeting with Devagnanam in the chair at the
commencement of the proceedings. Mr. C. Doraiswamy, solicitor-partner of
•
l
N.I.L. V. N.J.N.I.L.
701
King and Partridge was one of the directors present at the meeting. He had no
A
interest in the proposal of lndianisation which the meeting was to discuss. In
order to complete the quorum of two independent directors, the other directors
apart from C. Doraiswamy being interested in the business of the meeting,
Silverston an ex-partner of Doraiswamy's firm of solicitors, was appointed to
the board as an additional director under article 97 of the Articles of Association. Silverston chaired the meeting
after his appointment
as additional
director.
B
The meeting resolved that the issued capital of NHL be increased by a
new issue of 16,000 equity shares of Rs. 100 each to be offered as rights shares
to the exising shareholders in proportion to the shares held by them. The offer
was to be made by a notice specifying the number of shares which each shareholder was entitled to and in case the offer was not accepted within 16 days
from the date on which it was made it was to be deemed to have been declined
by the concerned shareholder.
In pursuance to the aforesaid resolution a letter or offer dated April 14,
1977 was prepared. The envelope containing Devagnanam's explanatory' letter
dated April 12 (without the copy of the letter of the Reserve Bank dated
March 30, 1977) and the letter of offer dated April 14 were received by the
Holding Company on May 2, 1977 in an envelope bearing the Indian postal
mark of April 27, 1977. The letter of offer which was sent to one of the Indian
shareholders, Manoharan was posted in an envelope which also bore the postal
mark of 27th April. The next meeting of the Board was due to be held on
May 2, 1977. The Holding Company was thus denied an opportunity to exercise its option whether or not to accept the offer of right shares, assuming that
any such option was open to it.
The meeting of the Boaard of Directors was held an May 2, 1977 as
scheduled and in the me~ting the whole of the new issue consisting of 16,000
rights share was allotted to the Indian shareholders including members of the
Manoharan group. Out of these the Devagnanam group was allotted 11,734
shares. After marking the allotment of shares a letter was sent to the Reserve
Bank by NHL reporting compliance with the requirements of F.E.R.A. by the
issue of 16,000 rights shares and the allotment thereof to the Indian shareholders which resulted in the reduction of the foreign holding to approximately 40% and
increased that of the Indian shareholders
to almost
60%.
The Holding Company filed a company petition in the High Court under
section 397 and 398 of the Indian Companies Act, 1956 alleging that the Indian
Directors abused their fiduciary position in the Company by deciding in the
meeting of April 6 to issue the rights shares at par and by allotting them exclusively to the Indian shareholders in the meeting of 2nd May, 1977.
In doing so,
they acted ma/a fide and in order to gain an illegal advantage for themselves.
By deciding
to issue the rights shares at par, they conferred a tremendous and illegitimate advantage on the Indian shareholders. Devagnanam
delayed deliberately the intimation of the proceedings of the 6th April to the
Holding Company. By that means and by the late giving of the notice of the
c
D
E
F
G
H
702
SUPREME COURT REPORTS
[1981 I 3 S.C.R.
A
meeting of the 2nd May, the Devagnanam group presented a fail uccomp/i to
the Holding Company in order to prevent it from exercising its lawful rights.
The conduct of the Indian directors lacked in probity and fair dealing which
the Holding Company was entitled to expect.
B
c
D
E
F
G
H
The acting Chief Justice who tried the Company Petition, found several
defects and infirmities in the Board's meeting dated May 2, 1977 and being of
the view that the average market value of the rights shares was about Rs. 190
per share on the crucial date and that, since the rights shares were issued at
par, the Holding Company was deprived unjustly of a sum Rs. 8,54,550 at
the rate of Rs. 90 per share on the 9,495 rights shares to which it wa:s entitled.
Exercising the power under section 398 (2) of the Companies Act, the learned
Judge directed NHL to make good that loss which, could have been avoided
by adopting a fairer process of communication with the Holding Company and
'a consequential dialogue' with them in the matter of the issue of rights
shares at a premium.
The Holding Company being aggrieved by the aforesaid judgment filed an
appeal and NHL filed cross-objections to the decree. The appeal and crossobjections were argued before the Division Bench of the High Court on the
basis of affidavits, the correspondence that bad passed between the parties and
certain additional documents which were filed before the Appellate Court.
The Division Bench concluded that the affairs of NIIL were being conducted in a
manner oppressive, that is to say burdensome, harsh and wrongful to the
Holding Company and held that since the action of the Board of Directors
of NHL was taken merely for the purpose of welding the Company into Newey's
Far Eastern complex it was just and equitable to wind up the Company. With
regard to the cross-objections, the Division Bench held that the injuries suffered
by the Holding Company could not be remedied by the award of compensa·
tion and, therefore, the action of the Board of Directors in issuing the rights
~bares bad to be quashed. It accordingly allowed the appeal filed by the
Holding Company and dismissed the cross-objections of the appellant and
directed that the Board of Directors be suspended and an interim Board
consisting of nine directors proposed by the Holding Company be constituted
and that the rights issue made on 6th April, 1977 and the. allotment of shares
made on 2nd May, 1977 at the Board Meeting be set aside and the Interim
Board be directed to make a fresh issue of shares at a premium to the: existing
shareholders including the Holding Company which was to have a right of
renunciation.
Jn the appeals to this Court, on the question whether the decisions taken
at the meetings of the Boards of Directors of NIIL on April 6 and May 2, 1977
constitute acts of oppression within the meaning of S. 397 of the Companies
Act 1956.
Allowing the appeals.
HELD : I. The charge of oppression rejected after applying to the con•
duct of Devagnanam and his group the standard of probity and fairplay,
which is expected of partners in a business venture. Not only is the law on
his side, but his conduct cannot be characterised as lacking in probity, considering the extremely rigid attitude by Coats. He was driven into a tight corner
from which the only escape was to allow the law to have its full play,
.
[824 lB-C;G-H]
'.
N.I.l.L. V. N.l.N.H.L.
703
2. Even though the company petition falls and the appeals succeed on the
finding that the Holding Company has failed to make out a case of oppression,
the court is not powerless to do substantial justice. between the parties and
place them, as nearly as it may, in the same position in which they would have
been, if the meeting of 2nd May were held in accordance with law. [824 H-825 A]
3. The willingness of the Indian shareholders to pay a premium on the
excess holding or the rights shares is a -factor which, to some extent, has gone in
their favour on. the question of oppression. Having had the benefit of that
stance, they must now make it good. Besides, it is only meet and just
that the Indian shareholders, who took the rights shares at par when the
value of those shares was much above par, should be asked to pay the difference
in order to nullify their unjust and unju~tifiable enrichment at the cost of the
Holding Company. The Indian shareholders are not asked to pay the premium
as a price of oppression. The plea of oppression having been rejected the
course being adopted is intended primarily to set right the course of justice.
[825 F-G]
A
B
c
4. Devagnanam, his group and the other Indian share-holders who took
the rights shares offered to the Holding Company shall pay, pro rat a, 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
D
of NIIL. [827 A-Bl
5. As a further measure of neutralisation of the benefit which the Indian
shareholders received in the meeting of 2nd May, 1977, it is directed that the
16,000 rights shares which were allotted in that meeting to the Indian shareholders will be treated as not qualifying for the payment of dividend for a period
of one year commencing from January 1, 1977 the Company's year being the
Calendar year. The interim dividend or any further dividend received by
the Indian shareholders on the 16,000 rights shares for the year ending December 31, 1977 shall be repaid by them to NHL, which shall distribute the same as
if the issue and allotment of the rights shares was not made untill after
December 31, 1977. This direction will not be deemed to affect or ever to have
affected the exercise of any other rights by the Indian shareholders in respect
of the 16,000 rights shar~s alloted to them. [827 B-D]
6. In order to ensure the smooth functioning of NHL and with a view
to ensuring that the directions are complied with expeditiously, it is directed
that Shri M.M. Sabharwal who was appointed as a Director and Chairman of
the Board of Directors under the orders of this Court dated November 6, 1978
will continue to function as such until December 31, 1982. [827 Fl
7. The
Company will take all effective steps to obtain the sanction
or permission of the Reserve Bank of India or the Controller of Capital Issues,
as the case may be, if it is necessary to obtain such sanction or permission for
giving effect to the directions. (827 Gl
8. Devagnanam and his group acted in the best interests of NHL, in the
matter of the issue of rights shares and indeed, the Board of Directors followed
in the meeting of the 6th April a course which they had no option but to adopt
and in doing which, they were solely actuated by the consideration as to what
E
F
G
H
A
B
c
D
E
F
G
H
704
SUPREME COURT REPORTS
[1981} 3 s.c.R.
was in the interest of the company. The shareholder Directors who were interested in the issue
of rights shares neither participated in the discussion of
that question nor voted upon it. The two Directors who, forming the requisite
quorum, received upon the issue of rights shares were Silverston who, was
a disinterested Director and Doraiswamy who, unquestionably, was so.
L792 A-CJ
9. Disinvestment by the Holding Company, as one of the two courses
which could be adopted for reducing the non-resident interest in NHL to 40%
stood ruled out, on account of the rigid attitude of Coats who, during the period
between the Ketty meeting of October 20-21, 1976 and the Birmingham discussions of March 29-31, 1977 clung to their self interest, regardless of the pressure
of FERA, the directive of the Reserve Bank of India and their transparent impact
on the future of NHL. [792 D-E]
10. Devagnanam and the disinterested Directors, having acted out of legal
compulsion precipipated by the obstructive attitude of Coats and their action it
being in the larger interest of the company, it is impossible to hold that the
resolution passed in the meeting of April 6 for the issue of rights shares at par to
the existing shareholders of NHL constituted an act of oppression against the
Holding Company. [792 E-F]
11. It puts a severe strain on ones credulity to believe that the letters of
offer dated April 14 to the Holding Company, to Rae burn and to M anoharan
were posted on the
14th itself but that somehow they rotted in the post office
until the 27th on which date they took off simultaneously for their respective
destinations. [793 El
12. The purpose behind the planned delay in posting the letters of offer
to Raeburn and to the Holding Company, and in posting the notice of the
Board's meeting for May 2 to Sanders, was palpably to ensure that no legal proceeding was taken to injunct the holding of the meeting. The object of withholding these important documents, until it was quite late to act upon them, was to
present to the Holding Company a fait accompli in the shape of the Board's
decision for allotment of rights shares to the existing Indian shareholders.
[794 C-E]
13. In so far as Devagnanam himself is concerned, there is room enough
to suspect that he was the part-author of the late postings of important documents, especially since he was the prime actor in the play of NILL's Indianisation. But even in regard to him, it is difficult to carry the case beyond the realm
of suspicion and 'room enough' is not the same thing as 'reason enough'.
[795 B-C]
13A. With regard to the impact on the legality of the offer and tht: validity
of the meeting of May 2,
(i) It is quite clear from the circumstances that the rights shares offered to
the Holding Company could not have been allotted to anyone in the
meeting of May 2, for the supposed failure of the Holding Company to
communicate its acceptance before April 30. The meeting of May 2, of
which the main purpose was to consider 'Allotment' of the rights shares
must, therefore, be held to be abortive,
[796 H-797 A]
' ,
. .,
(ii)
N.I.I.L. V, N.I.N.H.L.
705
The utter inadequacy of the notice to Sanders in terms of time stares in
the face and needs no further argument to justify the finding that the
holding of the meeting was illegal, at least in so far as the Holding
Company is concerned. It is self-evident that Sanders could not possibly have attended the meeting. There is, therefore, no alternative save
to hold that the decision taken in the meeting of May 2 cannot, in the
normal circumstances, affect the legal rights of the Holding Company
or create any legal obligations against it. [797 D-EJ
13B. The dilution of the non-resident interest in the equity capital of the
Company to a level not exceeding 40% "within a period of 1 (one) year from the
date of receipt of" the letter was of the very essence of the matter. The sane·
ti on for enforcement of a c,onditional permission to carry on business, where
conditions are breached, is the cessation, ipso facto, of the permission itself on
the non-performance of the conditions at the time appointed or agreed. When
NHL wrote to the Bank on February 4, 1976 binding itself to the performance
of certain conditions, it could not be heard to say that the permission will remain
in force despite its non-performance of the conditions. Having regard to the
provisions of section 29 read with sections 49, 56(1) and (3) and secHon 68 of
FERA, the continuance of business after May 17, 1977 by NHL would have been
illegal, unles5 the condition of dilution of no11.-resident equity was duly complied
with. [799 B; F-HJ
14. By reason of the provisions of section 29(1) and (2) of FERA and the
conditional permission granted by the RBI by its letter dated May 11, 1976 the
offer of rights shares made by NHL to the Holding Company could riot possibly
have been accepted by it. [800 BJ
A
B
c
D
The acceptance of the offer of rights shares by the Holding Company would
E
have resulted in a violation of the provisions of FERA and the directive of the
Reserve Bank. No grievance can be made by the Holding Company that since
it did not receive the offer in time, it was deprived of an opportunity to accept
it. [800 D-GJ
14A.
An offer of shares undoubtedly creates "fresh rights" but, the right
which it creates is either to accept the offer or to renounce it; it does not create
any interest in the shares in respect of which the offer is made.
[801 BJ
Matha/one v. Bombay Life Assurance Co. [1954] SCR IJ7 referred to.
15(i) Before granting relief in an application under section. 210 of the
English Companies Act as under 5ection 397 of the Indian Companies Act the
Court has to satisfy itself that to wind up the company will unfairly prejudice
the members complaining of oppression, but that otherwise the facts will justify
the making of a winding up order on the ground that it is just and equitable
that the company should be wound up. The fact that the company is prosperous
and makes substantial profits is no obstacle to its being wound up if it is just
and equitable to do so. [744 A-B; 775 GJ
Seo/fish Co-op. Wholesale Society Ltd. v. Meyer [1959J A.C. 324, Re Associated Tool lndusiries Ltd. [1964] Argus Law Reports, 75, Ebrahimi v. Westbourne
F
G
H
A
B
c
D
706
SUPREME COURT REPORTS
[1981] 3 S.C.R
Galleries Ltd. [ 1973] A.C. 360 (H.L.), Blissett v. Daniel [68] E.R. 1024. Re Yenidge
Tobacco Co. [1916] 2 Ch. 426 & Loch v. John Blackwood [1924] A.C. 783 referred
to.
(ii) On a true construction of section 397, an unwise, inefficient or careless
conduct of a Director in the performance of his duties cannot give rise' to a claim
for relief under that section. The person complaining of oppression must show
that he has been constrained to submit to a conduct which lacks in probity,
conduct which is unfair to him and which causes prejudice to him in the exercise
of his legal and proprietary rights as a shareholder. [748 E-G]
(iii) Technicalities cannot be permitted to defeat the exercise of the equitable jurisdiction conferred by section 397 of the Companies Act.
Blissett v. Daniel 68 E.R. 1024 referred to.
16. An isolated act which is contrary to law, may not necessarily and by
itself support the inference that the law was violated with a ma/a fide intention
or ihat such violation was burdensome, harsh and wrongful. But a series of
illegal acts following upon one another can, in the context, lead justifiably to
the conclusion that they are a part of the same transaction, of which the
object is to cause or commit the oppression of persons against whom those acts
are directed. [746 G-747 A]
17. An isolated order passed by a Judge which is contrary to law will not
normally sbpport the inference that he is biased, but a series of wrong or illegal
orders to the prejudioe of a party are generally accepted as supporting the inferenc~ of a reasonable apprehension that the Judge is biased and that the party
E
complaining of the orders will not get justice at his hands. [747 B-C]
F
G
H
S.M. Ganpatram v. Sayaji Jubilee Cotton and Jute Mills Co. [1964] 34
Company Cases 830-31 & Elder v. Elder (1952] S.C. 49 referred to.
18. It is generally unsatisfactory to record a finding involving grave consequences to a per son on the basis of affidavits and documents without asking
that person to submit to cross-examination. Men may lie but documents
will not and often, documents speak louder than words. But a total
reliance on the written word, when probity and fairness of conduct are in
issue, involves the risk that the person accused of wrongful conduct is denied
an opportunity to controvert the inferences _said to arise from the documents.
(754 E-G]
Re Smith and Fawcett Ltd. (1942] l All ER 542, 545; Nana Lal Zaver v. Bombay
Life Assurance (1950] SCR 390, 394 Piercy v. Mills (1920] (I) Chancery
77,
Hogg v. Cramphorn, (1967] I, Chancery 254. 260; Mills v. Mills [60] CLR 150,
160, Har/owe's Hominees (121] CLR 483, 485 & Howard Smith v. Amphol [1974]
A.C. 821, 831 Punt v. Symons (1903] 2 Ch. 506; Franzer v. Whall11y 71 E.R. 361
referred to.
In the instant case the High Court was right in holding that, having taken
up a particular attitude, it was not open to Devagnanam and his group to con-
---.,,.-
N.1.1.L. v. N.I.N,H,L.
707
tend that the allegation of ma/a fides could not be examined, on the basis of
affidavits and the correspondence only. There is ample material on the record in
the form of affidavits correspendence and other documents, on the basis of
which proper and necessary inferences can safely and legitimat~ly be drawn.
[755B-Cl
These docucuments and many more documents were placed on the record
mosdy by consent of parties, as the case progressed from stage to stage. That
shows· that the parties adopted willingly a mode of trial which they found to be
most convenient and satisfactory. [756 A-Bl
19. When the dominant motivation is to acquire control of a company,
the sparring groups of shareholders try to grab the maximum benefit for themselves. If one decides to stay on in such a company, one must capture its control. If one decides to quit, one must obtain the best price for one's holding,
under and over the table, partly in rupees and partly in foreign exchange.
Then, the tax laws and the foreign exchange regulations look on helplessly,
because law cannot operate in a vaccum and it is notorious that in such cases
evidence is not easy to obtain. [761 G-H; 762Al
20. It is difficult to hold that by the issue of rights shares the Directors of
NHL interfered in any manner with the legal rights of the majority. The
majority had to disinvest or else to submit to the issue of rights shares in order
to comply with the statutory requirements of FERA and the Reserve Bank's
directives. Having chosen not to disinvest, an option which was open to them,
they did not any longer possess the legal rights to insist that the Directors shall
not issue the rights shares. What the Directors did was clearly in the larger
interests of the Company and in obedience to their duty to comply with the
law of the land. The fact that while discharging that duty they incidentally
trenched upon the interests of tbe majority cannot invalidate their action. The
conversion of the existing majority into a minority was a consequence of what
the Directors were obliged lawfully to do. Such conversion was not the motive
force of their action. [782 A-El
Howard Smith Ltd. v. Ampo/ Petroleum Ltd. [1974] A.C. 821, 874, Punt v.
Symons [1903] 2 Ch. 506 & Fraser v. Whalley [71] E.R. 361 Piercy v. Mills [1920]
I Ch. 77, Hogg v. Cramphorn [1967] 1 Ch. 254, 260 referred to
21. (i) The Directors have exercised their power for the purpose of preventing the affairs of the company from being brought to a grinding
halt, a consumption devoutly wished for by Coats in the interest
~f
their extensive world-wide business. [784 CJ
(ii) The mere circumstance that the Directors derive benefit as shareholders
by reasons of the exercise of their fiduciary power to issue shares, will
not vitiate the exercise of that power. [785 El
A
B
c
D
E
F
G
(iii) The test is whether the issue of shares is simply or solely for the benefit
ff
· of the Directors. If the shares are issued in the largar interest of the
A
B
c
708
SUPREME COURT EPORTS
[1981] 3 S.C.R.
company that decision cannot be struck down on the ground that it
has incidentally benefited the Directors in their capacity as shareholders, [786 CJ
In the instant case the Board of Directors did not abuse its fiduciary power
in deciding upon the issue of rights shares. [786 DJ
Har/awe's
Nominess Pvt.
Lid.
v, Woodside (Lakes Entrance)
Oil
Company No. Liability & Anr. (121) CLR 483, 485, Trek Corporal/on Ltd. v.
Miller et al (33) DLR 3d. 288; Nana/al Zaver & Anr. v. Bombay Life Assurance Co. Ltd. [1950J SCR 390, 419-429; Hirsche v. Sims [1894) A.C. 654, 660-66!;
Gower in Principles of Modern Company Law, 4th Edn. 578 referred to.
22. Under section 287 (2) of the Companies Act, 1956 the quorum for the
meeting of the Board of Director was two. There can be no doubt ·that a
quorum of two directors means a quorum of two directors who are competent
to transact and vote on the business before the Board. [786 EJ
D
23. (i) It is wrong to attribute any bias to Silverston for having acted as an
adviser to the Indian shareholders in the Ketty meeting. Silverston is
by profession a solicitor and legal advisers do not necessarily have
a biased attitude to questions on which their advice is sought or
tendered. Silverston's
alleged personal hostility to Coats cannot,
within the meaning of section 300 (I) of the Companies Act, make him
person "directly or indirectly, concerned or interested in the contract
E
or arrangement" in the discussion of which he had to participate or
upon which he had to vote. [787 E-G]
F
G
(ii) The concern or interest of the Director which has to be disclosed at the
Board meeting must be in relation to the contract entered or to be
entered into by or on behalf of the company. The interest or concern
spoken of by sections 299 (1) and 300 (l) cannot be a merely sentimental interest or ideological concern. Therefore, a relationship of
friendliness with the Directors who are interested in the contract or
arrangement or even the mere fact of a lawyer-client relationship with
such directors will not disqualify a person from acting as a Director on
the ground of his being, under section 300 (I) as "interested" Director.
Howsoever one may stretch the language of section 300 (!) in the
interest of purity of company administration, it is next to impossible
to bring Silverston's appointment within the framework of that provision. [788 A-CJ
The argument that Silverston was an interested Director, that therefore his
appointment as an Additional Director was invalid and that consequently the
H
resolution for the issue of rights shares was passed without the necessary quorum
of two disinterested Directors has no force. [788 D-E)
N.1.1.L. V. N.I.N.H.L.
709
Firestone Tyre and Rubber Co. v. Synthetics and Chemicals Ltd., [1971] 41
A
Company Case 377 distinguished.
24. Silverston's appointment as an Additional Dire;tor is not open to
challenge on the ground of want of agenda on that subject. Section 260 of the
Companies Act preserves the power of the Board of Directors to appoint addi·
tional Directors if such a power is conferred on the Board by the Articles of
Association of the Company. Article 97 of NIIL's Articles of Association
confers the requiste power on the Board to appoint additional Dire;tors. The
occasion to appoint Silverston as an. Additional Director arose only when the
picture emerged clearly that the Board would have to consider the only other
alternative for reduction of the non-resident holding, namely, the issue of rights
shares. It is for this reason that the subject of appointment of an Additional
Director could not have, in the state of facts, formed a part of the agenda.
[788 F.G; 789 A-Cl
25. (i) The power to issue shares is given primarily to enable capital to bo
raised when it is required for the purposes of the company but that
power is not conditioned by such need. That power can be used for
other reasons as for example to create a sufficient number of share·
holders to enable the company to e:tercise statutory powors or to enable
it to comply with legal requirements.
[789 D-E]
Punt v. Sym1ns and Co., [1903] 2 Ch. 506 ; Hogg v. Cramphorn,
[1967] 1 Ch. 254; Howard Smith v. Amphol, [1974] A.C. 821 •.
(ii) The minutes of the Ketty meeting of October 20-21, 1976 saying that
it was agreed that the rights issues, with the Indian shareholders taking
up the U.K. members' rights, would be considered provided it was
demonstrated by NIIL that "there is a viable development plan requiring funds that the expected NHL cash flow cannot meet", cannot also
justify the argument that the power of the Company to issue rights
shares was, by fagreemont conditioned by the need to raise additional
capital for a developm~nt plan. (790 H; 791 A]
(iii) In the instant case the rights shares were issued in order to comply with
legal requirements which1 apart from being obligatory as the only
viable course open to the Directors, was for the benefit of the company
since, otherwise, its developmental activities ,would have stood frozen
as of December 31, 1973. The shares were not issuo d as a part of
takeover war between the rival groups of shareholders. [79J B·C]
26. It is not true to say, as a statement of law, that Directors have no
power to issue shares at par, if their market price is above par. These are
primarily matters of policy for the Directors to decide in the exercise of their
discretion and no hard and fast rule can be laid down to fetter that discretion.
Such discretionary powers in company administration are in the nature of fidu·
ciary powers and must be exercised in faith.
Mala fides vitiate the exercise of
such discretion. [791 E & G]
Hilder and Others v. Dexter [1902] A.C. 474, 480 referred to.
27. The definition of 'private company' and the manner in which a 'public
company' is defined ("public company meami a company which is not a private
B
c
D
E
F
G
H
A
B
c
D
E
F
G
H
710
SUPREME COURT REPORTS
(1981]3 S C.R.
company") bear out the argument that these two categories of companies are
mutually exclusive. But it is not true to say that between them, they exhaust
the universe of companies.
A private company which has become a . public
company by reason of S. 43A, may continue to retain in its articles, matters
which are specified in S. 3(1)(iii) and the number of its members may be or may
at any time be reduced below 7. (810 H; 811 A-Bl
[(i) A section 43A company may include in its articles as part of its
structure, provisions relating to restrictions on transfer of shares,
limiting the number of its members to 50, and prohibiting an invitatiun
to the public to subscribe for shares, which are typical characteristics of
a private company. The expression 'public company' in section 3(i)(iv)
cannot therefore be equated with a 'private company' which has
become a public company by virtue of section 43A.
(811 D-E]
(ii) A section 43A company can still maintain its separate corporate
indentity qua debts even if the number of its members is reduced below
seven and is not liable to be wound up for that reason.
(811 Fl
(iii) A section 43A company can never be incorporated and registered as
such under the Companies Act. It is registered as a private company
and becomes, by operation of law, a public company. (811 G]
(iv) The three contingencies in which a private company becomes a public
company bY virtue of section 43A (mentioned in sub-sections (I), (I A)
and (IB) read with the provisions of sub-section (4) of that section)
show that it becomes and continues to be a public company so long as
the conditions in sub-sections (l), (IA) or (IB) are applicable. The
provisos to each of these sections clarify the legislative intent that such
companies may retain their registered corporate shell of a private com·
pany but will be subjected to discipline of public companies. When
necessary conditions do not obtain, the legislative device in S. 43A is
to permit them to go back into their corporate shell and function once
again as private companies, with all the privileges anJ exemptions
applicable to private companies. The proviso to each of the sub-sections
of S. 43A clearly indicates that although the private company has
become a public company by virtue of that section, it is
pr~rmitted to
retain the structural characteristics of its origin, its birthmark.
[811 H-812 A-BJ
(v) Section 43A when introduced by Act 65 of 1960 did not adopt the
language either of section 43 or of section 44.
Under section 43 where
default is made in complying with the provisions of section 3(l)(iii)
a private company shall cease to be entitled to the privileges and
exemptions conferred on private companies by or under this Act, and
ihis Act shall apply to the company as if it were not a private company.