[1973] 43 COMP. CAS. 225 (MAD.)

HIGH COURT OF MADRAS

Sree Ayyanar Spg. & Wvg. Mills Ltd

v.

V.V.V. Rajendran

RAMANUJAM, J.

Second Appeal Nos. 185 and 186 of 1972

OCTOBER 11, 1972

S. Mohan and D. Raju for the appellant.

R. Gopalaswami Iyengar and B.R. Ramesh Bapu for the respondents.

JUDGMENT

Ramanujam, J—These second appeals arise out of the suits filed by the respondent in each against the appellant-company for recovery of the sitting fees due to them as directors of the company The plaint allegations in both the suits are substantially the same. The plaintiffs in both the suits were shareholders of the defendant-company, hereinafter referred to as the company, till October 3, 1969, when they resigned their offices. As per article 14 of the articles of the company they were entitled to sitting fees at the rate of Rs. 100 for each meeting of the board of directors attended by them while they were directors. According to the plaintiffs a sum of Rs. 2,000 was due to each of them on that account. The practice of the company has been to credit the sitting fees in the company's books as and when they accrued due, leaving it to the directors to draw it at their convenience. It is the common case of both the plaintiffs that when the total amount payable to each of them as sitting fees came to Rs. 700 the then managing director requested them to agree to accept seven preference shares of Rs. 100 each in lieu of the payment of the sum of Rs. 700, that the plaintiffs, however, were not amenable to that request but that the managing director sent the share certificates for seven fully paid preference shares which the plaintiffs firmly refused to accept and returned and that, therefore, they are entitled to get the entirety of sitting fees of Rs. 2,000 each due to them.

The company resisted the suits contending that the suit claims relate to the internal administration of the company and as such it is not maintainable in a civil court. It also contended that though the directors are entitled to a sitting fees of Rs. 100, for every meeting, the company with a view to conserve the little liquid cash it had, approached the directors with a request that they should take preference shares in the company in discharge of its dues to them by way of sitting fees which was accepted by all the directors, that they had passed a unanimous resolution on March 10, 1967, allotting the shares to the various directors including the plaintiffs, that both the plaintiffs were present in the meeting, that they had not demurred to the allotment of seven preference shares to each of them, that they had also attended the meeting held on June 22, 1967, and approved the minutes of the earlier meeting held on March 10, 1967, wherein the unanimous resolution was passed, that they also attended the subsequent meetings which considered and approved the annual accounts of the company for the years 1966-67, 1967-68 and 1968-69 and signed the balance-sheet for all the above years, that in the balance-sheets the preference shares allotted to the plaintiffs were included and shown under the head " Issued and subscribed capital" and that, therefore, the plaintiffs by their conduct in acquiescing in the allotment of the seven preference shares are estopped from questioning the validity of the allotment of the shares in these suits. As regards the claims for the balance of Rs. 1,300, the company stated that the claim is premature as all the directors had agreed to wait till the financial position of the company improves.

On the above pleadings which are common to both the suits, the trial court proceeded to consider the sustainability of the claims of the plaintiffs. At the stage of the trial no oral evidence was adduced by either of the parlies and they only produced documents in support of their contentions. The trial court held that exhibit A-1, the minutes of the meeting of the board oi directors of the company held on March 10, 1967, exhibit A-17, the agenda for the meeting to be held on March 10, 1967, and exhibit B-6, the attendance register, showed that a unanimous resolution had been passed allotting preference shares to such of those members who are entitled to get the sitting fees including the plaintiffs, that seven shares with specific numbers had been allotted to each of the plaintiffs, that the plaintiffs were also parties to the unanimous resolution, that exhibit A-7, the day book of the company showed that a sum of Rs. 700, which had been credited on March 1, 1967, in the plaintiffs' ledger page had been debited on March 10, 1967, being the value of seven preference shares as soon as the unanimous resolution had been passed. Exhibits A-8 to A-16 are adjustment vouchers prepared on the same day showing that Rs. 700, towards the value of the seven shares, has been adjusted against the names of the plaintiffs. The trial court, therefore, found that the plaintiffs in both the suits were consenting parties to the allotment of preference shares to them, that they have not chosen to question the resolution in general or the allotment of shares in particular in any of the subsequent meetings held on June 22, 1967, June 22,1968, and July 17, 1969, which they had admittedly attended. It also found that the profit and loss account and the balance-sheet as on March 31, 1969, had been approved and signed by the plaintiffs and that the said balance-sheets showed the total number of shares issued and subscribed which also included the shares allotted to the plaintiffs. It, therefore, held that the plaintiffs are bound by the allotment of the shares and cannot recover the sum of Rs. 700 each adjusted as the value of the seven preference shares allotted to each of them. As regards the balance of Rs. 1,300, the trial court held that the case of the defendant that all the directors of the company agreed not to press the claim till the financial position of the company improved cannot be a sufficient defence. It, therefore, passed a decree for the said sum in both the suits.

On appeal, the lower appellate court not only upheld the decree for the sum of Rs. 1,300 bat also passed a decree even in respect of the sum of Rs. 700 which had been adjusted towards the value of the seven preference shares. The lower appellate court has held that the allotment of shares was without any application from or the consent of the plaintiffs, that, therefore, they are not bound by the allotment of shares made on March 10, 1967, and that the mere fact that the plaintiffs have attended the various meetings and participated therein will not stand in the way of enforcing their claim for the said sum of Rs. 700 each which was admittedly due to them by way of sitting fees. The lower appellate court also held that the allotment of preference shares on March 10, 1967, was in contravention of section 81 of the Companies Act. Aggrieved against the decision of the lower appellate court the defendant has come in appeal.

The two substantial questions that have been urged before me are :

(1) whether the plaintiffs can question the allotment of shares made by the board of directors of the company on March 10, 1967, and (2) whether the said allotment of shares is in contravention of section 81 of the Companies Act as has been held by the lower appellate court. The view taken by the lower appellate court that the plaintiffs are not bound by the allotment of shares made on March 10, 1967, is based on the following circumstances: (1) the plaintiffs did not apply for allotment of any preference shares, (2) when the share certificates were sent the plaintiffs immediately repudiated the factum of allotment and sent back the share certificates which showed that they were not willing parties to the allotment of shares, (3) the mere fact that the plaintiffs signed the minutes or the balance-sheets cannot bind them if they established that there was no binding contract as between them and the company as regards the allotment of preference shares. The question is whether the above circumstances could justify the conclusion taken by the lower appellate court. The lower appellate court proceeds on the basis that there cannot be any allotment of shares unless there is an application in writing by the plaintiffs to the company seeking allotment of shares. The provisions of the Companies Act nowhere provide that there must be a written application for allotment of shares and, therefore, there can be an oral application for the purpose and an allotment made on the basis of such an oral application. If there has been an oral offer from the plaintiffs for the allotment of shares which had been accepted by the company and if an allotment is made by the company on the basis of that offer, it cannot later on be questioned on the ground that there was no application in writing.

In this case the plaintiffs were in the position of creditors of the company, and in the meeting of directors held on March 10, 1967, by a unanimous resolution the allotment has been made and the plaintiffs' accounts had been debited with the value of the shares. It is also significant to note that even the share certificate numbers allotted to the plaintiffs have been given in the resolution as against their names. Admittedly, the plaintiffs attended the meeting and participated in the proceedings, and the plaintiffs have nowhere stated that there was no such unanimous resolution. Even in exhibits A-3 and A-4 the protests made by the plaintiffs as soon as the share certificates reached them, they have not stated that there was no unanimous resolution on March 10, 1967, allotting the shares. There they have merely stated that they had not made any application for allotment of shares. Having regard to the fact that the unanimous resolution had been passed at a meeting which was attended by the plaintiffs, which fact is not disputed, it must be taken that they were willing parties to the unanimous resolution. The resolution came up for confirmation in the next meeting which was also attended by the plaintiffs. Even at that stage no protest was made against the said resolution. The balance-sheets prepared subsequent to the said allotment of shares for a period of three years had been seen and approved by the plaintiffs in the subsequent meetings held on June 22, 1967, June 22, 1968, and July 17, 1969, which they had attended. The question is whether without questioning the validity of the said unanimous resolution passed on March 10, 1967, the plaintiffs can question the allotment of shares as such only on the ground that they have not made any written application. Exhibit A-1 is the proceeding of the meeting held on March 10, 1967, and it is found therefrom that item 27 of the agenda was for considering the applications for preference shares. The resolution is stated to have been unanimously passed, that the shares applied for by the members should be allotted to them, and the plaintiffs' names are found as numbers 46 and 47 in the list of persons to whom shares had been allotted. Under section 194 of the Companies Act the minutes of a meeting recorded by the company shall be evidence of the proceedings. Therefore, even though it has not been shown that there were written applications from the plaintiffs for allotment of shares, the minutes show that there should have been an oral application by the plaintiffs along with others for allotment of shares. This appears to be clear also from the circumstances under which the unanimous resolution came to be passed. The company's financial position was not sound and, therefore, the amounts due to the various directors as sitting fees were agreed to be adjusted by allotment of preference shares and this all the directors agreed and the allotment of shares had bean done unanimously. In my view the continuous and consistent conduct of the plaintiffs at the time of the passing of the unanimous resolution and subsequently shows that they were willing parties for the allotment of shares If the shares had been allotted against their will, they would have questioned the same in the various meetings held subsequent to March 10, 1967, but in all the subsequent meetings they have not demurred and they have been approving the minutes as well as balance-sheets prepared after such allotment. It appears that the plaintiffs willingly agreed for the allotment of the shares on March 10, 1967, but have chosen to resile from the contract for allotment of shares with some ulterior motive. I do not, therefore, agree with the finding of the lower appellate court that the plaintiffs are not bound by the resolution to which they were parties.

Jones v. Bellegrove Properties Ltd. was a ease where the plaintiff lent a certain sum in 1936 to a company in which he was a shareholder. At the annual general meeting of the company held on December 31, 1946, at which the plaintiff was present as a shareholder, the accounts for the years 1939 to 1945 were presented. In an action by the plaintiff to recover the money lent, the company pleaded that the action was barred by limitation. But, the plaintiff contended that the entry in the balance-sheet showing the total sum due to the various creditors constituted an acknowledgment of his debt and that notwithstanding that the accounts were presented to him in his capacity as shareholder and not as a. creditor, his right of action must be deemed to have accrued on the date of the acknowledgment. In that case it was held that even though the debt due to the plaintiff had not been specifically and separately shown, the general entry giving the amount due to the creditors is sufficient to constitute an acknowledgment. The principle of the above decision has been followed and applied by this court in Rajah of vizianagaram v. Official Liquidator In Sharpley v. Louth and East Coast Railway Co. a shareholder in a company filed a bill to have his contract to take shares declared void on the ground of deception and misrepresentation by the company by reason of its having commenced its business before the minimum share capital was subscribed. The court in that case held that the shareholder is not entitled to the relief claimed as he had taken up the administration of the company as a director after the commencement of the business and thus acquiesced in the company carrying on the business and that in consequence of the act of acquiescence he has entirely lost his right to resile from the contract to take shares. The finding of the lower appellate court that the plaintiffs are not, therefore, bound by the allotment of the shares made on March 10, 1967, has, therefore, to be set aside.

On the question as to whether the allotment of shares made on March 10, 1967, has contravened section 81 of the Companies Act, it is seen that clause 6 of the articles of association of the company enables the directors to issue and allot share in the capital of the company in payment or part payment for any property sold or transferred or any goods or machinery supplied, or for services rendered to the company in or about the formation or promotion of the company or the conduct of the business, and any shares which may be so allotted may be issued as fully paid up shares, or as partly paid up. It is this power which the directors had exercised in making the allotment of preference shares on March 10, 1967. The above provision deals with a special situation where the directors have been given the discretion to allot shares in lieu of payment of dues to the various creditors. Such an allotment of shares cannot, in my view, come under the scope of section 81 of the Companies Act. That section applies when the company proposes to increase its subscribed capital by allotment of shares to the public. It cannot be said that in this case there has been an issue of further capital for the company. What has been done is only to tide over the financial difficulties of the company by allotting preference shares to all the creditors who were also directors of the company. In such circumstances where the shares are treated as paid up by adjusting the amounts due by the company to the various creditors, section 81 cannot have application. Thus the view of the lower appellate court that the resolution is hit by section 81 of the Companies Act appears to be erroneous.

Besides, even if the allotment of shares is held to offend section 81, still it will only be voidable at the instance of shareholders who could be aggrieved against the non-allotment of shares to them. A shareholder who has been allotted a share cannot question the same on the ground that similar offer was not made to all shareholders.

The result is the second appeals are allowed ; the decrees and judgments of the. lower appellate court are set aside and those of the trial court are restored. There will, however, be no order as to costs. No leave.

[1981] 51 COMP. CAS. 743 (SC)

SUPREME COURT OF INDIA

Needle Industries (India) Ltd.

v.

Needle Industries Newey (India) Holding Ltd.

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

In Civil Appeal 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 Madras. Its factory is situated at Ketty, Nilgiris. At the time of its incorporation, NIIL was a wholly owned subsidiary of Needle Industries (India) Ltd., Studley, England (hereinafter called "NI-Studley"). The authorised capital of NIIL was Rs. 50,00,000 divided into 50,000 equity shares of Rs. 100 each. Its issued and paid up capital prior to 1961 was Rs. 6,75,600 divided into 6,756 equity shares of Rs. 100 each. The issued and paid up capital was increased to Rs. 11, 09,000 in 1961. In that year, NI-Studley entered into an agreement with Newey Bros. Ltd., Birmingham, England (hereinafter called "NEWEY"), under which NEWEY agreed to participate in the equity capital of NIIL to the extent of Rs. 4,33,400 consisting of 4,334 equity shares of Rs. 100 each. Thus, in 1961, the position of the shareholding in NIIL was that Nl-Studley held approximately 60.86% of the issued capital and NEWEY held the balance of 39.14%. In 1963, NIIL increased its share capital by issuing 2,450 additional shares to NI-Studley, as a result of which the latter became the holder of about 68% shares in NIIL, the rest of the 32% belonging to NEWEY. Later in the same year, NI-Studley and NEWEY combined to form the Holding Company, of which the full official name, as stated earlier, is the Needle Industries-Newey (India) Holding Ltd. The Holding Company was incorporated in the United Kingdom under the English Companies Act, 1948, with its registsred office at Birmingham, England. The entire share capital of NIIL, held by NI-Studley and NEWEY, was transferred to the Holding Company in which NI-Studley and NEWEY became equal sharers. As a result of this arrangement, the Holding Company came to acquire 99.95% of the issued and paid up capital of NIIL. The balance of 0.05%, which consisted of 6 shares being the original nominal shares, was held by Devagnanam.

The NIIL, it shall have been noticed, was incorporated about two years after India attained independence. As a result of an undertaking given by it to the Govt. of India at the time of its incorporation, and pursuant to the subsequent directives given by the said Government, for achieving Indianisation of the share capital of foreign companies, three issues of shares were made by NIIL in the years 1968, 1969 and 1971, all at par. There was also an issue of bonus shares in 1971. As a result of these issues, about 40% of the share capital of NIIL came to be held by the Indian employees of the company and their relatives while the balance of about 60% remained in the hands of the Holding Company. In terms of the number of shares, by 1971-72, the Holding Company owned 18,990 shares and the Indian shareholders owned 13,010 shares. Out of the latter block of shares, Devagnanam and his relatives held 9,140 shares while the remaining 3,870 shares were held by other employees and their relatives, amongst whom were N. Manoharan and his group who held 900 shares and D.P. Kingsley and his group who held 530 shares. The total share capital of NIIL thus came to consist of 32,000 equity shares of Rs. 100 each.

In or about 1972, a company called Coats Paton 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 England and hardly ever attended the board meetings. The Holding Company reposed great confidence in the Indian management which was under the direction and control of Devagnanam.

But the acquisition of NI-Studley by Coats in 1972 and their consequent entry in NIIL created in its wake a sense of uneasy quiet between 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 Malaysia, Hong Kong, Taiwan, Japan and Australia and from 1972 onwards they drew Devagnanam increasingly into the orbit of their Far Eastern interests. In July, 1972, he was offered the office of managing director of a group of four companies in Hong Kong and Taiwan on a five year contract, with an annual salary of six thousand pounds. He had already been appointed to the board of the NEWEY joint venture company in Osaka, Japan, and acted as the liaison director for that company. He had also been asked to co-ordinate sales with NEWEY Brothers, Australia. Willing to accept these manifold responsibilities, Devagnanam became strenuously involved therein. He and his wife began to reside in Hong Kong and he cogitated over resigning from his position in NIIL. Coats, on their part, were clear that Devagnanam should relinquish his responsibilities in NIIL, in view of the time his role in NEWEY's Far Eastern interests was consuming. The question of appointing his successor as managing director in NIIL then began to be discussed, the Holding Company wanting to have Manoharan as a substitute. Devagnanam carried the feeling that he was already persona non grata with Coats, because of certain incidents which had taken place some years ago.

The Foreign Exchange Regulation Act ("FERA"), 46 of 1973, which came into force on January 1, 1974, provided to Coats and Devagnanam a legal matrix for fighting out their differences. The provisions of 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 Hong Kong to fulfil his commitment to NEWEY's Far Eastern business interests. The FERA had its implications for him too, especially since he could be regarded as a non-resident and did consider himself as such. He obtained a holding licence dated March 4, 1975, from the Reserve Bank in respect of his shares in NIIL. But, his interest in the affairs of NIIL began to flag for one reason or another and he started looking out for a purchaser who would buy his shares on convenient and attractive terms. In a note dated April 29, 1975, which he prepared on "further Indianisation—Needle Industries (India) Ltd"., he pointed out that Indianisation should be considered on the footing that the non-resident interest should be reduced to 40% and that, as between the two feasible methods of Indianisation, namely, (1) going to public, and (2) placement of shares, the latter was preferable. He said:

"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 India in what is left of my working life. I, therefore, have little choice but to sell my shares".

("Ketty" in Nilgiris, is the place where NIIL's factory is situated and is treated as synonymous with NIIL). Devagnanam referred in his note to an inquiry from 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 Madras firm of solicitors called "King and Partridge" who was a director of NIIL, Sanders, a director of the Holding Company on NIIL's board, expressed his grave concern at the proposed deal thus:

"No doubt Mr. Khaitan would pay the earth to acquire NIIL and judging by what Theo (Devagnanam) had said about him in the past, he may be prepared to arrange or facilitate payment abroad, a most attractive possibility from Theo's point of view, since he has said clearly that he intends leaving India for good, finally settling in Australia".

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

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

On October 22, 1975, an important meeting was held in which Alan 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 India and that they would not be a party to any illicit currency deal. Finding that Coats were determined not to allow him to sell his shares to Khaitan, Devagnanam changed his mind and decided against disposing of his holding in NIIL. On November 13, 1975, he wrote to Newey saying:

"I do not think any of us want to see Coats dominate 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 £10,000 in 1975, £11,000 in 1976 and £12,000 for the year ending July 31, 1977.

(p) The fact that NIIL informed the Holding Company on May 21, 1977, which was after the company petition was filed, that the Holding Company could not exercise and will not be allowed to exercise any rights in respect of the whole of 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 rights issue could be considered if the company required further capital for expansion. At the discussions and negotiations held between the Holding Company and the Indian group it was, inter alia, agreed that the rights issue would be made only if there was a viable development plan requiring further funds. The rights issue was made even though no such need for expansion or development existed or was referred to.

(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;......

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

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

"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 2½ years. A period of one year and eight months had gone by since the filing by NIIL of the application for dilution of the non-resident interest. Over and above that, the Reserve Bank had granted a long period of one year for bringing about the dilution of the non-resident interest. It is true that public authorities are hot generally averse, in the proper exercise of their 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.

[1974] 44 COMP. CAS. 228 (DELHI)

HIGH COURT OF CALCUTTA

Shrimati Jain

v.

Delhi Flour Mills Co. Ltd.

S. RANGARAJAN, J.

C.P. NO. 96 OF 1972

MAY 10, 1973

B. K. Shivcharan Singh, A. L. Kapur and Deepak Chaudhri for the petitioner.

Ved Vyas, A. N. Khanna, A. N. Khanna and C. S. Duggal for the respondent.

Satish Chandra for a shareholder of the company.

P. A. Behl for the general manager and secretary of the company.

JUDGMENT

Rangarajan, J.—This order will also dispose of Company Petition Nos. 1 and 2 of 1973, which have been filed by the husband of the petitioner and another shareholder, respectively, of the Delhi Flour Mills Co Ltd. (hereafter referred to as "the company") for calling a meeting of the company (the calling of which "otherwise" has become "impracticable"), and for certain other directions (which are not uniform in all the three petitions) without which the petitioner's purpose in calling such a meeting may not be served. Under section 186 of the Companies Act of 1956 (hereafter called "the Act"), the court has been given power to call a meeting other than an annual general meeting; section 167 of the Act enables general meeting. To the details of these I shall revert later. It is necessary, to start with, to notice briefly the facts which have led to these petitions.

The company was registered in the year 1916 as a public limited company, but is stated to have been controlled by the husband of the petitioner, R. K. Jain (petitioner in C. P. No. 1 of 1973) and some of their family members; Oudhbir Prasad (petitioner in C. P. No. 2 of 1973) who holds 63 ordinary shares of Rs. 10 each, is the son-in-law of the petitioner and was also a senior executive of the company. The petitioner and her husband had no male issue and had, therefore, adopted R. P. Jain, the brother-in-law of Sheel Chandra. Yogesh C. Gupta is said to be a friend of Sheel Chandra and R. P. Jain. There seems to have been considerable animosity between the petitioner and her husband on one side and their adopted son, R. P. Jain, as well as Sheel Chandra and Yogesh C. Gupta on the other.

The articles of association of the company (article 96) provide for eight directors, but there were actually three i (1) R. K. Jain, (2) Sheel Chandra, and (3) Yogesh C. Gupta. It is common ground that R. K. Jain had been appointed a managing director of the company for five years under an agreement to take effect from October 5, 1967, i.e. , till October 4, 1972. Nonetheless, he had also been in fact re-elected at least once in 1969 as a director, even subsequent to the said agreement. Sheel Chandra, who had retired by rotation was re-elected on April 30, 1968. Yogesh C. Gupta who had to retire by rotation next, according to the petitioner, was not in fact re-elected and had to retire at the farthest when the annual general meeting had to be held, namely, April 30, 1971. The accounting year of the company ends on the 31st October of each year. The accounts for the year ending October 31, 1969, were passed at the annual general meeting held on April 30, 1970. There has been no annual general meeting thereafter.

Article 106 provides for the continuing directors acting notwithstanding any vacancy in their body; the interpretation article (article 2) says that words importing the singular number include, where the context administers or requires, the plural number and vice versa. Article 115 provides for a quorum of three directors; but this is seen to be contrary to section 287 of the Act, which provides for one-third the number or two, whichever is higher; this section does not permit any article provision to the contrary, as some other sections of the Act seem to permit. The retirement of directors by rotation is provided by sections 255 and 256 of the Act and articles 109-112. To these details also I shall revert later.

Before the impugned right shares under section 81 of the Act were issued and allotted (on December 4, 1972), the petitioner held about 46% of the shares out of a total of Rs. 8,06,380 units of shares, the claim by the contesting respondents being that by the impugned issue and allotments the shares were increased to Rs. 12,27,100 thus reducing the proportion of the petitioner's holdings to about 25%. It would be sufficient to notice this broad feature but not the details of the holdings. The decision to increase the share capital (under section 81) is said to have been taken at a meeting of the board at which R. K. Jain is said to have been present, but R. K. Jain denies that he was present then. The validity of the said meeting is also denied. More importantly, a notice is said to have been given by the company to the petitioner (and others) concerning the issue of right shares (on November 17, 1972). There is some controversy as to whether an application for allotting right shares was in fact made and even whether one is necessary to be made in writing; it is, however, asserted for the petitioner that a sum of Rs. 2,12,540 was deposited in the company's bank by the petitioner on December 4, 1972 (3rd December being a Sunday), when she came to know of the issue from Bombay through some other source. The money is said to have been either loaned or arranged by Bk. Shivcharan Singh, learned counsel for the petitioner. According to the contesting respondents, the petitioners knew and were also informed in time about the issue of right shares, but they made no application because they did not raise the money and the money which was paid only on the afternoon of the 4th (after the allotments of the shares on the 4th morning) represents the money which R. K. Jain had secreted from out of the company's funds during his management. Applications Nos. 725 of 1972 and 73 of 1973 were filed for the petitioner, her husband, etc., being cross-examined on the said matters.

To complete the narrative it may also be noticed at this stage that S. L. Verma, yet another shareholder, a stranger, holding 3,054 ordinary shares, had applied to this court (in C.A. 481/72 in C.P. 71/72) for an order restraining the company from issuing right shares and Bk. Shivcharan Singh, appearing himself for the company, an order was passed restraining the issue of such shares. It is stated for the petitioners that in view of this restraint order, passed on 5th December, 1972, the contesting respondents have been put to a Hobson's choice, as it were, of either taking the allotments later, in violation of the restraint order, or land themselves in another difficulty by having to assert that the shares had been allotted even on the 4th December, 1972 (it is contended for the petitioner that this was short of the requisite period of notice under section 81). SL. Verma has since filed a suit in this court (No. 23 of 1972) making all the parties in this proceeding also as parties to that suit, alleging that in a petition under section 186 of the Act (these three petitions) the question of the validity of these allotments could not be gone into and asking for a declaration that the issue and allotment of 42,070 right shares (of Rs. 10 each) were illegal, that there was no legally constituted board after 30th April, 1971, that the directors who now purport to function (Sheel Chandra, Yogesh C. Gupta, Balbir Singh and Pritam Singh—the last two being co-opted on 9th and 4th of December, 1972, respectively) are not the directors and that they should be restrained from acting as such.

It was not found necessary to record evidence or allow the request made as aforesaid for cross-examining Mr. and Mrs. R. K. Jain in particular, because Bk. Shivcharan Singh stated that he was willing to argue these applications on facts which were admitted and the legal consequences arising therefrom.

Both sides, however, covered very wide ground touching various aspects in controversy between the parties.

Before discussing at least the important among them it is necessary to read section 186 of the Act:

"186.

(1) If for any reason it is impracticable to call a meeting of a company other than an annual general meeting, in any manner in which meetings of the company may be called, or to hold or conduct the meeting of the company in the manner prescribed by this Act or the articles, the court may, either of its own motion or on the application of any director of the company, or of any member of the company who would be entitled to vote at the meeting,—

(a) order a meeting of the company to be called, held and conducted in such manner as the court thinks fit; and

(b) give such ancillary or consequential directions as the court thinks expedient, including directions modifying or supplementing in relation to the calling, holding and conducting of the meeting, the operation of the provisions of this Act and of the company's articles.

Explanation.—The directions that may be given under this sub-section may include a direction that one member of the company present in person or by proxy shall be deemed to constitute a meeting.

(2) Any meeting called, held and conducted in accordance with any such order shall, for all purposes, be deemed to be a meeting of the company duly called, held and conducted".

Section 79(3) of the Act of 1913 enabled the court to order even an annual general meeting of the company. The present provision (section 186) only enables the court to call a meeting of the company, other than annual general meeting. The English Companies Act of 1929 provided (section 112(3)) that the court may call a general meeting of the company. But there was an amendment of the English Companies Act as a result of the report of a committee headed by Justice Cohen in the year 1945 recommending that it would save expense if the power of calling an annual general meeting should be transferred from the court to a Board of Trade. It was this later position that was made applicable to India by section 186 of the Act of 1956 which restricted the court's power in the matter of Calling an annual general meeting, the same being vested in the Central Government alone.

Every company shall hold every year, in addition to any other meeting, a general meeting. It is called the annual general meeting. Not more than 15 months shall elapse between the date of the general meeting and the next; the first general meeting of the company has to be held within 18 months after incorporation (section 166). At the annual general meeting the following items of business (which shall be deemed to be special) have to be put on the agenda :

(1) consideration of accounts, balance-sheet and reports of the board of directors and auditors;

(2) declaration of dividend;

(3) appointment of directors in the place of those retiring;

(4) appointment and fixing the remuneration of auditors (section 173).

The above items are within the exclusive domain of the annual general meetings.

Section 257 enables a person to stand for directorship at any general meeting, which may be held, and not necessarily only at an annual general meeting. So long as the company is not having the maximum number of directors fixed by its articles, additional directors may be appointed at general meetings up to the maximum limit. The only effect of introducing sub-section (1A) to section 257 seems to be that no one other than a director can stand as a candidate for appointment unless not less than 14 days' notice is given to the company, the company not having the power to waive such notice.

Concerning the retirement of directors by rotation section 255 of the Act provides that, unless the articles provide for retirement of all directors at every annual general meeting, not less than two-thirds of the total number of directors of a public company, or of a private company which is a subsidiary of a public company shall, (a) be persons whose period of office is liable to determination by retirement of directors by rotation, and (b) save as otherwise expressly provided in the Act, be appointed by the company at its general meeting. The remaining directors in the case of any such company shall, in default of and subject to any regulations in the articles of the company, also be appointed by the company in general meeting.

Section 256 deals with ascertainment of rotational retirement of directors at annual general meetings; one-third of the directors of a public limited company retire at every annual general meeting.

There is a conflict of judicial opinion on the question whether those directors who have to retire by rotation also vacate their offices by reason of their own failure to call a general meeting. Venkatarama Aiyar J. (as his Lordship then was), speaking for the Division- Bench of the Madras High Court in A. Ananthalakshmi Ammal v. Indian Trades and Investments Ltd. held that they must be deemed to have vacated their offices. That case arose under sections 76 and 79 of the Act of 1913. This view was followed by a Division Bench of the Bombay High Court in Krishna Prasad v. Colaba Land and Mills Co. Ltd. and by a single judge in In re Hindustan Co-operative Insurance Society Ltd. The single judge of the Calcutta High Court had not noticed an earlier Division Bench decision of the same High Court in Kailash Chandra Dutt v. Jogesh Chandra Majumdar , which had taken a contrary view. The Bombay decision did not specifically discuss the effect of, though it did notice, section 256(4) of the Act, which reads as follows :

"256.

(4)

(a) [f the place of the retiring director is not so filled up and the meeting has not expressly resolved not to fill the vacancy, the meeting shall stand adjourned till the same day in the next week, at the same time and place, or if that day is a public holiday, till the next succeeding day which is not a public holiday, at the same time and place,

(b) If at the adjourned meeting also, the place of the retiring director is not filled up and that meeting also has not expressly resolved not to fill the vacancy, the retiring director shall be deemed to have been re-appointed at the adjourned meeting, unless—

(i) at that meeting or at the previous meeting a resolution for the re-appointment of such director has been put to the meeting and lost;

(ii) the retiring director has, by a notice in writing addressed to the company or its board of directors, expressed his unwillingness to be so re-appointed;

(iii) he is not qualified or is disqualified for appointment;

(iv) a resolution, whether special or ordinary, is required for his appointment or re-appointment in virtue of any provisions of this Act; or

(v) the proviso to sub-section (2) of section 263 is applicable to the case.

Explanation.—In this section and in section 257, the expression ' retiring director ' means a director retiring by rotation".

In a later decision in Lalchand Mengraj v. Shree Ram Mills Ltd., Vimadalal J. discussed the above-said newly added provision from an unusual angle, namely, the impact of the order of the Companies Tribunal (as it then was) restraining the company from considering an item on the agenda relating to the offer by the director retiring by rotation for re-election, but allowing the said item to be adjourned pending further orders of the Tribunal. Vimadalal J. held that there was nothing in subsection (4)(b) of section 256 to lead to the conclusion that the deeming provision was to apply only when a company had the choice of fulfilling its conditions or not. Reliance was placed on Grundt v. Great Boulder Proprietary Mines Ltd. concerning an article provision somewhat similar to section 256(4)(b)(i). The concerned article provision in that case reads as follows:

"If at any general meeting at which an election of directors ought to take place the place of any director retiring by rotation is not filled up, he shall, if willing, continue in office until the ordinary meeting in the next year, and so on from year to year until his place is filled up, unless it shall be determined at any such meeting on due notice to reduce the number of directors in office".

At the annual general meeting held in July, 1947, Grundt retired by rotation but a resolution for re-electing him was lost by show of hands. There was no resolution, however, to reduce the number of directors. It was held that despite what happened Grundt continued in office in terms of the above-mentioned article provision. Lord Greene M. R. was not led to come to a different result merely on account of the absurdity of deeming Grundt to be re-elected despite his re-election having been lost by show of hands "Absurdity", observed Lord Greene M. R., "I cannot help thinking, like public policy, is a very unruly horse". What is of greater significance is that a previous decision in Robert Batcheller & Sons Ltd. v. Batcheller, which came to an opposite conclusion in identical circumstances, was disapproved. In Robert also the articles contained a similar provision and the retiring directors were not re-elected on a show of hands. A poll was demanded and the meeting was adjourned to take the poll, but due notice was not given as required by the articles for the adjourned meeting. At the illegally convened meeting the shareholders purported to elect other directors. Romer J. held that the retiring directors could not be deemed to have been re-elected thus enforcing what was exactly the opposite of what had in fact happened. Cohen L.J., with whom Lord Greene M. R. concurred in Grundt, disapproved of Robert as not being consistent with still an earlier decision by Maugham J. in Holt v. Catterall. The decision in Grundt was nullified by a change made in the Companies Act of 1948 (Schedule I, Table A, article 92) providing that the deeming provision would not apply in a case where a resolution for the re-election of such director had been put to the meeting and lost. Vimadalal J. observed that any statutory change made in England would not affect the validity of Grundt in the matter of interpreting an article of association. Ananthalakshmi Ammal having been a decision rendered under the Act of 1913, did not have to concern itself with section 256(4). Without referring to the same, which was a Division Bench decision, a single judge of the Madras High Court held a contrary view in V. Selvaraj v. Mylapore Hindu Permanent Fund Ltd. and observed that the directors retired at the annual general meeting which was convened but the meeting had not commenced at all owing to the confusion which prevailed; it was held that the previous directors must be deemed to continue in office. The contrary holdings of each of the two High Courts, Madras and Calcutta, introduce an additional element of uncertainty about the true legal position. In the view I take of this petition it seems unnecessary to express an opinion on this rather difficult question which may require fuller consideration when it arises.

The Indian decisions which hold that a retiring director vacates office if he fails to hold the annual general meeting seem to be based upon the view taken by the English court in In re Consolidated Nickel Mines Ltd. and the statement in Buckley on the Companies Acts (12th edition, page 882). Probably the decision of the House of Lords in Morris v. Kanssen is also material. In that case the question was whether the allotment of shares by some who purported to act as directors was valid when it was found that there was no appointment at all, the observations were expressly applicable to the case of there being no appointment at all or the original appointment itself being fraudulent. In Consolidated Nickel Mines Ltd. the question for consideration was whether the two directors were entitled to remuneration in spite of the obligation laid down on them by section 497 of the Act that the directors had to summon a general meeting every year and the articles of association providing that all the directors retire from office at the ordinary meeting.

Shri Ved Vyas, learned counsel for the respondent-company, referred to the uncertainty regarding the legal position in support of his contention that in the circumstances it could not be stated that the directors who were at least functioning de facto had notice of any defect in their appointment and for that reason the allotment of the right shares issued by them could not be questioned on the ground of their lacking the necessary authority to do so.

The articles of association of this company provide that at the second ordinary general meeting and at every succeeding ordinary general meeting, two of the directors, exclusive of the ex-officio directors and the debenture director (if any), shall retire from office; the provisions of this article are subject to the terms of any agreement between the company and a director (article 109). Articles 110 to 112 are also material and they read as follows:

"110. The directors to retire at the second ordinary general meeting shall, unless the directors concerned agree among themselves, be determined by lot, in every subsequent year the directors to retire shall be those who have been longest in office. As between directors who have been in office for an equal length of time, the directors to retire shall be determined by lot. The length of time a director has been in office shall be computed from his last election or appointment where he has previously vacated office. A retiring director shall be eligible for re-election.

111. The company at any general meeting at which any directors retire in manner aforesaid shall fill up the vacated offices by electing a like number of persons to be directors; provided that it shall not be obligatory upon the company to fill up any vacancy or vacancies not necessary to be filled up in order to make up the minimum number of directors required under article 96.

112. If at any general meeting at which an election of directors ought to take place, the place of any retiring director is not filled up, such director shall, if willing to continue in office, be deemed to have been re-elected at such meeting, unless it shall be determined at such meeting to reduce the number of directors, or to leave any vacancy unfilled".

It may be recalled that article 106 provides that the continuing directors may act notwithstanding any vacancy in their body and that article 2 (interpretation clause) states that " words importing the plural number also include the singular number".

Venkatarama Aiyar J. in A. Ananthalakshmi Ammal quoted the observations of Swinfen Eady L.J. in Channel Collieries Trust Ltd. v. Dover, St. Margaret's and Martin Mill Light Railway Co.:

"I think that the context requires that the word ' remaining directors ' should include the case of a remaining director..........and so long as there is any remaining director he may proceed to fill up the board by appointing persons when casual vacancies occur".

Venkatarama Aiyar J. applied those principles and held that the power to co-opt directors can be exercised even though the strength of the directors falls below the minimum and even when there was only one director capable of acting. Where there was at least one director he was capable of co-opting other directors. Pritam Singh and Balbir Singh are stated to have been co-opted on December 4, 1972, by Sheel Chandra and Yogesh C. Gupta. R. K. Jain (husband of the petitioner) retired in 1969, and he was re-elected despite the agreement according to which he was to be a managing director till October 4, 1972 (five years from October 4, 1967). That agreement does not expressly say that R. K. Jain did not have to retire as a director. In none of the model forms which have been suggested by Palmer's Company Precedents is there any particular form to suggest that by reason of an agreement alone the director could be a managing director for a period of 5 years without his also having to continue as director. It seems reasonable that the agreement would be operative if the person concerned was a director throughout the period mentioned in the agreement; in other words, if he ceased to be a director earlier than that period he may not by virtue of that agreement alone claim to be a managing director. As a fact, however, he seems to have been taken as continuing.

In the view that out of a total of three directors, Sheel Chandra and Yogesh C. Gupta alone continued as directors, article 109 would be relevant. It provides that at the second ordinary general meeting of the company and at every succeeding ordinary general meeting two of the directors, exclusive of the ex-officio director and debenture directors (if any), shall retire from office, but the provisions of this article are subject to an agreement between the company and the director. The expression in article 109 "two of the directors" itself suggests that the retirement by rotation of directors would take place only when there are more than two directors, that is to say, only if there are more than two directors, two, out of them, can retire by rotation. It is instructive to refer to In re David Moseley and Sons Ltd., where the concerned article provided for one-third of the directors retiring and also that, if the number is not a multiple of three, then the number nearer to but " not exceeding one-third" to retire from office. At the material date there were only two directors. Simonds J. observed (at page 723) as follows :

"The article, in my judgment, does not provide for the retirement of a director unless one of two conditions is satisfied : either there must be a number which is one-third of the directors, or there must be a number which is nearer to, but does not exceed, one-third. Here it is clear that neither of those conditions is satisfied. There are two directors and, therefore, you cannot find a number which is one-third. There are two directors and, therefore, you cannot find a number which is nearer to but does not exceed, one-third".

This case was referred to and distinguished by Venkatarama Aiyar J. in B. N. Viswanathan v. Tiffin's Barytes, Asbestos and Paints Ltd. on the basis of the language employed in David Moseley and the absence of analogous language in Viswanathan; it was held that even one of two directors should retire at the meeting. The language of article 109 is analogous to that employed in David Moseley.

Even if this view is not correct, Sheel Chandra must be taken to have retired not earlier than July 31, 1971, the last annual general meeting having been held on April 30, 1970 (there can be an interval of 15 months between two general meetings). Then, Yogesh C. Gupta, having become a director later than Sheel Chandra, he could continue as director till the next day on which the annual general meeting was to be held and in this sense did have the potentiality, according to Shri Veda Vyas, of co-opting other directors. I have referred to these aspects which may possibly have to be considered not for the purpose of deciding them but only for the purpose of indicating that these extremely difficult and complex questions cannot be satisfactorily and properly decided, collaterally, for the purpose of finding out whether it is "impracticable" for the company to conduct a meeting.

The expression "impracticable" is not, however, to be construed as "impossible". Sinha J. observed in Lothian Jute Mills Co. Ltd. that section 79(3) of the Companies Act of 1913 contemplated that the court should exercise its powers where it cannot say with reasonable approach to certainty, or even prima facie, that the meeting called in exercise of the powers contained in the regulations will be valid. This was to ensure that the shareholders should not be exposed to uncertainty flowing from the situation and the consequent litigation. Banerjee J. also held in In re Malhati Tea Syndicate that the word "impracticable" means "impracticable from a reasonable point of view". The court must take a "common-sense view" of the matter and must act as a prudent person of business. Following the observations of the Judicial Committee in Commissioner, Lucknow Division v. Deputy Commissioner of Pratabgarh, Banerjee J. observed in In re Malhati Tea Syndicate Ltd. that when there is doubt as to the existence of a board of validly appointed directors and there is possibility of interminable troubles and prejudice to the interest of the company if a meeting is held otherwise than under the direction of the court, it will be expedient for the court to call a meeting of the company. The observations of the same court in Indian Spinning Mills Ltd. v. His Excellency Lt. General Madan Shumshere Jang Bahadur . An appeal against an order of Mooker jee J. calling a meeting was dismissed by the Division Bench, to which Banerjee J. also was a party, when it was felt that the calling of a meeting by the requisitionists would lead to endless litigation and where matters may arise for debate and decision which were already the subject-matter of suits. The Division Bench had no difficulty in holding in such circumstances that a meeting of the company would be " impracticable". In a still later decision of the same High Court in Bengal and Assam Investors Ltd. v. J. K. Eastern Industries P. Ltd., P. B. Mukharji J. (as he then was) reviewed the case law in question and agreed with the principles decided by the aforesaid cases but still declined to order a meeting in that case. He observed that a discretion granted under section 186 should be sparingly used and with great caution so that the court does not become either a shareholder or a director of the company trying to participate in internecine squabbles of a company. In a still later case before the same High Court S. P. Mitra J. reviewed all the authorities in United Breweries Ltd. v. Ruttonjee & Co. Ltd. and summarised the principles to be borne in mind in an application under section 186. It seems to me that the following principles were re-stated :

(1) the court would not ordinarily interfere with the domestic management of a company which should be conducted in accordance with the articles;

(2) the discretion granted under section 186 should be used sparingly and with caution so that the court does not become either a share holder or a director of the company; in other words, the court will ordinarily keep itself aloof and not participate in quarrels of rival groups of directors or companies;

(3) the word " impracticable " has to be construed from a practical point of view;

(4) but where the meeting can be called only by the directors and there are serious doubts and controversies as to who are directors or there is a possibility that one or two or both the meetings called by rival groups have been invalid, the court ought not to expose the shareholders to un certainty and should hold that a position has arisen which makes it "impracticable" to convene a meeting in any manner in which the meeting may be called;

(5) the court should exercise its powers under section 186 when on considering all the facts and circumstances of a case it can with reasonable approach to certainty and even prima facie say that the manner in which meetings are previously called under the Act and/or under the articles would be invalid;

(6) before exercising discretion under section 186 the court must be satisfied that a director or a member moved an application bona fide in the larger interests of the company for removing a deadlock which is otherwise irremovable.

Mitra J., referred to In re El Sombrero Ltd., which was a somewhat extraordinary case. The applicant held 90% of the shares of a private company and each of the two directors held 5%. According to the company's articles of association, the quorum for the general meeting was 2, present in person or by proxy; if within half an hour from the time appointed for a meeting the quorum was not present, the meeting, if convened on the requisition of members, would stand dissolved. No general meeting of the company had ever been held. On March 11, 1958, the applicant requisitioned an extraordinary general meeting under section 132 of the Companies Act, 1948, for the purpose of passing resolutions removing the two directors and appointing two other persons as directors. The directors having failed to comply with the requisition the applicant himself convened an extraordinary general meeting for April 21, 1958. The directors did not attend the meeting either in person or by proxy; the quorum not being there the meeting stood dissolved. On April 29, 1958, the applicant served a special notice under section 142 of the Act of 1948 of his intention to move the same resolutions at the next extraordinary general meeting; on the same day he took summons asking for a meeting to be called by the court under section 135(1) of the Act of 1948 for the purpose of passing the resolutions, and for a direction that one member of the company should be deemed to constitute a quorum at such meeting. The application was opposed by the directors. An order directing a meeting to be held and that one member present should constitute a quorum was made in the circumstances. This case illustrates the exercise of such power in order to suit the exigency of each situation. It is also of interest to note that there was no reference here to the previous decision of the English Court of Appeal in MacDougall v. Gardiner. It was held in that case that where by the articles of association of a company, the directors, and in the alternative, a certain portion of the shareholders can summon a meeting of the company, the court will not order the directors to summon a meeting for the general purposes of the company.

Reliance was placed by the petitioner upon a Full Bench decision of the Allahabad High Court in Balkrishna Maheshwari v. Uma Shankar Mehrotra, a case arising under the old sections 76 and 79 of the Companies Act of 1913. The District Judge of Kanpur had passed an ex parte order directing an annual general meeting of the company which was later on confirmed. The dispute related to the annual general meeting of the company for the year 1946, the last one having taken place on February 3, 1945, According to the articles of association the annual general meeting of the company for the year 1946 had to be called on some date before 31st March of that year. The management of the affairs of the company lay in the hands of a council of 21 members, including a president and a vice president; the duty of calling the annual general meeting of the company in every calendar year lay upon that council. It was contended on one side that 14 days' clear notice had been given for the meeting in 1945, It was contended, on the other hand, that though a notice was directed to issue fixing a date, no notice had been issued and posted with the result that there could be no clear 14 days' notice as required. An objection had been raised by one of the members to whom a notice had been sent that the notice had been invalid. The District Judge had held that a meeting of some sort was held on March 28, 1946, though it was without a clear margin of 14 days' and was invalid. The Full Bench of the Allahabad High Court observed that the District Judge should also have held that he had the competence to find out whether there had been a previous valid meeting as a necessary step in the matter of calling the meeting sought for under section 186 of the Act. Mootham J., speaking for the Full Bench, observed :

"It was strenuously contended by learned counsel that the determination of such an issue might often involve the decision of complicated questions of fact and law and it must, therefore, be inferred that the law did not contemplate the determination of such a question in a miscellaneous proceeding under section 79(3). We are not impressed at all by this argument because we do not think that in the large majority of cases any complicated questions of law and fact will arise for consideration. The question of the validity or otherwise of a meeting will, in a vast majority of cases, turn upon the interpretation of the company's articles of association and some general provisions of the law".

The Full Bench decision is, therefore, of no assistance to the petitioner; this is not a simple case, free from complexity.

Shri Ved Vyas, on the other hand, contended that the present petitions not having been brought in the name of the company they are not maintainable according to the well-known rule in Foss v. Harbottle. As an important facet of the principle of majority rule, it was held that if a wrong has been done to a company only the company could sue. To this rule itself there are exceptions like the act or resolution complained of being itself illegal or ultra vires, the controllers of the company acting in breach of the articles of association and fraud on the minority being committed. This case was followed in a number of cases including Mozley v. Alston, where two shareholders in their individual capacity brought proceedings against the company and members of the board of directors seeking to restrain the directors from acting as such until four of their members had retired by rotation, as required by the company's constitution, and four new directors had been elected in their place. The action failed in the view that if injury was not one personally to the plaintiffs but to the company—an usurpation of the office of directors—being an invasion of the rights of the corporation; yet no reason had been assigned why the corporation had not put itself in motion to seek the remedy. The "pre-eminently procedural character" as described by Palmer (vide Company Law, 21st edition, page 503) of this rule was explained by Jenkins L.J. in Edwards v. Halliwell, as follows :

"The rule in Foss v. Harbottle, as I understand it, comes to no more than this. First, the proper plaintiff in an action in respect of a wrong alleged to be done to a company or association of persons is prima facie the company or the association of persons itself. Secondly, where the alleged wrong is a transaction which might be made binding on the company or association and on all its members by a simple majority of the members, no individual member of the company is allowed to maintain an action in respect of that matter for the simple reason that, if a mere majority of the members of the company or association is in favour of what has been done, then cadit quaestio, no wrong had been done to the company or association and there is nothing in respect of which any one can sue. If, on the other hand, a simple majority of members of the company or association is against what has been done, then there is no valid reason why the company or association itself should not sue. In my judgment, it is implicit in the rule that the matter relied on as constituting the cause of action should be a cause of action properly belonging to the general body of cooperators or members of the company or association as opposed to a cause of action which some individual member can assert in his own right".

In Edwards v. Halliwell two members of a trade union successfully sued two members of the executive committee of a trade union and the union itself for a declaration of illegality regarding a resolution passed by a delegate meeting of the union, without taking a ballot, increasing the contributions of members contrary to the constitution of the union—that it was not to be altered until a ballot of the members had been taken and a two-thirds majority obtained.

The submission of Shri Ved Vyas in this regard is seen to be without much force in so far as a petition under section 186 need not be on behalf of the company for the very language of that section even permits the court suo motu to call a meeting of the company if it has become impracticable to call a meeting, other than an annual general meeting. But the submission of Shri Ved Vyas may have force if this petition, under section 186, is sought to be used mainly for obtaining reliefs pertaining to the alleged usurpation of office by directors. However, an action need not be in the name of the company for actions concerning injuries personal to the petitioner. There is also one other aspect of the rule in Foss v. Harbottle, and the line of cases following it, namely, that the English court of equity had constantly and consistently refused to interfere on behalf of share holders until they have done their best to set right the matter of which they complain, by calling general meetings (vide Lindley L. J. in Isle of Wight Railway Company v. Tahourdin).

The ground has now been prepared for discussing some of the even more important aspects of this case.

The English cases pertaining to what is known as the rule in Royal British Bank v. Turquand, have been described by Gower as "Something of a jungle of irreconcilable decisions" (Principles of Modern Company Law, 3rd edition, page 158). The question which arose in that case, whether a third party dealing with a company is bound to ensure that all the internal regulations of the company have in fact been complied with as regards the exercise and delegation of authority was answered in the negative. In other words, third parties need not enquire into regularity of indoor proceedings and may assume that everything was validly done. Despite this rule having been laid down in such simple terms, as Gower (page 158) points out, the tendency during the last thirty years has been "to whittle it away notwithstanding the vigorous opposition by judges more familiar with company practice". It is most confusing to go into the English cases which have either applied the said rule in Royal British Bank v. Turquand, or did not apply it. Another standard author, Palmer (Company Law, list edition, pages 249-50) thinks that there is an exception to the said rule, namely, where the persons concerned have knowledge of the irregularity or even when those persons are put on enquiry. The effort not to apply the said rule is really based on the theory of protecting the shareholders; the further question, however, is whether there can be any unwarrantable protection given to the shareholders where the interests of the whole community is made to suffer ? It does not appear to be necessary to go into these difficult and nice questions in the present case because counsel for both sides did not endeavour to go into them.

Shri Ved Vyas relied upon section 290 of the Indian Act in support of his contention that the directors who were functioning in this case, even in the view contended for by the petitioner that they were not de jure directors, were at least de facto directors who functioned without any knowledge of the defect in their continuance or functioning as directors. To appreciate this contention it would be necessary in the first instance to read section 290:

"290. Acts done by a person as a director shall be valid, notwithstanding that it may afterwards be discovered that his appointment was invalid by reason of any defect or disqualification or had terminated by virtue of any provision contained in this Act or in the articles :

Provided that nothing in this section shall be deemed to give validity to acts done by a director after his appointment has been shown to the company to be invalid or to have terminated".

The corresponding section of the Indian Act of 1913 was section 86 and of the English Act section 180. The principle obviously is that there should be no vacuum in the affairs of a company and that all acts done bona fide should be fully protected not only between third parties and the company but also between the company and its members and between members and members.

While considering an article providing for the validity of acts of directors, notwithstanding the discovery later of some defect in the appointment of such directors, Chitty L.J. observed as follows in Dawson v. African Consolidated Land and Trading Co. :

"It is not framed so as to render valid a resolution passed by any persons who without a shadow of title assume to act as directors of a company .... The clause is addressed..........to cases of defective appointment or disqualification".

Dawson was followed in British Asbestos Co. v. Boyd. Until Dawson the object of such article and the concerned provision of the Act was understood as only protecting honest acts of de facto directors in relation to outsiders bat not as between members of the company and the company. In British Asbestos Co. Ltd. v. Boyd, Farwell J. had held that the above view of law to be incorrect; bona fide acts of de facto directors were also good between members of the company inter se and members of the company and the company. The same principle was reiterated in Channel Collieries Trust Ltd. v. Dover, St. Margaret's and Martin Mill Light Railway Co. It was pointed out by Lord Cozens Hardy M.R., when dismissing the appeal against the judgment of Sargant J. that the concerned statutory provision, which had to be construed broadly not only between the company and outsiders but also between the company and the members, validated the bona fide allotment of the shares in question. The view of Farwell J. in Dawson , that the subsequent discovery of a defect did not merely mean the discovery of facts but of the defect itself, was approved. Swinfen Eady L.J. referred to the defects not being present in the minds of the parties who so acted.

The said principle was affirmed by the House of Lords in Morris v. Kanssen also but the observations were confined to acts of defective appointment but not extending to cases of no appointment at all or a fraudulent usurpation of authority from the outset.

This distinction between discovery of facts and discovery of defects was also made by Dua J. (as he then was), speaking for a Division Bench of the Punjab High Court in Karnal Distillery Co. Ltd. v. Ladli Parshad Jaiswal . There is a full discussion of this aspect by Mallick J. in Albert Judah Judah v. Rampada Gupta. Referring not only to standard text writers but also to Indian cases, Mallick J. observed at pages 735-36 as follows:

"In all the authorities, however, cited before me and noticed before the term de facto directors has been restricted to directors with defective appointment. No case has been cited in which the court has upheld the act of a ' pretended director ' without any appointment. In other words, in no case the term de facto director has been applied to a mere usurper without any appointment whatsoever".

To the same effect is also the decision of a Division Bench of the Allahabad High Court in Shiromani Sugar Mills Ltd. v. Debi Prasad, where Desai J., speaking for the Division Bench, considered some of the cases and held that the actions of de facto directors are protected when brought to their minds. A similar view was also taken by Chopra J. in Fateh Chand Kad v. Hindsons (Patiala) Ltd.

Without recording evidence it is hardly proper to go into the facts bearing on this contention. The materials on record do not show any consciousness on the part of those concerned, before the controversies arose, that all or any of the retiring (?) directors could not legally continue. When by letter dated 6th December, 1972 (annexure "C" to the petition), Yogesh C. Gupta informed Bk. Shivcharan Singh (in reply to his letter of the 5th informing the company of the restraint order (annexure "B" to the petition) that the allotment of right shares had been made on 4th December, 1972, Bk. Shivcharan Singh wrote a long letter on 9th December, 1972 (annexure "D"), informing Yogesh C. Gupta about his various legal contentions, also citing some decisions in support. My attention has not been drawn to any communication prior to 4th December, 1972, drawing the attention of the company to the fact that the right shares could not be issued on the ground that there was no validly constituted Board. For this reason alone it does not seem possible for the petitioner, without bringing in more evidence if the same is available on this question to contend that the directors, if they were only de facto, did have notice of the alleged defects, and could not have validly allotted those right shares. Probably realising this difficulty Bk. Shivcharan Singh mounted his attack upon the invalidity pertaining to the decision to issue right shares and to the illegality of the notice issued in this behalf.

The invalidity of the decision to issue the right shares is only a part of the general question, discussed already, whether there were de jure or de facto directors and even if they were only de facto, they had notice of the alleged defects. Any other attack, on how the meeting, at which the decision to increase the capital was taken, was conducted would be possible only if detailed evidence is led on this question. In these circumstances Bk. Shivcharan Singh vigorously concentrated on the sufficiency of the notice that was issued to the petitioner (and others) concerning the issue of right shares.

According to article 10 of the articles of association :

"Where the board of directors of a company decides to increase the subscribed capital of the company by allotment of further shares, then unless the requirements of sub-section (1 A) of section 81 of the said Act are complied with, (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 the 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 offer, within which the offer, if not accepted, will be deemed to have been declined".

The notice is said to have been issued on November 17, 1972, and on the date of receipt the petitioner and her husband should have 15 clear days which would take us to December 3, 1972, but the issue in this case is stated to have been made on December 4, 1972; December 3, 1972, was a Sunday.

Section 81 of the Act provides for the issue of further capital; 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. This offer should be made by 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. In construing the expression "not less than 15 days" it is urged by the petitioner that the date of issuing the notice and receiving the notice must be excluded. It is at par with the expression "7 clear days' notice", which was interpreted in King v. Turner as exclusive of the dates of dispatch and receipt. The same was followed in In re Hector Whaling Ltd as exclusive of the date of service of the notice and exclusive of the day on which the meeting is to be held. The same view was taken by a Division Bench of the Madras High Court in N. V. R. Nagappa Chettiar v. Madras Race Club, where a number of English decisions were also considered. A Division Bench of this court consisting of P. N. Khanna and Prakash Narain JJ. in Bharat Kumar Dilwali v. Bharat Carbon and Ribbon Manufacturing Co. Ltd., interpreted the expression "not less than 21 days' notice" used in section 171 of the Act as notice of 21 whole or clear days. Part of the day, after the hour at which the notice is deemed to have been served, cannot be combined with the part of the day before the time of the meeting on the day of the meeting, to form one day.

The offer of right shares is stated to have been made by a letter dated November 17, 1972. The right shares are said to have been allotted on December 4, 1972; December 3, 1972, was a Sunday. 17 days notice inclusive of the date of issue and date of receipt of the letter will take us to December 3, 1972. Notice of not less than 15 days alone is necessary to be given; that will take us to December 3, 1972, alone exclusive of the day of the despatch and day of receipt of letter. A letter posted in Delhi ordinarily reaches another in Delhi the next day. It is contended that the notice asked the offeree to accept the notice "within 17 days from the date of this offer" and, therefore, there is an extension of time for that reason beyond what the statute prescribes. 17 days "from the date of offer", namely, November 17, 1972, will not take it beyond December 3, 1972. Prima facie the notice does not appear to be shorter than what is required by section 81. Even assuming that the notice was short a declaration cannot be granted against the allottees of those shares in their absence. This would be plainly opposed to the rule of natural justice. It will be sufficient to cite the latest decision of the Supreme Court on this question, i e., Smt. fatan Kanwar Golcha v. Golcha Properties Pvt. Ltd. in which both the official liquidator and the company court were held to be bound by the rules of natural justice. Even an application for the rectification of the share register could not be disposed of without notice to the parties affected. The court may even decline to grant rectification on an application made under section 155 if it involves any complicated questions and the parties could properly be referred to a suit in such a case. The following passage from Halsbury's Laws of England, third edition, page 218, may be usefully referred to :

"If the court thinks that the case, by reason of its complexity or on the ground that there are matters requiring investigation or otherwise, could more satisfactorily be dealt with by an action, the court will decline to make an order on a motion, without prejudice to the right of the applicant to institute an action for rectification".

A similar approach has been adopted by the Indian courts also (vide In re Dhelakhat Tea Co. Ltd., and Mahendra Kumar Jain v. Federal Chemical Works Ltd.). There is also great force in the contention that a suit having been filed, though not by the petitioner but by S. L. Verma (another shareholder) to which the petitioner and her husband are parties, specifically raising the question of the invalidity of the allotment of the right shares and rectification of the register of members concerning the entries made on the basis of the said allotments, it would not be proper to adjudicate on this question summarily.

A right of a shareholder of a company to vote is a right to property, vide Lord Maugham in Carruth v. Imperial Chemical Industries Ltd. . It has been repeatedly held by the Supreme Court that when civil consequences are involved an order having such consequences should comply with the rules of natural justice. The Supreme Court has recently pointed out in Smt. Jatan Kanwar Golcha v. Golcha Properties Private Ltd. that the company court will not pass orders affecting the rights of parties without notice to them; this is nothing but a rule of natural justice. It is instructive to also refer to In re Greater Britain Insurance Corporation Ltd.: ex parte Brockdorff. The Court of Appeal dismissed the appeal against an order passed by Russel J. throwing out an action praying for rectification of the register of members of the company on the ground that the interests of third parties were concerned and that it was not for the court to exercise jurisdiction conferred upon it by article 32 of the Companies (Consolidation) Act, 1908, in the absence of a party affected, even if satisfied, and that it must be enforced in an action to which affected persons are parties.

It remains to notice one other contention of Shri Ved Vyas that article 115, fixing the quorum for the meeting of the board of directors at three, is ultra vires in view of section 287(2), prescribing the maximum as two, not permitting an article provision to the contrary. It is true that there are some provisions contrary to what has been laid down (section 174 is one such) and that section 9 provides that save as otherwise expressly provided in the Act the provisions of the Act shall have effect notwithstanding anything to the contrary in the memorandum or articles of association. I wonder whether it has any relevance here. I have also not been referred to any decided case where such an article provision as the present (though it seems to be common enough) was ever questioned merely on the ground that it provides for a greater quorum than what the Act insists—it may be another matter if the articles provide for less. It seems unnecessary to express an opinion on this question also. Even if the decision to issue right shares was invalid a declaration concerning its invalidity cannot be granted in the absence of those who would be affected by it.

Bk. Shivcharan Singh drew my attention to In re Sly, Spink & Co. where rectification of register of members was granted when the shares were allotted by directors who were less than the quorum. (This argument subsumes that Pritam Singh and Balbir Singh were not properly co-opted and that even if Sheel Chandra and Yogesh C. Gupta were validly continuing as directors they could not by themselves (two of them alone) decide to raise the capital of the company. But then R.K. Jain is said to have been present at a meeting when such a decision was taken; R. K. Jain disputes this and this leads to a controversy concerning facts also). Assuming that everything contended for by Bk. Shivcharan Singh is true and valid we are confronted here with a somewhat extraordinary request to cancel the allotment of right shares without even an application to rectify the register of members, without even having all those who would be affected by that decision as parties before the court and when a suit for such a relief is pending in this very court. Perhaps the greatest difficulty faced by the petitioner is on the above score.

Bk. Shivcharan Singh wanted the sympathy of the court for the petitioner in the view that the adopted son was trying to displace his adoptive parents supported by his own brother-in-law and friends. But sympathy by itself would be hardly enough. The petitioner would have at least to show that there is no other option than to apply under section 186. Even this has not been done. Shri Ved Vyas contends, and with some force, that the members themselves may apply for an extraordinary general meeting under section, 169 and articles 64 to 66; if that were so it would not be for this court to call such a meeting. The petitioner can also apply to the Central Government to convene an annual general meeting under section 167. The petitioner has not obviously considered it sufficient to apply under section 167 to the Central Government because no relief in regard to the issue of right shares could be obtained. That is why these petitions have been filed for getting a declaration concerning the invalidity of the issue and allotment of right shares under the guise of the court having to give directions pertaining to who should vote at such a meeting if one is to be called by this court. I have endeavoured to study myself the reported decisions on this subject and I have not been able to come across a single case—none has been cited to me—where the court went to the extent of rectifying the register of members for the purpose of giving directions as to who should vote.

There was an exceptional situation arising out of the register of members and other records, maintained under the Building Societies Act, 1874, being destroyed due to enemy action, when Vaisey J. (in Payne v. Coe) gave a direction to hold a meeting in accordance with the rules for ascertaining the names and addresses of the members by means of public advertisement. No question of rectifying the register of members for the purpose of giving such directions arose in that case.

Krishnaswamy Nayudu J. of the Madras High Court had given a direction that those whose names appeared in the register of members on a certain date would vote at the meeting called under the old section 39(3), before the present section 186 was placed on the statute book. Venkatarama Aiyar J. in Viswanathan v. Tiffin's Barytes, Asbestos and Paints Ltd. has referred to this direction by Krishnaswamy Nayudu J. as follows : "to this course the company could have no objection". In the case on hand, however, there are several objections (they have been already noticed) to a direction being given that there should be no voting on the basis of the right shares. The petitioner's purpose would not be served if such a direction is not given. What was originally 46% had been reduced to about 25% after the said issue; even if the petitioner is supported by the other two petitioners and S.L. Verma it would be of no avail.

The circumstances discussed at length do not justify the court using its discretion under section 186 of the Act to call a meeting as prayed for.

C. A. Nos. 725 of 1972 and 73 of 1973 are accordingly dismissed. The separate application filed (C.A. No. 119 of 1973) to dismiss the main petition on the admissions contained therein has also become unnecessary. It is also needless to be detained by the question who is the proper person to represent the company, a point raised in C.A. No. 700 of 1972. All these interlocutory applications as well as the main petition (C.P. No. 96 of 1972) are dismissed. There will be no order as to costs in any of them in the circumstances.

[1960] 30 COMP. CAS. 367 (CAL.)

Hindusthan Commercial Bank Ltd.

v.

Hindusthan General Electrical Corn.

LAHIRI AND BACHAWAT, JJ.

A.O.O.NOS. 129 AND 130 OF 1958

AUGUST 11, 1959

BACHAWAT, J. - The appeal No. 129 of 1958 is from an order sanctioning a scheme of arrangement under section 391 of the (Indian) Companies Act, 1956. The appeal No. 130 of 1958 is from an order confirming reduction of capital. Both these orders were passed by BOSE J. The two appeals have been heard together. This judgment is intended to cover both the appeals.

The respondent company is a public company limited by shares. It was incorporated in 1945 under the Indian Companies Act, 1913. The appellant holds 2,000 preference shares in the share capital of the company. The authorised share capital of the company is Rs. 50,00,000 divided into 3,75,000 ordinary shares of Rs. 10 each, 10,000 5 per cent. cumulative participating preference shares of Rs. 100 each, 50,000 deferred shares of Rs. 5 each. The memorandum of the company states that shares have the rights, privileges and conditions attached thereto as are provided by the regulations of the company for the time being with power to increase and reduce capital of the company and to attach thereto respectively such preferential, deferred, qualified or special rights or privileges or conditions as may be determined by or increased under the regulations of the company and to vary modify or abrogate any such rights, privileges and conditions in such manner as may for the time being be provided by the regulations of the company. Article 74 authorises the company to reduce its capital by special resolution subject to confirmation by the court. Article 8 contains a statement of the rights and privileges of the several classes of shares. The article is expressly subject to what is thereafter provided in other articles of the company. BY article 8 the preferential shares have the right to a fixed cumulative preferential dividend of five per cent. per annum (income-tax free) on the capital for the time being paid up on the shares and to extra non-cumulative dividend in certain contingencies, the total dividend in any year not to exceed 7 per cent. In winding up all the preferential shares are to rank in priority both as regards the return of capital and the payment of arrears of the 5 per cent. preferential dividend. The total paid up capital of the company is Rs. 29,20,300. The paid up capital consists of 1,89,985 ordinary shares of Rs. 10 each, 8,452 preference shares of Rs. 100 each and 35,050 deferred shares of Rs. 5 each all fully paid up. The main business of the company is the manufacture of radios and radiograms and household electrical accessories. The company had always the benefit of technical collaboration with well-known foreign firms of repute. The company was, however, never able to declare dividends. The 5 per cent. preferential cumulative dividend on the preference shares was not paid for 12 years since 1945 up to 1957. The company sustained heavy losses. The total loss up to the 31st July, 1956, amounts to Rs. 36,00,000. In May, 1956, the company entered into an arrangement of technical collaboration with Messrs. Simplex Electric CO. Ltd., a well-known company of electrical equipment manufactures of Birmingham. This arrangement was approved of by the Government of India. For the purpose of maintaining and increasing its production further finance is necessary and for that purpose a presentable balance-sheet is essential. For the present Messrs. Simplex Electric Co. Ltd. has agreed to the arrangement only on a royalty basis. If the financial condition of the company improves, they will also partake in the capital of the company. The company had to incur various loans. A sum of Rs. 10,80,000 is due to the Industrial Finance Corporation of India on account of loans advanced by the Corporation. The loans from Messrs. Karamchand Bros. Private Ltd., the managing agents of the company, stands at over Rs. 75,00,000. The total dues of the sundry creditors amount to Rs. 5,36,286.

In these circumstances, in January, 1957, the board of directors of the company proposed a scheme of arrangement between the several classes of shareholders and as part of the scheme a reduction of the capital of the company. The proposal for the scheme of arrangement was accompanied by an explanatory circular. The scheme, as originally proposed, provided for (a) cancellation of share capital in accordance with the arrangement detailed in the circular (b) for reduction of the share capital by cancellation of the paid up capital to the extent of Rs. 70 for every preference share of Rs. 100 each, to the extent of Rs. 8 for every ordinary share of Rs. 10 each and to the extent of Rs. 4 each for every deferred share of Rs. 5 each (c) for consolidation of the shares and for issue of fully paid up ordinary shares of Rs. 10 each in lieu of preference, ordinary and deferred shares and for allotment of 3 fully paid up ordinary shares of Rs. 10 each in lieu of one preference share of Rs. 100 each including the arrears of dividend thereon (d) for reduction of the authorised capital of the company to Rs. 37,50,000 ordinary shares of Rs. 10 each (e) for further issue of 2,83,142 ordinary shares of Rs. 10 each subject to the sanction of the Controller of Capital Issues out of which 1,20,000 ordinary shares are to be allotted to the managing agents or their nominees in part satisfaction of their dues from the company to the extent of rupees 12 lakhs, 66,858 ordinary shares are to be offered to the existing shareholders of the company and the remaining 96,284 ordinary shares are to be disposed of by the directors in such manner as they deem fit. The explanatory circular pointed out that by the proposed cancellation of capital a sum of Rs. 22,51,720 would become available for wiping out the debit balance in the profit and loss account and that on making such adjustment a sum of Rs. 13,48,280 would remain to the debit of the profit and loss account. The circular states that the managing agents had subject to the acceptance of the scheme, agreed to forego Rs. 13 lakhs out of their advance to the company and to convert Rs. 12 lakhs out of the balance of the advance into ordinary shares of the company. The circular added that the managing agents had not charged any interest on their advance since August, 1951, and had thereby in leiu of one preference share of Rs. 100 each including the arrears of dividend thereon (d) for reduction of the authorized capital of the company to Rs. 37,50,000 dividend into 37,50,000 ordinary shares of Rs. 10 each foregone interest amounting to over Rs. 10 1/2 lakhs and had also foregone their monthly allowance amounting to Rs. 3,75,000.

As the scheme of arrangement involved reduction of capital the directors convened separate class meetings of the preference, ordinary and deferred shareholders for passing special resolutions for reduction of capital and also an extraordinary general meeting of the three classes of shareholders for approving the scheme of arrangement. Special resolutions for the reduction of capital were unanimously passed by the three classes of shareholders at their separate class meetings held on the 14th February, 1957. The scheme of arrangement as a whole including the reduction of capital was also approved at the extraordinary general meeting of the preference, ordinary and deferred shareholders held on the same day. At the extraordinary general meeting the scheme was opposed by the appellants, S.S. Pure who held 2,000 preference shares and by one Mohammed Abdulla who held 100 preference shares. The other shareholders present at the meeting approved of the scheme.

On the 12th of September, 1957, the appellant instituted in this court a suit for declaration that the resolutions passed on the 14th February, 1957, were ultra vires and illegal and not binding upon the company and for consequential injunction. We are informed that the suit is still pending. Mr. Mitra did not contend that the pendency of the suit is a relevant matter to be taken into consideration by the court in these appeals. On or about the 25th September, 1957, the company presented to this court two separate petitions for reduction of capital and for sanctioning the scheme of arrangement. The two petitions were admitted by MALLICK J., who gave the necessary directions for the convening of the class meetings of the three classes of shareholders for approval of the scheme of arrangement. Pursuant to that order three separate class meetings were convened and held on the 11th of December, 1957. The proposed scheme of arrangement with certain important modifications was approved by all the three separate meetings. The class meetings of ordinary and deferred shareholders unanimously approved of the modified scheme of arrangement. The meeting of the preference shareholders was attended by shareholders holding shares of the value of Rs. 6,42,700. Shareholders holding shares of the value of Rs. 4,42,700 voted in favour of the resolution approving the modified scheme. No one voted against the resolution. The appellant holding preference shares of the value of Rs. 2 lakhs was represented at the meeting by one V.G. Pai. The chairman enquired of V.G. Pai whether he was voting against the resolution and, if so, to raise his hands against it. V.G. Pai did not vote and informed the chairman and the meeting that he was neutral and that he would not vote either for or against the resolution, the chairman thereupon declared the resolution for approval of the modified scheme to be carried unanimously by the persons present and voting at the meeting. Subsequently by letter and in the affidavits filed on its behalf the appellant attempted to contend that the minutes of the meeting did not accurately represent what transpired there and that V.G. Pai really intended to oppose the resolution. This contention was apparently not pressed before BOSE J. Before us Mr. Mitra expressly abandoned this contention. Before BOSE J., it was argued that the modified scheme was not approved by the requisite majority of preference shareholders. This contention was rejected by BOSE J. There is no substance in this contention. The records show clearly that the majority in number representing 3/4 ths in value of preference shareholders present and voting at the meeting of preference shareholders approved of the modified scheme. Before us Mr. Mitra expressly conceded that the modified scheme was approved by the requisite majority of preference shareholders and other classes of shareholders in accordance with section 391 of the (Indian) Companies Act, 1956.

The scheme which was approved at the separate class meetings was the scheme as originally proposed subject to certain important variations proposed and carried out at those meetings. In lieu of the original proposal to cancel the preference shares and to allot ordinary shares in lieu of the preference shares the amended scheme provides for reorganisation and sub-division of the reduced preference shares of Rs. 30 each into preference shares of Rs. 10 and for allotment of 3 preference shares of Rs. 10 each in lieu of the reduced preference shares of Rs. 30 each including arrears of dividend on the preference shares. The modified scheme attaches to the reorganised preference shares of Rs. 10 each the right to payment of a fixed cumulative preferential dividend at 7 per cent. per annum and for certain extra divided not exceeding in any year 5 percent perannum. The modified scheme also provides for sub-division and reorganisation of the deferred shares in lieu of their cancellation as provided in the original scheme.

The two applications were heard and disposed of by BOSE J., by two separate judgments and orders on the 13th of June, 1958. He allowed both applications. By one order he sanctioned the modified scheme of arrangement subject to the conditions that (a) within three months from the date of his order the managing agents of the company would pay off the claims of the unpaid sundry creditors of the company, (b) within one month from the date of the order the managing agents would acknowledge in writing that they forego Rs. 13 lakhs of their claim against the company, and (c) if the company does not or is unable to pay any dividend to the shareholders by December 31, 1951, this fact may be brought to the notice of the court and the court would be at liberty to give directions for changing the management of the company if it thinks fit to do so and to take such other steps as it appears to the court to be proper. By a separate order he confirmed the proposed reduction of capital. These two appeals have been preferred from those orders. Pending the appeals the operations of the order of BOSE J. sanctioning the scheme of arrangement was stayed.

It is to be observed that the reduction of capital is an integral part of the scheme of arrangement. The scheme of arrangement being expressly conditional on the confirmation of the reduction of capital by the court the scheme will not be sanctioned if the reduction of capital is not confirmed. On the other hand, if the court for some reason refuses to sanction the scheme of arrangement, in the circumstances of the case, it will not be fair and equitable to confirm the reduction of capital alone.

Many of the matters which arise for consideration in the two appeals are common to them. In this judgment I will firstly deal with the contentions which are peculiar to one or the other appeal and will thereafter deal with contentions which are common to both of them.

Appeal No. 130 of 1958 is from the order confirming the reduction of capital. The share capital is sought to be reduced by cancelling the paid up share capital which has been lost and is unrepresented by available assets. Mr. Mitra contended that the company had no power to reduce any share capital which is already lost. He relied on the decision of JESSEL M.R. in In re Ebbw Vale Steel, Iron and Coal Co. {(1876) 4 Ch. D. 827}, in which JESSEL M.R. held that under section 9 of the English Companies Act, 1867, he had no jurisdiction to sanction the reduction of the paid up share capital which had been partially lost. He relied upon the following observation of JESSEL M.R. at page 831 : "You do not `reduce' capital which has been already paid up and exhausted." It is curious that such an eminent Master of Law as the late Master of the Rolls came to a conclusion which certainly did not represent the state of the law even at the time when that decision was given. This point is brought out clearly by LORD MACNAGHTEN in British and American Trustee and Finance Corporation Ltd. v. Couper {[1894] A.C. 399, 412}. The court had then and has now power to confirm a reduction of capital by cancellation of lost capital. The point is made clear by section 100 of the (Indian) Companies Act, 1956, which provides that subject to confirmation by the court, a company limited by shares may, if so authorised by its articles by special resolution, reduce its share capital in any way: and in particular and without prejudice to the generality of this power, the company may cancel any paid up share capital which is lost or is unrepresented by available assets.

Mr. Mitra argued that where the whole of the paid up share capital has been lost, part of it cannot be cancelled. There is no substance in this contention. The company may reduce its share capital in any way. It may cancel any paid up share capital which is lost. It may cancel a part of the lost share capital. Where the whole of the capital is lost the company may cancel any part of it. The section does not place any fetter on the power of the company as is suggested by Mr. Mitra. In appeal No. 130 of 1958,, Mr. Mitra further argued that the ,loss of capital has not been proved. In agreement with BOSE J., I am of the opinion that the loss of capital has been sufficiently proved. There is cogent evidence of the loss of capital on the record of this case. The balance sheets tell their own tale. There is also the affidavit of a director of the company in support of the petition. Even prima facie evidence of the loss of capital is sufficient where the power of the court under section 100 of the (Indian) Companies Act is invoked. See Caldwell v. Caldwell and Co. (Paper Makers) Ltd. (2) [1916] W.N. 70 (H.L.), Marwari Stores Ltd. v. Gourishanker Goenka. (3) [1936] 6 Comp. Cas. 285.

In appeal no. 129 of 1958, Mr. Mitra expressly abandoned the contention that the issue of fresh shares under the scheme of arrangement amounts to borrowing and as such as in in violation of section 293(d) of the (Indian) Companies Act, 1956. This contention was advanced before BOSE J. and was rejected by him. It is plain that the raising of capital by the issue of shares cannot be the borrowing of monies within the meaning of section 293(d) of the (Indian) Companies Act, 1956.

In appeal No. 129 of 1958 Mr. Mitra argued that clauses 9(a) and 9(c) of the scheme of arrangement which authorises allotment of 1,20,000 ordinary shares to the managing agents and which further authorises the directors to dispose of 96,284 ordinary shares in such manner as they deem fit is in contravention of section 81 of the (Indian ) Companies Act, 1956. It is true that by the scheme it is proposed to increase the subscribed capital of the company by the issue of new shares and such proposal is ,made at a time subsequent to the first allotment of shares in the company. In such a case, by section 81, subject to any directions to the contrary which may be given by the company in general meeting, the new shares have to be offered to the persons who are then holders of the equity shares of the company in proportion to the capital then paid up on those shares. In the absence of statutory restrictions the directors had power to issue new shares up to the limit of the authorised capital in such manner as they think fit. The section is intended to fetter this power of the directors where no direction is given on this smatter by the company in the general meeting. The section preserves the power of the company in a general meeting to give directions to the contrary. In this case, the company in a general meeting has given clear directions to the contrary. having regard to these directions, the allotment of shares to the managing agents and the disposal of shares in such manner as the directors deem fit, cannot be said to be in contravention of section 81. I should have expected that a complaint of contravention of section 81 should have come from the holder of an equity share who is sought to be deprived of the benefit of section 81. But the complaint in this case comes not from the holder of an equity share but from the holder of preference shares.

In appeal No. 130 of 1958, Mr. Mitra contended that clause (I) of the modified scheme of arrangement passed at the class meetings held on the 11th December, itself involves reduction of capital and as such the modified scheme ought not to be sanctioned because there is no special resolution for reduction of capital by the modified scheme and because the formalities required for the confirmation of such reduction have not been complied with. He relies on the decision of SIMONDS J. in re St. James Court Estate Ltd. (1) [1944] I Ch. 6; [1943] 13 Comp. Cas. 218. In that case SIMONDS J. refused to sanction a scheme of arrangement which provided for conversion of preference shares into redeemable preference shares. Such a conversion was in substance a surrender of the existing preference shares in exchange for the redeemable preference shares and amounted to a reduction and simultaneous increase of capital. Nothing of that kind took place by clause (I) of the modified scheme. Clause (I) of the modified scheme provides for reorganization and sub-division of preference shares of Rs. 30 into preference shares of Rs. 10 each and also for extinguishment and/ or modification of the special rights, privileges and conditions attached to the existing preference shares. The preference shares as such were not extinguished. The existing shares with the reduced capital were sub-divided and re-organised and the rights attached thereto were modified.

I will now deal with the arguments which are common to both appeals. Mr. Mitra argued that the scheme of arrangement as a whole including the reduction of capital has modified special rights attached to preference shareholders.

Mr. Deb appearing on behalf of the respondent expressly conceded that the scheme has modified some of the special rights and privileges attached to the preference shares. This concession was made though BOSE J. seems to have ruled that the scheme did not modify any of those special rights and privileges. I think that the concession was rightly made by Mr. Deb out of deference to BOSE J., I must briefly state the reasons for this conclusion. By article 8 (e) of the articles of association the preference shares rank in priority both as regards return of capital and payment of arrears of the 5 percent. Preferential dividend whether declared or not over all other shares for the time being in the capital of the company. The scheme of arrangement wipes out the arrears of the 5 per cent. cumulative preferential dividend for the last twelve years. In lieu of one preference share of Rs. 100 and reduced to Rs. 30 and all arrears of dividends thereon a preference shareholder would receive three preference shares of Rs. 10 each. The preference shareholders have been allowed to retain 30 percent of their paid up capital while the ordinary and preference shareholders have been allowed to retain 20 percent. of their paid up capital. The provision for reduction of capital forms part of one entire arrangement and it is impossible to say that extra 10 percent. capital represents arrears of dividend the payment of th4e arrears of dividend is being made by the issue of shares. The market value of the shares is not known. The right to receive payment of the arrears of dividend in cash is taken away. quite clearly the scheme of arrangement abrogates and or modifies, commutes and affects the preferential right to payment of the arrears of the 5 percent. cumulative preferential dividend. the scheme cancels 70 percent. of the paid up capital of the preference share without cancelling the entire paid up capital of the ordinary and the deferred shareholders. The scheme, therefore, abrogates modifies and affects the right of preference shareholders to preferential return of capital. The decision of In re Mackenzie & Co. Ltd. (1) [1916] 2 Ch. 450. is distinguishable. In that case the share capital of the company was divided into ordinary and preference shares. The preference shares were entitled to a fixed cumulative preferential dividend on the nominal amount of the capital from time to time paid up on them but they had no priority as to capital. ASTBURY J. held that in the circumstances of the case a rateable reduction of capital of both preference and ordinary shares did not alter the rights attached to the preference shares. In the instant case the right of the preference shareholder to preferential return of capital on winding up is abrogated, modified and affected by the cancellation of part of the capital paid up on the preference shares before cancelling the entire capital paid up on the deferred and the ordinary shares.

Mr. Mitra then referred us to the provisions of section 106 and 107 of the (Indian) Companies Act, 1956, and article 77A of the articles of the company.

By section 106 of the (Indian) Companies Act, 1956, in the case of a company the share capital of which is divided into different classes of shares provision may be made by the memorandum or articles authorising the variation of the rights attached to any class of shares subject to the consent of the holders of not less than three-fourth of the issued shares of that class or the sanction of a resolution passed at a separate meeting of the holders of those shares and supported by the holders of not less than three-fourths of those shares. By sub-section (2) of section 106 any provision in the memorandum or articles in force immediately before the commencement of the Act which specifies for this purpose a proportion of less than three-fourths had been specified therein instead. The variation of the rights attached to a class of shares in pursuance of such a provision is subject to the right of dissentient shareholders given by section 107 of the (Indian) Companies Act, 1956. Where an application on behalf of the holders of not less than ten per cent. of the issued shares of that class is made to the court in accordance with the section to have the variation cancelled the variation cannot take effect unless and until it is confirmed by the court and the court may disallow the variation if it is satisfied that the variation would unfairly prejudice the shareholders of the class represented by the applicant.

In this case rights have been attached to separate class of shares by the articles and the articles also provide for variation of those rights. Article 77A provides that the rights and privileges attached to each class of share may, subject to the provisions of section 66A of the Indian Companies Act, 1913, corresponding to section 106 of the (Indian) Companies Act, 1956, be modified, commuted, affected, abrogated or dealt with by agreement between the company and any person purporting to contract on behalf of that class, provided such agreement is (a) ratified in writing by the holders of at least three-fourths in nominal value of the issued shares of the class or is (b) confirmed by an extra-ordinary resolution passed at a separate general meeting of the holders of shares of that class. The last sentence of this article runs thus :

" This article is not to derogate from any power the company would have had if this article were omitted."

Mr. Mitra argued that the modification of the special rights attached to the preference shares could only be made with the sanction of the majority of the holders of three-fourths of the issued preference shares in accordance with article 77A of the articles of association read with section 106 of the (Indian ) Companies Act, 1956, and as the sanction of the requisite majority was not obtained, the scheme of arrangement as a whole including the reduction of capital cannot be sanctioned by this court.

Now, rights may be attached to classes of shares either by the articles or by the memorandum. Where rights are attached to a class of shares by the articles, in view of section 31 of the (Indian) Companies Act, 1956, it is permissible for the company to alter those rights by special resolution. And where rights are attached to a class of shares by the memorandum, in view of section 13 and 16 of the (Indian) Companies Act, 1956, such a provision of the memorandum is not deemed to one of its conditions and may, therefore, be altered in the same manner as the articles of the company. The (Indian) Companies Act,1956, does not contain a provision similar to section 23(2) of the English Companies Act, 1948, by which the power of the company to alter any condition in the memorandum which could lawfully have been contained in the articles does not extend to variation or abrogation of the special rights of any class of members. An alteration of the rights attached to a class of shares by special resolution is however open to challenge on the ground that it is an abuse of the power of the company to alter its articles and an oppressive device to benefit the majority at the expense of the class. For this reason the memorandum or the articles generally contains a provision authorising the variation of the rights attached to any class of shares with the sanction of the holders of a not less than three-fourths of the issued shares of that class. Such a provision is lawful and is sanctioned by section 106 of the (Indian) Companies Act, 1956. Article 77A of the articles of association of the respondent -company is such a provision. In form article 77A explicitly states that it does not derogate from any other power which the company would have had if it had been omitted.

Under these articles in strict law it is permissible for the company to alter the rights attached to a class of shares by passing a resolution altering the articles. See Palmer's company Precedents, 16th edn., page 531. Still except in special circumstances and in the absence of scheme of arrangement the court should refuse to sanction a reduction of capital involving alteration of class rights where the special resolution for reduction has not obtained the approval of the requisite majority of the class in accordance with the variation of rights clause, sometimes the provision for variation of class rights in terms restricts the powers of the company to alter those rights. In In re Old Silkstone Collieiries Ltd. (1) [1954] I. Ch. 169. article 6 provided that the special rights attached to any class of shares may either with the consent in writing of holders of three-fourths shares of that class or with the sanction of an extraordinary resolution passed at a separate general meeting of such holders (but not otherwise) be modified and abrogated. Certain special rights had been attached to two classes of preference stock by two previous special resolutions for reduction of capital which had been confirmed by the Court. The company passed a third resolution for reduction of capital which purported to extinguish those stocks. This resolution was not passed with the assent of separate meetings of those classes or with the consent of the holders of three-fourths shares of those classes. The English Court Of appeal refused to confirm the reduction. The court held that the reduction modified or abrogated the special rights of those classes. On this finding it was conceded that the total elimination of the preference capital was incompetent with out the approval of those classes under article 6. EVERSHED M.R. observed that the special rights could only be taken away under the articles by observing the restrictions of article 6.Jenkins L.J. observed that in order validly to carry out the reduction it was necessary to put the proposals to those two classes of stock in accordance with article 6 and to procure the approval of those two classes to the proposals by the requisite majority. It should be noticed that article 6 provided that the special rights might be modified or abrogated in the manner provided in that article but not otherwise, that article 6 had been neither deleted nor altered and that the company by special resolution in exercise of its power under the articles sought to abrogate and modify the special rights without observing the restrictions imposed by the articles and in these circumstances the court held that the special resolution had not been validly passed. The learned editors of Buckley on the Companies Acts, 13th edn., at page 158, foot note (r), notice the case of Fife Coal Co. Ltd., petitioners (2) [1948] S.C. 505. where a Scottish Court in special circumstances confirmed a reduction of capital which involved repayment of part of the ordinary paid up share capital otherwise than in accordance with the rights of the preference shareholders without requiring the approval of a class meeting of such shareholders.

It should be noticed that there was no scheme of arrangement or compromise in the case of In re Old Silkstone Collieries Ltd. (1) [1954] I. Ch. 169. the special rights attached to a class of shares may lawfully be altered by the machinery of a scheme of arrangement and under section 391 the court may sanction a scheme which involves alteration of class rights.

The word, "arrangement ", in section 391 is of wide import. By section 390, "arrangement" includes reorganisation of the share capital of the company by the consolidation of shares of different classes or by the division of shares into shares of different classes or both those methods. The court has the power to sanction a scheme of arrangement though the scheme modifies the special rights attached to a class of shares.

In re Hoare & Co. Ltd. (2) [1910] W.N. 87. NEVILLE J. sanctioned a scheme of arrangement which involved a reduction of capital and which modified the special rights attached to two classes of preference shares. The share capital was divided into preference shares of pounds 10 each, A cumulative preference shares of 10 pounds each and ordinary shares of I pounds all fully paid up. The preference dividend was five per cent. The preference shares had priority in dividend and capital over the ordinary shares. The scheme provided for cancellation of the entire paid up capital of the ordinary shares and for extinction of those shares, for cancellation of the paid-up capital of preference shares to the extent of 2 pounds share and for cancellation of the capital paid up on a preference share of 10 pounds each to the extent of 8 pounds- IOS. per share and for consolidation and conversion of the reduced shares into shares of 10 pounds each all ranking pari passu as regards dividends and capital. The reduction there, as in this case, was conditional on the scheme of arrangement being approved by the shareholders of the company and sanctioned by the court. The scheme provided for the extinguishment of all arrears of dividend on the two classes of preference shares and for issue of participation certificates to the to two classes of shareholders. Palmer's Company Precedents, 16th Edition, pages 1103-1104,, gives a form of an order sanctioning a scheme of arrangement and altering the rights of shareholders as fixed by the memorandum. The share capital of the company was divided into ordinary and deferred shares and the scheme varied the rights attached to ordinary shares by conferring on them a right to a preferential dividend at the rate of 7 1/2 per cent on this paid up capital in modification of clause 5 of the memorandum . I am conscious that the majority required by section 391(2) is the majority in number representing three-fourths in value of the class of members present and voting at the meeting whereas the majority required by the provision referred to in section 106, is three-fourths of the holders of the class of shares, and the court is bound to scrutinise this scheme of arrangement with care. But the absence of approval of the scheme by the majority required by the provision referred to in section 106 is no bar to the sanction of the scheme of arrangement under section 391.

Mr. Mitra argued that the special formalities required by article 77A or any other provision for variation of class rights such as is referred to in section 106 must be followed and observed just as the special formalities required to be observed by section100 to 105 on reduction of capital must be complied with in the case of a scheme of arrangement involving reduction of capital. There can be no doubt that where the scheme of arrangement involves reduction of capital, the special provisions relating to reduction of capital must be complied with. (see in re Cooper: Cooper v. Johnson Ltd. (1) [1902] W.N. 199; In re India National Bank Ltd. (2) (1949) 53 C.W.N. 207, 210., and Bengal Bank Ltd. v. Suresh Chakravarthy 93) [1951] 21 Comp. Cas. 315. Sections 100 to 103 of the Indian Companies Act being special provisions relating to the power of the court to confirm reduction of capital, they limit the generality of the power which is conferred on the court by section 391 to sanction a scheme of arrangement where the court called upon .to sanction a scheme of arrangement finds that it is also called upon to confirm a reduction of capital, the court is bound to follow and observe the formalities which it ought to follow and observe in cases of confirmation of reduction of capital. A provision in the articles providing for variation of rights of a class does not, however, prescribe any formality or formalities to be observed by the court. A provision of this type enables the company to alter the rights attached to a class without the sanction of the court. Where the power of the court to sanction a scheme of arrangement involving modification of the rights attached to a class in invoked such a provision can have no application. Mr. Mitra next argued that in the exercise of its discretionary power, the court should refuse to sanction the reduction of capital as also the scheme of arrangement. On this point, his argument was two-fold. He argued firstly that the reduction of capital and the scheme of arrangement are unfair and inequitable inasmuch as they cancel part of the capital paid up on the preference shares without cancelling the entire capital paid upon the deferred and the ordinary shares though, under the constitution of the company, the losses should fall in the first instance upon the ordinary and the deferred shareholders. He argued secondly that apart from this major consideration, having regard to all the circumstances of the case, the court ought not to confirm the reduction of capital or sanction the scheme of arrangement.

In this case the statutory formalities with regard to the reduction of capital as also the scheme of arrangement have all been complied with. The creditors do not object and are not prejudiced. Still before confirming the reduction of capital the court is under the duty of satisfying itself that reduction is fair and equitable between the different classes of shareholders : per LORD SIMONDS in Scottish insurance Corporation Ltd. v. Wilson Clyde and Coal Co. Ltd. (1) [1949] A.C. 462, 486; 19 Comp. Cas. 202 And before sanctioning the scheme of arrangement the court is under the duty of satisfying itself that the scheme is such that an intelligent and honest man, a member of the class concerned and acting in respect of his interest, might reasonably approve : per MAUGHAM J. in In re Dorman Long & Co. (2) [1934] I. Ch. 634, at 655, 657; 5 Comp. Cas. 30. whereas in this case the reduction of capital forms part of the scheme of arrangement : these two considerations are interlinked with each other and the overall duty of the court is to satisfy itself that the scheme of arrangement together with the reduction of capital is such that an intelligent and honest man, a member of the class concerned and acting in respect of his interest, might reasonably approve and might reasonably consider to be fair and equitable.

I will now consider the first branch of Mr. Mitra's argument. Prima facie on general principles of fairness the burden of the loss upon reduction of lost capital ought to fall in the same manner as it would have fallen if the company were being then wound up. But there may be special circumstances which may make it fair and equitable to throw the burden of the loss in some other manner. Thus where there is only one class of shares prima facie the loss should borne rateably by all. But for good reasons the loss may be made to fall unequally on different sets of shares and the court may sanction such a reduction : see British and American Trustee and finance Corporation Limited v. Couper (3) [1894] A.C. 399. In re Credit Assurance and Guarantee Corporations Ltd. (4) [1902] 2 Ch. 601. And also where there are different classes of shares are constituted without any preference shares and the preference shares are constituted without any preference as regards capital, prima facie there should be an all-round reduction of capital and the loss should be borne rateably by all the shares : Bannatyne v. Direct Spanish Telegraph Co. (5)(1887) 34 Ch. D. 287, 299-300. But where there are different classes of shares and one class has priority as regards return of capital in winding up prima facie the loss should be thrown first on the shares which have no such priority: See In re Floating Dock Co. of St. Thomas Ltd. (1) [1895] 1 Ch. 691. But special circumstances may justify a departure from this prima facie rule. In the present case the preference shares have a right to preferential return of capital in winding up. Prima facie the whole of the capital paid on the deferred and the ordinary shares should be cancelled before any part of the capital paid up on the preference shares is cancelled. This prima facie rule has not been observed. Only 80 per cent of the capital paid up on the ordinary and the deferred shares have been cancelled. Without cancelling the remaining 20 per cent of their paid up capital there has been cancellation of 70 percent of the capital paid up on the preference shares. But I have come to the conclusion that we ought not to withhold our sanction to the scheme of reduction on the ground that the entire capital paid up on the ordinary and deferred shares should have been cancelled in the first instance for the following reasons :

This ground was not taken and was not argued before BOSE J. There is no reference to this ground in the two judgments delivered by him. Mr. Mitra conceded before us that he did not argue this point before the learned judge and that this is a new point taken by him for the first time in appeal. The present contention appears to be contrary to the submissions made on behalf of the appellant by one Bhagatatula Venketa Sanyasi Rao in his affidavit affirmed on the 11th January, 1958. In paragraph 24 of his affidavit he submitted that the proposed reduction was in any event not equitable inasmuch as the proportion of reduction was not rateable and that the losses, if any, was not rateably borne by the different classes of shareholders and that the proposed reduction and or scheme would work injustice on all the different classes of shareholders. Far from saying that the whole of the ordinary and deferred share capital should be wiped out before cancellation of the preference share capital, his contention there was that the losses should be rateably borne by all the different classes of shareholders. Quite distinct and separate considerations of fact arise with respect to the contentions advanced in paragraph 24 of that affidavit and to the contention advanced now. Considerations of fact which are germane to the present argument are not necessarily germane to the argument advanced in that paragraph. In view of the fact that this point was not taken before BOSE J. and in view of the fact that the contention there taken was contrary to and inconsistent with the present contention we are not inclined to allow Mr. Mitra to raise this point for the first time in the appeal.

On the assumption that the appellant should be allowed now to raise this point I have examined the material on the record and I have come to the conclusion that the court ought not to withhold confirmation of the reduction of capital and the sanction of the scheme of arrangement on the ground now taken.

The whole of the paid up capital of the company has been lost. If the company were wound up to-day, not only the entire paid up capital of the ordinary and the deferred shares but also the whole of the paid up preference share capital would be wiped out. In such winding up in spite of their preferential right to return of capital the preference shareholders would get nothing. if the scheme of arrangement is not sanctioned the company is bound to be wound up and all the shareholders will lose their entire capital. The retention of 20 per cent of the capital of the ordinary and the deferred shares is not being made at the expense of the preference shareholders. The managing agents have foregone 13 lakhs of their dues conditionally on the scheme of arrangement being sanctioned by the court. If the scheme of arrangement is not sanctioned, the company will not get the benefit of this concession of Rs. 13 lakhs. The total uncancelled paid up share capital of the ordinary and deferred shareholders amounts to roughly about Rs. 4,15,020. If the abstract claim of the preference shareholders is upheld, loss to the extent of Rs. 4,15,020 should be further borne by the ordinary and the deferred shareholders but by the sanction of the scheme of arrangement the company is getting the additional benefit of Rs. 13 lakhs. The preference shareholders are, therefore, not really made to bear an additional burden of the loss by reason of the retention of 20 per cent of the paid up capital of the ordinary and the deferred shares to the extent of 4,15,020. In effect, what has been allowed to be retained by the ordinary and the deferred shareholders have come out of the concession of Rs. 13 lakhs made by the managing agents.

The scheme was approved at the separate class meeting of preference shareholders. At that meeting no one voted against the resolution. The appellant was represented at the meeting but its representative chose to remain neutral. The appellant now accepts the position that the minutes of the meeting correctly represents what happened at that meeting. Having done that the appellant does not explain why the appellant did not then oppose the resolution.

In these circumstances, I have come to the conclusion that the reduction of capital and the scheme of arrangement cannot be pronounced to be unfair and inequitable on the first ground advanced by Mr. Mitra.

I will now deal with the second branch of Mr. Mitra's argument on this point. he suggested that the scheme of arrangement has been proposed in order to prevent investigation in winding up with regard to the huge loss. The affidavit filed on behalf of the appellant suggests that the company should be wound up. Yet I find that the appellant has not chosen to present a petition to this court for winding up of this company. Mr. Mitra suggested that the allotment of the block of ordinary shares of the value of Rs. 13 lakhs will bring back the managing agents into power. The managing agents appear already to be in power. The managing agents have been with this company through all its lean times. They have advanced to it the huge sum of Rs. 75 lakhs. the object of the allotment of the shares of about the value of rs. 12 lakhs is to reduce the indebtedness of the company to the managing agents. There is reasonable chance of the company making profits if the company is allowed to function and to raise further capital. The total loss amount to Rs. 36 lakhs. By the reduction of capital a sum of Rs. 22,51,720 becomes available for partially wiping out this loss. A further sum of Rs. 13 lakhs is being foregone by the managing agents. The effect of sanctioning the scheme of arrangement is that almost the entire loss is being wiped out. BOSE J., has by his order imposed the further safeguard that if the company does not or is unable to pay any dividend to the shareholders by December 31, 1961, that fact may be brought to the notice of the court and the court may give directions for changing the management of the company if it thinks fir to do so. Considering all the materials on the record, I have come to the conclusion that the scheme of the class of arrangement is such that an independent and honest man, a member of the class concerned, namely the class of preferential shareholders and acting in respect of his interest might reasonably approve and might reasonably consider to be fair and equitable.

The scheme of arrangement is in the interest of the creditors. All the sundry creditors will be paid by the managing agents. The other creditors do not object to the scheme of arrangement.

In these circumstances, I have come to the conclusion that the court in the exercise of its discretionary power ought to confirm the reduction of capital and ought also to sanction the scheme of arrangement.

I have, therefore, come to the conclusion that the two orders passed by BOSE J. ought to be sustained and both these appeals should be dismissed.

In appeal No. 129 of 1958, I propose that the following orders be passed.

The appeal be dismissed. Each party do pay and bear its own costs of the appeal. We direct that the time fixed by the order of BOSE J., by which the managing agents are to pay off the sundry creditors be extended up to three months from today. We further direct that the condition imposed by BOSE J., that if the appellant company does not or is unable to pay any dividend to its shareholders by December 31, 1961, the same may be brought to the notice of the court and the court will then be at liberty to give directions, be modified and that the condition be read as a condition that if the appellant company does not or is unable to pay any dividends to its shareholders by 28th February 1963, the same may be brought to the notice of the court and the court will then at liberty to give directions.

In appeal No. 130 of 1958, I propose that the following order be passed.

The appeal be dismissed. Each party do pay and bear its own costs of the appeal.

LAHIRI J. - I agree.

[1983] 54 COMP. CAS. 469 (BOM)

HIGH COURT OF BOMBAY

Om Prakash Berlia

v.

Unit Trust of India

BHARUCHA J.

CIVIL JURISDICTION SUIT NO. 1108 OF 1981

AUGUST 3, 4. 5. 6. 1982

 K.S. Cooper, G.A. Thakkar, A.N. Mody and V.C. Kotwal for the Plaintiff.

F.S. Nariman, R.P. Bhatt, I.M. Chagla, R.A. Dada, Ashok Desai, D.R. Dhanuka, T.R. Andhyarujina and G.E. Vahanvatti for the Defendant.

JUDGMENT

Introduction

This is a suit for rectification of the register of shares of the Nationa Rayon Corporation Ltd., the 8th defendant. Rectification is sought in respect of 43,750 shares standing in the names of the Unit Trust of India (UTI), the 1st defendant, Industrial Credit and Investment Corporation of India (ICICI), the 7th defendant, General Insurance Corporation of India (GIC), the 2nd defendant, and four subsidiaries of GIC, being the 3rd, 4th, 5th and 6th defendants. On May 31, 1979, the company issued to the said financial institutions 35,000, 11% convertible debentures of the nominal amount of Rs. 1,000 each, privately placed with them. Each of the debenture-holders was entitled to convert 20% of the value of the debentures held by it into equity shares. Each of the debenture-holders exercised the option to convert to the full extent on May 31, 1979, itself and was allotted the 43.750 shares on June 5, 1979. The shares are more particularly described in Ex. S to the plaint.

The suit is filed by two shareholders of the company, members of the Berlia family who are shareholders of the company in a substantial way.

The plaint is verbose, even argumentative. It sets out the history of the Berlia shareholding in the company, the freezing order under s. 108D of the Companies Act passed in respect thereof, the writ petition filed to quash it, the failure of the company to register further shares of the Berlias, and the proceedings adopted to compel registration thereof. The plaint also sets out the history of the debentures and shares in suit. The plaint challenges the whole issue of the debentures and the issue of the shares upon their conversion. Many of these challenges are not pressed. In considering the challenges that are pressed, it will be necessary to refer to portions of the plaint. It is, therefore, that I do not here undertake the laborious task of summarising the plaint. The written statements are, necessarily, almost as long as the plaint ; they raise some technical defences and, for the rest and for the most part, contain denials. Upon the pleadings a large number of issues were raised, some now rendered redundant.

Little oral evidence has been led : really, only that of two witnesses, Shingal and Atmaramani, officers of the institutions. Two other witnesses on behalf of the institutions gave evidence on tangential points which do not much advance the case. Other witnesses led by both sides proved documents. The plantiffs did not examine themselves; no director or officer of the company was examined. This has caused much comment on either side. The bulk of the evidence on record—and it is of a fair bulk— is documentary and, as the notes of evidence will show, it could not be brought on record before the party seeking to do so had navigated reefs and shoals of objections to admissibility.

Section 81, the Companies Act, 1956

Pivotal to this suit are the provisions of s. 81, sub-ss. (1), (1A) and (3) of the Companies Act. Section 81(1) to (3) reads:

"81. Further issue of capital.—(1) Where at any time after the expiry of two years from the formation of a company or at any time after the expiry of one year from the allotment of shares in that company made for the first time after its formation, whichever is earlier, 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.

Explanation.—In this sub-section, 'equity share capital' and ' equity shares ' have the same meaning as in section 85.

(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 (whether on a show of hands, or on a poll, as the case may be) in favour of the proposal contained in the resolution moved in that general meeting (including the casting vote, if any, of the Chairman) by members who, being entitled so to do, vote in person, or where proxies are allowed, by proxy, exceed the votes, if any, cast against the proposal by members so entitled and voting 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.

(2) Nothing in clause (c) of sub-section (1) shall be deemed—

(a) to extend the time within which the offer should be accepted, or

(b) to authorise any person to exercise the right of renunciation for a second time, on the ground that the person in whose favour the renunciation was first made has declined to take the shares comprised in the renunciation.

(3) Nothing in this section shall apply—

(a) to a private company ; or

(b) to the increase of the subscribed capital of a public company caused by the exercise of an option attached to debentures issued or loans raised by the company—

(i) to convert such debentures or loans . into shares in the company, or

(ii) to subscribe for shares in the company :

Provided that the terms of issue of such debentures or the terms of such loans include a term providing for such option and such term—

(a) either had been approved by the Central Government before the issue of debentures or the raising of the loans, or is in conformity with the rules, if any, made by that Government in this behalf ; and

(b) in the case of debentures or loans other than debentures issued to, or loans obtained from, the Government or any institution specified by the Central Government in this behalf has also been approved by a special resolution passed by the company in general meeting before the issue of the debentures or the raising of the loans."

Excluding verbiage irrelevant for the purposes of this suit, these provisions say this :

Where it is proposed to increase the share capital of the company by allotment of further shares, such further shares shall be offered to the company's shareholders at the date of the offer. The offer shall be made by notice limiting a time within which the offer, if not accepted, will be deemed to have been declined. After the expiry of the time specified in the notice or on receipt of earlier intimation from the shareholder that he declines to accept the shares offered, the board of directors may dispose of them.

The further shares may be offered to any persons other than the shareholders if a special resolution to that effect is passed by the company in general meeting or if the votes cast in favour of the resolution exceed the votes cast against and the Central Govt. is satisfied that the proposal is beneficial to the company.

Nothing in the section shall apply to the increase of the subscribed capital of a public company caused by the exercise of an option attached to debentures issued by the company to convert such debentures into shares in the company, provided that the terms of issue of such debentures include a term providing for such option and such term has been approved by the Central Govt. before the issue of the debentures and, in case of debentures other than debentures issued to any institution specified by the Central Govt. in this behalf, such term has also been approved by a special resolution passed by the company in general meeting before the issue of the debentures.

Proved facts: Surrounding circumstances.

The facts regarding the issue of the debentures and shares have to be appreciated in the light of certain surrounding circumstances commencing with the date, July 11, 1977, when the Company Law Board, in exercise of the powers under s. 408 of the Companies Act, appointed 8 persons to hold office as directors of the company from the date of the order in order to prevent the affairs of the company from being conducted in a manner prejudicial to it. At that point of time, the two plaintiffs held about 26,000 shares in the company. On September 1, 1977, the plaintiffs filed against the company suits in the Bombay City Civil Court for declarations that transfer applications made to the company by the plaintiffs in respect of the company's shares should be deemed to have been accepted and for orders that the company be directed to enter the names of the plaintiffs on the company's share register as transferees and owners of those shares. On September 20, 1977, the plaintiffs filed against the company in this court a petition under s. 155 of the Companies Act requiring the rectification of the register of shares of the company in respect of 27,183 shares (which were some of the shares in the aforesaid suits). A similar petition was later filed in respect of the other shares in the aforesaid suits. On September 21, 1977, this court passed an interim order in the petition wherein it was directed that the annual general meeting of the company scheduled for September 23, 1977, should proceed as scheduled but the item on the agenda thereof to elect a director in place of a retiring director should not be considered until the petition was heard and disposed of. An agreement was arrived at on December 8, 1977, between the Berlias and the company, whereunder the company agreed to transfer 2,633 equity shares of the company lodged by the Berlias to their names and the Berlias agreed to withdraw the aforesaid suits and petitions. The agreement also provided that it would be open to the company to refuse the transfer of further shares that may be lodged by the Berlias and that it would be open to the Berlias to challenge and contest such refusal. Accordingly, the aforesaid suits and petitions were withdrawn.

It appears that the company had moved the Central Govt. for the issuance of directions under s. 108D of the Companies Act in respect of the acquisition of shares in the company by the Berlia group. The application is not on record. On March 15, 1978, the company was informed that it had not submitted adequate grounds for the Central Govt. to issue such directions. On April 26, 1978, a meeting was held under the Chairmanship of the Secretary, Dept. of Company Affairs, to consider steps to be taken to prevent the Berlia group from acquiring shares to gain a controlling interest in the company. The minutes of the meeting are on record. They show that the chairman explained that the Berlias had already registered in their names 68,853 equity shares and they had also got transferred some 6,000 preference shares ; that there was a strong suspicion that most of the transferees of 23,113 equity shares which had been lodged with the company for registration were nominees of the Berlia group ; that according to reports received by the committee, the Berlia group had obtained a total of 1,74,127 proxies as against 1,08,000 mustered by the institutions ; that the Berlias had filed nominations for the appointment of 2 directors on the company's board. In view of the large number of proxies obtained by the Berlias it was obvious to the committee that the Berlias were trying to gain controlling interest in the company and this would be prejudicial to the company's affairs ; besides, if the Berlias were able to put their nominees on the company's board they would be able to gain knowledge of all the happenings in the company to further their interests. It was decided by the committee that directions should be given to the company either under s. 108D or under s. 408 not to effect transfers of shares exceeding a block of 50 shares lodged by any individual or body corporate. In order to protect the interests of persons who wanted to transfer shares for genuine reasons, it was suggested that shares exceeding a block of 50 should be purchased by the institutions. It was also decided that the Dept. of Company Affairs would examine whether the directions to the company should be issued under s. 108D or under s. 408.

On April 28, 1978, the company gave notice that the 31st AGM of the company would be held on June 29, 1978.

On May 5, 1978, the Director, Dept. of Company Affairs, wrote to the Director, Dept. of Economic Affairs, enclosing therewith a copy of the said minutes. He stated that necessary action to issue directions to the company under s. 108D was being taken. He requested that immediate steps be taken for giving directions to the institutions to purchase shares of the company exceeding a block of 50 shares that may be lodged for transfer with the company. On May 15, 1978,the Director (Investment) in the Dept. of Economic Affairs wrote to the Chairman, UTI, enclosing a copy of the letter dated May 5, 1978, and asked for the Chairman's views. On May 23, 1978, UTI's Charman replied. According to him, the matter was rather serious. He felt that the Berlia group with the support of some other group was trying to take control of the company. It was, therefore, of vital importance to protect the interests of the institutions who had sunk huge funds into the company and who had a bigger stake than any other shareholder and also the interests of small shareholders, that the Berlias and their supporters should be prevented from gaining control of the company. The chairman suggested that not only should action be taken under s. 108 but also, simultaneously, under section 408, and it should be taken fast. He was prepared to render all assistance. On May 30, 1978, the Director (Investment), Dept. of Economic Affairs, sent a copy of the Chairman's letter to the Director of Company Affairs.

On June 6, 1978, UTI's and GIC's chairman wrote a confidential letter to the chairman, CLB, stating that they were given to understand that the chairman of the company had by its letter dated April 28, 1978 (which is not on record) advanced cogent reasons why the Company Law Board should take action, inter alia, under s. 108A. The letter stated that the Berlia group had participated in the malpractices of the earlier group in management, the Kapadias. The letter stated that the Berlia group had a large quantity of shares which they had got transferred in their own names or in the names of their nominees. The annual general meeting (AGM) of the company was now scheduled to be held on June 29, 1978. After April 3, 1978, the Berlia group had lodged several transfer applications in respect of equity and preference shares of the company in their names and in the names of their nominees. The shareholders of the company had been issued a circular purported to have been signed by R. M. Goculdas, Chairman of M/s. Dharamsi Morarji Chemical Co. Ltd., R. V. Ramani, Managing Director of Mettur Chemicals and Industrial Corporation Ltd., and S.C.L. Jain, managing director of M/s. Punjab National Fertilisers and Chemicals Ltd. They had been told by Goculdas that he had not signed the circular. They were awaiting replies from the other two gentlemen. The circular recommended to the shareholders that they issue proxies in favour of one or the other of the plaintiffs or their father. The circular had been posted by the Berlia concerns. From this it was obvious that the Berlias were trying to get the control of the company and if they were allowed to control the company it would be most harmful to the interests of the company and to the public interest at large. If they were allowed to appoint a director, he would obtain knowledge of what was happening at the board meetings. For these reasons the signatories asked that directions be given to the company not to give effect to transfers of the blocks of shares listed in the annexure thereto ; where the transfer of such shares had already been registered, not to permit the transferee or any nominee or proxy of the transferee to exercise any voting or other rights attached to such shares ; where the transfer of such shares had not been registered, not to permit any nominee or proxy of the transferor to exercise any rights attached to such shares; and, regardless of whether transfers of such shares had taken place or not, the voting rights in respect of the shares listed in the annexure should be frozen so as to disbar the registered holders thereof, whoever they may be, from exercising them. This would prevent the Berlias from gaining control of the company and from having any of their nominees on the board of directors either at the forthcoming AGM of the shareholders "on June 29, 1978, or at any other general meeting". The list annexed to the letter stated the folio number and the number of the shares, equity or preference, that had been forwarded to the company for transfer and the names and addresses of (apparently) the transferors. It is a long list. It is not clear upon what basis the letter stated that the transferees of these shares were Berlia nominees. It is clear that the list was supplied to the signatories of the letter by the company.

On June 17, 1978,- the Joint Secretary to the Govt. of India in the Dept. of Company Affairs issued an order under s. 108D which can aptly be called the freezing order. The order stated that it had been brought to the notice of the Central Govt. that the Berlia group were making concerted efforts to gain a controlling interest in the company ; that certain persons alleged to belong to the Berlia group had lodged transfers of 27,263 shares in bulk with the company in order to gain controlling interest in the company; that the Berlia group had lodged proxies numbering over 1,74,500 for the extraordinary general meeting of the company held on April 3, 1978, for the appointment of two of their nominees as directors of the company ; that the Berlia group had been involved in a number of irregularities committed by the Kapadia group in the affairs of the company prior to the appointment by the Central Govt. of persons to hold office as directors of the company under s. 408 ; that the Central Govt. was satisfied upon the facts enumerated above and upon the report received from the company that, as a result of the transfer of any share or block of shares of the company, a change in the controlling interest of the company was likely to take place and that such change was prejudicial to the interests of the company. The order directed the company not to to give effect to the transfer of any such shares or block of shares and (a) where the transfer of such share or block of shares had already been registered, not to permit the transferee or any nominee or proxy of the transferee to exercise any voting or other rights attached to such share or block of shares, and (b) where the transfer of such share or block of shares had not been registered, not to permit any nominee or proxy of the transferor to exercise any voting or other rights attached to such share or block of shares. The copy of the freezing order received by the company, which is on record, shows that the company received it on June 19, 1978.

On June 26, 1978, the plaintiffs' attorneys wrote to the company recording that the 2nd plaintiff had attended the registered office of the company to lodge proxies for the AGM of June 29, 1978. He had then been told that the proxies were useless, for, an order had been received by the company, whereby voting by the Berlia group had been frozen. The letter requested the company to forthwith hand over to the 2nd plaintiff, (sic) and their advocate-assistant, who were the bearers of the letter, a copy of the order. The evidence of the advocate-assistant, Mahimkar, discloses what transpired when he went to the company's office and thereafter to the office of the Registrar of Companies. There is also correspondence in this regard. On June 26, 1978, the plaintiff's attorneys wrote to the company recording that the 2nd plaintiff with the advocate assistant had attended the company's office to deliver the said letter. They had been told that the company's chairman was out of station. They had seen T. S. Narayanan, the company's Dy. Secretary, and had handed over the letter to him. They were informed by Narayanan that he had no knowledge of any order and that he would make enquiries and send a reply. The correspondence on record discloses that the advocate-assistant went to the office of the Registrar of Companies to take inspection of the order and was informed that it was not a public document and could not be inspected. Upon inspection of the files relating to the company it was found that the order was not therein. On June 26, 1978, the company wrote to the plaintiffs' attorneys stating that it had handed over the letter containing the demand for the copy of the order to its advocates. The letter was received on June 27, 1978. On June 27, 1978, the plaintiffs' attorneys informed the company that the plaintiffs had lodged a writ petition in this court impugning the order (without annexing it) and that an application for interim relief would be made on the next day. The company was required to produce the order at the time of the application. On June 27, 1978, the company sent the plaintiffs' attorneys a photostat copy of the freezing order. On June 28, 19 78, this court passed the interim order, inter alia, in these terms:

"There would be an injunction in terms of prayer (c) on the following conditions. At the meeting to be held on June 29, 1978, or at the adjourned meeting in respect of items 2 and 4 on the agenda of the meeting or any amendment thereof as mentioned by the learned counsel for respondent No. 3 (the draft of which has been handed over to the court and which is taken on file) the petitioners undertake to the court to exercise their voting rights in respect of their 69,633 shares mentioned in para. I of the petition and in respect of proxies held by them in respect of which the petitioners are entitled to vote in favour of said items and the said amendment thereof.

As regards items 1 and 3 on the said agenda and also as regards those terms or resolution in respect of which notice of moving resolution at the said meeting has been given to the 3rd respondent, the petitioners are at liberty to exercise at the said meeting or adjourned meeting all their rights including voting rights, a right to demand poll and right to contest.

The chairman of the meeting, however, shall not declare the result of the voting on poll being demanded, on any resolution either under the said items 1 and 3 or in respect of any matters for which notice has been given to the 3rd respondent, until further orders of the court............................"

On June 29, 1978, the 31st AGM was held. The plaintiffs voted thereat in accordance with their undertaking. The election results were not declared.

On October 13, 1978, the plaintiffs filed in this court a petition under s. 155 of the Companies Act, 1956, for a rectification of the share register of the company in respect of the shares lodged for transfer by them. A similar petition was filed in respect of other shares some time in the beginning of 1979. On November 11, 1979, Shah J. delivered the judgment in the writ petition filed by the plaintiffs in respect of the freezing order. He quashed the order.

On December 7, 1979, this court delivered a judgment in the two petitions for rectification. It was held therein that the refusal of the company's board to register the shares was inconsistent, arbitrary and capricious. It was observed that the arguments addressed by counsel for the petitioners therein upon the alleged mala fides of the company in harassing the petitioners had not impressed the court.

On December 12, 1979, this court dismissed the appeal filed by the Union of India against the order in the writ petition. To enable the Union of India to prefer an appeal to the Supreme Court of India, it was directed that the results of the voting at the 1978 AGM should not be declared until January 9, 1980.

It appears that on November 28, 1979, a representation was addressed on behalf of the 2nd plaintiff to the Union Minister for Law, Justice and Company Affairs and that on January 4, 1980, the 2nd plaintiff with his counsel and instructing advocate met the CLB. Pursuant to their discussions, the plaintiffs' attorneys on January 5, 1980, wrote to the CLB placing on record proposals with a view to end all disputes and causes of friction between the Berlias, the company and the Government. The proposals suggested, inter alia, that the order under s. 408 be continued for a further period not exceeding 3 years ; that the company should transfer all shares proposed for transfer and register them ; and that the Government should confirm and sanction the appointment of the two directors of the Berlias on the company's board.

On January 9, 1980, the Supreme Court heard the special leave petition filed by the Union of India in respect of the order on the writ petition. The Supreme Court recorded that the Solicitor-General had made a statement on behalf of the CLB and the Govt, of India that the proposals in the letter written by the plaintiffs' advocates to the CLB were acceptable. Accordingly, the Supreme Court passed an order in terms of the proposals contained in the letter and stated that these were deemed to be the directions of the court. The Supreme Court stated that in view of these final orders, the findings of the trial court would not remain in operation but the final order passed by the trial court would. The special leave petition was allowed to be withdrawn.

On January 21,1980, the CLB informed the company of the order passed by the Supreme Court and directed the company to implement fully the proposals in the letter of January 5, 1980, a copy whereof was enclosed.

There was considerable correspondence between the attorneys of the plaintiffs and the attorneys of the company, subsequent to the passing of the order by Shah J. on the writ petition in respect of the declaration of the result of the election at the 1978 AGM. On February 13, 1980, the result was ultimately declared and it was found that the 2nd plaintiff had been elected a director. On March 6, 1980, the CLB confirmed the appointment of the second plaintiff as a director. It appears that the second plaintiff attended his first board meeting on March 27, 1980.

Proved facts : Debentures and shares

It appears that an application for some financial assistance had been made by the company to the institutions. On December 20, 1977, ICICI informed the company that it had considered the company's application and was prepared to provide a rupee term loan of Rs. 58 lakhs to meet a a part of the cost of the company's scheme to complete the nylon tyre cord project, to set up a monomer recovery plant, to complete essential maintenance and to incur capital expenditure deferred earlier. The letter stipulated the terms and conditions upon which the loan would be given. One of the terms stated that ICICI would have the option to convert a part of the loan into shares on terms to be decided later. (It must be immediately mentioned that this loan of Rs. 58 lakhs is the subject-matter not of this suit but of O. O. C. J. Suit No. 1110 of 1981. It is, however, of some relevance to this suit.)

On January 17, 1978, UTI wrote to the company in respect of the company's application for financial assistance for the nylon tyre cord project (phase II). The letter informed the company that UTI was agreeable in principle to provide financial assistance to the extent of Rs. 50 lakhs by way of subscription to the proposed issue of privately placed debentures for financing a part of the costs of phase II of this project. The commitment would be on the understanding and subject to the conditions set out in the letter. Clause 8 of those conditions stated that the company should agree to vest in UTI the option to convert a portion of the amount into shares on terms and conditions to be decided by UTI in consultation with other institutions, which would be advised to the company in due course. The letter concluded that UTI would be prepared to place an advance deposit of Rs. 50 lakhs with the company.

On February 8, 1978, a bridging loan agreement was entered into between ICICI and the company in respect of the sum of Rs. 40 lakhs out of the total loan of Rs. 58 lakhs. On February 9, 1978, and February 13, 1978, respectively, ICICI forwarded to the company cheques for Rs. 20,00,000 each towards the disbursement of the bridging loan of Rs. 40,00,000. On March 8, 1978, ICICI wrote to the company with reference to the loan of Rs. 48 lakhs and sent therewith a draft loan agreement. Article 3(2) of the draft agreement set out the conversion right but left blank the value of the loan which could be converted, the period during which and the price at which the conversion could be effected.

On March 17, 1978, the company wrote to the UTI and confirmed acceptance of the terms contained in UTI's letters dated June 17, 1978, April 24, 1978, and March 13, 1978. The letter stated that the company would be grateful if UTI placed with them the deposit of Rs. 50 lakhs. This was done.

On May 19, 1978, a meeting was held of the special executives of the institutions. The summary record of its proceedings is on record. The terms of option for the conversion of the loan into equity in respect of the aggregate loan of Rs. 108 lakhs for the nylon tyre cord project, phase II, was discussed in relation to the settlement of the terms of an option for the conversion of the loan into shares and it was decided that 20% of the loan would be subject to conversion at a premium of Rs. 60 per share of the face value of Rs. 100, the period of conversion being July 1, 1978, to June 30, 1980, subject to confirmation at an Inter-Institutional Meeting.

On May 17, 1978, the company wrote to UTI a letter regarding the loan for the nylon project, phase II. It stated that in the course of discussions UTI had agreed that the Bank of Baroda would be appointed the debenture trustee in respect of the debentures of Rs. 50 lakhs to be issued to UTI. It asked UTI to confirm this so that the Bank of Baroda could be suitably advised. The letter went on to say this :

"...Incidentally, we may add that the consortium of banks comprising of Bank of Baroda, Dena Bank, Punjab National Bank and Canara Bank are providing additional term loan of Rs. 1 crore to meet company's working capital requirement, and this amount will be secured by a pari passu charge on the security mentioned above................."

On May 19, 1978, UTI wrote a confidential letter to the chairman of the company. It said that UTI found that the company was approaching a consortium of banks for a term loan of Rs. 1 crore to meet its working capital requirements. UTI felt that this means of financing would be costly for the company. UTI was prepared to take up, subject to its board's approval, privately placed debentures of Rs. 1 crore which may be issued by the company upon the terms and conditions mentioned in the letter. Term 4 stated :

"There would be conversion option into equity up to 20% of the face value of the said privately placed debentures. The option would be exercisable by the trust immediately after the company accepts terms and conditions of the issue of the said debentures, subject to the approval of the Controller of Capital Issues."

The UTI were prepared to place an advance deposit of Rs. 1 crore with the company.

On May 29, 1978, the company wrote to UTI that it was grateful for the offer of the term loan assistance of Rs. 1 crore contained in the letter dated May 19, 1978, for meeting the company's working capital requirements. The matter had been discussed by the company's board on May 24, 1978, and the board felt that "......................the offer may be accepted as an additional assistance instead of as an alternative to the consortium term loan.............." The letter went on to say :

"......................The committee of directors and the board of directors have earlier felt that a programme of modernisation/expansion/diversification should be drawn up and implemented to improve the long-term profit profile of the company. We would, therefore, seek your help for the first phase of the programme of modernisation in regard to the following :

	Rs. lakhs
Rayon Plant—8 spinning machines	120
Bleaching machine	80
Evaporation systems	25
Miscellaneous	30
		255
Anhydrous Sodium Sulphate Plant		100
100 T. Sulphuric Actd Plant		100
Rectifier System Changes		25
Modernisation Programme Cost		480
(Brief note on each item is attached)

The above figures are very tentative and detailed estimates are being worked out for placing before our board at its next meeting to be held on June 29, 1978. We may mention that out of the above items, we propose to take capital expenditure programme of approximately Rs. 3 crores in the first phase and would be grateful to have your concurrence that you would be able to give us the term loan through privately placed debentures on usual terms and conditions."

On May 31, 1978, a note was prepared by UTI in respect of the letter dated May 29, 1978, received by it from the company for consideration at the Inter-Institutional Meeting (IIM) to be held on May 31, 1978. The note summarised the assistance required by the company as being Rs. 480 lakhs of which Rs. 300 lakhs were to be the capital expenses in the first phase for the proposed modernisation programme ; the company had approached UTI for a term loan of Rs. 300 lakhs by way of privately placed debentures. UTI was prepared to provide Rs. 200 lakhs by way of term loan to the company jointly with other financial institutions for the modernisation programme. The point for consideration at the IIM was stated to be the proposal of UTI to sanction Rs. 200 lakhs to the company for its modernisation programme by way of privately placed debentures on its normal terms and conditions for such assistance. In the meanwhile, it was suggested that ICICI as the lead institution would process the request of the company further. UTI proposed to exercise its right to convert Rs. 40 lakhs (20 per cent. of the proposed assistance) into shares with immediate effect, subject to the approval of the Government, at a premium of Rs. 60 per share of Rs. 100, paid up. If the other institutions wished to participate with UTI in sharing the assistance of Rs. 200 lakhs, the UTI would reduce its assistance to that extent. The note was accompanied by a flash report. The note and the flash report set out the "very tentative" figures and brief facts mentioned in the company's letter dated May 29, 1978, and the note accompanying it.

On record in this suit is the informal summary record of the proceedings of the IIM held on May 31, 1978, in so far as it related to the company. It is stated therein that the proposal of UTI to sanction to the company an assistance of Rs. 200 lakhs contained in its note was discussed. It was observed that the company was yet to furnish firm figures regarding the proposed modernisation programme. The company was expected to show better results from 1978 onwards, and the modernisation scheme was a step in the right direction to improve the long-term profitability of the company, in which UTI had already a substantial stake. It was felt that UTI should extend assistance to the project and ICICI as the lead institution would take up the proposal for further processing for a sanction of the balance assistance required from the other institutions. The consensus was that UTI should sanction the increased assistance of Rs. 300 lakhs and should exercise its conversion option to the extent of 20 per cent. during the period January 15, 1978, to June 14, 1980.

On June 1, 1978, UTI prepared a note for circulation to its executive committee. It recorded that UTI had circulated the note for consideration at the IIM on May 31, 1978. It reproduced the figures contained in the company's letter dated May 19, 1978, and stated that the figures were tentative and detailed estimates were being worked out by the company. The institutions would carry out an appraisal of the modernisation programme and examine it further. The company had not furnished firm figures regarding the proposed modernisation scheme, its financial requirements, profitability estimates after the modernisation scheme was implemented, etc. However, even on the basis of profitability estimates worked out by ICICI in December, 1977, without taking into account the modernisation scheme, the company's operations were likely to show an operating profit of Rs. 56 lakhs in 1978, rising to Rs. 224 lakhs by 1981, and the company was likely to pay dividends from 1979 onwards. It was agreed at the IIM that UTI should sanction assistance of Rs. 300 lakhs and other institutions would indicate their participation, if any, to UTI. It was also agreed that "instead of telescoping conversion option", the period of conversion would be from June 15, 1978, to June 14, 1980, at the option of UTI. UTI would exercise its right to convert 20% of the proposed debenture loan into shares at a premium of Rs. 60 per share of Rs. 100 paid up, subject to government approval, during the period June 15, 1978, to June 14, 1980. In the meantime, ICICI as the lead institution would process the matter further. The members of UTI's executive committee were requested to approve the proposal for subscribing to the privately placed debentures up to Rs. 300 lakhs of the company and for placing an advance deposit of the equivalent amount with the company against. UTI's commitment to subscribe to the privately placed debentures. The evidence of Atmaramani shows that 3 members of UTI's executive committee signed the circular resolution approving the proposal on June 1, 1978.

On June 1, 1978, UTI wrote to the company that it was agreeable in principle.to provide the financial assistance, along with other institutions, of Rs. 300 lakhs for financing a part of the cost of the company's modernisation programme. The assistance would be in the form of subscription to the privately placed debentures and the amount of Rs. 300 lakhs would be reduced to the extent that other institutions indicated their willingness to participate. UTI's commitment to subscribe would be on the understanding and subject to the conditions set out in the letter. Clause (7). which related to the condition regarding conversion, reads thus :

"The company should agree to vest in Unit Trust of India and other financial institutions the option to acquire in lieu of conversion equity shares of Rs. 60 lakhs—the amount of Rs. 60 lakhs is inclusive of premium and constitutes 20 per cent. of the assistance of Rs. 300 lakhs—the trust has agreed to provide. The shares will be acquired at a price on payment of Rs. 160 per share of Rs. 100 (i.e , at Rs. 60 premium) or at such premium as may be approved by the Controller of Capital Issues. The period for conversion would be June 15, 1978, to June 14, 1980. The company should approach the Controller of Capital Issues/Government of India for necessary approval."

In respect of what transpired between May 29, 1978, and June 1, 1978, there is some evidence on record, of Atmaramani, an officer of UTI, and of Shingal, an officer of ICICI. It does not contain much by way of facts. Some reference will be made to it when dealing with the contentions. I do not consider it necessary to set it out here.

On June 2, 1978, the company wrote to UTI in relation to the term loan assistance of Rs. 300 lakhs and the discussions with UTI's Chairman whereat it had learnt that its request had been favourably considered at the IIM of May 31, 1978. The letter recorded that UTI's Chairman had mentioned that the term loan would carry a right to subscribe to shares of the company equivalent to 20% of the term loan at the rate of Rs. 160 per share during the period June 15, 1978, to June 14, 1980. The letter recorded that the proposal had been put up before the company's committee of directors and had been accepted by them, except for the share premium amount, and that the proposal would be put up before the board of directors on June 7, 1978. The letter, after mentioning several considerations, stated that it was felt that the share premium of Rs. 10 per share should be considered reasonable and asked UTI to agree. On June 6, 1978, the company wrote in reply to UTI's letter of intent of June 1, 1978. The letter stated that it required, inter alia, modifications of the clause dealing with the premium and reiterated that the premium should be Rs. 80 per share. The other modifications were trivial.

On June 6, 1978, UTI wrote to the company in respect of the assistance of Rs. 50 lakhs for the nylon tyre cord project. The letter advised that, in terms of cl. 8 of the letter of intent dated June 17, 1978, UTI will have the option to acquire, in lieu of the conversion, equity shares of Rs. 10 lakhs at the premium of Rs. 60 per share. The period for "conversion/ acquiring shares" would be June 15, 1978, to June 14, 1980. The letter went on to say :

"................In pursuance of the above, we hereby give notice of our intention to acquire with effect from June 15, 1978, in lieu of conversion, fully paid up equity shares of your company of a total amount of Rs. 10 lakhs............."

Such equity shares were required to be registered in the name of UTI "immediately on allotment, i.e., from June 15, 1978". Since UTI had already advanced Rs. 50 lakhs as a deposit, the amount of Rs. 10 lakhs thereout should be adjusted as application money for allotment to UTI of the shares in lieu of the conversion with effect from June 15, 1978. It was clearly understood that, after acquiring shares for Rs. 10 lakhs, UTI's commitment to subscribe to the debentures would stand reduced to Rs. 40 lakhs and the company should get the debenture trust deed executed for the amount of Rs. 40 lakhs and should allot debentures of the face value of Rs. 40 lakhs to UTI. The company was asked to confirm that it would be allotting to UTI the shares in lieu of the conversion as stipulated by UTI.

On June 8, 1978, ICICI wrote to the company saying that it was prepared to subscribe to the debentures of the value of Rs. 50 lakhs out of the total amount of Rs. 300 lakhs. The terms and conditions stated, inter alia, that ICICI would have the option to convert debentures of Rs. 10 lakhs into shares during the period June 15, 1978, to June 14, 1980.

On June 8, 1978, UTI wrote a letter to the company. It is necessary to reproduce it in extenso.

"Dear Sir,

Financial assistance for the company's modernisation programme.

Please refer to our letter No. UT-14973/RS(N-14) 78 dated June 1, 1978, agreeing in principle to provide to your company financial assistance of Rs. 300 lakhs jointly with other financial institutions in connection with the company's modernisation programme. In terms of clause (7) of the above letter, the Trust has the right to acquire, in lieu of conversion, fully paid-up equity shares of the company of Rs. 60 lakhs (which is equivalent to 20 per cent. of the debentures agreed to be subscribed by the Trust) at any time during the period June 15, 1978, to June 14, 1980. The amount of 60 lakhs is inclusive of a premium amount of Rs. 22.50 lakhs (i.e., premium of Rs. 60 per share of Rs. 100) or such premium as may be approved by the Controller of Capital Issues.

In pursuance of the said clause, we hereby give notice of our intention to acquire with effect from June 15, 1978, fully paid up equity shares of your company of a total amount of Rs. 60 lakhs (including premium amount of Rs. 22.50 lakhs, i.e., Rs. 60 per share of Rs. 100 or such premium as may be approved by CCI) against payment by us of an amount of Rs. 60 lakhs.

We agree to accept the above equity shares to be issued by the company pursuant hereto subject to the provisions of the memorandum and articles of association of the company.

We advise that such equity shares are required to be registered in the name of the Unit Trust of India immediately on allotment, i.e., from June 15, 1978, and you are hereby authorised to enter our name in the register of members in respect thereof. These shares will rank pari passu in all respects with the existing equity shares of the company except that for the year in which these are issued, these will be entitled only for pro rata dividend from the date of allotment.

Please take steps to complete the necessary formalities in this regard and arrange to issue and allot the equity shares to the Trust at the earliest.

It is clearly understood that, after acquiring equity shares of the company of a total amount Rs. 60 lakhs, our commitment to subscribe to the privately placed debentures will stand reduced to Rs. 240 lakhs. This commitment of Rs. 240 lakhs will stand reduced further to the extent of participation in the assistance to the company to be indicated by other financial institutions. Out of the equity shares to be acquired by the trust in lieu of conversion, the trust would transfer part to other financial institutions, pro rata to their share of assistance to the company.

Please acknowledge receipt and confirm that the company would be allotting to the Trust equity shares in lieu of conversion as stipulated above.

Yours faithfully,"

On June 15, 1978, ICICI wrote to the company a letter relating to the rupee loan of Rs. 58 lakhs. The letter stipulated that ICICI would have the option to convert Rs. 11.60 lakhs out of the loan of Rs. 58 lakhs into shares of the company during the period June 15, 1978, to June 14, 1980, at the rate of Rs. 160 per share. On 20th June, 1978, GIC wrote to the UTI that its board had approved the subscription by it and its subsidiaries to the debentures to the extent of Rs. 50 lakhs; since UTI had agreed to subscribe to debentures of the value of Rs. 300 lakhs, to be reduced to the extent subscribed for by ICICI and GIC and its subsidiaries, GIC enclosed a letter addressed by it on June 19, 1978, to the company agreeing in principle to so subscribe and authorised UTI to release the said letter to the company at an appropriate time. On June 2, 1978, UTI wrote to GIC to state that GIC's letter addressed to the company had been delivered and necessary action regarding conversion of shares would be taken up shortly.

On June 20, 1978, the Controller of Capital Issues wrote to the company consenting to the issue of "51,000 equity shares of Rs. 100 each at the premium of Rs. 60 per share, credited as fully paid up, to ICICI and UTI in conversion of a part of their loan/debentures to the extent of Rs. 81,60,000 (including the premium) out of the loan/debentures sanctioned to the company".

On June 23, 1978, the CLB wrote to the company in respect of the application made by the company under s. 81(3) of the Companies Act for the approval of the raising of convertible debentures. The letter stated that it was observed from UTI's letter of June 6, 1978, that UTI had already given notice for exercising its option to convert an amount of Rs. 10 lakhs out of the total advance deposit of Rs. 50 lakhs against UTI's commitment to subscribe to the proposed privately placed debentures issue and that UTI's commitment to subscribe to the debentures would thereafter stand reduced to Rs. 40 lakhs. The CLB requested the company to clarify whether the company had already issued the debentures to UTI for Rs. 10 lakhs. In case the debentures had not been issued, it was not clear to the CLB how UTI could exercise its option for the conversion of the debentures into equity shares. The company was also required to indicate whether the company had issued any shares to UTI in conversion. On July 6, 1978, the company replied to the CLB. It stated that the company had negotiated for a term loan of Rs. 58 lakhs from ICICI and Rs. 50 lakhs from UTI by privately placed debentures to meet a part of the scheme to complete the nylon tyre cord project, for completing essential maintenance, etc. The company had received Rs. 40 lakhs out of Rs. 48 lakhs term loan as bridging finance from ICICI and Rs. 50 lakhs from UTI as advance deposit. The company had not issued debentures to UTI. UTI had given notice of its intention to acquire with effect from June 15, 1978, in lieu of the conversion, fully paid up equity shares of the company equivalent to 20% of the privately placed debentures for a total amount of Rs. 10 lakhs. The company had not issued any shares to UTI in conversion of the debentures.

On August 17, 1978, the CLB informed the company that it approved the raising of a convertible loan of Rs. 11.60 lakhs out of the total loan of Rs. 58 lakhs from ICICI. The loan would be convertible into equity shares at the rate of Rs. 160 per share during the period June 15, 1978, to June 14, 1980. On the same day, i.e., August 17, 1978, the CLB informed the company that it approved the issue of convertible debentures of the value of Rs. 70 lakhs out of the total debentures of the value of Rs. 350 lakhs to be issued to UTI. The debentures would be convertible into equity shares at the rate of Rs. 160 per share during the period June 15, 1978, to June 14, 1980. On September 4, 1978, the company wrote to the CLB stating that other institutions had agreed to participate in the financial assistance agreed to be provided by UTI thus: ICICI in the sum of Rs. 50 lakhs, GIC and its subsidiaries in the sum of Rs. 50 lakhs and the balance would be provided by UTI. The letter requested that the CLB's letter of approval of August 17, 1978, be amended to include ICICI, GIC and its subsidiaries..

On October 5, 1978, the Controller of Capital Issues wrote to the company that the words "ICICI and UTI" in the consent order of June 20, 1978, should be substituted by the words, "ICICI, UTI, GIC and its subsidiaries". On October 5, 1978, the Controller of Capital Issues wrote to the company regarding the company's request to increase the amount of premium from Rs. 60 to Rs. 80 per share. The letter stated that the Government had considered the matter in the light of the company's representation but regretted its inability to accede to it.

On October 16, 1978, GIC wrote to the company stating its intention to subscribe, along with its subsidiaries, to debentures worth Rs. 50 lakhs out of the total debenture issue of Rs. 300 lakhs. The letter stated the terms and conditions upon which the sanction would be subject to. C1. 4 required the company to agree to vest in GIC and its subsidiaries the option to acquire, in lieu of conversion, shares of Rs. 10 lakhs, the period of conversion being June 15, 1978, to June 14, 1980. The subsidiaries also sent such letters of intent.

On October 18, 1978, the company sent to an officer in the projects dept. of ICICI a copy of the modernisation programme. It is the evidence of Singhal, chief of the projects dept. of the ICICI, that in making the detailed appraisal or assessment of the company's modernisation programme, his department proceeded upon the basis of this document.

On December 1, 1978, the CLB wrote to the company conveying its approval to the issue of convertible debentures of the value of Rs. 50 lakhs to GIC and its subsidiaries, the conversion to be at the rate of Rs. 160 per share during the period June 15, 1978, to June 14, 1980. On December 6, 1978 the company wrote to the CLB and asked for an amendment of the letter of approval so as to include the name of ICICI for the issue of convertible debentures of the value of Rs. 10 lakhs out of the total debentures of the value of Rs. 50 lakhs to be issued to it. On January 5, 1979, the CLB wrote to the company and stated that all the 51,000 shares by the conversion of debentures had already been covered by the approvals of the CLB issued in respect of loan/debentures of ICICI and UTI. On January 9, 1978 the company wrote to the CLB a long letter clarifying the entire position and asked the CLB to suitably amend the letter of approval to approve the issue of convertible debentures of the value of Rs. 70 lakhs out of the total debentures of the value of Rs. 300 lakhs in respect of UTI, ICICI, GIC and its subsidiaries for the amounts mentioned therein.

On January 24, 1979, the Controller of Capital Issues intimated to the company that the entry in the consent order of June 20, 1978, should be substituted to read as follows :

"51,000 equity shares of Rs. 100 each at a premium of Rs. 60 per share credited as fully paid up to the financial institutions in conversion of a part of their loan/debentures into equity shares of the company to the extent of Rs. 81,60,000 (inclusive of the premium out of the loans/ debentures aggregating Rs. 408 lakhs sanctioned, in the following manner :

	Loans/debentures sanctioned	No. of shares to be allotted	Value of share including premium of Rs. 60 per share
	Rs.		Rs.
ICICI	108,00,000	13,500	21,60,000
UTI	250,00,000	31,250	50,00,000
GIC and sits subsidiaries	50,00,000	6,250	10,00,000
	408,00,000	51,000	81,60,000."

On February 6, 1979, the CLB wrote to the company a letter approving the issue of convertible debentures of Rs. 50 lakhs out of total debentures of the value of Rs. 250 lakhs to be issued to UTI, convertible at Rs. 160 per share during the period June 15, 1978, to June 14, 1980. A similar letter approved the issue of convertible debentures of the value of Rs. 50 lakhs to be issued to the ICICI.

On April 7, 1979, M/s. Amarchand & Mangaldas & Hiralal Shroff & Co., the common attorneys for the institutions and the company, wrote to the institutions, the company and the debenture trustee with reference to the previous correspondence and a joint meeting and enclosed therewith a note of the discussion thereat. One of the items discussed was that the company would take steps to approach the CLB for a modification of the sanction granted under s. 81 so as to clearly specify that the convertible debentures would be to the extent of Rs. 350 lakhs in the aggregate and not only Rs. 70 lakhs. Another item discussed was that the company would take expeditious steps for the creation of securities to secure the debentures and the ICICI term loan as the institutions "were anxious to complete the transaction latest by May 30, 1979".

On April 25, 1979, ICICI wrote to the CLB with reference to the orders issued regarding the conversion of debentures. The letter stated that since the company would be actually issuing to ICICI convertible debentures of the value of Rs. 50 lakhs out of which debentures of the value not exceeding Rs. 10 lakhs would be convertible at ICICI's option, ICICI presumed that the order dated February 6, 1979, enabled the company to do so. Similar letters were written by UTI and GIC. On May 14, 1979, the CLB wrote to ICICI to say that in the approval letter of February 6, 1979 "...it has been clearly stated that the debentures of the value of Rs. 10 lakhs will be convertible into equity shares at a rate of Rs. 160 per share...during the period June 15, 1978, to June 14, 1980". Similar letters were also written to the other institutions.

On April 26, 1979, the company issued notice of the AGM to be held on June 28, 1979.

Around April, 1979, the company's nylon tyre cord project, phase II, was completed.

It appears that on May 7, 1979, the permission of the competent authority under the provisions of the Urban Land (Ceiling & Regulation) Act, 1976, was obtained to mortgage the company's lands to create a security for the debentures.

On May 18, 1979, ICICI wrote to the company enclosing a draft of the resolutions required to be passed in connection with the execution of the debenture trust deed, allotment of debentures, etc. On May 24, 1979, a meeting of the board of directors of the company passed the appropriate resolutions. One of the resolutions passed, it is common ground, authorised four directors to finalise, settle and incorporate necessary modifications and changes in the draft debenture trust deed and other documents.

On May 29, 1979, the common attorneys wrote to the institutions, the company, the debenture trustee and its attorneys stating that the transaction relating to the privately placed debentures of the company for Rs. 350 lakhs and the term loan of Rs. 58 lakhs sanctioned by ICICI was scheduled for completion at the office of ICICI at 2.45 p.m. on May 31, 1979. For ready reference, the attorneys, enclosed a short note on the points for completion of the transaction. Item 1 of the note stated that the company had to furnish to each of the debentureholders, the debenture trustee and the attorneys, certified copies of the board resolutions passed by the directors in connection with, inter alia, the acceptance of notices of conversion, entering into of contracts under s. 75 of the Companies Act, issue of equity shares upon conversion and other related matters. Item 3 refered to the execution of the debenture trust deed and the affixing thereon of the company's seal. Item 8 stated that UTI and ICICI would issue letters of adjustment in respect of the advances made by them towards the debenture subscription and also issue cheques for the balance amount and apply for subscription of the debentures. Item 9 stated that GIC and its subsidiaries would also apply for subscription and issue requisite cheques for the value of the debentures to be subscribed for by them. Item 10 stated that the company would issue letters of allotment of debentures to the debentureholders. Item 11 stated that after the letters of allotment were received the debentureholders would issue notices of conversion to the company and upon receipt of such notices of conversion, the company would issue letters of allotment of shares and also execute contracts in respect of the shares to be allotted under s. 75 of the Companies Act. Item 13 stated that the company would issue share certificates for the converted amount to the debentureholders. In respect of ICICI's term loan of Rs. 58 lakhs a similar programme was chalked out.

On May 30, 1979, the common attorneys wrote to the company enclosing a draft of the letter of allotment of the convertible debentures to be issued to ICICI and a draft of the letter of allotment for shares to be issued to ICICI upon conversion. The company was requested to finalise the drafts with ICICI and arrange to issue similar letters of allotment to UTI, GIC and its subsidiaries. The letter asked that the company do ensure that the letters of allotment were duly stamped before issue thereof.

What transpired at the meeting of May 31, 1979, has not been made the subject-matter of any evidence, oral or documentary, tendered by the defendants. Some of the documents executed and/or exchanged at that meeting are on record and some are not.

The debenture trust deed executed at the meeting of May 31, 1979, is on record. It is made between the company and the Bank of Baroda as debenture trustee. It recites that the company was installing equipment to convert nylon tyre yarn into fabric and that it had taken up a scheme to modernise its rayon textile and caustic soda plants and to increase the capacity in its anhydrous sodium sulphate plant. With a view to finance the cost of this project UTI, ICICI, GIC and its 4 subsidiaries had agreed to subscribe for privately placed debentures of the nominal value of Rs. 250 lakhs, Rs. 50 lakhs and Rs. 50 lakhs respectively. (It will be seen that UTI's agreement to provide the loan of Rs. 50 lakhs for the nylon tyre cord project, phase II, is included in the sum of Rs. 250 lakhs mentioned in respect of UTI). By letters dated January 17, 1978, and June 1, 1978, issued by the UTI and accepted by the company, referred to as the "UTI loan agreements", UTI had agreed to subscribe for privately placed debentures of the nominal value of Rs. 250 lakhs upon the terms and conditions therein mentioned. The loan agreements with the other institutions are also recited. The requisite resolutions passed by the company's board are recited. Reference is also made to the consents or permissions received from the various authorities. The last recital states that the debenture trustee had, at the request of the company, "consented to act as trustees of these presents and for the benefit of the debenture-holders on the terms and conditions hereinafter appearing".

Clause 1 of the debenture trust deed defines the "debentures" to mean "the debentures of the company issued under these presents...in accordance with the forms set out in Parts I to VII respectively of the Fifth Schedule hereunder written under the provisions of and secured by these presents.............." The "debenture holders" are defined to mean "the holders for the time being of the debentures so issued............on the conditions endorsed on the debentures............" Under cl. 2, the debentures "issued hereunder and which are entitled to the benefit of these presents" are 35,000 11% convertible debentures of the nominal amount of Rs. 1,000 each and comprised of 25,000 series "A" debentures, 5,000 series "B" debentures, 1,000 debentures each of series C, D, E, F and G, all carrying interest at the rate of 11% per annum and in the forms set out in Pts. I to VII of the Fifth Schedule therein written. Clause 2 contains the covenant to repay and sets out the redemption instalments. It provides that if for any reason the amount of subscription to the debentures of any series was less than the total amount, the relative redemption instalments would stand reduced pro rata.

Clause 4 contains the right of conversion. Sub-clause (a) deals with the right of conversion of UTI. The subsequent sub-clauses deal with the rights of conversion of the other institutions and are in identical terms. Sub-clause (a) reads as follows :

"UTI as the registered holder of the series 'A' debentures shall at any time and from time to time between the 15th day of June, 1978, and 14th day of June, 1980, have the right to convert series 'A' debentures of the nominal amount not exceeding Rs. 50,00,000 (Rupees fifty lakhs) into fully paid up equity shares of the company at a premium of Rs. 60 per share of a face value of Rs. 100 each and shall be entitled as such registered holder to call for allotment of 31,250 fully paid up equity shares of Rs. 100 each of the company at a premium of Rs. 60 per share or pro rata of an equivalent nominal value in respect of such series 'A' debentures for which the right is so exercised by UTI in the manner set out in the form of debentures in Part I of the Fifth Schedule hereunder written."

Under cl. 5, the principal moneys secured under the debenture trust deed is limited to the sum of Rs. 3,50,00,000.

Under sub-cl. (h) of cl. 15 if the company failed to observe or perform any covenants, conditions or provisions therein contained or in the loan agreements the debentures would be deemed to have forthwith become due and payable and the security to have become unenforceable.

Clause 23 reads as follows :

"In the event of any of the debentures being converted into equity shares pursuant to the option in that behalf reserved to the debenture-holders as provided in these presents, the debenture-holders shall surrender such debentures to be so converted to the company within thirty days from the date of notice exercising such option for the purpose of necessary memorandum to be made by the company thereon indicating the cancellation or extinguishment of each of such debentures and the conversion into fully paid up equity shares as aforesaid."

Under cl. 34, the company is required to maintain at its registered office a register of the debentureholders showing, inter alia, the name and address of each holder, the nominal amounts of the debentures held by him, the date on which his name was entered in the register as a debenture-holder, the date on which he ceased to be a debentureholder and subsequent transfers and changes of ownership. Under sub-cl. (B) of cl. 34, the company was required to issue in the first instance, within a period of three months from the date of allotment, to each debentureholder, free of charge, a debenture certificate in respect of his holding showing on the face thereof the denomination, number and the amount of debentures. Under sub-cl. (C)of cl. 36, the company was obliged to duly observe and perform all the terms and conditions contained in the loan agreements and not to commit any breach or default thereof.

The Fifth Schedule of the debenture trust deed sets out the form of debentures to be issued to the institutions. Part I relates to the series A debentures to be issued to UTI. Clause 5 thereof sets out the mode and form in which the debentureholders are required to exercise their right of conversion. Sub-clause (i) of cl. 5 is reproduced :

"UTI as the registered holder of the series 'A' debentures of the aggregate nominal value of Rs. 250,00,000 (Rupees two hundred and fifty lakhs) shall to the extent of such series 'A' debentures of the nominal value of Rs. 50,00,000 (Rupees fifty lakhs) at any time and from time to time between the 15th day of June, 1978, and 14th day of June, 1980, (both days inclusive) by notice in writing of not less than one month given either before or during the said period of conversion and delivered at the registered office of the company accompanied by the relative debenture certificate have the right of conversion conferred under the trust deed and shall be entitled to call for the allotment to UTI as the registered holder of the 31,250 fully paid up equity shares of the company of the face value of Rs. 100 each at a premium of Rs. 60 per share or pro rata of an equivalent nominal value in respect of such series 'A' debentures so intended to be converted and to be applied towards the nominal value of each such equity share and to require the company to apply the nominal value of such converted series 'A' debentures in full payment of such equity shares inclusive of premium and the company shall allot to UTI in satisfaction of the amount of such converted series "A" debentures such equity shares as aforesaid credited as fully paid up and ranking for dividend from the date of allotment of such equity shares and pay to UTI interest in respect of such converted series "A" debentures up to the date of allotment aforesaid."

In respect of each series of the debentures the provisions of mode and form of conversion is identical.

The letter of subscription for the debentures issued by UTI to the company is on record. It is dated May 31, 1979, and it is signed by the witness, Atmaramani. It stated that UTI thereby subscribed to debentures of the aggregate nominal value of Rs. 2.5 crores by adjustment of the advance deposit of Rs. 75 lakhs placed with the company and subscription of Rs. 175 lakhs by cheque. (Rs. 50 lakhs were deposited by UTI with the company in respect of the loan of R?. 50 lakhs for the nylon project, phase II, and Rs. 25 lakhs were advanced earlier in 1979 out of the proposed loan by UTI of Rs. 200 lakhs for the modernisation programme). The letter requested the issue of the letter of allotment of debentures and stated that UTI would be entering into a separate contract with the company for the allotment of equity shares on exercise of UTI's option for conversion. The cheque is on record and has been deposed to by Atmaramani.

The letters of allotment of debentures are not on record.

The notices of conversion given by the institutions to the company are on record. The notice of conversion issued by UTI may be reproduced in full:

"Dear Sirs,

Re : Subscription to convertible debentures of Rs. 2.50 crores option of conversion—exercise of.

Pursuant to our application for subscription in respect of 25,000 convertible debentures of Rs. 1,000 each of the aggregate face value of Rs. 2,50,00,000 (Rupees two crores fifty lakhs only) on the 3 J st day of May, 1979, accompanied by the remittances of the unsubscribed portion being Rs. 175 lakhs and by way of an adjustment against the advance deposit being Rs. 75 lakhs your company has agreed to issue a letter of allotment whereby you would be allotting to us 25,000 convertible debentures of Rs. 1,000 each of your company.

Pursuant to the letter of intent No. UT/9578/RS (N-14) 77-78, dated 17th January, 1978, and further letter No. UT/14973/RS (N-14) 78, dated 1st June, 1978, and accepted by the company all of which represent the loan agreement, and in terms of cl. 4(a) of the debenture trust deed dated the 31st day of May, 1979, made between the company and Bank of Baroda as Trustees, the Unit Trust of India as debenture holders of series 'A' debentures is entitled to call for allotment 31,250 fully paid up equity shares of Rs. 100 each of the company of the aggregate nominal face value of Rs. 31,25,000 (Rupees thirty one lakhs twenty five thousand only) at a premium of Rs. 60 per share on conversion of 5,000 convertible debentures of the aggregate nominal value of Rs. 50,00,000 (Rupees fifty lakhs only) and to require your company to apply the aggregate nominal value of the said 5,000 debentures in full payment of the said equity shares.

We hereby give notice to convert with immediate effect the said 5,000 convertible debentures in series 'A' of the aggregate nominal value of Rs. 50,00,000 (Rupees fifty lakhs only) into 31,250 fully paid up equity shares of Rs. 100 each of the company at a premium of Rs. 60 per share as per the aforesaid loan agreement and the provisions of the said debenture trust deed.

We have also agreed to waive the notice period and have confirmed that against the surrender of the said letter of allotment to the extent of 5,000 debentures you will issue 31,250 fully paid up equity shares to us and issue a letter of allotment for the balance of 20,000 debentures of the nominal value of Rs. 100 each and of the aggregate nominal value of Rs. 2,00,00,000 (Rupees two crores only). We accept the said 31,250 fully paid up equity shares of the company being issued pursuant and subject to the memorandum and articles of association of the company. We desire that the said 31,250 fully paid up equity shares be registered in our name and hereby authorise the entry of our name in the register of members in respect thereof. We would also request you to issue a modified letter of allotment for the remaining 20,000 debentures or have the necessary surrender to the extent of 5,000 debentures endorsed on the original letter of allotment.

Yours faithfully,

Sd. (K. N. Atmaramani)

Joint Director Investment Division."

Atmaramani deposed that at the end of May, 1979, he was instructed by UTI's legal dept. to keep an amount of Rs. 175 lakhs ready for subscription towards the debentures of the company, for, he was told that it was likely that on 31st May, 1979, or 1st June, 1979, the company would execute the debenture trust deed and other documents. In cross-exami-nation he stated that he had been instructed by Shankar, of UTI's legal dept., to keep this money ready for subscription towards the debentures three or four days before 31st May, 1979, and that this was the first time he had been so told. On 30th May, 1979, he had sent a note instructing UTI's accounts dept. to keep the moneys ready on 1st June, 1979, for, he had been told that that was the day on which the company would execute the document. The note is on record. It required that he should be sent the cheque by 4-00 p.m. on 31st May, 1979, but he deposed that he called for it after lunch on 31st May, 1979. He was not present at the meeting of 31st May, 1979, but had handed over the letter of subscription to the debentures, the cheque and the notice of conversion, all signed by him, to Poojara, one of UTI's officers.

On 5th June, 1979, shares pursuant to the conversions were allotted to the institutions.

Plaintiff's Counsel's statement

Before I proceed to discuss the contentions that were pressed, I must record a statement made by Mr. Cooper, learned counsel for the plaintiffs. Mr. Cooper stated that "for the purposes of this suit only—

(a) the plaintiffs will not contest that the debenture trust deed dated 31st May, 1979, was void.

(b) the plaintiffs will not rely on any allegation regarding the conduct of the adjourned 33rd annual general meeting or any contention based thereon, as the 1st plaintiff and another have filed a separate suit in respect thereof.

(c) the plaintiffs are not making or relying on any allegation against the Controller of Capital Issues or the Company Law Board.

(d) the plaintiffs will not rely on the grounds alleged in paras. 73(a), 73(b) and 73(c) of the plaint, save and except the submissions, viz :

(1) The issue in reality was an issue of shares by allotment and of debentures, but was deliberately termed as an issue of debentures.

(2) The alleged option was such as to be exercisable simultaneously with the issue of debentures and was a mere cloak to obviate falling within the clutches of ss. 81(1)(a) and 81(1A) of the Companies Act, and

(3) The directors could not by such means defeat and set at nought the provisions of s. 81(1)(a) or s. 81 (1A) of the Companies Act.

(e) the plaintiffs will not rely on the submission made in para. 73(e) to the extent that the whole issue of the debentures was ultra vires the company and ultra vires the powers of the board of directors.

(f) the plaintiffs will not contend that the whole issue of debentures is null and void on the ground alleged in para. 73(f) of the plaint."

The rule in Foss v. Harbottle [1843] 2 Hare 461 :

The rule in Foss v. Harbottle [1843] 2 Hare 461 was invoked by the defendants. It was first enunciated in the case of Foss v. Harbottle but waa explained more lucidly in later cases.

In MacDougall v. Gardiner [1875] 1 Ch D 13 (CA), Mellish L.J. explained the rule in terms which have become a classic (p. 25):

"In my opinion, if the thing complained of is a thing which in substance the majority of the company are entitled to do, or if something has been done irregularly which the majority of the company are entitled to do regularly, or if something has been done illegally which the majority of the company are entitled to do legally, there can be no use in having a litigation about it, the ultimate end of which is only that a meeting has to be called, and then ultimately the majority gets its wishes. Is it not better that the rule should be adhered to that if it is a thing which the majority are the masters of, the majority in substance shall be entitled to have their will followed ? If it is a matter of that nature, it only comes to this, that the majority are the only persons who can complain that a thing which they are entitled to do has been done irregularly ; and that, as I understand it, is what has been decided by the cases of Mozley v. Alston [1847] 1 Ph 790 and Fossv. Harbottle [1843] 2 Hare 461."

In Burland v. Earle [1902] AC 83, the Privy Council said that it was an elementary principle of the law relating to joint stock companies that the court would not interfere with the internal management of companies acting within their powers, and in fact had no jurisdiction to do so. Again, it was clear law that in order to redress a wrong done to the company or to recover moneys or damages alleged to be due to the company, the action should prima facie be brought by the company itself.

In Edwards v. Halliwell [1950] 2 All ER 1064, Jenkins L.J. said (at p. 1066):

"The rule in Foss v. Harbottle [1843] 2 Hare 461, as I understand it, comes to no more than this. First, the proper plaintiff in an action in respect of a wrong alleged to be done to a company or association of persons is prima facie the company or the association of persons itself. Secondly, where the alleged wrong is a transaction which might be made binding on the company or association and on all its members by a simple majority of the members, no individual member of the company is allowed to maintain an action in respect of that matter for the simple reason that, if a mere majority of the members of the company or association is in favour of what has been done, then cadit quaestio. No wrong had been done to the company or association and there is nothing in respect of which anyone can sue. If, on the other hand, a simple majority of members of the company or association is against what has been done, then there is no valid reason why the company or association itself should not sue. In my judgment, it is implicit in the rule that the matter relied on as constituting the cause of action should be a cause of action properly belonging to the general body of corporators or members of the company or association as oppose I to a cause of action which some individual member can assert in his own right."

Halsbury's Laws of England, Fourth Edn., Vol. 7, para. 713, puts it thus:

"The court has no jurisdiction to interfere with the internal management of a company acting within its powers. To redress a wrong done to the company or to recover money or damages due to it the action must prima facie be brought by the company itself, if the matter constituting the cause of action is a cause of action properly belonging to the company or the general body of members."

Counsel for the defendants urged that since upon rectification the plaintiffs' names were not sought to be substituted in the company's register of shares for the names of the institutions in respect of the shares in suit, the suit was not for the redress of a wrong done to the plaintiffs in an individual capacity but for the redress of a wrong done to the company. In their submission, this was a case to which the rule in Fuss v. Harbottle [1843] 2 Hare 461 applied and the suit, having been filed by the plaintiffs in an individual capacity, was not maintainable or, at any rate, the plaintiffs were not entitled to relief therein.

It was contended by Mr. Cooper, learned counsel for the plaintiffs, that the right to rectify the share register of a company was the individual right of each of its shareholders. Each shareholder was entitled to have the register reflect the true position and to take action to ensure that it did. In Mr. Cooper's submission, the shareholder's right to vote, his right to a share in the company's profits and his right to acquire new shares in the company depended upon the entries in the company's share register. In his submission, the individual shareholder's right to rectify the company's share register was recognised by s. 155 of the Companies Act. Reference was made in this context to an unreported judgment of a Division Bench of this court in Appeal No. 344 of 1981 in Company Applica-cation No. 169 of 1981, in Company Petition No. 196 of 1981, delivered on 9th September, 1981—since reported as Killick Nixon Ltd. v.Dhanraj Mills Pvt. Ltd.[1983] 54 Comp Cas 432 (Bom). It was there contended that only a person aggrieved by an incorrect or wrong entry in the share register was entitled to file a petition under s. 155 for a rectification of the register. It was contended that the expression "any member" in that section meant only a member who was aggrieved or who was in a position to show that some prejudice or wrong was caused to him. The court declined to accept the submission and held that any member was entitled to apply for a rectification under s. 155 without being compelled to show that he was aggrieved or any prejudice had been caused to him.

Counsel for the defendants submitted that this judgment, though of a Division Bench of this court, was not binding because it was delivered in an appeal from an interlocutory application. I decline to go into the question ; assuming it to be only of. persuasive value, I am entirely in agreement with the reasoning.

Reference was made by counsel for the defendants to the judgment of this court in Rao Saheb Manilal Gangaram Sindore v. Western India Theatres Ltd. [1962] 64 Bom LR 532 ; [1963] 33 Comp Cas 826. That was a suit for rectification of the share register of a company. The value of the shares which were the subject-matter of the suit was stated in the plaint to be Rs. 1,200 and the interim relief sought was valued at Rs. 100. A preliminary objection was taken that the court had no pecuniary jurisdiction to entertain the suit. It was held that for the relief contemplated by s. 155 a suit was the primary remedy under the general law. The relief contemplated by that section was one which was available at common law. Section 155 merely provided a summary remedy. Its object was not to whittle down or abrogate the procedure by way of a suit for getting the relief contemplated by the section. A long line of judicial decisions recognised that the court was not bound to give relief under s. 155 if it was found that complicated questions of fact were involved but had the power to direct the party concerned to file a proper action in a civil court. When this court entertained a petition under s. 155 it was exercising jurisdiction under the Companies Act but in the case of a suit, the jurisdiction that was exercised was the ordinary original civil jurisdiction, which was entirely different. In exercising the latter jurisdiction, the court was bound to see whether the suit was filed within the scope of its pecuniary jurisdiction. The suit, which was valued at Rs. 1,300, was, therefore, dismissed.

Counsel for the defendants relied upon this judgment to submit that different considerations applied to a petition under s. 155 and to a suit for the same relief. Mr. Cooper relied upon the judgment to submit that the relief of rectification was a relief available at common law.

Reference was also made to the judgment in T. A. K. Mohideen Pichai Taraganar v. Tinnevelly Mills Co. Ltd., AIR 1928 Mad 571. The court held that the true and correct view to take would be that the Companies Act merely legislated for or regulated rights recognised under the common law; this observation was made in the context of s. 38 of the Indian Companies Act, 1913, which provided for a rectification of the share register.

In my view, every shareholder of a company has an individual right and interest in seeing that the share register of the company reflects the true position. Upon the share register rests each shareholder's right to receive his due share of the company's profits by way of dividend, his right to exercise his vote and to have it correctly assessed as against the votes of other rightful shareholders, and his right to acquire new shares in the company pro rata with other rightful shareholders. An entry in the register which is bad or illegal affects these rights of the individual shareholder. He is thereby prejudiced and aggrieved.

The right to rectify was recognised at common law and was translated into the statutes, English and Indian. (The provisions of s. 116 of the English Companies Act, 1948, provide to any member of the company the right to apply for a rectification of the company's share register). The statutes do not create any new right in the member.

In England, as in most High Courts in India, it is recognised that the procedure of rectification made available by the Companies Act is a summary procedure and that the petitioner may, in the court's discretion, if the matter be a complex one, be referred to a suit. It would be anomalous if a shareholder, who can maintain a petition under s. 155 of the Indian Companies Act or s. 116 of the English Act, is directed to file a suit because the matter is complex, and is then told that he is not entitled to maintain the suit because he is not a person aggrieved.

In the view that I take, this suit is maintainable.

It is needless to add that where the suit is filed by the shareholder in an individual capacity it need not be in the representative form, but it may be. (See Gower's Principles of Modern Company Law, fourth edn., p. 655 and Gore-Browne on Companies, 43rd edn., para. 28.8).

Reduction of capital

It was urged by counsel for the defendants as a point of maintainability that the suit involved a reduction of the company's capital and that the reduction of a company's capital could only be achieved by following the procedure laid down in ss. 100 to 105 of the Companies Act. This argument need not detain me long. If the court holds that the issue of the shares in suit is invalid, it is as if the shares were never issued and no question arises of reduction of the share capital or of following the provisions of the Companies Act to reduce it. That must necessarily be consequential upon the order in the suit.

Rectification of debenture register

Counsel for the defendants contended that the relief sought involved the rectification of the company's debenture register ; this had not been expressly sought, nor could it be sought, for, the debenture trustee, a necessary party, was not impleaded. If the court comes to the finding that the issue of the shares in suit is bad and restores the institutions to the position of being debenture holders, rectification of the debenture register will be a necessary consequence of the order. It need not be prayed for nor is it requisite that the debenture trustee be heard in that regard.

Debenture trustee a necessary party

It was urged, first, that the debenture trustee was a necessary party upon the averments in the plaint, notwithstanding the fact that the plaintiffs had given up the contentions that made the debenture trustee a necessary party. I cannot agree, that, though no contention is urged regarding which it is requisite to hear the debenture trustee, by reason of the frame of the suit, it must be held to be bad for non-joinder.

Secondly, it was urged that if the institutions were restored to the position of being debenture holders the debenture trustee would hold the same security for a larger number of debenture holders than heretofore and that, therefore, the debenture trustee is a necessary party. That does not, in my view, make the debenture trustee a party that ought to have been impleaded.

Article 18 of the articles of association

Mr. Cooper argued that no option could be given to any person to call for shares unless the company in general meeting had so resolved and he relied for this purposes upon art. 18 of the company's articles of association ; the general body having passed no such resolution before the shares were allotted to the institutions, the allotment of the shares was bad.

Article 18 reads thus :

"In addition to and without derogating from the powers under article 15, the company in general meeting may determine that any shares (whether forming part of the original capital or of any increased capital of the company) shall be offered to such persons (whether members or not) in such proportion and on such terms and conditions and either at a premium or at par or (subject to compliance with the provisions of section 79 of the Act) at a discount as such general meeting shall determine and with full power to give any person the option to call for or be allotted shares of any class of the company either at premium or at par or (subject to compliance with the provisions of section 79 of the Act) at a discount such option being exercisable at such times and for such consideration as may be directed by such general meeting ; or the company in general meeting may make any other provision whatsoever for the issue, allotment or disposal of any such shares."

As I analyse the material portion of the article, it provides this :

The company in general meeting may determine that any shares shall be offered to such persons (whether members or not)

in such proportion and on such terms and conditions and either at a premium or at par or at a discount as such general meeting shall determine

and with full power to give any person the option to call for and be allotted shares.................

So analysed, it is clear that the. article is applicable only to the issue of shares and to an option contained in the shares issued to call for further shares. It has no application to an option to call for shares contained in debentures.

Option not exercised in respect of convertible debentures

Mr. Cooper relied upon cls. 4 and 23 of the debenture trust deed and cl. 5 of the form of debentures in the Fifth Schedule to the debenture trust deed and submitted that the debenture certificates in respect of which the option of conversion was exercised had to be sent to the company along with the notice of conversion. It was submitted that it was imperative that such debentures as were being converted should be identified, for, all debentures were called convertible but what really made them convertible was the fact of their being sent to the company. This being, in his submission, a matter of substance not of form, there could be no waiver of that which made the debentures convertible.

Clauses 4 and 23 of the debenture trust deed and cl. 5 of the form of debentures have already been quoted in extenso. Clause 4 states that the debenture holder would be entitled to call for the allotment of shares in respect of such debentures "for which the right is so exercised" by the debenture holder "in the manner set out in the form of debentures in the 5th Schedule hereunder written". The form of debentures requires the delivery to the registered office of the company of a notice of conversion of not less than one month "accompanied by the relative debenture certificate" and states that the debenture holder shall be entitled to call for allotment "in respect of such..................debentures so intended to be converted.......". Clause 23 of the debenture trust deed requires the debenture holder "to surrender such debentures to be so converted to the company within thirty days from the date of conversion notice....for the purpose of necessary memorandum to be made by the company thereon indicating the cancellation or extinguishment of each of such debentures and the conversion into fully paid up equity shares..."

It must be noted that the option to convert is vested only in the first holders of the debentures, that is to say, only in the institutions; transferees of the debentures would not be entitled to call for a conversion thereof into shares. It must also be noted, as cl. 23 of the debenture trust deed makes clear, that the debentures that are converted are required to be surrendered to the company to enable the company to endorse thereon their cancellation or extinguishment. Where the institution converts only a portion of its conversion quota it would be necessary to earmark and cancel the debentures of the particular series which are converted but, as I see it, where the institution converts its full quota—and that before the debenture certificates have been issued—the requirement of earmarking and cancellation would not be absolutely necessary and could be dispensed with or waived. The company would then issue debenture certificates only for the remaining debentures of the series and even could endorse thereon that no debentures of the series were convertible. In the instant case, all the institutions have at one time, and that before the issue of the debenture certificates, exercised their rights of conversion to the fullest extent. I am unable to go so far as to hold that the fact that a debenture was sent to the company with a notice that it was to be converted alone made that debenture convertibe. The requirement of sending debentures to be converted to the registered office of the company could, therefore, be waived.

Option not exercised by registered debenture holders

Mr. Cooper argued that only a debenture holder whose name had been entered in the company's register of debenture holders could exercise the option to convert, by reason of the words used in cl. 4 of the debenture trust deed and cl. 5 of the form of debentures. He argued that there was nothing on record to show that the institutions had been registered as debenture holders at the point of time at which they had exercised the option. He relied upon s. 106 of the Evidence Act and urged that, since the point of time at which the names of the institutions were entered in the company's register of debenture holders was within the company's knowledge, the onus lay on the company to prove when this was done ; but the company had led no such evidence.

It does not appear to be the argument of the defendents that the institutions' names were entered on the register of debenture holders before they exercised the option to convert. The case of the defendents is that the company waived its right to insist that the option could be exercised only after the institutions' names were entered upon the register.

In find it difficult to agree with Mr. Cooper's submission that the right or option to convert came to exist only upon registration. Basically, the requirement is set out for the company's benefit, as describing a debenture holder who has been recognised by the company by virtue of the fact that his name has been entered by the company in its register of debenture holders in respect of his debenture certificates. The company would be entitled to refuse to recognise an exercise of the option by a debenture holder whose name is not entered on the register, but there is nothing to prevent the company from recognising and giving effect to the exercise of the option by such a debenture holder. The company is entitled to waive the requirement imposed for its benefit ; and it may do so by express waiver or by conduct.

Option not exercised in due form

Mr. Cooper contended that since the institutions had not given to the company's registered office one month's advance notice of the exercise of the option to convert, the institutions had not exercised the option in the manner and form requisite and, consequently, the issue of the shares upon such conversion was bad. It is cl. 5 of the form of debentures that requires the giving of one month's advance notice to the company's registered office of the exercise of the option. It is a requirement imposed, obviously, for the company's administrative convenience and the company would certainly be entitled to waive the manner and form if it wanted to do so.

Option exercised by party to whom letters of allotment were yet to be issued

Mr. Cooper submitted that the option to convert had been exercised by parties to whom letters of allotment of debentures were yet to be issued. He made the submission based upon a sentence in para. 73(d) of the plaint which reads thus : "The plaintiffs say that the option could have been exercised only by a registered debentureholder and not by a person to whom allotment letter was yet to be issued."

Just before the sentence quoted above the plaint says, "The plaintiffs submit that having regard to the chronology of events which is narrated hereinbelow, it is apparent that the option has not been exercised modo et forma or in strict compliance with the conditions laid down in the 3rd Debenture Trust Deed". A little after the sentence quoted above the plaint reads thus :

(i) 3rd debenture trust deed was executed on May 31, 1979.

(ii) Letters for allotment of debentures were merely issued.

(iii) No debenture certificate was issued to any of the defendants on May 31, 1979.

(iv) On May 31, 1979, itself the defendants Nos. 1 to 7 as alleged debenture holder purported to exercise the option..............."

The plaint, therefore, proceeds upon the factual basis that on May 31, 1979, the debenture trust deed was first executed, letters of allotment of debentures were then issued and thereafter the institutions exercised their options. In view of these averments in the plaint, I must uphold the objection on behalf of the defendants that it is not open to the plaintiffs to urge that letters of allotment of debentures were not issued before the institutions exercised the opitions.

Purchase of shares

Mr. Cooper urged that the transaction that took place at the meeting of May 31, 1979, was not the issue of debentures for the whole amount of Rs. 350 lakhs and the exercise of the option to convert, but was, to the extent of 80%, the giving of a loan and the issue of debentures and, as regards the balance 20%, it was the payment of application monies and the purchase of shares. He urged that the transaction of May 31, 1979, had to be seen as one and indivisible and in its reality.

Reference was made by Mr. Cooper to the judgment of the Court of Appeal in Manksv.Whiteley [1912] 1 Ch. 735. What was relied upon comes from the judgment of Fletcher Moulton L.J. It runs :

".....................But I say it to emphasize the principle that where several deeds form part of one transaction and are contemporaneously executed they have the same effect for all purposes such as are relevant to this case as if they were one deed. Each is executed on the faith of all the others being executed also and is intended to speak only as part of the one transaction, and if one is seeking to make equities apply to the parties they must be equities arising out of the transaction as a whole. It is not open to third parties to treat each one of them as a deed representing a separate and independent transaction for the purpose of claiming rights which would only accrue to them if the transaction represented by the selected deed was operative separately......................"

This decision was followed by the Supreme Court in S. Chattanatha Karayalar v. Central Bank of India Ltd. [1965] 35 Comp Cas 610. The Supreme Court quoted with approval a part of what I have just recited and it observed that the "The principle is well established that if the transaction is contained in more than one document between the same parties they must be read and interpreted together and they have the same legal effect for all purposes as if they are one document."

Mr. Cooper made the argument on two footings. First, he urged that what had been exercised by the institutions was the right to purchase shares in lieu of the right of conversion mentioned in cl. 7 of UTI's letter of June 1, 1978, a letter which was referred to in the debenture trust deed as a loan agreement. Mr. Cooper submitted, and I reproduce the submission virtually in the words used by him.

The agreement between the institutions and the company was in the loan agreement which contained a clause (cl. 7) giving the institutions the right to purchase shares in lieu of the right of conversion.

On June 8, 1978, an attempt was made to exercise the right of purchase. No right of conversion then existed. The right to purchase could only come into effect if there was a right of conversion, being in lieu of that right. The attempt failed.

Before the loan agreement became operative—including the right to purchase—the condition precedent was the signing of the debenture trust deed by the company and the debenture trustee in terms settled by the institutions. This was obligatory upon the company under the loan agreement. On May 31, 1979, the debenture trust deed was signed. Itcontained cl. 4, conferring the right of conversion, and cl. 36(c), which required the company to duly observe and perform all the terms and conditions, covenants and stipulations contained in the loan agreements. By reason of cl. 36(c) the right to acquire shares in lieu of conversion was incorporated into the debenture trust deed. On subscription to the debentures and their allotment the institutions acquired the right of conversion and, simultaneously, the right to purchase shares in lieu of the right of conversion became effective. The institutions purported to exercise the right of conversion or, at least, claimed they were duing so. This was not correct because a true exercise of the right meant the giving of a real loan intended to be used by the borrower. Really, it was the exercise of a right to purchase.

The real transaction between the institutions and the company was not the giving of the loan of Rs. 300 lakhs and the conversion thereof into shares but was the giving of a loan plus the purchase of shares. This transaction was contemplated by the debenture trust deed and would have been a valid transaction if there had been a special resolution in that behalf.

There was nothing which could have prevented the institutions from exercising the right of purchase in a legal manner or of giving up that right and effecting a real conversion of the loan. The debenture trust deed recorded both rights and the fact that parties had agreed to the exercise of the right of purchase did not invalidate the right of conversion. In fact, the whole transaction was on the footing that the right of conversion and was it corollary (sic).

Mr. Cooper's submission has its foundation in this : that the debenture trust deed recorded and conferred upon the institutions the right to acquire shares in lieu of conversion. As I read UTI's letter of June 1, 1978, the right to acquire shares in lieu of the right of conversion mentioned therein was to operate in advance of and in lieu of the conferment of the right of conversion, which would be conferred only under the debenture trust deed. This is clear from the time-limit imposed in the letter written by UTI to the company on June 8, 1978, namely, June 15, 1978. It is difficult to hold that the debenture trust deed conferred the right to acquire shares in lieu of the right of conversion. As I read it, it conferred only the right of conversion. If the right to acquire shares in lieu of the right of conversion was intended to be conferred under the debenture trust deed that would have found place in the debenture trust deed immediately after cl. 4 thereof, and not by oblique implication. Besides, not all the loan agreements stipulate the right to acquire shares in lieu of conversion. Further, the conversion notices themselves state that it was the right of conversion which was being exercised. Mr. Cooper relied on the statements in the agreements to allot shares entered into between the company and the institutions on May 31, 1979, that the shares were to be "in lieu of and in full satisfaction of the conversion rights." The agreements elsewhere clearly state that it was the right of conversion which was being exercised. The argument on the first footing cannot, therefore, be accepted.

The second footing upon which Mr. Cooper argued is this : Assuming cl. 4 of the debenture trust deed constituted the agreement between the institutions and the company, the institutions only purported to carry it out but did not in fact do so ; what they did was to buy shares, not convert debentures.

The emphasis of the argument is on the fact that the options were exercised immediately they came into existence. There was Mr. Cooper submitted, no loan in respect of Rs. 70 lakhs (20% of the total of Rs. 350 lakhs) for the essence of a loan was that the borrower was given the use of it, but it was paid as application monies for shares.

To uphold the argument would mean to read into cl. 4 of the debenture trust deed—and, indeed, into s. 81—a term that the conversion could not be effected or the option could not be exercised until after a reasonable period of time. This would, in my view, be unjustified. I see no bar under the law to the exercise of an option immediately after it comes into existence, and the allotment of shares pursuant to such conversion cannot on that account be voided.

It may also be pointed out that the agreements to allot shares mention that interest would be payable upon the debentures until the shares in conversion thereof were issued. This also goes to establish that Rs. 70 lakhs were not paid, to begin with, as application monies but were intended to be a loan on which interest at the debenture rate was payable until shares in conversion were allotted.

Coming as I do to this conclusion, I do not rely upon the documents on record which prima facie establish that it was the right of conversion which was exercised and that conversion took place.

It was urged by counsel for defendants that it was not open to the plaintiffs to contend that the shares had really been purchased, in view of their counsel's statement that the plaintiffs would not contend that the debenture trust deed was void, and that this would be the inevitable result of the contention being accepted. As I see it, the manner in which the contention has been put by Mr. Cooper does not constitute a challenge to the validity of the statement, which I have earlier set out, expressly reserves this contention (sic).

Mala fides of waiver

Mr. Cooper urged that the waiver by the company of the notice of conversion to be delivered to the company's registered office, accompanied by the relative debenture certificates, one month in advance, as required by cl. 5 of the form of debentures in the debenture trust deed, was vitiated by reason of mala fides and breach of fiduciary duty on the part of the company's directors.

It was submitted by counsel on behalf of the defendants that there was no such plea in the plaint. The plea upon which the submission was based is contained in para. 73(d) of the plaint and it reads thus :

"The plaintiffs submit that in any event the purported waiver by defendants Nos. 1 to 7 themselves and the purported acceptance thereof by the directors was wholly mala fide and an abuse of the fiduciary position, illegal and invalid. The plaintiffs submit that the directors had no power to waive or accept any waiver and they are guilty of deliberate fraud upon the equity shareholders as a class."

In para. 55 of the written statement of the company, which deals with para. 75(d) of the plaint, the denial is in these terms :

"These defendants deny that the waiver by defendants Nos. 1 to 7 or these defendants is mala fide or is an abuse of the fiduciary position or is illegal or invalid."

In the written statements of the institutions the denial is identically worded. The defendants, therefore, understood that the plaint ascribed mala fides and breach of fiduciary duty to the company and they denied the allegation. They cannot, then, be heard to say that there is no such plea in the plaint.

It was contended by counsel on behalf of the defendants that, assuming that there was such a plea, there were no particulars of the mala fides alleged therein. Let me look through the plaint. The relevant portion begins with para. 71. The opening sentence of para. 71 reads:

"The plaintiffs say that it is thus apparent from the aforesaid facts and those stated hereinafter and in the other suits that there has been consistent and persistent attempt on the part of the Government directors whilst they were acting as the financial institution directors to prevent the lawful exercise of voting by ordinary citizens and to capture more and more voting powers for themselves and prevent the voting power being acquired by any other individual except.those who were willing to support them and thus exercise control over the company."

The paragraph goes on :

"...................With this very motive on 31-5-1979 the debentures were privately placed and issued to the financial institutions and loans raised from them both of which gave an option to the financial institutions to obtain and acquire shares by exercising such option to the extent of 51,000 shares........

On the same day, that is to say, May 31, 1979, options were exercised by the financial institutions (though not in accordance with the terms of the option) and shares are shown to have been registered in the names of the financial instituitions on June 6, 1979."

Sub-paragraph (i) of para. 72F of the plaint avers that the company's directors procured execution of the debenture trust deed on May 31, 1979. Some of its provisions are set out. The manner in which the option had to be exercised, i.e., cl. 5 of the form of debentures, is also set out. In sub-para. (ii) the notice of conversion is extracted. In sub-para. (v) it is averred that the institutions thus acquired for themselves voting power. Paragraph 73 opens with the submission that the allotment of shares was wholly null and void, irregular, illegal and fraudulent and had been made by abusing fiduciary duties and by colourable exercise of powers. In sub-para. (d) of para. 73 the plaintiffs submits that the option to convert the debentures into shares had to be exercised strictly in accordance with the conditions laid down. Sub-para. (d) submits that it was not open to the defendants to waive the notice and alleges that the waiver was wholly mala fide and an abuse of fiduciary position.

As I read the plaint, than (sic) the particulars of mala fides stated in it clearly intended to apply to all the aspects of the issue of the shares, including the act of waiver. It was not necessary for the plaint to repeat the same particulars of mala fides in respect of each aspect.

Mr. Cooper relied upon several circumstances on record and. submitted that, by reason thereof, the plaintiffs had established the prima facie case that the directors of the company had waived the requirements of cl. 5 of the form of debentures with the intention of favouring one group of the company's shareholders, namely, the institutions, against another, namely, the Berlias, and this was a mala fide exercise of powers and was in breach of the directors' fiduciary duties. He submitted that as the defendants had failed to lead evidence to establish that the intentions of the company's directors had not been such, the prima facie case was established.

Counsel for the defendants submitted that the presumption in law was that the directors of a company act bona fide and that, therefore, the plaintiffs had to rebut that presumption. Only if this was done and the circumstances led to the irresistible inference of mala fides and breach of fiduciary duty would the onus shift to establish the contrary.

A presumption of fact determines where the burden of proof lies. Quite apart from the presumption that the directors act bona fide and that, therefore, the burden of proof lies on the plaintiffs, the burden of proving mala fides must rest on the party alleging it. The presumption here would stand rebutted and the evidentiary burden would be satisfied if the plaintiffs made out a prima facie case, a case upon which, in the absence of evidence from the other side, a finding in their favour could reasonably be given upon a balance of the probabilities. The absence of evidence from the other side entitles the court to infer that "the absence of that evidence is to be accounted for by the fact that even if it were adduced it would not displace the prima facie case. But that always presupposes that a prima facie case has been established..." (Cockburn C.J. in McQueen v. Great Western Rail Co. [1875] LR 10 QB 569 at 574). It must also be remembered that animus can only rarely be proved by direct evidence. Generally, the party alleging animus proves the circumstances which make the animus probable and the evidentiary burden then shifts to the party against whom the allegation is made to establish that he acted bona fide.

Upon this basis in law, I proceed to examine Mr. Cooper's submission The circumstances that he relied on are :

That after July, 1977, the Berlias had to file suits in the Bombay City Civil Court and petitions for rectification of the company's share register in this court before the company consented to transfer shares to the names of the Berlias.

That even after the agreement and consent terms of December 8, 1977, the company refused to transfer further shares to the Berlias.

That in April, 1978, the Berlias demonstrated that the majority of the company's shareholders supported them by lodging about 1,74,000 proxies for an extraordinary general meeting while the institutions had proxies and voting strength to the extent of about 1,04,000.

That the company and the institutions had applied to the Central Govt. for the issuance of orders under s. 108D and the Government was told by them that the Berlias would capture the company and control it if the orders were not issued.

That the Central Govt. owned the institutions and, by virtue of the appointment of 8 directors on the company's board, in July, 1977, controlled it.

That the freezing order was issued on June 17, 1978. The company having received it on June 19, 1978, kept it back from the Berlias till they were compelled to lodge a writ petition challenging the order, without annexing its copy, two days before the company's AGM of June 29, 1978.

That on May 31, 1979, the writ petition and two petitions for rectification of the company's share register by placing thereon the names of the Berlias in respect of further shares of the company were pending.

That on May 31, 1979, as a result of the interim order passed in the writ petition, the Berlias were by and large free to exercise the voting rights on their shares.

That on May 31, 1979, it was known to the company's directors that the Berlias had secured a majority of votes at the 1978 AGM in connection with the election of a director.

That the company and the institutions could not, on May 31, 1979, know how the Berlias would vote at the AGM on June 28, 1979, whether they would put up candidates for the board, or oppose the passing of the accounts, and so on ; but they knew that they could not expect support from the Berlias.

That there was one nominee of the institutions and one employee of LIC on the company's board ; seven other directors were government nominees.

That the AGM having been called for June 28, 1979, by notice dated April 26, 1979, it was not possible to obtain additional voting strength except by waiving the one month's notice period and the other requirements for conversion.

That the company had been in terms informed orally as well as by the letter written by the common attorneys that the institutions wanted the shares upon conversion by the end of May, 1979.

That the debentures could not have been issued till the debenture trust deed was registered with the Sub-Registrar of Assurances and the certificate of registration of the charge was obtained from the Registrar of Companies and incorporated in the debentures as provided by the form of debentures.

That in para. 73(2) of the plaint, it was alleged that the Government nominated directors stood to gain by lending support to the institutions and to submit to their demands, for, there was a quid pro quo, inasmuch as the institutions were anxious to have a continuation of the order under s. 408 so that they would have the full control and were requiring the appointment on the board of the same persons as government directors. The paragraphs of the written statements which deal with para. 73(e) of the plaint do not contain a denial of the allegation.

It was pointed out by counsel for the defendants that it was not put to UTI's witness Atmaramani whether there was any apprehension about the conduct of the Berlias at the 1979 AGM. It is not the apprehension of UTI or of Atmaramani that I am really concerned with, but that of the company and its directors ; no director or officer of the company was examined to whom such case could have been put. The letter written by the Chairman of UTI and GIC to the Chairman of the Company Law Board on June 6, 1978, is relevant in this connection. After setting out their apprehensions about the Berlias' intentions the writers asked that the voting rights of the shares lodged with the company for transfer should be frozen so as to debar the registered holders thereof, whoever they may be, from exercising the voting rights thereon ; this would prevent the Berlias from gaining control of the company and from having any nominees or agent on the company's board "either at the forthcoming AGM of the shareholders on June 29, 1978, or at any other general meeting". (Emphasis supplied).

That the company was involved in the preparation of this letter is patent by reason of its annexure listing the shares lodged for transfer with the company, their folio numbers and their holders' names. There is little doubt, in the circumstances, that the apprehension expressed in the letter was also the apprehension of the company and it extended not only to the 1978 AGM but to all subsequent general meetings.

Reliance was put upon the case put to Atmaramani, namely, that the only urgency was the desire of the institutions to see that they acquired more shares and increased their voting strength before the 1978 AGM and that this urgency ceased when the freezing order was obtained. It was commented by counsel for the defendants that no case was put to Atmaramani of any urgency felt by the institutions and the company in 1979. Atmaramani deposed that the urgency of obtaining the loan for working capital and the modernisation programme commenced in 1976 and continued in 1977 and 1978; in 1979 it continued but had abated to some extent. It is not as if it was Atmaramani's evidence that the urgency had ceased in 1979 so that it was necessary to put to him such an express case. In any event, the submission would have acquired substance if the company had examined a director or officer and the express case had not been put to him.

Counsel for the defendants made reference to the period after April 7, 1979, and submitted that the conduct of the defendants belied the inference that the waiver was premeditated or was the result of any apprehension about the Berlias' intentions. Reliance was placed on the letter of April 7, 1979, written by the common attorneys to the institutions and the company wherein it was stated that the institutions were anxious to complete the transaction at the latest by May 30, 1979. It was pointed out that on that day the 1979 AGM had not been notified and the sanctions of the various authorities to the issue of the debentures were still to come. On April 26, 1979, the company notified the AG.M for June 29, 1979. It was submitted that this could have been delayed. The sanctions were yet to come. If any apprehension or animus had existed, it was submitted, the 1 979 AGM would have been scheduled for much later. On May 9, 1979, or thereabouts all the sanctions had come in but the debenture trust deed was not immediately executed. It was suggested that it would have been, if an apprehension or animus had existed, so that there would have been a one month's period before the AGM during which the conversion notice could have been given and the shares issued without waiver. On May 24, 1979, the company's board approved the draft debenture trust deed. It was submitted that on that day there was every intention of operating upon the clause of the form of debenture that required one month's notice of conversion, and that the fact that the board had approved the draft with the clause showed that there was no animus or apprehension. On that day, the board gave powers to four directors to demand or alter the draft. It was submitted that it was nobody's case that the document differed from the draft. That the draft was not amended or altered to delete clause 5, it was submitted, showed that there was no animus or apprehension. Nothing, it was urged, had been brought on record which suggested a reason for any animus or apprehension arising between April 26, 1979, and May 30, 1979. According to counsel for the defendants it was, thus, shown that up to May 31, 1979, there was no apprehension or animus.

What the argument ignores, in my judgment, is that on May 29, 1979, their attorneys sent to the institutions, the company and the debenture trustee a note setting down the programme to be followed at the meeting of May 31, 1979. Clause (1), sub-ss. (i) and (ii) of that note referred to the acceptance of notices of conversion, the entering into of contracts under s. 75 of the Companies Act and the issue of equity shares upon conversion. Clause 11 stated that, after the letters of allotment were received, the debentureholders would issue notices of conversion to the company, upon receipt whereof the company would issue letters of allotment of shares and enter into contracts for the shares. Clause 13 stated that the company would issue share certificates for the converted amount to the debenture holders. Patently, before the note was sent on May 29, 1979, it had been agreed between the institutions and the company that the requirements of cl. 5 would not be enforced. Why, then, was the draft debenture trust deed not amended by deleting cl. 5 ? Why was the debentures trust deed executed making compliance with clause 5 a pre-requisite for conversion and why, immediately upon its execution, was the pre-requisite waived ?

Most important to notice in this regard is that it was agreed that all the institutions were to exercise on May 31, 1979, their rights of conversion to the fullest extent so that cl. 5 was not being retained to be operative in the event of a future exercise of the option.

Counsel for the defendants submitted as part of the earlier argument that, that the company had called the AGM for June 28, 1979, was a fact, which militated against its alleged intention to ensure that the institutions were issued the shares upon conversion before it. Counsel relied upon s. 166 of the Companies Act and said, the AGM could have been delayed till September, 1979, by which time the institutions could have got the shares without recourse to waiver. It seems to me that Mr. Cooper was right when he submitted that, having regard to s. 210 the AGM had to be called by June 30, 1979, to adopt the company's profit and loss account prepared up to December 31, 1978.

It was submitted by counsel for the defendants that the directors could well have acted innocently in waiving the requirements of cl. 5. The circumstances on record do not suggest an inference consonant with innocence. Innocence could, however, have been established, and it is not.

It was said that cl. (5) could have been deleted and nobody would have been any the wiser ; instead cl. (5) was waived. This is not an inference that may be drawn, but is something which the directors could have deposed to. What could have then been deleted, was incorporated in a document and, no sooner was the document signed, waived.

It was submitted that since under the document dealing with ICICI's loan and the conversion thereof into shares no advance notice of conversion was required, the directors merely wanted to put the debentures and the loans on a par and they, therefore, waived the requirement of cl. 5. If so, the first course that would suggest itself would be to delete cl. 5 from the draft debenture trust deed. No such inference can, therefore, be raised.

It was submitted that the directors were not put into the witness-box because the judgment in the company petition for rectification filed by the Berlias said that the court had not been impressed by the arguments advanced by counsel for the Berlias upon the alleged mala fides of the company in harassing the Berlias. The submission does not take into account the fact that that judgment holds that the conduct of the company's board could justly be said to be inconsistent, arbitrary and capricious. It was, patently in connection with the argument of harassment that the observation was made that the court was not impressed. This certainly can, in any case, have been no ground for not putting the directors into the witness-box in this suit.

It was even submitted that the directors did what they did because they considered the Berlias undesirable people. Emphasis was placed upon the circular sent by the Berlia concerns to the company's shareholders recommending the Berlias, and upon the evidence of Goculdas, one of the purported signatories of the circular, that he had neither signed it nor authorised its issuance. It was also emphasised that a specific case of having given authority was put to Goculdas by plaintiffs' counsel but the plaintiffs did not give evidence to support that case. First, if the directors did what they did because they considered the Berlias undesirable persons, they did what they did with the intention that the Berlias should be outvoted. In para. 73(e) of the plaint it is alleged that it was obvious that continuous efforts were made by the company's directors for the time being to deprive the Berlias and other shareholders of voting power and to prevent the Berlias and others from acquiring voting power, and that the directors acted, in the manner they did, so as to acquire voting power for the institutions which they represented or were interested in. In para. 69 of the written statement of the company it is denied that an effort was made by the directors to deprive the Berlias or other shareholders of their voting power or to prevent the Berlias or other shareholders from acquiring voting power or that the directors acted so as to acquire voting power for the financial institutions. In view of this denial, the argument, that the directors did what they did because they considered the Berlias undesirable people, cannot be put forward to justify what the directors did. Secondly, as will be evident from the authorities to which I shall presently refer, the directors of a company may not disfavour one group of shareholders and favour another, it is a breach of their fiduciary duty to do so.

I now proceed to examine the record subsequent to May, 1978, to see what light it throws on the conduct of the company and the institutions. It is necessary to do the latter, in view of the plea that was raised in the course of arguments that, in any event, the institutions were innocent parties who had paid large sums of money by way of loans to the company on condition that they would be entitled to convert a part thereof into shares; against the institutions, therefore, the discretionary relief of rectification should not be granted.

It will be recalled that on March 15, 1978, the company had been informed that it had not submitted adequate grounds to the Central Govt. for the issuance of directions under s. 108D and that on April 28, 1978, the company had notified the date of the AGM to be June 29, 1978.

On May 17, 1978, the company wrote to UTI in respect of the term loan of Rs. 50 lakhs for the nylon tyre cord project, phase II, asking for confirmation that the Bank of Baroda would be appointed the debenture trustee. Incidentally, the company added, a consortium of banks was providing it with an additional term loan of Rs. 1 crore to meet its working capital requirements and this loan would be secured by a pari passu charge on the same security as that provided for the debentures. On May 19, 197 8, UTI wrote to the company with reference to its letter dated May 17, 1978, and expressed the view that financing by the consortium of banks would be costly. UTI said that it was prepared to take up, subject to its board's approval, privately placed debentures of Rs. 1 crore which may be issued by the company, inter alia, on the term that there would be a conversion option into equity up to 20 per cent. of the value of the debentures, which option would be exercisable by UTI immediately after the company accepted its terms and conditions.

On May 23, 1978, the Chairman of UTI wrote to the Director (Investment), Dept. of Economic Affairs, Ministry of Finance, that he felt that the Berlia group was trying to take control of the company and it was, therefore, of vital importance to protect the interests of the institutions and those of small shareholders. It was necessary that the Berlias and their supporters should be prevented from gaining control of the company and action should be taken fast under various provisions of the Companies Act to that end.

On May 29, 1978, the company replied to UTI's letter of May 19, 1978, and stated that, while it was grateful for UTI's offer of Rs. 1 crore it could be accepted only as an additional assistance instead of as an alternative to the consortium term loan. The company said that it would be grateful if UTI gave its assistance in the sum of Rs. 3 crores because it wanted to take up a modernisation programme. What was said about that modernisation programme was said to be very tentative and detailed estimates were being worked out. The note annexed to the letter upon the modernisation programme is patently, as tentative.

On May 17, 1978, no plea had been made by the company to UTI for assistance in the sum of Rs. 1 crore. The company, in fact, said that it was securing such assistance from a consortium of banks. On May 19, 1978, with rather remarkable solicitude and expedition, UTI offered the company, the same amount for the same purpose. No doubt an institution with a large stake in the company might do so with the best interests of the company at heart. What renders this somewhat suspect here is the term that the conversion option would be exercisable immediately after UTI's terms and conditions were accepted by the company, read in the light of the company's desire to get an order under s. 108, a similar desire stated by UTI, and the immediate prospect of the company's AGM.

It is clear from the evidence of (sic) that such details as were mentioned in the company's letter of May 29, 1978, in respect of the modernisation programme were of little value. He said, for example, that nobody replaced spinning machines, although this was what the note attached to the company's letter dated May 29, 1978, said would be done, but only modified them to operate at high speed by adding certain attachments. He also said that though the company's letter of May 29, 1978, estimated the expenditure on this item to be Rs. 120 lakhs, the detailed appraisal estimated this expenditure at Rs. 12 lakhs.

One would reasonably have expected UTI's response to the company's letter of May 29, 1978, to be something like this : "we were offering you Rs. 1 crore on better terms than you got from the consortium of banks, but we will not press you. So far as your modernisation programme is concerned, when you have worked out the details and estimates and placed them before your board you may apply to us and certainly we will consider your proposal".

That is not the response. It is the evidence of Atmaramani that the response of UTI was to expedite the preparation of a note to be placed before the IIM to be held two days later in respect of UTI's intention to advance the company Rs. 200 lakhs for the modernisation programme. Atmaramani was cross-examined at great length on what happened at UTI's office in respect of the company's letter dated 17th day of May, 1978, and its sequel. I accept that the correspondence of that period was exchanged between the company and UTI, but I find Atmaramani's explanation, as to what gave rise to such urgency, strained. He said that a proposal received by an institution had to be placed before the very next IIM. Nothing on record supports this unlikely explanation. He said also that the company was in a hurry to obtain approval for the proposal so that it could have passed the requisite resolution under s. 293 at the June, 1978, AGM. It is a strain on one's credulity to be asked to believe that to oblige the company in this, a public financial institution agreed in principle to advance first Rs. 200 lakhs and then Rs. 300 lakhs within two days, without an appraisal of the project, of which only the sketchiest details and figures were provided by the applicant. Atmaramani even claimed to read urgency in the company's letters which plainly was not there. The company had not asked for any moneys for the modernisation programme until after UTI's letter of May 19, 1978, there plainly, was no urgency for the moneys and no properly evolved proposal upon which they could have immediately been spent.

It is on record that at the IIM of May 31, 1978, the proposal of UTI to advance to the company Rs. 200 lakhs was considered and was modified so that UTI would now advance to the company Rs. 300 lakhs. Shingal deposed that the general procedure of the institutions was that a detailed appraisal of the proposal for financial assistance was carried out by the institutions before acceptance of the proposal, even in principle. He insisted in cross-examination that in the present case that procedure had been followed, but it had been followed in reverse ; the company's proposal was accepted in principle first, in May, 1978, and the detailed appraisal was carried out thereafter, after November, 1978.

It was suggested by counsel for the defendants that UTI and the IIM could so act because of earlier appraisal carried out by ICICI. The appraisal is required to be made of the project for which the Joan is sought, here the modernisation programme. No earlier appraisal had been made of the modernisation programme. UTI and the IIM acted without the benefit of such appraisal.

After the IIM had sanctioned the proposal in principle the sanction of the executive committee of UTI was obtained.

On June 1, 1978, UTI wrote to the company with reference to the letter of May 29, 1978, stating that it was aggreeable in principle to provide financial assistance along with other institutions of Rs. 300 lakhs for financing a part of the company's modernisation programme upon the terms and conditions set out therein. Clause 7 required the company to agree to vest in UTI the option to acquire in lieu of conversion shares of Rs. 60 lakhs, the period for conversion being June 15, 1978, to June 14, 1980. The underlining of the phrase "to acquire in lieu of conversion" is in the letter and it speaks of the urgency felt in respect of the acquisition of shares.

I have already referred to the letter written on June 6, 1978, by the Chairmen of UTI and of GIC to the CLB and to the involvement of the company in its preparation. The letter expressed the apprehension that the Berlias would gain control of the company "either at the forthcoming AGM of the shareholders on June 29, 1978, or at any other general meeting".

On June 6, 1978, UTI wrote to the company with reference to the term loan of Rs. 60 lakhs and to the letter of January 7, 1978, whereby UTI agreed in principle to provide that assistance. It will be recalled that that letter stipulated that the company should agree to vest in UTI the option to convert a portion of the debentures amount into shares on terms and conditions to be decided thereafter. By the letter dated June 6, 1978, UTI advised the company, in terms of that clause, that UTI would have the option to acquire in lieu of conversion equity shares of Rs. 10 lakhs. The words " acquire in lieu of conversion "are again underlined. The letter went on to give notice of UTI's" intention to acquire with effect from June 15, 1978, in lieu of conversion " shares of the value of Rs. 10 lakhs. The letter said that such equity shares were to be " registered in the name of UTI immediately on allotment, i.e., from June 15, 1978". Once again, the urgent desire to acquire as many shares as possible is writ large upon the latter.

On June 8, 1978, UTI wrote to the company in respect of the letter of intent dated June 1, 1978, and stated that, in terms of cl. (7) thereof, it had the right to acquire, in lieu of conversion, shares of the value of Rs. 60 lakhs. The letter advised that such shares were required to be registered in the name of UTI immediately on allotment, i.e., from June 15, 1978. This letter is on the same lines as those that succeeded the company's letter of May 29, 1978, UTI wanted the company's shares as fast as it could get them and was quite willing in the bargain to advance Rs. 300 lakhs for a project the company had not finalised and which the institutions could not, and had not investigated.

On June 17, 1979, the freezing order was passed. A copy was received by the company on June 19, 1978. It is in evidence that the company did not disclose to the Berlias or their attorneys a copy of the freezing order or its contents, even when demanded, and that it was disclosed to them only two days before the 1978 AGM, when the company was called upon to produce it in court at the time of the interim application in the writ petition filed to challenge it. This conduct speaks of animus.

On June 23, 1978, the CLB asked the company to clarify, how UTI could exercise its option for conversion of debentures into equity shares when no debentures had been issued to it. A reply was sent by the company ; it is, I think, a fair reading of it to say that it contains no such clarification.

It appears from the record that, whatever UTI's earlier intentions might have been to acquire shares in lieu of conversion, they ceased after this letter of the CLB.

At the 1978 AGM, by reason of the undertaking given and recorded in the interim order passed in the writ petition, the Berlias voted in favour of the resolution under s. 293 to create a security for the debentures. They were free to exercise their votes in respect of all other items on the agenda, and as the results which were subsequently disclosed showed, the second plaintiff was there elected as director.

There was then a lull till April, 1979, when the prospect of yet another AGM loomed. On April 7, 1979, the attorneys for the institutions and the company sent to them and the debenture trustee a note of discussions that had taken place between their officers. The note stated that the institutions were anxious to complete the transaction at the latest by May 30, 1979. On April 28, 1979, the company issued the notice convening the AGM on June 28, 1979. By May 9, 1979, or thereabouts all the sanctions required prior to the execution of the debentures trust deed had been received. On May 24, 1979, a meeting of the company's board passed the appropriate resolutions. They approved the draft of the debenture trust deed in the form in which the document was executed and they gave to four directors the power, inter alia, to amend the draft.

On May 29, 1979, the attorneys wrote to the institutions, the company and the debenture trustee setting out the programme for completion. I have already referred to the note in some detail. Suffice it to say here that it contemplated the delivery of notices of conversion by the institutions to the company immediately upon the debenture trust deed being executed and letters of allotment of debentures being issued. It also contemplated that letters of allotment of shares in conversion and contracts under s. 75 in respect of those shares would be executed and issued. In fact, it contemplated the issue of the shares themselves.

It is obvious that prior to May 29, 1979, it had been agreed between the institutions and the company that, immediately upon the debenture trust deed being executed, cl. 5 of the form of debentures incorporated therein would be waived. There is nothing upon the record which indicates when such agreement was reached or why.

On May 31, 1979, the transaction was completed. No evidence has been led of what happened then.

Upon a consideration of the circumstances relied upon by Mr. Cooper, by counsel for the defendants and of the record, I cannot but see that the company had sought to prevent the Berlias from adding to their shareholding in the company and from exercising their votes on their existing shares and on proxies secured by them, that the Berlias had the capacity to muster a sufficiently large number of proxies to worry the company's directors and the institutions, and that, moments after the execution of the debenture trust deed that made a month's notice a pre-requisite for conversion, the company waived, as agreed at some prior date, this prerequisite. Without such waiver shares upon conversion could not have been issued to the institutions at the time they were, they could not have been issued before June 28, 1979, the date of the company's AGM.

Having regard to this, I have no doubt that the plaintiffs have established the prima facie case that the waiver was actuated by the desire to increase the voting strength of the institutions at the AGM of June 28, 1979, and thus counter the votes and proxies of the Berlias. No director or officer has been examined to refute the prima facie case. In fact, none of the defendants has examined a witness, who could depose as to what transpired in those last days of May, 1979, or at the meeting of May 31, 1979. I am reluctantly but inevitably impelled to the conclusion that no witness upon this aspect has been examined because his evidence would not have dispelled the prima facie case.

I now turn to the authorities. There are two judgments of the Supreme Court on the point. I need refer to only one English judgment thereafter. The first case is that of Nanalal Zaver v. Bombay Life Assurance Co. [1950] 20 Comp Cas 179 (SC). The company issued shares and it was contended that the shares had been issued not because the company was in need of funds but with the object of retaining to the directors the control of the company. The true approach to a question of this nature was stated by Mahajan J. (p. 195) thus :

"It is well settled that in exercising their powers, whether general or special, the directors must always bear in mind that they hold a fiduciary position and must exercise there powers for the benefit of the company and for that alone and that the court can intervene to prevent the abuse of a power whenever such abuse is held proved, but it is equally settled that where directors have a discretion and are bona fide acting in the exercise of it, it is not the habit of the court to interfere with them. When the company is in no need of further capital, directors are not entitled to use their power of issuing shares merely for the purpose of maintaining themselves and their friends in management over the affairs of the company, or merely for the purpose of defeating the wishes of the existing majority of shareholders."

Mahajan J. held that the controlling factor working in the mind of the directors was the necessity of further funds for the company at the moment they passed the resolution. That being so, the existence of the other motive did not make the action of the directors in respect of the issue of further shares mala fide. Upon the evidence he found that there was no dolus malus in their mind as directors of the company, as affecting the company or its shareholders. Das J. put it this way (p. 207): "If the directors exercise the power for the benefit of the company and at the same time they have a subsidiary motive which in no way affects the company or its interests or the existing shareholders then the very basis of interference of the court is absent, for........................ the court of equity only intervenes in order to prevent a breach of trust on the part of the directors and to protect the cestui que trust, namely, the company and possibly the existing shareholders." He held that the directors' motive of keeping out the Singhania group, who were not yet shareholders but were strangers, did not prejudicially affect the company or the existing shareholders and the presence of such further motive could not vitiate the good motive of finding the necessary funds for the company.

In the instant suit, a prima facie case of dolus malus and breach of fiduciary duty is established. No evidence is led by the company of its motives, whether mixed or otherwise. Upon the reasoning in Nanalal Zaver [1950] 20 Comp Cas 179 (SC), the court must interfere.

In the case of Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. [1981] 51 Comp Cas 743 (SC), directors forming the requisite quorum resolved to increase the share capital of the company with the intention of complying with the provisions of the FERA as to foreign holdings. The issue of the shares was challenged on the ground that it constituted an abuse of fiduciary power. A substantial portion of the judgment is devoted to the consideration of what constitutes a breach of fiduciary duty by a company's directors. Several judgments of the English and Commonwealth Courts are referred to. The Supreme Court approved the dictum of Byrnes J. in Punt v. Symons & Co. [1903] 2 Ch 506 (Ch D), that it would be unconstitutional for directors to use their fiduciary powers over the shares in the company purely for the purposes of destroying the existing majority or creating a new majority which did not previously exist, and to do so was to interfere with that element of the company's constitution which is separate from and set against their powers. The Supreme Court laid emphasis on the fact that the sole, single and simple purpose of the directors must be to destroy the existing majority or create a new majority which did not previously exist. The Supreme Court recalled (p. 813) what was laid down by the Privy Council in Hirsche v. Sims [1894] AC 654:

"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 mains or breach of trust merely because in promoting the interest of the company they were also promoting their own ..."

The Supreme Court also approved the decision in Howard Smith Ltd. v. Ampol Petroleum Ltd. [1974] AC 821 (PC) to which I shall presently refer. The Supreme Court held that if the shares were issued in the larger interest of the company the decision to issue shares could not be struck down on the ground that it had incidentally benefited the directors in their capacity as shareholders.

It is true that, it was the case of the plaintiffs here that the shares had been issued though there was no need for the finance, and that, that case was not urged in the course of Mr. Cooper's final argument. I am, therefore, concerned not with whether the directors issued shares mala fide or in breach of fiduciary duty, but with whether they acted mala fide in breach of the fiduciary duty in waiving the requirement of cl. 5 of the form of debentures, thus enabling the shares to be allotted to the institutions earlier than the prescribed one month's period. There is, to repeat, no evidence which refutes the prima facie case of mala fides and breach of fiduciary duty made out. There is no evidence before me upon which I can conclude, in the words of the Privy Council, that the directors truly and reasonably believed that what they did was for the interest of the company. If they had given such evidence it would not have been possible for the plaintiffs' counsel to argue or for the court to hold that such belief was unjustified, the only question would have been : did they really so believe ?

In Howard Smith Ltd. v. Ampol Petroleum Ltd. [1974] AC 821, 835, the Privy Council quoted with approval Viscount Finlay in a Scot's case (Hindle v. John Cotton Ltd. [1919] 56 Sc. LR 625, 630, 631):

"Where the question is one of abuse of powers, the state of mind of those who acted, and the motive on which they acted, are all important, and you may go into the question of what their intention was, collecting from the surrounding circumstances all the materials which genuinely throw light upon that question of the statement of mind of the directors so as to show whether they were honestly acting in discharge of their powers in the interests of the company or were acting from some bye-motive, possibly, of personal advantage, or for any other reason."

I conclude that the prima facie case, which is not refuted, is established that the company's directors exercised the power of waiver with the object of adding to the voting strength of the institutions, to the detriment of the voting strength of the Berlias and their supporters. They favoured, by so doing, one group of the company's shareholders against another. They acted mala fide and in breach of their fiduciary duty. I also conclude that the institutions were privy and party thereto and at all stages the company and the institutions marched hand-in-hand to the common goal.

The constitutional point:

It is the case of the plaintiffs that the phrase "or any institution specified by the Central Government in this behalf" in cl. (b) of the proviso to sub-s. (3) of s. 81 is ultra vires the Constitution by reason of excessive delegation of power to the Central Govt.

It was urged by counsel for the defendants that if this case is accepted the consequence would be to invalidate the option term contained in the debenture trust deed. They relied upon the statement made by counsel for the plaintiffs which says that the plaintiffs would not contend that the debenture trust deed was void and submitted that it was not open to the plaintiffs to advance any argument which would lead to an invalidation of any part of the debenture trust deed.

I now state the material portion of Mr. Cooper's reply to this in, substantially, his own words :

Section 81, he submitted, applied only when it was "proposed to increase the subscribed capital of the company by allotment of further shares". It was only (when) the increase in the subscribed capital, by allotment of further shares, had been decided upon, that sub-section (1) came into play. Sub-section (1A) began with the words "notwithstanding anything contained in sub-s. (1) the further shares aforesaid may be offered to any persons" if a special resolution was passed. Since the words used in the sub-section were "the further shares aforesaid", it necessarily followed that the further shares referred to were those which fell within the scope of the clause, when it was proposed to increase the subscribed capital of the company by the allotment of "further shares" and the further shares aforesaid in the clause meant such further shares'. It could be suggested that, sub-s. (1) only came into play, and could refer only to the point of time, at which the further shares were to be offered, and that the sub-section could only be applicable to shares to be issued as a result of the exercise of an option clause in a convertible debenture, if the sanction by the special resolution was given before the option was inserted as a covenant. In the alternative, if sanction could be given only after the "proposal to increase the subscribed capital by allotment of further shares" had fructified, that is, by the actual exercise of the option, then the language of sub-s. (1A) would preclude any application of that sub-section to such a situation. This interpretation, however, was completely against the meaning of the section as a whole as could be gathered from a reading of it, including sub-s. (3). The section contemplated that sub-s. (1A) would apply if the conditions laid down in the proviso to sub-s. (3) were not fulfilled, and sub-s. (1A) would apply to "the increase of subscribed capital of a public company caused by the exercise of the option attached to such debentures". In other words, sub-s. (3) negatived any suggestion that sub-s. (1A) was not to apply to such increase of subscribed capital caused by the exercise of such option. Again, the wording of sub-s. (3) would have been different, if a special resolution passed before the option was granted (not exercised) could be passed under sub-s. (1A). It was, therefore, submitted that sub-s. (1A) read with sub-s. (3) clearly contemplated that a special resolution in the case of shares to be issued as a result of the exercise of an option clause in a debenture must be passed before the shares are actually allotted after the exercise of the option.

It was further submitted by Mr. Cooper that even if the sanction contemplated by sub-s. (1A) in respect of the issue of shares as a result of the exercise of the option clause in a debenture had to be given by a special resolution passed before the option was given, this would not render the agreement granting such option invalid but would only mean that the agreement would be subject to the sanction of a special resolution. Every agreement was presumed to be entered into on the footing that it would be carried out in a legal manner with due compliance of all statutory requirements.

In the further alternative, Mr. Cooper submitted that, even assuming that the special resolution was required before the issue of the debentures, it did not make the debenture trust deed void in any way. The debenture trust deed remained valid even if the convertibility of the debentures to be issued thereunder was affected. The debenture trust deed was only a supporting document and it was open to the company to pass a special resolution before issuing the debentures themselves and accepting the subscription moneys. The fact that, in the instant case, it was all done on the same day did not alter this position, because the argument proceeded on the footing that everything done had been done bona fide and the transaction was what it had been made out to be.

I proceed to consider Mr. Cooper's reply.

If the phrase impugned is excluded from cl. (b) of the proviso to sub-s. (3) of s. 81, the term providing for the option to convert the debentures into shares had to be (sic) approval meeting. There is no such approval. Does it mean, then, that s. 80 applies ? As section reads, what would apply is sub-s. (1A), for, the shares were not being offered to all the holders of the company's equity shares. Sub-section (1A) authorises the offer of shares to any person if a special resolution to that effect is passed. It makes the special resolution a precondition to the offer,or the option. Without the special resolution the offer or the option is bad. It would mean, in the instant case, that there being no special resolution, the clause in the debenture trust deed providing the option is bad. This the plaintiffs may not urge having given up the challenge to the debenture trust deed.

But, Mr. Cooper said, "further shares aforesaid" in sub-s. (1A) must be read in the context of "where....................it is proposed to increase the subscribed capital of the company by allotment of further shares" in the opening portion of s. 81. This must be done.

Mr. Cooper submitted that in the case of options given to convert debentures (or loans) into shares the proposal to increase the capital of the company by allotment of further shares would come to be only after the option was exercised. He submitted that, therefore, the special resolution was not a precondition to the giving of the option but to the issue of the shares upon the exercise of the option.

Once the company makes an offer under sub-s. (1) or (1A) and the offeree accepts it, the company is bound to allot the shares accepted. Similarly, once the company gives to any person the option to call for shares, and the person exercises the option, the conpany is bound to allot the shares opted for. It cannot then be said by the company that the shares opted for would be issued provided a special resolution to increase the subscribed capital of the company was passed. Nor, for the same reason, can it be urged that the option to call for shares is not invalid but only subject to the sanction of a special resolution. The special resolution must precede the issue of the debentures containing the option to call for shares, just as much as it must precede the offer of shares, whether sub-s. (3) applies or sub-s. (1A). If the special resolution has not sanctioned the conferment of the option before the issue of the debentures, the conferment is bad.

Let me look at the debenture trust deed to test the argument that the debenture trust deed is unaffected even if the conferment of the option has to be preceded by a special resolution. The argument is that the option would be contained in the debentures that were yet to be issued and the issue thereof could be preceded by a special resolution.

The 22nd recital of the debenture trust deed states that the debenture trustee had at the request of company consented to act as trustees of the deed on the terms and conditions therein after appearing. In cl. 1 debentures are defined to mean the debentures issued under "these presents and in accordance with the forms set out in the Fifth Schedule". The debenture holders are defined to mean the holders for the time being of the debentures so issued on the conditions endorsed on the debentures. Under cl. 2 it is stated that the debentures issued under the debenture trust deed and which were entitled to its benefit would be 35,000, 11% convertible debentures comprised in series A to G. Clause 4 of the debenture trust deed provides the right of conversion and cl. 5 of the form of debentures provides the mode in which the right may be exercised. Both these have been quoted above.

It is patent, therefore, first, that the debentures were to be issued under the debenture trust deed and, secondly, that the debenture trustee accepted the assignment on the terms and conditions contained in the debenture trust deed, including the terms of conversion. The option to convert therein is not made subject to the sanction of a special resolution but is unqualified. To read into it this qualification would, in my view, be unjustified, the more so as it would be done without hearing the debenture trustee, who is not a party to the suit.

As it stands, then, the validity of the option clause in the debenture trust deed is impeached by the argument that the impugned phrase in cl. (b) of the proviso to sub-s. (3) of s. 81 is ultra vires the Constitution. By reason of the statement made on their behalf, the plaintiffs cannot be allowed to impeach the validity of any part of the debenture trust deed. The constitutional argument cannot, therefore, be permitted.

The position is firmly established, in the field of constitutional adjudication, that the court will decide no more than needs to be decided in any particular case. (See Dr. Vasant Kumar Pandit v. Union of India, AIR 1982 SC 710 at 724). Bearing this in mind and having regard to the position that, first, the constitutional argument is not open to the plaintiffs and, secondly, that by virtue of my finding on the aspect of mala fides a decision of the constitutional question would be more than needs to be decided in this case, I refrain from discussing the arguments that were advanced before me on the constitutional question and the conclusion that I have reached.

Approval of Central Government not complied with

Under s. 81(3) a term in a debenture which provides for an option to convert the debenture into shares must be approved by the Central Govt.

If, in Mr. Cooper's submission, there were no such approval or the terms of such approval were not complied with, the provisions of sub-s. (1A) would apply ; since the provisions of sub-s. (1A) had not been complied with, the issue of the shares upon conversion was bad.

In dealing with the constitutional point, I have concluded that if the special resolution required by sub-s. (1A) had not preceded the option to call for shares the option was bad, but that it is not open to the plaintiffs to so contend in the instant case by reason of their counsel's statement.

In any event, it appears to me that there has been substantial compliance with the Central Govt's approval. On December 1, 1978, the CLB granted approval to the company for the issue of convertible debentures to GIC and its subsidiaries of the value of Rs. 10 lakhs out of total debentures of the value of Rs. 50 lakhs. Approval in respect of the other institutions were given in similar terms. On April 7, 1979, the attorneys of the institutions and the company wrote to them regarding discussions that had been held earlier. It was recorded by the attorneys that the company would take steps to approach the CLB for modification of the approvals so as to clearly specify that the convertible debentures would be to the extent of Rs. 350 lakhs in the aggregate and not only Rs. 70 lakhs as stated therein. The letters to the CLB pursuant to this discussion were written not by the company but by the institutions. On May 19, 1979, the CLB replied to GIC and stated that in the approval it had been clearly stated that debentures of the value of Rs. 10 lakhs would be convertible. Replies in similar terms were sent to the other institutions.

It is true that what the company has done is to issue convertible debentures of the aggregate amount of Rs. 350 lakhs of which only 20% in value are convertible. The effect of doing so is the same, substantially, as of issuing non-convertible debentures of the value of Rs. 280 lakhs and convertible debentures of the value of Rs. 70 lakhs.

Acquiescence, laches and ratification

Counsel for the defendants argued that relief in favour of the plaintiffs should not, in any event, be given by reason of acquiescence, laches and ratification.

It was submitted that, having regard to the knowledge of the plaintiffs as shareholders or their means of knowledge, and the plaintiffs' acts of positive assent, the plaintiffs were not entitled to the equitable relief of rectification. It was submitted that by reason of the plaintiff's acquiescence at the meeting of June 29, 1978, and their unconditional undertaking to vote in favour of the resolution under s. 293, amended to include debentures of the value of Rs. 350 lakhs, they were precluded from urging that any part of the issue of convertible debentures were for any reason void. It was also submitted that the plaintiffs were not entitled to the relief because of their acts at and in connection with the AGM of May 15, 1980. The second plaintiff as a director was a party to the directors' report which acknowledged that 51,000 shares were duly issued upon conversion, and to the balance-sheet whose accuracy must be assumed, which showed an increase in the capital due to the issue of the shares and a decrease in the amount of the loan from Rs. 350 lakhs to Rs. 280 lakhs. It was submitted that the 1st plaintiff, having attended this AGM, was a party to the approval of the directors' report and the adoption of the accounts. It was also submitted that the plaintiffs had received dividend for the years ended December, 1979, and December, 1980, on profits due to the utilisation of the loans and issued on the basis of the increased share capital.

Counsel for the plaintiffs relied on authorities to which I now refer. In Phosphate of Lime Co. Ltd. v. Green [1871] LR 7 CP 43, it was observed that the law with respect to ratification was clear. The principle by which a person on whose behalf an act was done without his authority may ratify and adopt it, is as old as any proposition known to law, but it is subject to one condition ; in order to make it binding, it must be either with full knowledge of the character of the act to be adopted, or with intention to adopt it at all events and under whatever circumstances. In regard to the knowledge of the shareholder it was observed by Brett J. that it was sufficient to show that facts were made known to the shareholders, into the effect of which they might and ought to have inquired, and to which they ought to have objected at the time, unless they intended to adopt the transaction.

In re New Zealand Banking Corporation, [1868] 3 Ch App 131, it was held that it was impossible not to impute to every shareholder of the company the knowledge of what the memorandum of association contained, for, if they chose to address their minds, the shareholders had all the facts that were necessary and when, in the face of that, and with that knowledge, they passed resolutions it was to be considered that they had done what was necessary to cure any irregularity that had been committed.

In re Magdalena Steam Navigation Company, 70 English Reports 597, it was held that debentures issued by directors under the seal of their company without due authority could not be enforced by members of the company who accepted them after having been present at the meeting where the issue of the irregular debentures was sanctioned ; and bona fide transferees for value from such shareholders were in no better position. Neither could strangers enforce them as valid legal securities. But where the moneys advanced on such irregular securities had been applied by the directors for the benefit of the company, and the shareholders had acquiesced in the transaction, the company and the shareholders were precluded from disputing their liability to repay the advance. They were bound by acquiescence not to recognise the instruments as valid debentures, but to accept their liability for the advances, regarding the debentures as nothing more than evidence of the debt.

In V. N. Bhajekar v. K.M. Shinkar [1934] 4 Comp Cas 434 (Bom); 36 Bom LR 483, it was held that a company cannot confirm or ratify anything which is beyond its powers, express or implied, in the memorandum or conferred by statute. Short of that, a transaction by the directors which is beyond their own powers but within the powers of the company can be ratified by a resolution of the company in general meeting or even by acquiescence, provided that the shareholders had knowledge of the facts relating to the transaction to be ratified or the means of knowledge are available to them.

Mr. Cooper submitted that acquiescence at the time the impugned action was in progress was different from acquiescence after the act. In the latter case the right to challenge the action had vested and could not be divested except by what amounted to fraud or accord and satisfaction. In such a case delay was irrelevant until the suit was barred by limitation. The doctrine of acquiescence was based on the principle that delay defeated equity and also defeated a legal right where the plaintiffs stood by for an unconscionably long period, for, in England there was no statutory limitation. In India, by reason of statutory limitation, the principle was much weakened. Acquiescence to bar a relief had to amount to fraud and any action of ratification required the intention to ratify with the knowledge of all the relative facts and the knowledge that the act to be ratified was bad. It had to be a conscious act with knowledge and intent. The onus of proving acquiescence was on the other party. In Mr. Cooper's submission not even a prima facie case of acquiescence had been established against the plaintiffs. Mr. Cooper relied upon authorities which I now set out.

In Thakor Fatesingji Dipsingji v. Bamanji Ardeshir Dalai [1903] 5 Bom LR 274, a Division Bench of this cqurt drew a distinction between estoppel and acquiescence. Acquiescence, in an act while it was still in progress, operated as an estoppel if it had induced an action infringing a right. Submission to an action when it had been completed did not change the part, and the right of action once vested could not as a general rule, be divested without accord and satisfaction. Estoppel by acquiescence had no application to an ex post facto submission not amounting to ratification, and inducing no action or omission, and, consequently, insufficient to constitute what in such case would be necessary ; accord and satisfaction with full knowledge. Acquiescence after a fait accompli if not prolonged beyond the verge of limitation, was no bar to a right of suit already accrued.

In Ghasia v. Thakur Ramsingh, AIR 1927 Nag 180, Kinkhede, A.J.C. said that there was a distinction between a case where the acquiescence alleged occurred while the act acquiesced was in progress, and another where the acquiescence took place after the act had been completed. In the former case, the acquiescence under such circumstances that assent might be reasonably inferred from it. In the latter case, when the act was completed without any knowledge or without any assent on the part of the person whose right was infringed, the matter had to be determined on very different legal considerations. A right of action had then vested in him, and a mere delay to take legal proceedings to redress the injury could not, by itself, constitute a bar to such proceedings, unless the delay on his part, after he had acquired full knowledge had affected or altered the position of his opponent. It followed that delay would count against any person who had shown quiescence under the circumstances from which assent could be reasonably inferred as a matter of a legal inference.

In Willmott v. Barber [1880] 15 Ch D 96, Fry J. observed (p. 105):

"It has been said that the acquiescence which will deprive a man of his legal rights must amount to fraud, and in my view that is an abbreviated statement of a very true proposition. A man is not to be deprived of his legal rights unless he has acted in such a way as would make it fraudulent for him to set up those rights. What, then, are the elements or requisites necessary to constitute fraud of that description ? In the first place the plaintiff must have made a mistake as to his legal rights. Secondly, the plaintiff must have expended some money or must have done some act (not necessarily upon the defendant's land) on the faith of his mistaken belief, Thirdly, the defendant, the possessor of the legal right, must know of the existence of his own right which is inconsistent with the right claimed by the plaintiff. If he does not know of it he is in the same position as the plaintiff, and the doctrine of acquiescence is founded upon conduct with a knowledge of your legal rights. Fourthly, the defendant, the possessor of the legal right, must know of the plaintiff's mistaken belief of his rights. If he does not, there is nothing which calls upon him to assert his own rights. Lastly, the defendant, the possessor of the legal right, must have encouraged the plaintiff in his expenditure of money or in the other acts which he has done, either directly or by abstaining from asserting his legal right. Where all these elements exist, there is fraud of such a nature as will entitle the court to restrain the possessor of the legal right from exercising it, but, in my judgment, nothing short of this will do."

In the Hope Mills Ltd. v. Sir Cowasji J. Readymoney [1911] 13 Bom LR 162, Beaman J. quoted and followed the exposition of the principle by Fry J. The principle has also been followed by the Allahabad and Calcutta High Courts.

In S. L. Ramaswamy Chetty v. M.S.A.P.L. Palaniappa Chettiar, AIR 1930 Mad 364, a Division Bench of the Madras High Court observed that (p. 369):

"The ground for admitting the defence of acquiescence or laches according to the doctrine of the English Courts of equity is that a plaintiff in equity is bound to prosecute his claim without undue delay. Where, however, there is, as in India, a statutory time limit to all conceivable kinds of action, the plaintiff is entitled to the full statutory period before his claim becomes unenforceable. Besides, even if in such cases the defence of laches were admissible the defendants would have to show that they had suffered a change of position by reason of the respondent's laches in which it would not be reasonable to allow him to assert his right."

In Smt. Premila Devi v. Peoples Bank of N. India Ltd. [1939] 9 Comp Cas 1 (PC); AIR 1938 PC 284, it was held that (p. 13 of 9 Com Cas):

"There can in truth be no ratification without an intention to ratify, and there can be no intention to ratify an illegal act without knowledge of the illegality."

In Firestone Tyre and Rubber Co. v. Synthetics and Chemicals Ltd. [1971] 41 Comp Cas 377, this court held that there could be no ratification except with full knowledge of the facts and the shareholders were never asked to ratify the resolution in question in that suit after the facts were made known to them. In the context of notice the court approved the observations of a Division Bench of the Calcutta High Court in Shalagram Jhajharia v. National Company Ltd. [1965] 35 Comp Cas 706, 740 thus :

"As the legislature has thought it fit to provide that shareholders must approve of the appointment of selling agents the opportunity given to the shareholders must be full and complete and there must be a full and frank disclosure of the salient features of the agency agreement before the shareholders can be asked to give their sanction. The provision for inspection of the agreement at the registered office of the company is not enough. Few shareholders have either the time or the inclination to go to the registered office to find out what the company is about to do. Moreover, such an opportunity is illusory in the case of shareholders who do not live in Calcutta when the registered office is situate here."

In Tilakdhari Lal v. Khedan Lal, AIR 1921 PC 112, it was held that notice could not in all cases be imputed from the mere fact that a document was to be found upon the Indian register of deeds. This was followed by this court in Peerka Lalka v. Babu Kashiba Mali, AIR 1923 Bom 410.

As I look at it, the matter can be treated on a simpler basis if one keeps in mind that the act of illegality here is the act of waiver. The plaintiffs must be shown to be estopped by reason of acquiescence in the act of waiver. Laches must be shown to have occurred in relation to the act of waiver. Ratification must be of the act of waiver.

A man may be said to have acquiesced in the act of another if, knowing it to be a legal wrong to himself, he stands quiet and lets it happen. He is then estopped by acquiescence from challenging the act. The plaintiffs can be said to have acquiesced in the act of waiver if they had known before May 31, 197,9, that the act of waiver was going to take place. Attributing to the plaintiffs the knowledge of the letters of intent mentioned in the notice of the meeting of June 29, 1978, and taking into account their vote at that AGM in favour of the resolution under s. 293 authorising the creation of the security for the debentures, the plaintiffs could still have had no knowledge or means of knowledge that there was going to be the act of waiver of a precondition mentioned in the debenture trust deed immediately after it was executed. I am, therefore, unable to hold that the plaintiffs are estopped by acquiescence.

A man may be said to have been guilty of laches if, after finding out that an act, which does a legal wrong to himself, has been done, he stands quiet for some substantial period of time. He may then be disentitled to relief by reason of laches. The plaintiffs can be said to have been guilty of laches if, after finding out about the act of waiver, they had stood quiet for some period of time. It is shown that at the June, 1979, AGM, the chairman stated that the institutions had exercised their options to convert and there was a discussion in this behalf. It is not shown, nor was it the defendants' case, that the fact of the waiver was disclosed or discussed or, for that matter, any disclosure was made which could have suggested that the act of waiver had occurred. At the first board meeting that was attended by the 2nd plaintiff in March, 1980, the balance-sheet for the year ended December, 1979, was signed and the directors' report was approved. They were considered and adopted at the AGM of May 15, 1980, when both the plaintiffs were present. There is nothing in the balance-sheet, the accounts or the directors' report which would suggest the fact of the waiver. It is not shown nor is it the defendants' case that the fact of the waiver was disclosed at the board meeting or that any disclosure was made which could have suggested that the act of waiver had occurred. It was urged further that the plaintiffs should be deemed to have constructive notice that the debentures were issued on May 31, 1978, and the shares on conversion were issued on June 5, 1978, by reason of the annual return filed by the company with the Registrar of Companies. A copy of the annual return is on record. Assuming that, it would not dislcose the fact of the waiver to the plaintiffs. That fact they could have inferred only if after inspecting the annual return they had inspected the debenture trust deed at the company's office and ascertained the terms of conversion. This does not appear to be the basis upon which the doctrine of constructive notice can be applied, and that to spell out laches.

It was submitted that the plaintiffs had not given any explanation in the witness box why they had instituted the suit so long after the issue of the shares although they had stated the reason in an affidavit filed in support of their motion for interim relief and that, therefore, they were barred from obtaining the relief sought in the suit. Counsel for the defendants relied upon the relevant portion of that affidavit. This was, quite rightly, objected to. No part of that affidavit is tendered on record and, indeed, it could have been tendered only if the defendants intended to use it as an admission against the plaintiffs, which they did not. What they really say is, a false reason is stated in the affidavit which the plaintiffs do not dare to advance in the box. That the affidavit may not be relied upon is clear from the judgment in Clemens v. Clemens Bros. Ltd. [1976] 2 All ER 268 (Ch D). The court had said that (at p. 277): "...an affidavit sworn in interlocutory proceedings cannot be relied on by the other party at the trial for its full contents as evidence. The plaintiff can, however, rely on any admission to be found in it, just as reliance can be placed on any other document which contains an admission."

There is nothing upon the record that indicates that the plaintiffs took unduly long to institute the suit after acquiring the requisite knowledge.

Ratification may be said to have occurred when the persons concerned approve an act done on their behalf with knowledge of its irregularity or upon the basis that they endorse it, irregular though it may be. There is no evidence that the shareholders of the company ever came to know the fact of the waiver so that they could ratify it, nor is there any evidence that they intended to and did ratify the issue of the shares upon conversion, whether or not it was in order.

I am entirely at a loss to understand how, in the circumstances, the acceptance of dividends upon their shares estops the plaintiffs from claiming relief.

The plaintiff's conduct

It was submitted by counsel for the defendants that the plaintiffs' conduct disentitled them to relief. The circumstances relied on by counsel for the defendants were these :

That the plaintiffs had issued a false circular to get control of the company.

That to the witness Goculdas, shown on the circular to be its signatory, the case has been put in cross-examination that the issue of the circular had been authorised by him but the plaintiffs had not gone into the witness box to prove that case.

That the undertaking to vote in respect of s. 293 resolution at the 1978 AGM, given at the hearing for interim relief on the writ petition challenging the freezing order, is not mentioned in the plaint.

That the issue of debentures is challenged in the plaint but the issues relative thereto had not been pressed.

That, though the plaint stated that the shareholders objected to the conversion option at the 1979 AGM, this had not been proved.

That the allegations against the Controller of Capital Issues and the Company Law Board contained in the plaint had not been pressed.

Now, it is true that to the witness Goculdas the case was put in cross-examination that the circular had been authorised by him and that the plaintiffs did not go into the box to substantiate that case. Goculdas' evidence must, consequently, be accepted that the circular, in so far as it was purported to be signed by him, was false. It is also true that many of the issues raised on the basis of the averments made in the plaint have not been pressed.

In exercising discretion, however, the court must consider not only the plaintiffs' conduct but also that of the defendants. I have held that the company's directors acted mala fide and in breach of fiduciary duty in exercising the power of waiver and that the institutions were privy and party to this. Having weighed the conduct of the one against the findings regarding the other, I believe I would be unjustified in exercising discretion in favour of the defendants.

Restitution

Ordinarily, the institutions would have been entitled to restitution to the position of being holders of convertible debentures with the option to convert 20% of the value thereof into shares during a stated period. I have here held them to be privy and party to the mala fide exercise of the power of waiver by the company's directors so that they could secure the shares in time for voting thereon at the 1979 AGM. It does not advance the defendants' case to say that, in fact, the votes upon these shares were not used at the 1979 AGM. The point is that, as it appears to me upon the prima facie case made out—which has not been refuted—the power of waiver was exercised so that these votes would be available to the institutions to try and outvote the Berlias and their supporters, if this became necessary, at the 1979 AGM.

It was suggested that the company should be ordered to register the shares as on July 1, 1979, instead of June 5, 1978, that is to say, after the expiry of the notice period of one month, which had been waived. The exercise of the power of waiver has not been held by me to be bad by reason of some technical lapse which can be so cured.

In the circumstances, the institutions cannot be restored to the position of being holders of convertible debentures with the option to convert 20% of the value thereof into shares during a stated period, and cannot, justly, complain of it. The institutions shall, however, be restored to the position of debentureholders who have already (but, in view of the finding, unfruitfully) exercised their option to convert. Equities will be adjusted in the sense that the institutions will hold in trust for the company such amounts as they have received from the company as and by way of dividends on the shares as are in excess of interest at the debenture rate of 11% and shall adjust them against future interest.

I answer the issues thus :

"Issues on behalf of the defendants 1 to 7 :.

Issue No. 1	In the negative.
Issue No. 2	In the negative.
Issue No.3	In the negative.
Issue No.4	In the negative.
Issue No.5	In the affirmative.
Issue No.6	Not necessary.
Issue No.7	In the negative, in the sense that the exact number of equity shares has not been established.
Issue No.8	The suit is maintainable.
Issue No.9	The plaintiffs are entitled to urge the contention.
Issue No.10	Not pressed.
Issue No.11	In the negative.
Issue No.12	Not pressed.
Issue No.13	Does not service.
Issue No.14	In the negative.
Issue No.15	In the negative.
Issue No.16	In the negative.
Issue No.17	There was power to waive the notice. The act of waiver is, however, vitiated by mala fides.
Issue No.18	The 1st to 7th defendants were party to the abuse of power in rel-ation to the issue of the shares.
Issue No.19	In the affirmative.
Issue No.20	In the negative, this issue was not pressed in final argument.
Issue No.21	In the affirmative, in the sense that the conversion of debentures and the allotment of shares pursuant to the mala fide exercise of the power to waive is bad.
Issue No. 22	In the negative.
Issue No. 23	In the negative.
Issue No. 24	In the negative.
Issue No. 25	In the negative.
Issue No. 26	In the negative.
Issue No. 27	The institutions were not allottees in good faith of the shares upon con-version.
Issue No. 28	In the negative.
Issue No. 29	In the negative.
Issue No. 30	Not pressed.
Issue No. 31	In the negative, the plaintiffs are entitled to the challenge.
Issue No. 32	In the negative, the plaintiffs are entitled to the challenge.
Issue No. 33	In the negative.
Issue No. 34	In the negative.
Issue No. 35	In the negative, not argued.
Issue No. 36	This issue has been deleted.
Issue No. 37	In the negative.
Issue No. 38	In the affirmative, by reason of the mala fides of the waiver.
Issue No. 39	In the negative, the suit is main-tainable.
Issue No. 40	In the affirmative, the plaintiffs are entitled to the relief.
Issue No. 41	In the negative, not argued.
Issue No. 42	In the negative.
Issue No. 43	In the negative, the plaintiffs are not precluded or estopped from the challenge.
Issue No. 44	In the negative, the plaintiffs have a cause of action.
Issue No. 45	In the negative, the plaintiffs are entitled to the relief.

'Additional issues on behalf of defendant No. 8 in addition to those raised by defendents 1 to 7 :

Issue No. 1	Not pressed.
Issue No. 2	In the affirmative.
Issue No. 3	In the negative.

'Further issues on behalf of defendants 1 to 7 arising from the amendment to the pleadings :

Issue Nos. 1	The approval covers the option term in the debentures.
Issue No. 2	In the negative.
Issue No. 3	In the negative, the plaintiffs have a cause of action.
Issue No. 4	In the negative.

"Supplemental issues on behalf of defendant No. 8 :

Issue No. 1	The approval covers the option term in the debenture.
Issue No. 2	In the negative.
Issue No. 3	In the negative, the plaintiffs have a cause of action.
Issue No. 4	In the negative.

In the premises, I pass the following order : —

It is declared that the entry upon the Register of Members of the 8th defendant as and from June 5, 1979, of the names of the 1st, 2nd, 3rd, 4th, 5th, 6th and 7th defendants in respect of the 43,750 shares, particulars whereof are given in Exhibit S to the plaint, is bad and illegal. The 1st to 7th defendants shall as and from June 5, 1979, continue to hold the debentures in conversion of which the said shares were issued. The 1st to 7th defendants shall not have an option to convert any of 11% privately placed debentures into shares.

It is ordered and decreed that the 8th defendant do rectify its Register of Members by deleting therefrom the names of the 1st to 7th defendants as holders of the said shares. The 1st to 7th defendants are permanently restrained from exercising any voting rights in respect of the said shares in any manner whatsoever. The 8th defendant is permanently restrained from paying to the 1st to 7th defendants any dividends in respect of the said shares.

The 8th defendant is ordered and directed to carry out in its books and registers all alterations consequent upon this order within 30 days from today and to give to the Registrar of Companies all notices consequent upon it within the same period.

The 1st to 7th defendants are ordered to hold in trust for the 8th defendant such amounts as they have received from the 8th defendant as and by way of dividend in respect of the said shares as are in excess of the amounts of interest that would have been payable thereon at the debenture rate of 11% per annum and do adjust the same against future interest payable on the said debentures.

Ordinarily, costs should follow the event. However, a great deal of time has been spent upon issues which have either not been pressed at the stage of final argument or which have been decided against the plaintiffs.

The defendants do pay to the plaintiffs one-half of the total amount of costs that would be payable upon the basis of two counsel being briefed.

[1984] 55 COMP. CAS. 160 (CAL.)

HIGH COURT OF CALCUTTA

Jadabpore Tea Co Ltd

v.

Bengal Doors National Tea Co Ltd

SABYASACHI MUKHARJI AND SUHAS CHANDRA SEN JJ.

Appeal No. 201 of 1979 in Company Petition No. 150 of 1978

JANUARY 27,1982

S.B. Mukherji and Dilip Dhar for the appellant.

P.C. Sen and R.K. Lala for the respondents.

JUDGMENT

Sabyasachi Mukharji J.—This appeal has arisen out of an order passed and judgment delivered by the learned trial judge on 17th May, 1979. There is also a cross-objection filed by the respondent to the appeal. In the application which has resulted in the order appealed from the petitioner, the Bengal Dooars National Tea Co. Ltd., the respondent herein, had asked for certain orders, inter alia, that the resolution passed in the meeting held on 5th December, 1977, be declared illegal, invalid, null and void and of no effect. There was also a prayer for an injunction restraining respondents Nos. 2 to 7, who are the directors of the appellant, Jadabpore Tea Co. Ltd., from dealing with, disposing of or transferring or selling or alienating any of the assets of the company. There were mainly' three factors involved in this application. The petitioner, viz., the Bengal Dooars National Tea Co. Ltd., claimed to be a shareholder of 10,002 ordinary shares of Rs. 20 each. The authorised share capital of the company was Rs. 4,50,000 divided into 22,500 shares of Rs. .20 each, and the subscribed capital was Rs. 49,689. The petitioner in the original application under s. 397 of the Companies Act, 1956, was holding about 49 per cent, shares and was the largest single shareholder.

There were three grounds of challenge in the application. One was on the issue of further shares which was sanctioned by the company at the meeting held on 5th December, 1977. The other was about the shifting of the registered office from Jalpaiguri to Siliguri and the third was relating to certain alleged private sales and misapplication of the sale proceeds of tea. The application under ss. 397 and 398 was presented to this court on the 3rd April, 1978. The petitioner also contended that the petitioner had not received the notice of the impugned meeting. The learned judge did not accept the grievance of the petitioner about the shifting of the registered office from Jalpaiguri to Siliguri. The learned judge was unable to accept the submissions of the petitioner that the petitioner did not receive the notice of the meeting, the proceedings of which were impugned. The learned judge, however, did not deal with, either way, about the alleged private sale and misapplication of the sale proceeds. It was contended on behalf of the appellant that the learned judge had refused to accept the grievance made by the applicant under s. 397 of the Companies Act. But the learned judge held that the resolution was invalid in law, in view of the provisions of s. 81(1A), for the issue of further share capital. As the learned judge held that the resolution was not in a proper form, in view of the notice given, that action of the learned trial judge has been challenged as contrary to the provisions of law. The short facts which are necessary for .the present purpose are the following :

The main business of the Jadavpur Tea Co. is to maintain tea garden at Ramshaighat in the district of Jalpaiguri, manufaclure and sale of the tea grown in the said garden. The said company has its administrative office at the gate of Rai & Co., Siliguri. In or about November, 1977, the Bengal Dooars National Tea Co., being the petitioner under s. 397, came to know that the respondent, Jadavpore Tea Co. Ltd., was attempting to shift the registered office from Jalpaiguri to some other district. There- fore, according to them, they authorised one Manish Chandra Mitra to write letters on their behalf. On or about 19th November, 1977, the said Manish Chandra Mitra wrote certain letters to the respondent. It may be mentioned here that there was originally an agreement by the present applicant to sell their shares to the Chowdhuries who were willing to undertake the running of the company and it is their further case that in view of this they had lodged their share certificates with the company. When the sale transaction with the Chowdhuries had failed in 1974, they had repeatedly written to the respondent for the return of share certifi -cates or for the issue of duplicate shares, if the shares were not available. But those were not heeded to. In this connection letters were also written to the Registrar of Joint Stock Companies as well as to the company. Thereafter several letters were written by the respondent to the appellant asking for copy of the annual balance sheets for several years as well as the particulars of the share registers. There were certain grievances as to whether Sri Manish Chandra Mitra was duly authorised or was competent to make those enquiries on behalf of the said res-pondent. On 9th November, 1977, it is stated that the notice for the impugned annual general meeting was alleged to have been sent under certificate of posting to the respondent. Between 21st November, 1977, and 20th December, 1977, it is the allegation of the appellant-company that there was the closure of the share register in compliance with s. 154 of the Companies Act, 1956. On 23rd November, 1977, the said Manish Chandra Mitra was written to by the appellant-company that due to the closure of the share register it was not possible to send the complete list of the shareholders. This letter, though dated 23rd November, 1977, appears to have been posted on 19th January, 1978, and was received by the respondent on the 21st January, 1978. This would be apparent from the records placed before the learned trial judge which were appearing in the paper book. In this connection a reference may be made to page 111 of the paper book. The importance of this fact is that the present respondent relied on such conduct to indicate that the company, Jadavpore Tea Co. Ltd., was proceeding in a high-handed manner and was deliberately trying to shut out all information from the respondent so that the company could clandestinely increase the share capital and transform the respondent into a minority shareholder without any effective say in the running of the company. On 5th December, 1977, according to the appellant, the annual general meeting was held and the proceedings of the said meeting are under challenge in this appeal. On 13th December, 1977, the respondent wrote to the appellant company asking for copies of the balance-sheets of the years 1972 to 1976 as also copies of the memorandum and articles of the association. A sum of Rs. 10 was also remitted along with that letter for the aforesaid purpose. On 23rd December, 1977, the respondent reminded the appellant-com-pany to send a complete list, as aforesaid. On 3rd January, 1978, the appellant-company wrote to the respondent enclosing balance-sheets for the years 1972-73, 1973-74, 1974-75 and 1975-76 as also memorandum and articles of association on 4th January, 1978, there was a publication in the news paper, "Basumati", about the shifting of the registered office. On 12th January, 1978, there was a publication about the shifting of the registered office in "Amrita Bazar Patrika". From the post mark on the envelope. it appears that the letter dated 23rd November, 1977, which we have referred to hereinbefore, was posted on the 19th January 1978. On 20th January, 1978, a letter was written by the appellant-company to Manish Chandra Mitra to send the registration number of the shareholder. On 21st January, 1978, there was a letter received by Manish Chandra Mitra intimating to him that the registers of shareholders were closed from 21st November, 1977, to 20th December, 1977. On 21st January, 1978, a letter was written by the said Manish Chandra Mitra to the appellant-company stating that the envelope containing the letter dated 23rd November, 1977, showed that the letter was posted on the 19th November, 1978, and was received by him on 21st January, 1978, on the same date there was a letter written to the same effect by the said Manish Chandra Mitra to the Registrar of Companies, West Bengal. On 25th January, 1978, the respondent-company wrote to the Registrar of Companies, West Bengal, complaining about the illegal shifting of the registered office and non-receipt of notice convening the impugned annual general meeting. Again on 31st January, 1978, a letter was written by the respondent-company to the Registrar of Companies, inter alia, complaining about the illegal shifting of the registered office, failure to supply copies of the balance-sheets for the years ending 1972 and 1976 and non-service of the notice of impugned annual general meeting. On 4th March, 1978, the Registrar of Companies wrote to the appellant company directing them to furnish copies of the balance-sheets for 1972 and 1976 and memorandum and articles of association. It was, inter alia, stated in the letter as to whether any special resolution had been passed for shifting the registered office of the company in compliance with s. 146 of the Companies Act, 1956. On 20th March, 1978, the appellant-company forwarded a memorandum and articles of association as also balance-sheets for the years 1972 and 1976. On the same day, the appellant-company wrote to the Registrar of Companies in answer to the letter dated 4th March, 1978, of the Registrar of Companies. That letter, according to the respondent, was regarding the failure to give notice of such change to the Registrar as required under s. 146 of the Companies Act, 1956. Thereafter, further searches were caused to be made on 21st March, 1978, in the office of the Registrar of Companies and the respondent came to know about the resolution increasing the share capital of the company, which was impugned in the application under ss. 397 & 398, and the order in respect of which is under appeal. The application under s. 397 and s. 398 was, as we have mentioned hereinbefore, made ready on 31st March, 1978, and was filed on 3rd April, 1978.

In order to decide the main and first legal question on which the appellant has challenged the findings of the learned judge, it is necessary to set out the resolution which has been impugned in this case. The resolution increasing the share capital reads as follows :

"7. Resolved the 15,000 equity shares of Rs. 20 each be and are hereby issued, in terms of section 81(lA)(a) of the Companies Act, 1956, and the directors be and are hereby authorised to decide the time and the manner of issue including the calls to be made on the shares and any other matter incidental thereto.

Explanatory notes on agenda No. 7.

The company is in need of immediate funds for the development works of its garden and as such quick realisation of the share capital is vitally important. The impecunious losses for the same period has eroded public confidence to a great extent. And it will be futile to expect the general public and the existing members who have shown no interest in the matter of the company for this long time, to invest in these shares. The matter is, therefore, left entirely to the discretion of board of directors of the company who are authorised to allot and issue the shares and make calls in such a manner as would be most beneficial to the company and conducive to the purpose for which these new shares are being issued".

The notice dated 19th January, 1977, was also given to that effect. It has been alleged that the said notice was bad being violative of s. 81(1A). Section 81 provides, along with (1A), which was substituted by the Companies (Amend.) Act, 1960, as follows:

"81. Further issue of capital.—

(1) Where at any time after the expiry of two years from the formation of a company or at any time after the expiry of one year from the allotment of shares in that company made for the first time after its formation, whichever is earlier, 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 15 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.

Explanation : In this sub-section, 'equity share capital' and 'equity shares' have the same meaning as in section 85.

(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) here no such special resolution is passed if the votes cast (whether on a show of hands, or on a poll, as the case may be) in favour of the proposal contained in the resolution moved in that general meeting (including the casting vote, if any, of the chairman) by members who, being entitled so to do, vote in person, or where proxies are allowed, by proxy, exceed the votes if any cast against the proposal by members so entitled and voting 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".

The other sub-sections are not relevant for our purpose. In this case we have seen the notice and the explanatory note. The question is, whether the said notice read with the explanatory note gave any indication as to how the existing shareholders or the public were not interested in the shares of the company and whether the section required to specify furthermore as to which persons or the manner in which the company wanted to issue the share capital. According to the appellant, whether (or not?) it was necessary to indicate either the persons or the particular classified group to which further share capital would be issued on behalf of the appellant, it was submitted that the manner of the issue was left to the discretion of the directors. It was further submitted that the explanatory statement made it clear that the existing shareholders or the general public would not be interested in the company's shares in view of the past performance. Hence the matter was left to the directors, according to the appellant, to allot the shares in a manner most conducive to the company. Sub-section (1) of s. 81 enjoins that where at any time after the expiry of two years from the formation of the company or at any time after the expiry of one year from the allotment of shares in that company made for the first time after its formation, whichever was earlier, it was proposed to increase the subscribed share capital of the company by allotment of further shares, then such further shares should be offered to the persons who, at the date of the offer, were holders of the equity shares of the company, in proportion, as nearly as circumstances admitted to the capital paid-up on those shares, at that date and in such a contingency by other sub-clauses notice had to be given in a particular manner. On behalf of the appellant it was contended that when it could not be given to the existing shareholders then it could be given to any other persons under s. 81(1A), which might or might not include the existing shareholders, in any manner whatsoever, provided the directors were so authorised by a special resolution of the company. In this case, therefore, it was contended on behalf of the appellant that inasmuch as the learned trial judge held that the resolution passed was iniviolation of s. 81(1A)(a) of the Companies Act, 1956, the learned judge was in error. In considering this aspect of the matter there are certain other factual aspects, which have to be borne in mind. We have noticed that here the shareholding was so balanced that the present respondent to the appeal was holding nearly about 49 per cent, of the shares and was the largest single shareholder. Any increase of the share capital in such a manner and allotment of shares to such persons other than the respondent to the appeal would have the possibility of reducing the present respondent to absolute minority. Learned advocate for the respondent drew our attention to certain other observations and facts appearing in this case to emphasise that not only was the proposed issue and allotment of the shares illegal in view of the provisions of s. 81(1A)(a) of the Act but also this was found as mala fide and not in the interest of the company. In aid of this submission reliance was placed on the observations of the learned trial judge where the learned judge has further held at page 370 of the paper book that in the facts of the present case the appellant-company had not given the names of the proposed allottees and, therefore, further allotment to the respondent company which was the major shareholder and which had started making some correspondence before the meeting and which had not attended the previous meetings would transform them into a minority shareholder. It was further contended that on the facts of this case where there was really a debt over Rs. 9 lakhs, further share capital would not have succeeded in raising funds to the extent which would have been sufficient to augment the working funds of the company. The learned trial judge has observed that though the shares of Rs. 15 each were proposed to be allotted, only Rs. 2 per share was realised. On behalf of the appellant this observation of the learned trial judge has been criticised on the ground that it was not a fact and subsequently the full amount had been realised. But this finding of fact of the learned judge, as pointed out by the respondent, has not been challenged as such, and it is a finding of fact. It was stated that the authorised capital was increased by Rs. 3 lakhs divided into 15,000 shares of Rs. 20 each. Admittedly, there was no offer of the shares to the existing shareholders and there was no cogent evidence that the existing shareholders would not have taken these shares, though it was true that until the writing of the letters on behalf of Manish Chandra Mitra there was no interest shown by the respondent in the affairs of the company and they did not attend any meetings of the company. The liabilities of the company were nearly Rs. 8,90,679 and raising the share capital of the company to the extent of Rs. 3 lakhs, according to the respondent, would not have been sufficient to meet the liabilities of the company. In this connection, the learned judge was unable to accept the contention that the intention of issuing further shares was the improvement of the financial position of the company, as only a nominal sum had been called up and subsequently during the pendency of the application the entire amount of fresh issue had been paid by the allottees. It was nowhere disclosed in the proceedings as to who were the allottees of the new shares and there appeared to be several illegalities. The learned judge has made those findings at pages 356-357 of the paper book, and, therefore, in the back-ground of this fact there was a non-indication, as to, who were the pro-posed allottees of the new shares to the members in the annual general meeting, who were authorised to allot shares by the special resolution under s. 81(1A)(a) of the Companies Act, 1956, and in particular the expression "to any persons" as also the expression "in any manner whatsoever" must be particularised in the notice so that shareholders could effectively exercise their judgment before voting for the resolution. Otherwise, it was submitted that the purpose of s. 81(1 A) would be defeated, specially in view of s. 81(1) of that Act. It was submitted on behalf of the appellant that this view is concluded by the observation of the Supreme Court. Reliance was placed on the decision of the Orissa High Court in the case of Kalinga Tubes Ltd. v. Shanti Prasad Jain, AIR 196.3 Orissa 189. There at page 205 learned advocate appearing in that case challenged the validity of the resolutions passed therein on 29th March, 1958, on the ground that this could not be given effect to. According to one of the resolutions, 39,000 ordinary shares of Rs. 100 each should not be offered or allotted to the existing holders of equity shares in the company or to the public. It was contended that the existing shareholders with the members of the public exhausted all persons to whom shares could be issued and if no shares were issued either to the existing shareholders or to the public, then no allotment could at all be made. The court was unable to accept this contention. This resolution and the next resolution, passed immediately after, must be read together and by the other resolution it was resolved that the directors were expressly authorised subject to the special resolution, to issue and allot the said 39,000 ordinary shares privately in the best interest of the company at the sole discretion of the directors to such persons as might have applied or might hereafter apply. There the court set out the explanatory statement which was more or less identical to the present explanatory statement. But the court made a finding of fact that the bona fides of the issue of the shares to the allottees were not disputed nor the bona fides of the allottees were questioned. In that background the Orissa High Court came to the conclusion that the resolution did not violate the provisions of s. 81(1A)(a). In the appeal from this judgment the Supreme Court did not proceed on this basis. But, reliance was placed on the observations of the Supreme Court in the case of Shanti Prasad Jain v. Kalinga Tubes Ltd. [1965] 35 Comp Cas 351; AIR 1965 SC 1535, paras. 24, 25f and 32, of the judgment, where, it was submitted that the notice of the general meeting was not in compliance with s. 173 and so the proceedings of the meeting must be held to be bad. This objection was, however, not taken in the petition and the Supreme Court, therefore, did not allow this question to be raised before the Supreme Court as it was a mixed question of law and fact. The objection was not taken in the petition but it was urged before the Orissa High Court and it was dealt with and the Supreme Court made an observation that their Lordships would have agreed with the views of Das J., if the question was permitted to be raised. We may reiterate that the Supreme Court in para. 25 of the judgment mentioned that in the facts of that case there could be no doubt that the seven persons to whom the shares were eventually allotted were respectable persons of independent means. There was nothing to show that they were stooges or benamidars of the Patnaik or Loganathan group. In the facts of that case the Supreme Court was of the view that the action of the majority shareholders in allotting the new shares to outsiders and not to the existing shareholders could not, therefore, in the circumstances, be said to be oppressive of the appellant and his group.

In our opinion, whether a particular resolution or notice should be specific as to the manner and to the persons to whom the shares would be offered, or as to whether the entire share value should be paid at a time or whether the persons should be indicated, belonging to a particular group or not, as the Supreme Court itself noted, must, in certain cases, be a mixed question of law and fact. Though it is quite true, as the learned advocates for the appellant urged, that on the construction of the section it was not obligatory that a special resolution to that effect must always mean that the persons or the allottees' names should specifically be made or the manner of their allotment should also be specifically indicated, but, in an appropriate case, that is to say, where the allotment of shares might tilt the balance of the shareholdings and might transform the major bulk of the shareholders into a minority group of shareholders, the particulars of the allottees or the manner of their allotment should also be indicated. This is necessary because, in the existing climate of erosion of the intrinsic sense of fairness, it is necessary in some cases to insist on certain procedural safeguards to ensure fair play in action in corporate management, and we agree with the learned advocate for the respondent, that the observations of the Orissa High Court as well as the Supreme Court in the cases referred to hereinbefore that the resolution passed in that meeting, which was sought to be impugned, did not violate the provisions of s. 81(1A)(a), depended on the facts of that case upon which the Supreme Court laid great emphasis, that is to say, the action of the majority shareholders was for the benefit and the interest of the company and the allottees of the new shares were independent persons. In this case there is no such fact indicating that position, [n such a background, in our opinion, it cannot be said that the learned judge was in error in holding that the issue of share capital was in violation of s. 81(1)(a) of the Act. In aid of this submission, on behalf of the respondent it was emphasised that allegations had been made that the allotment of shares to the benamidars of the other group of shareholders was made but in spite of that fact, in the subsequent proceedings and in subsequent affidavits, the names of allottees had not been disclosed by the appellant. As a matter of fact, on behalf of the respondent, it was emphasised, till today the respondent was quite in the dark as to who were these allottees. Such a conduct, it was submitted, showed that the action of the company in issuing the increased shares was not in the bona fide interest of the company. It was emphasised that this fact is highlighted by the fact that the money sought to be raised would be quite insignificant and would not be of much significance in helping the so-called object of raising more funds for the company. On behalf of the appellant it was submitted that even where there was a mixed motive, such an action would not be bad. In this connection reliance was placed on the observations of the Supreme Court in the case of Nanalal Zaver v. Bombay Life Assurance Co. Lid. [1950] 20 Comp Cas 179; AIR 1950 SC 172. There, the Supreme Court was dealing with a situation where it was found that that the company needed funds and in order to subserve funds, the com-pany issued further share.-; but the motive was also there to prevent a certain group, who were strangers to the company, from intruding into its affairs. The Supreme Court held that it was well established that the directors of the company, who were in a fiduciary position vis-a-vis the company, must exercise their power for the benefit of the company. If the power to issue further share capital for raising funds of the company was 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 would interfere and prevent the directors from doing so. The very basis of the court's interference, it was stated by the Supreme Court, in such a case was the existence of a relationship of trustee and cestuique trust as between the directors and the company. If the directors had exercised the power for the benefit of the company and, at the same time, they had a subsidiary motive, which would in no way affect the company or its interests or the existing shareholders then the very basis of the interference of the court was absent. From the narration of facts in the background of which the observations of the Supreme Court were made it would be apparent that these observations cannot, in view of the facts appearing in this case, have any application to this case. It was further contended on behalf of the appellant that the issue of further shares for raising the share capital in the instant case was done by a single transaction, and, therefore, it could not constitute the subject-matter of a challenge under ss.397 and 398 of the Companies Act. In aid of this submission and specially in view of the other findings of the learned judge reliance was placed on the observations of the Gujarat High Court in the case of Sheth Mohanlal Ganpatram v. Shri Sayaji Jubilee Cotton and Jute Mills Co. Ltd. [1964] 34 Comp Cas 777 at p. 830; AIR 1965 Gujarat 96 at p. 103, para. 49. In this case, the learned judge has also observed that the motive of the directors in issuing further shares in the manner they proposed to do for raising the share capital, was not for the purpose of raising funds. In view of the facts found by the learned judge, as the broad object of the resolution was to transform the respondent into a minority shareholder, the observation of the Supreme Court, in our opinion, cannot have any application in this case and in that view of the matter we are unable to accept the contention, as contended, in support of the appeals.

Now, we shall deal with the cross-objection filed on behalf of the respondent. This cross-objection was based on certain grounds. But, before we do that, we must observe that the non-publication of the closing of the share registers, which the learned judge has observed in his judgment, violated s. 154 of the Companies Act. It was submitted on behalf of the appellant that these were not relevant factors in considering the allegations made in the petition and the notice issued under s. 81 of the Companies Act and in any event the non-publication of the closure of the share register would not affect the validity of the meeting. Reliance was placed in this connection on the observations of the learned trial judge. It is quite true that the violation of s. 154 of the Companies Act by non-publication of the closing of the share register would not invalidate the resolution on this ground but this was a factor which, in our opinion, the learned trial judge was entitled to take into consideration in considering the mala fide or bona fide of the non-indication of the names of the allottees.

Now, we come back to the cross-objection filed on behalf of the respondent. Here, it is the positive case of the respondent that they did not receive the notice of the annual meeting. The learned judge did not accept this contention. The learned judge had drawn presumption from the certificate of posting. It was submitted on behalf of the respondent that the learned judge did not take into consideration the totality of all the facts. In this connection reliance was placed on the observations of the learned judge. It was submitted that the learned judge was in error in observing that the appellant-company by its letter dated 3rd January, 1978, forwarded the balance-sheets for the years 1972 to 1976. It was submitted on behalf of the respondent that this observation of the learned judge was wrong because from the letter itself, which was set out by the learned judge, it did not indicate that the balance-sheets for the year 1976 had been forwarded. The learned judge had noted that the respondent herein by its letter dated 9th January, 1978, wrote to the appellant company, inter alia, alleging that the balance-sheets for the years 1972 to 1976 and also a copy of the memorandum were not received by them and again requested the appellant-company to send the balance-sheets including the balance-sheet for the year ending 31st of December, 1976. The learned judge has further observed that from the said correspondence it was quite clear that the appellant must have sent the notice of the annual general meeting held on the 5th of December, 1977, to the respondent herein, and they were aware of the existence of the balance-sheet of 1976 as they were asking for a copy of the same It was submitted on behalf of the respondent that the learned judge had erred on this aspect of the matter. It must be noted that the respondent was taking keen interest in the company through Manish Chandra Mitra, who had also written certain letters to the appellant, and it was submitted that the respondent was aware of the meeting. It is true that the letter dated 23rd November, 1977, was posted subsequently on the 21st January, 1978, and it was also received subsequently. It is also true that the said letter was posted under certificate of posting. In our opinion, on the totality of the facts which have been discussed by the learned judge, the learned judge was entitled to come to a finding of facts on this aspect of the matter. It is to be noted that the factual finding based on a totality of facts should not be looked at piece-meal or by either non-consideratinn of one single factor or the other. About the effect of service of the notice under certificate of posting, reliance was placed on the observations of the court in the case of Kanak Lata Ghose v. Amal Kumar Ghose, AIR 1970 Cal 328 at page 332, in the case Achamma Thomas v. E. R. Fairman, AIR 1970 Mys 77, at pages 80-81, paras. 7 and 11, and also in the case of Ramashankar Prosad v. Sindri Iron Foundry (P.) Ltd., AIR 1966 Cal 512 at pages 519, 528 and 547. It is true that whether in a particular case, the presumption of the receipt of a letter under certificate of posting would be drawn or not, would depend upon the facts and circumstances of the case, in this case in view of the facts that after some time, though not after avery long time, the respondent was taking some interest through Manish Chandra Mitra, who had been looking after the interest of the company on behalf of the respondent, we are of the opinion that it could not be said that the learned judge was in error in coming to the conclusion about the drawing of the presumption that the respondent must have received the notice, and at least, such an error does not call for an interference by this court, though we are conscious that this finding of the learned judge is rather weak. That there was some preponderance of the facts, which indicated that perhaps the notice may have been received by the respondent, also fails.

As to private sales, allegations have been made in the petition in paras. 41 to 43. These allegations have been denied in the affidavit in opposition. On the facts before the learned judge, particulars of district average sales were produced which would be apparent from page 126 of the paper book. It is true that the learned judge, though he noted the arguments advanced in this regard, did not deal with this question specifically. It appears that the allegations were of such a nature that it could not be said to have been clearly established before the learned judge, and, if the learned judge did not exercise his discretion, in the absence of other evidence on this aspect in the application made under ss. 397 & 398 of the Companies Act, we are of the opinion that the learned judge did not commit any error which could call for any interference by this court. Having regard to these features of this case we are unable to accept the submissions made in respect of the cross objection. Therefore, the cross-objection filed on behalf of the respondent also fails.

In the result, the appeal as well as the cross-objection fail and both the appeal and the cross-objection are dismissed. The order of the learned trial judge is confirmed.

The board of directors will now call a fresh annual general meeting in accordance with law and will not take into consideration the increased share capital but proceed on old basis in accordance with law.

Stay asked for is refused.

The parties will be at liberty to act on the signed copy of the operative portion of the order of the minutes.

Each party will pay and bear its own costs.

Suhas Chandra Sen J.—I agree