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Introduction
The case was first filed in the Madras High Court in 1977. The appeal against the decision then went to the Supreme Court and the judgement was delivered in 1981.
Disputes between the shareholders is undoubtedly prevalent in the Corporate World. Time and again we see Corporate feuds between the shareholders of the biggest companies in the world and it is not something limited to India but is a global phenomenon. What is common in most of these feuds is the oppression faced by the minority shareholders by the majority shareholders. The Indian Laws do provide relief and a way out of such a problem, but to what extent they effectively solve the problem is still a topic of discussion. Section 397[1] and to section 399[2] of the erstwhile Indian Companies act, 1965(now section 341 to section 346 of Indian Companies Act, 2013[3]) dealt with provisions relating to oppression and mismanagement against a member/ members of any company incorporated in India and the relief to be granted to such member or group of members if a case of oppression or mismanagement actually exists.
The terms “oppression” and “mismanagement” are not defined under this act. However, the courts have discretion to interpret them in a way which they deem fit given the facts of a case, determine if there are instances of “oppression’ or “mismanagement” in the given case and pass a judgement granting equity and protecting the public interest.
Needle Industries (India) v. Needle Industries Newey (India) Holding Ltd.[4] is a landmark case on this matter and serves as an authority in similar cases. I shall be discussing about the relevant aspects of law that from the crux of the judgement.
Summary of Facts
Needle Industries Newey (India) Holding based in UK (hereafter referred to as the “holding company”) filed a case against its Indian Subsidiary i.e Needle Industries India Ltd., (hereinafter “NIIL”) under S. 397 and S. 398[5] of the Indian Companies Act, 1956. The holding company alleged an act of oppression by NIIL. The holding company had majority shares in NIIL. After the FERA[6] act was passes, NIIL was to reduce the non resident percent of shareholdings from 60% which was held by the holding company to 40% within a period of one year. The MD of NIIL, Devagnanam, proposed the excess shares be issued to only the existing Indian Shareholders to which the holding Company refused. After a lot of deliberations and negotiations, a consensus still couldn’t be reached by the Holding Company and NIIL regarding the manner in which Indianization (Indianize: to bring under the cultural or political influence or control of India)[7] could be achieved.
NIIL without proper coordination with the Holding Company, issued rights shares to its existing Indian Shareholders at a price much lower than the market price and appointed a Silverstone as an additional director and the Holding company which was a majority now became the minority group. The holding company filed a case against NIIL alleging that NIIL and Devagnanam deliberately held the Annual General Meeting without proper coordination with the Holding Company so that the excess shares could be issued to the existing Indian shareholders and would ultimately lead to Devagnanam holding greater control over the company. The holding Company also contested Silverstone’s appointment as an additional director and his post an “independent” director in the Annual General Meeting in which the issue of rights shares was decided.
The case was filed in the High Court of Madras and it was held that the “acts” of NIIL were “Oppressive” as the right shares were sold at a very low price and asked NIIL to make good the loss bore by the Holding Company. An appeal went to the division bench who upheld the decision and removed the Managing Director of NIIL, appointed an interim board by removing the existing board members as well as issued additional direction regarding the affairs of NIIL.
The final appeal then went to the Supreme Court of India.
Issues in the case
- Whether the Act of NIIL issuing right shares at a price much lower than the market price to the existing Indian shareholders only constituted an act of “oppression” against the Holding Company under S.397 of the Indian Companies Act, 1956?
- Whether there is an abuse of fiduciary powers by the Indian Stakeholders and whether the appointment of Silverstone as Additional Director in the board meeting valid?
- Whether the court could decide a case, where there are allegations of mala fides and abuse of fiduciary powers, solely on the basis of affidavits and no oral evidence?[8]
Arguments advanced by the appellants
The counsel for appellants, Shri Nariman, argued that there existed no case of “oppression” by the Indian Shareholders. The reasons cited was that the company had to take a decision as soon as possible as the time period given by RBI was about to expire. Secondly, the decision was taken keeping in mind the best interest of the company. The Holding Company after refusing to the issue of rights shares to the Indian Shareholders only did not put forth any plan to reduce its share percentage. Thus, NIIL had no option but to proceed in whichever way it deemed fit to save the company
Shri Nariman contested that by deciding for the best of the company, if the Indian directors incidentally affected the rights of the majority by reducing them to a minority group doesn’t imply that the decision was unconstitutional and the motive of the directors can be questioned. The Holding company was given the option to either disinvest or to agree to offer of rights shares, and by denying to disinvest the holding company lost any claim to say that the directors should not issue right shares to the Indian stakeholders.
On the appointment of Silverston, Mr. Nariman contested that just because he had acted as an advisor to the Indian shareholders doesn’t imply that he was biased as he was acting in his capacity as a solicitor. Section 299 of the companies Act states that when a director is an interested party, he must disclose his object of interest and Silverston had no such interest and mere friendly relations with the Indian directors doesn’t mean he would be biased towards them. Also regarding the powers of the directors to appoint an additional directors, S. 260 of the Companies Act empowers them to appoint additional directors for certain functions to be carried out.[9]
Shri Nariman also contested that Sanders was asked to attend the meeting held on the 6th April which he didn’t thus Devagnanam had no option but to appoint Silverston as an independent director to meet the quorum so as to proceed with the meeting.
Shri Nariman contested that “Under the Company Court Rules framed by this Court, petitions, including petitions under section 397, are to be heard in the open court (Rules 11 (12) and Rule 12 (1), and the practice and procedure of the Court and of the Civil Procedure Code are applicable to such petitions (Rule 6)[10]. Under Order XIX Rule 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.”[11] he argued that there was no request for cross examination of Devagnanam in the trial Court. Only Devagnanam had complete knowledge of everything that had happened and his conduct and intentions ought to be questioned in a cross examination and not just be based on mere statements who did not have complete knowledge of the material facts. When there is such a grave allegation made against a person which can put his complete position in jeopardy, such allegations cannot be proved merely on the basis of affidavits but needs oral evidence. He cited various cases like Nanalal Zaver v. Bombay Life Assurance[12], Plexcy v. Mills[13] to support his arguments.
Arguments advanced by the Respondents in the case
The counsel for respondents, Shri Seervai argues that the decision taken by NIIL issuing rights shares to only Indian shareholder and that too at a much disadvantageous price was a direct act of oppression against the holding company. The Counsel argued that Devagnanam had his own personal interest behind taking this decision as this would bring more control of NIIL into his hands. In the previous meetings held between both the parties, the Holding Company had not denied in giving up 20% of shares but had just not agreed to the method proposed by Devagnanam but since Devagnanam was so keen on acquiring more control over the company, he proceeded to take the decision anyway. The counsel further argued that NIIL could have sent an application to the Control of Capital Issues to fix the price of shares at par with the market value which it didn’t and ultimately marked the shares at a much lower price. Also, the Holding Company was not given enough time to attend the General Body Meeting. It was contested by Shri Seervai that non compliance with the notice given by the RBI would not have led RBI to ask NIIL to shut down its business nor would it have left the Indian Directors of that company exposed to penalties or legalities of any kind. Thus, the Appellants could have filed an application to the RBI to extend the timeline and thus the Holding company could have had the opportunity to attend the meeting.
Shri Seervai contested that issuing of rights shares by the Directors was aimed at converting the majority shareholders (Holding Company) to a minority that is void and unconstitutional and an abuse of fiduciary powers. Thus any arguments further made by counsel for appellants that the decision was taken with the best interest of the company kept in mind would be futile. This would be so because the decision as to what constitutes the best interest of a company is to be taken by the majority. But in the meeting, since the majority of votes, which should have been taken into account, were absent, the meeting, was futile. The outcome of that meeting was rights to shares be issued to India shareholders only.
Shri Seervai further contested the appointment of Silverston as an additional director stating that there was no agenda of the meeting that required the appointment of an additional director. He also contested the appointment of Silverston as an independent director in the meeting where the issue of rights shares was discussed. S.300 of the Companies Act states that no director shall take part in any arrangement or meeting in which he has a direct interest or concern. Silverston was said to be an interested person as he had previously been an adviser to the Indian Shareholders and a person under no such circumstances could be said to be unbiased while judging any issue between NIIL and the Holding company. Also, since he was directly interested in the issue of rights shares, the meeting that took place on the 6th April with Silverston as an “independent” director should be declared void and of no consequence.
Shri Seervai argued that when the case petition was argued both in Trial and Appellate Court, both the parties had agreed to proceed on the basis of documents and affidavits only and there was no request for trial by both the Parties. There are sufficient material available in the affidavits and documents submitted which clearly show the intent of mala fides. Apart from that Shri Seervai argues that the cases cited by the appellants like Nanalal Zaver v. Bombay Life Assurance[14] say that just because certain similar cases were decided on oral evidence only doesn’t mean all such cases should be decided in the similar manner. Documents were submitted by both the parties willingly as the case proceeded which shows that the appellants went for a method of trial which they deemed more convenient. Thus, Shri Seervai asked the court to reject the submission that mala fides ought not be proved by affidavits and documents only.
Summary of the Court’s Judgement in the case
The term “Oppressive” manner indicates acts that are “burdensome, harsh and wrongful”. An isolated act, which is against the law, cannot be said to be “oppressive” unless it has a mala fide intention behind it or if that act was “harsh, burdensome and wrongful”. However, if there is a sequence of illegal acts, it can be concluded that all those acts were a part of the same action, the motive of which was to oppress the ones against whom such acts had been directed.
The person alleging oppression against the other party has to show how the oppression led him to compromise on his decision and surrender to an act that lacks in integrity, an act that is on the face of it unfair and had affected his proprietary rights.
Thus, the allegations of oppression against the Holding Company were rejected and it was held that Devagnanam and his colleagues took a decision in a manner that a partner in a business venture is expected to do. The existing Indian shareholders were willing to pay for the shares at a premium and by offering them the shares at a price which was below the market price, NIIL had unjustly caused loss to the Holding company. Thus, even though the case petition failed, the Court, in order to attain substantial Justice, asked the existing Indian shareholders at NIIL to make good the loss incurred by the Holding company and buy the shares at a premium rate which would take away even the last hint of oppression that had been alleged in this case.
In a matter involving grave consequences, giving a judgement solely on the basis of documents and affidavits is seen as unsatisfactory, but it cannot be considered illegitimate. If in case of a mala fide or bon fide case, there exists enough evidence on the face of the documents, then such documents can be considered the sole evidence. In the present case, since both the parties had agreed to proceed in the case by affidavits, thus the High Court was right in not allowing any party to contend that only affidavits could not prove a mala fide act.
The power to issues shares can be given for many reasons, one of them being to bring in adequate number of shareholders for the proper functioning of the business. In the process of issuing shares, if the Directors are being indirectly benefited by it, then the decision cannot be stuck down. Just because by deciding for the best interest of the company, the directors have incidentally been benefited, they cannot be assumed to have a mala fide intention. However, if such issuing of shares is done for any improper motive of the directors, then it would be irrelevant that such a decision was taken in the best interest of the company.
Between the “private companies” and “public companies” there exist a range of other companies like the private companies that have become public companies and such companies have certain proviso of a private company while being exempted from enjoying certain privileges of being a private company and NIIL belongs to the third category of the companies.
If a Director is alleged to be an “interested” person, then his direct concern or interest in the agreement must be disclosed and such interest should be much more than any emotional or friendly interest and mere friendly relations with the Directors that are directly concerned with the issues/ agreements, doesn’t make that person an “interested” person. Even if there exists an attorney-client relation between that person and an interested director, he won’t be considered an “interested” person.
Analysis of the case
The interpretation of the terms “oppression” and “mismanagement”:
Needle industries (India) v. Needle Industries Newey (India) Holding Ltd. became a landmark judgement on the matter of “oppression”, “mismanagement” and the rights of majority and minority shareholders. The court decided in favour of the minority shareholders as well as ensured that substantial justice be guaranteed to the majority shareholders that had to incur huge losses due to the acts of the minority shareholders. To see whether the court’s decision was accurate or not, we need to consider a number of relevant factors. The Judgement relied on an ample number of case laws and authorities to reach to a conclusion on a different aspect.
What formed the most important bulk of the judgement was the interpretation of the term “oppression” mentioned in Section 397 of the Companies Act.
The Judges’ interpretation of the term “oppression” :In the case of Seth Mohanlal Ganpatram v. Sayaji Jubilee Cotton & Jute Mills Co. Ltd.[15] it was said that a resolution passed by the directors may be oppressive and still not against the law while alternatively an resolution which is per se against the law could be passed for the best interest of the company. The judgement in the Needle case relied on the judgement in the case of Shanti Prasad Jain v Kalinga Tubes[16] and held a similar opinion that when there is an allegation is of oppression against the members of the company, then it is not sufficient to show only one act or separate acts which when considered separately constituted “oppression” but a series of events which formed a part of that act and thus led to oppression. The judges relied on the Halsbury’s Laws of England[17] to find the definition of “oppression” as an act that is “harsh, burdensome and wrongful”
However, it has to be noted that in this Judgement, the “Majority Rule” was overlooked. The majority rule is the basic feature of democracy and even while considering corporate democracy, the same rule has equal relevance. The other judgements touching upon similar facts have favoured the decision of the majority shareholders over the minority shareholders and have held an opinion that the company would face no challenges in its management, even if the minority shareholders exit highlighting that the majority shareholders have the right to buy the shares of the minority and the majority shareholders ought not be compelled to sell their shares. However, in this case if the Holding Company (majority shareholders) had been allowed to sell its shares to an India Company it was interested in involving in business with, that would have defeated the whole purpose of the provisions of the FERA Act regarding the reduction of the percentage of shares held by foreign shareholders from 60% to 40% as that would have ultimately placed 20% of the excess shares back to the hands of the Holding Company. Thus, the act of NIIL in moving forward with issuing shares to the existing shareholders only did not amount to oppression per se as it was in the best interest for the company and in compliance with the provisions of the FERA Act.
Even though the act of oppression was not proved, the Court, in order to ensure Substantial Justice, asked the Indian shareholders to buy the shares at a premium so as to make good the losses that the Holding Company had to incur due to the deliberate actions of NIIL. By this, a precedent was set that even oppression against the members cannot be proved, the Court has the discretion to see that justice is done to the party alleging oppression against them so as to keep them back in the position they would have been in had such an act of alleged oppression not taken place.
On the Intentions of the Directors while deciding for the best of the company:
Next, the judgement touched upon the point that while taking a decision for the best interest of the company if the Directors are incidentally benefitting from that decision then it cannot be concluded that the Director had mala fide intentions. For this, the judges were right by relying on the case of Hogg v Cramphorn Ltd[18] which embarked upon the fact that of the Directors issue shares to stop the majority from exercising power they won’t be held to have acted in bad faith and breached the fiduciary powers if they had acted in good faith for the best interest of the company, even if they incidentally benefitted from the same.
Even though the Court decided to dismiss the case petition, it was right in holding Devagnanam liable for the intentional late posting of the letter to the Holding Company so as to put the Holding Company in a position in which it could not possibly attend the meeting in which the issues of rights shares was to be discussed. This led to the conclusion that the holding of the meeting was illegal but as far the decision of the meetings were concerned, it cannot be stuck down as the proprietary rights of the shareholders were not affected. Thus, a precedent was set that so long the proprietary rights are not affected, a decision taken in a wrong way, but for the best interest of the company cannot be stuck down.
On the Majority rule:
The Foss V Harbottle[19] case which sets the rule of Supremacy of majority shareholders, was earlier said to be a pillar of company laws. However, the judgement of the Needles case diluted the importance of that rule due to which now the rule is not adhered to in most of the Indian corporate cases.
Conclusion
The Companies Act has been amended from time to time to incorporate new provisions to safeguard the interest of the shareholders. However, how efficiently these laws are being executed is still a matter of contention. The changes now lies in the hands of the judiciary to properly interpret the laws to meet the ends of justice. The Judgement in this case is now a landmark judgement which sets out several rules and reiterates the already-mentioned rules. The judgement has laid out that not all illegal acts are oppressive and neither are all oppressive acts illegal per se. To prove a case of oppression, the mala fide intention of the members to oppress the other party has to be proved. In the later Judgements that courts have however widened the scope of the meaning of “oppression”. In V.S. Rahi v Ram Chambeli[20], the Court had highlighted the requirement of “position of dominance” to form a case of oppression. In V.S Krishnan v Westfort High-tech Hospital Ltd., [21], the Court held that- what amounts to Oppression is fundamentally a question of fact.
This judgement, however did not confer to “majority rule” and had set out a clear example that any act done by the minority which incidentally reduces the majority to a minority, doesn’t imply the existence of oppression. The court reiterated the existence of a third category of companies and thus increased the scope of application of provisions of the Companies Act. The court also did not held back from ensuring substantial justice even though the case petition failed. Thus, this judgement has set out clear rules of what constitutes as “oppression” and shall serve as a precedent to similar future cases.
References:
[1] Indian Companies Act 1956
[2] Indian Companies Act 1956
[3] Indian Companies Act, 2013
[4] Needle Industries (India) v. Needle Industries Newey (India) Holding Ltd (1981) 51 CompCas 743 (SC)
[5] Indian Companies Act, 1956
[6] Foreign Exchange Regulation (Amendment) Act, 1993
[7] Indianize, Merriam Webster <https://www.merriam-webster.com/dictionary/Indianize > accessed on 7th July 2020
[8] Needle Industries (India) v. Needle Industries Newey (India) Holding Ltd (1981) 51 CompCas 743 (SC)
[9] Indian Companies Act 1967 s 299
[10] Companies (Court) Rules, 1959
[11] The Code of Criminal Procedure, 1973
[12] Nanalal Zaver v. Bombay Life Assurance 1950 AIR 172
[13] Plexcy v. Mills (1920) 1 Ch 77
[14] Nanalal Zaver v. Bombay Life Assurance 1950 AIR 172
[15] Mohanlal Ganpatram v. Sayaji Jubilee Cotton & Jute Mills Co. Ltd. (1964) 34 Comp Cas 777
[16] Shanti Prasad Jain v Kalinga Tubes AIR 1965 SC 1535
[17] Halsbury’s Laws of England, Vol.7, 4th Ed. , p.218
[18] Hogg v Cramphorn Ltd (1967) 1 Chancery 254, 260
[19] Foss V Harbottle (1843) 67 ER 189
[20] V.S. Rahi v Ram Chambeli 1984 1 SCC 612
[21] V.S Krishnan v Westfort High-tech Hospital Ltd 2008 3 SCC 363
