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Indian Case Summary

Needle Industries (India) Ltd., & … vs Needle Industries Newey (India) … on 7 May, 1981 – Case Summary

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In the case of Needle Industries (India) Ltd., & Ors. vs Needle Industries Newey (India) Holding Ltd. & Ors., a significant legal dispute arose concerning the Companies Act 1956, the Foreign Exchange Regulation Act 1973, and the conduct of company directors. The case was heard by the Supreme Court of India on 7 May 1981, with the judgment delivered by Y.V. Chandrachud.

Facts of the Case

The appellant, Needle Industries (India) Ltd. (NIIL), was incorporated as a private company under the Indian Companies Act 1913 on 20 July 1949. Initially, it was a wholly-owned subsidiary of Needle Industries (India) Ltd., Studley, England (NI-Studley). In 1963, NI-Studley and Newey Bros. Ltd., Birmingham, England (Newey) combined to form the respondent, Needle Industries-Newey (India) Holding Ltd. (the Holding Company). This resulted in the Holding Company acquiring 99.95% of the issued and paid-up capital of NIIL.

By virtue of the introduction of section 43A in the Companies Act in 1961, NIIL became a public company, as not less than twenty-five per cent of its paid-up share capital was held by a body corporate, the Holding Company. By 1971, about 40% of the share capital of NIIL came to be held by the Indian employees of the company and their relatives, and the balance of about 60% remained in the hands of the Holding Company.

Issues

The main issue arose when the Foreign Exchange Regulation Act 1973 came into force on 1 January 1974. This Act prohibited non-residents and non-citizens from carrying on any activity in India of a trading, commercial, or industrial nature without the permission of the Reserve Bank of India. As the Holding Company was a non-resident and its interest in NIIL exceeded 40%, NIIL had to apply for the permission of the Reserve Bank under this Act to continue its business. The Holding Company also had to apply for permission to continue to hold its shares in NIIL.

The Reserve Bank granted permission to NIIL to continue its business on the condition that it must reduce the non-resident interest from 60% to 40% within one year of the receipt of its letter. This led to a dispute between the Holding Company and the Indian shareholders of NIIL over who had the right to take up the shares which the Holding Company was no longer in a position to hold due to the directives issued by the Reserve Bank.

Court’s Observations

The court observed that the Indian shareholders, who took the rights shares at par when the value of those shares was much above par, should pay the difference to nullify their unjust enrichment at the cost of the Holding Company. The court also held that the meeting of the Board of Directors of NIIL on 2 May 1977, which decided to issue the rights shares at par and allot them exclusively to the Indian shareholders, was illegal as the Holding Company was denied an opportunity to exercise its option whether or not to accept the offer of right shares.

The court further observed that the acceptance of the offer of rights shares by the Holding Company would have resulted in a violation of the provisions of the Foreign Exchange Regulation Act and the directive of the Reserve Bank. Therefore, no grievance could be made by the Holding Company that it was deprived of an opportunity to accept the offer due to not receiving it in time.

The Supreme Court, therefore, allowed the appeals and held that the Indian shareholders should pay a sum of Rs. 8,54,550 to the Holding Company, pro rata, and that the 16,000

rights shares which were allotted 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 court also directed that any interim dividend or further dividend received by the Indian shareholders on the 16,000 rights shares for the year ending December 31, 1977, should be repaid by them to NIIL, which would then distribute the same as if the issue and allotment of the rights shares were not made until after December 31, 1977.

The court also made observations on the conduct of the directors of NIIL. It was noted that 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 formed the requisite quorum were disinterested in the business of the meeting. The court held that the directors acted in the best interests of NIIL, in the matter of the issue of rights shares, and followed a course which they had no option but to adopt. Their action was solely actuated by the consideration as to what was in the interest of the company.

The court also noted that the Holding Company had failed to make out a case of oppression. The court held that the resolution passed in the meeting of April 6 for the issue of rights shares at par to the existing shareholders of NIIL did not constitute an act of oppression against the Holding Company. The court observed that the Indian shareholders, who took the rights shares at par when the value of those shares was much above par, should pay the difference to nullify their unjust enrichment at the cost of the Holding Company.

In conclusion, the Supreme Court allowed the appeals and held that the Indian shareholders should pay a sum of Rs. 8,54,550 to the Holding Company, pro rata, and that the 16,000 rights shares which were allotted 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 court also directed that any interim dividend or further dividend received by the Indian shareholders on the 16,000 rights shares for the year ending December 31, 1977, should be repaid by them to NIIL, which would then distribute the same as if the issue and allotment of the rights shares were not made until after December 31, 1977.