Needle Industries Ltd. v. Needle Industries (India) Holding Ltd.

The present Corporate World suffers a lot in the shareholders’ disputes. This not only happens specifically in India but this applies to the whole world. Allegations done against the majority shareholders by the minority shareholders have a continuing and serious effect in courtrooms throughout the world. Indian law provides for various reliefs for oppression and mismanagement but how effective they are is a point of debate.

Key Provisions

Section 43A in The Companies Act, 1956, Section 81 in The Companies Act, 1956, Section 29 in The Companies Act, 1956, Section 3(1)(iii) in The Companies Act,1956, Section 397 in The Companies Act, 1956, Section 398 in The Companies Act, 1956.

Introduction 

The case is between the foreign majority shareholder of the company and the Indian minority shareholders of the company where the Indian minority shareholders of the company appointed an additional director which is against the rule of the company. First, the case was adjudicated in High Court of Madras after the order of the High Court of Madras Needle Industries Ltd. went for an appeal in the Supreme Court of India. By fully observing the scenario the Supreme Court of India gave their decision. 

Background of the case

In this case, the foreign majority alleged oppression by the Indian minority shareholders as the minority appointed additional directors and issued further shares. The Company Law Board [hereinafter “CLB”] and the High Court held such acts of the minority shareholder as oppressive. In the appeal, however, the Supreme Court observed that even if a case of oppression fails, the court has the power to do substantial justice in the matter and therefore on the facts and circumstance of the case, the Supreme Court while rejecting the plea of oppression, directed the minority Indian shareholders to purchase shares held by the majority foreign shareholders.

Facts

Under Section 397 of the Companies Act, 1956 the foreign majority shareholders of the company, (which was a holding company) filed a case against the Indian minority shareholders of the company, (which was a subsidiary of the holding company) alleging an act of “oppression” against them.

The allegation of the majority was based on the deliberate act of the minority shareholders which includes the appointment of an additional director (Silverstone) by the existing board of directors under an Annual General Meeting (AGM) and rightful issuance of the shares to the Indian group of shareholders at par which was far below their market price.

The plea of foreign majority shareholders was accepted by the division bench of Madras High Court, stating that such an act to be oppressive and against the interest of the company. The bench also suspended the existing Board of Directors and even removed the Managing Director (Devagnanam) and appointed an Interim Board. A consequential direction was also issued concerning acquire the company 

Issues

1. Whether the act of Indian minority shareholders appointing additional directors and issuing of rightful shares to the Indian group of shareholders amounts to a case of “oppression” against the foreign majority company? (Under Section 397 of the Companies Act, 1956)
2. Whether the board abused for fiduciary powers in deciding upon the issue of the right track?

Related Provisions

Section 43A in The Companies Act, 1956 says about Private companies to become a public company in certain cases.

Section 81 in The Companies Act, 1956 says about the further issue in the capital. 

Section 29 in The Companies Act, 1956 says about the Form of articles in the case of other companies. The articles of an association of any company, not being a company limited by shares, shall be in such one of the Forms in Tables C, D and E in Schedule I as may be applicable, or in a form as near thereto as circumstances admit: Provided that nothing in this section shall be deemed to prevent a company from including any additional matters in its articles in so far as they are not inconsistent with the provisions contained in the Form in any of the Tables C, D, and E, adopted by the company.

Section 3(1)(iii) in The Companies Act,1956 says that “private company” means a company which, by its articles,-

1. Restricts the right to transfer its shares, if any:
2. Limits the number of its members to fifty not including.

Section 397 in The Companies Act, 1956 says about the Application to Company Law Board for relief in cases of oppression.

Section 398 in The Companies Act, 1956 says about the Application to Company Law Board for relief in case of mismanagement.

Related cases

1. Dale and Carrington Investment (P) Ltd. v.P.K.Prathapan, (2005) 1 SCC 212
2.   Sangramsinh P. Gaekwad and Ors. v. Shantadevi P.Gaekwad (Dead) through L.R.s and Ors, (2005) 11 SCC 314 
3. M.S.D.C. Radharamanan v.M.S.D. Chandrasekara Raja and Anr, AIR 2008 SC 1738
4.  Shri Gurmit Singh v. Polymer Papers Ltd., (2005) 123 Comp. Cas. 486
5. Chander Mohan Jain v. CRM Digital Synergies P. Ltd., (2008) 142 Comp. Cas. 658 
6. Probir Kumar Misra v. Ramani Ramaswamy and Ors., CDJ 2009 MHC 3785
7. Namtech Consultants Pvt. Ltd. v. GE Termometrics India Pvt. Ltd., ILR 2008 Kar 1187 

Judgment

When the dispute was presented for the adjudication before the Supreme Court of India, based on the merits, it held that alleged acts of the minority shareholders do not amount to oppression. The vital highlights of the judgment are mentioned below:

1. An illegal act (about the affairs of the company) alone would not amount to oppression. But when an illegal act combines with the ill intention of doing such an act would amount to oppression.
2. An isolated act which is prima facie contrary to the law enforced at the time, may not necessarily and by itself suggest that the very law was violated with a mala fide intention of such violation was harsh, burdensome, and wrongful. 

Rather, a series of such illegal acts committed one after the other can lead to the conclusion, that they were all part of the equivalent transaction whose object was to commit oppression against whom those acts directed.

• In an instance where a group incidentally got control over the affairs of the company through its directors, does not amount to the abuse of fiduciary powers by such directors. The objection can be raised when the use of such powers are meant merely for an extraneous purpose of gaining control over the company
• This is an appeal in which the High Court declined to examine the appeal on merits on the ground that there is a delay of 49 days in filing the appeal. The appellant was in jail. He has submitted an application explaining the circumstances in which the delay occurred in filing the appeal. Having regard to those circumstances, we think that the High Court ought not to have dismissed the appeal on the only ground that the appeal is barred by limitation. There is good ground for condoning the delay. Accordingly, we allow this appeal, set aside the order of the High Court dismissing the appeal as time-barred, and remit the case to the High Court to admit it as appeal and dispose it of on merits. Liberty to move the High Court for bail.

Apart from these major highlights the court also directed the Indian minority shareholders to purchase shares of the foreign majority shareholders to make good of the loss caused to them and achieve substantial justice over the dispute.

Comment

This case is one of the landmark judgments in corporate law. However, in this case, the company’s majority shareholders are from foreign countries so there is a very possibility of bias being existed towards the Indian minority shareholders. Because of the belief that the company can still survive without the minority shareholders there haven’t been any other decisions similar to this in any other case. 

The proper plaintiff rule which was laid down under the Foss vs Harbottle, (1843) 67 ER 189 is based on the supremacy of majority shareholders. This rule is now being diluted and not followed in its strict sense especially in India.  But in earlier times this rule was considered as one of the pillars of corporate governance.

In turn, expressing the intention of the legislature of safeguarding the interests of minority shareholders our government laid down several rights of minority shareholders in the latest Indian Companies Act, 2013. But the challenge lies wholly on the enforcement mechanism of these rights by giving importance to the minority shareholders in the management of the company.

Frequently Asked Questions (FAQs)

1. Is there any relief done by our government for the shareholders disputes?
2. Is the “proper plaintiff rule” is still being followed?
3. How did the supreme court explained the word “oppression”?

References

1. http://docs.manupatra.in/newsline/articles/Upload/3AFDCE22-7A59-4514-BDCF-9CA926784AC9.pdf
2. https://indiankanoon.org/doc/292160/
3. http://www.cdjlawjournal.com/common.php