1990 (10) TMI 286 - HC - Companies Law

Summary

Issues Involved:
1. Whether the collaboration agreement (exhibit D-1) came to an end consequent on the alleged violation of clauses 6(a), (b), and (c) thereof or not?
2. Whether the respondent continued to be a shareholder of the appellant company or not?

Issue-Wise Detailed Analysis:

1. Termination of Collaboration Agreement:
The primary issue was whether the collaboration agreement (exhibit D-1) was terminated due to a violation of clauses 6(a), (b), and (c). The agreement between Hackbridge and Hewittic Electric Company and the defendant company stipulated that Hackbridge would provide technical know-how and not render technical assistance to any other entity in India. The defendant contended that the agreement was breached when Hackbridge became a subsidiary of General Electric Company (GEC) of the UK, which had a subsidiary in India, General Electric Company of India Limited, manufacturing transformers in competition with the defendant.

The court examined whether the change in Hackbridge's status to a subsidiary of GEC, UK, constituted a breach of clause 6(a) of the agreement. The trial judge found no direct evidence of technical know-how being transferred to any other company in India and concluded that there was no breach. However, the appellate court noted that the trial judge failed to consider whether GEC India Limited's activities could be indirectly attributed to Hackbridge, thus potentially breaching the agreement. The appellate court emphasized the need to pierce the corporate veil to determine if GEC India Limited was acting as an agent of GEC, UK, and thereby indirectly breaching the agreement.

2. Shareholding Status:
The second issue was whether the respondent continued to be a shareholder of the appellant company. Hackbridge had acquired 12,000 equity shares in the defendant company and received dividends until November 1970. The defendant argued that Hackbridge's entitlement to dividends ceased when it became a subsidiary of GEC, UK, alleging that the collaboration agreement was terminated at that point.

The trial judge held that the defendant had acquiesced to the changes in Hackbridge's constitution and continued to honor the agreement, thus the plaintiff remained entitled to dividends. The appellate court, however, found that the trial judge did not adequately consider whether the changes in Hackbridge's status and the subsequent actions of GEC, UK, and GEC India Limited affected the plaintiff's entitlement to dividends.

Additional Considerations:
The court also addressed the provisions of sections 39 and 64 of the Indian Contract Act, which deal with the rescission of contracts and the consequences of a party refusing to perform its obligations. The trial judge's interpretation of these provisions was found to be flawed, as he presumed acquiescence by the defendant without sufficient evidence.

The appellate court highlighted the need for a closer examination of the relationship between the holding company (GEC, UK) and its subsidiaries (Hackbridge and GEC India Limited) to determine if they functioned as a single economic entity, which could affect the interpretation of the collaboration agreement and the plaintiff's entitlement to royalties and dividends.

Conclusion:
The appellate court concluded that the trial judge's decision was based on an incomplete analysis and remanded the case for rehearing. The trial judge was directed to frame specific issues regarding the relationship between the holding company and its subsidiaries, provide an opportunity for the parties to present further evidence, and reconsider the case in light of the appellate court's observations. The judgment and decree of the trial judge were set aside, and no order as to costs was made.