2002 (6) TMI 439 - HC - Companies Law

Summary

Issues Involved:
1. Scope of the expression "affairs of the company" in sections 397 and 398 of the Companies Act, 1956.
2. Whether the expression includes the affairs of subsidiaries of the holding company.
3. Whether a shareholder of the holding company can seek relief against subsidiaries u/s 402.
4. Jurisdiction of the Company Law Board (CLB) to decide these questions as preliminary issues.

Summary:

1. Scope of "Affairs of the Company" in Sections 397 and 398:
The court examined whether the term "affairs of the company" in sections 397 and 398 of the Companies Act, 1956 includes the affairs of subsidiaries. The appellant argued that the holding company and its subsidiaries function as a single economic unit, and thus, the affairs of the subsidiaries should be considered part of the holding company's affairs. The court referred to various judgments, including those of the Allahabad and Calcutta High Courts, which supported the view that the affairs of a holding company could include those of its subsidiaries, depending on the facts of each case.

2. Inclusion of Subsidiaries' Affairs:
The court noted that the CLB had erred in holding that the expression "affairs of the company" does not include the affairs of subsidiaries. The court emphasized that the determination of whether the affairs of the holding company include those of the subsidiaries should be based on the specific facts and circumstances of each case. The court cited the Allahabad High Court's decision in Life Insurance Corporation of India v. Hari Das Mundhra, which held that the affairs of a subsidiary could be considered part of the holding company's affairs if the subsidiary functions as a branch or department of the holding company.

3. Relief Against Subsidiaries u/s 402:
The appellant contended that the CLB should have allowed the parties to lead evidence on the issues in dispute rather than deciding them piecemeal. The court agreed, stating that the CLB should not have deleted the names of the subsidiaries and their directors from the array of parties at the preliminary stage. The court held that the CLB has the power to grant relief under sections 397, 398, and 402, which could include the affairs of subsidiaries if warranted by the facts of the case.

4. Jurisdiction of the CLB:
The court criticized the CLB's decision to uphold the preliminary objection and delete the names of the subsidiaries from the array of parties. The court held that the CLB should have considered the allegations and evidence in their entirety before making such a determination. The court emphasized that the CLB has wide powers under sections 397 and 398, and it should not restrict its jurisdiction by excluding subsidiaries from the scope of these sections.

Conclusion:
The court set aside the CLB's order directing the deletion of the names of the subsidiaries and their directors from the array of parties in the company petition. The court allowed the appeal, holding that the appellant is entitled to costs. The court directed that the matter be decided on its merits, taking into account the allegations and evidence presented by the parties.