2008 (3) TMI 489 - HC - Companies Law

Lifting of a corporate veil - The single economic unit argument - Can, in India, a subsidiary of a subsidiary of a holding company be treated as the subsidiary of the holding company even if the holding company is not registered in India and functions in India, through its subsidiary, which is not registered in India, as a company under the Companies Act, 1956, but which, in turn, functions through its subsidiary, which is registered in India, as a company under the Companies Act, 1956 ? Held that - From the observations made on the concept of single economic unit by Professor Gower, it clearly follows that a facade, concealing the true state of affairs, is not a condition precedent for lifting of a corporate veil. In a given case, the principle of single economic unit can be taken into account in determining the economic reality in the expanding horizon of global economy. There is a presumption that a subsidiary will act in accordance with law, but according to the conscience of its parents. Unless, therefore, this presumption is rebutted, it is proper for the parent and the subsidiary to be treated as single economic unit. Considered thus, there can be no escape from the conclusion that the conditions, stipulated by the NIT, made respondent No. 4 eligible to offer the products of its parent company. What crystallises from the discussions held, as a whole, is that this writ petition suffers from suppression of materials facts, contain consciously made incorrect, false and misleading statements in order to persuade the court to interfere with the selection process and even when the writ petitioners were pointed out to have suppressed material facts, made incorrect, colourised, false and misleading statements, the writ petitioners remained unrepentant and continued to pursue their line of action by offering explanations, which the materials on record do not support ; rather, clearly belie. The writ petitioners were also ineligible to participate inasmuch as the pacemaker, which they claim to have offered, did not meet the specifications contained in the NIT. No deviation, going to the root of the selection process, could be shown to have taken place in the act of selecting the pacemaker, in question. The writ petitioners have also failed to show that in the context of the facts and circumstances of the present case, respondent No. 4 was not manufacturer of the pacemaker, which has been selected. Even if one were to assume, for a moment, that respondent No. 4 is not a manufacturer of the pacemaker aforementioned, the writ petitioners failed to show that in the light of the terms and conditions, specified in the NIT, respondent No. 4 was not eligible to bid in the tender process as a subsidiary of its holding company. W.P. dismissed.

Summary

Issues Involved:
1. Whether a subsidiary of a subsidiary of a holding company can be treated as the subsidiary of the holding company.
2. Whether the activities of a wholly owned subsidiary can be treated as the activities of its holding company.
3. Allegations of suppression of material facts and making false and misleading statements by the petitioners.
4. Legality of the tender process and the selection of respondent No. 4.
5. Whether respondent No. 4 is a manufacturer of pacemakers and eligible to participate in the tender process.

Issue-wise Detailed Analysis:

1. Whether a subsidiary of a subsidiary of a holding company can be treated as the subsidiary of the holding company:
The court referred to Section 4 of the Companies Act, 1956, which clarifies that a subsidiary of a subsidiary of a holding company is considered a subsidiary of the holding company. The illustration appended to Section 4 supports this interpretation. Thus, respondent No. 4, being a wholly owned subsidiary of the Netherlands company, which is a wholly owned subsidiary of the parent American company, is deemed a subsidiary of the parent American company.

2. Whether the activities of a wholly owned subsidiary can be treated as the activities of its holding company:
The court discussed the principle of lifting the corporate veil, citing cases such as Salomon v. A. Salomon and Co. Ltd., DHN Food Distributors Ltd. v. London Borough of Tower Hamlets, and State of Uttar Pradesh v. Renusagar Power Co. The court concluded that when a subsidiary is wholly owned and controlled by its parent company, the activities of the subsidiary can be treated as those of the parent company. The NIT's stipulation that a subsidiary can supply pacemakers if it provides a lifetime warranty from the parent company further supports this view.

3. Allegations of suppression of material facts and making false and misleading statements by the petitioners:
The court found that the petitioners had suppressed material facts and made false and misleading statements. The petitioners initially claimed ignorance of the reasons for not opening the tender papers on May 28, 2007, and the subsequent date of opening. However, evidence showed that the petitioners' representative was present on May 29, 2007, when the tender papers were opened. The court concluded that the petitioners had misled the court and committed perjury.

4. Legality of the tender process and the selection of respondent No. 4:
The court examined the technical committee's findings and the specifications mentioned in the NIT. It found that the petitioner-company's offered models did not meet the required specifications, whereas respondent No. 4's product satisfied all the minimum criteria and had additional features. The selection of respondent No. 4's product was found to be in public interest, and there was no evidence of arbitrariness, irrationality, or illegality in the decision-making process.

5. Whether respondent No. 4 is a manufacturer of pacemakers and eligible to participate in the tender process:
The court considered the argument that respondent No. 4, as a wholly owned subsidiary of the parent American company, should be treated as a manufacturer of the pacemakers. The NIT allowed a subsidiary to bid if it provided a lifetime warranty from the parent company. Respondent No. 4 had submitted such a warranty. The court concluded that respondent No. 4 was eligible to participate in the tender process as a manufacturer.

Conclusion:
The writ petition was dismissed with costs of Rs. 10,000. The court found no merit in the petitioners' claims, determined that respondent No. 4 was eligible to participate in the tender process, and upheld the selection of respondent No. 4's product.