1980 (7) TMI 169 - HC - Companies Law

Subsidiary Appointment of directors and proportion of those who are to retire by rotation Inter-corporate investment Oppression and mismanagement -Powers of Government to prevent

Issues Involved:
1. Whether the petitioner-company is the holding company and Poonam Hotels Ltd. its subsidiary.
2. Whether the amendment of the articles of association of Poonam Hotels offends the provisions of sections 255, 256, and 257 of the Companies Act.
3. Whether the Department of Company Affairs' directive for Oriental Ltd. to "disinvest" their shareholding in Poonam Hotels is valid.
4. Whether there was a delay in filing the petition by Oriental Ltd.

Issue-wise Detailed Analysis:

1. Whether the petitioner-company is the holding company and Poonam Hotels Ltd. its subsidiary:
The court examined whether Oriental Ltd. is the holding company of Poonam Hotels Ltd. under the definitions provided in section 4 of the Companies Act. According to section 4, a company is deemed to be a subsidiary if the other company controls the composition of its board of directors or holds more than half in nominal value of its equity share capital. Oriental Ltd. had the power to appoint a majority of the board of directors of Poonam Hotels as per article 139A of the articles of association, which was amended pursuant to an agreement dated August 19, 1975. This power was exercised by Oriental Ltd. by appointing five directors on the board of Poonam Hotels, thereby establishing the relationship of a holding company and subsidiary company. The court concluded that Poonam Hotels became a subsidiary of Oriental Ltd. in terms of section 4(1)(a) read with section 4(2) of the Act.

2. Whether the amendment of the articles of association of Poonam Hotels offends the provisions of sections 255, 256, and 257 of the Companies Act:
The Department of Company Affairs contended that the amendment of the articles of association of Poonam Hotels, which allowed Oriental Ltd. to appoint directors, was contrary to sections 255, 256, and 257 of the Act. However, the court noted that section 255(1)(b) includes the phrase "save as otherwise expressly provided in this Act," which excludes the application of section 255 where other express provisions exist. Section 4(2) is an express provision that allows the appointment of directors on the board of a subsidiary by the holding company, thus overriding section 255. The court held that the amendment did not contravene sections 255, 256, and 257, as section 4(2) provided the necessary express provision for such appointments.

3. Whether the Department of Company Affairs' directive for Oriental Ltd. to "disinvest" their shareholding in Poonam Hotels is valid:
The Department of Company Affairs directed Oriental Ltd. to disinvest its excess shareholding in Poonam Hotels, claiming a violation of section 372 of the Act. The court found that section 372(14)(d) exempts investments by a holding company in its subsidiary from the restrictions of section 372. Since Poonam Hotels was deemed a subsidiary of Oriental Ltd., the investment did not contravene section 372. Consequently, the court quashed the department's directive to disinvest.

4. Whether there was a delay in filing the petition by Oriental Ltd.:
The department argued that there was a delay in filing the petition. The court noted that Oriental Ltd. had requested the government to reconsider its decision, and the final decision was communicated on July 5, 1977. The petition was filed on September 17, 1977, which the court did not consider to be an unreasonable delay. Therefore, the argument of delay was not accepted.

Conclusion:
The writ petition was accepted, and the decisions of the Department of Company Affairs contained in their letters dated July 5, 1977, and December 6, 1975, were quashed. The parties were left to bear their own costs.

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