2013 (9) TMI 850 - HC - Companies Law

Oppression and mismanagemnt - Maintainability of Company s Petition u/s 399 - Whether the affairs of the holding company would include the affairs of the subsidiary company in a petition filed under sections 397, 398, 402 and 403 of the Act - Held that - The Company Law Board had rightly concluded that the company petition was essentially a petition against the holding company - Therefore the Company Law Board found that without even going into the merits of the case and ordering investigation into the affairs of the holding company, the court cannot definitely order investigation into the affairs of the subsidiary companies - In fact, if it was found, after hearing the petition that the order of investigation can be made into the affairs of the holding company, then the provisions of section 239 would come into play and it was for the inspectors, to be appointed by the Central Government, to decide as to whether the business of the subsidiary also required to be investigated Relying upon Micromeritics Engineers (P.) Ltd. Versus S. Munusamy 2004 (8) TMI 381 - HIGH COURT OF MADRAS . The Company Law Board had rightly stated that there need not be any direction and gave liberty to the respondent in case the respondent desires that there should be a direction for investigation into the affairs of any of the subsidiary company, it is always open to him to file separate applications in terms of section 214(2) read with section 235 of the Act - When this safeguard was given by the Company Law Board, it was not open for the respondent, at this stage, to contend that because the company application filed by him was a combined application, it had to be taken up together along with the main company petition when he had not complied with section 399(4) of the Act. Whether by impleading the subsidiary companies as the respondent, a shareholder of the holding company, without satisfying the provisions of section 399 of the Act in respect of the subsidiary companies can claim relief in respect of the subsidiary companies in terms of section 402 of the Act also - Held that - The respondent had not even made any allegations against the subsidiary company or claimed any relief against most of the subsidiary companies in the main company petition - the subsidiary companies cannot be included in the company petition - Hence, the order passed by the learned single judge, setting aside the order of the Company Law Board deleting the subsidiary companies from the array of parties, was not correct - Inasmuch as the subsidiary company cannot be made a party to the company petition. The holding company challenging that portion of the order of the Company Law Board rejecting certain preliminary objections raised by the appellant and against the order of the Company Law Board in not dealing with certain preliminary objections raised by the appellant and against certain directions given by the Company Law Board, as rightly pointed out by the learned single judge, the Company Law Board has not made any error in recognising the statutory right of the respondent herein under law to file a petition under section 214(2) read with section 235 of the Act - Further, in view of the fact that we have categorically held that the order of the Company Law Board ordering to delete the names of the subsidiary companies from the array of parties in the company petition and permitting the holding company to file objections relating to the objections made against them was valid.

Issues Involved:
1. Maintainability of the company petition against subsidiary companies.
2. Allegations of oppression and mismanagement.
3. Compliance with section 399 of the Companies Act.
4. Inclusion of subsidiary companies in the company petition.
5. Rights under sections 397, 398, and 235 of the Companies Act.
6. Lifting of the corporate veil.
7. Jurisdiction and powers of the Company Law Board.

Detailed Analysis:

1. Maintainability of the company petition against subsidiary companies:
The primary issue was whether a shareholder of a holding company can file a petition under sections 397 and 398 against subsidiary companies. The court held that the respondent, who was a shareholder in the holding company but not in most of the subsidiary companies, did not meet the requirements of section 399 of the Companies Act. Therefore, the petition against the subsidiaries was not maintainable.

2. Allegations of oppression and mismanagement:
The respondent alleged oppression and mismanagement by the majority group in the holding company and its subsidiaries. The court noted that the respondent had not made specific allegations or sought relief against many of the subsidiary companies. This indicated that the petition was aimed at tarnishing the image of the holding company rather than addressing genuine grievances.

3. Compliance with section 399 of the Companies Act:
Section 399 specifies the qualifications required to file a petition under sections 397 and 398. The court emphasized that the respondent did not meet these qualifications concerning the subsidiary companies. The court referenced the Supreme Court's decision in Ambay Cements, which stated that statutory requirements must be strictly followed.

4. Inclusion of subsidiary companies in the company petition:
The court held that the affairs of a holding company do not automatically include the affairs of its subsidiary companies. It was noted that the subsidiaries were independent entities, some of which were listed companies or had foreign collaborations. Therefore, the inclusion of subsidiaries in the company petition was not justified.

5. Rights under sections 397, 398, and 235 of the Companies Act:
The court clarified that while section 214(2) allows a shareholder of a holding company to seek an investigation into the affairs of a subsidiary under section 235, this does not extend to filing a petition under sections 397 and 398 against the subsidiary. The respondent could seek relief under section 235 but not under sections 397 and 398 for the subsidiaries.

6. Lifting of the corporate veil:
The respondent argued for lifting the corporate veil to treat the holding and subsidiary companies as a single economic unit. The court rejected this argument, stating that the subsidiaries were distinct entities with their own management and responsibilities. The court distinguished the present case from the precedent cited by the respondent, where the subsidiary was treated as a mere department of the holding company.

7. Jurisdiction and powers of the Company Law Board:
The court upheld the Company Law Board's decision to delete the names of the subsidiary companies from the array of parties in the company petition. The court found no reason to interfere with the Board's order, which was based on a correct interpretation of the law and the facts of the case.

Conclusion:
The court allowed the appeals filed by the holding company and its subsidiaries, setting aside the order of the learned single judge and restoring the Company Law Board's order. The court dismissed the appeal filed by the holding company challenging the Board's recognition of the respondent's statutory rights under section 214(2) read with section 235. The court directed the Company Law Board at Delhi to transmit the case files to the Company Law Board at Madras for expeditious disposal.

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