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"subsidiary company" or "subsidiary" - Companies Law Ready Reckoner - Companies LawExtract As per section 2(87) of the Companies Act, 2013 , unless the context otherwise requires. subsidiary company or subsidiary , in relation to any other company (that is to say the holding company), means a company in which the holding company- ( i ) controls the composition of the Board of Directors; or ( ii ) exercises or controls more than one-half of the total voting power either at its own or together with one or more of its subsidiary companies: Provided that such class or classes of holding companies as may be prescribed shall not have layers of subsidiaries beyond such numbers as may be prescribed. Explanation. -For the purposes of this clause,- (a) a company shall be deemed to be a subsidiary company of the holding company even if the control referred to in sub-clause (i) or sub-clause (ii) is of another subsidiary company of the holding company; (b) the composition of a company's Board of Directors shall be deemed to be controlled by another company if that other company by exercise of some power exercisable by it at its discretion can appoint or remove all or a majority of the directors; (c) the expression company includes any body corporate ; (d) layer in relation to a holding company means its subsidiary or subsidiaries; As per Cox And Kings Ltd. Versus Sap India Pvt. Ltd. Anr. - 2023 (12) TMI 427 - SUPREME COURT (LB) Group of Companies Doctrine i. Separate legal personality 82. The phenomenon of group companies is the modern reality of economic life and business organisation. Group companies are a set of separate firms linked together in formal or informal structures under the control of a parent company . The group companies can be defined in the Indian context as an agglomeration of privately held and publicly traded firms operating in different lines of business, each of which is incorporated as a separate legal entity, but which are collectively under the entrepreneurial, financial, and strategic control of a common authority, typically a family, and are linked by trust-based relationships forged around a similar persona, ethnicity, or community. , Jayati Sarkar, Business Groups in India in Asli Coplan, Takashi Hikino, and James Lincoln (eds) The Oxford Handbook of Business Groups (2010) 299 A group company involving the parent and subsidiary companies are created for myriad purposes such as limiting the liability of the parent corporation, facilitating international trade, entering into business ventures with investors, establishing domestic corporate residence, and avoiding tax liability. 83. The principle of separate legal personality has been the cornerstone of corporate law. In Salomon v. Salomon, [1897] AC 22 the House of Lords famously observed that a company is at law a different person altogether from the promoters, directors, shareholders, and employees. The principle of separate legal personality equally applies to corporate groups. A parent company is not generally held to be liable for the actions of the subsidiary company of which it is a direct or indirect shareholder. The Companies Act, 2013, 2013 Act has statutorily recognized a subsidiary company as a separate legal entity., Balwant Rai Saluja Versus Air India ltd. - 2014 (8) TMI 1084 - Supreme Court Section 2(46) of the 2013 Act defines a holding company as a company of which one or more other companies are subsidiary companies. Section 2(87) defines subsidiary company to mean a company in which the holding company exercises control over the composition of the Board of Directors and has a controlling interest of at least 50 percent over the voting rights. Although a holding company owns a controlling interest in the subsidiary company, they are considered as separate legal entities. Group companies structures allow multinational corporations to structure their businesses at both the national and international level to leverage better returns for the investors and ensure business growth of the corporation. Principles of corporate separateness- 85. The separateness of corporate personality will be ignored by courts in exceptional situations where a company is used as a means by the members and shareholders to carry out fraud or evade tax liabilities. If the court, on the basis of factual evidence, determines that the company was acting as an agent of the members or shareholders, it will ignore the separate personality of the company to attribute liability to the individuals. In Tata Engineering Locomotive Co. Ltd. Versus State of Bihar - 1964 (2) TMI 32 - Supreme Court , the issue before a Constitution Bench of this Court was whether a company could be treated as a citizen for the purposes of maintaining a writ petition under Article 32 of the Constitution. The company urged that the corporate veil should be lifted to treat the petition as one filed by the shareholders. This Court held that the veil of a corporation can be lifted where fraud is intended to be prevented or trading with an enemy is sought to be defeated. 86. In case of group companies, there may arise situations where a holding company completely dominates the affairs of the subsidiary company , to the extent of misusing its control, to avoid or conceal liability. In such situations, the courts apply the doctrine of alter ego or piercing the corporate veil to disregard the corporate separateness between the two companies and treat them as a single entity., Gary Born (n 44) 1545. In Life Insurance Corpn. of India Versus Escorts Ltd. - 1985 (12) TMI 289 - Supreme Cour t a Constitution Bench of this Court noted that the principle of distinct legal personality may be ignored where the associate companies are inextricably connected as to be, in reality, part of one concern. Speaking for the Bench, Justice O Chinnappa Reddy observed: 87. The application of the doctrine of lifting the corporate veil rests on the overriding considerations of justice and equity., Delhi Development Authority v. Skipper Construction Co. (P) Ltd., (1996) 4 SCC 662 Often, the courts pierce the corporate veil when maintaining the separateness of corporate personality is found opposed to justice, convenience, and public interests., Kapila Hingorani v. State of Bihar, Kapila Hingorani Versus State of Bihar - 2003 (5) TMI 359 - Supreme Court . In Balwant Rai Saluja v. Air India, this Court cautioned that the principle of piercing the corporate veil should be applied in a restrictive manner and only in scenarios where it is evident that the subsidiary company was a mere camouflage deliberately created by the holding company for the purpose of avoiding liability. It was further observed that the intent of piercing the corporate veil must be such that would seek to remedy a wrong done by the holding company . In the context of arbitration, the principle of piercing the corporate veil has been sparingly used because it disregards the intention of the parties by emphasizing on the overriding considerations of good faith and equity to bind the non-signatories to an arbitration agreement. 88. Moreover, since the companies in a group have separate legal personality, the presence of common shareholders or directors cannot lead to the conclusion that the subsidiary company will be bound by the acts of the holding company . The statements or representations made by promoters or directors in their personal capacity would not bind a company . Similarly, the mere fact that the two companies have common shareholders or a common Board of Directors will not constitute a sufficient ground to conclude that they are a single economic entity. The single economic entity or the single economic unit theory imposes general enterprise liability on the corporate group. In D H N Food Distributors Ltd v. Tower Hamlets London Borough Council, [1976] 1 WLR 852 (2) , Lord Denning held that a group of three companies should be treated as a single economic entity on the basis of two factors: first, the parent company owned all the shares of the subsidiary companies to the extent that it controlled every movement of the given subsidiary companies; and second, all the three companies in the group virtually acted as partners and could not be treated separately. Thus, the determination of whether two or more companies constitute a single economic entity depends upon the concerted efforts of the companies to act in pursuance of a common endeavour or enterprise. 89. From the above discussion, we can infer that entities within a corporate group have separate legal personality, which cannot be ignored save in exceptional circumstances such as fraud. The distinction between a parent company and its subsidiary is fundamental, and cannot be easily abridged by taking recourse to economic convenience., Bank of Tokyo v. Karoon, (1986) 3 All ER 468 Legally, the rights and liabilities of a parent company cannot be transferred to the subsidiary company, and vice versa, unless, there is a strong legal basis for doing so.
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