9911796707
TMI Blog1971 (3) TMI 78X X X X Extracts X X X X X X X X Extracts X X X X ..... other applicable provisions, if any, of the Companies Act, 1956, the company hereby sanctions investment by it in the shares of the Swadeshi Polytex Ltd., Kanpur, to the extent of the aggregate face value of Rs. 1 crore by way of subscribing and/or purchasing to the extent of 10,00,000 equity shares of the value of Rs. 10 each at par on such terms and conditions as the board of directors think fit notwithstanding the fact that the investment in the shares of the said Swadeshi Polytex Ltd. exceeds 10 per cent. of the subscribed capital of the said Swadeshi Polytex Ltd. and shall exceed 30 per cent. of the subscribed capital of this company and the board of directors of the company be and are hereby authorised to do and/ or cause to be done all such acts, deeds or things as they may think expedient for the purpose. The explanatory statement annexed to the said notice stated : The company had received a letter of intent from the Government of India for establishment of a new undertaking for the manufacture of polyester fibre. As a considerable amount of capital will have to be raised it was considered expedient to promote a new company.............Accordingly a company under the nam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent stated : "The letter of intent which has been revalidated by the Central Government has been transferred by the Central Government to the name of Swadeshi Polytex Ltd. and accordingly the plant is being put up by them at Ghaziabad in collaboration with Messrs. Vickers Zimmer AG. Frankfurt. Terms of collaboration have been approved by the Central Government and the work has already commenced. The plant is likely to go into production in early 1973." The petitioner instituted a representative suit against the respondent-company and its directors for a declaration that the notice dated September 14, 1970, and the explanatory statement annexed thereto convening a general meeting of the respondent-company for the purpose of passing the resolution set out in the said notice were void and the said resolution, if passed, is void and inoperative and of no effect and for a permanent injunction restraining the respondents from holding any meeting pursuant to the said notice or giving any effect to the resolution if passed. The present application has been made in aid of the suit. On the 12th October, 1970, the said resolution was unanimously passed at a general meeting held in pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which the question arises as to whether this part does or does not apply to such undertaking; .......... 22. Establishment of new undertakings. (1) No person or authority, other than Government, shall, after the commencement of this Act, establish any new undertaking which, when established, would become an interconnected undertaking or an undertaking to which clause ( a ) of section 20 applies except under, and in accordance with the previous permission of the Central Government. (2) Any person or authority intending to establish a new undertaking referred to in sub-section (1) shall, before taking any action for the establishment of such undertaking make an application to the Central Government in the prescribed form for that Government's approval to the proposal of establishing any undertaking................" The respondent-company has a subsidiary of the name of Swadeshi Mining and Manufacturing Ltd. It is conceded that the undertaking of the subsidiary company is an inter-connected undertaking within the meaning of the statute. It is clear that section 22 is not attracted to an undertaking unless its own assets or its own assets together with the assets of its inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sociation, a group, or a corporate body, not with its facade. The statute seeks to tear the veil and not merely of corporate bodies. It aims at demolition of fictions. It is concerned with the actual magnitude of concentration of economic power, no matter how the concentration is achieved, by creation of partnerships, associations of persons or corporate bodies, or by taking recourse to devices or subterfuges. It is not among the objects of the statute, and it is certainly against its spirit, to endorse or sanction the validity of fictions. If the values of the assets of the holding company and of its subsidiary have to be added for the purpose of determining the degree of concentration of economic power, what ought to be considered is the real value of the total assets. Once the assets of the holding and of the subsidiary company are treated as one, the shares of the subsidiary company held by the holding company cease to be real assets and the question of valuing those shares does not arise. This will become clear if one visualises amalgamation of the subsidiary company with the holding company in which case the shares of the subsidiary company held by the holding company have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich he is a shareholder to restrain it from committing an illegal act or from questioning the sufficiency or validity of the notice of a resolution. Here the petitioner is not asking for an injunction restraining the respondent-company from acquiring shares of the polytex company; he is contending that the notice of the meeting at which the resolution proposing the acquisition of shares was passed was invalid and asking for an injunction restraining the respondent-company from implementing the resolution. A shareholder is competent to ask for such an order. In that view of the matter, I reject the contention that the petitioner has no locus standi to make the application. In clause ( v ) of section 2 of the Act the word "undertaking" has been defined to mean an undertaking which is engaged in the production, supply, distribution or control of goods of any description or the provision of services of any kind. Therefore, an "undertaking" in the sense of the statute, has to be an undertaking in its grammatical signification. The Oxford English Dictionary assigns to the word "undertaking" the meaning of a "a thing undertaken or attempted". The word does not mean the owner of a thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1956. Mr. Prabir Sen, counsel for the petitioner, strongly relied on paragraph (d) of sub-clause ( iii ) of clause ( g ) of section 2. The term, "control", he argued, is of the widest amplitude. He relied on Commissioner of Income-tax v. Nandlal Gandalal [1960] 40 ITR 1, 7 ; [1960] 3 SCR 620 ; AIR 1960 SC 1147 , where at page 1150, the court observed : "It is settled, we think, that the expression ' control and management' means de facto control and management and not merely the right or power to control and manage." Mr. S.C. Sen, on behalf of the respondent-company, relied on British American Tobacco Co. Ltd. v. Inland Revenue Commissioners [1943] AC 335 ; [1943] 1 All. ER 636 ; 29 TC 49 ; 11 ITR (Supp.) 29 (HL) and urged that "control", in the context of section 2( g ) of the Monopolies Act, can only mean the control of the majority of the voting power in a company. He submitted that the words "any other manner" in paragraph ( d ) refer to the machinery through which the control of the majority of voting power is exercised. "Control", he argued, does not mean minority control or managerial control. I am inclined to agree that "control", in the context of paragra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ven directors. There are three common directors, namely, Mr. Rajaram Jaipuria, Mr. Sitaram Jaipuria and Mr. R. Chaudhuri. Mr. Rajaram Jaipuria is the managing director of the respondent-company and Mr. Sitaram Jaipuria is the managing director of Swadeshi Polytex Ltd. Be that as it may, the majority of the directors of one company are not the majority of the directors of the other. Therefore, it is difficult to see how it can be said that the Jaipuria group or the Jaipuria group together with Mr. Chaudhuri will control the undertaking of the polytex company. Reliance was placed on the fact that the letter of intent, which was originally granted to the respondent-company has been transferred to the polytex company. In that connection, counsel relied on a letter dated May 20, 1970, from the Under-Secretary to the Government of India, addressed to the respondent-company. The Under-Secretary wrote : "The Government has no objection to your implementing the project for the manufacture of 'polyester fibres' under the name of Swadeshi Polytex Ltd. Accordingly, the said letter of intent of even number dated 24th July, 1969, is transferred to the name of Messrs. Swadeshi Polytex Ltd., K ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company. There is no evidence again of any group master having the ultimate and decisive decision making power in the affairs of the polytex company. There are common directors. That may or may not lead to concentration, of economic power. It all depends on the facts and circumstances of a particular case. The question before me is not whether having regard to the constitution of the two companies, concentration of economic power has taken place or is likely to take place. The question is whether the undertakings are inter-connected undertakings within the meaning of the statute. The tests of inter-connection which the statute lays down are ownership, control and management. Unless one of the three tests is satisfied by legal evidence, inter-connection cannot be predicated. It may not be out of place to mention that a great deal of the observations in the report was not reflected in the relevant bill and the bill itself suffered many alterations during its passage through the legislature. It was submitted that the directors of the respondent-company are the promoters of the polytex company. That, it was urged, is an evidence of inter-connection. The explanatory statement fully ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of clause ( g ) two or more undertakings shall be deemed to be inter-connected if one or more individuals together with their relatives, jointly or severally, own, manage or control the other. A distinction is made in the explanation between management and control. Mr. Rajaram Jaipuria is the managing director of the respondent-company. His relative, Sitaram Jaipuria, is the managing director of the polytex company. The term "manage" or "management" has not been defined in the Monopolies and Restrictive Trade Practices Act or in the Companies Act. Be that as it may, I am unable to hold that the managing director of a company does not manage its undertaking, within the meaning of clause ( g ) of section 2. In my judgment, on a proper construction of paragraph ( b ) of the Explanation, it must be held that if a relative of the managing director of a company is the managing director of another company, their undertakings must be deemed to be inter-connected undertakings in the sense of the statute ; they will be inter-connected because the managing directors who are relatives will be managing either undertaking severally. The undertakings may have nothing to do with each other; th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essary permission was yet to be had. After all, the Central Government may or may not grant the permission. In the absence of such disclosure, the notice must be held to be invalid having regard to section 173 of the Companies Act. One of the grounds taken in the petition is that the notice and the explanatory statement are bad because none of the terms and conditions of the collaboration agreement, financial or technical, have been disclosed. At the hearing counsel conceded on the authority of East India Commercial Co. Ltd. v. Raymon Engineering Works Ltd. AIR 1966 Cal. 232 , that the technical aspect of the collaboration agreement need not have been disclosed. In that case, there were two sets of agreements, one for financial participation in the enterprise by the foreign parties and the other for technical collaboration. The terms for financial participation were disclosed in the explanatory statement; the terms of the collaboration agreements were not disclosed nor was their inspection offered. The court held that the agreement for technical collaboration is a matter peculiarly within the competence of the directors and ordinary shareholders are not to be treated as expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was contended by counsel appearing on behalf of the petitioner that under section 11 of the Industries (Development and Regulation) Act a licence is required before any steps could be lawfully taken for establishment of an industrial undertaking; that a licence is required even before laying the foundation of the undertaking or even before preparation of the blueprint. In that view of the matter, action taken before the licence was obtained, namely, the work of putting up the plant or any other work done in connection with the establishment of the undertaking was not permissible under the law. The explanatory note, therefore, should have at least disclosed that the requisite licence under section 11 had not been obtained. Sub-section (1) of section 11 of the Act provides that no person or authority other than the Central Government, shall, after the commencement of this Act, establish any new industrial undertaking except under or in accordance with a licence issued in that behalf by the Central Government. In my opinion, all that section 11 requires is that a licence must be obtained before the undertaking is established. An industrial undertaking is not established on the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n arise. An undertaking is not established at a stage when the work of establishment has merely commenced. The language of sub-section (1) of section 11 is clear and unequivocal. As for sub-section (2) if the Central Government does not approve of the proposed location of the undertaking it cannot be established there. It does not imply that any step taken for establishing it is in contravention of the statute. Moreover, the license required under the Industries (Development and Regulation) Act was obtained in this case, before the meeting was held. The shareholders, therefore, have sufferred no prejudice. In that view of the matter, the contention raised by the petitioner fails. I may now briefly deal with the objection that after increase of share capital of the polytex company it was no longer open to the members of the respondent-company to confirm the resolution in pursuance of the order of Ghose J. It is true, that by increase of share capital the proposed holding of the respondent-company in the polytex company will be reduced to less than thirty per cent. of its equity capital. The explanatory statement fairly disclosed the proposed increase in the share capital. The reso ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
