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TMI Blog2002 (6) TMI 439X X X X Extracts X X X X X X X X Extracts X X X X ..... and deleted the names of subsidiaries and their directors from the array of parties. 3. The necessary facts are that the appellant herein, who is the petitioner in the company petition, is holding 10 per cent of shares in the first respondent-company. The first respondent-company has 38 subsidiaries and some of the subsidiaries are, in turn, holding companies of other subsidiaries and there are direct subsidiaries of the first respondent company and there are also direct subsidiaries of the subsidiaries of the first respondent-company and there are companies where the first respondent-company and its subsidiaries are holding more than 51 per cent of shares and there are companies in the group other than subsidiary companies. 4. The appellant has filed a petition before the CLB claiming reliefs under section 402. The appellant in the petition has mentioned some other companies which are in the same group, but they were not made parties/respondents since there were no averments made against them in the company petition. The facts of the case, as seen from the company petition, are that one late S. Anantharamakrishnan was the founder of Amalgamations Group of companies and the firs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich are set out in the company petition. 6. The first respondent-company and some of the respondent-companies have questioned the maintainability of the petition as against subsidiaries as the appellant is not holding requisite percentage of shares in the subsidiaries which are made parties in the company petition. Before the CLB, extensive arguments were advanced and the CLB held that the expression, 'affairs of the company' in sections 397 and 398 does not include the affairs of the subsidiaries and no petition against the subsi-diaries under sections 397 and 398 would lie and no order in terms of section 402 can be passed against the subsidiaries. The CLB, therefore, held that the expression, 'affairs of the company' in sections 397 and 398 does not include the affairs of the subsidiaries and a shareholder of the holding company cannot array subsidiaries as parties seeking relief against the subsidiaries under section 402. It is against this part of the order, the present appeal has been filed. 7. Mr. Arvind P. Datar, the learned senior counsel appearing for the appellant submitted that the CLB should have decided all the issues after allowing the parties to lead evidence on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the CLB directing deletion of the subsidiary companies is illegal per se. His submission is that by the deletion of subsidiary companies from the array of parties in the company petition, the CLB has rejected the reliefs sought for by the appellant even before adjudication. He referred to the shareholding pattern of the first respondent-company and submitted that the entire group is in the nature of a quasi-partnership and it is functioning as a single economic unit. The learned senior counsel submitted that the first respondent-company is a closely knitted company and there is a consistent policy of having transitions within the same group. His main submission is that there has been a deliberate and systematic attempt by the respondents 2 and 3 to destroy the functioning of the fifth respondent. The learned senior counsel submitted that the allegations made by the appellant regarding the functioning of various companies and the role played by the respondents 2 and 3 have to be investigated and considered in detail at the final hearing of the company petition and by the deletion of the names of subsidiaries from the array of parties in the petition. Even at the threshold, the C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enior counsel for the respondents 1 to 3, on the other hand, submitted that the appeal preferred by the appellant should be dismissed on a very short ground as the CLB has examined the entire allegations made against the respondents 5 and 8 and found that no prima facie case has been made out to implead them as subsidiaries. The learned senior counsel referred to paragraph-38 of the order of the CLB and submitted that the appellant has not made any allegation or averment in respect of respondents 9, 10, 14, 15, 17, 18 and 19 and in respect of those against whom allegations or averments have been made, no relief has been sought for against those subsidiaries except in relation to respondents 5 and 8 and the CLB has found that the appellant has not made out any prima facie case for the inclusion of the subsidiaries either as necessary or proper parties to adjudicate his allegations against the holding company. The learned senior counsel submitted that it is a pure finding of fact and it has become final and, hence, the appeal should be dismissed on the short ground. As regards the above submissions made by the learned senior counsel for the first respondent, I will consider the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aving the requisite number of shares in the subsidiary companies which are impleaded as parties in the company petition. Mr. Anil B. Divan, the learned senior counsel referred to section 214 of the Act which provides that a member of holding company has a right to look into the books of account kept by the subsidiary companies. Mr. Anil B. Divan, the learned senior counsel also referred to section 235 of the Act which confers a right on the members of the holding company to seek for investigation into the affairs of subsidiary companies. Learned senior counsel, therefore, submitted that by necessary implication the members of the holding company are not treated as members of the subsidiary companies and if they are members of the subsidiary companies, there is absolutely no need for inserting section 214 or 235. Mr. Anil B. Divan, the learned senior counsel also laid emphasis on the expression, 'any members of a company' and submitted that only shareholder of a particular company holding not less than 1/10th shares of the company is entitled to invoke the provisions of sections 397 and 398. 11. Mr. Anil B. Divan, the learned senior counsel referred to section 402 and pointed out v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax Act, 1922 would mean a person whose name and address are entered in the register of shareholders maintained by the company. The above decision is an authority for the proposition that the expression, 'any members of a company' means a person who holds shares, and having his name registered in the register of members maintained by the company. The decision in Balkrishan Gupta v. Swadeshi Polytex Ltd. AIR 1985 S.C. 520 is also an authority for the proposition that a subscriber of the memorandum is liable as the holder of shares which he has undertaken to subscribe for and any other person who agrees to become a member of a company and whose name is entered in its register of members shall be a member of the company and a person ceases to be a member by transferring his share to another person, by transmission of his share by operation of law, by forfeiture of share, by death or by any other manner known to law. The Supreme Court also held that the expressions, 'a member', 'a shareholder' or 'holder of a share' are used as synonyms to indicate the person who is recognised by a company as its owner for its purposes. There is absolutely no difficulty in holding that the expression, ' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r subsidiaries at the end of the financial year, the following documents in respect of such subsidiary or of each subsidiary, viz., a copy of the balance sheet of the subsidiary, a copy of its profit and loss account, a copy of the report of its Board of Directors, a copy of the report of its auditors, a statement of the holding company's interest in the subsidiary, the net aggregate amount so far as it concerns members of the holding company which is not dealt with in the company's accounts of the subsidiary's profits after deducting its losses or vice versa and the net aggregate amount of the profits of the subsidiary after deducting its losses or vice versa for the financial year and of the previous financial years. Sub-section (4) of section 212 provides that the statements contemplated in clauses (b) and (c) of sub-section (3) of section 212 shall apply to revenue profits and losses of the subsidiary. Sub-section (5) of section 212 of the Companies Act deals with the situation where the financial year or years of a subsidiary do not coincide with the financial year of the holding company and how a statement containing information as required in the sub-section should be attach ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to inspect the books of account of its subsidiaries and they also deal with the powers of the Inspector to inspect the affairs of the subsidiaries. In my view, it is impermissible to cut down or restrict or abridge the powers of the CLB in the exercise of the power under sections 397 and 398 read with section 402. I am of the view, merely because specific provisions are made granting a right of inspection of books of account of subsidiaries to the shareholder of a holding company and conferring a right to approach the CLB to get an order of investigation into the affairs of the subsidiary companies, and empowering the Inspectors to investigate into the affairs of the subsidiary companies, they do not mean that the CLB has no such power to grant relief under sections 397, 398 and 402. It is well to remember here that before the constitution of the CLB by the Companies (Amendment) Act, 1988, the powers under sections 397 and 398 were exercised by the High Courts and, in my view, the width of the power of the CLB under sections 397 and 398 is the same as that was exercised by the High Courts prior to the constitution of the CLB. Hence, it is impermissible to read sections 397 and 398 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eme for management of the Corporation under section 398, though the evidence let in was not sufficient to establish misfeasance of the directors. Thus, two appeals were preferred before the Division Bench of the Allahabad High Court and the question before the Division Bench was whether while dealing with the affairs of the holding company under sections 397 and 398, it is permissible to investigate into the affairs of its subsidiaries. V.G. Oak, J. held that the holding company and subsidiary company are separate legal entities and broadly speaking, their affairs are separate. Learned Judge also held that for certain purpose, the affairs of the subsidiary company are treated as the affairs of the holding company under sections 214(2), 318(3)(e) and the deleted section 338 of the Act. The learned Judge also held that it is not necessary to decide whether in every case brought under sections 397 and 398, the Court is entitled to make an inquiry into the affairs of the subsidiary company, but it was found on evidence that the holding company used to consider and sanction transactions relating to the purchase and sale of shares of the subsidiary company. The learned Judge further foun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d hardly allow the holding company or the subsidiary to resort to court to hasten their doom. It is for this reason that several jurisdictions in the United States of America permit, even without a statute, shareholders of a holding company to maintain a 'double derivative' suit to enforce a cause of action in favour of a subsidiary company, if the directors of both the companies have refused to institute an action in the name of either company. (Ballantine, ibid., page 350). Incidentally it looks somewhat cynical that directors of the Corporation should seek to insulate their wrongs behind the company's corporate bracket which they themselves had rubbed out beyond recognition." (p. 393) 19. I am in respectful agreement with the view expressed by the Allahabad High Court in Life Insurance Corpn. of India's case (supra). The CLB was not correct in distinguishing the decision of the Allahabad High Court on the ground that the decision was rendered with reference to peculiar facts and circumstances of the case. Though the Allahabad High Court held that it is not necessary to decide the larger question whether, in every case brought under sections 397 and 398, it is entitled to make ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company and the petitioners were not shareholders of the second respondent-company. Before the Calcutta High Court, a similar objection was raised regarding maintainability of the petition and the Calcutta High Court held as under :- "Apart from the above, the respondents have sought to contend that the petitioners are not shareholders of the respondent No. 2 and as such cannot make any grievance with regard to the affairs of the respondent No. 2 or any of the said two Board Meetings and Minutes relating thereto. The petitioners, however, have contended that in proceedings under sections 397 and 398 of the Act, the affairs of holding company include the affairs of its subsidiary. In the instant case, the respondent Nos. 1 and 2 have common Directors and common registered office. The respondent No. 2 is a wholly owned subsidiary of the respondent No. 1. The main asset of the respondent No. 1 is its shareholding in the respondent No. 2. The main asset of the respondent No. 2 is its shareholding in Oriental. The respondent Nos. 1 and 2 do not have any other business. For all practical purposes, the respondent Nos. 1 and 2 are part of one concern. In such circumstances, and on the bas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imited liability company. The petitioner No. 1 or his family members and their nominees and the respondent No. 4 and family members and their nominees were actively involved in the day-to-day business and affairs of the respondent Nos. 1 and 2 and this is further corrobo- rated by the Director's minutes book and shareholder's minute book of the respondent Nos. 1 and 2 and the vouchers contained in the files of this respondent." 22. Another decision that was relied upon is the unreported judgment of a Division Bench of the Calcutta High Court in the matter of Raigarh Jute & Textile Mills Ltd., v. Bajrang Prasad Jalan and another in Appeal No. of 1992, C.A. No. 207 of 1992 and C.P. No. 135 of 1990 dated 24-9-1992 and the Bench laid down the law as under :- "It is true that the 'oppression' has not been defined in the Act but it is left to the Court to decide on the facts of each case whether there exists any oppression as calls for any action under section 397, whether the conduct of the affairs of a company by the majority of the shareholders is oppressive or not will depend upon the facts of a particular case. Technicalities cannot be permitted to defeat the exercise of the equit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... subsidiary where the holding company was outside the jurisdiction of this Court. An appeal was preferred from the decision. By an unreported judgment dated 24-9-1992, the Appeal Court set aside the finding of this Court and held that in proceedings under sections 397 and 398 the Court was entitled to investigate not only into the affairs of the company against which the proceedings are initiated but also the other entity be it a subsidiary or a holding company. The Court further held that the issue whether reliefs could be granted against the holding company should not be decided as a preliminary issue but should be decided after an investigation into the facts. A further appeal was preferred to the Supreme Court from the decision of the Division Bench. The Supreme Court said : 'We do not understand the appellate order to conclude the question of jurisdiction against the petitioner in the proceedings on remand. On the contrary, a proper understanding of the appellate order would indicate that the company Judge could, on a consideration of the whole matter, decide afresh whether the Calcutta Court had jurisdiction or not. Similarly, we do not understand the order to conclude ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e holding company an enquiry would lie into the affairs of the subsidiary company cannot be decided at preliminary stage. The learned Judge held that the question cannot be decided at preliminary stage, but on consideration of facts to assess whether there was such an identification of subsidiary company with the holding company. Mrs. Ruma Pal, J. (as Her Lordship then was) held that it is a question of fact whether the affairs of the subsidiary company could be considered to be a part of the holding company. The learned Judge referred to the decision of the Queen Bench in R. v. Board of Trade [1964] 2 All ER 561 and held that the Court is entitled to direct enquiry into the affairs of subsidiary company, provided the affairs of holding company and subsidiary company are interfused. I am of the view, the decision of the Calcutta High Court cannot be ignored on the ground that there was no reference to the provisions of sections 214, 401, 402, 405, 41(2), 42(2), 237 and 239 as most of the sections relate to the definition of a member and the Calcutta High Court focussed its attention to the expression, 'affairs of the company' found in sections 397 and 398. I am of the view, the mer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r and illegal to join a subsidiary as party/respondent. Mr. Mukharji, C.J. also held that in appropriate cases, the subsidiary would come under the expression, 'affairs of the company' thereby meaning that the affairs of the holding company would also include the affairs of the subsidiary company, but in that event the subsidiary company would not be considered as necessary and proper party. Therefore, the judgment of Mr. Mukharji, C.J. also recognised the fact that in certain circumstances the affairs of holding company would include the affairs of the subsidiary company and, therefore, it cannot be stated that the expression, 'affairs of the company' in sections 397 and 398 does not include the affairs of subsidiary company. I am, therefore, of the view that, in each case it has to be investigated and decided whether the expression, 'affairs of the company' would include the affairs of the subsidiary company as well. 27. An appeal was taken against the decision of Mr. Mukharji, C.J. In Hungerford Investment Trust Ltd.'s case (supra) and by the unreported judgment dated 21-5-1981, a Division Bench of the Calcutta High Court has reversed the decision of Mr. Mukharji, C.J. The subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aw that the said question cannot be decided at preliminary stage and, hence, the CLB was not correct in holding that the later decisions of the Calcutta High Court have no relevance to the preliminary objection raised by the first respondent herein. 29. Mr. Anil B. Divan, the learned senior counsel submitted that in the decisions of the Calcutta High Court, the shareholders were holding approximately equal size of share capital in the parent company and in the subsidiary company. In my view, the decisions of the Calcutta High Court cannot be confined only to the situation where the shareholders were holding shares in the parent as well as subsidiary company. If a shareholder is holding requisite number of shares in the subsidiary company, there can be no difficulty at all for the shareholder to maintain a petition under section 399. Further, even assuming that the shareholders were holding equal number of shares in the parent company and in the subsidiary company, the Calcutta High Court has not decided the question on that ground, but considered the expression, 'affairs of the company' occurring in sections 397 and 398 and in that context, the High Court laid down the law. 30. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the preliminary issue is not confined to a pure question of law, but also would extend to the determination of an issue, in which a mixed question of law and fact is involved. However, the decision has no application to the facts of the case as the question whether the expression, 'affairs of the company' in sections 397 and 398 of the Companies Act would include the affairs of subsidiary company necessarily involves a detailed examination of factual disputes and analysis of evidence, and ultimately a conclusion has to be arrived at on the facts of each case. Hence, I hold that the decision of this Court in Saroj Goenka's case (supra) is not applicable. In my view, it is not possible to accept the submission of Mr. Anil B. Divan, the learned senior counsel that in no case 'affairs of the company' in sections 397 and 398 would include the affairs of subsidiary company, nor is it possible to accept the case of the appellant that in all cases the affairs of holding company would include the affairs of subsidiary company. In my view, the middle course suggested by the Allahabad and Calcutta High Courts is acceptable and it would depend upon the facts of each case whether the affairs of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... point in question by any other High Court. 37. As far as the submission of Mr. Anil B. Divan, the learned senior counsel that the CLB has given a finding that no prima facie case has been made out to implead Additions Paints & Chemicals Ltd. and Tractors & Farms Equipments Ltd. is concerned, the CLB has noticed that the main allegation in respect of Additions Ltd. is that the second respondent who is the Chairman of the Amalgamations Ltd. is giving step-motherly treatment to Additions Ltd. and the father of the petitioner is the Chief Executive and the relief sought for in respect of additions is that the two existing directors should be removed and that an independent Chairman should be appointed and the father of the petitioner should be appointed as a director. In respect of TAFE the CLB has observed that the complaint against TAFE is that it is not placing orders on Additions for paints during the recent past. The CLB observed that the relief sought for by the petitioner cannot be granted in respect of subsidiaries and the appellant has not prima facie established the inclusion of the subsidiaries either as necessary or proper parties. I am of the view that the observation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rlier. In my view, the observation by the CLB regarding the establishment of prima facie case against the two companies has been made to support its view expressed on the preliminary issue and the said observation cannot be regarded as a finding of fact which is binding on the appellant. 38. Mr. Anil B. Divan, the learned senior counsel also referred to the extensive power of the CLB under section 402 and submitted that that wide power has to be exercised in the case of subsidiaries or otherwise, it would amount to interference in the corporate management of the subsidiary companies. I am of the view that the CLB has very wide power and ultimately if the CLB finds that there is oppression, it is always open to the CLB to mould its relief on just and equitable grounds and it is not necessary that the CLB should exercise all its powers under section 402 in case oppression has been established by the appellant even with reference to the affairs of the subsidiary companies. Further, when the CLB finds ultimately on evidence that the subsidiaries are branches or departments of the holding company, there will be nothing wrong on the part of the CLB to exercise all its powers conferred u ..... X X X X Extracts X X X X X X X X Extracts X X X X
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