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TMI Blog2003 (1) TMI 557X X X X Extracts X X X X X X X X Extracts X X X X ..... ded in the claim of the workmen of holding company in liquidation against estate of the holding company. When the Official Liquidator adjudicated claim of the union the subsidiary company was not in liquidation. Be it also noted that the order of the Official Liquidator dated 15-4-1997 became final and it was not challenged before any authority much less this Court. The present company applications 2. M/s. Krishi Foundry Limited (hereinafter referred to as subsidiary) which was initially incorporated as Private Limited Company under the Act on 4-2-1961 later converted as Public Limited Company (hereinafter called, subsidiary company) in 1976 and became a subsidiary of the holding company in the same year. The subsidiary company had 69 employees on its rolls. It was catering to the requirements of its holding company by manufacturing mouldings and engine components. The subsidiary became sick and its management was taken over by A.P. Industrial Development Corporation (APIDC) by virtue of orders issued by the Government of Andhra Pradesh being G.O. Ms. No. 150, dated 18-2-1976 and G.O. Ms. No. 151 dated 4-4-1988. But, APIDC stopped operations of the subsidiary company along ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned from APIDC on hire purchase, claims of the workers of the company shall have to be satisfied out of the assets of the holding company. On 17-9-2001 sale of open land belonging to holding company in favour of A.P. Housing Board was confirmed and an amount of Rs. 19.70 crores was realised. The total liabilities of the holding company are about Rs. 14.97 crores and therefore even after meeting all the liabilities there would be surplus amount of Rs. 4.73 crores. The workers of the subsidiary company are also entitled to be considered for satisfaction of their claims from out of the assets of the holding company in as much as liability of the subsidiary company has to be considered as liability of the holding company. 5. With the above factual background, the union filed these two applications. C.A. No. 319 of 2002 is filed under Rule 9 of the Companies (Court) Rules, 1959 praying this Court to hold that the workers of the Krishi Foundry Limited are entitled to claim wages against the available assets of the holding company and for a consequential direction of Official Liquidator to admit and quantify the claims of the workers of the company and pay them out of the assets of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nto hire purchase agreement with APIIC for two factory sheds bearing Nos. B.31 and B.32 at Sanathnagar and they were sold by APIIC without leave of the High Court. The application filed by the Official Liquidator being C.A. No. 525 of 2001 in C.P. No. 64 of 1997 seeking declaration under section 537 of the Act that the sale effected by APIIC is void was dismissed by this Court on 28-1-2001. The assets and funds of the holding company cannot be applied for discharging liabilities of its subsidiary company. 7. Respondent Nos. 5 and 6, namely, Industrial Development Bank of India (IDBI), and Industrial Credit and Investment Corporation of India (ICICI) filed a common counter opposing both the applications. They plead that the holding company and subsidiary company are two separate entities that the Board of Directors or each of the company is different and that the Board of Directors of one company does not control the affairs of the other company. The Union has to prefer the claim for realisation of the assets of the subsidiary company, but not the holding company. Even if subsidiary company has not declared lay off or lock out, the same is not relevant for the purpose of decidin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al principle of company law does not get obliterated. It remains always same. Both the companies remain distinct and independent of each other though in the case of holding company and subsidiary company the former may to some extent be interdependent of the later and vice versa, it is no doubt true that the doctrine of lifting the veil has been applied in the case of holding company and subsidiary company. The same, however, is not universal principle. To a limited extent, in certain situations, the holding company was held omnipotent in the affairs of the subsidiary. 12. When the holding company is liable for the debts of the subsidiary ? Palmers Company Law 24th Edn. 1987 made the following statement in this regard. ". . .The legal principle is clear. In principle, the separate legal existence of the constituent companies of the group has to be respected . . . The rule in Salomon v. Salomon Co. Ltd. thus prevails; . . . That is particularly so when the creditors of the holding company are different from those of the subsidiary, as will normally be the case. However, the holding company is liable for a debt of the subsidiary if it has guaranteed that debt or if it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Holdings which has no assets of its own except the shares transferred to it and with no business or income of its own, and that it was a mere smoke-screen adopted by the Associated Rubber Industry to deprive the workmen. It was observed that in a situation like that, it is the duty of the Court, where ingenuity is expended to avoid taxing and welfare legislations to get behind the smoke-screen and discover the true state of affairs, and the Court is not to be satisfied with form, but should consider substance of a trans-action. Dealing with the facts of the case presented, the Apex Court observed : ". . .A new company is created wholly owned by the principal company, with no asset of its own except those transferred to it by the principal company with no business or income of its own except receiving dividends from shares transferred to it by the principal company and serving to purpose whatsoever except to reduce the gross profits of the principal company. These facts speak for themselves. There cannot be direct evidence that the second company was formed as a device to reduce the gross profits of the Principal company for whatever purpose. An obvious purpose that is served and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of U.P. based on report of three-man committee. The rejection order was challenged before the High Court of Allahabad. In the meanwhile, the State Government granted exemption from payment of excise duty on the energy consumed by any person from its own source of generation. The High Court quashed the order of the State Government and directed to reconsider the application of Hindalco. Subsequent also, the Government disallowed the request for exemption. Again a writ petition was filed in Allahabad High Court which was allowed by quashing the order of the Government rejecting the application for exemption. The matter was carried in appeal to the Supreme Court. The Supreme Court considered the question whether Renusagar is "own source of generation of electricity" for Hindalco and whether the order passed by the State Government is in accordance with the principles of natural justice. It was contended that the Court can disregard separate legal entity of the company only where the company of firm have legal obligations. The Apex Court referred to the decisions in Harold Holdsworth Co, (Wakefield) Ltd. v. Caddies [1995] 1 ALL ER 725, Scottish Co-operative Whole-sale Society ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... must consequently be sought in the person of somebody who for some purposes may be called an agent, but who is really the directing mind and will of the corporation, the very ego and centre of the personality of the corporation. The orthodox approach that a company is a legal entity in itself and thus whether it is a subsidiary of another or not, is of no meaning or consequence for fixing the responsibility of the activities of one upon another. Thus, on the principle aforementioned, the fact that the subsidiary company has a district legal personality does not suffice to dispose of the possibility that its behaviour might be imputed to the parent company. Such may be the case in particular when the subsidiary, allthough being a distinct legal personality, does not determine its behaviour on the market in autonomous manner but essentially carries out the instructions given to it by the parent company. When the subsidiary does not enjoy any real autonomy in the determination of its course of action on the market, it is possible to say that it has no personality of its own and that it has one and the same as the parent company . . ." (p. 555) 18. In U.K. Mehra s case ( supra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany to take employees from subsidiary either by transfer or deputation from the holding company. The stray cases where some employees were sent to holding company is not crucial unless there was any common cadre of service in both holding company and subsidiary company. Nothing is pleaded or proved that holding company stood guarantee for any of the loans raised by subsidiary company. It is not denied that secured creditors of the holding company and subsidiary company are different. Financial investments were different. Therefore, while deciding the question whether workmen and employees of the subsidiary company can be treated as such of holding company, it is not permissible to pierce the corporate veil of subsidiary company. Whether holding company has any legal obligation under industrial law or company law to safeguard the interests of the employees of the subsidiary company ? This question is next point for consideration in this case. In re Point No. 2 21. Section 529A and employer of subsidiary Chapter-V of the Act contains provisions applicable to every mode of winding up. When a company is in winding up all debts and all claims against the company shall be admi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or compensation under the said Act is respect of the death or disablement of any workman of the company; ( iv )all sums due to any workman from a provident fund, a pension fund, a gratuity fund or any other fund for the welfare of the workmen, maintained by the company; ( c )"workmen s portion", in relation to the security of any secured creditors of a company, means the amount which bears to the value of the security the same proportion as the amount of the workmen s dues bears to the aggregate of ( i )the amount of workmen s dues; and ( ii )the amounts of debts due to the secured creditors". 23. The definition of workmen as defined in Industrial Disputes Act, 1947, by reference is the definition of workman for the purpose of company law. As per section 2( s ) of Industrial Disputes Act the definition of workman is as follows : "2( s ). Workman means any person (including an apprentice) employed in any industry to do any manual, unskilled, skilled, technical, operational, clerical or supervisory work for hire or reward, whether the terms of employment be express or implied, and for the purpose of any proceeding under this Act in relation to an industrial dispute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diary were working in incidental operations of the holding company. It is settled principle that when there is subsisting contract of service under master, it is bar to serve any other master and therefore a workman cannot have two masters at a time. 25. The definition "workman" presupposes the relationship of master and servant. By no stretch of imagination the person appointed in Krishi Foundry Limited can be said to be workmen of Krishi Engines Limited though former may be subsidiary. In fact the definition of the company also does not permit such inference. The holding company is a separate company and has its subsidiary and for the purpose of company law both are separate legal entities and both have its own employment policy and workmen in one company cannot be treated as workmen of the other. 26. In Cement Corpn. of India Ltd. s case ( supra ), a Division Bench of this court, to which I was a party, considered the question whether employees of a company which is transferred to another company, can also be transferred to the transferee company? After referring to Pyarechand Kesarimal Porwal Bidi Factory v. Onkar Laxman Thenge [1973] 1 SLR 946, Jawaharlal Nehru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t be treated as workman or employees of the company which is a holding company. This needs a little elucidation as under. 28. A person who is a workman for the purpose of section 2( s ) of the Industrial Disputes Act ceases to be a workman if he is not dismissed, discharged or retrenched employee. If a workman is dismissed, re- trenched, discharged, he can still be a workman for the purpose of Industrial Disputes Act and for the purpose of claiming benefits under the said Act. In the event of closer of industry, the workmen would suffer retrenchment even if there is no specific order retrenching such workmen. A reading of provisions of section 25-FFF, sub-section (8) of section 25-O and section 25-F of the Industrial Disputes Act would show that the relationship of "master" and "servant" between workman and employer in the event of industry being closed down ceases and the same would result in retrenchment. The retrenchment is not in the sense that there is voluntary act resulting in severance of relationship between master and servant, but deemed retrenchment. The deemed retrenchment can only result when the management satisfies certain legal requirements. If an industry is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and may not choose to send away his employees as actually has been done in regard to some mills before us or he may not advert to it at all nor apply the mind to it, it is only when closure in accordance with the enactment is effect that there would be termination of service." 29. It is the case of the union that the subsidiary company became sick and management of affairs was taken over by APIDC by reason of orders issued by the Government in G.O. Ms. No. 150 dated 18-2-1976 and G.O.Ms. No. 151 dated 4-4-1988. The petitioner did not raise any objection when there is change of management. Further, when admittedly APIDC stopped all affairs of subsidiary company, they filed a writ petition and this Court passed orders directing to pay wages. By that time, the company petition filed against the holding company being C.P. No. 14 of 1987 was pending and the same was ordered to be wound up on 16-11-1991. The members of Union continued with subsidiary company till it was ordered to be wound up. The union did not take any steps for their rights against the holding company, but only proceeded against subsidiary company and rightly so. This is also an indication that the members of the p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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