TMI Blog1968 (9) TMI 77X X X X Extracts X X X X X X X X Extracts X X X X ..... cent, equity capital in Free Wheel (India) Limited (hereafter referred to as the "subsidiary company"). H. P. Bhatnagar was, at the time of passing the resolution to issue further capital, the managing director of the holding company as also of the subsidiary company. Some of the directors of both the companies were also common. The subsidiary company is admittedly a prosperous concern, and the holding company are the selling agents of the products of the subsidiary company. This selling agency admittedly yields good profits to the holding company. On 22nd July, 1968, the subsidiary company, by a resolution of the board of directors, decided to issue a further capital of Rs. 3,00,000 and to offer the same, in accordance with section 81, to the holders of equity shares in the subsidiary company. If the holding company were in a position to subscribe to the additional capital issued, they would retain their majority of 52 per cent, as under section 81 the shares have to be offered to the existing equity shareholders in proportion, as nearly as the circumstances admit, to the capital paid up on their shares. A communication was accordingly addressed by a letter, dated 24th July, 196 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (2)even if the court had jurisdiction to pass an order, it was not an appropriate case for grant of injunction because ( a ) the working of the subsidiary company could not be jeopardised and its expansion could not be hampered because of the financial difficulties in which the holding company had landed; and ( b )the only ground for stay pressed by the petitioner in the stay matter was the inability of the holding company to subscribe to the capital which was not a valid ground for issue of an injunction." So far as the power of the court to grant an injunction in such circumstances against a person not a party to the winding up proceedings is concerned, the matter has to be decided in the light of the scope and amplitude of section 443 of the Companies Act. The said section provides that "on hearing a winding up petition, the court may ... ( c ) make any interim order that it , thinks fit...". The main object of the winding up of a company is to protect its assets and the interest of its creditors and/or shareholders. It is for this reason that power has been given under section 456(1 A) to the liquidator or the provisional liquidator to secure the custody or control o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f assets and in aid of the final order that may be made. Whether or not an injunction should be granted must necessarily depend on the facts of each case, but it seems difficult to deny the power to the court to pass interim orders necessary for the protection of assets against persons who are not parties to the proceedings. The rule of natural justice may then , require such persons to be heard, but that rule has admittedly been satisfied in this case. Mr. P.N. Lekhi and Mr. K.K. Jain, learned counsel for the respondents, contended that, if I tear asunder the corporate veil of the subsidiary company, it will lead me to an inescapable conclusion that the subsidiary company is, in fact, not a separate entity but merely an agent or trustee of the holding company, so that the assets of the subsidiary company are really the assets of the holding company. The learned counsel contended that the development and growth of corporations and the necessity of striking a balance between the theory of indoor management by the corporations and the public gaze and control in the corporate sector had led the courts to tear the veil woven by Salomon v. Salomon Co. [1897] AC 22 and the presen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions, inter alia , indicate the leaning of the legislature to treat all companies within a group as part of the same entity as against the arbitrary unit-wise distinction of each company. To that extent, it will not be incorrect to say, as suggested by the learned counsel for the respondents, that the legislature has itself rent the veil of protection thrown round corporations by the House of Lords in Salomon's case ( supra ) . There are, however, limitations to rending the veil, and the courts will not do so except for specific purposes and when compelled by the clear words of the statute. The law reports abound with decisions showing the tendency of the different courts to tear the veil in varying circumstances. For instance, in Apthorpe v. Peter Schoenhofen Brewing Co. [1894] 4 Tax Cas. 41 the finding of fact arrived at by the Commissioners that the property ostensibly in the name of the New York Company was, in fact, that of the English company liable to English income-tax on the ground that the business was being carried on partly in London was upheld. Again, in some cases the courts have come to the conclusion that the subsidiary company was merely an agent of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent company will be considerably jeopardised. If this argument is taken to its logical conclusion, then it may mean that, even in the case of companies other than the subsidiary companies, a creditor or a shareholder of a company holding a large block of shares in another company may raise a grievance that the management by particular individuals of the other company will considerably reduce the value of the block of shares. Even if I were to accept that the controlling block of shares will fetch a better price, it does not entitle me to hold up the working of the subsidiary company merely because the holding company is under a financial strain. No doubt, the subsidiary company has sought to raise a capital of Rs. 3,00,000 only, and admittedly their needs extend to over Rs. 20,00,000. But what actually they need immediately is for them to decide, and the courts will not probe into such matters and interfere with the indoor management of the companies. For the foregoing reasons, I am not in agreement with the findings of the learned single judge that the subsidiary company was really an asset of the holding company. In the view that the learned single judge took that the subsidiar ..... X X X X Extracts X X X X X X X X Extracts X X X X
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