TMI Blog2013 (9) TMI 850X X X X Extracts X X X X X X X X Extracts X X X X ..... S. Munusamy [2004 (8) TMI 381 - HIGH COURT OF MADRAS]. The Company Law Board had rightly stated that there need not be any direction and gave liberty to the respondent in case the respondent desires that there should be a direction for investigation into the affairs of any of the subsidiary company, it is always open to him to file separate applications in terms of section 214(2) read with section 235 of the Act - When this safeguard was given by the Company Law Board, it was not open for the respondent, at this stage, to contend that because the company application filed by him was a combined application, it had to be taken up together along with the main company petition when he had not complied with section 399(4) of the Act. Whether by impleading the subsidiary companies as the respondent, a shareholder of the holding company, without satisfying the provisions of section 399 of the Act in respect of the subsidiary companies can claim relief in respect of the subsidiary companies in terms of section 402 of the Act also - Held that:- The respondent had not even made any allegations against the subsidiary company or claimed any relief against most of the subsidiary companies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d some of the subsidiary companies themselves are holding companies, which are sought to be arrayed as parties in the company petition by the respondent by taking out a company application before the Company Law Board for necessary action under section 397 of the Companies Act, 1956 (hereinafter referred to as "the Act"). 3. The proceedings originated by filing of Company Petition No. 94 of 1999 filed by Shankar Sundaram, respondent in the appeals, complaining of oppression and mismanagement by the majority group under sections 397 and 398 of the Act. In the said Company Petition No. 94 of 1999, the deceased Sivasailam, director and one Krishnamoorthy have filed Company Application No. 48 of 2000 mainly to delete the name of subsidiary companies from the array of parties in the company petition and also to dismiss the company petition itself as not maintainable in view of certain preliminary objections raised by the holding company. 4. The Company Law Board allowed the Company Application No. 48 of 2000 Shankar Sundaram v. Amalgamations Ltd. [2001] 104 Comp. Cas. 638/ 30 SCL 167 (CLB - New Delhi) by ordering to delete the names of the subsidiary companies from the array of part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 402 of the Companies Act. It is also an admitted fact that the respondent was holding 10 per cent. share in the main holding company namely, Amalgamation Ltd., but does not hold any share in any of the subsidiary companies, except in one company. Therefore, on this background, the company as well as some of the subsidiaries have questioned the maintainability of the very company petition itself against the subsidiaries inasmuch as the respondent does not fulfil the requirements of section 399 of the Companies Act as far as the subsidiaries are concerned. Therefore, they have filed an application before the Company Law Board in the company petition to decide this as a preliminary issue before considering the company petition on merits. It was also contended that the preliminary objection goes to the root of the matter in terms of section 399 of the Act, as far as the subsidiaries are concerned. 9. The main contention raised as preliminary objection by the holding company is that none of the allegations made in the company petition have been substantiated and consequently the company petition cannot be maintained against the subsidiaries inasmuch as the respondent is not a shar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the materials on record. The appellant is aggrieved by the order passed by the learned single judge, reversing the order passed by the Company Law Board and also directing that the petition can be filed even against the subsidiary companies under sections 397 and 398 of the Act and setting aside the order of the Company Law Board. 13. The main ground of attack of the appellant was that the maintainability of the petition namely, company application against the subsidiaries inasmuch as the respondent does not fulfil the requirements of section 397 of the Act as far as the subsidiaries are concerned. 14. Shri Anil Divan, learned senior counsel appearing for the appellants in O. S. A. Nos. 129 and 131 of 2002 would mainly contend as follows : (i)The inclusion of the subsidiary companies in terms of section 399 of the Act in so far as subsidiaries are concerned itself is a preliminary issue and therefore it was rightly decided by the Company Law Board as it goes to the root of the matter. It was further contended by learned senior counsel that whatever allegations have been made against the holding company have not been made against the subsidiary company. (ii)The company petit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the company" used in sections 397 and 398 would only denote that particular company and it does not include the affairs of the subsidiary company as was held by the learned single judge. In this context, reliance was also placed by learned senior counsel to the decision reported in Ishwar Alloy Steels Ltd. v. Jayaswals Neco Ltd. [2001] 105 Comp. Cas. 1 (SC). (viii)Learned senior counsel also pointed out that the learned single judge relied on the decision in Life Insurance Corpn. of India v. Hari Das Mundhra [1966] 36 Comp. Cas. 371 (All), and wrongly applied it to the facts of the case, whereas, in that case, the very subsidiary company was only treated like a department of the holding company, which is not so in the present case. (ix)The decisions rendered by the Calcutta High Court are not in consonance with the principle which is now brought forward especially in this case, the applicability of the company application under section 399 of the Act was not taken into consideration. In fact, learned senior counsel has taken us to the provisions of sections 214, 235, 237, 239, 397, 398, 401 and 402 of the Act to demonstrate that the company petition against the subsidiary com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he company application, only the averments made in the petition need to be looked into and the subsequent events or production of records or documents at a later point of time cannot be taken into consideration for deciding the maintainability of the company application. 15. Mr. Krishna Srinivas, learned counsel appearing for the appellant in L.P. A. No. 130 of 2002 would contend that even as against the main company, the respondent has not made out any case in respect of sections 397 and 398 of the Act as the respondent himself has participated in all the meetings, accepted the resolutions, in certain resolutions, he had seconded and signed in all the balance-sheet and therefore, it is not open to the respondent, at this stage, to spike against the company. It was further argued that the whole episode carried out only by him in a vindictive manner to seek a plum post in the management and the fact that he is seeking a plum post in a very good company would indicate the intention of the respondent herein and the company application was not filed for the welfare of the company and it was filed in his own personal interest. Therefore, even as against the company, when no case is ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is bad and that the holding company is bound to answer the queries of its shareholders concerning the affairs of the subsidiaries company, hence, he prayed for dismissal of the letters patent appeals. 19. Before dwelling in detail as to the rival contentions, it is necessary to look into some of the relevant provisions of the Companies Act, 1956, which are extracted hereunder : "214. Rights of holding company's representatives and members.-(1) A holding company may, by resolution, authorise representatives named in the resolution to inspect the books of account kept by any of its subsidiaries ; and the books of account of any such subsidiary shall be open to inspection by those representatives at any time during business hours. (2) The rights conferred by section 235 upon members of a company may be exercised, in respect of any subsidiary, by members of the holding company as if they alone were members of the subsidiary. 235. Investigation of the affairs of a company.-(1) The Central Government may, where a report has been made by the Registrar under sub-section (6) of section 234, or under sub-section (7) of that section, read with sub-section (6) thereof, appoint one or m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Section 239 of the Act deals with the power of the inspectors appointed under section 235 or 237 of the Act even to investigate into the affairs of the related company or managing agent or associates, etc., and the inspector can report on the affairs of the other body corporate or managing director in so far as the result of the investigation thereof are relevant to the investigation into the affairs of the main company itself with a provision that the investigator or the inspector can obtain prior approval of the Central Government. 21. Section 242 of the Act deals with the power of the Central Government to prosecute anybody as per the report of the other directors, who shall give necessary assistance to the Central Government. 22. Section 243 of the Act deals with the power of the Central Government on the basis of any report by the investigating officer to wind up the company under section 237(1) or (2) of the Act. Further, sections 397, 398 and 401 of the Act reads as follows : "397. Application to Tribunal for relief in cases of oppression. - (1) Any members of a company who complain that the affairs of the company are being conducted in a manner prejudicial to public ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Central Government may itself apply to the Tribunal for an order under section 397 or 398, or cause an application to be made to the Tribunal for such an order by any person authorised by it in this behalf." 23. Section 402 of the Act deals with the power of the Tribunal or court on the application under sections 397 and 398 of the Act. 24. Section 403 of the Act deals with the power of the Tribunal or the court to grant interim order pending final order under sections 397 and 398 of the Act. 25. When we analyse these sections, for an application to be filed under sections 397 and 398, the person who files such an application should possess the requisite qualification as contemplated under section 397 of the Act namely any member of the company, who complains about the affairs of the company, may apply to the then Company Law Board (now Tribunal) for an order under this section provided that such member has the right so to apply in virtue of section 399 of the Act. Therefore, there is a qualification rider in section 397 to apply to the satisfaction of section 399 of the Act. 26. When we take section 399, it is made clear that the following members of the company shall h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n will be deemed to be a member of the subsidiary company, in so far as it relates to the provisions of section 235 of the Act. 30. Section 235 of the Act contemplates seeking for investigation into the affairs of the company. Therefore, when a shareholder is given a right under section 214(2) of the Act, even to seek for investigation into the affairs of the subsidiary company under section 235, it is deemed that this provision will entitle a shareholder in the holding company to seek for a remedy under section 235 of the Act, but the Legislature did not think it fit to give the same interpretation in so far as it relates to sections 397 and 398 of the Act. Therefore, an application under sections 397 and 398 of the Act cannot be filed by a shareholder of a holding company even though he could be a holder of 10 per cent. share to seek remedy under sections 397 and 398 of the Act in so far as the holding company is concerned and not against the subsidiary company : S. No. Remedial provision of Companies Act Mandatory requirements of shareholding 1. Section 235(2). Investigation of the affairs of a company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t would further contend that the Company Law Board had correctly pointed out that when these subsidiary companies are totally distinct and separate, that cannot be questioned in one single application. Therefore, learned senior counsel points out that the qualification in section 399 of the Act which provides that only a member of the company, as stipulated in section 399 of the Act has to satisfy in respect of the subsidiary company is legal and correct. But in so far as section 235 of the Act is concerned, by invoking the provisions under section 214(2) he may file petition separately under section 235 of the Act, but not entitled to file a petition under section 397 of the Act. The relief to be granted is only to seek investigation, but that cannot be considered to be one which entitles him to seek winding up of the company in this application under section 397 of the Act nor this can be treated or converted into an application under section 235 of the Act. Therefore, the argument of the respondent that the company application filed before the Company Law Board is a cumulative application which combines the provisions of sections 397, 398 and 235 of the Act cannot be accepted. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urable Supreme Court held that the petitioner who filed the petition for winding up of the company must make out a case on just and equitable ground, otherwise, no relief can be granted. In the case on hand, as pointed out earlier, there is no allegations made or no relief is sought against many of the subsidiary companies and no case is made out by the respondent as against the subsidiary companies. Inasmuch as no case has been made out by the respondent against the subsidiary companies, the relief sought for by the respondent to include the subsidiary companies also in the company petition cannot be granted as per the above decision of the honourable Supreme Court. Therefore, the decision of the learned single judge, in ordering to include the subsidiary companies also in the company petition, is not correct. 36. In J.P. Srivastava Sons (P.) Ltd. v. Gwalior Sugar Co. Ltd. [2004] 122 Comp. Cas. 696/ 56 SCL 1 (SC) it was held by the honourable Supreme Court as follows (page 716) : "The object of prescribing a qualifying percentage of shares in petitioners and their supporters to file petitions under sections 397 and 398 is clearly to ensure that frivolous litigation is not in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs of a company are being conducted in a manner oppressive to any member or members including any one or more of those applying. The court then has power to make such orders under section 397 read with section 402 as it thinks fit, if it comes to the conclusion that the affairs of the company are being conducted in a manner oppressive to any member or members and that to wind up the company would unfairly prejudice such member or members, but that otherwise the facts might justify the making of a winding up order on the ground that it was just and equitable that the company should be wound up. The law, however, has not defined what is oppression for purposes of this section, and it is left to courts to decide on the facts of each case whether there is such oppression as calls for action under this section . . . We now come to the case under section 398. It provides that any members of a company who have rights to apply in virtue of section 399 may complain : (i) that the affairs of the company are being conducted in a manner prejudicial to the interests of the company, or (ii) that a material change has taken place in the management or control of the company and that by reason of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 122 Comp. Cas. 150/[2005] 58 SCL 301 held that the phrase "the company" has been used only to emphasis the fact that the members of that company alone could give a complaint with reference to the affairs of that company. The relevant portion of the judgment can usefully be extracted hereunder as follows (page 156) : "But, according to learned senior counsel appearing for the appellants, the Company Law Board should pass such orders only with respect to 'the company' and should not pass a combined order with respect to two different companies. Learned senior counsel pointed out the phrase 'the company' and 'a company' as mentioned in the above said provisions. Under section 397 of the Act, the phrase 'the company' is used only to emphasise that the members of that company alone can give a complaint with reference to the affairs of that company. It is nothing to do with the powers of the Company Law Board. Even under section 398(2) of the Act, if the Company Law Board on any application filed under section 398(1) of the Act is of the opinion that the affairs of the company are being conducted as mentioned under section 398(1) of the Act or that by reason of any material change me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 41. In fact, the Company Law Board relied upon the decision reported in Hungerford Investment Trust Ltd. (supra) and rightly arrived at a conclusion that it will be improper and illegal to join subsidiaries in the company application on facts and circumstance of the case. But the Company Law Board has held that the main company petition under section 397 of the Act is not demurrable or objectionable in the absence of subsidiary companies and their directors and shareholders and in appropriate case, they would come under the expression affairs of the company meaning the affairs of the holding company. Further, it was also held that (page 665 of 104 Comp Cas) : "Therefore, when a person is not a member of a company, his alleging oppression and invoking the provisions of section 397 against that company does not arise. Therefore, a shareholder of a holding company cannot complain of oppression by a subsidiary in which he is not a member as there is no legal relation between him and the subsidiary company." 42. Therefore, the proposition of law that the affairs of the company would mean the affairs of the subsidiaries also cannot be accepted as it creates a legal fiction to treat the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elonged to the board of directors of the Corporation ; the remaining two must also have held office by the grace of the Corporation for it was the beneficial owner of the entire share capital of the company . . . It is no exaggerated truth to say that the directors of the Corporation were treating the company as a mere department of the Corporation and its directors as managers of that department. The appellant and Haridas Mundhra describe it as an 'asset' of the Corporation in their petition and written statement. By and large the two bodies were fused together so that the adversity of the one inevitably created a crisis in the other . . . It is not necessary to hold their entire share capital ; control of the voting power in the existing companies is enough to place them at the head of the multitiered pyramid of industrial enterprises. The device of the holding company gives rise to vertical and horizontal combines. It is obvious that these combines cannot be profitably exploited without a head, that is, the holding company. It exercises unified control over the pyramided subsidiaries through the contrivance of inter-corporate accountancy and management . . . Lastly, the ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of capital, control of the subsidiary by the parent's directors and managing agents, their inter-corporate finance and accountancy and disclosure of the subsidiary's affairs to members of the holding company. Further, at least for one purpose it looks upon the members of the holding company as members of the subsidiary . . . In such a case the courts will not permit themselves to be blinded or deceived by mere forms of law, but regardless of fictions, will deal with the substance of the transaction involved as if the corporate agency did not exist and as the justice of the case may require . . . An analysis of these cases and others shows that courts are willing to lift the corporate veil where it is used to defeat public convenience, to justify wrong, to protect fraud, or to defend crime . . . Furthermore, they are prone to cast aside the corporate mask and give recognition to the economic entity of a group of companies." 45. When we look into the judgment, it was clearly stated that the affairs of the company namely subsidiary company has become a department of the corporation and therefore it was held that since the object of the section is to liquidate mismanagement in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be separates but there are many restrictions and qualifications in relation thereto. But there cannot be any doubt whatsoever that for the purpose of considering a matter of oppression, the action on the part of the majority shareholders of a holding company may also be applied in the case of the subsidiary companies as holding companies hold majority shares in the subsidiary companies particularly when both holding company and subsidiaries are family companies and for that limited purpose the corporate veil can be lifted." 47. When we peruse the decision cited supra, in the last paragraph in paragraph No. 97, it was clearly held that (page 178 of AIR 1999 Cal) : "The only property of all these companies is an immovable property situate at No. 36, Chowringhee Road. It does not have any other business nor does run any industry . . ." and therefore, it was held that the question as to whether who manages the company takes the backseat. Therefore, in that context, the court held that whether a direction to sell shares by minority shareholders to the majority shareholders would serve the purpose. The facts in that case and the facts in the case on hand are entirely different and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se the respondent desires that there should be a direction for investigation into the affairs of any of the subsidiary company, it is always open to him to file separate applications in terms of section 214(2) read with section 235 of the Act. When this safeguard was given by the Company Law Board, it is not open for the respondent, at this stage, to contend that because the company application filed by him is a combined application, it has to be taken up together along with the main company petition when he has not complied with section 399(4) of the Act. 51. In any view of the matter, as we have found that the respondent has not even made any allegations against the subsidiary company or claimed any relief against most of the subsidiary companies in the main company petition and as per the decisions of the honourable Supreme Court mentioned supra, the subsidiary companies cannot be included in the company petition. Hence, the order passed by the learned single judge, setting aside the order of the Company Law Board deleting the subsidiary companies from the array of parties, is not correct. Inasmuch as the subsidiary company cannot be made a party to the company petition, we ar ..... X X X X Extracts X X X X X X X X Extracts X X X X
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