TMI Blog2000 (10) TMI 966X X X X Extracts X X X X X X X X Extracts X X X X ..... etitioner has arrayed 17 subsidiaries as respondents and he has sought certain reliefs against some of the subsidiaries in terms of section 402. The petitioner, other than holding 10 per cent shares in the company does not hold any shares in any of the subsidiaries except in one. 3. In this background, the company as well as some of the respondent subsidiaries, have questioned the maintainability of this petition against the subsidiaries inasmuch as the petitioner does not fulfil the requirements of section 399 as far as these subsidiaries are concerned. These respondents have also sought for deciding this issue as a preliminary issue before considering the petition on merits. 4. Shri Anil Divan, Senior Advocate appearing for the company submitted that this preliminary issue should be decided first as it goes to the root of maintainability of the petition in terms of section 399 as far as the subsidiaries are concerned. He pointed out that in Dipak G. Mehta v. Shri Anupar Chemicals India (P.) Ltd. [1999] 2 CLJ 539, this Board has held that the CLB is bound to examine the maintainability of a petition in terms of section 399 as a preliminary issue. Further, it is more so, in v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... subsidiaries as respondents, yet, there are no allegations against many of these subsidiaries and wherever there are allegations in respect of some subsidiaries, he has not sought for any relief. Wherever he has made allegations and has sought for certain reliefs, they are all motivated and have been made for an ulterior purpose. Accordingly he submitted that the names of all subsidiaries should be removed from the array of parties. He further pointed out that even the allegations in respect of the holding company are all after thought especially relating to the directorial appointments to which the petitioner himself was a party and as such he cannot now question these appointments on account of acquiescence, waiver and estoppel as decided in Maharani Yogeshwari Kumari v. Lake Shore Palace Hotel (P.) Ltd. [1995] 3 CLJ 418 (Raj.). He further pointed out that the company was incorporated in 1963 and the petitioner became a shareholder only in 1993 that too by way of devolution of shares. He had never been the part of the management of the company and therefore the question of application of quasi-partnership principles would not arise in this case for the petitioner to seek equitab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on by Shri Divan, he pointed out that in both these cases the issue was whether the petition was maintainable in terms of section 399 while in the present case it is not so inasmuch as the petitioner holds 10 per cent shares in the company. In regard to nariman point case, he pointed out that in that case the petition itself ran to hundreds of pages and the issue in that petition was whether the petitioners were shareholders in the company or not. He also pointed out that the very fact that the petitioner holds 10 per cent shares in the company, the question of dismissing the petition in limine did not arise. Accordingly he urged that that the matter should be heard on merits and all the objections raised by the respondents could also be considered in the final order. 7. Dealing with the preliminary objections, he pointed out that the company is a family company having only 12 shareholders. Even though this company has a large number of subsidiaries, in fact, they all are a single economic entity and all the decisions relating to these subsidiaries are taken by the Board of the company. Therefore, the entire group is nothing but a domestic and family group controlling a number ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oard of Trade, In re [1964] 2 AER 561 wherein it was held that the term affairs of a company in section 165 of the Companies Act, 1948, includes its control of its subsidiaries. He also referred to Scotish Co-operative Wholesale Society Ltd. v. Meyar [1958] 3 AER 66 to the proposition that in a 397/398 petition, the CLB could examine as to whether, the holding company has fairly dealt with the affairs of its subsidiary, thereby arguing that the affairs of a company includes the affairs of its subsidiary. Therefore, according to the learned counsel, a shareholder of a holding company has every right to challenge the affairs of the subsidiaries of a company against which a petition has been filed. Referring to the coments of Ramiya, he pointed out that these comments are not supported by the various decisions cited by him. He further referred to the order of this Board in All India Shaw Wallace Employees Federation v. Shaw Wallace Co. Ltd. [1996] 5 CLJ 304-CLB, wherein, the CLB had passed certain orders in relation to a subsidiary of Shaw Wallace Co. Ltd. Referring to certain portions of the petition as well as the rejoinder, the learned counsel pointed out that the petitioner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt is made out, with a view to put an end to the disputes between the parties, the Bench has all powers to do justice. He also pointed out to page 74 of the petition, where in the petitioner had made some suggestions as to how the interest of the petitioner could be secured and submitted that the petitioner would be willing to accept any of the alternatives suggested therein. According to him, even the CLB can direct one of the options being implemented as all the options are within the ambit of the powers of the CLB in terms of section 402. On this proposition he relied on Needle Industries India Ltd. v. Needle Industries Newey (India) Holdings Ltd. AIR 1981 SC 1298, Yashovardhan Saboo v. Groz Beckert Saboo Ltd. [1993] 1 CLJ 20 (CLB), Bolton Engg. Co. Ltd. v. T.J. Graham [1956] 3 AER 624. 11. Summing up his arguments, Shri Mookherjee submitted that the question of dismissing the petition in limine does not arise inasmuch as the petitioner holds 10 per cent shares in Amalgamations Ltd. Since section 397 as well as section 398 refers to the term affairs of the company which would mean that it includes the affairs of subsidiaries. Since these sections are to protect the interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Kondabai (AIR 1994 Bom. 293), he pointed out that the law declared by the High Court, right or wrong, is binding on all courts and Tribunals in the State and since CLB has all India jurisdiction, it is bound by the decisions of the High Court cited earlier. On the same proposition, he also relied on Saik Giridhira Supply Co. v. Collector of Central Excise [1987] 28 ELT 438 - Tribunal. He further pointed out that there has been no application from any of the subsidiaries for deleting their names from the array of parties. Further, he pointed out that even the cases cited by Shri S.B. Mookherjee, the issue relating to subsidiary companies was decided only along with the merits of the case and not as a preliminary issue. 13. Shri Divan giving his reply in rejoinder argued that the preliminary issue relating to the subsidiaries is an important question of law in terms of section 399 and as such should be decided at the threshold. He pointed out that if the arguments of the petitioner were to be accepted, then, it would mean that any shareholder of the holding company having qualification shares in that company could question the affairs of the subsidiaries which in the present case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent case. He also pointed out that the two other unreported judgments of the Calcutta High Court - Raigarh Jute Textile Co. Ltd. and Debonair Agencies Ltd. and also Bajrang Prasad Jalan s case (supra) had also not examined the issue in detail but had only referred to the Division Bench Judgment in Hungerford Investment Ltd. Further, even the facts of these cases were completely different as two warring groups controlling both the holding as well as the subsidiaries through same set of Board of Directors tried to oust each other and grab the only immovable property in Calcutta. Even in these cases, the High Court only ordered investigation under section 237. Insofar as the other case cited by the learned counsel for the petitioner viz Board of Trade s case (supra), Shri Divan pointed out that in that case the petition was for investigation into the affairs of the company in terms of section 165(a) of the English Companies Act, 1948 wherein it was held that the affairs of a company would include the affairs of its subsidiaries. That petition was not on the allegations of oppression and mismanagement. Dealing with LIC v. Haridas Mundhra s case (supra), the learned counsel pointed ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ese judgments, that the decision of the High Court will have the force of binding principle only in the same or territories on which the court has jurisdiction. In these decisions, it has also been held that only the decisions of the Supreme Court will be binding on all courts and Tribunals in the country by virtue of article 141. Therefore, Shri Divan contended that the decisions of the Calcutta High Court and the Allahabad High Court on which reliance has been placed by the petitioner are not binding on the CLB sitting in New Delhi. The decision of the Delhi High Court alone is binding on the CLB and there has been no decision of the Delhi High Court on the issue under consideration. As a matter of fact, he pointed out that the Delhi High Court has held in Taylor Instruments Co. (India) Ltd. v. CIT [1998] 232 ITR 771/99 Taxman 155 that the decision of one High Court is not a binding precedent for another High Court or for courts or Tribunals outside the territorial jurisdiction of the High Court to which they are subordinates. Referring to the decision of the Madras High Court in Pioneer Miyati Chemicals Ltd. [2000] 116 ELT 441 in which the court has followed the decision of Smt. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and does not hold any shares in Amalgamations Ltd. If the proposition as suggested by the learned counsel for the petitioner is approved, then, he pointed out that it would mean that this foreign collaborator would have the right to file a petition not only against Amalgamations but also against all its subsidiaries leading to an absurd situation. He, therefore, pointed out that the qualification in terms of section 399 that only a member of the company as stipulated in section 399 has to be first satisfied in respect of the subsidiary companies also. He also pointed out, referring to the contention of the learned counsel for the petitioner that since there is a prayer in the petition for investigation the petition cannot be dismissed against the subsidiaries, that the petitioner cannot seek investigation against the subsidiaries through a 397/398 petition. He is at liberty to file a petition against the subsidiaries in terms of section 235 read with section 214. 18. Shri Gopal Subramanian appearing for the respondent Nos. 4 and 5 pointed out that in the Act, the Legislature has consciously used the words company , holding company and subsidiary company in various places. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g nature of the decisions of High Courts on the CLB, the difference between an orbiter dicta and ratio decidendi and legality of a division Bench of the CLB differing from an earlier decision of another division bench of the CLB on a point of law. The counsel cited nearly 50 cases in support of their respective submission on all these issues. 21. First we shall decide as to whether the issues raised by the respondents deserve to be considered as preliminary issues meriting a finding without considering the merits of the case. This petition has been filed under section 397/398. Section 397 reads: Application to Company Law Board tax relief in cases of oppression Any members of a company who complains that the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members (including any one or more of themselves) may apply to the Company Law Board for an order under this section provided such members have a right so to apply in virtue of section 399 . Section 398 reads : Application to Company Law Board for relief in cases of mismanagement. (1) Any members of a company who complain (a) that the af ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e company in whose affairs complaints are made, its directors and majority shareholders are all necessary and proper parties. In addition, any one whose appearance the petitioner considers as necessary can also be made a party if such a party is willing. In case such a party is not willing, it is for the petitioner to establish that such a party is either a necessary or a proper party failing which we cannot compel such a party to be impleaded. If any order is to be passed in terms of section 402(d), (e) or (f), then those against whom such order is to be passed become necessary parties. If the petitioner had impleaded the subsidiaries either as necessary or proper parties for adjudicating the allegations against the holding company, then perhaps, it would not have become a preliminary issue. However, the learned counsel for the petitioner did not advance this argument. Instead, his argument was that the subsidiaries have been made parties on the ground that the affairs of a company include the affairs of its subsidiaries. Normally, a judicial forum is bound to give its finding before getting into the merits of the case, if its jurisdiction or the capacity of the petitioner in term ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve cited some cases. Shri Divan cited Herbertsons Ltd s case (supra) and contended that the deci--sion in that case is binding on the CLB and that if we were to differ from the same, a larger Bench has to be constituted. While citing Calcutta and Allahabad cases, Shri Mookerjee contended that the High Court judg-ments are binding on the CLB and the decision in Herbertson s case (supra) is per incurium. It is an established principle of law that a ratio decidendi of a superior court is binding on a subordinate court. What is a ratio decidendi has been explained by the Apex Court in a recent judgment in Amit Das v. State of Bihar [2000] (4) Scale 515 wherein the Court held A decision not expressed, not accompanied by reason, not proceeding on conscious consideration of an issue cannot be deemed to be a law declared to have a binding effect as is contemplated by article 142 of the Constitution. That which escaped in the judgment is not ratio decidendi. This is the rule of sub silento in the technical sense when a particular point of law was not consciously determined . Keeping this in view, we have to examine the various decision cited by the counsel to find out whether there is any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubsidiaries do not become ipso facto necessary and proper parties . According to Shri Divan this judgment has categorically settled the issue that by virtue of ones shareholding in a company, a shareholder cannot seek relief against its subsidiaries by adding them as parties. 25. However, Shri Mookerjee contended that this judgment was taken on an appeal to the Division Bench which set aside the judgment of the learned Single Judge and as such, the decision of the learned Judge is no longer a good law. On the other hand, he contended that by directing the addition of the subsidiaries as parties, the Division Bench has held that the affairs of company includes the affairs of its subsidiaries. One of the issue taken up for examination by the Division Bench as is evident from page 13 of the judgment was whether the application was maintainable in the absence of its subsidiaries and their directors and shareholders. By this time, as is evident from the judgment, the circumstances had changed and 3 of the subsidiaries voluntarily agreed to be added as parties as seen from page 27 of the judgment wherein the Court observed:- At the further hearing of these appeals, the learned co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y it sought for striking out its name from the petition. The Single Judge dealt with these preliminary objections and held that the petitioners could not seek any reliefs in term of section 397/398 in respect of the 2nd respondent (holding company) as they did not satisfy the requirements of section 399 and accordingly rejected the prayers against this respondent but allowed its addition as a proper and necessary party to adjudicate the allegations in respect of the 1st respondent company. When the matter came up on appeal, the Division Bench examining the provisions of section 397 observed in page 14 of the judgment The court has to examine the conduct of majority - shareholders to see whether such act of the majority amounts to oppression to the minority. Such enquiry cannot be made in isolation by the Court strictly confining itself to the affairs of the company. Such an enquiry, may, in facts and circumstances of the case, have to be made into affairs of any other body-corporate, if such body corporate as a majority shareholders or holding company has or is likely to have a dominating control over the affairs of the company so as to cause oppression to a group of shareholders ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on under section 399, but followed the earlier decision of a co-ordinate Bench, which we have, in the earlier paragraph observed that the provisions of section 399 had not been examined in that judgment. 28. In Bajrang Prasad Jalan s case (supra), the petition was filed in respect of the holding company and 4 of its subsidiaries claiming various reliefs. From the judgment, we do not find any reference to the provisions of section 399. In paragraph 22 of the Judgment, the court observed Exercise of right under sections 397 and 398 of the Companies Act comes within the purview of the equitable jurisdiction of the Company s court. There can hardly be any dispute that in view of the structures of shares, the respondent Nos. 2 to 5 in truth and substance and subsidiary companies of Akshay Nidhi Limited which is thus, a holding company and thus in such a situation, the court cannot be a helpless spectator in looking behind the corporate veil so as to disentitle itself from considering as to whether in fact that had been mismanagement or oppression by one group or the other. There is another aspect of the matter. Provisions of sections 397 and 398 are taken recourse to in a piquant si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4(2), section 318(3)(e) and section 338). It is not necessary to decide the larger question whether in every case brought under sections 397 and 398 of the Act, the court is entitled to make an enquiry into the affairs of the subsidiary company. It will be sufficient to consider whether such a course is permissible in the present case . Having observed thus, finding that the subsidiary company in which the holding company held 100 per cent shares and that it was treating the subsidiary company as a department of the holding company the court observed that in that particular case, the affairs of the holding company included the affairs of its subsidiary. 30. As far as the Board of Trade s case (supra) is concerned, as rightly pointed out by Shri Divan, the decision that affairs of a company would include the affairs of its subsidiaries was in relation to sections 165 and 167 of the English Companies Act, 1948 and these sections relate to investigation in the affairs of a company and not relating to oppression and mismanagement. Our Companies Act also, in case of investigation ordered under section 235/237 provide for investigation into the affairs of its subsidiaries as is e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nclude the affairs of its subsidiaries, that too, in respect of investigation. In view of this, the arguments of the counsel from both the side on the binding nature of the judgments of the High Court have become more of an academic nature and such are we are not examining the same. 33. We shall now consider the decision of this Board in Herbertsons Ltd. s case (supra). In this case, in a petition filed by the holding company against its wholly owned subsidiary, the shareholders of the holding company desired to participate in the proceedings in support of the subsidiary. When objections were raised for such impleadment, this Board observed as follows : Both section 397/398 give a right to apply under these sections only to Members of the company against which proceedings are initiated. The same is the position in section 399 also. There is no special provision in the Act regarding the rights of the members of a holding company in the matter of a subsidiary company except in section 214(2) by which the members of a holding company could be treated as members of a subsidiary to exercise the right under section 235. This provision in section 214(2) makes it abundantly clear t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he arguments of the counsel. 35. In sections 397, 398 and 399, the expression used are members of a company . Section 3 stipulates that the expression company in the Act would mean a company formed and registered under the Act. Section 41 defines a member as one who is a subscriber to the memorandum or who has, in writing, agreed to become a member and whose name is entered in the register of members. These two sections would indicate that the word company in sections 397, 398 and 399 would mean a single company and the word member would mean a member of that company. Therefore it is obvious that both sections 397 and 398 vest the right to invoke the provisions of these sections specifically on the members of the company against which these sections are invoked. In addition, section 399 prescribes certain minimum qualifications even in respect of such members. Therefore, ordinarily, a person who is not a member of a company cannot invoke these provisions against that company. This being the position, can a member of a company, who is not a shareholder of its subsidiary company file a petition against the subsidiary in virtue of his being a member of the holding company? A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fication for winding up of the company on just and equitable grounds. If some relief is sought against the subsidiary in a petition against the holding company, the question that would arise as to in respect of which company such justification is to be made out whether holding or subsidiary company or both. We may also look at the provisions of section 402 in terms which this Board could order purchase of shares of any members either by the company or other members in a proceeding under section 397/398. When a shareholder is not a member of the subsidiary, the question of ordering the purchase of his shares does not arise. Thus, it is clear from the provisions of section 397 that a non-shareholder cannot invoke the provisions of this section and since the same wordings relating to the locus standi of a person have been used in section 398 also, this provision can also not be invoked by a non-member. 36. One of the arguments of the counsel for the petitioner is that the CLB should take a pragmatic view and interpret the law to advance justice. We do agree to this proposition, provided there is scope for such an interpretation. Shri Gopal Subramanian rightly pointed out that that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Herbertsons with 99 per cent shares in its subsidiary BDA had to file a petition under section 397/398 against BDA. This would indicate that the affairs of a holding company are different from the affairs of its subsidiaries. 37. While holding that as a proposition of law the affairs of a company cannot be construed to include the affairs of its subsidiaries, yet, if it is established that a subsidiary is either a proper or necessary party, such a subsidiary could be arrayed as a respondent. In what manner or circumstances, a subsidiary becomes a necessary or proper party would depend on the facts of a case. For instance, in All India Shaw Wallace Employees v. Federation s case (supra), as cited by the learned counsel for the petitioner, the allegation was that the holding company had diverted its funds to the subsidiaries either for acquisition of shares in those companies, or had lent substantial funds without charging any interest. In such circumstances, these subsidiaries became necessary parties to adjudicate on the allegations against the holding company. It is to be noted that even in such cases, such arraying the subsidiaries as parties, would be only for the purposes o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es are not subsidiaries. Of these companies, in eight companies, there are foreign shareholders by virtue of collaboration agreements. In six of other companies, there are outside shareholders. In all there are 38 companies that come under this group Amalgamations . The petitioner has impleaded 17 of these companies as respondents and has reserved in the petition, the right to implead the remaining 21 companies. The 1st, 5th and the 8th respondents have, in their replies, questioned the impleadment of the subsidiaries, and later a joint affidavit has been filed by the other respondents also challenging the impleadment of the respective subsidiary. In other words, all the subsidiaries impleaded, have objected to their inclusion as respondents. Of the seventeen companies impleaded in the petition, the petitioner has not made any allegations/averments in respect of respondents 9, 10, 14, 15, 17, 18 and 19. In respect of those against which allegations/averments have been made, no relief has been sought against any subsidiary except in relation to the Respondent 5, viz. Addisons Paints Chemicals Ltd. and respondent 8 viz. TAFE in terms of section 402. Arguments were advanced by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stigation into its affairs, we cannot order investigation into the affairs of its subsidiaries. In case, we find, after hearing the petition, that an order of investigation has to be made into the affairs of the holding company, then the provisions of section 239 would come into play and it is for the Inspectors to the appointed by the Central Government to decide as to whether the affairs of the subsidiaries have also to be investigated. [Division Bench Judgment in Hungerford Ltd. s case (supra)]. There is no need for a direction from us in this regard. Further, we have already pointed out that in respect of 7 subsidiaries there are no allegations and the question of ordering investigation into their affairs does not arise. In case, the petitioner desires that there should be a direction from us for investigation into the affairs of any of the subsidiaries, he is at liberty to move a separate petition before us in terms of section 214(2) read with section 235. 40. It was argued by the counsel for the petitioner that the group as a whole is a family group and as such he cited some judgments as to the nature of just and equitable reliefs that could be granted. We are not dealing ..... X X X X Extracts X X X X X X X X Extracts X X X X
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