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Oriental Industrial Investment Corporation Vs. Union of India - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtDelhi High Court
Decided On
Case NumberCivil Writ Appeal No. 714 of 1977
Judge
Reported in[1981]51CompCas487(Delhi); 1980RLR739
ActsCompanies Act, 1956 - Sections 4
AppellantOriental Industrial Investment Corporation
RespondentUnion of India
Advocates: F.S. Nariman,; P.N. Amin,; Atul Munim,;
Cases Referred(Nalla K.K. Shanmugan v. Commissioner
Excerpt:
.....that controls the composition of the board of directors of another company would be treated as holding company of subsidiary company, though it may not be the holder of the shares of the subsidiary company - in view of the fact, it was ruled that poonam hotel would be a subsidiary of oriental ltd within section 4(1)(a) read with section 4(2) of the act - - control over the composition of the subsidiary's board is almost invariably derived from the voting rights enjoyed by the holding company by virtue of shares in the subsidiary held by it or its nominees, but it could also arise from the provisions of the subsidiary's memorandum or articles, or from a contract with the subsidiary which empowers the holding company to appoint directors to the subsidiary's board. this being the..........in march 1974 oriental limited acquired 2400 equity shares of the face value of rs. 100.00 each of poonam hotels for the aggregate price of rs. 2,08,900.00 that is, at the average rate of rs. 89.00 per share. this investment was within the limit of 10 per cent prescribed under section 372 of the act. (3) by an agreement in writing dated august 19. 1975 made between oriental limited on the one hand and poonam hotels on the other the oriental limited was given full and absolute right to appoint five directors on the board directors of poonam hotals. this gave power to oriental limited to appoint a majority of the board of directors of poonam hotels with power to remove any such director and to appoint another in his place. poonam hotels agreed to make necessary changes in its articles of.....
Judgment:

Avadh Behari Rohatgi, J.

(1) This petition under Article 226 of the Consitution raises a short point. The question is whether the petitioner company is the holding company and whether Poonam Hotals Limited its subsidiary. The facts giving rise to the question were as follows ;--

(2) The petitioner Oriental Industrial Investment Corporation Limited (Oriental Limited) is a public limited company incorporated under the provisions of the Companies Ast 1913 and shall be deemed to be incorporated under the provisions of the Companies Act, 1956 (the Act). Poonam Hotals Limited (Poonam Hotals) is also a company incorporated under the Act for carrying on business of hoteliers. They have a paid up capital of Rs. 24,70,000.00 divided into 24700 equity shares of Rs. 100.00 each. In March 1974 Oriental Limited acquired 2400 equity shares of the face value of Rs. 100.00 each of Poonam Hotels for the aggregate price of Rs. 2,08,900.00 that is, at the average rate of Rs. 89.00 per share. This investment was within the limit of 10 per cent prescribed under section 372 of the Act.

(3) By an agreement in writing dated August 19. 1975 made between Oriental Limited on the one hand and Poonam Hotels on the other the Oriental Limited was given full and absolute right to appoint five directors on the board directors of Poonam Hotals. This gave power to Oriental Limited to appoint a majority of the board of directors of Poonam Hotels with power to remove any such director and to appoint another in his place. Poonam Hotels agreed to make necessary changes in its articles of association and to incorporate therein the agreed rights of Oriental Limited to appoint five directors.

(4) Pursuant to the agreement 1 dated August 19, 1975, the share holders of Poonam Hotels at an extraordinary general meeting held on August 29, 1975 passed a special resolution amending the articles of association of Poonam Hotels. The newly added Article 139-A reads as follows ;

'139A.The Oriental Industrial Investment Corporation Limited shall have a full and absolute right and power exercisable by it at its discretion without the consent or concurrence of any other peason, to appoint five Directors on the Board of Directors of the Company so as to constitute majority on the Board of Directors of the company with power to remove any such Director from office on a vacancy being caused whether by retirement, by rotation, death, resignation, removal or otherwise, to appoint another and such Directors shall not be bound to hold any qualification shares.'

(5) By virtue of the power given under Article 139-A of the articles of association Oriental Limited appointed 5 persons as directors of Poonam Hotels pursuant to the resolution of the board of directors dated August 29, 1975. Having thus established the relationship of a holding company and subsidiary company Oriental Limited acquired further 19447 fully paid up equity shares of Poonam Hotels at an aggregate price of Rs. 19, 56, 434.91. Thus the total equity shares which Oriental Limited held in Poonam Hotels aggregated to 21847 shares representing approximately 88 per cent of the total paid up capital of Poonam Hotels. The purchase price paid by Oriental Limited for 21847 shares was Rs. 21,65,334.91.

(6) The accounting year of Oriental Limited is from October 1 to September 30 and that of Poonam Hotels from January 1 to December 31. On September 19, 1975 Oriental Limited made an application to the respondent Department of Company Affairs of the Government of India, for necessary permission under section 213(2) of the Act for extension of the financial year of Oriental Limited so as to bring the same and that of its subsidiary Poonam Hotels in conformity with the provisions of S. 212 of the Act. The idea was to extend the financial year of Oriental Limited ending on September 30, 1975 to March 1976. This naturally meant permission to extend the time for calling the annual general meeting and time for making the annual return for the relevant period.

(7) Now the trouble arose. The department of company affairs of Government of India at once objected to the claim that Oriental Limited was the holding company of its subsidiary, Poonam Hotels. By their letter dated December 6, 175 the department took the view that article 139-A of the articles of association of Poonam Hotels was contrary to the provisions of sections 255, 256, and 257 of the Act and that the said article and the resolution in this behalf were void in view of the provisions of section 9 of the Act. In a word the department held that Poonam Hotels was not a subsidiary of Oriental Limited. They thereforee directed Oriental Limited to 'disinvest' the excess shareholding in Poonam Hotels and to comply with the provisions of section 372 of the Act.

(8) By way of abundant caution Oriental Limited sought by letter dated March 5, 1976 expost facto sanction under section 372 of the Act in regard to the investment in shares of Poonam Hotels in excess of the ceiling pres- cribed by the said section. The department by their letter dated February 15, 977 rejected this request and once again directed Oriental Limited to dispose of the share holding within a period of six months from the date of the order.

(9) The Oriental Limited addressed an- other letter dated January 13, 1976 to the department requesting them to reconsider their previous order. By order dated July 5, 1977 the department reiterated their previous view and held that Oriental Limited had contravened the provisions of section 372(4) of the Act in acquiring shares of Poonam Hotels. They once again directed Oriental Limited to dispose of the shares within. the time allowed failing which they threatened to take action for the contravention of the provisions of section 372 of the Act.

(10) The single question for decision is whether the relationship of holding and subsidiary company exists between Oriental Limited on the one hand and Poonam Hotels on the other. If the answer to the question is in the affirmative then it must be held that section 372(4) does not apply to investment made by the holding company in its subsidiary.

(11) The case of the department is that the amendment of the articles of association of Poonam Hotels effends the provisions of sections 255, 256 and 257 of the Act and thereforee Poonam Hotels cannot be deemed to be a subsidiary of Oriental Limited. On the view that Poonam Hotels was not a subsidiary they directed Oriental Limited to 'disinvest'' their shareholding.

(12) The terms 'holding company' and 'subsidiary'' are defined by section 4 of the Act which proceeds initially to establish the circumstances under which a company shall be deemed to be the subsidiary of another. If these circumstances of subsidiary relationship are found to apply, then the other company is deemed to be a holding company.

(13) In general, a company is deemed to be a subsidiary company of another if (1) the other controls the composition of of directors, or (2) the other holds more thin half in nominal value of its 'equity share capital; or (3) a company is a subsidiary of any company which is in turn a subsidiary of another company, (section 4)

(14) The definition is based on the ability to control the composition of a majority of the board of the subsidiary Control involves the power to appoint all or a majority of the board without the consent or concurrence of some other person. It might arise either from , a holding of shares giving sufficient voting rights or from special rights conferred by the company's articles. (Gore-Brown on Companies 42nd ed. p. 586).

(15) In a commercial sense one company is considered to be the parent or holding company of another if it controls the composition of the other's board of directors b being able to appoint or direct the appointment of a majority of their number. The other company is then known as the subsidiary of the parent or holding company. Control over the composition of the subsidiary's board is almost invariably derived from the voting rights enjoyed by the holding company by virtue of shares in the subsidiary held by it or its nominees, but it could also arise from the provisions of the subsidiary's memorandum or articles, or from a contract with the subsidiary which empowers the holding company to appoint directors to the subsidiary's board. (Pennington's Company Law 4th ed. p. 639).

(16) Section 4 adopts a dual lest : a body corporate is to be regarded as a subsidiary of another (holding company) if the holding company (1) controls the composition of its board of directors in the sense that it has power to appoint or remove a majority of the board, or (2) holds more than half of its 'equity share capital'. (See Gower Principles of Modern Company Law 4th ed. pp, 118-119). This section is adopted from section 154 of (he English Companies Act 1948 The difference between Indian and English law is that while under the English section it is necessary for a company to be treated as having the legal status of a holding company of another that it must both be a member of that other company and also control the composition of its board of directors; it is enough under the Indian Act to have control over the composition of board of directors of the order company. That is to say, a company will be treated as holding company of a subsidiary company under the Indian Act even though it may not be a member of the subsidiary company and does not hold any shares in it.

(17) A company shall be deemed to be a subsidiary of another if that other controls the composition of the board of directors. This is one mode of creating the relationship of holding and subsidiary company as provided in section 4(1) of the Act. Now section 4(2) says that the composition of a company's board of directors shall be deemed to be controlled by another company if, but only if, that other company by the exercise of some power exerciseable by it at its discretion without the consent or concurrence of any other person, can appoint or remove the holders of all or majority of the directorships. In the present case the addition of a new article 139-A in the articles of association of Poonam Hotels gives absolute power to Oriental Limited to appoint or remove a majority of the directorships of Poonam Hotals' at its discretion without the consent or concurrence 742 of any other person.' As has been observed by Pennington, control over the composition of the subsidiary's board can also arise from the provisions of the subsidiary's memorandum or articles, or from a contract with the subsidiary which empowers the holding company to appoint directors to the subsidiary's board'. In this case there is a clear provision in the articles of association of Poonam Hotels which empowers Oriental Limited to appoint directors to Poonam Hotels' board, this power was given by virtue of the agreement dated August 19, 1975 made between Oriental Limited and Poonam Hotels. Pursuant to this agreement Poonam Hotels passed a special resolution and amended the articles of association by adding Article 139-A. By resolution dated August 29, 1975 passed by the board of directors of Oriental Limited the holding company appointed five directors on the board of Poonam in Hotels. Thus Poonam Hotels became subsidiary of Oriental Limited in terms of section 4(l)(a) read with section 4(2) of the Act. This being the conclusion it must be held that section 372(4) does not apply to Oriental Limited because section 372(24)(d) clearly says that that section shall not apply to investments by a holding company in its subsidiary. There is thereforee no contravention of the provisions of section 372 and tile view of the department must be held to be wrong.

(18) Counsel for the department contended that the control of Oriental Limited over the composition of the board of Poonam Hotels which they exercise by virtue of the agreement dated August 19, 1975 is in contravention of the provisions of sec'ions 255, 256, and 257 of the Act. This argument overlooks the important fact that section 255 excludes from its purview cases which have been otherwise expressly provided in the Act. The words 'save as otherwise expressly provided in this Act' used in section 255(l)(b) are of commanding significance. Section 4(2) is an express provision for the appointment of the directors on the board of the subsidiary. That provision is nit subject to section 255 because it is expressly excluded. It is true that section 255 does not expressly refer to .section 4. But that is not necessary. All that is necessary is that the excluded provision must be express, that is clear, definite and explicit. It must be declared in terms by the statute. It must be set forth in words. It must not be left to inference or implication.

(19) The express provision is a provision the applicability of which not arise by inference ; it arises directly from the language used. To be 'express provision' with regard to something it is not necessary that that thing should be specially mentioned ; it is sufficient that it is directly covered by language however broad the language may be which covers it so long as the applicability arises directly from the language used and not by inference there from. (Nalla K.K. Shanmugan v. Commissioner, 1962 A.C. 515(527) per Lord Radeliffe).

(20) Counsel for the department argued that the existence of holding-subsidiary relationship in the present case is not covered by the terms of section 4(2) because the exercise of the power is not exerciseably by the holding company at its discretion 'without the consent or concurrence of any other person'. He said that it was dependant on the consent of Poonam Hotels. We do not agree. As regards the control of the composition of the board of directors, this requirement is established only if the holding company has the independent power to appoint or remove the holders of all or a majority of the directors, and the Act states three circumstances in which the requiste power to appoint is considered to exist S, 4(2). (See Palmer's Company Law Vol. I p. 746 22nd ed.). By virtue of the agreement dated August 19, 1975 the exercise of the power to appoint directors is not subject to the consent or concurrence of any other person. Though that power originated in contract it was embodied in the articles of association. Poonam Hotels fulfills the above condition so as to make it a subsidiary of Oriental Limited. The department of company affairs cannot deny the relationship of a holding and subsidiary company existing between them.

(21) In the counter-affidavit of the department it was said that an illustration where the directors may be appointed other than at the annual general meeting by virtue of the saving clause (^ of sub-section (1) of section 255 of the Act is the appointment of directors by the Government under section 408 of the Act. This argument is based on a misreading of section 408. That section opens with the words 'notwithstanding anything contained in this Act. This is a non-obstante clause which vests over riding powers in the Government to nominate directors to prevent mismanagement or oppression.

(22) There is no denying the fact that the right of the members of a public company to appoint directors of their choice at a general meeting is greatly abridged when there comes into being a relationship of a holding and a subsidiary company. But this restriction inheres in the definition of the holding company. It is firmly embedded in section 4. The ability to control the conduct of the subsidiary is the hall-mark of the holding company.' The holding company is the controlling company. The controlled company is called a subsidiary.

(23) Counsel for the department finally argued that there was delay in filing the petition. We are not impressed by this argument. At the request of Oriental Limited the Government 'reconsidered' the matter and the department finally came to the conclusion in theit letter dated 5th July 1977 that Oriental Limited had contravened the pro- visions of section 372(4) of the Act in acquir- ing the shares of Poonam Hotels. To contest this view of the department the present writ petition was filed on September 17, 1977.

(24) For these reasons the writ petition is accepted and the decision of the department of company affairs contained in their letter dated July 5, 1977 including their prior decision dated December 6, 1975 is quashed. The parties are however left to bear their own costs.


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