Gillanders Arbuthnot and Co. Ltd. and ors. Vs. Union of India and ors. - Court Judgment

B.N. Kirpal, J.

(1) In this writ petition the question which arises for consideration is as to what is the full scope and effect of the term 'inter-conneeted undertaking', as defined in Section 2(g) of the Monopolies and Restrictive Trade Practices Act 1969 (hereinafter referred to as 'the said Act').

(2) Petitioner No. 1. is a company incorporated under the Indian Companies Act, 1930. Petitioners 2 to 4 are its Directors. A number of undertakings, carrying on different businesses, are owned by petitioner No. 1. One of the undertakings of petitioner No. 1 is, inter alia, engaged in the marketing of paints. The said Company also acts as selling agents and|or agents of various other Companies.

(3) Petitioner No. 1 also has two subsidiary companies, namely, Tangpani Tea Co. Ltd. (hereinafter referred to as T.T.C.) in which it holds 53 per cent (approximately) of the equity capital and the Jutilibari Tea Co. Ltd. (hereinafter referred to as J.T.C.) in which it holds 56 per cent (approximately) of the equity capital of the said Company.

(4) It is an admitted case that petitioner No. 1 also has investments in shares of various joint stock companies, other than its aforesaid subsidiaries. One such company, of which petitioner No. 1 holds shares, is Waldies Limited (hereinafter referred to as Waldies). It appears that prior to July, 1977 the petitioner-company held approximately 36 per cent shares of the said Waldies. It, however, transferred 4 per cent of its shares of Waldies with the result that as in July, 1977 it held only 32 per cent shares of Waldies.

(5) As on 31st March, 1981 some of the shares of Waldies were also held by T.T.C. and J.T.C. (the subsidiary companies of petitioner No. 1). T.T.C. held 2 per cent of the equity share capital of Waldies while I.T.C. held 1.99 per cent approximately of the said Company's equity share capital.

(6) The majority of the shares of Waldies were held by an English Company, namely. Lead Industries Group Limited (hereinafter referred to as LIG). This was a company incorporated in the United Kingdom and it held approximately 63.88 per cent of the equity shares capital of Waldies. Lig also holds more than 1|3rd of equity capital of two other companies, namely, Eyre Smelting Pvt. Limited, Calcutta (hereinafter referred to as Eyre) and Gondlass Nerolac Paints Ltd., Bombay (hereinafter referred to as Goodlass).

(7) In order to understand, more clearly, the connection and the link between the various companies, reference may usefully be made to the following illustration : Lig Petitioner No.1 -------------------------------- ------------------------------------------ | | | | | | |More | More |63.88% | | 53% |56% |than | than | | 32.1% | Tengapani |Tulibari | 1/3 | 1/3 | | | | | | | |1.99% | | | | |2% | | | | | | | ------------------------------- ------------------------------------------ Eyre Goodlass Waldies

(8) On 2nd June, 1977 petitioner No. 1 received a notice from the Joint Director, Ministry of Law, Justice and Company Affairs, Department of Company Affairs (respondent No. 2) asking the petitioner-company to make an application for registration under section 26 of the said Act. The reason given for this in the notice was as follows :

'GILLANDERSArbuthnot & Co. Ltd. (GACL) (S. No. 1) is the holding Co. of the four subsidiaries (S. No. 2 to 5) and controls 36 per cent of equity in Waldies Ltd. (S. No. 6)'

Waldies Ltd. is also the subsidiary of a foreign Company namely Land Industries Group Ltd. of U.K. which also controls not less than 1|3rd voting rights in the companies at S. No. 7 and 8. These two companies and Waldies Ltd. are thereforee under the same management in terms of Expl. I(iii) and (vii) of Section 2(g) of the Mrtp Act'.

(9) In its reply dated 19th July, 1977 petitioner No. 1 contended that it held less than 1|3rd of the paid-up capital of Waldies. It was also stated that the petitioner-company was not under the same management as Waldies. and as such it could not be regarded as inter-connected with Waldies. According to the petitioner-company, the question of its being inter-connected with Goodlass and Eyre, thereforee, did not arise. Thereupon the petitioner company received a letter dated 5th August, 1977 from the Department of Company Affairs, New Delhi asking for information as to when the petitioner company had transferred 4 per cent of the shares held by it of Waldies. In the said letter it was noted that earlier it had been reported that the petitioner company held 36 per cent of the said shares and not: 32 per cent. This query was answered by the petitioner company vide its letter dated 10th August 1977. It was pointed out that the petitioner company had sold 4 per cent of its shares of Waldies. with the result that its present share-holding stood reduced to 32 per cent approximately.

(10) The petitioner company thereupon received a letter dared 7th March, 1978 from the Department of Company Affairs. Certain information was asked for from the petitioner company as, according to the Department, certain facts revealed that there had been no severance of interconnection between petitioner No. 1, Indian Wood Products Limited and Waldies. The requisite particulars were furnished by the petitioner company vide its letter dated 15th May, 1978. Thereupon the petitioner company received a notice dated 6th October, 1978. In the said notice it was, inter alia, stated that petitioner No. 1 and Indian Wood Products Limited were still considered to be inter-connected undertakings and since they together held more than 1|3rd of the equity shores in Waldies, thereforee, Waldies was inter-connected with petitioner No. 1 and its subsidiaries. It was further stated that Goodlass and Eyre were also inter-connected with petitioner company with the result that the aggregate value of all the assets of these undertakings was in excess of rupees twenty crores. The affect of this, according to the Department of Company Affairs, was that all the under takings were considered to be registerable under section 26 read with section 29(a)(ii) of the said Act. The petitioner-company was accordingly asked to get itself registered failing which the patitioner-company was informed that penal provisions would be attracted against it.

(11) By letter dated 23rd October, 1978 the petitioner company informed respondent No. 2 that 4 per cent of the shares of Waldies had been sold by Indian Wood Products Limited and. thereforee, it had ceased to be inter-connected with Waldies. Nothing was heard by petitioner No. 1 from the said respondent for aperiod of nearly ten months. Thereafter petitioner-company received a letter dated 4th August, 1979 from the Senior research officer. Department of Company Affairs, New Delhi requiring the petitioner company to furnish information about its share-holding and management in the format which was enclosed. This information was supplied by the petitioner vide its letter dated 9th September, 1979.

(12) The petitioner company then received a copy of notice dated 5th December, 1979 addressed by respondent No. 2 to Goodlass. In the said notice it was, inter alia, stated that petitioner-company had reduced it share-holding of Waldies from 36 per cent to 32 per cent by transferring A 4 per cent of the shares firstly to Indian Wood Products Co. Limited and thereafter to Shree . According to the Department the transfer of 4 per cent shares did not affect the position, and the petitioner-company was still in a position to control 36 per cent of the equity shares of Waldies. According to the respondents Goodlass was inter-connected with petitioner No. 1 and, thereforee, it was liable to register itself under section 26 of the Act.

(13) The petitioner-company, vide a letter dated 9th November, 1979 of the Department of Industrial Development, was granted an industrial license for carrying on the business of manufacture of cut hand tacks and upholstly tacks. Thereupon the petitioner received a letter dated 14th September, 1979 from the Deputy Secretary, Ministry of Law, Justice and Company Affairs to the effect that the petitioner-company was is default in not registering itself under the said Act, and it was necessary for the petitioner-company to obtain prior clearance|approval under the provisions of the said Act before taking steps to implement the said industrial license. According to the petitioner company it sent a reply by its letter dated 7th February, 1980, which was alleged to have been written under duress and coercion, to the effect that the provisions of the said Act were not attracted but as a matter of expedience, and without conceding, the petitioner-company had been advised to apply for registration under protest and without prejudice to its contentions.

(14) The petitioner-company then received another letter dated 16th April, 1980, written by the Department of Company Affairs to Goodlass, directing it to make an application under section 26 of the said Act. A copy of the said letter was marked to the petitioner-company for 'such necessary action'. The petitioner-company also received copies of two more letters dated 26th February, 1981 and 27th February, 1981 addressed to M/s. Crawfold Bayley & Co. (Solicitors of Goodlass) directing them to inform Goodlass to register under section 26 of the Act. In the said letters it was, inter alia, stated that the petitioner-company and Waldies were inter-connected and consequently Goodlass and Eyre were inter-connected with the petitioner.

(15) Petitioner Nos. 1 to 4 thereupon received notices dated 31st October, 1981 from the Director, Ministry of Law, Justice and Company Affairs ( Respondent No. 3). In the said notices it was, inter alia, alleged that an opportunity had been given to the petitioner-company on 29th November, 1979 and it had been clarified at the time of hearing, and also through subsequent correspondence, that the provisions of Chapter Iii were applicable and that the petitioner-company was liable to register under section 26 of the Act. In the notice served on petitioner No. 3 it was also alleged that he was also a Director of Indian Wood Products Co. Ltd. The case of the petitioner-company, with regard to the statement contained in these letters, is that in fact no hearing was given to the petitioner and the letters referred to in the said notices were in fact addressed to M/s. Crawfold Bayley & Co., the Solicitors of Goodlass and only copy of the same was marked to the petitioner. It is also submitted that petitioner No. 3 had ceased to be a Director of Indian Wood Products Co. Ltd. with effect from 28th June, 1980.

(16) In the present petition the challenge is to the petitioner-company being required to get itself registered under section 26 of the said Act. It is, inter alia, prayed that the aforesaid notices dated 31st October, 1981 should be quashed and the respondents should be restrained from requiring the petitioner-company to get itself registered under section 26 of the said Act.

(17) The case of the respondents, in the return filed to the writ petitioner, is the same as contained in the correspon- dence referred to hereinabove. According to the respondents since Lig holds not less than 1|3rd of the total voting power in Goodlass, Eyre and Waldies, the said three companies are inter-connected undertakings within the meaning thereof under section 2(g)(iii)(e) read with sub-clause (vii) of Explanationn 1. Further, it is contended that the petitioner-company is inter-connected with Waldies, by virtue of the definition thereof in section 2(g)(iii)(e) read with clause (iii) of Explanationn I as also Explanationn Iii, as the petitioner-company along with its subsidiaries J.T.C. and T.T.C. control more than 1,3rd of the equity shares in Waldies. According to the respondents, by virtue of clause (vii) of sub-section (g) if section 2 of the Act, the petitioner-company is also inter-connected with Goodlass and Eyre since it is inter-connected with Waldies which, in turn, is inter-connected with Goodlass and Eyre.

(18) There is no dispute that Lig, Eyre, Goodlass and Waldies are inter-connected companies, within the meaning of that expression in the said Act. The only question which arises for consideration is as to whether the petitioner-company is inter-connected with Waldies. It is conceded by the petitioners that if the petitioner-company is held to he inter-connected with Waldies then it must necessarily follow that it is also inter-connected with Eyre and Good-luss. and the provisions of the Act would then be attracted and it would have to get itself registered under section 26 of the Act.

(19) Before examining this question, it is necessary to refer to the provisions of the Act. Section 26 of the Act requires that every undertalcing to which part A of Chapter Iii of the Act applies, should get itself registered. Section 20 states that the said part A of Chapter Iii will, inter alia, apply to an undertaking if the total value of its own assets together with the assets of its inter-connected undertakings is not less than twenty crores of rupees. There is no dispute in the present case that the assets of the petitioner-company and that of Eyre and Goodlass, if taken together would be more than twenty crores of rupees.

(20) The expression 'inter-connected undertaking' is defined in section 2(g) of the Act. The relevant portion of the said section is as follows:-

'2.(g) 'inter-connected undertakings' means two or more undertakings which are inter-connected with each other in any of the following manner, namely: (i) if one owns or controls the other, (iii) where the undertakings are owned by bodies corporate, (a) if one manages the other, or (b) if one is a subsidiary of the other, or (c) if they are under the same management, or (d) if one exercises control over the other in any other manner, (vii) if one is connected with the other either directly or through any number of undertakings which are inter-connected undertakings within the meaning of one or more of the foregoing sub-clauses. Explanationn I.---For the purposes of this Act, two undertakings, owned by bodies corporate, shall be deemed to be under the same management, (i) if one such body corporate exercise control over the other or both are under the control of the same group or any of the constituents of the same group; or (ii) if the managing director or manager of one such body corporate is the managing director or manager of the other; or (iii) if one such body corporate holds not less than one-third of the equity shares in the other or controls the composition of not less than one-third of the total membership of the Board of directors of the other; or (iv) it one or more directions of one such body corporate constitute, or at any time within a. period of six months immediately preceding the day when the question arises as to whether such bodies corporate are under the same management, constituted (whether independently or together with the relatives of such directors) one-third of the directors of the other; or (v) if the same individual or individuals, belonging to a group while holding (whether by themselves or together with their relatives) not less than one-third of the equity shares in one such body corporate also holds (whether by themselves or together with their relatives) not less than one-third of the equity shares in the other: or (vi) if the same body corporate or bodies corporate belonging to a group, holding not less than one-third of the equity shares in one body corporate, also hold not less than one-third of the equity shares in the other; or (vii) if not less than one-third of the total voting power with respect to any matter relating to each of the two bodies corporate is exercised or controlled by the same individual (whether independently or together with his relatives) or the same body corporate (whether independently or together with its subsidiaries); or (viii) if not less than one-third of the total voting power with respect to any matter relating to each of the two bodies corporate is exercised or controlled by the same individuals belonging to a group, or by the same bodies corporate belonging to group, or jointly by such individual or individuals and one or more or such bodies corporate, or (ix) if the directors of the one such body corporate are accustomed to act in accordance with the directions or instructions of one or more of the directors of the other, or if the directors of both the bodies corporate are accustomed to act in accordance with the directions or instructions of an individual, whether belonging to a group or not.'

Explanation III. If two or more bodies corporate under he same management hold, in the aggregate, not less than one-third equity share capital in any other body corporate, such other body corporate shall be deemed to be under the same management as the first-mentioned bodies corporate. Illustration. Undertaking B is inter-conneeted with undertaking A and undertaking C is inter-conneeted with undertaking B. Undertakirig C is inter-connected with undertaking A. if undertaking D is inter-conneeted with undertaking C, undertaking D will be inter-conneeted with undertaking B and consequently with undertaking a; and so on.' According to section 2(g)(iii)(C) two undertakings would be inter-conneeted if they are under the same management. Explanationn I contains deeming provisions whereby two undertakings, owned by bodies corporate, are deemed to be under the same management. According to such clause (iii) of Explanationn I, two undertakings are deemed to be under the same management, inter-alia, if one such body corporate holds not less than 1|3rd of the equity shares of the other body corporate. The petitioner-company, admittedly, owned less than 113rd shares of Waldies. Along with its subsidiaries Ttc and JTC., however, the total shareholding with the petitioner-company in Waldies would come to 36 per cent. Clause (iii) of Explanationn I on a plain reading does not contemplate the share-holding of a subsidiary company to be aggregated with the share-holding of the holding company in order to determine whether the holding company holds l]3rd shares of another company or not. Clause (iii) of Explanationn I does not state that a body corporate should control not less than l!3rd of the equity shares of the other body corporate. The expression used. in this behalf, in the said sub-clause (iii) is 'holds' and not 'controls'. The indication clearly is that the body corporate must, on its own, hold not less than 113rd of the equity shares of the other body corporate. In other words, in com- puting this 113rd, the share-holding of another body corporate, even if that body corporate or its subsidiary, cannot be added or taken into consideration.

(21) This becomes more clear if one refers to sub-clause (vii) of Explanationn 1. In cases falling under said sub-clause (vii), while calculating the voting power of a body corporate, the voting power of its subsidiaries is also to be taken into account. This is so because in clause (vii) it is expressly stated that the two bodies corporate would be deemed to be under the same management if not less than 1|3rd of the total voting power with respect to any matter, relating to each of two body corporates, is exercised or controlled by 'the same body corporate whether independently or together with its subsidiaries. The later words in clause (vii), by virtue of which the voting power of the subsidiaries is to be counted together with that (if the holding company, is not to be found in clause (iii) of Explanationn I. It must, thereforee, he presumed that the legislature deliberately did not want, for the purposes of clause (iii) of Explanationn I, to provide the share-holding of the subsidiaries to be counted together with the shares of the holding company. It must necesarily follow that under clause (iii) of Explanationn I the share-holding of Jtc and Ttc cannot be added to that of the petitioner-company, for the purposes of computing whether the petitioner-company holds 1|3rd shares of Waldies or not. We may note that it is not the respondents' case before us that either the petitioner-company or Waldies controls the composition of not less than 1|3rd of the total membership of the Board of Directorship of the other, a situation which is contemplated by the later portion of clause (iii) of Explanationn I.

(22) It was then contended by the respondents that Explanationn Iii would clearly be applicable to the present case. According to the respondents the petitioner-company. Jtc and Ttc are bodies under the same management and they hold, in the aggregate, not less than 1|3rd equity share capital of Waldies. Mr. Sorabjee, however, on the other hand, contended that the petitioner-company and Jtc and Ttc cannot be regarded as being companies under the same management.

(23) The expression bodies corporate under the same management has not been defined in the Act. Section 2(g) of the Act, however, provides that words and expressions which are used, but not defined in the Act and are defined in the Companies Act, 1956 shall have the same meanings as are assigned to them under the Companies Act. Section 370(IB) of the companies Act provides when two bodies corporate shall be deemed to be under the same management. The said section reads as under

'370(IB).For the purposes of sub-sections (1) and (1A) two bodies corporate shall be deemed to be under the same management-- (i) if the managing agent, secretaries and treasurers managing director or manager of the one body, or where such managing agent or secretaries and treasurers are a firm, any partner in the firm, or where such managing agent or secretaries and treasurers are a private company, any director of such company, is (a) the managing agent, secretaries and treasurers, managing director or manager of the other body; or (b) a partner in the firm acting as managing agent or secretaries and treasurers of the other body; or (c) a direct of the private company acting as managing agent or secretaries and treasurers of the other body; or (ii) if a majority of the directors of the one body constitute, or at any time within the six months immediately preceding constituted, a majority of the directors of the other body; or (iii) if not less than one-third of the total voting power with respect to any matter relating to each of the two bodies corporate is exercised or controlled by the same individual or body corporate; or (iv) if the holding company of the one body corporate is under the same management as the other body corporate within the meaning of clause (i), clause (ii) or clause (iii), or (v) if one or more directors of the one body corporate while holding, whether by themselves or together with their relatives, the majority of shares in that body corporate also hold whether by themselves or together with their relatives, the majority of shares in the other body corporate.'

The learned counsel for the respondents has not been able to show to us under which of the clauses of sub-section (IB) of section 370 of the Companies Act can the subsidiary companies and the holding company be regarded as being under the same management. In our opinion on the facts of the present case, none of the aforesaid clauses of sub-section (IB) are applicable.

(24) From the aforesaid it must follow that as the petitioner company and Jtc and Ttc cannot be regarded as being bodies under the same management, the question of Explanationn Iii to section 2(g) applying cannot arise.

(25) Though in their return, as well as in the correspondence which was exchanged between different parties, the only case which the petitioners were required to meet was that the petitioner-company together with its subsidiaries owned more than l/3rd shares of Waldies, and that Waldies was inter-cennected with Eyre and Goodlass and, thereforee, petitioner-company was inter-connected with Eyre and Good-lass, but at the time of arguments Mr. Chandrasekran, the learned counsel for the respondents, sought to contend that in any case the petitioner-company would be inter-connected with Eyre and Goodlass under section 2(g)(vii) of the said Act.

(26) Under sub-clause (vii) of section 2(g) the petitioner-company could be regarded as inter-connected with. Eyre or Goodlass if they are (a) connected directly, or (b) connected through other undertakings winch are inter-connected undertakings within the meaning of any of sub-clauses (i) to (vi) of section 2(g). According to the learned counsel for the respondents, the petitioner-company is inter-connected with Ttc under section 2(g)(iii)(b), as Ttc is a subsidiary of the petitioner-company. Further, Waldies and Ttc are deemed to be under the same management because of sub-clause (vii) of Explanationn I which provides that two bodies corporate shall be under the same management if not less than lj3rd of the total voting power with respect to matters relating to each of the said two bodies corporate is exercised or controlled by the same body corporate (whether independently or together with its subsidiaries). To put it differently, the contention is that the petitioner-company, on its own or along with its subsidiaries, can exercise or control l/3rd of the total voting power of Ttc as well as of Waldies and, thereforee, Waldies and Ttc become inter-connectod undertakings. According to Mr. Chandrasekhran. the chain. of connection contemplated by section 2(g)(vii) continues as Waldies is inter-connected with Ltg which is mter-connected with Goodlass and Eyre. According to the learned counsel the petitioner-company thus becomes inter-connected with Goodlass, as the petitioner-company is inter-con nected with Ttc which is inter-connected with Waldies, which is inter-coonected with Lig and which is inter-connected with Goodlass.

(27) There is considerable force in the aforesaid contention. We, however, refrain from expressing any final opinion for the reason that the question as to whether the petitioner-company does exercise or control such voting power in Waldies and its subsidiary companies, with respect to any matter relating to each of them, is a question of fact. This question has neither been pleaded nor put to the petitioners. If any such voting power is exercised or controlled, then the respondents ought to have issued a show cause notice to the petitioners in this behalf. This has admittedly not been done in the present case. Even if we were to agree with the learned counsel for the respondents on the aforesaid interpretation which is sought to be put on section 2(g)(vii) read with sub-clause (vii) of Explanantion I, we are unable to apply the said provision at the present moment, in the absence of there being a factual averment or a finding to the aforesaid effect.

(28) It may be open to the respondents, if they so desire, to issue a fresh notice to the petitioners, if it can be shown that the provisions of section 2(g)(vii) read with sub-clause (vii) of Explanantion I are attracted to the present case. So far as the present notice is concerned the same has, however. to be quashed for the reasons which we have already stated earlier.

(29) For the aforesaid reasons the writ petition is allowed and the notice dated 31st October, 1981, issued to the petitioners, are quashed. The petitioners shall be entitled to costs. Counsel's fee Rs. 550.