Hon. K. N. Pandey, J.
Dr. Manmohan Sharma, the petitioner appearing in person has prayed for quashing the minutes of the meeting dated 16.5.2002 of the Board of Directors of Swadeshi Polytex Limited, Ghaziabad in which it was decided, while discussing any other matter with the permission of the chair at Item No.10 that the pay and allowance paid to Dr. Manmohan Sharma, Company Secretary by Shri Gaurav Swarup in 1998 were on a very higher side and a company, which is sick and their employees cannot be paid salary to the workers cannot afford to accumulate such a big liability. It was decided that the services of Shri Man Mohan Sharma, Company Secretary may be dispensed with from 1st June, 2002 and Shri H.K. Sharma be given charge of all official records/ official equipments from him. Shri O.P. Soni, Company Secretary, NTC (HC) was directed to look after the work of Company Secretary in addition to his present duties.
The petitioner has also prayed for direction to the respondents to reinstate him on the post of Advisor-cum-Company Secretary w.e.f. 8.6.2002 and to pay him retirement benefits, namely provident fund, gratuity and superannuation together with unpaid salary and allowance w.e.f. September, 2002 till date, along with 18% interest.
Shri Anurag Khanna appearing for Swadeshi Polytex Ltd., Ghaziabad (the Company) has raised a preliminary objection to the maintainability of the writ petition. It is stated by him on the basis of averments made in the affidavit of Shri B. Mehrotra, Executive Director of the company that as per the shareholders pattern of the company in which NTC has 34%; Paharpur Cooling Tower Ltd. has 25%; MKJ Enterprises has 12.50%; Financial Institution as 2.50% and General Public as 26% shares, the company is not a 'government company' as defined under Section 617 of the Companies Act and thus the writ petition by an Officer-cum-Company Secretary of the company challenging the termination of his contract of service is not maintainable. Shri Anurag Khanna submits that the High Court does not ordinarily interfere with the resolution of the Board of Directors of the Public Limited Companies, which are not government companies, terminating their services and for other reliefs. He submits that the petitioner has to search for competent forums other than the writ petition under Art.226 of the Constitution of India to seek reliefs.
Shri Anurag Khanna supported his objections by further stating that Shri R.K. Sharma-respondent No.5 is the Chief General Manager (DPR) and not Chairman and Managing Director of National Textile Corporation (Delhi and Rajasthan). He is presently functioning as occupier of the company. The petitioner is not functioning since 1998 and hence there is no question of payment of salary and allowance to him. The amount calculated by the petitioner are wrong and nothing whatsoever was minimum due to the petitioner as company is not taking his services since September, 1998. Shri Anurag Khanna has relied upon the judgments of this Court in Writ Petition No.50571 of 2002, M/s Paharpur Cooling Towers Ltd. Vs. the Collector, Ghaziabad & Ors. dated 13.1.205 connected with other writ petitions including Writ Petition NO.54861 of 2003, M/s Swadeshi Polytex Limited Officers Welfare Association Vs. Union of India & Ors. In this case while considering the challenge of M/s Paharpur Cooling Towers Ltd. to the recovery certificates issued by the Deputy Labour Commissioner, Ghaziabad of the dues of the workman, the Court did not accept the challenge on the ground that the Paharpur Cooling Towers has filed application under Section 397 and 398 of the Companies Act, 1956 dealing with the termination of a part of management alleging that the nominee directors of the NTC were acting against the interest of the company by not defending the litigation or contesting the proceedings relating to the impugned recovery certificate. A reference under Section 15 (1) of the Sick Industrial Companies (Special Provisions) Act, 1985 was registered as Case No.182 of 2002. Auction proceedings were challenged by Paharpur Cooling Tower in BIFR. The reference was rejected on 15th November, 2002 as time barred. An appeal in AAIFR was registered and in which an application was filed on behalf of the Swadeshi Polytex Ltd. that the appeal can be dismissed since Shri Sharma was not authorised by Board of Directors to file the appeal. After referring to the litigation regarding the workers' dues and the directions given as an interim measure restraining auction of the property, if the company pays Rs.16.87 crores towards satisfaction of the recovery certificate, the Court held, after noticing the rival contentions that 33.60% shares of the company are held by NTC; 28.02% by Paharpur Cooling Towers; 15.29% by Financial Institutions and remaining shares are held by general public. Out of 10 directors of the company there are 5 nominee directors of the NTC; 4 nominee directors of Paharpur Cooling Towers and 1 nominee director of IDBI. The Court held that Paharpur Cooling Towers having 28.02% shares is a minority shareholder, which does not have a right to file a writ petition challenging the recovery certificate. The company was pursuing its remedies against oppression and mis-management as minority shareholders in Company Law Board in which its applications filed against the recovery certificates were disposed of. The company was thus pursuing the equally efficacious alternative remedy available to it and was also pursuing the same before the Company Law Board. In the circumstances, the writ petitions filed against the recovery certificate were dismissed.
Dr. Manmohan Sharma submits that the order terminating his services by the company, which is government company within the definition of Section 617 of the Companies Act is violative of principle of natural justice. The petitioner was not given any opportunity and was not heard, before the Board of Directors resolved to terminate his services. He would submit that the Board of Directors was misled and acted with malafide intentions to terminate his services. The period during which the decision was taken by the Board of Directors that is on 16.5.2002, the company was under deep and pervasive control of the Government, as it had majority of its nominees on its Board of Directors, and was headed by IAS officer. During the period 25.8.2009 the financial institution (IDBI) had sold its shares in the company and the government nominees were reduced to minority. The non-banking financial companies got its 5 nominees changed in the extraordinary general meeting held on 23.11.2006 without the consent of Chairman and Managing Director of NTC Ltd.
Shri Sharma submits that initially in the year 1998, when the management of the company was taken over, Jaipurias-NTC and Financial Institutions had three nominees on its Board of Directors with Chairman and Managing Director of NTC Ltd. (the holding company) as Chairman and Managing Director of the Board of the Company. At that time there was no nominee of Paharpur Cooling Towers. In the year 1991 the NTC and FIs increased their nominees to 5. Paharpur Cooling Towers had 2 nominees on its Board. This arrangement continued upto 1998, when on the directions of Ministry of Textiles, Government of India, a shareholder agreement was signed on 30.7.1998. In the extraordinary general meeting of the company held on 23.11.2006 at Mumbai, 5 nominees of NBFC were appointed which had reduced the majority of the government nominee. The consent of NTC Ltd. was not obtained in changing the composition of the Board. The composition of the Board of Directors was changed in violation of the shareholders agreement dated 30.7.1998, which was accepted by the Delhi High Court on 17.8.1998.
Shri Sharma submits that on 16.5.2002, when the impugned resolution was passed by the Board of Directors, out of total 8 Directors on the Board of the Company the Government had its 5 nominees and remaining 3 nominees were of Paharpur Cooling Tower Group in terms of the shareholders agreement dated 30.7.1998, which was also signed by the Joint Secretary, Ministry of Textile, Government of India and thus under Section 4 (1) (a) of the Companies Act, 1956 the company shall be deemed to be subsidiary of another but only if that other controls the composition of its Board of Directors. Section 4 (2) stipulates that the composition of the 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 exercisable by it at its discretion, without the consent or concurrence of any other persons, can appoint or remove the holders of all or a majority of the director; but for the purposes of this provision that other company shall be deemed to have power to appoint to a directorship with respect of which any of the following conditions given in sub-section are satisfied, that is to say that a person cannot be appointed thereto without the exercise in his favour by that other company of such a power. In other case, if one company holds not less than half of the equity share capital in another company but controls the composition of the Board of Directors namely that it is absolute and unrestricted powers to appoint or remove all or majority of the Directors in the company is the holding company and that other company is the subsidiary company. Shri Sharma submits that since on the day when the impugned resolution was passed, out of 8 Directors on the Board of Directors of the company government had its 5 nominees against 3 nominees of the Paharpur Cooling Towers, the company would have a government company and thus the writ petition is maintainable.
It is not denied that NTC was holding 34% shares on the relevant date in the company. The emphasis is on the number of nominee directors. Before considering the effect of the number of nominee directors and the Board of Company, it would be relevant to refer to some of the documents namely statement given by the Minister of Textiles on 26.7.1989 in the Parliament, in which he stated that the Swadeshi Polytex Ltd. is not a government company. The Minister of Textile also categorically stated in its letter dated 31.3.2005, that Swadeshi Polytex Ltd. is not government company. A similar stand was taken by NTC to the Enforcement Officer EPF that the company is a separate public limited company in which NTC has 34% shareholders; it is not unit of NTC and is only a associate company of NTC. The Chairman of NTC is only Non-Executive Chairman of the Board of the Company and is not responsible for day to day management of the company.
The meeting of the Board of Directors dated 16th May, 2002 in which impugned resolution was passed, was presided by Shri K.M. Chaddha, IAS of NTC Ltd. as Chairman. There were 7 more persons present. Out of these Shri S.C. Burdhan, R.P. Yadav, Shri B. Mahapatra and Shri V.K. Jain were nominee of NTC and Shri Gaurav Swarup, J.K. Agrawal and Shri H.K. Sharma were of Paharpur Cooling Tower Ltd.; 5 out of 8 Directors were of NTC Ltd.
The meaning of holding company and subsidiary company under Section 4 (1) refers to the test of control over the composition of its Board of Directors. Sub-section (2) of Section 4 provides for situation in which the deeming clause is attracted, namely where the other company by the exercise of some power exercisable 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 Director. Sub-section (3) of Section 4 provides that in determining whether one company is subsidiary of another, any share held or power exercisable of that other company in a fiduciary capacity shall be treated as not held or exercisable by it.
With only 34% shares the National Textile Corporation Ltd., which is government company under Section 617 of the Companies Act did not have control over Swadeshi Polytex Ltd., nor there is any proof of consent or concurrence to appoint or remove the holders of all or a majority of the Directors. The deeming provisions under sub-section (1) of Section 4 and sub-section (2) of Section 4 are attracted, where either there is control of the composition of its Board of Directors, or where the other company by the exercise of same powers exercisable by it without the consent or concurrence, can appoint or remove the holders of all or majority of the Directors. The ultimate test is of the percentage of shares held, which give the controlling power of appointment of Directors.
A government company where it is wholly owned and controlled by the Government is amenable to the writ jurisdiction of the High Courts under Art.226 of the Constitution of India. In Som Prakash Rekhi Vs. Union of India, AIR 1981 SC 212; Ramana Dayaram Shetty Vs. International Airport Authority of India, AIR 1979 SC 1628 and in Sukhdev Singh Vs. Bhagat Ram, 1975 (45) Company Cases 285 (SC) it was held that statutory corporate body or other authority and the companies, which are wholly owned and controlled by the Government are deemed to be 'state' within the meaning of Art.12 of the Constitution. In Central Inland Water Transport Corporation Ltd. Vs. Brojo Nath Ganguly, 1986 (60) Company Cases 797 the Supreme Court held that policies and actions of the wholly owned government companies must be in conformity with the rights guaranteed under the Constitution of India, and if they are violated the writ jurisdiction of the Court can be invoked. The applicability of Art.311 of the Constitution of India was, however, held by the Supreme Court in Pyare Lal Sharma Vs. J & K Industries Ltd., AIR 1989 SC 1854 subject to the provisions in the Articles of Association of the company to that effect. The removal of employee by the Management Director to whom such power was delegated was found to be effective removal.
"S. 617. Definition of "Government Company"- For the purposes of [this Act] Government company means any company in which not less than fifty one percent of the [paid-up share capital] is held by the Central Government, or by any State Government or Governments, or partly by the Central Government, and partly by one or more State Governments, [and includes a company which is a subsidiary of a Government Company as thus defined]."
It is not denied that National Textile Corporation Ltd. is a Government Company. It holds 34% shares in Swadeshi Polytex Ltd., when the impugned resolution was passed.
On 16.5.2002 there were 5 Nominee Directors of NTC including Shri K.M. Chaddha, IAS, Chairman and Managing Director in the Board of Swadeshi Polytex Ltd. Remaining 3 out of 8 were the Nominee Directors of the Paharpur Cooling Towers Ltd. holding 25% equity shares. The holding company and subsidiary have not been defined under the Companies Act, 1956. The meaning of 'holding company' and 'subsidiary' is given in Section 4 of the Act, quoted as below:-
4. Meaning of "holding company" and "subsidiary"
(1) For the purposes of this Act, a company shall, subject to the provisions of subsection (3), be deemed to be a subsidiary of another if, but only if,-
(a) that other controls the composition of its Board of directors; or [(b) that other-
(i) where the first-mentioned company is an existing company in respect of which the holders of preference shares issued before the commencement of this Act have the same voting rights in all respects as the holders of equity shares, exercises or controls more than half of the total voting power of such company;
(ii) where the first-mentioned company is any other company, holds more than half in nominal value of its equity share capital; or]
(c) the first-mentioned company is a subsidiary of any company which is that other's subsidiary.
Illustration Company B is a subsidiary of Company A, and Company C is a subsidiary of Company B. Company C is a subsidiary of Company A, by virtue of clause (c) above. If Company D is a subsidiary of Company C, Company D will be a subsidiary of Company B and consequently also of Company A, by virtue of clause (c) above; and so on.
(2) For the purposes of sub-section (1), 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 exercisable by it at its discretion without the consent or concurrence of any other person, can appoint or remove the holders of all or a majority of the directorships; but for the purposes of this provision that other company shall be deemed to have power to appoint to a directorship with respect to which any of the following conditions is satisfied, that is to say:-
(a) that a person cannot be appointed thereto without the exercise in his favour by that other company of such a power as aforesaid;
(b) that a person's appointment thereto follows necessarily from his appointment as director 2[***] or manager of, or to any other office or employment in, that other company; or [(c) that the directorship is held by an individual nominated by that other company or a subsidiary thereof.] (3) In determining whether one company is a subsidiary of another,-
(a) any shares held or power exercisable by that other company in a fiduciary capacity shall be treated as not held or exercisable by it;
(b) subject to the provisions of clauses (c) and (d), any shares held or power exercisable-
(i) by any person as a nominee for that other company (except where that other is concerned only in a fiduciary capacity); or
(ii) by, or by a nominee for, a subsidiary of that other company, not being a subsidiary which is concerned only in a fiduciary capacity, shall be treated as held or exercisable by that other company;
(c) any shares held or power exercisable by any person by virtue of the provisions of any debentures of the first-mentioned company or of a trust deed for securing any issue of such debentures shall be disregarded;
(d) any shares held or power exercisable by, or by a nominee for, that other or its subsidiary [not being held or exercisable as mentioned in clause (c)] shall be treated as not held, or exercisable by that other, if the ordinary business of that other or its subsidiary as the case may be, includes the lending of money and the shares are held or the power is exercisable as aforesaid by way of security only for the purposes of a transaction entered into in the ordinary course of that business.
(4) For the purposes of this Act, a company shall be deemed to be the holding company of another if, but only if, that other is its subsidiary.
(5) In this section, the expression "company" includes any body corporate, and the expression "equity share capital" has the same meaning as in sub-section (2) of section 85.
(6) In the case of a body corporate which is incorporated in a country outside India, a subsidiary or holding company of the body corporate under the law of such country shall be deemed to be a subsidiary or holding company of the body corporate within the meaning and for the purposes of this Act also, whether the requirements of this section are fulfilled or not.
[(7) A private company, being a subsidiary of a body corporate incorporated outside India, which, if incorporated in India, would be a public company within the meaning of this Act, shall be deemed for the purposes of this Act to be a subsidiary of a public company if the entire share capital in that private company is not held by that body corporate whether alone or together with one or more other bodies corporate incorporated outside India.]"
Section 4 as it was enacted provided that the company shall be subsidiary of another, if that other, controls the composition of its Board of Directors. Sub-sub-section (b) of sub-section (1) of Section 4 and sub-sub-section (c) of sub-section (2) of Section 4 were substituted by Act No.65 of 1960. By the same Act sub-section (7) was inserted in Section 4.
The concept of holding and subsidiary companies has been borrowed from English Law, which requires the preparation and publication of set of group accounts. There is no such requirement under the Indian Law. A reading of Section 4 would show that it is not required as in English Law that holding company must be the member of other company (subsidiary company), it must control the composition of its Board of Directors. A company will be treated as holding company of a subsidiary company even though it may not be a member of the subsidiary company, and does not hold any shares in it. Where holding company is in position to control the Board of Directors of its immediate subsidiaries and through such control, controls also the subsidiaries of such subsidiary without itself being a member of such subsidiaries, will be the holding company. Say for example, company (A) would be deemed to be subsidiary of Company (B), if one of the following conditions is satisfied namely; (i) Company (B) controls the composition of the Board of Directors, or (ii) Company (B) holds more than half of companies equity share capital in normal value or (iii) Company (A) is subsidiary of any subsidiary of Company (B).
In the present case we have to find out the meaning of the crucial word 'control', falling in sub-section 1 (a) of Section 4 of the Act. The expression control in relation to a company ordinarily means the possession of the power, by the exercise of voting rights to carry a resolution at the general meeting of the company. The control can also be said to be exist, where holding company has independent power by the exercise of which either directly and/ or through one or more subsidiaries, it can appoint or remove the whole or majority of the Board of Directors. It must be direct or indirect. The holding of majority of voting power in a company is also treated to be sufficient to constitute controlling interest.
In Velayudhan M. Vs. ROC, (198) 50 Company Cases 33 (Kerala) a company had entered into an agreement with another, under which it advanced money to other. The agreement provided that the lending company would have power to nominate the majority of the number of directors, that the nominee directors would be treated in all respects as the Directors of the borrowing company and that they would be co-opted on its Board, and that lending company would have the power to convert the loan into shares in installments or in lumpsum. The lending company had nominated its Directors and they were immediately co-opted by the borrowing company at its Board in defending proceedings launched by the Registrar for violation of Section 372 of the Act namely exceeding the limits of permissible investments. The lending company contended that they were holding the company and therefore enjoyed exemption under sub-section (14) of Section 372. The Court accepted the possibility of a temporary controlling power and the temporary relationship of holding and subsidiary because the Act nowhere prescribes the duration of the relationship.
In PENINGTON'S COMPANY LAW, 796 (%th Edn., 1985), the type of control envisaged by the Act has been clarified as follows:- "Powers of appointment to and removal from the putative subsidiary's board which are exercisable by other subsidiaries of the holding company, or by nominees for its or such other subsidiary are deemed to be exercisable by the holding company, but powers held in a fiduciary capacity, or conferred by debentures issued by the subsidiary, or by a trust deed securing such debentures, or enjoyed in consequence of holding shares in the subsidiary as security for loans are disregarded in the same way as shares in the subsidiary are disregarded when ascertaining whether the holding company holds more than half of the subsidiary's equity share capital." Sub-section (2) of Section 4 provides deeming control by the holding company over the subsidiary company at its own discretion and without depending upon any other person's consent or concurrence, where it has powers to appoint or remove the whole or majority of the directors of the first mention directors of the subsidiary company. On this legal position, we find that Swadeshi Polytex Ltd. on the date it passed the resolution on 16th May, 2002, was not the subsidiary company of National Textiles Ltd. The number of nominee directors by itself do not suggest nor the deeming provisions under Section 4 of the Companies Act could be invoked unless it is found that National Textiles Ltd. had control over the compostion of the Board of Director of Swadeshi Polytex Ltd. The petitioner was Advisor cum Company Secretary of Swadeshi Polytex Ltd. He is the best person to have knowledge to the arrangement under which inspite of holding only 34% shares NTC Ltd. had 5 nominee directors including Chairman and Managing Director in the Board of Swadeshi Polytex Ltd. There was a dispute pending between Paharpur Cooling Towers with 3 directors on Board alleging oppression and mismanagement against the National Textiles Ltd. The minutes of the meeting dated 16th May, 2002 also records that the Advocate fighting the case in DRT on behalf of the Swadeshi Polytex Ltd. did not recognise the authority of the Chairman of the Swadeshi Polytex Ltd. and had made statement that he will be taking instructions from the Company Secretary of the Swadeshi Polytex Ltd. The company had taken a decision not to revive and applied for closure to the Government of U.P. and that despite such decision the Directors of Paharpur Group were still pursuing the case of revival without reference to the Board of the Company. The minutes further record a statement by Shri Gaurav Swarup for Paharpur Cooling Towers that as per agreement arrived at in 1998, the Committee of Directors is to take action for administering the affairs of Swadeshi Polytex Ltd. for its day to day functioning. The Paharpur Group, however, did not honour the decisions of the Board. The minutes further record:- "as far as occupier is concerned, for the last two years no occupier has even visited the SPL factory at Ghaziabad, where he will be setting in the premises and dealing with administration matters. The new occupier Shri H.K. Sharma, who has been appointed for more than two months back has not even visited the SPL factory in Ghaziabad but has started filing petitions in the High Courts and BIFR without showing it either to the Committee of Directors/ Board of Directors or to the Chairman". The resolution of the Board of Directors, the pendency of the petition in Company Law Board, which had allowed the meetings to take place but not to give effect to the resolutions till further orders are passed by it; the denial of authority of the Chairman, Swadeshi Polytex Ltd. in DRT by the Advocate of the Company; the decision to withdraw the case filed by Shri H.K. Sharma, Director and occupier Swadeshi Polytex Ltd. from the High Court; the authorisation of Shri K.M. Chaddha, Chairman to sign the affidavit on behalf of Swadeshi Polytex Ltd.; and the conflicting decisions taken by the Directors of NTC Group for closure of the factory and the Paharpur Group to pursue for its revival, demonstrates that NTC had no control over the Board of Directors and in the circumstances it cannot be inferred that NTC Ltd. either by holding 34% of the equity or by having 5 out of 8 nominee directors including Chairman and Managing Director had control over the company within the meaning of Section 4 of the Companies Act to be treated as holding company of which Swadeshi Polytex Ltd. was a subsidiary. For the aforesaid reasons, we find that Swadeshi Polytex Ltd. as on 16th May, 2002, when the impugned resolution was passed to dispense the services of Dr. Manmohan Sharma, the Company Secretary, was not a subsidiary company of NTC Ltd. to fall within the meaning of expression Government Company under Section 617 of the Act. We further find that there is nothing on record to show that there was any such control much less deep and pervasive control of the Central Government in Swadeshi Polytex Ltd, either directly or through the NTC Ltd. M/s Swadeshi Polytex ltd. was not following the policies of the Central Government and was not working in tandem with the Central Government in running the company. The resolutions passed by the company in the year 2002 and thereafter do not show that it was serving as an instrumentality, as an extended limb of the Central Government to be deemed to be a 'state' under Art.12 of the Constitution of India. The decisions of the company are therefore not amenable to the writ jurisdiction of the Court under Art.226 of the Constitution of India. The petitioner is not protected by Art.311 of the Constitution of India and that his services being essentially contractual in nature, he could revert to the remedies in civil court to claim damages for loss of employment, if such a claim is established.
We also do not find that apart from the fact that there were 5 nominee Directors of NTC on the Board of Directors on the date, when the impugned resolution was passed, there is anything else to show that NTC was controlling the composition of its Board of Directors or that it had the powers to appoint or remove the holders of all or majority of the Directors. There is a clear denial in the counter affidavit filed on behalf of the company that NTC Ltd. was not having the control over the Board of Directors nor there is anything to show that NTC Ltd. could have either remove or appoint the Board of Directors to have the ultimate control over the affairs.
For the aforesaid reasons, we find that the company was not subsidiary company of NTC Ltd. on 16th May, 2002, when the impugned resolution was passed and was not a Government Company within the meaning of Section 617 of the Companies Act. Consequently, we find that the writ petition under Art.226 of the Constitution is not maintainable to challenge the resolution of the Board of Directors of the company. The petitioner will have to seek his remedies elsewhere, for seeking reliefs prayed for in the writ petition.
The writ petition is dismissed.
Dt.21.07.2011 SP/