National law university odisha corporate law I national law university odisha
Download 0.88 Mb. View original pdf
|
- Navigate this page:
- INDIAN JURISPRUDENCE HOLDING AND SUBSIDIARY COMPANIES
- According to Section 2(87)
- Vodafone International Holdings BV v. Union of India
- Mahanagar telecom vs. Canara Bank 32
| The Enterprise Liability Theory In any case, the principle of enterprise liability may instead base parental liability. The former has been formulated primarily in the sense of tort law in response to the ramifications of the doctrine of separate legal identity and the concept of restricted shareholder liability– particularly in the case of corporate groupings. In short, the principle of enterprise liability encapsulates the idea that, insofar as parent companies reap the benefits of their subsidiaries ' operations, they will bear the corresponding risks faced as well. Accordingly, this theory sees the organization as a single "enterprise" and eventually allows the corporate veil to be lifted, to the extent that it catalyses third parties to go after the parent company/holding company while seeking compensation for the damage they have suffered as a consequence of the actions of the subsidiary. 29 DHN Food Distributors Ltd v Tower Hamlets LBC [1976] 3 All ER 462 at 467 CA. Case Ci Viho Europe BV v Commissionn of the European Communities [1996] ECR I (EU. NATIONAL LAW UNIVERSITY ODISHA CORPORATE LAW Ii bJUDICIAL APPROACH OF THE APPLICABILITY OF THE SEE DOCTRINE IN INDIAN JURISPRUDENCE HOLDING AND SUBSIDIARY COMPANIES Holding and subsidiary companies are relative terms. Generally speaking, if one company controls another company, the controlling company maybe termed as the Holding Company and the company so controlled as a ‘Subsidiary’. According to Section 2(87) subsidiary company or subsidiary, in relation to any other company, means a company in which the holding company- 1. Controls the composition of board of directors. 2. Exercises or controls more than one-half of the total share capital either at its own or together with one or more of its subsidiary companies. It is an established rule that a subsidiary is considered as a separate legal entity and is distinct from its parent company. The position holds good even in the case of Wholly Owned Subsidiaries i.e when 100% of stake in subsidiary is held by the parent company. The decision of Supreme Court in Vodafone International Holdings BV v. Union of India 31 succinctly captures the position in following words “The legal relationship between a holding company and Wholly Owned Subsidiary is that they are two distinct legal persons and the holding company does not own assets of the subsidiary and, in law, the management of the business of the subsidiary also vests in the Board of Directors, holding company and subsidiary company are, however, considered as separate legal entities, and subsidiary is allowed decentralized management.” Use of complex corporate structures is an ordinary activity which involves a huge number of companies as a vehicle to do business. Commercial, regulatory and tax considerations drive the form of these structures. Due to the limitations of the conventional principles of privity and separateness of corporate identity, a potent challenge to contract enforcement is raised by these complex structures. It is a fundamental principal of company law that the shareholders and the company are taken as two different entities. The fundamental rule of contract law holds liable only those persons 31 Vodafone International Holdings BV v Union of India (2012) 1 Comp LJ SC. NATIONAL LAW UNIVERSITY ODISHA CORPORATE LAW Ii for the breach who are parties to an agreement. Hence, financially sound parent companies enter and execute the contract under the veil of shell subsidiary companies to skip liability. It is to solve this problem that the group-company doctrine was enacted. To impose liability on a group of companies, the Indian courts have relied on the doctrine of piercing the corporate veil and privity by conduct. Applying the group company doctrine, the SC in the case of Mahanagar telecom vs. Canara Bank 32 held that in Arbitration matters, the subsidiaries should be bound by the agreement which is entered by the parent company. However no hard and fast rule was adopted that would bind all group companies to an arbitration agreement entered into by one of the companies in the group. To bind the non-signatory group companies, it was not considered to be adequate, the principles of common ownership and control. Certain additional or other elements which would bind the non-signatory group companies were taken into account by the Indian Courts. These elements contained a common intention, negotiation or performance of the contract in question by non-signatory group companies. The non-signatory group companies which are getting an advantage from the contract should also be bound by the arbitration agreement it contains, the Court held. The parent company in Mahanagar Nigam case, however, expands the scope postulated in Download 0.88 Mb. Share with your friends:
|