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Introduction and facts
First petitioner is a public limited company registered under the Companies Act, 1956, and the second petitioner is the Director of the first petitioner.
A tender notice was published on 22 April, 1993 by the General Manager, Hyderabad Telecommunications inviting sealed tenders from competent agencies for printing, binding and supply of telephone directories in English for three annual issues starting from 1993.
The notice said that the job involved “Compilation of given data into directory format, procurement of paper, printing, binding and delivery of the telephone directories to General Manager, Hyderabad Telecommunications free of cost at the specified distribution points. Besides this, the tenderer had to pay a royalty to General Manager, Hyderabad Telecommunications for each issue by clearly specifying the maximum royalty amount for each issue offered by him. The successful tenderer will be permitted to procure on his own classified advertisements and cover page advertisements”.
Then the notice said that “The directory shall conform to the technical specifications given in the tender document. The tenderer should have experience in compiling, printing and supply of telephone directories to the large telephone systems with the capacity of more than 50,000 lines. The tenderer should substantiate this with documentary proof. He should also furnish credentials in this field”.
For the total job could be obtained from the Directory Officer, Hyderabad Telecom on payment of certain charges, Tender was to be received up to 15 hours on 14 May, 1993 and to be opened on the same day after half an hour of closing time of receipt of tenders.
The petitioners before us were not the parties to that petition.
Arguments
During hearing of this petition we were told that that petition was dismissed by the Andhra Pradesh High Court on 30 August 1993, but the petitioners contend that the challenge there was on a different ground.
First petitioner says it was most suitable and competent party for award of the contract and particularly when it offered much higher amount of royalty than the fourth respondent.
The balance 60% equity of the first petitioner is stated to be held by M/s. Thompson Press Limited; M/s. Living Media India Limited; Mr. Aroon Puric; World Media Limited and the other companies in the same group.
The petitioners have described in detail the functioning of all the shareholders of the first petitioner claiming that they have rich experience in printing, publishing and marketing.
The first petitioner is claimed to possess the management expertise, experience and know how in the printing of directories with yellow pages having available to it the infrastructure for marking and latest production facilities.
By awarding the contract to the fourth respondent, the petitioners say, the exchequer has lost about Rs. 365 lakhs at the fourth respondent had offered royalty of Rs. 95 lakhs as against the royalty of Rs. 459.9 lakhs offered by the first petitioner.
The petitioners have also complained that they were not informed of any reason for non-consideration of their tender.
These facilities, the petitioners claimed, were available to them to execute the contract in question and that all these facts were clearly brought out in the tender documents submitted by the petitioners.
The petitioners say that award of the contract to the fourth respondent has been based on extraneous considerations and this action of respondents 1 to 3 is violative of Article 14 of the Constitution.
Mr Sarin, appearing for the petitioner, formulated three points : though the petitioners are not challenging the eligibility conditions as set out by the authorities, the authorities acted in an irrational, unreasonable and arbitrary fashion and also against the public interest in just only looking at the experience of the first petitioner itself; On a proper reading of the tender submitted by the first petitioner it had to be read “We the following companies, namely, Thompson Press, Living Media, Integrated Information Pte. Ltd. and World Media Limited and Aroon Purie poll their experience and their resources together in a joint venture in the name of the first petitioner”.
The authorities should have lifted the corporate veil of the first petitioner though in view of the above submission it might not arise.
Still in the alternative it was submitted that the first petitioner was in the nature of partnership of the aforesaid companies and the person; the question of public revenue and, thus, the public interest was involved and the tender of the first petitioner could not be rejected on hypertechnical pleas that the first petitioner itself had no experience.
Respondents 1 to 3, i.e. the authorities, have denied the allegations of the petitioners and affirmed their action in awarding the tender to the fourth respondent.
As a documentary proof of experience, they say, the petitioner gave the telephone directories of Bombay and Delhi 1992 Issues.
The petitioners have themselves stated that M/s. Thompson Press and M/ s. Living Media had printed and bound these telephone directories for respective parties who had been awarded contract for Delhi and Bombay.
These respondents say that first petitioner did not produce any evidence to show that it had in its own name undertaken compiling, printing, binding and supply of telephone directories as mentioned in the tender notice.
The tender of the first petitioner these respondents say, could not be considered as it did not satisfy one of the conditions of eligibility.
These respondents further say that statement in tender document of the first petitioner that it was converted into a joint venture in 1992 and that the first petitioner’s plan included directory publishing as one of the items among other items of work, viz.
Criticising the high offer of royalty given by the first petitioner this respondent says that it was a sheer attempt of adventurism and the very enormity of the bid would make any reasonable man suspect the bona fides of the first petitioner.
Then respondent further says that the first petitioner had also bid for the contract for Delhi directories for five years 1993-1998 where the number of subscribers was over seven lakhs as opposed to two lakhs in Hyderabad offering a royalty amount of Rs. 6 crores.
For the Calcutta telephone directory also the first petitioner gave its bid offering Rs. 7 crores for a five years contract.
Compared to this’the bid of the petitioner for Rs. 4.59 crores for a three years contract for Hyderabad, the fourth respondent says, shows that the petitioner has very little knowledge of the business and the enormity of the bid would make the contract commer- daily unavailable leading to severe losses and the possibility of default, as had happened in the past.
As regards Calcutta, the first petitioner stated, that it is almost a stagnant market while Hyderabad is a growing metropolis.
The first petitioner wanted to enter into a foreign collaboration agreement with Integrated Information Pvt. Limited, Singapore.
The terms of the foreign collaboration were that the foreign company would have equity participation of Rs. 2 lakhs having 40% of the authorised capital in the first petitioner.
Foreign equity participation was to be 40% amounting to Rs. 2 lakhs in the paid up capital of Rs. 5 lakhs of the first petitioner.
The first petitioner was incorporated in the year 1961.
The argument of Mr. Sarin had been that the authority should have pierced the veil of the first petitioner to find out as to who were the sharehoders of the company and whether they were having the requisite experience and satisfy the conditions of eligibility of the tender notice.
A Bench of this Court in U. K. Mehra v. Union of India, said that setting up of the subsidiary company could not be construed as joint venture and that joint venture would come into existence when the resources of two different persons or entities are pooled together.
In the present case we find that it is no joint venture as such as alleged by the first petitioner, but there is only a certain amount of equity participation by a foreign company in the first petitioner.
Mr. Chidambaram was also critical of the stand of the first petitioner that its shareholders had the requisite experience including the Singapore Company.
Mr. Chidambaram said there was no bar on any party disposing of its shares at any time and in such circumstances how could an experience of a shareholder be considered to be that of the company.
Executive can in given circumstances and in public interest embark upon the exercise of piercing the veil of corporate ness of a company.
If for some wrongful act a company is blacklisted by a certain department of the Government and the directors of that company from another company the department can pierce the veil to find out who are in fact lurking behind the newly formed company, and thus, deprive the newly formed company to deal with the department.
As far as the first petitioner, a company, is concerned it cannot make the argument of piercing the veil either as a ground of attack or as a ground of defense.
Under Section 34 of the Companies Act, 1956, on the registration of the memorandum of a company the Registrar of the Companies is to certify that the company is incorporated.
From the date of incorporation mentioned in the certificate of incorporation the company shall be a body corporate by the name contained in the memorandum, capable forthwith of exercising all the functions of a incorporated company, and having perpetual succession and a common seal.
A company, unlike partnership, is a legal person set apart from its members.
House of Lords in England as far back as at the turn of this century set its seal on the reality of corporate existence when it gave to a debenture-holder, who was virtually the proprietor of the company, priority over unsecured creditors in a winding up, despite the protest of those creditors that Salomon and his company were in truth the same person AC 22). Corporate veil is certainly not an impregnable screen.
Palmer in his Company Law gives, with reference to case law, twelve instances where corporate veil was lifted.
The court said that generally and broadly speaking corporate veil might be lifted where a statute itself contemplates lifting the veil, or fraud or improper conduct is intended to be prevented, or a taxing statute is sought to be evaded, or where associated companies are inextricably connected as to be, in reality, part of one concern.
The Supreme Court in the Renusagar Power Company case again observed as under :- “It is high time to reiterate that in the expanding of horizon of modern jurisprudence, lifting of corporate veil is permissible. Its frontiers are unlimited. It must depend primarily on the realities of the situation. The aim of the legislation is to do justice to all the parties. The horizon of the doctrine of lifting the corporate veil is expanding….” Nevertheless the fact remains that it has to be seen if from the share holdings of the company, the inevitable inference in any event is if the company is merely Mr. so-and-so in corporate form.
Experience of a shareholder cannot be the experience of the company.
Where a shareholder has lost the privilege of limited liability and has become directly liable to certain creditors of the company on the ground that, with his knowledge, the company continued to carry on business six months after the number of its members was reduced below the legal minimum.
In the competition law of the European Economic Community, as contained in Articles 85 and 86of the EEC Treaty and in secondary legislation on that subject, a holding company and a subsidiary, which does not determine its behavior on the market in an autonomous manner, are treated as forming an economic unit.
An arrangement between a holding company and its non-autonomous subsidiary does not fall under Art.
The court will not allow an abuse of Section 429 by the formation of a new company by members holding of the shares in an existing company, if the new company is formed solely for the purpose of expropriating the shares of the minority shareholders in the existing company.
Where a transport company sought to obtain licenses for its vehicles, which it was unlikely to obtain if it made application on its own behalf, by causing the application to be made by a subsidiary company to which the vehicles were to be transferred, the court refused to treat parent and subsidiary as independent bodies, and decided the application on the basis that they were one commercial unit.
Where a vendor of land sought to avoid an action for specific performance by transferring the land in breach of contract to a company he had formed for the purpose, the court treated the company as a mere “Sham” and made an order for specific performance against both the vendor and the company.
A rearrangement of a group of companies so as to minimise the extent of any future tort liability that could be enforced in respect of the group’s activities is a proper use of the possibilities provided by company law and will not entitle the court to lift the corporate veil.
Where a bankrupt obtained credit for himself through the “Charade” of a company, he committed an offence under what is now section 360(1(a) of the Insolvency Act 1986, although normally the offence is not committed if the credit is obtained for another person.
Where a private company is founded on a personal relationship between the members, the court is prepared to order the winding up of the company under the “Just and equitable” clause(g) of the Insolvency Act 1986), if a member commits a breach of good faith which the members owe each other as the result of the personal relationship and thereby acts inequitably.
There are many cases in which the distinction between parent and subsidiary company has been ignored by the court, of which notable recent examples are DHN Food Distribution Ltd. v. Tower Hamlets LBC 1 WLR 852, and Revlon Inc. v. Cripps and Lee, FSR 85.
In the former, for the purposes of a statutory claim for compensation arising out of a compulsory purchase, the holding company, which ran the business, was held to be entitled to compensation for disturbance of that business, even though the land had been compulsorily acquired belonged to a subsidiary company.
A somewhat similar approach was taken in Lonrho Lld.v. Shell Petroleum Co. Ltd., QB 358, affd1 WLR 627, where the question arose whether English holding companies could be compelled by an English Court to give discovery of documents held by their Rhodesian and South African subsidiaries under the Rules of the Supreme Court 1965, Ord.
It was clear that the Rhodesian and South documents were not in the possession or custody of the English holding companies but the question was whether they were in their “Power”.
The Court of Appeal held that much depended on the facts of the individual case and that in the present case the documents were not in the “Power” of the holding companies, as the subsidiaries enjoyed a great deal of autonomy and compliance with a request for disclosure would have exposed the directors of the subsidiaries to criminal prosecution in the countries in which they carried on business.
This is against the basic tenet of a company under the Company Law.
A company is a corporate body distinct from its members apart from certain exceptional cases enumerated in Palmer’s Company Law. “Though their number is” growing”, as above noted.
Of Income-tax, Bombay, it was argued before the Supreme Court that the position of shareholders in a company was analogous to that of partners inter se.
Such is not the case for a company that stands as a separate juristic entity distinct from the shareholders.
” In the treatise, Palmer’s Company Law, the distinction has been brought out between a company and a partnership.
It will be advantageous to reproduce this distinction from that book:- “The principle that, apart from exceptional cases, the company is a body corporate, distinct from its members, lies at the root of many of the most perplexing questions, a distinction which must be firmly grasped.
The principle is thrown into clear relief by contrasting an incorporated company with a partnership, for under English law a firm or partnership is not a separate entity from its members.
The principal distinctions between a company and an English partnership are as follows :
- Creditors of a firm are creditors of the members of the firm, and on obtaining judgment against the firm can levy execution on the property of the partners in the firm, whereas, in the case of a company, “The creditor has no debtor but that impalpable thing, the corporation,” and judgment against the company normally gives no right to levy execution against the members.
- A member of a firm can on behalf of the firm dispose of property and incur liabilities, within the scope of the business, lo any extent, whereas a member of a company, as such, has no power.
- A partner cannot contract with the firm, whereas a member of the company can contract with the company.
- It is not the case of the petitioners that first petitioner is a subsidiary of any holding company as that would have different implications.
The contention appears to be that first petitioner is in fact Thompson Press, Living Media, World Media, Aroon Purie and others, and thus amalgamated with these companies.
We do not think that the authorities failed in their duty to look behind the facade corporate ness of the first petitioner.
Of the first petitioner and came to the conclusion that it did not satisfy the eligibility conditions.
For one, we do not think that the petitioners can advance such an argument as stated above, and secondly, loss of revenue is not always sole consideration where question of public service is involved.
The sole consideration before the authorities was that if the first petitioner satisfied the eligibility conditions, and if it did satisfy, the authorities had certainly to accept its bid but not merely on account of the higher amount of royalty.
Mr. Soli Sorabjee, who appeared for the petitioners, in rejoinder again stressed that absence of reasons for rejecting the tender of the first petitioner would vitiate the whole thing and that the authorities failed in their duty to hold enquiry as to the eligibility of the first petitioner and that was at the cost of the public revenue, and lastly, reasons to oust the first petitioner could be by the authorities concerned and not by the fourth respondent who was a rival in the trade.
In the present case, the reasons existed on the record of the authorities that the tender submitted by the first petitioner was not in conformity with the condition of the tender and the first petitioner was found ineligible for award of the tender and its offer could not have been accepted.
The fourth respondent could not support the decision of the authorities in rejecting the tender of the first petitioner on any other ground except that given by the authorities, and we will not consider any such argument in arriving at the decision in the present case.
During the course of arguments Mr. Sarin did file tender documents which the first petitioner submitted in pursuance of tender notice issued by the Mahanagar Telephone Nigam Limited for Delhi and Bombay directories.
Record docs not show if the Hyderabad Telecom was aware of the terms of notice of tender issued by the M.T.N.L. We have seen the tender notice of the M.T.N.L. and that of the Hyderabad Telecom and we find that various clauses are not altogether the same.
The eligibility condition of 50,000 directories of Hyderabad Telecom was not there in the case of tender notice issued by the M.T.N.L. Mr. Sarin said that though the first petitioner satisfied the technical bids issued by the M.T.N.L. and failed in financial bids, but these very documents were submitted to the Hyderabad Telecom.
In these documents there is no mention if the M.T.N.L. found the first petitioner eligible for technical bids.
Summary
The Supreme Court said that the Calcutta High Court would not have jurisdiction in the matter. This judgment is of no relevance to us. Here the respondents 1 and 2 are in Delhi and so is respondent No. 4. The third respondent is the General Manager, Telecom District, Hyderabad, a department of the Central Government in the Ministry of Communications. We find this Court will, therefore, have jurisdiction in the matter. We could certainly have directed the petitioners to approach the Andhra Pradesh High Court which also has jurisdiction in the matter since the telephone directories were required for Hyderabad Telecom District and the contract was to be entered there and the records were also maintained there in Hyderabad. We could decline to exercise jurisdiction under article 226 of the Constitution in such a matter in spite of the fact of our having jurisdiction in the matter. However, since the arguments were addressed at length we do not think any useful purpose will be served by sending the petitioners to Hyderabad.
