Case: Carew and Company Limited Vs. Union of India

The appellant is a public limited company and is a subsidiary of United Breweries Ltd. and other companies interconnected with it. The appellants undertaking consists of a sugar factory and a distillery for manufacture of liquor at Rosa, Shahjahanpur and another distillery at Asansol The appellants sugar factory at Rosa had been facing difficulties for some years on account of inad equate supply of sugarcane and to ensure regular and adequate supply of sugarcane, the appellant proposed to float a company with a share capital of Rs. 50 lakhs for the purpose of taking over the sugar unit of the appellant and for working it as an undertaking of the company to he formed. The proposal was that the appellant would be entitled to an allotment of 100 per cent shares in the new company and a further sum of Rs. 15 , 77, 093/as consideration for transfer of the sugar u nit. According to the appellant, its object in getting 100 per cent shares in the new company was to offer the shares to cane growers later on.The appellant wrote a letter to the Secretary of the Company Law A Boar d onstating that since the new company would be a subsidiary of the appellant, the approval of the Company Law Board under s. 372 of the Companies Act would not be necessary, in view of the provisions of clause (d) of14 of the said section. The Central Government in the Ministry of Industry and Company Affairs 3, replied by a letter dated November 1, 1971, that the provisions of f s. 372(2) of the Companies Act would be applicable to the acquisition of the share s by the appellant in the company proposed to be formed. The appellant, therefore, applied for permission under s. 372 of the Companies Act to acquire the 100 per cent shares of the new company upon its incorporation. The appellant was also told by the Central Government in its letter datedthat sections 22 and 23 of the Act would prima facie be attracted and that the appellant should file a separate application under the relevant section. The appellant had already intimated the Central Government, Department of Company Affairs onthat the provisions of sections 21, 22 and 23 of the Act would not apply to its proposal to acquire the shares of the company proposed to be formed for taking over the sugar un it of the appellant. However, the appellant filed an application datedpurporting to be23 (4) of the Act. The new company proposed to be set up by the appellant was incorporated on June 15, 1973 under the name of Shahjahanpur Sugar Private Limited. By order dated July 2, 1973, the Central Government, in the Department of Company Affairs rejected the appellants application under s. 372(4) of the Companies Act for investing Rs. 50 lakhs in the equity shares of the capital of Shahjahanpur Sugar Private Limited. By another order datedthe Central Government, in the Department of Company Affairs also rejected the appellants application under s. 23(4) of the Act. As already stated, this appeal is against the latter order, Under s. 55 of the Act.The point for consideration in this appeal lies in a narrow compass viz., whether s. 23(4) was attracted to the facts of the case. To decide the question it is necessary to refer to certain provisions of the Act.

Reasoning: It is clear that on the date of the proposal the sugar unit of the appellant had not become an undertaking of Shahjahanpur Sugar Private Limited as it had not been engaged in the production of goods, etc., as an enterprise owned by that company. It is only possible to visualize two possibilities when the proposal was made: either the sugar unit remained an undertaking of the appellant, although it was proposed to be transferred to Shahjahanpur Sugar Private Limited or that the sugar unit became an enterprise of Shahjahanpur Sugar Private Limited. If the sugar unit remained part of the undertaking of the appellant when the proposed was mad e to take the 100 per cent shares, the proposal cannot be one to acquire an undertaking, as ex hypothesi the undertaking had not been transferred to Shahjahanpur Sugar Private Limited. But, if the proposal to take 100 per cent shares involved an acquisition in future by the appellant of the sugar unit after it has been transferred to the new company, there was no proposal to acquire by transfer, take over or otherwise of an undertaking as the sugar unit was not at the time of the proposal engaged in production of goods, etc. as an enterprise of Shahjahanpur Sugar Private Limited.An enterprise can be characterized as an undertaking, , within the definition of the term only when it is engaged in the production supply, distribution or control of goods of any description or the provision of service of any kind. In The Union of India v Tata Engineering and Locomotive Co. Ltd. ([1972) Bombay Law Reporter 1.), the Court held that a mere capacity or a mere intention by a n undertaking to carry on an activity as referred to in clause (v) of s. 2 of the Act in future alone without its being so done in the present, i.e., at the material date, or some time in the past i.e., before the material date, cannot mean that the undertaking is engaged in an activity as contemplated in s. 2(v) of the Act. No doubt, a temporary cessation of the activity will not detract an enterprise from its character as an undertaking, if the animus to resume the activity a s soon as possible is there. If a factory has had to close Down its operations on account of a strike, lock out, shortage of raw materials, shortage of power, or even want of finance, it cannot be said that it is not engaged in the production of goods, if the intention of the owner is to resume its activities. The view taken in In re Canara Bank Ltd. (A. 1. R. 1973 Mysore 95.) is much the same. There the Court followed the decision of the Bombay High Court referred to above and said that until a concern goes into the actual production, it cannot be said to be ananswer this question, it is necessary to see whether the sugar unit which was proposed to be transferred to Shahjahanpur Sugar Private Limited had been engaged in the production of goods, etc., as an enterprise of that company;It is clear that on the date of the proposal the sugar unit of the appellant had not become an undertaking of Shahjahanpur Sugar Private Limited as it had not been engaged in the production of goods, etc., as an enterprise owned by that company. It is only possible to visualize two possibilities when the proposal was made: either the sugar unit remained an undertaking of the appellant, although it was proposed to be transferred to Shahjahanpur Sugar Private Limited or that the sugar unit became an enterprise of Shahjahanpur Sugar Private Limited. If the sugar unit remained part of the undertaking of the appellant when the proposed was mad e to take the 100 per cent shares, the proposal cannot be one to acquire an undertaking, as ex hypothesi the undertaking had not been transferred to Shahjahanpur Sugar Private Limited. But, if the proposal to take 100 per cent shares involved an acquisition in future by the appellant of the sugar unit after it has been transferred to the new company, there was no proposal to acquire by transfer, take over or otherwise of an undertaking as the sugar unit was not at the time of the proposal engaged in production of goods, etc. as an enterprise of Shahjahanpur Sugar Private Limited.An enterprise can be characterized as an undertaking, , within the definition of the term only when it is engaged in the production supply, distribution or control of goods of any description or the provision of service of anysugar unit of the appellant was no doubt engaged in production of goods, etc., when the proposal was made and was, therefore, an undertaking; but it was only an undertaking of the appellant as the sugar unit had not been transferred and had not become an enterprise of Shahjahanpur Sugar Private Limited. The sugar unit did not become an undertaking of Shahjahanpur Sugar Private Limited as it was not and could not be engaged in the production of goods, etc., on its behalf before it was transferred to it. Subsection (4) of s. 23 is confined to the case of a proposal to acquire an undertaking by purchase, take over or otherwise but, to become an undertaking, it must presently be engaged in the production of goods, etc. The more fact that the Memorandum of Association of Shahjahanpur Sugar Private Limited contained an object clause which provided for production of sugar would not necessarily mean that the company would go into production and thus become the owner of an undertaking as defined in s. 2(v) of the Act. Take for instance the case of an individual or a firm. Does he or it become an undertaking merely because he or it entertains an object to produce goods unless he or it is actually engaged in production of goods, etc.? Certainly not. If that is so in case of an individual or a firm, we see no reason why a different standard should be applied in the case of a company merely because the object or one of the objects of the company is to produce goods, etc., if it is not actually engaged in production of goods. Reference was made to Strouds Judicial Dictionary, 4th edition, Vol. 1, p. 909 where it is stated that the phrase "engaged in any business" is apt to include employment at a salary as well as embarking on a business or in partnership. We do not think that even if the phrase engaged in business` conveys the idea of embarking on it, Shahjahanpur Sugar Private Limited had embarked on the business of production of sugar merely because its memorandum of association provided that the object of the company was to produce sugar. It is therefore difficult to imagine how when the proposal was made there was an enterprise engaged in the production or sugar and owned by Shahjahanpur Sugar Private Limited which could be acquired.To put the matter in a nutshell: The sugar u nit. Of the appellant was an undertaking of the appellant. Even if the proposal to acquire 100 per cent shares in Shahjahanpur Sugar Private Limited is considered to be a proposal to acquire either Shahjahanpur Sugar Private Limited or its sugar unit, since neither Shahjahanpur Sugar Private Limited nor its sugar unit as an enterprise owned by it had gone into production of goods, the proposal did not involve the acquisition if an undertaking. Until the object in the memorandum of association Of Shahajahanpur Sugar Private Limited was realized by the sugar A unit going into production on behalf of the new company, it cannot be said that either Shahjahanpur Sugar Private Limited or t he sugar unit transferred to it was an undertaking. An entity which is not engaged in actual production of goods or supply of services is of no economic significance and has to be excluded from the purview of the Act. Hence, what may be done b y an individual, firm or company in future has no present economic significance therefore, even if it be assumed that acquisition of 100 per cent shares could result in the acquisition of the new company or of an undertaking, the appellant was not acquiring an undertaking as defined in the Act as the new company would not be engaged in production of goods etc. at the of the acquisition of the shares by the appellant and s. 23 (4) of the Act would not be attracted.We also think that by the proposal to acquire the 100 per cent shares in Shahjahanpur Sugar Private Limited or by the actual acquisition of the shares, the appellant acquired only the control and the right to manage the company. The word undertaking in the latter part of s. 23(4) denotes an enterprise which is considered as an entity engaged in the production of goods, etc. By setting 100 per cent shares in Shahjahanpur Sugar Private Limited, the appellant never acquired that undertaking owned by the new company by purchase take over or otherwise. The undertaking remained the undertaking of` Shahjahanpur Sugar Private Limited. In other words, the purchase of 100 per cent shares in Shahjahanpur Sugar Private Limited cannot b e equated to the purchase of the undertaking owned by Shahjahanpur Sugar Private Limited. What s. 23(4) requires is the acquisition by purchase, take over or otherwise of an undertaking. As we said, by getting the 100 per cent shares in Shahjahanpur Sugar Private Limited, the appellant only acquired the control and the right of management of Shahjahanpur Sugar Private Limited; but that will not amount to a purchase of the undertaking owned by that company It is well settled that a company has separate legal personality apart from its shareholders and it is only the company as a juristic person that could own the, undertaking. Beyond obtaining control and the right of management of Shahjahanpur Sugar Private Limited, the purchase of 100 per cent shares had not the effect of an acquisition of the undertaking owned by it. No doubt, on a dissolution of the company, the shareholders would be entitled to a distributive share of the assets of the company. But it does not follow that while the company is a going concern, the shareholders are the owners of its assets including any undertaking. It is the company as a separate entity which alone can own the undertaking and the purchase by the appellant of 100 per cent shares did not make it the owner of the undertaking. We are aware that we are dealing with an economic legislation calculated to give effect to the Directive Principles of State Policy set out in clauses (b) and (c) of Article 39 of the Constitution and that the purpose of the legislation should be kept in mind in interpreting its provisions; but we are not prepared to assume that the legislature has, by a sidewind, swept away the well established fundamental legal concepts of the law of corporation in making the legislation. We do not pause to consider whether the circumstances which the Central Government took into account in passing the order were germane in the light of the provisions of s. 28 of the Act as we hold that s. 23 (4) has no application at all to the facts of the case.No arguments were addressed at the bar as to whether the facts of the case would attract the provisions of s. 22. We, therefore, think it not proper to express any definite opinion about the applicability of that section and we refrain from doing so. If, however, the facts of the case attract the provisions of s. 22, it goes without saying that the appellant will have to apply and obtain the approval as visualized in thatI have had the advantage of perusing the judgment of my learned brother, Mathew J. but, while concurring in the conclusion, desire to append a separate opinion since the strands of my reasoning differ. Mathew, J.s judgment presents the necessary facts in the simplest form, sets out the scheme and the object of the Monopolies and Restrictive Trade Practices Act (for short, the Act) whose construction falls for decision, but perhaps tends to petrify the pivotal concepts of undertaking defined in s. 2(v) and acquisition in the context of Part A of Chapter III of the Act, if I may say so with respect. Perhaps we are hearing the first case in this Court under this economic legislation, although three rulings from two High Courts, having some bearing on the controversy before us, were cited at theprovision deals with concentration of economic power whose inhibition is one of the paramount purposes of the statute. Section 23 falls within Chapter III, Part A, of the Act. Section 20 states that that Part shall apply only to certain types of undertakings. Admittedly, the appellant is a big, plural undertaking falling within this Part and proposes to make over the sugar unit (which is one of the enterprises of this largeconcern) to a new company to be floated. This latter company is to have 100% of its shares owned by t he appellant and, what is more, by a process of inflated valuation of the assets of the sugar unit the appellant will also appear to be advancing a loan of several lakhs of rupees toneed not go into the details except to state that if the facts urged by counsel for the respondent were true, it is a high risk to the community to approve of the proposed scheme from the point of view of the purposes of the Act and the Directive Principle enshrined in Art. 39(c) of the Constitution.It is unfortunate that in cases where the economic object and A impact of special types or legislation call for judicial interpretation, the necessity for a detailed statement of the background facts and supportive data, apart from some sort of a Brandeis brief illuminating the social purpose of the statute, is not being fully realised by the State. In the present appeal materials were read out from the files which disturbed me but no comprehensive affidavit marshalling the social and economic facts relevant to the case and the statute was filed. (At least copies of the Monopolies Inquiry Commissions Report, extracts from the draft Bill, Notes on Clauses and the objects and Reasons of the Act were made available while arguments started). Even so, the Court should hesitate to upset the Central Governments order without a strong case of glaring error on the merits and clear excess or absence of jurisdiction being made out by the appellant.Shri Gupte, has, however,the controversial area of facts by a line of legal reasoning which is attractive butthe present case the sugar unit is already an asset of the appellants concern and what is proposed is nothing more than to float a new company whose shares will be acquired in toto by the appellant. Only when that company goes into product ion it becomes an undertaking and only then can s 23(4) possibly cover the case, the reason being that an undertaking, by definition in s. 2(v). means an undertaking which is engaged in the production.... Of goods..... The accent placed by counsel is upon is engaged in the production. He submits that the new company does not become an undertaking until is engaged in the production of goods. What is not in esse but only in posse is not an undertaking. So much so the application of s. 23(4) is premature and the Central Governments order is illegal. Moreover, no acquisition of the new company is contemplated, the owning of 100% shares thereof not being in law an acquisition of the undertaking as such by the appellant. I concede there is force in thisthis case really turns on the Courts choice of the correct canon of construction as between two alternatives. Is an undertaking an economic enterprise which is actually producing goods ? Here wethe in praesenti aspect and thereby undermine the legislative object. On the contrary, is an undertaking used in its economic sense and in its wider connotation of embracing not merely factories which have been commissioned but projects which are embryonic and designed to go into production immediately formal legal personality is acquired and statutory approval under the Act secured ? In the present case there is already a sugar unit which is working and this mill is being transferred as the ass et of the new company. The new company, immediately it is registered and the Central Governments approval under s. 23(4) obtained, will go on stream since the mills wheels will continue to turn regardless of the legal metempsychosis of ownership. In such a case it would be abandoning commonsense and economic realty to treat the proposed undertaking as anything less than an undertaking (as defined in the Act) because it is only in immediate prospect. For certain purposes, even a child in the womb is regarded as in existence by the law and I cannot bring myself to an understanding of the definition which will clearly defeat ther objective of the legislation. Moreover, to undertake is to set about; to attempt to take upon oneself solemnly or expressly; to enter upon; to endeavour to perform (see Blacks Law Dictionary). If what the appellant intends to acquire or establish is as undertaking in fact and therefore in law, t he transformation device and the refuge in grammar cannot help him, the expression being capable of taking in not merely what is, but what is about to be. An undertaking is defined as an undertaking...... which itself discloses the difficulty felt by the draftsmen in delineating the precise content. Obviously, a dynamic economic concept cannot be imprisoned into ineffectualness by a static strict construction. Is engaged in production, in the context, takes in not merely projects which have been completed and gone into production but also blueprint stages, preparatory moves and likepoints. It is descriptive of the series of steps culminating in production. You are engaged in an undertaking for production of certain goods when you seriously set about the job of getting everything essential to enable production. Economists, administrators and industrialists understand the expression in that sense and oftentimes projects in immediate prospect are legitimately set down as undertakings engaged in the particular line. Not the tense used but the integration of the steps is what is decisive. What will materialise as a productive enterprise in futuro can be regarded currently as a n undertaking, in the industrial sense. It is not distant astrology but imminent futurology, and the phrases of the statute are amenable to service of the purposes of the law, liberally understood. Likewise, acquisition of an undertaking is to be viewed not in a narrow sense but as a broad business operation. Surely, the new company is an undertaking which, by the vesting of 100% of its shareholding in the appellant, is going to belong to the latter. It is either acquiring or establishing the new adventure. That is the plain truth and law must accord with it. After all, a broadened, sophisticated and spectral sense must be given to these words of economic connotation without beingby lexicography or legalism. Of course, any infant in law knows that holding shares is not acquiring the company with its distinctive personality. But any adult in corporate economics knows that controlling the operations of an industrial unit is to acquire or establish it for all economicon whether that one is new orword undertaking takes in also enterprises attempted (See Websters Dictionary on undertaking, the meaning having received judicial approval in AIR 1960 Bom. 22   at p. 24, paragraph 4). This Court in Gymkhana Club(1) has accepted the meaning, given in Webster. Similarly, engaged in takes within its wings embarking on (Vide: Strouds Judicial Dictionary, 4th Edn. Vol. 2, p. 909).If the language used in a statute can be construed widely so as to salvage the remedial intendment, the Court must adopt it. Of course, if the language of the statute does not admit of the construction sought, wishful thinking is no substitute and then, not the Court but the Legislature is to blame for enacting a damp squib statute. In my view, minor definitional disability, divorced from the realities of industrial economics, if stressed as the sole touchstone, is sure to prove disastrous w hen we handle special types of legislation like the one in this case. I admit that viewed from one standpoint the logic of Shri Gupte is flawless, but it also makes the law lifeless, since the appellant is thereby enabled neatly to nullify the whole object of Chapter III which is to inhibit concentration of economic power. To repeat for emphasis, when two interpretations are feasible, that which advances the remedy and suppresses the evil, as the legislature envisioned, must find favour with the Court. Are there two interpretations possible ? There are, as I have tried to show and I opt for that which gives the law itsviewed, what does an undertaking mean in s. 23(4) of the Act ? Surely, definitions in the Act are a sort of statutory dictionary to be departed from when the context strongly suggestsdecisions of the High Courts cited before us do not convince me. On the other hand, the reasoning based on the present tense is faulty as already elaborated. If this Court accepts the legalistic connotation of undertaking a disingenuous crop of new companies with ulterior designs may well be floated taking theconsequence which this Court should thwart because thereby the law will be condemned to a pathetic futility. But in the view I take, may be s.he sections when placed in juxtaposition, suggest that the appellants operation is to establish a new undertaking (out of its old sugar unit, though) which, in view of thewill inevitably become aninterconnected undertaking ofCarew &Co. (the original undertaking, i.e., the appellant). Not so much to acquire an existing undertaking as to establish, by a concealed expansionist objective, a new undertaking with sugar manufacture is the core of the operation. Therefore, it is not s. 23(4) that magnetizes the appellants proposal but, prima facie, Sec. 22. The special provision must exclude the general and, in this view, the acquisition of an existing undertaking stands repelled. The scheme of the Act deals both with establishing a new undertaking and acquiring (by contrast) an existing undertaking. So I agree with my learned brother Mathew J. that the order under s. 23 (4) is beyond its pale but add that this looks like a case for the application of s. 22. If the appellant intends to go ahead with the new adventure, he is trying to establish, he may, prima facie have to apply for and get the previous permission of the Central Government under s. 22. I am not pursuing this aspect of the application of Sec. 22 as that will be decided, if found necessary, after fuller investigation from the angle of that provision.The problem of interpretation of statutes raised in this case is far too important for me to ignore the manner in which jurists have been viewing the question in Angloo conclude on the point with which I began, undertaking is an expression of flexible sementics and variable connotation, used in this very statute in different senses and defined in legal dictionaries widely enough. In sum, what the appellant proposed to the Central Government was to establish a new undertaking, if we throw aside legal camouflages built around a verb and pierce the corporate veil. Therefore, while jurisdiction in the respondent to apply s. 23(4) of the Act is absent, the appellant may caught within the spiders web of s.do not express myself finally. The appeal must now succeed, but the legal drama may still have its fifth Act for thecannot be futuristic as the full facts will first be examined by Government for that purpose in case he chooses toagree with my brother Mathew, J., that s. 23 of the Monopolies and Restrictive Trade Practices Act,to be referred to as theabsolutely no application to the fact s and circumstances of the present case. In this view of the matter the impugned order of the Central Government must, therefore, be quashed. Section 23 of the Act would apply only if the undertaking sought to be acquired is in actual and physical existence and has gone into actual production. The scheme which is theof this case is merely a proposal and unless the undertaking is in existence and doing business it will not fall within the meaning of s. 2(v) of the Act which defines an "undertaking".I, however, entirely agree with my brother Krishna Iyer, J., that on the facts disclosed in the appeal the Scheme propounded by the appellant may prima facie fall within the four corners of s. 22 of the Act. The resolution passed by the appellant for setting up a new Company may be extracted thus:"RESOLVED that the Board of Directors be and is hereby authorised to form a separate Company to be called "SHAHJAHANPUR SUGAR (PR IVATE) LIMITED", as asubsidiary of this Company, to ultimately take over and operate the Sugar Factory undertaking of this Company at Rosa (Uttar Pradesh) as a going concern.FURTHER RESOLVED that t he transfer of the assets of the Sugar Factory undertaking to the newly formed subsidiary, viz. "SHAHJAHANPUR SUGAR (PRIVATE) LIMITED", be made on the basis of the valuation of the respective assets made by Messrs. LE ES &DHAWAN, Chartered Surveyors on May 29, 1970."This resolution unmistakably reveals the following essential features:(1) that the appellant intended to establish a new Company and this proposal was approved by virtue of the resolution quoted above;(2) that the new Company was to be floated by transferring 100 per cent shares from the Sugar Unit of the Company so that the appellant could retain effective control over the new Company;(3) that the new Company after being established was to be known as "SHAHJAHANPUR SUGAR (PRIVATE) LIMITED"; and(4) that after the establishment of the new Company the appellant would become the owner of the new Company as well as Carew Company Ltd. and thus the proposed new Company would be aninterconnected undertaking ofthe appellant.These facts, therefore, may attract the essential ingredients of s. 22 of the Act and, if so, the appellant cannot be allowed to float a new Company without complying with the statutory requirements of s. 22 of the Act in which case fuller facts may have to be investigated for that purpose.The object of the Act in my opinion appears to be to prevent concentration of wealth in the hands of a few and to curb monopolistic tendencies or expansionist industrial endeavours. This objective is sought to be achieved by placingcurb on industrial activities to which the Act applies,By providing that if it is proposed to substantially expand the activities of a Company by issue of fresh capital or by installation of new machinery, then notice to the Central Government and its approval must be taken under s. 21 of the Act.(2) In the case of establishment of a new Company by insisting on the previous permission of the Central Government under s. 22 of the Act.(3) In the case of acquisition of an existing Company by another Company by requiring the sanction of the Central Government to be taken by such Company under s. 23 of the Act.The present case, in my opinion, may fall within the second category mentioned above.