As you all know company is an artificial legal person and it has a separate legal identity. One can sue the company name itself or it can be sued. As per Companies Act 2013, a company’s rules and regulations are mentioned in the memorandum of association and article of association and it is registered after registering with the registrar of the area of the company. Company has a separate legal identity and it enjoys its separate existence from the case of Solomon v. Solomon. As you all know people don’t give up the chance to get or save the tax or money as much as they can. It doesn’t matter to them if they are keeping it in the illegal or wrong way. The separate legal identity of the company is covered by the doctrine of corporate veil. You can say it in a common or simple language that the doctrine of the corporate veil is the exception of the separate legal identity of the company. It protects the company from becoming the accused in the case of the fault of its directors or shareholders. In this case, the management of the company evaded the tax of the company and showed higher profits.
Facts of the case
A company named Associated Rubber Industries Ltd. had purchased the shares of INARCO Ltd. with an investment amount of Rs. 4,50,000/-. The company was receiving the annual dividends from the shares of the company in which they have invested. Associated Rubber Industries Ltd. takes the amount of the dividend to calculate the bonus of the workmen of the company and also shows it to the profit and loss account of the company.
After some years the shares of INARCO Ltd. were wholly transferred to Aril Bhavnagar Ltd. which is the subsidiary company of Associated Rubber Industries Ltd., Aril Bhavnagar Ltd. was not doing any work just it was formed for the sake of owning the shares of INARCO Ltd. Aril Bhavnagar Ltd doesn’t have any income by any other source, I mean that it is only earning from profit or dividend of the shares of INARCO Ltd. It was found that the profit from shares of INARCO Ltd was also not showing in the profit and loss account of Associated Rubber Industries Ltd. As a result, the workmen of Associated Rubber Industries Ltd were getting fewer bonuses due to showing less profit in the account. Therefore the workmen filed the complaint claiming that they were getting a 4% bonus instead of a 16% bonus.
High Court of Gujarat held that Aril Bhavnagar Ltd. which is the subsidiary company of Associated Rubber Industries Ltd. was both different entities therefore the profit of Aril Bhavnagar Ltd. and Associated Rubber Industries Ltd. will not be allowed to be merged into one account.
Issues raised
Whether the companies Aril Bhavnagar Ltd. and Associated Rubber Industries Ltd. are two different companies?
Whether the company Aril Bhavnagar Ltd. was formed to avoid the higher payment of bonuses to the workmen of Associated Rubber Industries Ltd?
Judgment
The Supreme Court held that the subsidiary company Aril Bhavnagar Ltd. doesn’t have any assets of its own nor does it have any running business through which it can generate profits. Aril Bhavnagar Ltd. has only the source of income from the dividend of the shares of INARCO Ltd. The court observed that it is clear that Associated Rubber Industries Ltd formed its subsidiary companies to deceive the workmen into paying less bonuses to them. There is no direct proof which shows that the subsidiary company was formed for another purpose. The Supreme Court in its order held that Associated Rubber Industries Ltd was used to create another company for only the sole purpose of giving lesser bonuses to its workmen.
Conclusion & Comments
Well in my point of view, the company must follow all the rules and regulations of the Companies Act and other applicable laws to get out of the court border. But they should also see the welfare of the workmen and employees of the company before making any decision that can harm the workmen financially, mentally, or physically.
Reference:
Blog IPleaders, https://blog.ipleaders.in/case-analysis-workmen-v-associated-rubber-industries-ltd-1985/By Aryan Gupta
Intern at Nyaya Nishtha