1995 (11) TMI 314 - HC - Companies Law

Court Quashes Orders on Common Directorship, Emphasizes Control vs. Directorship, Directs Reassessment

The court quashed the orders rejecting the petitioner's applications based on common directorship and clubbing of investments. It emphasized the ... Small scale industries - Determination of Issues Involved:1. Whether the respondent could reject the petitioner's request on the ground of common directors in some of its industrial undertakings.2. Whether the respondent could club the investments of all the industrial undertakings of the petitioner.Detailed Analysis:Issue 1: Rejection of Petitioner's Request Based on Common DirectorsThe petitioner, Inalsa Ltd., a limited company with five small-scale industrial undertakings, faced rejection of its applications for registration and reassessment by the respondents. The rejections were based on the ground that the directors were common across these undertakings, leading to the clubbing of investments, which exceeded the permissible limit of Rs. 35 lakhs. The court examined whether the presence of common directors justified the rejection.The court noted that the Ministry of Industry's notification under section 29B of the Industries (Development and Regulation) Act, 1951 ('the IDR Act') specified that an undertaking should not be a subsidiary of or controlled by another undertaking to qualify as a small-scale industrial unit. The respondents argued that the presence of common directors implied control by a single entity, thus disqualifying the petitioner's undertakings from separate registration.However, the court found that the mere presence of common directors did not necessarily imply control or ownership. The legal entity of a company is distinct from its directors. The court emphasized that the respondents failed to provide a definitive finding that the undertakings were controlled by a single entity. The rejection based solely on common directorship was deemed insufficient and arbitrary.Issue 2: Clubbing of Investments of All Industrial UndertakingsThe second issue was whether the respondents could club the investments of all the petitioner's industrial undertakings. The respondents argued that all the undertakings, despite being located at different places and manufacturing different products, were under the control of a single entity, thus justifying the clubbing of investments.The court examined the criteria for constituting a small-scale industrial undertaking, which included investment limits and the condition that the undertaking should not be controlled by another entity. The court found that the respondents' interpretation of control was flawed. The presence of common directors did not equate to control or ownership. The court highlighted that the legislative intent was to regulate products and ensure that exemptions were granted to genuine small-scale units, not to large business houses masquerading as small units.The court noted that the respondents failed to establish that the petitioner's undertakings were controlled by a single entity. The rejection of the applications based on the clubbing of investments was deemed arbitrary and without proper justification.Conclusion:The court quashed the impugned orders dated 27-11-1990, rejecting the petitioner's applications for registration and reassessment. The respondents were directed to reconsider the applications afresh, keeping in view the court's observations. The court emphasized the importance of distinguishing between control and mere directorship and ensuring that genuine small-scale units receive the benefits intended by the legislation. No order as to costs was made.