WORKMEN V. ASSOCIATED RUBBER INDUSTRIES LTD. (1985) 4 SCC 11

WORKMEN V. ASSOCIATED RUBBER INDUSTRIES LTD. (1985) 4 SCC 11

 

FACTS

• The Associated Rubber Industry Ltd. had purchased, some years back, shares of INARCO Ltd. by investing a sum of Rs 4,50,000. They were getting annual dividends in respect of these shares and the amount received was shown in the profit and loss account of the company year after year.
• Some time in the course of the year 1968, the company transferred the shares of INARCO Ltd. held by it to Aril Bhavnagar Ltd. (changed to Aril Holdings Ltd.), a subsidiary company wholly owned by The Associated Rubber Industry Ltd. Aril Holdings Ltd. had no other capital except the shares of INARCO Ltd. transferred to it by the Associated Rubber Industry Ltd.
• It had no other business or source of income whatsoever except receiving the dividend on the shares of INARCO Ltd.
• The workmen of the company were entitled to a bonus at the rate of 16% but they were given a bonus at the rate of 4%. The workmen of the company filed an industrial dispute claiming the rightful amount that they deserved as a bonus.
• Industrial tribunal and the High Court of Gujrat held that the Associated Rubber Industry Ltd. and Aril Bhavnagar Ltd are two different legal entities having separate legal existence and as a result, the profits made by the Aril Bhavnagar can not be shown as the profits of Associated Rubber Industry Ltd for the effect of calculating the gross profits made by the Associated Rubber Industry Ltd.
• An appeal was filed in the Supreme Court by the workmen of the Associated Rubber Industry Ltd under Article 133(1) of the Indian Constitution.

 

ISSUE

• Whether the transfer of shares of INARCO Ltd. by Associated Rubber Industry Ltd to Aril Holdings Ltd was a device to avoid payment of a higher bonus to the workmen of the company?
• Whether the companies, Associated Rubber Industry Ltd and Aril Holdings Ltd were two separate legal entities?

 

HELD

The appeal was allowed. Thus the hon’ble Supreme Court decided in favour of the workers.

• The Supreme Court held that a new company was created which was wholly owned by the principal company, having no assets of its own, with no business to generate income other than receiving dividends from the shares transferred to it by the principal company.
• There was no direct evidence to prove the fact that the subsidiary was formed as an instrument to lessen the gross profits of the principal company but the bonus of the workmen of the company was reduced as a result. It was also held that in the year 1971, the Aril Holdings Ltd. was wound up and amalgamated with the Associated Rubber Industry Ltd and it was clear from this action as to why the subsidiary was created in the first place.
• The Supreme Court took into account the amount of dividend that the Aril Holdings Ltd. received from the shares of INARCO for calculating the bonus that was rightly payable to the workmen of the Associated Rubber Industry Ltd and held that the workmen of the company are righteously entitled to get the bonus at the rate of 16 % for the year 1969.

  

COMMENTARY                                                                                                       

“Where it was found that the sole purpose for the formation of the new company was to use it as a device to reduce the amount to be paid by way of bonus to workmen, the Supreme Court upheld the piercing of the veil to look at the real transaction—Workmen of Associated Rubber Industry Ltd. v. Associated Rubber Industry Ltd. [1986] 59 Comp. There could not be a more direct evidence that the second company was formed as a device to reduce the gross profits of the principal company for whatever purpose. An obvious purpose that was served and which stared one in the face was to reduce the amount to be paid by way of bonus to workmen. The amount of dividend received by ‘C limited’ was, therefore, to be taken into account in computing profits of ‘A Ltd.’ available for bonus.”