Full Judgment Text
Neutral Citation Number: 2023:DHC:1902
* IN THE HIGH COURT OF DELHI AT NEW DELHI
% Order reserved on: 10 March 2023
Order pronounced on: 17 March 2023
+ OMP (ENF.) (COMM.) 145/2021
DELHI AIRPORT METRO EXPRESS PRIVATE LIMITED
..... Decree Holder
Through: Mr. Kapil Sibal, Sr. Adv. with
Mr. Mahesh Agarwal, Mr. Rishi
Agarwal, Mr. Shri Venkatesh,
Ms. Megha Mehta, Ms. Niyati
Kohli, Mr. Pranjit
Bhattacharya, Mr. Suhael
Buttan, Mr. Vineet Kumar, Ms.
Manavi Agarwal and Ms.
Manisha Singh, Advs.
versus
DELHI METRO RAIL CORPORATION LTD.
..... Judgement Debtor
Through: Mr. Tarun Johri, Mr.
Vishwajeeet Tyagi, Mr. Ankur
Gupta, Advs. with Mr. Sanjay
V. Kute, GM/Legal, DMRC.
Mr. Chetan Sharma, ASG with
Mr. Apoorv Kurup, CGSC, Mr.
Amit Gupta, Ms. Nidhi Mittal,
Mr. Ojaswa Pathak, Mr. R.V.
Prabhat, Mr. Vinay Yadav and
Mr. Suresh Tripathi, Advs. for
UOI.
Mr. Parag P. Tripathi, Sr. Adv.
and Mr. Manish Vashisht, Sr.
Adv. with Mr. Santosh Tripathi,
SC with Mr. Udit Malik, ASC,
Mr. Arun Panwar, Ms. Rachita
Garg and Ms. Astha Gupta,
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Advs. for GNCTD.
CORAM:
HON'BLE MR. JUSTICE YASHWANT VARMA
O R D E R
EX.APPL.(OS) 2933/2022 in OMP (ENF.) (COMM.) 145/2021
1. The present execution petition relates to an award dated 11 May
2017. The challenge under Section 34 of the Arbitration and
1
Conciliation Act, 1996 which was mounted by the Delhi Metro Rail
2
Corporation came to be dismissed on 06 March 2018. DMRC is
thereafter stated to have preferred an intra-court appeal which came to
be partly allowed by the Division Bench in terms of its judgement
dated 15 January 2019.
2. Aggrieved by the aforesaid, the execution petitioner preferred a
Special Leave Petition before the Supreme Court which was allowed
in terms of the judgement rendered on 09 September 2021. The said
decision stands reported as Delhi Airport Metro Express (P) Ltd. v.
3
Delhi Metro Rail Corporation Ltd. . The review petition preferred
by DMRC seeking review of the aforesaid order also came to be
dismissed by the Supreme Court on 23 November 2021. The
execution petition as well as the objections which had come to be
preferred came up for substantive consideration before the Court
thereafter.
1
The Act
2
DMRC
3
(2022)1 SCC 131
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3. For the purposes of the present order, it would be pertinent to
principally advert to the orders of 10 March 2022 and 20 June 2022
passed by this Court on the present petition. In terms of the order
dated 10 March 2022, the Court by way of an elaborate order
proceeded to rule on the question of interest as well as the liability of
the DMRC to make payments in terms of the final Award that was
rendered. The Court also decided the various objections which were
raised by the DMRC with respect to computation of interest and the
ambit of Section 89 of the Metro Railways (Operation and
4
Maintenance) Act, 2002 . It would be apposite to extract the
following parts of that decision: -
“ 31. During pendency of these proceedings, the judgment debtor
had also made payment of Rs.678 crores and Rs.1000 crores i.e.
Rs.1678.42 crores. Even on the day orders in the present petition
were reserved, learned senior counsel for judgment debtor had
undertaken that the amount of Rs.600 crores shall be deposited in
the ESCROW account. The judgment debtor has raised the
contention that the payments made by the judgment debtor should
have been adjusted from the due amount on the date of payment
can not be accepted. The Constitution Bench of Hon'ble Supreme
Court in Gurpreet Singh Vs. Union of India , (2006) 8 SCC 45 has
held that the payments made by the judgment debtor to decree
holder has to be appropriated first towards the interest and costs
and then towards the principal amount. Also, the Hon'ble Supreme
Court in Bharat Heavy Electricals Ltd. Vs. R.S. Avtar Singh
(2013) 1 SCC 243 has held that if the payment made by the
judgment-debtor falls short of the decreetal amount, the decree-
holder will be entitled to apply the general rule of appropriation by
appropriating the amount deposited towards the interest, then
towards costs and finally towards the principal amount due under
the decree and observed as under:-
“31. From what has been stated in the said decision, the
following principles emerge:
4
The 2002 Act
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31.1. The general rule of appropriation towards a decretal
amount was that such an amount was to be adjusted strictly
in accordance with the directions contained in the decree
and in the absence of such directions adjustments be made
firstly towards payment of interest and costs and thereafter
towards payment of the principal amount subject, of
course, to any agreement between the parties. 31.2. The
legislative intent in enacting sub-rules (4) and (5) is a clear
pointer that interest should cease to run on the deposit
made by the judgment-debtor and notice given or on the
amount being tendered outside the court in the manner
provided in Order 21 Rule 1(1)(b).
31.3. If the payment made by the judgment-debtor falls
short of the decreed amount, the decree-holder will
be entitled to apply the general rule of appropriation by
appropriating the amount deposited towards the interest,
then towards costs and finally towards the principal
amount due under the decree. 31.4. Thereafter, no further
interest would run on the sum appropriated towards the
principal. In other words if a part of the principal amount
has been paid along with interest due thereon as on the
date of issuance of notice of deposit interest on that part of
the principal sum will cease to run thereafter. 31.5. In
cases where there is a shortfall in deposit of the principal
amount, the decree-holder would be entitled to adjust
interest and costs first and the balance towards the
principal and beyond that the decree-holder cannot seek to
reopen the entire transaction and proceed to recalculate
the interest on the whole of the principal amount and seek
for reappropriation.”
33. On the aspect as to whether the funds available with the DMRC
under OMP (ENF.) (COMM.) 145/2021 different heads in terms of
additional affidavit dated 21.12.2021can be attached barring
provisions of Section 89 of the Metro Railways (Operation &
Maintenance) Act, 2002 or Section 60 CPC, this Court has gone
through the aforesaid provisions of law.
35. The afore-noted Section 89 of the Act mandates that without
prior sanction of the Central Government, the property mentioned
in sub-Section (1) of Section 89, cannot be attached in execution,
however it does not fetter the authority of the Court to attach the
earnings of the metro administration in execution of a decree or
order.
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37. The afore-noted Section 60 CPC also mandates that properties
belonging to the judgment debtor, which are under its disposing
power, whether in its name or in the name of any other persons,
profits/benefits of which shall accrue to the judgment debtor, are
liable to be attached in execution proceedings.
40. According to the aforesaid affidavit, as on 14.02.2022, the total
funds available with the judgment debtor under the head Total
DMRC Funds is Rs.1,452.10 cores; under the head Total Project
Funds is Rs.2681,29 and under the head Total Other Funds is
Rs1,560/-. However, as per details of funds shown in Annexure-A
in the affidavit dated 10.01.2022 filed on behalf of judgment
debtor, a sum of Rs.514 crores is committed to the salary, medical
and post retiral benefits of employees and Rs.114 crores is the
portion of security deposit on smart cards which is refundable to
the commuters. In the considered opinion of this Court, the said
amount i.e. Rs.514+ Rs.114 crores has to be kept aside for the
aforesaid purpose, however, from the remaining amount available
in different bank accounts of judgment debtor as well as under
other heads, the payments towards decreetal amount has to be
made. The award dated 11.05.2017 has attained finality and cannot
be allowed to remain as a paper award, therefore, the judgment
debtor is duty bound to either divert its finds shown to be available
in different heads mentioned in the affidavit of 14.02.2022 after
seeking permission of the Central Government, if necessary, or
raise loans to satisfy the award.
41. Accordingly, out of the funds available under the head Total
DMRC Funds of Rs.1,452.10 cores, judgment debtor is directed to
keep aside amount of Rs.628 crores (Rs.514+ Rs.114 crores)
towards statutory expenses as mentioned herein above and from
the remaining amount, part payment of decreetal amount be made
within two weeks.
42. For the remaining outstanding amount judgment debtor is
directed to make the payments in two equal instalments within two
months. The first instalment shall be paid on or before 30.04.2022
and the second instalment shall be made on or before 31.05.2022.
43. With aforesaid directions, the present petition and pending
applications are accordingly disposed of.”
4. As would be evident from a reading of the aforesaid passages as
appearing in the order of 10 March 2022, the Court after taking into
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consideration the provisions of Section 89 of the 2002 Act as well as
5
Section 60 of the Code of Civil Procedure, 1908 had proceeded to
frame operative directions requiring the DMRC to liquidate the
liability flowing from the Award from out of the “Total DMRC
Funds”, “Total Project Funds” and “Total Other Funds”. The Court
had additionally permitted DMRC to set apart a sum of Rs. 514+114
crores for the payment of salaries, medical and post-retirement
benefits of employees and the security deposits retained by it in
respect of smart cards which may have been issued.
5. The order of 10 March 2022 was assailed by DMRC only to the
extent of the conclusions which came to be recorded by the Court and
stood embodied in Para 30. It becomes pertinent to note that in Para
30, the Court had essentially answered the issues pertaining to
computation of interest. The aforesaid challenge came to be negatived
by the Supreme Court on 05 May 2022. DMRC is also stated to have
moved a review petition in respect of the order of 10 March 2022
which also met a similar fate and came to be dismissed on 20 May
2022.
6. The matter thereafter came to be substantively reviewed by the
Court and the issues which were canvassed on behalf of the DMRC
were again adjudicated upon by the order of 20 June 2022. It becomes
pertinent to note that while by this time the DMRC had proceeded to
make certain payments, the Court found that even on that date, the
Award remained unsatisfied. A reading of the said order would
indicate that the bar of Section 89 was again raised and urged in
5
Code
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opposition to the execution proceeding as drawn as well as the
liability of DMRC to liquidate the same from out of the Total DMRC
Funds, Total Project Funds and Total Other Funds.
7. The Court in its order of 20 June 2022 observed as follows: -
“ 25. Despite the Execution Judgment dated March 10, 2022, not
having been challenged by DMRC, which directed payment of the
outstanding decretal amount in two equal instalments by April 30,
2022 and May 31, 2022, respectively, and the Execution Judgment
being in operation, DMRC has now submitted that time may be
given to DMRC to arrange bank loans to pay the decretal amount.
30. The submission of DMRC regarding the deficiency of
resources to satisfy the awarded amount, also goes contrary to the
records available, as its total revenue for the financial year 2019-
2020 was approximately Rs.7015 crores. Other bank balances
(deposits) amounted to Rs.10,280 crores. DMRC being a
completely sovereign entity having total assets of Rs.78,439 crores,
will have no difficulty in raising debts for this purpose. Therefore,
the conduct of DMRC shows that it has no intention to comply
with the Execution Judgment. That apart, Mr. Sethi has also
contested the averment of DMRC that its operations could be
affected if its accounts were to be attached. Merely because the
Judgment debtor is a sovereign entity, it cannot claim any
differential treatment and refuse to honour a decree, more so, when
the Supreme Court has upheld the Arbitral Award. In this regard he
has referred to the Judgment in the case of Pam Developments Pvt.
Ltd. v. State of West Bengal , (2019) 8 SCC 112 .
32. Considering the fact that the daily interest on the decretal
amount is Rs.1.15 crores and the incremental interest from
September 10, 2021 to May 31, 2022, is Rs.287.06 crores, it is in
the interest of both the parties that the Supreme Court vide order
January 24, 2022, in SLP (Civil) No. 770/2022 directed as follows:
"We request the High Court to take up the matter at the
earliest and dispose of the Execution Application without
any further delay, as consequences of the pendency of the
said application are detrimental to the interest of the
petitioner as well as the respondent".
34. Mr. Sethi has prayed, that DMRC not be granted any further
time and be directed to immediately make full payment towards the
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balance decretal sums of Rs.4451.63 crores as on May 31, 2022,
along with further interest up to the date of actual payment, for
which the bank accounts and amounts lying in the credit of such
bank accounts of DMRC along with all its fixed deposits, other
financial investments and daily revenue / earnings be attached
towards satisfaction of the decretal amount.
35. Mr. Parag P. Tripathi, learned Senior Counsel appearing for the
DMRC/Judgment debtor has stated the instant application filed by
the DAMEPL praying for an order of attachment of bank accounts
of the DMRC including the fixed assets to the extent of Rs.4427.41
crores, i.e., the amount which is calculated as payable by
DMRC under the Arbitral Award up to May 10, 2022. Admittedly,
Rs.2444.87 crores have already been paid in the escrow account of
the decree holder, and the remaining amount to be paid is
Rs.2652.17 crores. He has admitted that this Court vide order dated
March 10, 2022, had directed DMRC to either divert the funds
shown to be available under different heads mentioned in the
affidavit of February 14, 2022, after seeking permission of the
Central Government, if necessary or raise loans to satisfy the
Award. It was further directed to keep aside a sum of Rs.628 crores
from the amount of Rs.1452 crores available under the head of
DMRC Funds and from the remaining amount, make part payment
of the decretal amount within two weeks.
45. It is a fact that the execution petition was disposed of on March
10, 2022, the directions of which have already been reproduced in
paragraph 1 above. It is also a fact that the order dated March 10,
2022, was the subject matter of a challenge in Civil Appeal
No.3657/2022 to the extent of Paragraph 30 of the order dated
March 10, 2022. The appeal was dismissed by the Supreme Court
on May 05, 2022. The review petition filed by the Judgment debtor
seeking review of the order dated March 10, 2022, has been
dismissed by this Court vide order dated May 20, 2022.
46. The submission of Mr. Sethi is that, after the directions given
in the order dated March 10, 2022, only an amount of Rs.166.44
crores has been paid to the decree-holder on March 14, 2022. The
DMRC has not paid any amount thereafter.
51. Mr. Tripathi has opposed the plea by stating that Section 89 of
the MR Act is in the nature of statutory protection conferred by the
Parliament in recognition of the functions carried out by DMRC in
the public interest. He also stated that as per Section 89 of the MR
Act only earnings of DMRC would be open for attachment and not
the amounts held by DMRC in Trust for construction of metro
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projects in NCR and elsewhere. In other words, any attachment of
funds lying in the bank accounts of DMRC would lead to the
stoppage of operation and maintenance activities of DMRC and
halting of public carriage activities of DMRC.
52. Similar submissions were made by the applicant / decree holder
before this Court which resulted in the order dated March 10, 2022.
The Court in Paragraph 40 gave an option to the DMRC /
Judgment debtor either to divert its funds shown to be available in
different heads after seeking the permission of the Central
Government or raise loans to satisfy the Award. It is the case of the
DMRC / Judgment debtor that the Central Government has not
granted sanction for diversion of funds in terms of their
communications dated April 13, 2022 and April 27, 2022,
respectively.
53. Rather the case of the DMRC / Judgment debtor is that in terms
of the liberty granted for raising loans, the DMRC has called for
quotations / proposals for raising Capex loan from various banks
for payment of the amount due and payable to the applicant/ decree
holder and the DMRC expects to process the bids of the banks by
July 10, 2022, and expects the signing of loan documents by
August 15, 2022. He, during his oral submissions, did state that the
matter be posted in the early part of August 2022 to ensure
payment of the outstanding amount to the applicant / decree holder.
54. Noting the submissions made by the counsels, this Court is of
the view that the challenge to the order dated March 10, 2022, by
the petitioner was decided on May 05, 2022, and action has been
initiated by the DMRC, as noted above, time should be granted to
DMRC to ensure payment of the outstanding amount to the
applicant/decree holder on or before August 05, 2022. It is ordered
accordingly.”
8. The said order was challenged by the execution petitioner
before the Supreme Court by way of Special Leave Petition (C)
11358/2022. The said petition was ultimately withdrawn on 14
October 2022. The order sheet would reflect that on 18 November
2022, the Court was apprised of a proposal which was being
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6
considered by the Union Ministry of Housing and Urban Affairs
7
and the Government of National Capital Territory of Delhi with
respect to equity infusion in order to enable DMRC to meet the
liability that stood created pursuant to the Award. The learned
Attorney General, who had appeared on that occasion on behalf of the
DMRC, had consequently prayed for the deferral of proceedings to
enable both the principal shareholders to explore that possibility. The
matter was accordingly directed to be re- notified on 12 December
2022.
9. The said order of 18 November 2022 was challenged by the
execution petitioner by way of Special Leave Petition(C) 21396/2022.
The said petition came to be disposed of on 14 December 2022 in the
following terms:-
“This petition basically challenges the order passed by the
learned Single Judge of the High Court dated 18.11.2022 whereby
adjourning the matter to 12.12.2022.
Shri R. Venkatramani, learned Attorney General for India
basically objects to the tenability of the petition. He submits that
the special leave petition arises only out of an adjournment matter
and the court should not entertain the same.
In ordinary circumstances, we would not have entertained
the matter.
The arbitration award passed in favour of the present
petitioners has reached finality in as much as in special leave
petition filed by the respondent, has been dismissed by an elaborate
judgment of this Court dated 09.09.2021.
Subsequent thereto, the petitioner(s) herein had filed a
petition under Section 36 of the Arbitration and Conciliation Act.
In the said petition, certain directions were issued by the
learned Single Judge of the High Court of Delhi vide order dated
6
MoHUA/Union Ministry
7
GNCTD
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10.03.2022 and special leave petition challenging the same was
also dismissed by this Court vide order dated 05.09.2022. In spite
of that, the matter is only being adjourned by the learned Single
Judge from time to time. The law with regard to execution is not
different either for the Government or the Statutory Corporation.
We, therefore, direct the learned Single Judge of the High
Court to proceed further with the execution of the award
expeditiously and take the same to its logical end in accordance
with law as early as possible and in any case, within a period of
three months from today.
The special leave petition is disposed of accordingly.
Pending application(s), if any, stand(s) disposed of. ”
10. When the matter was taken up thereafter on 04 January 2023,
the Court was apprised that the GNCTD in term of its communication
of 21 December 2022 had apprised DMRC that it would not be
desirous of participating either in any rights issue or in considering
further infusion of funds by way of equity. The learned Attorney
General, however, made a statement that both the Union Government
as well as DMRC were actively debating on how the impasse which
existed could be resolved. On his request, the matter was adjourned
and posted for 19 January 2023.
11. On 31 January 2023 when the execution petition was again
taken up for consideration, the learned Attorney General informed the
Court that the measures which were being considered for adoption and
resolution could not fructify. He, however, prayed for the deferral of
the proceedings to grant DMRC one last opportunity to explore all
possible modes in terms of which the debt owed to the execution
petitioner could be liquidated.
12. When the matter was thereafter called on 17 February 2023, the
Court on hearing submissions proceeded to pass the following order: -
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“ EX.APPL.(OS) 2933/2022 IN OMP (ENF.) (COMM.)
145/2021
1. The present execution proceedings have been instituted in
respect of an Arbitral Award which was rendered on 11 May 2017.
In terms of the said Award and as per the disclosures made in these
proceedings by the Enforcement Petitioner, the total gross decretal
amount along with interest up to 14 February 2022 stood at Rs.
8009.38 crores as on that date. According to the petitioner, out of
the aforesaid amount, a sum of Rs. 1678.42 crores alone has been
paid so far by the Respondent Delhi Metro Rail Corporation
[Respondent Corporation]. According to the Enforcement
Petitioner, the said amount along with interest has further swelled
to Rs. 6330.96 crores.
2. For the purposes of disposal of the proceedings today, the entire
history of the present execution petition, the various orders passed
thereon as well as those which were passed by the Supreme Court
on challenges laid by respective parties need not be reiterated in
this order. Suffice it to note that from the various additional
affidavits which have been filed by DMRC post the order of the
Supreme Court dated 14 December 2022, it is essentially submitted
that despite requisite efforts having been expended, its two
principal shareholders have been unable to arrive at a consensus of
the manner in which the debt due and payable under the Award is
proposed to be liquidated.
3. Mr. Sibal, learned Senior Counsel appearing for the
Enforcement Petitioner, has commended for the consideration of
the Court the judgment rendered by the Bombay High Court in
Bhatia Industries vs. Asian Natural Resources & Anr. [2016
SCC OnLine BOM 10695] as well as of the Supreme Court in
Cheran Properties Ltd. vs. Kasturi & Sons Ltd. [ (2018) 16 SCC
413] to submit that in light of the position as it prevails today, the
Court would be justified in lifting the corporate veil of the DMRC
and proceeding further against the shareholders for the purposes of
execution of the Award which undisputedly has attained finality.
The Bombay High Court in Bhatia Industries while dealing with
the issue of whether the doctrine of piercing of the corporate veil
could be adopted in execution proceedings observed as follows: -
“19. From the conspectus of the judgments which are
referred to hereinabove, it is now quite well settled that the
doctrine of piercing or removing corporate veil is
applicable not only in the case of holding of subsidiary
companies or in the case of tax evasion but can be equally
applied in execution proceedings. It can be seen from these
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judgments that the doctrine has been referred to also in
cases:
(i) where “two separate corporate entities are
functioning as if they are in partnership with one
company as an alter-ego of the other company,
where one company is bound hand and foot by the
other”;
(ii) where “parent company's management has
steering influence on the subsidiary's core activities
that the subsidiary can no longer be regarded to
perform those activities on the authority of its own
executive directors”; and
(iii) where “the company is the creature of the
group and the mask which is held before its face in
an attempt to avoid recognition by the eye of equity
or is a mere cloak or sham and in truth the business
was being carried on by one person and not by the
company as a separate entity”.
(iv) where “two companies are inextricably inter-
linked corporate entities”.
20. We therefore hold that the concept of lifting the
corporate veil is also available in execution proceedings
and answer the question No. 1 above accordingly.
21. We are therefore of the view that the corporate veil can
be lifted in cases where the Court from the material on
record comes to the conclusion that the Judgment Debtor is
trying to defeat the execution of the Award which is passed
against him. In our view, the learned Single Judge was
justified in carrying out that exercise.”
5. Cheran Properties was dealing with the question of an Award
binding even non-signatories to the arbitration agreement. While
dealing with the aforesaid aspect, the Supreme Court had observed
as follows: -
“20. Both these decisions were prior to the three-Judge
Bench decision in Chloro Controls [ Chloro Controls India
(P) Ltd. v. Severn Trent Water Purification Inc. , (2013) 1
SCC 641 : (2013) 1 SCC (Civ) 689] . In Chloro
Controls [ Chloro Controls India (P) Ltd. v. Severn Trent
Water Purification Inc. , (2013) 1 SCC 641 : (2013) 1 SCC
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(Civ) 689] this Court observed that ordinarily, an
arbitration takes place between persons who have been
parties to both the arbitration agreement and the substantive
contract underlying it. English Law has evolved the “group
of companies doctrine” under which an arbitration
agreement entered into by a company within a group of
corporate entities can in certain circumstances bind non-
signatory affiliates. The test as formulated by this Court,
noticing the position in English law, is as follows : (SCC
pp. 682-83, paras 71 & 72)
“ 71 . Though the scope of an arbitration agreement
is limited to the parties who entered into it and
those claiming under or through them, the courts
under the English law have, in certain cases, also
applied the “group of companies doctrine”. This
doctrine has developed in the international context,
whereby an arbitration agreement entered into by a
company, being one within a group of companies,
can bind its non-signatory affiliates or sister or
parent concerns, if the circumstances demonstrate
that the mutual intention of all the parties was to
bind both the signatories and the non-signatory
affiliates. This theory has been applied in a number
of arbitrations so as to justify a tribunal taking
jurisdiction over a party who is not a signatory to
the contract containing the arbitration agreement.
[ Russell on Arbitration (23rd Edn.)]
72 . This evolves the principle that a non-signatory
party could be subjected to arbitration provided
these transactions were with group of companies
and there was a clear intention of the parties to bind
both, the signatory as well as the non-signatory
parties. In other words, “intention of the parties” is
a very significant feature which must be established
before the scope of arbitration can be said to include
the signatory as well as the non-signatory parties.”
The Court held that it would examine the facts of
the case on the touchstone of the existence of a
direct relationship with a party which is a signatory
to the arbitration agreement, a “direct commonality”
of the subject-matter and on whether the agreement
between the parties is a part of a composite
transaction : (SCC p. 683, para 73)
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“ 73 . A non-signatory or third party could be
subjected to arbitration without their prior consent,
but this would only be in exceptional cases. The
court will examine these exceptions from the
touchstone of direct relationship to the party
signatory to the arbitration agreement, direct
commonality of the subject-matter and the
agreement between the parties being a composite
transaction. The transaction should be of a
composite nature where performance of the mother
agreement may not be feasible without aid,
execution and performance of the supplementary or
ancillary agreements, for achieving the common
object and collectively having bearing on the
dispute. Besides all this, the Court would have to
examine whether a composite reference of such
parties would serve the ends of justice. Once this
exercise is completed and the Court answers the
same in the affirmative, the reference of even non-
signatory parties would fall within the exception
afore-discussed.”
21. Explaining the legal basis that may be applied to bind a
non-signatory to an arbitration agreement, this Court
in Chloro Controls case [ Chloro Controls India (P)
Ltd. v. Severn Trent Water Purification Inc. , (2013) 1 SCC
641 : (2013) 1 SCC (Civ) 689] held thus : (SCC p. 694,
paras 103.1, 103.2 & 105)
“ 103.1 . The first theory is that of implied consent,
third-party beneficiaries, guarantors, assignment
and other transfer mechanisms of contractual rights.
This theory relies on the discernible intentions of
the parties and, to a large extent, on good faith
principle. They apply to private as well as public
legal entities.
103.2 . The second theory includes the legal
doctrines of agent-principal relations, apparent
authority, piercing of veil (also called “the alter
ego”), joint venture relations, succession and
estoppel. They do not rely on the parties' intention
but rather on the force of the applicable law.
*
105 . We have already discussed that under the
group of companies doctrine, an arbitration
agreement entered into by a company within a
group of companies can bind its non-signatory
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affiliates, if the circumstances demonstrate that the
mutual intention of the parties was to bind both the
signatory as well as the non-signatory parties.”
xxx xxx xxx
23. As the law has evolved, it has recognised that modern
business transactions are often effectuated through multiple
layers and agreements. There may be transactions within a
group of companies. The circumstances in which they have
entered into them may reflect an intention to bind both
signatory and non-signatory entities within the same group.
In holding a non-signatory bound by an arbitration
agreement, the court approaches the matter by attributing to
the transactions a meaning consistent with the business
sense which was intended to be ascribed to them.
Therefore, factors such as the relationship of a non-
signatory to a party which is a signatory to the agreement,
the commonality of subject-matter and the composite
nature of the transaction weigh in the balance. The group of
companies doctrine is essentially intended to facilitate the
fulfilment of a mutually held intent between the parties,
where the circumstances indicate that the intent was to bind
both signatories and non-signatories. The effort is to find
the true essence of the business arrangement and to unravel
from a layered structure of commercial arrangements, an
intent to bind someone who is not formally a signatory but
has assumed the obligation to be bound by the actions of a
signatory.”
6. The Court additionally takes note of the submission of Mr. Sibal
who contended that in light of the unequivocal directions as
appearing in the order of the Supreme Court dated 14 December
2022, both the Union Government as well as the GNCTD must be
held to be liable to make good the monies payable under the
Award.
7. Undisputedly, the two principal shareholders of the DMRC are
the Ministry of Housing and Urban Affairs in the Union
Government and the GNCTD. The ends of justice would thus
warrant the said shareholders being placed formally on notice and
being invited to address submissions before this Court proceeds in
the matter and evolves and adopts an appropriate measure for the
purposes of recovery of the moneys payable under the Award.
8. Consequently, let the Ministry of Housing and Urban Affairs in
the Union Government as well as the GNCTD acting through its
Chief Secretary be impleaded in the present proceedings. Ordered
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accordingly. The Court requests learned counsel for the
Enforcement Petitioner to effect service on the said respondents
dasti in addition to other permissible modes. The Court
additionally grants liberty to learned counsel to effect service upon
the Union Ministry through the office of the learned ASG and upon
the Chief Secretary of the GNCTD through the office of the
Standing Counsel.
9. The newly impleaded respondents shall address submissions in
light of what stands recorded hereinabove. The Court hopes and
trusts that the shareholders shall bear in mind that the impasse
which exists needs to be resolved expeditiously bearing in minding
the peremptory directions of the Supreme Court as well as the need
to protect and preserve the DMRC which not only represents a
project of immense public importance but also constitutes the
lifeline for the residents of the NCT.
10. Let the execution petition be called again on 20.02.2023.
11. Order dasti under the signatures of the Court Master.
CONT.CAS(C) 654/2022, CONT.CAS(C) 845/2022
List on the date fixed.”
13. Based on the directions issued, both the Union Ministry as well
as the GNCTD entered appearance and were also heard in the matter.
On 27 February 2023, the following order came to be passed: -
“ EX.APPL.(OS) 2933/2022 (U.O. XXI R. 1(c) r/w S. 151CPC)
in OMP (ENF.) (COMM.) 145/2021
1. The instant execution application has been continuing on the
Board of this Court for the purposes of enforcement of the Award
dated 11 May 2017 which has attained finality. Pursuant to the
order passed by the Court on 17 February 2023, the learned ASG
along with Mr. Kurup, CGSC has appeared for the Union Ministry.
Mr. Vashisht learned senior counsel assisted by Mr. Santosh
Tripathi, Standing Counsel has appeared for the Government of
National Capital Territory of Delhi [GNCTD].
2. At the outset, and before the Court proceeds further to deal with
the objections which are taken both by the Union Ministry as well
as the GNCTD and which pertain to the limited liability principle
which applies to a shareholder and before the Court proceeds to
consider and rule on the issue of whether circumstances warrant
the corporate veil of the DMRC being lifted, it would appear
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expedient to call upon the Union Government to take a decision on
whether it proposes to accord sanction for the attachment of the
movable and immovable assets of the DMRC for the purposes of
satisfaction of the amounts payable under the Award. The aforesaid
exercise would have to be undertaken in light of the provisions of
Section 89 of the Metro Railways (Operation and Maintenance)
Act, 2002.
3. In order to enable the competent authority in the Union
Government to take that decision and place the same on the record
of these proceedings, let the matter be called again on 02.03.2023
at 2:15 PM.”
14. As would be evident from a reading of the order of 27 February
2023, the Court had granted another opportunity to the Union to
consider the grant of consent as contemplated under Section 89 of the
Act and for the competent authority to take a decision in that regard
and place the same on the record. Although the learned ASG had
placed for the perusal of the Court an affidavit which purported to
convey a decision taken by the competent authority not to accord
consent, the formal order which may have embodied that decision
despite request had not been placed on the record. The aforesaid
decision which is dated 01 March 2023 was ultimately placed on the
record by way of an additional affidavit dated 03 March 2023.
15. It would be pertinent to recall that the order of 10 March 2022
had referred to three broad heads in which funds were held by the
DMRC. These were described as the “Total DMRC Funds” , the
“Total Project Funds” and “Total Other Funds” . The Total DMRC
Funds were disclosed to be the funds available with the corporation
and contributed by the Union Government as well as GNCTD. As per
the disclosures made in these proceedings as on 14 February 2022,
DMRC held a sum of Rs. 1452.10 crores under the head of Total
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DMRC Funds, Rs.2681.29 crores under the head of Total Project
Funds and Rs.1560.86 crores in Total Other Funds.
16. Total DMRC Funds as per the disclosures made in these
proceedings relate to all earnings obtained by DMRC including from
operation and management of property business, consultancy, and
external project fee. The Total Project Funds are the equity and debt
funds made available to it by its shareholders, namely, the Union
Government and GNCTD and loans from bilateral or multilateral
agencies for construction of metro lines in Delhi. Other than the
aforesaid, DMRC holds funds titled Total Other Funds and which was
also described at some places as “Other Than DMRC Funds”. That
fund holds moneys received by DMRC from external agencies
including various State Governments for the purposes of execution of
metro rail works and in respect of which consultancy fee/supervisory
fee is earned by it.
17. Before proceeding further and till the Court notices the
disclosures which were made in the last affidavit filed by the DMRC
dated 03 March 2023, it would be pertinent to briefly note the details
which had been proffered with respect to the aforesaid three funds at
different stages of the present proceedings.
18. In an affidavit filed on 21 December 2021, the Total DMRC
Funds were shown to stand at Rs.1642.69 crores. Under the heading of
Total Project Funds, DMRC is stated to have held an amount of
Rs.2412.12 crores. The Total Other Funds had a credit balance of Rs.
1746.12 crores. In the same affidavit, DMRC disclosed that it had
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Rs.1642.69 crores as cash which was available. However, after
making various provisions, it was asserted that the net available cash
stood at minus (-) Rs.6.31 crores. In a subsequent filing which was
made on 05 January 2022, DMRC disclosed its fund position to be as
follows:-
I. Total DMRC Funds on 22 December 2021 = Rs 1642.69
crores
II. Total DMRC Funds on 03 January 2022 = Rs 1520.63
crores
19. As per the aforesaid disclosures, it is apparent that as on 03
January 2022, Total DMRC Funds were stated to stand at Rs.1520.63
crores. In this affidavit, it was further disclosed that Rs.514 crores
stood committed towards liabilities relating to payments to be made to
employees on account of leave, salaries and post-retirement medical
expenses. The security deposits towards smart cards were pegged at
Rs.114 crores. The grand total of funds held under Total Project Funds
as on 21 December 2021 stood at Rs.5,800.93 crores and on 03
February 2022 was stated to be Rs. 6208.03 crores.
20. By an additional affidavit which was filed on 10 February 2022,
DMRC set out its funds position as on 09 February 2022 as under:-
I. Total DMRC Funds = Rs. 1,478.39 crore
II. Total Project Funds = Rs. 2,668.81 crore
III. Total Other Funds = Rs. 1,561.30 crore
Grand Total = Rs 5708 crore
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21. In yet another additional affidavit, the funds position of DMRC
as existing on 14 February 2022 were disclosed as under:-
I. Total DMRC Funds = Rs. 1452.10 crore
II. Total Project Funds = Rs. 2681.29 crore
III. Total Other Funds = Rs. 1560.86 crore
Grand Total = Rs. 5694.25 crore
22. However, by the time DMRC filed its additional affidavit dated
13 May 2022, Total DMRC Funds were shown to have drastically
reduced to Rs.291.80 crores, Total Project Funds to Rs.66.24 crores
and Total Other Funds to Rs. 651.46 crores. It further made a
disclosure with respect to its funds position as standing on 27 May
8
2022. The aforesaid disclosure which finds place at page no. 1484 set
out the fund position with it being contended that the Total DMRC
Funds stood at Rs. 267.66 crores, Total Project Funds at Rs. 53.59
crores and Total Other Funds at Rs. 639.37 crores.
23. The aforesaid reduction in the funds held by DMRC is of
significance since by this time, the Court by its order of 10 March
2022 had already framed directions requiring the corporation to effect
payments and liquidate the liabilities flowing from the Award. The
reduction in funds clearly appears to have taken place post the passing
of the aforesaid order.
24. The reduction in funds appears to have occurred in light of the
communications which were exchanged between DMRC, the Union
8
PDF Page No. of the record
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Ministry and the GNCTD commencing from 06 April, 2022. The
aforesaid communications which have been placed on the record
establish that DRMC approached the Union after the passing of the 10
March 2022 order for permission to utilize the funds standing to its
credit. On receipt of that request, the Union Ministry directed the
DRMC to repatriate all monies held by it in respect of various projects
taking the position that the unspent balance had been released in the
form of equity and debt to enable DMRC to undertake necessary
works for the Delhi Metro Phase-IV and that those funds could not be
utilized by it for any other purpose. DMRC acting upon those
directives of the Union appears to have proceeded to repatriate the
aforesaid sums back to the Union Ministry.
25. In terms of the subsequent disclosures as made in the additional
affidavit filed by the DMRC dated 18 January 2023, DMRC brought
on record communications addressed to the Union Government as
well as the GNCTD for infusion of equity funds. However, and as was
noticed hereinabove, this no longer remains a live issue since the two
principal shareholders have failed to reach a consensus on that mode
of infusion of funds.
26. On 03 March 2023, DMRC placed on record its funds position
through which it sought to assert that the Total DMRC Funds
available with it as on 03 March 2023 stood at Rs. 450.05 crores.
However, net DMRC funds were shown to stand in the negative at Rs.
(-) 2210.58 crores. This was explained by it to be the result of
requisite provisions having been made with respect to the retiral
benefits of employees, contractual liabilities, operation and
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maintenance expenditure and the amounts payable in respect of the
Japan International Corporation Agency Loan. The reduction under
the three heads was thereafter explained by an additional affidavit
filed on 03 March 2023 and certain charts which were placed on the
record.
27. In terms of the charts which were placed for the consideration
of the Court, Mr. Johri, learned Counsel appearing for the DMRC
pointed out that out of the balance as was held on 14 February 2022
and further funds which were received from the Union Government as
well as the GNCTD, various sums were repatriated in light of the
directives received by the DMRC from the Union Government. The
attention of the Court in this respect was drawn to various
communications received by DMRC from the Union Government
including those dated 13 April 2022 and 27 April 2022. The said
communications themselves appear to have been prompted by the
DMRC‟s requests to the Union Ministry for appropriations being
made from the Total DMRC Funds and Total Project Funds to comply
with the order of 10 March 2022.
28. The Union Government conveyed its position in terms of the
aforenoted communications asserting that since the said funds had
been provided specifically for various projects, the same cannot be
utilized by DMRC for any purpose other than what was originally
intended. The Union Ministry again referred to the provisions of
Section 89 of the 2002 Act in this regard. It asserted that those funds
in any case are not liable to be diverted for satisfaction of any decree
passed against DMRC. It accordingly directed DMRC to repatriate the
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funds so held by it. DMRC is stated to have accordingly proceeded to
transfer the aforesaid funds to the Union Government and other
agencies.
29. The comparative position of the Project Funds was also
explained by Mr. Johri with the aid of the following two charts:-
“ DELHI METRO RAIL CORPORATION LIMITED
Comparative position of DMRC funds
Rs. In Crore
Particulars 03.03.2023 14.02.2023 Difference Remarks
1.7 Traffic
Earning
202.47 84.40
Rs 920.75 crore
paid to DAMEPL
pursuant to orders of
Hon'ble High Court
as detailed below:
1.10 Property
Business
5.07 946.67
2.2 Consultancy 27.44 168.36
-Rs. 600 crore on
23.02.2022 (UTR
No.
UBINH2205486819
9)
-Rs. 166.44 crore on
14.03.2022 (UTR
No.
UBINH2207313697
1)
-Rs. 154.31 crore on
05.09.2022 (UTR No.
PUNBR52022090516
097665)
1,002 . 05
3.3 External
project fee
215.07 252.67
450.05 1,452.10
Avg. passenger journeys in February 2022 31.85 lakhs
Avg. passenger journeys in February 2023 52.8 lakhs ”
“ DELHI METRO RAIL CORPORATION LIMITED
Comparative position of Project funds
Rs. in crore
Item No. Particulars 03.03.2023 14.02.2023 Difference
4.3 Phase-III 35.65 75.23 -39.58
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5.10 Phase-IV 267.08 2,606.06 -2,338.98
302.73 2,681.29 -2,378.56
Particulars (Rs. in crore)
Balance as on 14.02.2022 2,681.29
Add Funds received from GoI, GNCTD etc. 4,773. 15
Less Debits towards Gel, GNCTD, project
expenditure etc.
-7.151 .71
Balance as on 03.03.2023 302.73”
30. Insofar as the position as it prevails today, it is evident that a
sum of Rs. 450.05 crores is available under Total DMRC Fund, Rs.
302.73 crores under the Total Project Funds and Rs. 699.61 crores
under the Total Other Funds.
31. During the pendency of these proceedings and post the two
shareholders having failed to concur on the question of equity
participation, the record bears out that DMRC had approached its
shareholders for being provided sovereign guarantees to enable it to
raise loans from banks and financial institutions and use those funds
for the purposes of satisfaction of the Award. DMRC has placed on
the record the steps taken by it for obtaining Capex Loans in this
direction. It is also shown to have received various bids from banks
and financial institutions. Although it had specifically requested both
the Union Ministry as well as the GNCTD for extension of sovereign
guarantees as were being formally required by banks and financial
institutions, it failed to receive any response thereto. In fact, even
when the matter was closed for judgement, on that date too neither the
Union Ministry nor the GNCTD appear to have taken any decision in
this regard. At least the Court was neither apprised of any decision
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taken in this respect nor were learned counsels, in the absence of
instructions, in a position to provide details in respect of the aforesaid
proposal. The Court was also not informed of any reason which may
have prevailed upon the two principal shareholders to not accede to
the request as made by DMRC.
32. DMRC is also stated to have addressed communications to both
the Union Ministry as well as the GNCTD for the grant of an interest
free subordinate debt in the sum of Rs. 3565.64 crores. Those requests
as embodied in its letter of 18 January 2023 have also not been
attended to and in any case no final decision has been communicated
by the competent authorities in the Union Government as well as the
GNCTD.
33. Mr. Johri, learned counsel appearing for the Corporation had
laid stress on the fact that the DMRC performs a vital public function
with the metro rail network managed by it constituting an essential
lifeline for the citizens residing in the NCT. It was submitted more
than five million people across the NCT avail of the facilities provided
by that network every day. It was submitted that DMRC had made
herculean efforts even during the pandemic to ensure that the metro
rail network remained functional and people were provided an
efficient and economical mode of transport for their daily commute.
Mr. Johri submitted that the metro rail network constitutes an essential
service which is availed of by residents of the NCT and that the
DMRC has always carried out its functions and discharged its
obligations keeping the aforesaid aspect in mind.
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34. Mr. Johri submitted that DMRC had made sincere and genuine
efforts to meet the obligations flowing from the Award and that it was
only on account of the huge losses suffered by it that it has been
unable to meet its liabilities flowing therefrom. Mr. Johri also
submitted that the judgment of 10 March 2022 itself had provided that
the diversion of moneys from the three principal funds would be
subject to due permission being accorded by the competent authority.
According to learned counsel, it was in the aforesaid backdrop that it
had approached the Union Ministry for grant of requisite permission.
However, Mr. Johri submitted that in light of the directives issued by
the Union Government noticed hereinabove, it was constrained to
return all funds of the Union Government which were held by it at the
relevant time.
35. Consequent to the Court having placed both the Union Ministry
as well as the GNCTD on notice, both parties had appeared and had
addressed elaborate submissions which are noticed hereinafter.
36. Appearing for the GNCTD, Mr. Tripathi, learned senior counsel
had contended that the execution petitioner had woefully failed to
either aver or disclose the basis on which the shareholders were
proposed to be held liable. Mr. Tripathi submitted that in order to
invoke the principle of lifting of the corporate veil, it was incumbent
upon the execution petitioner to disclose the basis on which that
principle was sought to be applied. Mr. Tripathi submitted that the
execution petitioner undisputedly has not sought to invoke that
principle on the basis of fraud or divergence of funds. According to
learned senior counsel, it is also not its case that the corporation had
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been incorporated to avoid obligations owed. According to Mr.
Tripathi that leaves the GNCTD to only presume that the aforesaid
principle is sought to be invoked against it solely on the basis of it
being a mere shareholder.
37. Mr. Tripathi submitted that no precedent exists which may be
read as even remotely recognizing a liability being foisted on a
shareholder for the debts due and payable by a company. It was
submitted that holding a shareholder liable for the dues of a corporate
entity would fly in the face of the limited liability principle which
stands established and engrained in our jurisprudence. Mr. Tripathi
cited for the consideration of the Court, the judgment rendered by the
High Court of Justice (Family Division) of England and Wales in
9
Faiza Ben Hashem versus Abdulhadi Ali Shayif & Anr. and more
particularly to the following passages as appearing in the report: -
“ 159 . In the first place, ownership and control of a company are
not of themselves sufficient to justify piercing the veil. This is, of
course, the very essence of the principle in Salomon v A Salomon
& Co Ltd [1897] AC 22, but clear statements to this effect are to be
found in Mubarak at page 682 per Bodey J and Dadourian at para
[679] per Warren J. Control may be a necessary but it is not a
sufficient condition (see below). As Bodey J said in Mubarak at
page 682 (and, dare I say it, this reference requires emphasis,
particularly, perhaps, in this Division): "it is quite certain that
company law does not recognise any exception to the separate
entity principle based simply on a spouse's having sole ownership
and control."
160 . Secondly, the court cannot pierce the corporate veil, even
where there is no unconnected third party involved, merely because
it is thought to be necessary in the interests of justice. In common
with both Toulson J in Yukong Line Ltd of Korea v Rendsberg
Investments Corporation of Liberia (No 2) [1998] 1 WLR 294 at
page 305 and Sir Andrew Morritt VC in Trustor at para [21], I take
9
[2008] EWHC 2380 (Fam)
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the view that the dicta to that effect of Cumming-Bruce LJ in In re
a Company [1985] BCLC 333 at pages 337-338, have not survived
what the Court of Appeal said in Cape at page 536:
"[Counsel for Adams] described the theme of all these cases
as being that where legal technicalities would produce
injustice in cases involving members of a group of
companies, such technicalities should not be allowed to
prevail. We do not think that the cases relied on go nearly so
far as this. As [counsel for Cape] submitted, save in cases
which turn on the wording of particular statutes or contracts,
the court is not free to disregard the principle of Salomon v
Salomon & Co Ltd [1897] AC 22 merely because it considers
that justice so requires. Our law, for better or worse,
recognises the creation of subsidiary companies, which
though in one sense the creatures of their parent companies,
will nevertheless under the general law fall to be treated as
separate legal entities with all the rights and liabilities which
would normally attach to separate legal entities."
161 . Thirdly, the corporate veil can be pierced only if there is some
"impropriety; see Cape at page 544 and, more particularly, Ord at
page 457 where Hobhouse LJ said:
"it is clear... that there must be some impropriety before the
corporate veil can be pierced"
162 . Fourthly, the court cannot, on the other hand, pierce the
corporate veil merely because the company is involved in some
impropriety. The impropriety must be linked to the use of the
company structure to avoid or conceal liability. As Sir Andrew
Morritt VC said in Trustor at para [22]:
"Companies are often involved in improprieties. Indeed there
was some suggestion to that effect in Salomon v A Salomon
& Co Ltd [1897] AC 22. But it would make undue inroads
into the principle of Salomon's case if an impropriety not
linked to the use of the company structure to avoid or conceal
liability for that impropriety was enough."
163 . Fifthly, it follows from all this that if the court is to pierce the
veil it is necessary to show both control of the company by the
wrongdoer(s) and impropriety, that is, (mis)use of the company by
them as a device or façade to conceal their wrongdoing. As the
Vice Chancellor said in Trustor at para [23]:
"the court is entitled to "pierce the corporate veil" and
recognise the receipt of the company as that of the
individual(s) in control of it if the company was used as a
device or facade to conceal the true facts thereby avoiding or
concealing any liability of those individual(s)."
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And in this connection, as the Court of Appeal pointed out in Cape
at page 542, the motive of the wrongdoer may be highly relevant.
164 . Finally, and flowing from all this, a company can be a façade
even though it was not originally incorporated with any deceptive
intent. The question is whether it is being used as a façade at the
time of the relevant transaction(s). And the court will pierce the
veil only so far as is necessary to provide remedy for the particular
wrong which those controlling the company have done. In other
words the fact that the court pierces the veil for one purpose does
not mean that it will necessarily be pierced for all purposes. ”
38. Emphasis was laid on the enunciation of the legal position
relating to the piercing of the corporate veil being attracted only in
cases of fraud or in cases where it be established that the corporate
structure was a mere facade. Faiza Ben Hashem holds that the
doctrine of piercing of the corporate veil cannot be invoked merely
because it is thought to be necessary in the interest of justice.
Explaining the position which would prevail in case an impropriety be
alleged, Faiza Ben Hashem enunciated the legal position to be that the
alleged impropriety must be linked to the use of the company structure
to avoid or conceal a liability. Faiza Ben Hashem proceeded further to
postulate the necessary imperative of the twin tests of control of the
company by the wrongdoer and misuse of the company as a devise or
facade as being necessary for the purposes of the aforesaid principles
being held to apply.
39. Mr. Tripathi also drew the attention of the Court to a more
10
recent decision handed down in Prest v Prest and Ors. where the
U.K. Supreme Court explained the concept of piercing of the
corporate veil as under: -
10
[2013] UKSC 34
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“ [34] These considerations reflect the broader principle that the
corporate veil may be pierced only to prevent the abuse of
corporate legal personality. It may be an abuse of the separate legal
personality of a company to use it to evade the law or to frustrate
its enforcement. It is not an abuse to cause a legal liability to be
incurred by the company in the first place. It is not an abuse to rely
upon the fact (if it is a fact) that a liability is not the controller's
because it is the company's. On the contrary, that is what
incorporation is all about. Thus in a case like VTB Capital plc v
Nutritek International Corp , where the argument was that the
corporate veil should be pierced so as to make the controllers of a
company jointly and severally liable on the company's contract, the
fundamental objection to the argument was that the principle was
being invoked so as to create a new liability that would not
otherwise exist. The objection to that argument is obvious in the
case of a consensual liability under a contract, where the ostensible
contracting parties never intended that anyone else should be party
to it. But the objection would have been just as strong if the
liability in question had not been consensual.
[35] I conclude that there is a limited principle of English law
which applies when a person is under an existing legal obligation
or liability or subject to an existing legal restriction which he
deliberately evades or whose enforcement he deliberately frustrates
by interposing a company under his control. The court may then
pierce the corporate veil for the purpose, and only for the purpose,
of depriving the company or its controller of the advantage that
they would otherwise have obtained by the company's separate
legal personality. The principle is properly described as a limited
one, because in almost every case where the test is satisfied, the
facts will in practice disclose a legal relationship between the
company and its controller which will make it unnecessary to
pierce the corporate veil. Like Munby J in Ben Hashem v Al Shayif
[2008] EWHC 2380 (Fam), [2009] 1 FLR 115, I consider that if it
is not necessary to pierce the corporate veil, it is not appropriate to
do so, because on that footing there is no public policy imperative
which justifies that course. I therefore disagree with the Court of
Appeal in VTB Capital plc v Nutritek International Corp [2012] 2
BCLC 437 who suggested otherwise at [79]. For all of these
reasons, the principle has been recognised far more often than it
has been applied. But the recognition of a small residual category
of cases where the abuse of the corporate veil to evade or frustrate
the law can be addressed only by disregarding the legal personality
of the company is, I believe, consistent with authority and with
long-standing principles of legal policy. ”
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40. Learned Senior Counsel also cited for the consideration of the
Court the judgment rendered by the United States District Court for
11
the Northern District of California in Ahcom Ltd. versus Smeding .
The said court while dealing with the issue of piercing of the corporate
veil as applied by courts in California had held as follows:-
“When applying these rules to particular cases, California courts
have considered a variety of 12 factors, including: commingling of
assets; diversion of corporate assets to personal use; whether the
individual defendants held themselves out as personally liable for
the debts of the corporation; whether the individual defendants
acted in bad faith; whether the individual defendants entered into
contracts with the intent to avoid performance by using the
corporate entity as a shield against personal liability; whether the
individuals and corporation used the same office; whether they
employed the same attorney; whether the individuals used the
corporation to procure labor, services and merchandise for another
person or entity; whether the individuals failed to adequately
capitalize the corporation; and whether the individuals failed to
maintain minutes or adequate corporate records. Assoc. Vendors,
210 Cal. App. 2d at 838-840 (collecting cases).”
41. Mr. Tripathi further submitted that similar principles have been
adopted in Australia and placed for the perusal of the Court the
judgment handed down by the High Court of Australia in Industrial
12
Equity Limited & Ors. v. Blackburn & Ors. Mr. Tripathi relied
upon the following passages from that decision: -
“ In the first place, it is a natural consequence of the recognition of
the separate personality of each company, a recognition which
derives from Salomon v. Salomon & Co. Ltd. (28), and which has
been confirmed by Lee v. Lee's Air Farming Ltd. (29). It has been
said that the rigours of the doctrine enunciated by Salomon v.
Salomon & Co. Ltd. have been alleviated by the modern
requirements as to consolidated or group accounts introduced in
the United Kingdom by the Companies Act , 1948 and in New
South Wales by the Companies Act , 1961 (N.S.W.)-see Gower,
11
Case No. 07-1139 SC
12
(1977) 137 C.L.R.
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Modern Company Law , 3rd ed. (1969), pp. 198-199. But the
purpose of these requirements is to ensure that the members of, and
for that matter persons dealing with, a holding company are
provided with accurate information as to the profit or loss and the
state of affairs of that company and its subsidiary companies within
the group, information which would not be forthcoming if all the
shareholders received was limited to the accounts of the holding
company disclosing as assets the shares which it holds in its
subsidiaries. It is for this purpose that the Companies Act treats the
business group as one entity and requires that its financial results
be incorporated in consolidated accounts to be circulated to
shareholders and laid before a general meeting (s. 162 (4), s. 164
(1)) and requires that the accounts and other documents shall
accompany the annual return which shall be lodged with the
Corporate Affairs Commission (s. 158; Eighth Schedule, Pt II).
However, it can scarcely be contended that the provisions
of the Act operate to deny the separate legal personality of each
company in a group. Thus, in the absence of contract creating some
additional right, the creditors of company A, a subsidiary company
within a group, can look only to that company for payment of their
debts. They cannot look to company B, the holding company, for
payment (see Walker v. Wimborne (30)).
The Companies Act does not, in the case of holding companies,
substitute the requirement for group accounts for the old
requirement of accounts of the holding company itself. Group
accounts are an additional requirement; the holding company is
still obliged to lay before its shareholders in general meeting its
profit and loss account and balance sheets (s. 162 (1) and (3)).
containing the information prescribed by the statute and
accompanied by the prescribed documents. Indeed, s. 162 in sub- s.
(1) and sub-s. (4) draws a distinction between the "profit or loss of
the company" and "the profit or loss of the company and its
subsidiaries", thereby indicating, to my mind. that s. 376 (1) refers
to the profits of the company, not those of the group. The
predecessors of s. 376 (1), expressed in like terms, were in force
well before the provisions as to group accounts were introduced.
There are, of course, even stronger grounds for taking a similar
view of art. 129 expressed, as it is, according to a time- honoured
formula which originated long before group accounts or groups of
companies became part of the company scene. ”
42. It would be pertinent to note that Industrial Equity Limited was
essentially dealing with the accounting principle of consolidation of
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group accounts and whether the aforesaid accounting practice could
be said to enable the creditor of a company to move against the assets
of a subsidiary within a group. It was in that context that the High
Court of Australia observed that in the absence of a contract creating
any additional right, the creditor can only look at the company which
owes the debt and cannot seek recourse against any other company
which may form part of that group.
43. Turning then to the principles relating to the lifting of the
corporate veil as elucidated by our courts, Mr. Tripathi placed reliance
on the judgment rendered by three learned Judges of the Supreme
Court in Balwant Rai Saluja & Anr. vs. AIR India Limited &
13
Ors. . The said doctrine was explained by the Supreme Court in the
following terms:-
“ 69 . Vodafone case [ Vodafone International Holdings BV v. Union
of India, (2012) 6 SCC 613 : (2012) 3 SCC (Civ) 867] further
made reference to a decision of the US Supreme Court in United
States v. Bestfoods [141 L Ed 2d 43 : 524 US 51 (1998)] . In that
case, the US Supreme Court explained that as a general principle of
corporate law a parent corporation is not liable for the acts of its
subsidiary. The US Supreme Court went on to explain that
corporate veil can be pierced and the parent company can be held
liable for the conduct of its subsidiary, only if it is shown that the
corporal form is misused to accomplish certain wrongful purposes,
and further that the parent company is directly a participant in the
wrong complained of. Mere ownership, parental control,
management, etc. of a subsidiary was held not to be sufficient to
pierce the status of their relationship and, to hold parent company
liable.”
70. The doctrine of “piercing the corporate veil” stands as an
exception to the principle that a company is a legal entity separate
and distinct from its shareholders with its own legal rights and
obligations. It seeks to disregard the separate personality of the
13
(2014) 9 SCC 407
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company and attribute the acts of the company to those who are
allegedly in direct control of its operation. The starting point of this
doctrine was discussed in the celebrated case of Salomon v.
Salomon & Co. Ltd. [1897 AC 22 : (1895-99) All ER Rep 33 (HL)]
Lord Halsbury LC, negating the applicability of this doctrine to the
facts of the case, stated that : (AC pp. 30 & 31)
“[a company] must be treated like any other independent
person with its rights and liabilities [legally] appropriate to
itself … whatever may have been the ideas or schemes of
those who brought it into existence.”
Most of the cases subsequent to Salomon case [1897 AC 22 :
(1895-99) All ER Rep 33 (HL)] , attributed the doctrine of piercing
the veil to the fact that the company was a “sham” or a “façade”.
However, there was yet to be any clarity on applicability of the
said doctrine.
71. In recent times, the law has been crystallised around the six
principles formulated by Munby, J. in Ben Hashem v. Ali Shayif
[ Ben Hashem v. Ali Shayif , 2008 EWHC 2380 (Fam)] . The six
principles, as found at paras 159-64 of the case are as follows:
( i ) Ownership and control of a company were not enough to
justify piercing the corporate veil;
( ii ) The court cannot pierce the corporate veil, even in the
absence of third-party interests in the company, merely because
it is thought to be necessary in the interests of justice;
( iii ) The corporate veil can be pierced only if there is some
impropriety;
( iv ) The impropriety in question must be linked to the use
of the company structure to avoid or conceal liability;
( v ) To justify piercing the corporate veil, there must be both
control of the company by the wrongdoer(s) and impropriety,
that is use or misuse of the company by them as a device or
facade to conceal their wrongdoing; and
( vi ) The company may be a “façade” even though it was not
originally incorporated with any deceptive intent, provided that
it is being used for the purpose of deception at the time of the
relevant transactions. The court would, however, pierce the
corporate veil only so far as it was necessary in order to provide
a remedy for the particular wrong which those controlling the
company had done.
72. The principles laid down by Ben Hashem case [ Ben Hashem v.
Ali Shayif , 2008 EWHC 2380 (Fam)] have been reiterated by the
UK Supreme Court by Lord Neuberger in Prest v. Petrodel
Resources Ltd. [(2013) 2 AC 415 : (2013) 3 WLR 1 : 2013 UKSC
34] , UKSC at para 64. Lord Sumption, in Prest case [(2013) 2 AC
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415 : (2013) 3 WLR 1 : 2013 UKSC 34] , finally observed as
follows : (AC p. 488, para 35)”
“ 35 . I conclude that there is a limited principle of English law
which applies when a person is under an existing legal
obligation or liability or subject to an existing legal restriction
which he deliberately evades or whose enforcement he
deliberately frustrates by interposing a company under his
control. The court may then pierce the corporate veil for the
purpose, and only for the purpose, of depriving the company
or its controller of the advantage that they would otherwise
have obtained by the company's separate legal personality.
The principle is properly described as a limited one, because
in almost every case where the test is satisfied, the facts will
in practice disclose a legal relationship between the company
and its controller which will make it unnecessary to pierce
the corporate veil.”
73. The position of law regarding this principle in India has been
enumerated in various decisions. A Constitution Bench of this
Court in LIC v. Escorts Ltd. [(1986) 1 SCC 264] , while discussing
the doctrine of corporate veil, held that : (SCC pp. 335-36, para
90)”
“ 90 . … Generally and broadly speaking, we may say that the
corporate veil may be lifted where a statute itself
contemplates lifting the veil, or fraud or improper conduct is
intended to be prevented, or a taxing statute or a beneficent
statute is sought to be evaded or where associated companies
are inextricably connected as to be, in reality, part of one
concern. It is neither necessary nor desirable to enumerate the
classes of cases where lifting the veil is permissible, since
that must necessarily depend on the relevant statutory or
other provisions, the object sought to be achieved, the
impugned conduct, the involvement of the element of the
public interest, the effect on parties who may be affected,
etc.”
74. Thus, on relying upon the aforesaid decisions, the doctrine of
piercing the veil allows the court to disregard the separate legal
personality of a company and impose liability upon the persons
exercising real control over the said company. However, this
principle has been and should be applied in a restrictive manner,
that is, only in scenarios wherein it is evident that the company was
a mere camouflage or sham deliberately created by the persons
exercising control over the said company for the purpose of
avoiding liability. The intent of piercing the veil must be such that
would seek to remedy a wrong done by the persons controlling the
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company. The application would thus depend upon the peculiar
facts and circumstances of each case.”
44. Balwant Rai Saluja also noticed the decision in Faiza Ben
Hashem and had reiterated the position of law regarding the piercing
principle as was enunciated by the Supreme Court in Life Insurance
14
Corporation of India vs. Escorts Ltd. . It was further clarified that
while the doctrine of piercing the veil enables the Court to disregard
the separate legal personality of a company, the same is liable to be
applied in a restrictive manner and only in circumstances where it is
evident that the company was a mere camouflage or sham.
45. Learned Senior Counsel then cited for the consideration of the
Court the judgment rendered by this Court in Balmer Lawrie & Co.
Ltd. vs. Saraswathi Chemicals Proprietors Saraswathi Leather
15
Chemicals (P) Ltd. It becomes relevant to note that Balmer Lawrie
was rendered on a petition filed under Section 36 of the Act. While
negating the argument of an Award being enforced against non-
parties, the learned Judge made the following pertinent observations: -
“ 12. In view of the above, the only question that needs to be
addressed in the present petition is whether this Court can lift the
corporate veil while enforcing the arbitral award and whether the
necessary grounds for doing so have been established?
13. In the first instance, it is doubtful whether this Court could
enforce the arbitral award against non parties to the arbitration
agreement. It is trite law that an arbitral Tribunal draws its
jurisdiction from the agreement between the parties and persons
who are not party to the arbitration agreement cannot be proceeded
against by an arbitral Tribunal. Thus, an arbitral award made by an
arbitral Tribunal against any person who is not a party to the
arbitration agreement would be wholly without jurisdiction and
14
(1986) 1 SCC 264
15
2017 SCC OnLine Del 7519
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unenforceable. There may be exceptional cases where a Court may
compel persons who are not signatories to an arbitration agreement
to arbitrate provided it is established that the non-signatory(ies) are
either claiming through signatory(ies) or there was clear intention
to be bound as parties (see: Chloro Controls India Private Limited
v. Severn Trent Water Purification Inc & Ors.,
MANU/SC/0803/2012 : VII (2012) SLT 502 : (2013) 1 SCC 641).
However an arbitrator cannot lift the corporate veil and proceed
against non parties. An arbitration is consensual. It is based on the
agreement between parties. The arbitrator derives his jurisdiction
to adjudicate disputes from the consent of parties, therefore, he is
not in a position to enlarge the scope of his influence and extend
his jurisdiction to non-parties by exercise of his limited jurisdiction
based on the consent of parties.
14. Though a Court can lift the corporate veil, the same can be
done only in extraordinary circumstances and by due adjudicatory
process. It is trite law that an executing Court cannot go behind the
decree; it must be enforced as it is. Thus, it is not open for a
petitioner to claim that although the decree is against one entity it
must be enforced against another. However, there may be cases
where it is found that the assets of the judgment debtor have been
secreted, siphoned off, or by a fraudulent device ostensibly placed
outside the control of the judgment debtor, in an endeavour to
frustrate the enforcement of the decree. In such cases, the Court is
not powerless to extend its reach to third parties to enforce the
decree; however this is limited for recovering the assets of the
judgment debtor. In the event a corporate facade is used to
perpetuate such fraud, the corporate veil may be lifted.
1 5. In the present case, none of the grounds for lifting the corporate
veil are established. The DH has not made out a case of egregious
fraud; the same has been neither been pleaded nor established.
Thus, there is no occasion for this Court to examine the question of
lifting the corporate veil. The statement that the Mundhra family
members have been conducting the affairs of the JD company is no
ground for piercing the corporate veil. The decision of the Bench
of this Court in V.K. Uppal v. M/s. Akshay International Pvt. Ltd.
(supra) is also of no assistance to the petitioner. On the contrary, in
that case, this Court had observed that "This Court as the executing
Court cannot execute the decree against anyone other than the
judgment debtor or against the assets/properties of anyone other
than the judgment debtor. The identity of a Director or a
shareholder is distinct from that of the company". ”
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It may only be observed that in Balmer Lawrie , the Court had
ultimately found it unnecessary to deal with the issue since no
foundation in support of invocation of the piercing principle had
been laid.
46. It becomes pertinent to note that Mr. Sibal, learned Senior
Counsel appearing for the execution petitioner, had sought the
impleadment of the Union Ministry as well as the GNCTD in light of
the principles which had been enunciated by a Division Bench of the
Bombay High Court in Bhatia Industries & Infrastructure Limited
16
vs. Asian Natural Resources (India) Limited and where the said
High Court had come to conclude that the veil of corporate personality
could be lifted in execution proceedings. The said decision had been
duly noticed by the Court in its order dated 17 February 2023 when it
originally placed the Union Ministry and GNCTD on notice.
47. The Bombay High Court in Bhatia Industries had held as
follows: -
“ 12. It would be relevant if a reference is made to the judgment
in State of U.P. v. Renusagar Power Co. This judgment noted the
change in the concept of lifting of corporate veil. It has been
observed in the said judgment that the concept of lifting of
corporate veil is a changing concept and was permissible in the
expanding horizon of modern jurisprudence. It will be relevant and
useful to reproduce the relevant paragraphs of the said judgment in
which evolution of this doctrine has been beautifully traced. Paras
51 to 72 of the said judgment are relevant and they read as
under:—
“51. This naturally brings us to the question of lifting the
corporate veil or piercing the corporate veil as we often call
it. On behalf of the appellants, however, it was very strongly
urged that in this case there was no ground for lifting the
16
2016 SCC Online Bom 10695
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corporate veil and Shri. Trivedi, learned Additional
Advocate-General, State of U.P., who was assisted by Shri.
Gopal Subramaniam, submitted before us elaborate
arguments and made available to us all the relevant
documents, urged that there was no warrant either in law or
in fact to lift the corporate veil and to treat Renusagar's plant
as Hindalco's own source of generation. Shri. Trivedi urged
that facts in this case do not justify such a construction and
the law does not warrant such an approach. We may say that
Shri. Trivedi mainly relied on the proposition that normally
the court has disregarded the separate legal entity of a
company only where the company was formed or used to
facilitate evasion of legal obligations. He referred us to the
observations of this Court in Western Coalfields
Ltd. v. Special Area Development Authority, Korba [(1982) 1
SCC 125]. The facts of that case were, however, entirely
different and it is useless to refer to them but at page 17 of
the report, Chandrachud, C.J. speaking for the Court quoted
the observations in APSRTC v. ITO [(1964) 7 SCR 17],
where this Court had held that though the Transport
Corporation was wholly controlled by the State Government
it had a separate entity and its income was not the income of
the State Government. While delivering the judgment in that
case Gajendragadkar, C.J. referred to the observations of
Lord Denning in Tamlin v. Hannaford [(1950) 1 KB 18]
where Lord Denning had observed that the Crown and the
corporation were different and the servants of the corporation
were not civil servants.
52. Chandrachud, C.J. relied on the aforesaid observations
and referred to Pennington's Company Law , 4th Edn., pages
50-51, where it was stated that there were only two cases
where the court had disregarded the separate legal entity of a
company and that was done because the company was
formed or used to facilitate the evasion of legal obligations.
53. The learned Editor of Pennington's Company Law ,
5th Edn., at page 49 has recognised that this principle has
been relaxed in subsequent cases. He states that the principle
of company's separate legal entity has on the whole been
fully applied by the courts since Salomon case [1897 AC 22].
Corporate veil has been lifted where the principal question
before the court was one of company law, and in some
situations where the corporate personality of the company
involved was really of secondary importance and the
application of the old principle has worked hardship and
injustice. In England, there have been only a few cases where
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the court had disregarded the company's corporate entity and
paid attention to where the real control and beneficial
ownership of the company's undertaking lay. When it had
done this, the court had relied either on a principle of public
policy, or on the principle that devices used to perpetrate
frauds or evade obligations will be treated as nullities, or on a
presumption of agency or trusteeship which at first
sight Salomon case [1897 AC 22] seems to prohibit. Again at
page 36 of the same book, the learned author notes a few
cases where the courts have disregarded separate legal entity
of a company and investigated the personal qualities of the
shareholders or the persons in control of it because there were
overriding public interests to be served by doing so.
54. Indubitably, in this case there was no question of evasion
of taxes but the manner of treatment of the power plant of
Renusagar as the power plant of Hindalco and the
Government taking full advantage of the same in the case of
power cuts and denial of supply of 100 per cent power to
Hindalco, in our opinion, underline the facts and, as such,
imply acceptance and waiver of the position that Renusagar
was a power plant owned by Hindalco. Shri. Trivedi naturally
relied on several decisions which we shall briefly note in aid
of the submission that Renusagar's power plant could not be
treated as Hindalco's power plant. He referred us to the well
known case of Aron Salomon v. A. Salomon & Co. Ltd. [1897
AC 22] (at pp. 27, 30-31, 43, 56) to emphasise the distinction
between the shareholders and the company. This point of
view was emphasised by this Court also by Chandrachud,
C.J. in Western Coalfields Ltd. case [(1982) 1 SCC 125]
relying on Rustom Cavasjee Cooper v. Union of
India [((1970) 1 SCC 248] where this Court held that a
company registered under the Companies Act was a legal
person, separate and distinct from its individual members.
Property of the company was not the property of the
shareholders. These propositions, in our opinion, do not have
any application to the facts of the instant case. Shri. Trivedi
also drew our attention to Bank voor Handel en Schee pvaart
N.V. v. Slatford [(1953) 1 QB 248] where in the context of
the international law property belonging to or held on behalf
of a Hungarian national came up for consideration and the
distinction between a shareholder and a company was
emphasised and highlighted.
55. In Kodak Ltd. v. Clark [(1976) 1 SCC 248] the Court of
appeal in England while dealing with an English company
carrying on business in the U.K. owned 98 per cent of the
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shares in a foreign company, which gave it a preponderating
influence in the control, election of directors etc. of the
foreign company. The remaining shares in the foreign
company were, however, held by independent persons, and
there was no evidence that the English company had ever
attempted to control or interfere with the management of the
foreign company, or had any power to do so otherwise than
by voting as shareholders. It was held that the foreign
company was not carried on by the English company, nor
was it the agent of the English company, and that the English
company was not, therefore, assessable to income tax.
Renusagar was not the alter ego of Hindalco, it was
submitted. On the other hand these English cases have often
pierced the veil to serve the real aim of the parties and for
public purposes. See in this connection the observations of
the Court of appeal in DHN Food Distributors Ltd. v. London
Borough of Tower Hamlets [(1976) 3 ALL ER 462]. It is not
necessary to take into account the facts of that case. We may,
however, note that in that case the corporate veil was lifted to
confer benefit upon a group of companies under the
provisions of the Land Compensation Act, 1961 of England.
Lord Denning at page 467 of the report has made certain
interesting observations which are worth repeating in the
context of the instant case. The Master of the Rolls said at
page 467 as follows:
Third, lifting the corporate veil. A further very
interesting point was raised by counsel for the claimants
on company law. We all know that in many respects a
group of companies are treated together for the purpose
of general accounts, balance sheet and profit and loss
account. They are treated as one concern. Professor
Gower in his book on company law says: „there is
evidence of a general tendency to ignore the separate
legal entities of various companies within a group, and to
look instead at the economic entity of the whole group‟.
This is especially the case when a parent company owns
all the shares of the subsidiaries, so much so that it can
control every movement of the subsidiaries. These
subsidiaries are bound hand and foot to the parent
company and must do just what the parent company
says. A striking instance is the decision of the House of
Lords in Harold Holdsworth & Co. (Wakefield)
Ltd. v. Caddies [(1955) 1 ALL ER 725]. So here. This
group is virtually the same as a partnership in which all
the three companies are partners. They should not be
treated separately so as to be defeated on a technical
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point. They should not be deprived of the compensation
which should justly be payable for disturbance. The three
companies should, for present purposes, be treated as
one, and the parent company, DHN, should be treated as
that one. So that DHN are entitled to claim compensation
accordingly. It was not necessary for them to go through
a conveyancing device to get it.
I realise that the President of the Lands Tribunal, in
view of previous cases, felt it necessary to decide as he
did. But now that the matter has been fully discussed in
this Court, we must decide differently from him. These
companies as a group are entitled to compensation not
only for the value of the land, but also compensation for
disturbance. I would allow the appeal accordingly.
56. Lord Justice Goff proceeded with caution and observed as
follows at pages 468 and 469 of the report:
Secondly, on the footing that that is not in itself
sufficient, still, in my judgment, this is a case in which
one is entitled to look at the realities of the situation and
to pierce the corporate veil. I wish to safeguard myself
by saying that so far as this ground is concerned, I am
relying on the facts of this particular case. I would not at
this juncture accept that in every case where one has a
group of companies one is entitled to pierce the veil, but
in this case the two subsidiaries were both wholly
owned; further, they had no separate business operations
whatsoever; thirdly, in my judgment, the nature of the
question involved is highly relevant, namely whether the
owners of this business have been disturbed in their
possession and enjoyment of it. I find support for this
view in a number of cases, from which I would make a
few brief citations, first from Harold Holdsworth &
Co. ( Wakefield) Ltd. v. Caddies [(1955) 1 ALL ER 725]
where Lord Reid said: (All ER pp. 737-38)
It was argued that the subsidiary companies were
separate legal entities, each under the control of its own
board of directors, that in law the board of the appellant
company could not assign any duties to anyone in
relation to the management of the subsidiary companies,
and that, therefore, the agreement cannot be construed as
entitling them to assign any such duties to the
respondent.
My Lords, in my judgment, this is too technical an
argument. This is an agreement in re mercatoria , and it
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must be construed in the light of the facts and realities of
the situation. The appellant company owned the whole
share capital of British Textile Mfg. Co. and, under the
agreement of 1947, the directors of this company were to
be the nominees of the appellant company. So, in fact,
the appellant company could control the internal
management of their subsidiary companies, and, in the
unlikely event of there being any difficulty, it was only
necessary to go through formal procedure in order to
make the decision of the appellant company's board fully
effective.
That particular passage, is I think, especially cogent
having regard to the fact that counsel for the local
authority was constrained to admit that in this case, if
they had thought of it soon enough, DHN could, as it
were, by moving the pieces on their chess board, have
put themselves in a position in which the question would
have been wholly unarguable.
I also refer to Scottish Cooperative Wholesale Society
Ltd. v. Meyer [(1958) 3 ALL ER 66]. That was a case
under Section 210 of the Companies Act, 1948 and
Viscount Simonds said: (All ER p. 71)
„… I do not think that my own views could be
stated better than in the late Lord President
Cooper's words on the first hearing of this case.
He said:
“In my view, the section warrants the court
in looking at the business realities of a
situation and does not confine them to a
narrow legalistic view”.‟
My third citation is from the judgment of Danckwerts,
L.J. in Merchandise Transport Ltd. v. British Transport
Commission [(1961) 3 ALL ER 495] where he said that
the cases — (All ER p. 518)
„show that where the character of a company, or
the nature of the persons who control it, is a
relevant feature the court will go behind the mere
status of the company as a legal entity, and will
consider who are the persons as shareholders or
even as agents who direct and control the activities
of a company which is incapable of doing anything
without human assistance.‟
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The third ground, which I place last because it is longest,
but perhaps ought to come first, is that in my judgment,
in truth, DHN were the equitable owners of the property.
In order to resolve this matter, it will be necessary for me
to refer in some detail to the facts.”
57 . Shaw, L.J. also observed at page 473 as follows:
“Even if this were not right, there is the further
argument advanced on behalf of the claimants that
there was so complete an identity of the different
companies comprised in the so-called group that
they ought to be regarded for this purpose as a
single entity. The completeness of that identity
manifested itself in various ways. The directors of
DHN were the same as the directors of Bronze; the
shareholders of Bronze were the same as in DHN,
the parent company, and they had a common
interest in maintaining on the property concerned
the business of the group. If anything were
necessary to reinforce the complete identity of
commercial interest and personality, clause 6, to
which I have referred already, demonstrates it, for
DHN undertook the obligation to procure their
subsidiary company to make the payment which
the bank required to be made.
If each member of the group is regarded as a
company in isolation, nobody at all could have
claimed compensation in a case which plainly
calls for it. Bronze would have had the land but
no business to disturb; DHN would have had the
business but no interest in the land.”
58. In this connection it would be useful to refer to Harold
Holdsworth & Co. (Wakefield) Ltd. v. Caddies [(1955) 1 ALL ER
725], where Lord Morton of Henryton in England, at page 734 of
the report observed as follows:
“My Lords, this clause refers to a group of companies
consisting of the appellant company and their existing
subsidiary companies. I cannot read the clause as
compelling the board to assign duties to the respondent
in relation to the business of every company in the group.
Nor can I read it as compelling the board to assign him
duties in relation to the business of the appellant
company. That business is not treated as being on a
different footing from the business of British Textile or
of another subsidiary of the appellant company, Whalley
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& Appleyard, Ltd., which is mentioned in the
respondent's condescendence 3. As I read the clause, it
leaves the board of the appellant company free to assign
to the respondent duties in relation to the business of one
only, or two only or all of the companies in the group,
and to vary the assignment and the duties from time to
time. Further, I think the clause leaves the board free to
appoint another person to be „a managing director‟, and
to divide the duties and powers referred to in the clause
between the respondent and the other managing director
in such manner as they think fit. It is true that each
company in the group is, in law, a separate entity, the
business whereof is to be carried on by its own directors
and managing director, if any; but there is no doubt that
the appellant company, by taking any necessary formal
steps, could make any arrangements, they pleased in
regard to the management of the business of (for
instance) British Textile. They owned all the issued
capital and the directors were their nominees.”
59. Lord Reid at pages 737-38 observed as follows:
“It was argued that the subsidiary companies were
separate legal entities, each under the control of own
board of directors, that in law the board of the appellant
company could not assign any duties to anyone in
relation to the management of the subsidiary companies,
and that, therefore, the agreement cannot be construed as
entitling them to assign any such duties to the
respondent.
My Lords, in my judgment, this is too technical an
argument. This is an agreement in re mercatoria , and it
must be construed in the light of the facts and realities
of the situation. The appellant company owned the
whole share capital of British Textile Manufacturing
Co. and, under the agreement of 1947, the directors of
this company were to be the nominees of the appellant
company. So, in fact, the appellant company could
control the internal management of their subsidiary
companies, and, in the unlikely event of there being any
difficulty, it was only necessary to go through formal
procedure in order to make the decision of the appellant
company's board fully effective.”
60 . Our attention was drawn by Shri. Sen to Scottish
Cooperative Wholesale Society Ltd. v. Meyer [(1958) 3 ALL ER
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66], where Viscount Simonds of House of Lords observed at pages
71-72 as follows:
“My Lords, it may be that the acts of the society of which
complaint is made could not be regarded as conduct of the
affairs of the company if the society and the company were
bodies wholly independent of each other, competitors in the
rayon market, and using against each other such methods of
trade warfare as custom permitted. But this is to pursue a
false analogy. It is not possible to separate the transactions
of the society from those of the company. Every step taken
by the latter was determined by the policy of the former. It
will give an example of this. I observed that, in the course
of the argument before the House, it was suggested that the
company had only itself to blame if, through its neglect to
get a contract with the society, it failed in a crisis to obtain
from the Falkland Mill the supply of cloth that it needed.
The short answer is that it was the policy of the society that
the affairs of the company should be so conducted, and the
minority shareholders were content that it should be so.
They relied — how unwisely the event provided — on the
good faith of the society, and in any case they were
impotent to impose their own views. It is just because the
society could not only use the ordinary and legitimate
weapons of commercial warfare but could also control from
within the operations of the company that it is illegitimate
to regard the conduct of the company's affairs as a matter
for which it had no responsibility. After much consideration
of this question, I do not think that my own views could be
stated better than in the late Lord President, Lord Cooper's
words on the first hearing of this case. He said (1954 SC at
p. 391):
„In my view, the section warrants the court in looking
at the business realities of a situation and does not
confine them to a narrow legalistic view. The truth is
that, whenever a subsidiary is formed as in this case
with an independent minority of shareholders, the
parent company must, if it is engaged in the same
class of business, accept as a result of having formed
such a subsidiary an obligation so to conduct what are
in a sense its own affairs as to deal fairly with its
subsidiary.‟
At the opposite pole to this standard may be put the
conduct of a parent company which says “our subsidiary
company has served its purpose, which is our purpose.
Therefore let it die” and, having thus pronounced
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sentence, is able to enforce it and does enforce it not only
by attack from without but also by support from within. If
this section is inept to cover such a case, it will be a dead
letter indeed. I have expressed myself strongly in this case
because it appears to me to be a glaring example of
precisely the evil which Parliament intended to remedy.”
61 . Similarly, at page 84 of the report, Lord Keith's observations
are also relevant to the facts of this case:
“My Lords, if the society could be regarded as an
organisation independent of the company and in
competition with it, no legal objection could be taken to
the actions and policy of the society. Lord Carmont
pointed this out in the Court of Session. But that is not
the position. In law, the society and the company were, it
is true, separate legal entities. But they were in the
relation of parent and subsidiary companies, the
company being formed to run a business for the society
which the society could not at the outset have done for
itself unless it could have persuaded the respondents to
become servants of the society. This the respondents
were not prepared to do. The company, through the
knowledge, the experience, the connections, the business
ability and the energies of the respondents, had built up a
valuable goodwill in which the society shared and which
there is no reason to think would have been maintained,
if not increased, with the Cooperation of the society. The
company was in substance, though not in law, a
partnership consisting of the society and the respondents.
Whatever may be the other different legal consequences
following on one or other of these forms of combination
one result, in my opinion, followed in the present case
from the method adopted, which is common to
partnership, that there should be the utmost good faith
between the constituent members. In partnership the
position is clear. As stated in Lindley
on Partnership (11th Edn.), p. 401:
„A partner cannot, without the consent of his co-partners,
lawfully carry on for his own benefit, either openly or
secretly, any business in rivalry with the firm to which he
belongs.‟
It may not be possible for the legal remedies that would
follow in the case of a partnership to follow here, but the
principle has, I think, valuable application to the
circumstances of this case.
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62 . In Charterbridge Corpn. Ltd. v. Lloyds Bank Ltd. [(1969)
2 ALL ER 1185] at page 1194 Justice Pennycuick
emphasised that the reality of the situation must be looked in.
63 . Shri. Trivedi drew our attention to the decision
in Marshall Richards Machine Co. Ltd. v. Jewilt [36 Tax
Cases 511], where at page 525 of the report Lord Upjohn, J.
observed that where you have a wholly owned subsidiary,
and both the parent company and wholly owned subsidiary
enter into trading relationships, there is, of course, a dual
relation, but you cannot for the purposes of tax disregard the
fact that there are, in fact, two entities and two trades, that is
to say, the trade of each company. It is normally a question of
fact whether the disbursement in question is laid out wholly
and exclusively and for the purposes of the trade. In aid of
this proposition and in furtherance Shri. Trivedi drew our
attention to the profits of the two companies which were
separately computed and also referred to Vol. C, p. 641
where the profits of Renusagar were separately indicated and
Vol. C at p. 642 where the profits of Hindalco were
separately indicated.
64 . We are, however, of the opinion that these tests are not
conclusive tests by themselves. Our attention was also drawn
to the decision of the Madras High Court in Spencer & Co.
Ltd. Madras v. CWT [(AIR 1969 Mad 359] where
Veeraswami, J. held that merely because a company
purchases almost the entirety of the shares in another
company, there was no extinction of corporate character for
each company was a separate juristic entity for the tax
purposes. Almost on similar facts, are the observations of
P.B. Mukharji, J. in Turner Morrison & Co.
Ltd. v. Hungerford Investment Trust Ltd. [AIR 1969 Cal
238], where he held that holding company and subsidiaries
are incorporated companies and in this context each has a
separate legal entity. Each has a separate corporate veil but
that does not mean that holding company and the subsidiary
company within it, all constitute one company.
65 . Mr. Justice O. Chinnappa Reddy speaking for this Court
in LIC v. Escorts Ltd. [(1986) 1 SCC 264] had emphasised
that the corporate veil should be lifted where the associated
companies are inextricably connected as to be, in reality, part
of one concern. It is neither necessary nor desirable to
enumerate the classes of cases where lifting the veil is
permissible, since that must necessarily depend on the
relevant statutory or other provisions, the object sought to be
achieved, the impugned conduct, the involvement of the
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element of the public interest, the effect on parties who may
be affected. After referring to several English and Indian
cases, this Court observed that ever since A. Salomon & Co.
Ltd. Case [1897 AC 22] a company has a legal independent
existence distinct from individual members. It has since been
held that the corporate veil may be lifted and corporate
personality may be looked in. Reference was made to
Pennington and Palmer's Company Laws.
66 . It is high time to reiterate that in the expanding horizon of
modern jurisprudence, lifting of corporate veil is permissible.
Its frontiers are unlimited. It must, however, 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 of corporate veil is expanding. Here, indubitably, we
are of the opinion that it is correct that Renusagar was
brought into existence by Hindalco in order to fulfil the
condition of industrial licence of Hindalco through
production of aluminium. It is also manifest from the facts
that the model of the setting up of power station through the
agency of Renusagar was adopted by Hindalco to avoid
complications in case of take over of the power station by the
State or the Electricity Board. As the facts make it abundantly
clear that all the steps for establishing and expanding the
power station were taken by Hindalco, Renusagar is wholly
owned subsidiary of Hindalco and is completely controlled
by Hindalco. Even the day-to-day affairs of Renusagar are
controlled by Hindalco. Renusagar has at no point of time
indicated any independent volition. Whenever felt necessary,
the State or the Board have themselves lifted the corporate
veil and have treated Renusagar and Hindalco as one concern
and the generation in Renusagar as the own source of
generation of Hindalco. In the impugned order the profits of
Renusagar have been treated as the profits of Hindalco.
67 . In the aforesaid view of the matter we are of the opinion
that the corporate veil should be lifted and Hindalco and
Renusagar be treated as one concern and Renusagar's power
plant must be treated as the own source of generation of
Hindalco and should be liable to duty on that basis. In the
premises the consumption of such energy by Hindalco will
fall under Section 3(1)( c ) of the Act. The learned Additional
Advocate-General for the State relied on several decisions,
some of which have been noted.
68 . The veil on corporate personality even though not lifted
sometimes, is becoming more and more transparent in
modern company jurisprudence. The ghost of Salomon
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case [1897 AC 22] still visits frequently the hounds of
Company Law but the veil has been pierced in many cases.
Some of these have been noted by Justice P.B. Mukharji in
the New Jurisprudence [Tagore Law Lectures, p.183]
69 . It appears to us, however, that as mentioned the concept
of lifting the corporate veil is a changing concept and is of
expanding horizons. We think that the appellant was in error
in not treating Renusagar's power plant as the power plant of
Hindalco and not treating it as the own source of energy. The
respondent is liable to duty on the same and on that footing
alone; this is evident in view of the principles enunciated and
the doctrine now established by way of decision of this Court
in Life Insurance Corpn. of India [(1986) 1 SCC 264] that in
the facts of this case Sections 3(1)(c) and 4(1)(c) of the Act
are to be interpreted accordingly. The persons generating and
consuming energy were the same and the corporate veil
should be lifted. In the facts of this case Hindalco and
Renusagar were inextricably linked up together. Renusagar
had in reality no separate and independent existence apart
from and independent of Hindalco.
70 . In the aforesaid view of the matter we are of the opinion
that consumption of energy by Hindalco is clearly
consumption by Hindalco from its own source of generation.
Therefore, the rates of duty applicable to own source of
generation have to be applied to such consumption, that is to
say, 1 paisa per unit for the first two generating sets and nil
rate in respect of third and fourth generating sets. It is
appropriate to refer that having regard to the conduct of the
State the power cuts matter and also the present proceedings
the State should not be permitted to treat consumption of
Renusagar's energy by Hindalco as anything other than
( sic or) different from consumption of energy by Hindalco
from its own source of generation. We are, therefore, of the
opinion that in the facts of this case the corporate veil must
be lifted and Hindalco and Renusagar should be treated as
one concern and if that is taken the consumption of energy by
Hindalco must be regarded as consumption by Hindalco from
its own source of generation.
71 . Inasmuch as the High Court upheld this contention of the
respondent we are in respectful agreement of its views and
the appeal directed against this finding of the High Court
must, therefore, be rejected.
72 . The electricity bill for arrears, subject to consideration of
other aspects of the matter, that is to say, the validity of the
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order of rejection passed by the State on February 16, 1982
rejecting the claim for exemption would be treated
hereinafter.”
13. Even after the said judgment was delivered, it has now been
held that even in respect of execution proceedings, this doctrine
can be adhered to. The Delhi Delhi High Court in Formosa Plastic
Corporation Ltd. v. Ashok Chauhan and Punjab and Haryana High
Court in Sai Sounds Private Limited v. Kiran Contractors Private
Limited have held that this doctrine can be applied even in
execution proceedings.
14. The Delhi High Court in Formosa Plastic Corporation
Ltd. (supra) has in terms held in para 45 as under:—
“45. The question whether the assets and the properties in
question are owned and/or possessed by Chauhan and/or the
names in which they may have been acquired are fictitious
or fraudulent or merely cloaks can be decided after parties
have led evidence. The Court has always the power of
lifting the corporate veil or mere cloaks where device is
employed and the properties have been acquired fictitiously
in others names for the purpose of committing illegalities or
for defrauding others so as to enable it to pass appropriate
orders to do justice between the parties concerned
(See DDA v. Skipper Construction Co. (P) Ltd. , AIR 1996
SC 2005.”
15. Brief facts in the said case were „Formosa‟ and „KOA‟
entered into agreement for supply of Resin. As per the said
agreement, Formosa began delivering Resin but no payment was
made by KOA. One Chavan had signed individual guarantee in
1993 in which he personally vouched for the “existence and future
qualified claims of Formosa”. The suit was filed by Formosa in
District Court of Texas, USA. Decree was passed in favour of
Formosa. Appeal filed against it was dismissed. Application was
filed in execution of the decree before High Court of Justice,
London. Leave was granted by the High Court, London to enforce
the decree in India. In the execution proceedings various objections
were raised and in that context Delhi High Court held that it was
open for the Court in execution proceedings to resort to the power
of lifting the corporate veil.
16. Punjab and Haryana High Court in Sai Sounds Private
Limited v. Kiran Contractors Private Limited 1 has also taken a
view that in execution proceedings corporate veil can be lifted. In
para 10 of the said judgment, it has been observed as under:—
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“10. The issue of competency of the decree-holder to
proceed against the assets of the Managing Director could
be taken only if it is a circumstance when it is possible to
tear the corporate veil. There is no difficulty in
understanding the fundamental proposition that a company
registered under the Companies Act is an independent
entity and the liability of the company cannot be
understood as constituting a personal liability for the
Managing Director, except to the extent provided under
the Income Tax Act. The known exceptions are exceptions
which courts have accepted through judicial interpretation
when the corporate veil could be lifted. The decision are
abundant, which I do not feel constrained to cite that if in
the suit a Managing Director is sought to be made as party
along with the company when the liability is contracted by
the Company, the Court will examine whether there has
bee any fraud committed by the Managing Director to use
the corporate cloak only as a facade to secure personal
immunity. In this case, admittedly the decree is only
aagainst the company and there is no reference to the
Managing Director's personal liability. However, it must
be noticed that when the execution petition was filed, the
petitioner had made a specific reference to the fact of the
admission made by the Managing Director of the
Company offering to make the payment before the
Company Court, while prefering the appeal, but failed to
comply with the direction of the Company Court's order.
A plea of undertaking and default persisted even before
the Appellate Court against the decree when the Company
was preferring an appeal through the Managing Director
and seeking for stay. There was a direction for payment
but he failed to comply with the direction. The decree-
holder was, therefore, saying that the Managing Director
of the Company had approached the Division Bench of the
Calcutta High Court only with a motive to buy time and
after the dismissal of appeals, the Managing Director was
operating from House No. 703, Sector 3, Chandigarh, but
evading all types of liabilities.”
19. From the conspectus of the judgments which are referred to
hereinabove, it is now quite well settled that the doctrine of
piercing or removing corporate veil is applicable not only in the
case of holding of subsidiary companies or in the case of tax
evasion but can be equally applied in execution proceedings. It can
be seen from these judgments that the doctrine has been referred to
also in cases:
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(i) where “two separate corporate entities are functioning as if
they are in partnership with one company as an alter-ego of the
other company, where one company is bound hand and foot by
the other”;
(ii) where “parent company's management has steering
influence on the subsidiary's core activities that the subsidiary
can no longer be regarded to perform those activities on the
authority of its own executive directors”; and
(iii) where “the company is the creature of the group and the
mask which is held before its face in an attempt to avoid
recognition by the eye of equity or is a mere cloak or sham and
in truth the business was being carried on by one person and
not by the company as a separate entity”.
(iv) where “two companies are inextricably inter-linked
corporate entities”.
26. On the basis of this material the learned Single Judge has
observed that BIIL and BIL was one single economic entity which
was being managed by Surinder Singh Bhatia and his close
relatives.
33. It was then contended that BIIL had established the ownership
of the said goods which were purchased by entering into High Seas
Sale Agreement. It was submitted that the Appellant had also
produced High Seas Sale Invoice/Debit Note. It was submitted that
the learned Single Judge had rejected the said evidence of
ownership of BIIL by holding that BILL had not shown that
payment, if any, was made by it to the seller of the cargo. It was
submitted that Respondent No. 2-Vitol had never disputed the
aforesaid agreement and invoice in any way and had not placed
any material before this Court to show that High Seas Sale
Agreement and High Seas Sale Invoice/Debit Note were either
false or incorrect. It was submitted that the finding of the learned
Single Judge was given firstly without giving an opportunity to the
Appellant to produce proof of payment by BILL. It was submitted
that the Appellant had prepared an additional affidavit to bring on
record the proof of payment by BIIL. At this stage, the learned
Counsel appearing on behalf of Respondent No. 2 took an
objection to the production of the additional affidavit at the hearing
of the appeal. The objection raised by the learned Counsel for
Respondent No. 2 is sustained and the Appellant cannot be
permitted now to produce this additional affidavit.
34. In our view, this submission also cannot be accepted. It has to
be noted that the learned Single Judge proceeded to examine the
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material on record which indicated that the BILL and the BIL was
a single entity and has come to the said conclusion after piercing
the corporate veil of both the companies.
35. It was then vehemently urged that the finding of the learned
Single Judge that BIIL is an alter-ego of BIL was contrary to law
and facts of the case and it was submitted that in any case BIIL
cold not be held liable for the debt of BIL. It was submitted that the
BILL was incorporated in 1993 and is a registered Company on the
Bombay Stock Exchange since 5/4/2001. It was further submitted
that 34% of the equity shares of the Company were held by public
at large. It was further contended that BILL, from the time of its
incorporation, has been carrying on business with regard to coal. It
was further submitted that the learned Single Judge had relied on
the following judgments to arrive at a conclusion that BIIL is an
alter-ego of BIL.
“ a. Adams v. Cape Industries PLC (1990) Ch. 433 CA.
b. D.H.N. Food Distributors Ltd. v. Tower Hamlets London
Borough Council (1976) 1 W.L.R. 852.
c. New Horizon Limited v. Union of India (1997) Co. cases 785
(Del).
d. New Horizon Limited v. Union of India (1995) 1 SCC 478.
e. State of U.P. v. Renu Sagar Power Company (1988) 4 SCC 59.
f. Jones v. Lipman [1962] 1 All ER 442.
g. Gilford Motor Co. Ltd. v. Horn (1933) ALL ER REP 109.” ”
48. According to Mr. Tripathi, learned Senior Counsel appearing
for the GNCTD, the aforesaid decision is clearly distinguishable on
facts as was noticed by a learned Judge of the same High Court who
had refused to invoke or adopt the principle of lifting of the corporate
veil in execution proceedings relating to an Award which had been
rendered. Mr. Tripathi, in this connection, drew the attention of the
Court to the decision of Mitsui OSK Lines Ltd. vs. Orient Ship
17
Agency Pvt. Ltd. and more particularly to Para 74 thereof which
reads as follows: -
17
2019 SCC OnLine Bom 6773
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“ 74 . The Award Holder has not been able to produce a Single
judgment where, as in the present case, the Additional Respondents
are to be made personally liable to satisfy the decree passed against
the Respondent/Judgment Debtor. In fact, the Judgment relied
upon by the Award Holder viz. Bhatia Industries And
Infrastructure Ltd. (supra) is entirely distinguishable on facts as in
that case, the attachment was alleged to be made in respect of coal
which belonged to BIIL and not the Judgment Debtor (BIL). It was
when the said BIIL sought to vacate the attachment, the Division
Bench of this Court concluded that both BIL and BIIL are in fact,
one and the same and therefore, the attachment was in effect of the
properties of BIL the Judgment Debtor. In fact, it appears from the
decision of the Single Judge in case of Bhatia Industries And
Infrastructure Ltd. (supra) that, the claim made by the BIIL that the
coal belonging to it, could not be attached as BIIL is not the
Judgment Debtor was held to be false and a finding was arrived at
that the coal in fact belonging-to-BIL who was the Judgment
Debtor. In the present case, the Award Holder is not going against
the Associate Companies who are the Additional Respondent Nos.
1 to 4 in respect of particular assets claiming that they belong to
the Judgment Debtor, but is in fact, making the Additional
Respondents personally liable in respect of the Foreign Award
passed against the Judgment Debtor. Hence, the judgment in
Bhatia Industries And Infrastructure Ltd. (supra) will have no
application in the facts and circumstances of the present case. In
any event, the Supreme Court in the case of Bhatia Industries And
Infrastructure Ltd. (supra) has kept the question of law open.
Considering that the ratio decidendi arrived at in the case of Bhatia
Industries And Infrastructure Ltd. (supra) does not apply to the
present case, the precedent relied upon by the Award Holder
cannot apply in the facts and circumstances of the present case. ”
49. Mr. Tripathi had also placed reliance on the decision rendered
18
by this Court in V.K. Uppal Vs. Akshay International Pvt. Ltd.
where while considering an application for execution of an Award, a
similar argument with respect to the doctrine of lifting of the corporate
veil came to be negatived in the following terms: -
18
2010 SCC OnLine Del 538
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“ 5. The counsel for the decree holder has relied upon (i) Ashish
Polyfibres (Bihar) Ltd. v. State Bank of India 2009 (107) DRJ 1
(DB); (ii) Jawahar Lal Nehru Hockey Tournament v. Radiant
Sports Management 149 (2008) DLT 749; (iii) M.R. Khanna v.
Union of India MANU/DE/8981/2006 : 133 (2006) DLT 114; (iv)
Iyer & Son Pvt. Ltd. v. LIC2007 X AD (Delhi) 643 and Saurabh
Exports v. Blaze Finlease & Credits Pvt. Ltd.
MANU/DE/1052/2006 : 129 (2006) DLT 429.
6. The admitted position is that the arbitration award having force
of the decree is against the judgment debtor company only and not
against its Directors. The question which arises is whether a money
decree against a Private Limited Co. can be executed against its
Directors. There is no provision therefore in the CPC. Order 21
Rule 50 does provide for execution of a money decree against a
firm from the assets of the partners of the said firm mentioned in
the said rule but there is no provision with respect to the Directors
of a company. The executing court, as this Court is cannot go
behind the decree and can execute the same as per its form only.
The decree is against the company. This Court as the executing
court cannot execute the decree against anyone other than the
judgment debtor or against from the assets/properties of anyone
other than the judgment debtor. The identity of a Director or a
shareholder of a company is distinct from that of the company.
That is the very genesis of a company or a corporate identity or a
juristic person. The classic exposition of law in this regard is
contained in Solomon v. Solomon & Co. Ltd. 1897 AC 22 where
the House of Lords had held that in law a company is a person all
together different from its shareholders and Directors and the
shareholders and Directors of the company are not liable for the
debts of the company except to the extent permissible by law.
7. The counsel for the decree holder has sought to, by relying upon
the judgments aforesaid make out a case for invoking the principle
of lifting of the corporate veil. The question which arises is, in
what circumstances and in which proceedings is the corporate veil
to be lifted. Whether it can be lifted in execution proceedings also
or it has to be lifted in the substantial proceedings, of
orders/decrees wherein execution is sought. In the judgment of the
single judge in Jawahar Lal Nehru Hockey Tournament (supra)
there is an observation that there could be a case where the court
even in an execution proceeding lifts the veil of a closely held
company, particularly a private limited company and in order to
satisfy a decree, proceeds against the personal assets of its
Directors and shareholders. However, I may notice that the
aforesaid judgment has been overruled by the Division Bench in
EFA(OS) No. 17/2008 decided on 7th November, 2008 and
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reported as MANU/DE/1756/2008. Though the Learned Single
Judge had held no case of lifting of the corporate veil in execution
to be made out in that case, the Division Bench found that the
Director of the company had agreed to be personally liable to
satisfy the decree and held him liable. However, the Division
Bench refrained from commenting authoritatively on the aspect of
lifting of the corporate veil in execution. Thus the said judgment
cited by the counsel for the decree holder does not come to his
rescue. ”
50. Supplementing the arguments addressed by Mr. Tripathi for and
on behalf of the GNCTD, Mr. Vashisht, learned Senior Counsel in
addition to the judgments which had been cited and have been noticed
hereinbefore also placed for the consideration of the Court the
judgment rendered in Anirban Roy & Anr. vs. Ram Kishan Gupta
19
& Anr. which had reiterated the well-settled position that directors
and shareholders are not to be held personally liable for the debts and
dues of the company. In Anirban Roy , the Court had held as follows: -
“ 8. It is settled principle of law that the Directors and shareholders
of a company are not liable for the dues of the company except to
the extent permitted by law.
9. I have in V.K. Uppal v. Akshay International Pvt. Ltd. , 2010
SCC OnLine Del 538 held; (i) that there is no provision in the CPC
for execution of a money decree against a Pvt. Ltd. company,
against its directors; (ii) that though Order XXI Rule 50 of the CPC
does provide for execution of a money decree against a firm, from
the assets of the partners of the said firm mentioned in the said
Rule but there is no provision with respect to directors of a
company; (iii) that the Executing Court cannot go behind the
decree and can execute the same as per its form only; (iv) that if
the decree is against the company, the executing Court cannot
execute the decree against anyone other than the judgment-debtor
company or against the assets and properties of anyone other than
the judgment-debtor company; (v) that the identity of a director or
a shareholder of a company is distinct from that of the company—
that is the very genesis of a company or a corporate identity or a
19
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juristic person;(vi) the classic exposition of law in this regard is
contained in Solomon v. Solomon & Co. Ltd. , [1897] A.C. 22
where the House of Lords held that in law, a company is a person
all together different from its shareholders and directors and the
shareholders and Directors of the company are not liable for the
debts of the company except to the extent permissible; (vii) that
though a Single Judge of this Court in Jawahar Lal Nehru Hockey
Tournament v. Radiant Sports Management , (2008) 149 DLT 749
observed that there could be a case where the Court even in a
execution proceeding lifts the veil of a closely held company,
particularly a Pvt. Ltd. company and in order to satisfy a decree,
proceed against the personal assets of its directors and shareholders
but the said judgment was over ruled by the Division Bench
EFA(OS) No. 17/2008 decided on 7th November, 2008 and
reported as 2008 SCC OnLine Del 342, finding that the director of
the company had agreed to be personally liable to satisfy the
decree and for this reason holding him liable; however the Division
Bench refrained from commenting authoritatively on the aspect of
lifting of the corporate veil in execution; (viii) that though Section
53 of the Transfer of the Property Act, 1882 allows the creditors to
have a transfer of property made with an intent to defeat the
creditors set aside but a case therefor has to be pleaded; (ix) that it
cannot be laid as a general proposition that whenever the decree is
against a company, its Directors/shareholders would also be liable-
to hold so would be contrary to the very concept of limited liability
and obliterate the distinction between a partnership and a company;
(x) that though the Courts have watered down the principle in
Solomon supra to cover the cases of a fraud, improper conduct, etc.
as laid down in Singer India Ltd. v. Chander Mohan Chadha ,
(2004) 7 SCC 1 but a case therefor has to be made out; (xi) that the
decree holders in that case had not made out any case therefor; the
directors were not parties to the proceedings in which decree was
passed and were not impleaded in the execution petition also and
there were no averments in the execution petition of fraud or
improper conduct or of incorporation of the company to evade
obligations imposed by law and in which situations Supreme Court
in Singer India Ltd. supra has held that the corporate veil must be
disregarded.
10. Applying the aforesaid principles, the decree in favour of the
respondent No. 1 and against the respondent No. 2 for recovery of
money cannot be executed against the petitioners for the reason of
the petitioners being directors of the respondent No. 2.
11. The High Court of Madhya Pradesh in Vimalchand v. Arora
Distillery Pvt. Ltd. Co., Vidisha , (2009) 3 MP LJ 332 held that
decree obtained against a private company cannot be executed
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against its managing director or directors and the managing
director and directors cannot be held personally liable for the
decretal amount.
12. This Court again in Balmer Lawrie & Co. Ltd. v. Saraswathi
Chemicals Proprietors Saraswathi Leather Chemicals (P) Ltd. ,
2017 SCC OnLine Del 7519 held that the money due under
arbitrator's award against a company could not be recovered from
the directors of the company. It was further held that though the
court can lift the corporate veil, the same can be done only in extra-
ordinary circumstances and by due adjudicatory process and the
executing Court cannot go behind the decree and it must enforce it
as it is and that it is not open to a decree holder to enforce a decree
against any person other than the one against whom the decree is.
It was further held that a mere allegation that the directors have
siphoned off the assets without any particulars, cannot be accepted
as the ground for improper conduct.”
51. It was further submitted by Mr. Vashisht that the judgment
which had been rendered by the learned Single Judge of this Court in
Jawahar Lal Nehru Hockey Tournament Society vs. M/s Radiant
20
Sports Management (P) Ltd. and which was sought to be pressed
in aid of the piercing theory being applied had subsequently come to
be set aside by a Division Bench of this Court. Mr. Vashisht firstly
drew the attention of the Court to Para 13 of the judgment rendered by
the learned Single Judge which is extracted hereunder: -
“ 13. It is settled law that a Company has a separate juristic or
artificial existence apart from its Directors and members. The
execution application has not disclosed how the property bearing
No. S-524, Greater Kailash-I, New Delhi, was connected with the
judgment debtor or that any part of it was owned by it. The more
circumstance that a Director of the judgment debtor owned a
portion of the property at some stage could not have, in the
circumstances, clothed this Court with the authority to issue an
attachment order and later to sell that property. There could be a
case that where the Court even in an execution proceeding “lifts
the veil” of a closely held Company, particularly, a private limited
20
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company and in order to satisfy a decree, proceeds against the
personal assets of its directors and shareholders. But before such a
course of action is adopted, the Court has to be satisfied about the
need to follow such a course and return appropriate findings in that
regard. All these are absent in the present proceeding. Therefore, I
have no hesitation in concluding that the attachment and the
subsequent orders directing auction of the property had no legal
basis.
”
52. It was pointed out that the aforesaid decision can no longer be
countenanced as being a binding authority since it ultimately came to
be set aside by the Division Bench in a Letter Patents Appeal which
was allowed and stands reported as Jawahar Lal Nehru Hockey
Tournament Society vs. M/s Radiant Sports Management (P)
21
Ltd . Mr. Vashisht had also taken the Court through the decision
rendered by the Supreme Court in Life Insurance Corporation of India
22
and Singer India Ltd. vs. Chander Mohan Chadha & Ors. to
highlight the scope of the doctrine of the corporate veil being pierced.
53. Apart from the above, Mr. Vashisht had also drawn the
attention of the Court to the judgment rendered in Moons
23
Technologies Limited & Ors. vs. Union of India & Ors. where the
position of a shareholder in a corporate structure was explained as
under:-
“106. In Bacha F. Guzdar [ Bacha F. Guzdar v. CIT , (1955) 1 SCR
876 : AIR 1955 SC 74] , this Court held that though a shareholder
acquires no right in the assets of a company as the company itself
is the owner of such assets, yet a shareholder certainly has the right
to dividends and the right to participate in the assets of the
company which would be left over after winding up. The Court
held : (SCR p. 882 : AIR p. 77, para 7)”
21
2008 SCC OnLine 342
22
(2004) 7 SCC 1
23
(2019) 18 SCC 401
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“ 7 . … The true position of a shareholder is that on buying
shares an investor becomes entitled to participate in the
profits of the company in which he holds the shares if and
when the company declares, subject to the Articles of
Association, that the profits or any portion thereof should be
distributed by way of dividends among the shareholders. He
has undoubtedly a further right to participate in „ the assets of
the company which would be left over after winding up ‟ but
not in the assets as a whole as a Lord Anderson puts
(emphasis in original)
107. In LIC v. Escorts Ltd. [ LIC v. Escorts Ltd. , (1986) 1 SCC
264] , this Court dealt generally with the rights of shareholders as
follows : (SCC p. 326, para 84)
“ 84 . On an overall view of the several statutory provisions
and judicial precedents to which we have referred we find
that a shareholder has an undoubted interest in a company, an
interest which is represented by his shareholding. Share is
movable property, with all the attributes of such property.
The rights of a shareholder are ( i ) to elect Directors and thus
to participate in the management through them; ( ii ) to vote on
resolutions at meetings of the company; ( iii ) to enjoy the
profits of the company in the shape of dividends; ( iv ) to apply
to the court for relief in the case of oppression; ( v ) to apply to
the court for relief in the case of mismanagement; ( vi ) to
apply to the court for winding up of the company; ( vii ) to
share in the surplus on winding up.”
108 . On the facts of the present case, we are directly concerned
with points (iii) and (vii). It has been argued that the profits of the
company post-amalgamation will obviously come down, and
dividends payable to shareholders will consequently either come
down or be wiped out if the low net worth of NSEL is taken into
account post amalgamation, together with potential liabilities of the
amalgamated company, which may have to be paid in the near
future. Secondly, if the amalgamated company is wound up, the
amount that is payable to the shareholders post-amalgamation will
be much less, if at all anything is to be paid, than pre-
amalgamation.”
54. Mr. Vashisht then submitted that the execution petitioner cannot
be recognized to have a right of recourse against GNCTD bearing in
mind the provisions of Sections 38 and 47 of the Code. Mr. Vashisht
contended that undisputedly neither the Union Ministry nor the
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GNCTD had been arrayed as parties before the Arbitral Tribunal.
According to learned Senior Counsel, this fact itself would clearly
disentitle the execution petitioner in law from seeking recourse against
them on the execution petition. Mr. Vashisht further contended that it
cannot possibly be disputed that an executing court cannot go behind
the decree. The submission essentially was that the prayers made by
the execution petitioner for the shareholders being held liable to
satisfy the decree would clearly amount to the Court acting in
violation of the settled and accepted principle as flowing from the
aforesaid provisions.
55. Mr. Vashisht submitted that undisputedly the execution
petitioner could not have instituted any suit against the GNCTD in
respect of disputes that may have arisen between the execution
petitioner and DMRC. According to Mr. Vashisht, this itself would
clearly establish that the prayers made by the execution petitioner for
lifting of the corporate veil and for the Union Ministry and as well as
GNCTD being held liable is wholly untenable and liable to be
rejected.
56. The learned ASG opening submissions on behalf of the Union
Ministry relied upon the following passages from the decision of the
Supreme Court in PC Agarwala vs. Payment of Wages Inspector,
24
M.P and Ors. in order to explain the limited circumstances in which
the piercing doctrine could be invoked. The learned ASG had relied
upon the following observations as appearing in Para 21 to Para 23 of
the report: -
24
(2005) 8 SCC 104
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“ 21. In TELCO v. State of Bihar" the basic features of a company,
its corporate existence and its position vis-à-vis shareholders was
highlighted as follows: (SCR pp. 897-98)
"The true legal position in regard to the character of a
corporation or a company which owes its incorporation to a
statutory authority, is not in doubt or dispute. The corporation
in law is equal to a natural person and e has a legal entity of
its own. The entity of the corporation is entirely separate
from that of its shareholders; it bears its own name and has a
seal of its own; its assets are separate and distinct from those
of its members; it can sue and be sued exclusively for its own
purpose; its creditors cannot obtain satisfaction from the
assets of its members; the liability of the members or
shareholders is limited to the capital invested by them;
similarly, the creditors of the members have no right to the
assets of the corporation. This position has been well
established ever since the decision in the case of Salomon v.
Salomon & Co. was pronounced in 1897: and indeed, it has
always been the well-recognised principle of common law.
However, in the course of time, the doctrine that the
corporation or a company has a legal and separate entity of its
own has been subjected to certain exceptions by the
application of the fiction that the veil of the corporation can
be lifted and its face examined in substance. The doctrine of
the lifting of the veil thus marks a change in the attitude that
law had originally adopted towards the concept of the
separate entity or personality of the corporation. As a result
of the impact of the complexity of economic factors, judicial
decisions have sometimes recognised exceptions to the rule
about the juristic personality of the corporation. It may be
that in course of time these exceptions may grow in number
and to meet the requirements of different economic problems,
the theory about the personality of the corporation may be
confined more and more."
22. The doctrine of lifting of the veil has been applied, in the words
of Palmer, in five categories of cases: where companies are in
relationship of holding and subsidiary (or sub-subsidiary)
companies; 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 certain matters
pertaining to the law of taxes, death duty and stamps, particularly
where the question of the "controlling interest" is in issue; in the
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law relating to exchange control, and in the law relating to trading
with the enemy where the test of control is adopted ( Palmer's
Company Law , 20th Edn., p. 136, now p. 215, 24th Edn. 1987). In
some of these cases judicial decisions have no doubt lifted the veil
and considered the substance of the matter.
23. Gower has similarly summarised this position with an
observation that in a number of important respects, the legislature
has rent the veil woven by Salomon case. Particularly this is so,
says Gower, in the sphere of taxation and in the steps which have
been taken towards the recognition of the enterprise entity rather
than corporate entity. It is significant, however, that according to
Gower the courts have only construed the statutes as "cracking
open the corporate shell" when compelled to do so by the clear
words of the statute-indeed they have gone out of their way to
avoid this construction whenever possible. Thus, at present the
judicial approach in cracking open the corporate shell is somewhat
cautious and circumspect. It is only when the legislative provision
justifies the adoption of such a course that the veil has been lifted.
In exceptional cases where the courts have felt "themselves able to
ignore the corporate entity and to treat the individual shareholder
as liable for its acts" the same course has been adopted.
Summarising his conclusions, Gower has classified seven
categories of cases where the veil of corporate body has been
lifted. But it would not be possible to evolve a rational, consistent
and inflexible principle which can be invoked in determining the
question as to whether the veil of the corporation should be lifted
or not. Broadly, where fraud is intended to be prevented, or trading
with the enemy is sought to be defeated, the veil of the corporation
is lifted by judicial decision and the shareholders are held to be
"persons who actually work for the corporation. ”
57. It was further contended that the funds of the Union which had
been placed in the hands of the DMRC were specific to the capital
expenditure likely to be incurred in connection with the Delhi Metro
Phase-IV expansion project. The learned ASG would submit that the
said funds could not have been possibly appropriated by DMRC for
the purposes of satisfaction of the Award. The learned ASG had lastly
contended that the Union Ministry has for cogent and justifiable
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reasons refused to accord permission as contemplated under Section
89 of the Act.
58. Appearing for the petitioner, Mr. Sibal while refuting the
aforesaid submissions contended that the very fact that DMRC had
sought the specific permission of the Union to utilize the funds which
were held by it, is sufficient evidence to establish and demonstrate the
nature of the control that was being exercised by the principal
shareholders. According to Mr. Sibal, this itself establishes that the
veil of corporate personality had been disregarded by DMRC itself.
Mr. Sibal also drew the attention of the Court to the observation as
appearing in Prest and which had alluded to the piercing principle
being liable to be invoked where a debtor deliberately evades or
frustrates obligations by interposing a corporate structure.
59. Mr. Sibal further submitted that it is not permissible for the
DMRC to urge that the total funds held under the three heads cannot
be attached for the purposes of satisfaction of the Award since that is
an issue which stands duly determined by the Court in terms of its
order of 10 March 2022 and 20 June 2022. Mr. Sibal laid stress upon
the fact that the aforesaid two orders had undoubtedly attained finality
and consequently, according to learned senior counsel, the
submissions addressed yet again and turning upon Section 89 are
liable to be rejected outrightedly.
60. Having noticed the submissions which were addressed, the
Court firstly takes up the issue arising out of Section 89 of the Act. It
is pertinent to note that the aforesaid provisions were pressed into aid
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by DMRC along with Section 60 of the Code yet again to assert that
“Total DMRC Funds”, “Total Project Funds” and “Total Other Funds”
cannot be proceeded against for the purposes of satisfaction of the
Award. It is pertinent to note that identical contentions had been
addressed before the Court on an earlier occasion and which had
ultimately culminated in the passing of the order of 10 March 2022.
Significantly, the Court had upon due consideration of the aforesaid
submissions proceeded to frame directions for the three aforenoted
funds and monies standing to the credit thereof being utilized to
liquidate the liability which stands raised under the Award.
Undisputedly, the order of 10 March 2022 has attained finality
consequent to the dismissal of the challenge which was mounted
against that order before the Supreme Court and the subsequent
rejection of the review petition. The Court is thus of the considered
opinion that it is clearly not permissible for the DMRC or for that
matter any of the other respondents to contend that directions cannot
be framed for the liabilities flowing from the Award being satisfied
from the funds which stand to the credit of “Total DMRC Funds”,
“Total Project Funds” and “Total Other Funds”.
61. Additionally, the Court notes that Section 89 proscribes
proceedings for attachment being taken against rolling stocks, metro
railway tracks, machinery, plant, tools, fittings, materials or effects
which are used or provided by a metro railway administration for the
purposes of traffic on its railway. Additionally, it also prohibits
attachment proceedings being taken against the stations, workshops,
or offices of a metro railway. Insofar as the first part of Section 89 is
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concerned, that clearly restricts the powers of attachment being
exercised over articles specified in that section and which are directly
connected with the maintenance of traffic by a metro railway.
Stations, workshops, and offices are additionally exempted from the
powers of attachment. On a consideration of the plain language of
Section 89, it is manifest that “Total DMRC Funds”, “Total Project
Funds” and “Total Other Funds” would clearly not stand covered
within its ambit. On a more fundamental plane, the Court deems it
apposite to observe that Section 89 places a statutory embargo on
execution against metro railway properties and thus clearly impeding
the execution of any decree or order of a court or any other local
authority or person having the power in law to attach or distrain
property. That embargo can be lifted only upon the Union
Government according sanction. The significance of this provision is
also liable to be understood bearing in mind the fact that the Union
Government is a majority shareholder along with the GNCTD in the
DMRC. What needs to be emphasized is that since these powers act
as a restraint with respect to the satisfaction of decrees issued by
courts, they must be accorded a strict interpretation. The Court in any
case finds itself unable to accord an expansive interpretation upon that
provision so as to recognize the principal funds being included
therein.
62. While on Section 89 it may be additionally noted that the Court
in its order of 10 March 2022 had framed directions in unambiguous
terms that the monies standing under the three heads noted above,
must be diverted so as to enable the DMRC to meet its liabilities as
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flowing from the Award. The Court on that occasion was constrained
to observe that since the Award of 11 May 2017 had attained finality,
it cannot be allowed to “ remain as a paper award ”. In the order of 10
March 2022, the Court had further found that DMRC was duty bound
to either divert its funds shown to be available under the aforenoted
three heads or raise loans to satisfy the Award. The Court clearly
appears to have as a matter of abundant caution further observed that
the diversion of monies standing under the aforesaid three heads
would be affected after seeking permission of the Union Government
“ if necessary ”. Once the Court had found that the amounts standing
under the aforesaid three heads were liable to be diverted so as to
enable DMRC to meet its liabilities flowing from the Award, there
clearly existed no justification or requirement for DMRC approaching
the Union Government for being granted permission. Those directions
were explicit and were clearly not dependent upon any sanction being
accorded by the Union Ministry. More importantly, the directions of
the Court as contained in its order of 10 March 2022 could not have in
any case been eclipsed or thwarted by invocation of the previous
sanction provisions as contained in Section 89. The “Total DMRC
Funds”, “Total Project Funds” and “Total Other Funds” as existing on
10 March 2022 thus could not have been either touched, diverted, or
repatriated post the passing of that order. 10 March 2022 would thus,
for all purposes, be liable to be declared to be the decisive,
determinative and crucial date.
63. That takes the Court to consider the submissions which were
addressed relating to the impleadment of the Union Ministry and
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GNCTD in these proceedings. As the recordal of submissions would
establish, both the Union Ministry as well as the GNCTD had
vehemently argued that they could not be held liable to bear the
liabilities flowing from the Award since they were merely
shareholders in the Corporation. The elaborate submissions which
were addressed on this score revolved upon the perceived narrow
window in which the lifting the corporate veil principle could be
applied.
64. Before proceeding to consider the decisions rendered by courts
in the United Kingdom, U.S.A. and of other jurisdictions which were
cited, the Court deems it apposite to firstly notice the law as
enunciated on this point by our own courts. In State of U.P. v.
25
Renusagar Power Co. , the Supreme Court had noted that in various
judgments the treatise on the subject as appearing in Robert P
26
Pennington's Company Law, Seventh Edition had been noticed
and cited with approval. That work while spelling out the exceptions
to the separate and distinct corporate legal entity precept had noticed
that the piercing principle had been principally applied by courts in
England either on a principle of public policy or where the corporate
structure is created to perpetrate fraud or evade obligations. In such
circumstances, Pennington had observed that the creation of a
corporate structure would be liable to be treated as a nullity. What
needs to be highlighted is that even Pennington recognised the lifting
of the corporate veil principle being invoked either on a principle of
25
(1988) 4 SCC 59
26
Pennington‟s Company Law
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public policy or where the separate legal entity concept was urged in
order to evade obligations.
65. It becomes significant to note that Renusagar Power Co. itself
was not a decision where the corporate veil came to be lifted on the
ground of perpetration of fraud or on an allegation that the corporate
structure was a facade or a mere sham. The Supreme Court in that
very decision had also noticed the opinion of the House of Lords in
27
Scottish Cooperative Wholesale Society Ltd. V. Meyer where
Viscount Simmonds in his speech had noticed with approval the legal
position as was explained by Lord Cooper who had observed that it is
the “business realities” of a situation which must be borne into
consideration rather than a narrow legalistic view being taken.
Referring to the decision in Life Insurance Corporation , the Supreme
Court in Renusagar Power Co. accepted the enunciation of the legal
principles relating to the concept of when a corporate veil should be
lifted as well as the situations or the classes of cases where it would be
permissible. It had been aptly observed that rather than exhaustively
enumerating the situations in which that principle could be invoked, it
would be best to leave it to be considered in individual cases,
depending upon the relevant statutory or other provisions, the object
sought to be achieved, the impugned conduct, the involvement of an
element of public interest and the impact on parties who may be
affected. For the purposes of the present case, it is the two concepts of
element of public interest and the effect on parties which are likely to
be affected, which is of import and significance.
27
(1958) 3 All ER 66
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66. The Supreme Court had gone on to observe in Renusagar
Power Co. that in the expanding horizon of modern jurisprudence, the
lifting of the corporate veil is not only permissible, its frontiers are
unlimited and ever expanding. It further significantly observed that
the lifting of the corporate veil was a changing concept and of
expanding horizons. It was the aforesaid observations which appear
to have weighed upon the Bombay High Court and the learned judges
who penned the decision in Bhatia Industries.
67. Bhatia Industries too was a decision which came to be rendered
in the course of execution proceedings drawn and initiated in respect
of an international Arbitral Award. After taking into consideration the
eloquent observations in Renusagar Power Co. their Lordships held
that the principle of piercing or lifting of corporate veil can be equally
applied to execution proceedings. This clearly appeals to reason
bearing in mind the fact that in Renusagar Power Co. as well it had
been found that the said principle should neither be restricted nor
confined within the archaic views with respect to a separate legal
personality which imbue upon a company and it being duly
recognized that the said principle could be invoked and resorted to
where either principles of public policy so dictate or where it be found
that the corporate structure is set up as a defense to evade obligations,
the involvement of public interest and the effect that it may have on
affected parties. The Court in Bhatia Industries had proceeded to
move against the cargo which stood in the name of a group company
even though the award debtor was Bhatia International Limited. Their
Lordships had found that the group companies constituted one single
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economic entity and consequently, assets and properties of a party
other than the judgement debtor could be proceeded against.
68. In Balwant Rai Saluja, our Supreme Court had observed that
courts would be empowered to disregard the separate legal personality
of a company and impose liabilities upon the person actually in
control subject to the caveat that the doctrine should be applied in a
restrictive manner. While reiterating some of the situations where such
a recourse could be taken and as an exception to the well-recognised
grounds of the company being a mere camouflage or sham, it was
pertinently observed in Para 74 of the report that the essential intent of
the piercing of veil of a corporate structure must be guided by the
necessity to remedy a wrong done by persons controlling the company
and that the said principle would have to be tested based upon the
facts and circumstances of each case.
69. The Court notes that in the present case the proceedings for
execution have been instituted in respect of an Award which had been
rendered way back in 2017. Despite various orders passed during the
pendency of the instant petition, DMRC is yet to liquidate the liability
flowing from and under that Award. Regard must also be had to the
fact that the execution petition itself had been disposed of way back in
March 2022 with the Court framing peremptory directions for DMRC
to clear off all liabilities as per the express directions framed and
appearing in Paras 41 and 42 of the 10 March 2022 order. Despite the
aforesaid orders and directions having attained finality, DMRC has
neither cleared the entire debt nor has it been able to raise the requisite
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funds in order to meet the obligations placed upon it and abide by the
directions issued by this Court.
70. Elaborate submissions were addressed by Mr. Tripathi and Mr.
Vashisht, learned senior counsels appearing for GNCTD as well as the
learned ASG of the piercing of the corporate veil principle not being
liable to be invoked in the facts of the present case. Those submissions
were addressed in the backdrop of not just the judgements rendered by
this Court as well as the Supreme Court on the subject but also on the
basis of precedents handed down by courts spanning international
jurisdictions.
71. Before proceeding further, it may be noted that although it was
contended that Mitsui had distinguished the decision in Bhatia
Industries in light of the peculiar facts that obtained there and on it
being found that the goods which were attached belonged to the
judgment debtor, this Court finds that the same is clearly contrary to
the facts which obtained in the latter. As would be evident from Para
31 and 51 of the report, the Division Bench has clearly recorded that
the case set up was of recourse being sought in respect of cargo which
stood recorded in the name of BIIL on the ground that it was merely
an alter ego of the judgment debtor, namely, BIL. Similarly, while it
was sought to be contended that the decision of the learned Judge in
Jawahar Lal Nehru Hockey stood reversed, a reading of the judgment
rendered on the appeal would show that the invocation of the piercing
principle was neither frowned upon nor reversed. The judgment of the
learned Single Judge came to be set aside on a wholly independent
ground.
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72. From the principles which ultimately came to be laid down in
Prest , the Court notes that courts in the United Kingdom have
hesitated in adopting the principle of lifting the veil and have
essentially held that where relief could be founded on other
identifiable legal principles, the same would suffice. On a
consideration of that decision as well as various others rendered by
courts in that jurisdiction, there clearly appears to be a reluctance
towards either a wholehearted acknowledgement or an express
application of the doctrine. The aforesaid decision thus appears to
indicate a rigid adherence to the principles laid down in Solomon v.
28
Solomon & Co Ltd. . The jurisprudence in the United Kingdom
thus appears to tether around the aforesaid decision which was
rendered in 1897. The reluctance of courts in England to move
forward or to consider expanding the applicability of the piercing of
the veil principle is one which has also been noticed in various
authoritative texts dealing with the principles relating to modern
company law.
73. In Gower and Davies’ Principles of Modern Company
29
Law , the lifting of the veil principle as explained in various
decisions was described in the following words: -
“LIFTING THE VEIL UNDER CASE LAW
Under statute or contract
When analysing the judicial decisions on lifting the veil, it
is crucial to distinguish between those situations where the court is
28
[1897] A.C. 22
29
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applying the terms of a statute (other than the Companies Act) or,
less often, a contract, from those where, as a matter of common
law, the veil is lifted. The reason is that the justification for lifting
the veil in the former group of cases is to be found in the policy of
the statute or the intention of the contracting parties. As we have
noted, it is perfectly in line with the doctrine of limited liability that
parties should contract out of it and so there is nothing remarkable
in the courts‟ deciding that this has occurred in a particular case,
provided the parties' intention has been accurately identified.
Equally, Parliament is free to decide that the policy of a particular
statute requires that the doctrine of limited liability needs to be
overruled, though it is doubtless the case that if Parliament took
this step routinely, one would begin to have doubts about its
commitment to the doctrine of limited liability.
In looking at the statutory cases, it is also crucial to
distinguish between those cases where the courts decide that the
separate legal personality of the company should be disregarded
and those where, in consequence of this disregard, the additional
consequence follows that the shareholders are made liable for the
company's debts or other obligations. There are in fact very few, if
any, cases where the courts have concluded that the policy of the
statute requires the separate legal personality of the company to be
ignored so that personal liability can be imposed on shareholders,
except where the statute in express terms requires this approach.
Typically, as a result of ignoring the separate legal personality of
the company, some legal issue other than the limited liability of the
shareholders is determined in a way which is different from the
way in which it would have been determined, had the separate legal
personality been maintained. Thus, in Re FG ( Films ) Ltd a US
company had incorporated a shell company in Britain for the
purposes of claiming a declaration that a film it produced was
British. The result of the failure by the courts to uphold the
separation between the British and US companies was that the film
was not classified as British. In some cases, in fact, ignoring the
separate legal personality of the company has been for the benefit
of the shareholders."
In deciding whether to lift the veil in such cases, the courts
ought to be guided by the policy of the statute in question, and so
the decision arrived at is likely to vary from statute to statute.
Nevertheless, it is difficult to avoid the conclusion that the courts
are unwilling to it the veil except where the statutory wording
clearly requires this.”
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74. While dealing with the challenges associated with the
invocation of that doctrine, the authors have made the following
pertinent observations: -
“At Common Law
Challenges to the doctrines of separate legal personality and
limited liability at common law tend to raise more fundamental
challenges to these doctrines, because they are formulated on the
basis of general reasons for not applying them, such as fraud, the
company being a 'sham' or 'façade, that the company is the agent of
the shareholder, that the companies are part of a „single economic
unit‟ or even that the 'interests of justice require this result.
However, the courts seem, if anything, more reluctant to accept
such general arguments against the doctrines than arguments based
on particular statutes or the terms of particular contracts. The
leading case is Adams v Cape Industries Plc . That case raised the
issues in a sharp fashion. It concerned liability within a group of
companies and the purpose of the claim to ignore the separate legal
personality of the subsidiary was to make the parent liable for the
obligations of the subsidiary towards involuntary tort victims.
Thus, the case encapsulated two features-internal group liability
and involuntary creditors-where limited liability is most in
question. The facts of the case were somewhat complicated but for
present purposes it suffices to say that what the Court had
ultimately to determine was whether judgments obtained in the
United States against Cape, an English registered company whose
business was mining asbestos in South Africa and marketing it
worldwide, would be recognised and enforced by the English
courts. In the absence of submission to the foreign jurisdiction, this
depended on whether Cape could be said to have been "present" in
the United States. On the facts, the answer to that question
depended upon whether Cape could be said to be present in the
United States through its wholly owned subsidiaries or through a
company (CPC) with which it had close business links. The court
rejected all the arguments by which it was sought to make Cape
liable.”
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75. The strict and narrow view as adopted by the Courts in the
United Kingdom was also recognised by the authors, as would be
evident from the following passage: -
“CONCLUSION
The doctrine of lifting the veil plays a small role in British
company law, once one moves outside the area of particular
contracts or statutes. Even where the case for applying the doctrine
may seem strong, as in the under-capitalised one-person company,
which may or may not be part of a larger corporate group, the
courts are unlikely to do so. As Staughton L.J. remarked in Atlas
Maritime Co SA v Avalon Maritime Ltd. The Coral Rose:
“The creation or purchase of a subsidiary company with
minimal liability, which will operate with the parent's
funds and on the parent's directions but not expose the
parent to liability, may not seem to some the most honest
way of trading. But it is extremely common in the
international shipping industry and perhaps elsewhere. To
hold that it creates an agency relationship between the
subsidiary and the parent would be revolutionary
doctrine."
This is in contrast to the law in the United States where the
veil is lift more readily. However, even in the United States it
seems the courts have never lifted the veil so as to remove limited
liability in the case of a public company and will not do so as a
matter of routine in private companies. Probably, the most
significant addition to the grounds for lifting the veil which US law
adds to the categories recognised by British law is that of
inadequate capitalisation. As we shall see in the next chapter,
British law has approached that problem through the statutory
doctrine of wrongful trading rather than through lifting the veil.
Indeed, at a more general level, the approach of British law to
regulation of the abuse of limited liability is a combination of
facilitating self-help and statutory constraints. In the succeeding
chapters we turn to examine the latter.”
76. In Pennington’s Company Law , the exceptions to the rule of
separate legal personality have been explained as follows:-
“EXCEPTIONS TO THE RULE OF SEPARATE LEGAL
PERSONALITY
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Four inroads have been made by the law on the principle of
the separate legal personality of companies. By far the most
extensive of these has been made by legislation imposing taxation.
The Government, naturally enough, does not willingly suffer
schemes for the avoidance of taxation which depend for their
success on the employment of the principle of separate legal
personality, and in fact legislation has gone so far that in certain
circumstances taxation can be heavier if companies are employed
by the taxpayer in an attempt to minimise his tax liability than if he
uses other means to give effect to this wishes. Taxation of
companies is a complex subject, and is outside the scope of this
book. The reader who wishes to pursue the subject is referred to the
many standard text books on Corporation Tax, Income Tax, Capital
Gains Tax and Inheritance Tax.
The other inroads on the principle of separate corporate
personality have been made by five sections of the Companies Act
1985, by the Company Directors Disqualification Act 1986 and the
Insolvency Act 1986, and by judicial disregard of the principle
where the protection of public interests is of paramount importance
or where the company has been formed to evade obligations
imposed by law or contract, and by the courts implying in certain
cases that a company is an agent or trustee for its members.”
77. Dealing with the subject of whether the said principle could be
resorted to in cases where corporate entities seek to evade obligations
imposed by law, the authors have explained the position as follows:-
“Evasion of obligations imposed by law
There are only three decided cases where the court has
disregarded the separate legal personality of a company because it
was formed or used to facilitate the evasion of legal obligations. In
the first of these cases the defendant had been employed by the
plaintiff company and had entered into a valid agreement not to
solicit the plaintiff's customers or to compete with it for a certain
time after leaving its employment. After ceasing to be employed by
the plaintiff, the defendant formed a company which carried on a
competing business, and caused the whole of its shares to be
allotted to his wife and an employee of the company, who were
appointed to be its directors. It was held that since the defendant in
fact controlled the company, its formation was a mere 'cloak or
sham' to enable him to break his agreement with the plaintiff, and
an injunction was issued against him and against the company he
had formed restraining them from soliciting the plaintiff's
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customers. In the second cases a vendor of land sought to evade
specific performance of the contract for sale by conveying the land
to a moribund company which he 'bought' for the purpose. The
company had been formed by third parties, and the vendor
purchased the whole of its shares from them, had the shares
registered in the name of himself and a nominee, and had himself
and the nominee appointed to be the company's directors. It was
held again that the acquisition of the company and the conveyance
of the land to it was a mere 'cloak or sham' for the evasion of the
contract of sale, and specific performance of the contract was
therefore ordered against the vendor and the company which he had
acquired. In the third case a company sought to avoid a judgment
for damages for wrongful dismissal obtained against it by its
manager by forming a new company to which it transferred all its
assets and liabilities, except the judgment debt in favour of its
dismissed manager. The company then procured its own
dissolution by applying to the Register of Companies to strike it off
the register of companies. It was held that the new company was
bound by the judgment in view of the blatant attempt by the
original company to evade its enforcement, but the new company
was given time to plead any defence it might have (other than the
binding effect of the judgment) before judgment was entered
against it.
English law has, however, not gone so far as imposing
liability on a company if it takes steps to avoid entering into an
obligation to the plaintiff at all. Consequently, when a company
incorporated in England set up independently managed, but wholly
owned subsidiaries in foreign countries to manufacture the products
of the group, it was held that breach by those subsidiaries of the
obligations imposed on them by local law to ensure the safety of
their employees did not result in the parent company being liable
on judgments obtained in those foreign countries against the
subsidiaries by their injured employees. The fact that the parent
company deliberately formed the subsidiaries in order to insulate
itself from safety obligations imposed on them did not of itself
impose liability on the parent company.
The American courts have been far readier to disregard a
company's separate legal personality when it was clearly formed or
acquired to facilitate a breach of the general law or of a contractual
obligation. Their attitude is summed up in the words of Sanborn J,
in a passage which further litigation in this country will probably
show represents English law too:
„...A corporation will be looked upon as a legal entity as a general
rule... but when the notion of legal entity is used to defeat public
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convenience, justify wrong, protect fraud, or defend crime, the law
will regard the corporation as an association of persons.‟”
30
78. Gore- Browne on Companies explains the precept of
piercing of the corporate veil in the following terms:-
“Peeping Behind the Veil
7[8] As has already been noted, many cases of 'lifting the veil' do
not go as far as removing the separate personality status of the
company, but are merely examining who the members are to
determine some specific status or classification of the company.
Even then, the courts have been reluctant to make such enquiries
except where required to by statute. Prior to the Trading with the
Enemy Act 1939 requiring it, the House of Lords was prepared to
look at the membership of a company to determine whether it was
an enemy alien, and more recently to determine that the frauds of a
sole member should make a company subject to the doctrine of ex
turpi causa.
The clearest example of peeping required by statute is the
requirement to produce group accounts and the associated
definitions of subsidiary undertakings etc. Other provisions of the
Companies Act 2006 require determination of whether a company
is a subsidiary of another, such as the need for members' approval
of directors' transactions, and what amounts to public companies'
financial assistance.
Another area where statute has required peeping for a
specific purpose is taxation. In Gramophone & Typewriter Co Ltd v
Stanley , the separate personality of subsidiaries was upheld for tax
purposes, but since then elaborate statutory provisions deal with tax
liabilities. Tax, or rather a concession from tax, also lay behind Re
FG (Films) Ltd . In determining that a film was not British for tax
purposes, the court looked through the UK subsidiary owned 90 per
cent by the American director and held that the UK company was
merely a nominee or agent of the director's American company. In
The Abbey , Malvern Wells Ltd v Ministry of Local Government and
Planning , the charitable purposes imposed upon the trustee-
shareholders of the company could be claimed by the company to
exempt its property from development charge.
European law seems less concerned with peeping behind
the veil of incorporation for specific purposes than UK law. For
30
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example, although under the TUPE Regulations a transfer of
control of a company is not of itself a transfer of the employees of
the company, the veil can be lifted to see if, in effect, there is some
transfer of business and personnel. One area where parents and
subsidiaries have been treated as single entities for at particular
purpose has been European competition law. In what are now Arts
101 and 102 of the European Treaty, the European Court of Justice
has for a long time taken the understandable view that it is the
competitive effect of the group as a whole that has to be assessed.
On the other hand, the same court has rejected the argument
that, however practically convenient it may be, the nationality of
incorporation of a parent company should be a factor in
determining a company's 'centre of main interests' for the purpose
of determining insolvency jurisdiction. In Stojevic v Official
Receiver , a Registrar followed this approach rejecting the argument
that the Austrian habitual residence of a sole owner and effective
controller of an English registered company should lead to the
company's insolvency being conducted in Austria rather than in
England, even though the same control was considered a factor in
attributing the frauds of the Austrian controller to the company
when applying the doctrine of ex turpi causa.""
In exercising their wide discretion under what is now s 994
of the Companies Act 2006 (s 459 of the 1985 Act), the courts have
accepted that members can be unfairly prejudiced by activities that
strictly speaking involved subsidiaries of the company of which
petitioners were members. In Re Bugle Press Ltd, a company could
not be set up to expropriate a minority using what is now s 979 of
the Companies Act 2006, and in Acatos & Hutcheson plc v Watson
Lightman J admitted he would peep behind the veil to determine
whether a company was being used to allow another company to
improperly own its own shares, though this was not the case on the
facts.
Although, as can be seen from the examples above, the
courts have been quite pragmatic about peeping behind the veil,
when it comes to piercing the veil, the UK courts' approach in
recent years has generally reverted to the hard line taken in
Salomon .”
79. Significantly even this authoritative work had noticed that
courts in the United Kingdom appear to have reverted to the strict and
unerring line of reasoning which had been laid down in Solomon way
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back in the 1800s. The aforesaid work while noticing the legal
position as it prevails in England observes as follows:-
“Circumventing or Piercing the Veil
7[9] As has already been noted, the House of Lords firmly upheld
the doctrine of separate personality in Salomon v A Salomon & Co
Ltd , and the Court of Appeal maintained the same position in
regard to associate and group companies in Adams v Cape
Industries plc . Cape Industries had created subsidiaries and
associates in the US, which marketed the asbestos other
subsidiaries of Cape mined in South Africa. An Illinois court had
held Cape Industries liable for asbestosis claims in the state, but
Cape resisted the enforcement of these judgments on the argument
that under UK law, Cape Industries itself had never operated in
Illinois. The Court of Appeal refused to enforce the claims against
Cape Industries. However, the courts have accepted that under
some general principles of law, controlling members of a company
(including a parent company) may be liable for (or occasionally
claim rights from) what are primarily the actions of the company.
This might be termed 'circumventing the veil'. They have also
upheld one example of piercing the veil. This very restrictive
approach to piercing, as against circumventing the veil, has been
upheld twice by the Supreme Court. However, in Prest Lord
Sumption seems to have concentrated on a slightly different
distinction, the concealment principle (where only a circumventing
legal principle can apply and the evasion principle (where piercing
may still apply).
Piercing the Veil
7[14B] Circumventing the corporate veil, whether to make a
controlling shareholder liable for thoughts and actions of the
controlled company, or to make the controlled company liable for
those of the controlling shareholder (really a question of attribution
dealt with in Chapter 7A ), only requires the application of general
legal principles. What the courts have struggled with is whether
there are circumstances where a special corporate rule applies to
override the Salomon principle. Historically, the courts have
referred to „shams' and 'facades'. Although not necessarily more
enlightening, Lord Sumption's adoption in Prest of the distinction
between the concealment and evasion principles may now be
established.
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Cases pre-Prest
7[14C] The Court of Appeal in Adams accepted that there was 'one
well-recognised exception to the rule prohibiting the piercing of the
"corporate veil"‟.
To justify such piercing a scheme of concealment should be
shown. It was a scheme of concealment behind a chain of
companies that led to the veil being lifted in Kensington
International Ltd v Congo ."
This 'one well-recognised exception' to the Salomon
principle has been based on two cases. In Gilford Motor Co v
Horne , the respondent had contracted with the appellant company
not to solicit its customers when he left their employment. On
ceasing employment, Horne formed a company to carry on a
competing business and this company started to solicit the Gilford
Motor Co's customers. The court granted an injunction to enforce
the covenant not to solicit against both Horne and the company he
had formed as a 'cloak' for his activities. In Jones v Lipman the
defendant had entered into a contract to sell his house. He sought to
escape his obligation to complete by conveying the property to a
company in which he and a nominee of his controlled all the shares
and were the directors. Russell J, in granting a decree of specific
performance, described the company as 'the creature of the first
defendant, a device and a sham, a mask which he holds before his
face in any attempt to avoid recognition by the eye of equity'."
These cases were followed in Trustor AB v Smallbone , the
veil being lifted where a controlling shareholder behind a trust used
a company to receive moneys improperly transferred from another
company, though Sir Andrew Morritt V-C refused to extend the
device and sham exception to any case involving companies and
improprieties or where the interests of justice required. He also
stressed that no third party rights should be affected by piercing the
veil (eg depriving innocent creditors of assets), an issue that
featured in the majority judgment in Stone & Rolls Ltd v Moore
Stephens .
In International Credit Investment Co v Adham , Robert
Walker J held that where a worldwide Mareva injunction (now a
'freezing order') had been granted over property it was right for the
court to pierce the veil and appoint a receiver over the property in
circumstances where there appeared to the court to be a real risk
that such a freezing order might be breached. It is clear that the
court was aware that 'serious fraud' was involved. A Mareva
injunction has also been granted against a company probably
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holding defendant's assets, even if there was no claim against the
company.
It has been held that where a constructive trust would be
imposed on an individual acquiring property, the same obligation
would be imposed where the property was acquired or held by a
company 'owned' by the individual. This does point to the
possibility that these 'sham' cases are not really about some
separate doctrine of piercing the veil as much as about when
knowledge may be attributed to a company to make it liable for
wrongs like inducing breach of an existing contract, fraud, knowing
receipt etc.
The close relationship between lifting the veil and
attribution can also be seen in the 3-to-2 decision of the House of
Lords in Stone & Rolls Ltd v Moore Stephens . The case was argued
as a matter of attribution (see Chapter 7A ), but it required the veil
to be lifted to determine that there were no innocent shareholders.
In effect, Stone & Rolls Ltd and Mr Stojevic were being treated as
one and a company taken over for an improper purpose was being
considered a sham or facade just like the company formed for an
improper purpose in Gilford Motor or bought off the shelf for such
a purpose in Jones v Lipman .
The most controversial use of sham or façade argument was
in Creasey v Breachwood Motors Ltd where one of two companies
(which had common shareholders and directors) was allowed to
become insolvent while its assets were transferred to the other
company. The court exercised its power to substitute the company
to which the assets had been transferred, so that judgment on the
plaintiff's claim might be enforced against it.
The Court of Appeal in Ord v Belhaven Pubs disapproved
of Creasey v Breachwood Motors and refused to allow the holding
company to be substituted as defendant even though a subsequent
corporate reorganisation left the subsidiary without assets.
Likewise, in Yukong Lines Ltd of Korea v Rendsburg Investments
Corpn of Liberia the transfer of assets so that claims could not be
met was not held to be a sham. Toulson J pointed out that other
claims could be brought (against the director for breach of duty, for
example). These asset moving cases would be easier to understand
and reconcile if the piercing the veil argument was abandoned and
instead claims were based or breaches of duty and knowledge of
such breaches being attributed to other companies.
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VTB Capital plc v Nutritek
7[14D] The concept of lifting the veil was resurrected by Burton J
in Gramsci Shipping Corp v Stepanovs , and Alliance Bank JSC v
Aquanta Corporation where controllers who had set up sham
companies to divert moneys away from the group employing them
were held to be parties to the fraudulent contracts. In both cases,
the, need to hold the controllers to be parties to the contract was to
ensure that the jurisdiction clauses in the contracts (imposing the
jurisdiction of the English courts) applied.
This approach was rejected by the Supreme Court in VTB
Capital plc v Nutritek . Lord Neuberger, who gave the court's
judgment on the issue of piercing the veil found no other cases
pierced the veil to make a controlling shareholder a party to a
contract entered into by a company before Burton J's decisions in
Gramsci and Alliance . He also found no reason to extend any
power to pierce the veil in this way because:
(1) Agency normally relieves the agent of being a contractual
party, but it was not suggested that the companies here were
not parties, just that the controlling shareholders were as
well.
(2) If A makes misrepresentations about B to induce C to enter
a contract, there are already the remedies for C in negligent
or fraudulent misrepresentation.
(3) Neither when the contract was entered nor subsequently did
the controlling shareholder intend or act as a party and none
of the other parties believed he was. Contractual liability is
determined objectively.
(4) The undisclosed principal rule has long been regarded as
anomalous and not to be extended.
Indeed, in the Supreme Court on VTB Capital , Lord Neuberger
considered the argument from one counsel, that the sham or facade
exception did not exist at all but refused to rule on the point.
The Supreme Court had almost immediately a further
opportunity to review all these cases in Prest .
Prest v Petrodel Resources Ltd
7[14E] Prest involved the financial provisions of a divorce. Most
of the husband's assets were held by companies that he controlled.
The Supreme Court was asked to determine whether those
corporate assets could be treated as the husband's for the purposes
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of ss 23 and 24 of the Matrimonial Causes Act 1973. In fact, all the
justices held that they could because the companies held the assets
on trust for the husband, and so circumvented the corporate veil.
However, the justices also considered, obiter, if there had not been
a trust, could the court pierce the corporate veil.
The principal judgment in Prest was given by Lord
Sumption who concluded that: 'the consensus that there are
circumstances in which the court may pierce the corporate veil is
impressive... I think that the recognition of a limited power to
pierce the corporate veil in carefully defined circumstances is
necessary if the law is not to be disarmed in the face of abuse.‟
The carefully defined circumstances, according to Lord
Sumption, turned on the distinction between:
(1) the concealment principle „the interposition if a company
or… companies so as to conceal the identity of the real
actors‟; and
(2) the evasion principle „if there is a legal right against the
person in control … and the company is interposed… [to]
defeat the right or frustrate its enforcement‟.
Concealment was subject to conventional legal principles,
which could circumvent the veil. Only evasion required piercing of
the corporate veil. Lord Neuberger reduced Lord Sumption's
review of the history of piercing the corporate veil to six findings:
(1) The International Court of Justice recognised the doctrine
but only in the context of civil law systems.
(2) There were judgments based on the doctrine in family cases,
but its application in these cases was unsound.
(3) There were two cases outside the family law context -
Gilford and Jones- which laid the ground for the doctrine.
(4) There were two subsequent cases in which it was assumed
the doctrine existed, but they were merely obiter
observations.
(5) The Court of Appeal and High Court had subsequently
assumed the doctrine does exist.
(6) In only two of those cases had the doctrine been relied on,
and that was illegitimate as they could have been decided
without recourse to the doctrine.
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Although Lord Sumption left Gilford and Jones as cases of
evasion relying on the doctrine, Lord Neuberger thought that the
injunction against the company in Gilford could easily have been
justified on the basis that the company was Horne's agent or
nominee; and as for Jones , Lord Neuberger thought that an order
for specific performance against Lipman could have compelled him
to compel the company to convey the property to the plaintiffs.
Nevertheless, despite concluding that he thought that there had
been no cases in the UK that needed to rely on the doctrine, Lord
Neuberger again was not prepared to declare the doctrine dead.
Only in Lady Hale's judgment is a continuing confusion in all
these 'piercing' cases really highlighted. She drew the distinction
between where a remedy was being sought against a controlling
shareholder and where it was being sought against the company.
This distinction also seems to lie behind Lord Sumption's
distinction, the concealment principle being where the remedy
sought is against the concealed controlling shareholder(s), the
evasion principle being where the remedy is against the interposed
company. In Gilford and in Jones, the main issue was not whether
the controlling shareholders had broken their contracts, and in
Stone & Rolls v Moore Stephens , had the fraudulent controlling
shareholder been bringing a claim against the auditors, he would
clearly have faced the defence of ex turpi causa. The problems
arose because the remedy was being sought (or defence raised)
against the company. In other words, all the cases that might still be
considered ones of piercing the veil, are really cases about
attributing the thoughts and actions of the controlling
shareholder(s) to the company. So, if the doctrine does not have a
place in the rules of attribution, it really has no place at all and like
her fellow judges, Lady Hale was not prepared to go that far.”
80. In contrast to the restricted construction which has been given
by courts in the United Kingdom, the United States Supreme Court in
First National City Bank v. Banco Para EI Comercio Exterior De
31
Cuba made the following pertinent observations:-
“36 . In discussing the legal status of private corporations, courts in
the United States [ See 1 W.M. Fletcher, Cyclopedia of the Law of
Private Corporations § 41 (rev. perm. ed. 1974): "[A] corporation
will be looked upon as a legal entity as a general rule, and until
31
1983 SCC OnLine US SC 130
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sufficient reason to the contrary appears; but, when the notion of
legal entity is used to defeat public convenience, justify wrong,
protect fraud, or defend crime, the law will regard the corporation
as an association of persons." Id., at 166 (footnotes omitted). See
generally, H. Henn, Handbook of the Law of Corporations § 146
(2d ed. 1970); I.M. Wormser, Disregard of the Corporate Fiction
and Allied Corporate Problems 42-85 (1927).] and abroad [ In Case
Concerning The Barcelona Traction, Light & Power Co., 1970
I.CJ. 3, the International Court of Justice acknowledged that, as a
matter of international law, the separate status of an incorporated
entity may be disregarded in certain exceptional circumstances:"
Forms of incorporation and their legal personality have sometimes
not been employed for the sole purposes they were intended to
serve; sometimes the corporate entity has been unable to protect the
rights of those who have entrusted their financial resources to it;
thus inevitably there have arisen dangers of abuse, as in the case of
many other institutions of law. Here, then, as elsewhere, the law,
confronted with economic realities, has had to provide protective
measures and remedies in the interests of those within the corporate
entity as well as those outside who have dealings with it: the law
has recognized that the independent existence of the legal entity
cannot be treated as an absolute. It is in this context that the process
of 'lifting the corporate veil' or 'disregarding the legal entity‟ has
been found justified and equitable in certain circumstances or for
certain purposes. The wealth of practice already accumulated on
the subject in municipal law indicates that the veil is lifted, for
instance, to prevent misuse of the privileges of legal personality, as
in certain cases of fraud or malfeasance, to protect third persons
such as a creditor or purchaser, or to prevent the evasion of legal
requirements or of obligations. In accordance with the
principle expounded above, the process of lifting the veil, being an
exceptional one admitted by municipal law in respect of an
institution of its own making, is equally admissible to play a similar
role in international law... “ld., at 38-39. On the application of these
principles by European courts, see Cohn and Simitis, "Lifting the
Veil" in the Company Laws of the European Continent, 12 Int. &
Comp.L.Q. 189 (1963); Hadari, The Structure of the Private
Multinational Enterprise, 71 Mich.LRev. 729, 771, n. 260 (1973).],
have recognized that an incorporated entity-described by Chief
Justice Marshall as "an artificial being, invisible, intangible, and
existing only in contemplation of law" [ Trustees of Dartmouth
College v. Woodward, ( 17 U.S.) 4 Wheat. 514, 636, 4 L.Ed. 629
(1819).]-is not to be regarded as legally separate from its owners in
all circumstances. Thus, where a corporate entity is so extensively
controlled by its owner that a relationship of principal and agent is
created, we have held that one may be held liable for the actions of
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the other. See NLRB v. Deena Artware, Inc., 361 U.S. 398, 402-
404, 80 S.Ct. 441, 443, 44 L.Ed.2d 400 (1960). In addition, our
cases have long recognized "the broader equitable principle that the
doctrine of corporate entity, recognized generally and for most
purposes, will not be regarded when to do so would work fraud or
injustice." Taylor v. Standard Gas Co., 306 U.S. 307, 322, 59 S.Ct.
543, 550, 83 L.Ed. 669 (1939). See Pepper v. Litton , 308 U.S. 295,
310, 60 S.Ct. 238, 246, 84 L.Ed. 281 (1940). In particular, the
Court has consistently refused to give effect to the corporate form
where it is interposed to defeat legislative policies. Eg, Anderson v.
Abbot, supra, 321 U.S., at 362-363, 64 S.Ct., at 537-38. And, in
Bangor Punta Operations, Inc. v. Bangor & Aroostook Railroad
Co., 417 U.S. 703, 94 S.Ct. 2578, 41 L.Ed.2d 418 (1974), we
concluded:
37 . "Although a corporation and its shareholders are deemed
separate entities for most purposes, the corporate form may be
disregarded in the interests of justice where it is used to defeat an
overriding public policy.... [W]here equity would preclude the
shareholders from maintaining the action in their own right, the
corporation would also be precluded.... [T]he principal beneficiary
of any recovery and itself estopped from complaining of
petitioners' alleged wrongs, cannot avoid the command of equity
through the guise of proceeding in the name of... corporations
which it owns and controls." Id., at 713, 94 S.Ct., at 2584 (citations
omitted).
41 . Giving effect to Bancec's separate juridical status in these
circumstances, even though it has long been dissolved, would
permit the real beneficiary of such an action, the Government of the
Republic of Cuba, to obtain relief in our courts that it could not
obtain in its own right. without waiving its sovereign immunity and
answering for the seizure of Citibank's assets-a seizure previously
held by the Court of Appeals to have violated international law. [
See Banco I, supra, 478 F.2d, at 194.] We decline to adhere blindly
to the corporate form where doing so would cause such an
injustice. See Bangor Punta Operations, Inc. v. Bangor &
Aroostook Railroad Co., supra, 417 U.S., at 713, 94 S.Ct., at
2584.”
81. As would be evident from a reading of the aforesaid extracts
that Court had justified the adoption of the piercing principle where
economic realities may so warrant as also to protect the interests of
third parties in their dealings with a corporate entity. In First National
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City Bank it was pertinently observed that the said principles could be
also adopted to protect third persons such as a creditor or a purchaser
or to prevent the evasion of legal requirements or obligations.
82. The United States Court of Appeals in Wm. Passalacqua
32
Builders v. Resnick Developers S., explained the concept relating
to the lifting of the corporate veil principle as under: -
“...Applying this analysis is difficult because courts and
commentators rarely address the historic origins of the piercing
doctrine at length. Some believe its origin is equitable. See Bangor
Punta Operations, Inc. v. Bangor & Aroostook R.R. Co., 417 U.S.
703, 713, 41 L. Ed. 2d 418, 94 S. Ct. 2578 (1974) (" The corporate
form may be disregarded in the interests of justice where it is used
to defeat an overriding public policy. [ 10 ] ... In such cases,
courts of equity, piercing all fictions and disguises, will deal with
the substance of the action and not blindly adhere to the corporate
form."); United States v. Golden Acres, Inc., 684 F. Supp. 96, 103
(D. Del. 1988 ) ("Piercing the corporate veil is an action that sounds
in equity."), aff'd sub nom., Golden Acres, Inc. v. Sutton Place
Corp. , 879 F.2d 857 (3d Cir. 1989); Fletcher, Cyc. Corp. § 41
(1990 perm. ed.) ("Since the doctrine of piercing the corporate veil
is an equitable one that is particularly within the province of the
trial court, the right to a jury trial on the issue of piercing the
corporate veil does not exist.").
Other courts conclude disregarding the corporate form is of
legal origin or so touches on the determination of legal issues that it
is for the jury to decide. See American Protein, 844 F.2d at 59 (“
the issue of corporate disregard is generally submitted to the jury”);
FMC Fin. Corp. v. Murphree, 632 F.2d 413, 421 n. 5 (5th Cir.
1980) ("This Court holds that the issue of corporate entity disregard
is one for the jury."). And at least one early scholar has [11]
noted that, whatever its origin, the doctrine has been applied in
courts both of law and equity. See Wormser, I.M., Piercing the Veil
of the Corporate Entity, 12 Colum. L. Rev. 496, 497-99, 513-14
(1912) ("courts, whether of law, of equity or of bankruptcy, do not
hesitate to penetrate the veil and to look beyond the juristic entity at
the actual and substantial beneficiaries.").
The latter view appears to have the greatest historical
support. According to Professor Phillip Blumberg, enforcement of
32
933 F.2d 131
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shareholder liability for corporate obligations began as "a crude
system in which any creditor with an unsatisfied judgment [* 136 ]
against the corporation sued any shareholder at common law."
Blumberg, The Law of Corporate Groups : Tort, Contract, and
Other Common Law Problems in the Substantive Law of Parent
and Subsidiary Corporations § 2.02, at 52 (1987) (Blumberg, The
Law of Corporate Groups); cf. Widdrington v. Cudworth and
Others, (1662) Vidian's Exact Pleader, p. 3 (plaintiff who brought
action in tort at common law claiming conspiracy to eject a fellow
from Cambridge college, sued the fellows as a combination of
individuals rather than the college as [12] a corporation) (cited in
Baker, An Introduction to English Legal History 524 (3d ed.
1990)).
The next stage in the evolution of this theory of disregard
was the development of the equitable procedure known as a
"creditor's bill." When fully formed, the creditor's bill had two
parts. The first part was a proceeding in equity "instituted by any
creditor with an unsatisfied judgment, usually on behalf of all
creditors, against the corporate debtor," the purpose of which was
to adjudge the extent of the total corporate liability to the group of
creditors. Blumberg , The Law of Corporate Groups § 2.02 at 53 .
The second part was an action at common law against the
shareholders individually to collect the amount owed in which only
personal defenses were allowed to be raised. See Abbot, Conflict of
Laws and the Enforcement of the Statutory Liability of
Stockholders in a Foreign Corporation, 23 Harv. L. Rev. 37, 43-45
(1909); Restatement (Second) of the Conflict of Laws §308,
comment e (1971). These sources support the proposition that the
nature of the ancient action disregarding the corporate form had
equitable and legal components. Having examined the way [13]
this issue was treated historically we turn next to examine the
remedy sought.
...Ten years later Lowendahl v. Baltimore & Ohio R.R. Co.,
247 A.D. 144, 287 N.Y.S. 62 (1st Dept.), aff'd, 272 N.Y. 360, 6
N.E.2d 56 (1936 ), set forth the New York a rule for corporate
disregard. Lowendahl took Berkey's proposition as a starting point,
and proceeded to explain that to pierce the corporate veil, the
parent corporation must at the time of the transaction complained
of: (1) have exercised such control that the subsidiary "has become
a mere instrumentality" [19] of the parent, which is the real
actor; (2) such control has been used to commit fraud or other
wrong; and (3) the fraud or wrong results in an unjust loss or injury
to plaintiff. Id. at 157 . The doctrine, it was said, is invoked "to
prevent fraud or to achieve equity." International Aircraft Trading
Co. v. Manufacturers Trust Co., 297 N.Y. 285, 292, 79 N.E.2d 249
(1948). Professor Blumberg believes -- and we agree -- that the
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three- factor rule in New York and the alter ego theory sued on in
this case are indistinguishable, do not lead to different results, and
should be treated as interchangeable. See Blumberg, The Law of
Corporate Groups § 6.-03 at 120.
HN8 Under New York law it has been further held that
when a corporation is used by an individual to accomplish his own
and not the corporation's business, such a controlling shareholder
may be held liable for the corporation's commercial dealings as
well as for its negligent acts. See Walkovszky v. Carlton, 18 N.Y.2d
414, 417, 276 N.Y.S.2d 585, 223 N.E.2d 6 (1966 ). Where there is
proof that defendants were doing business in their individual
capacities to suit their own ends shuttling their own funds in and
out without [20] regard to the corporation's form -- this sort of
activity exceeds the limits of the privilege of doing business in a
corporate form and warrants the imposition of liability on
individual stockholders. Id. at 420 . The critical question is whether
the corporation is a "shell" being used by the individual
shareowners to advance their own "purely personal rather than
corporate ends." Port Chester Elec. Constr. Corp. v. Atlas, 40
N.Y.2d 652, 656-57, 389 N.Y.S.2d 327, 357 N.E.2d 983 (1976)
( quoting Walkovszky, 18 N.Y.2d at 418).
We capsulized this view of New York law in American
Protein, 844 F.2d 56 (2d Cir. 1988), where we observed that HN9
control, whether of the subsidiaries by the parent or the corporation
by its stockholders, is the key; and the control must be used to
commit a fraud or other wrong that causes plaintiff's loss. Id. at 60 .
See Electronic Switching Indus., Inc. v. Faradyne Elec. Corp., 833
F.2d 418, 424 (2d Cir. 1987) (absent a showing that "control and
domination was used to commit wrong, fraud, or the breach of a
legal duty, or a dishonest and unjust act" New York law will not
allow a piercing [21] of the corporate veil); Gorrill v
Icelandair/Flugleidir, 761 F.2d 847, 853 (2d Cir. 1985) (same as
American Protein ).
Liability therefore may be predicated either upon a showing
of fraud or upon complete control by the dominating corporation
that leads to a wrong against third parties. See Itel Containers Int'l
Corp. v. Atlanttrafik Exp. Serv. Ltd., 909 F.2d 698, 703 (2d Cir.
1990) ("New York law allows the corporate veil to be pierced
either when there is fraud or when the corporation has been used as
an alter ego.") (emphasis in original); Gartner v. Snyder, 607 F.2d
582, 586 (2d Cir. 1979) (" Because New York courts disregard
corporate form reluctantly, they do so only when the form has been
used to achieve fraud, or when the corporation has been so
dominated by an individual or another corporation..., and its
separate identity so disregarded, that it primarily transacted the
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dominator's business rather than its own and can be called the
other's alter ego."); cf. Kirno Hill Corp. v. Holt, 618 F.2d 982, 985
(2d Cir. 1980) (in federal maritime law "The prerequisites for
piercing a corporate [22] veil are... clear...: [the defendant] must
have used [the corporation] to perpetrate a fraud or have so
dominated and disregarded [the corporation's] [*139] corporate
form that [the corporation] primarily transacted [the defendant's]
personal business rather than its own corporate business.”)
Wm. Passalacqua Builders has adopted the principle of courts, be it of
law or of equity, being entitled to unhesitatingly penetrate the veil and
look beyond the juristic entity and identify the actual and substantial
beneficiaries. It also recognised the aforesaid principle being resorted
to where on facts it be found that the corporation was a mere alter ego.
33
83. In Dill v. Rembrandt Grp., Inc. , the Court of Appeals of
Colorado while expounding upon the separate legal entity doctrine,
made the following pertinent observations: -
“ [*P27] An LLC is a legal entity separate from the
members who own it. In re Griffith v. SSC Pueblo Belmont
Operation Co. LLC, 381 P 3d 308, 2016 CO 60M, 11; Sedgwick,
15-17. Thus, neither the members of an LLC nor its managers are
personally liable for debts incurred by the LLC. § 7-80-705, C.R.S.
2019; Griffith, 11 . Indeed, the corporate veil fiction "isolates „the
actions, profits, and debts of the corporation from the individuals
who invest in and run the entity[.]‟ [and] [o]nly extraordinary
circumstances justify disregarding the corporate entity to impose
personal liability." Sedgwick, 15 (quoting In re Phillips, 139 P.3d
639, 643 (Colo. 2006)).
[*P28] To pierce the corporate veil in Colorado, a court
must conduct a three-part inquiry. Id. at 21 . First, it must determine
whether the corporate entity is the alter ego of the person or entity
in issue. Id . An alter ego relationship exists when a corporation or
LLC is merely an instrumentality for the transaction of the [14]*
shareholders' or members' affairs and "there is such unity of interest
in ownership that the separate personalities of the corporation [or
LLC] and the owners no longer exist." In re Phillips. 139 P.3d at
33
2020 WL 1881062
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644 (quoting Krystkowiak v. W.O. Brisben Co., 90 P.3d 859, 867
n.7 (Colo, 2004)).
[*P29] To determine whether unity of interest exists, a
court considers several factors, including whether (1) the
corporation [184] or LLC operates as a distinct business entity;
(2) the two entities commingle funds and assets; (3) the two entities
maintain inadequate corporate records; (4) the nature and form of
the entities' ownership and control facilitates misuse by an insider;
(5) the corporation or LLC is “used as a 'mere shell‟”: (6) “the
business [i]s thinly capitalized”: (7) legal formalities are
disregarded; and (8) corporate funds of assets are used for
noncorporate purposes. Id . (quoting Leonard v. McMorris, 63 P.3d
323, 330 (Colo, 2003)); Sedgwick, 32. Courts examine the specific
facts of the case and need not find the existence of every factor to
find an alter ego. Great Neck Plaza L.P. v. Le Peep Rests., LLC, 37
P.3d 485, 490 (Colo. App. 2001),
[*P30] Second, upon finding that an entity is the alter ego
of its owners, a court must determine whether the corporate fiction
was used to perpetrate a fraud or defeat a rightful claim. Sedgwick,
21 .
[*P31] Third, a court must consider whether disregarding
the corporate form would achieve an [15] equitable result. Id* . If
it finds that the moving party has satisfied this three-part test by a
preponderance of the evidence, then it may disregard the corporate
identity and impute liability. Griffith, 14; Sedgwick, 21 .
C. Horizontal Veil Piercing in Colorado
[*P32] RGI and PPA assert that the trial court erred by
piercing the corporate veil because RGI and PPA have no parent-
subsidiary relationship and do not exercise control over each other.
The trial court found that, at the time RMMF assigned the RMMF
note to PPA, neither RGI nor PPA possessed any ownership
interest in the other, nor did either entity control the other. Rather,
the five common owners, who controlled 81.25 percent of RGI's
shares, were also the founders and only members of Intellitec, the
LLC that wholly owned PPA.
[*P33] Entities that share common shareholders, owners, or
parents are sister companies. Black's Law Dictionary 418 (10th ed.
2014) (defining sister corporation as "[o]ne of two or more
corporations controlled by the same, or substantially the same,
owners"); see also Minno v. Pro-Fab, Inc., 121 Ohio St. 3d 464,
2009- Ohio 1247, 905 N.E.2d 613, 617 (Ohio 2009) . RGI and PPA
are therefore sister entities because the five common owners who
own 81.25 percent of RGI also own the LLC that, in turn, owns
PPA. [16] Mr. Dill does not cite, nor have we found, any
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Colorado case that extends piercing the corporate veil horizontally
to sister companies.
[*P34] Some jurisdictions categorically bar piercing the
corporate veil between entities that are not in vertical, or parent-
subsidiary, relationships. See Minno, 905 N.E.2d at 617 (holding
that "a plaintiff cannot pierce the corporate veil of one corporation
to reach its sister corporation" because the "lack of ability of one
corporation to control the conduct of its sister corporation
precludes application of the piercing-the- corporate-veil doctrine");
see also Madison Cty. Commc'ns Dist. v. CenturyLink, Inc., No. CV
12-J-1768- NE, 2012 U.S. Dist. LEXIS 180064, 2012 WL 6685672
at 4 (N.D. Ala. Dec. 20, 2012)* (horizontal veil piercing cannot
occur because "[s]ister corporations do not benefit from the
corporate form of their siblings" and because, without evidence of
ownership interest, complete domination and control necessary for
the alter ego element cannot be established); Kiesel Co. v. J & B
Props., Inc., 241 S.W.3d 868, 872 (Mo. Ct. App. 2008) (piercing the
corporate veil doctrine "generally serves to reach shareholders, not
horizontal affiliates, in cases involving fraud"). Unlike Colorado,
these jurisdictions typically do not recognize reverse veil piercing.
[*P35] In jurisdictions where horizontal piercing is
recognized, a plaintiff [*17] seeking to disregard [185] the
corporate formalities separating horizontal affiliates must first
pierce the veils separating each entity from their shared corporate
parent. Capmark Fin. Grp. Inc. v. Goldman Sachs Credit Partners
L.P.. 491 B.R. 335, 349 (S.D.N.Y. 2013); Outokumpu Eng'g Enters,
Inc. v. Kvaerner EnviroPower, Inc., 685 A.2d 724, 729 (Del. Super.
Ct. 1996) (refusing to pierce the veil between sister entities for
personal jurisdiction without first piercing the veils to the common
parent); see also Huntsville Aviation Corp. v. Ford, 577 So. 2d
1281, 1287-88 (Ala. 1991) (a sister corporation could be held liable
for the debts and obligations of a corporation owned by the same
parent because the parent used the corporations "interchangeably").
Except for Alabama, these jurisdictions typically recognize reverse
veil piercing.
[*P36] But even in jurisdictions that do not explicitly
recognize reverse veil piercing, horizontal piercing between sister
entities can still occur when the veil piercing elements are satisfied.
See Tower Inv'rs, LLC v III E. Chestnut Consultants, Inc., 371 III.
App. 3d 1019 864 N.E.2d 927 941. 309 III . Dec. 686 (III. App. Ct
2007) (courts may also pierce the corporate veil between two
affiliated, or "sister," corporations when there is such unity of
interest and ownership between the corporations that separate
personalities between the corporations no longer exist, and
adherence to the fiction of separate personalities would promote
injustice or inequitable circumstances); see also Greenspan v
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LADT, LLC, 191 Cal. App. 4th 486, 121 Cal. Rptr. 3d 118. 138 (Ct.
App. 2010) ("Generally, alter ego liability is reserved for the
parent-subsidiary relationship. [18]* However, under the single-
enterprise rule, liability can be found between sister companies."
(quoting Las Palmas Associates v. Las Palmas Center Associates,
235 Cal. App. 3d 1220, 1 Cal. Rptr. 2d 301, 318 (Ct. App. 1991))).
[*P37] Because our supreme court has not explicitly barred
horizontal piercing to find that sister entities are alter egos, and it
recognizes the doctrine of reverse veil piercing, see In re Phillips,
139 P.3d at 645 , we reject RGI and PPA's contention that Colorado
courts may never pierce the veil to reach sister entities. See
McCallum Family L.L.C., 221 P.3d at 75 („“[T]he mere existence
or nonexistence of formal stock ownership is not necessarily
conclusive' in determining whether the corporate veil may be
pierced." (quoting William M. Fletcher, Cyclopedia of
Corporations § 41.10, at 141 (2006))); see also Nursing Home
Consultants, Inc. v Quantum Health Servs., Inc. 926 F. Supp. 835,
840 n.12 (E.D. Ark. 1996) ("horizontal" or "triangular" veil
piercing "results from a sequential application of the traditional
piercing doctrine and the 'reverse piercing' doctrine"), aff'd , 112
F.3d 513 (8th Cir. 1997). Indeed, another division of this court held
an individual, who was not a shareholder, officer, or director, but
who had some beneficial interest in a corporation, liable for the
debts and obligations of the corporation over which he exercised
dominion and control through its owners. McCallum Family L.L.C.,
221 P.3d at 75 ; see also Cathy S. Krendl & James R. Krendl,
Piercing the Corporate Veil: Focusing the Inquiry , 55 Denv. L.J. 1,
24 (1978).
[P38] However, we [19] agree with RGI and PPA that
horizontal veil piercing between sister entities may occur only if (1)
the entities share a parent or common owners in the ownership
chain and (2) the veils separating each entity from the parent or
common owners are first pierced to find that each sister entity is the
alter ego of its owners.
[*P39] Recently, a division of this court considered
circumstances involving piercing the veil between related entities.
Sedgwick, 45 . In Sedgwick , the plaintiff sought to pierce the veil
between a single- member, single-purpose LLC (1950 Logan) and
its manager (Sedgwick, another LLC). Id. at 16. The division
concluded that the trial court erred in finding that Sedgwick and
1950 Logan were alter egos in part because the court had failed to
first find that Sedgwick was the alter ego of its principal, Paris, an
individual who also controlled 1950 Logan through other business
entities. Id. at 45 .
[186] [P40]* We therefore conclude that Colorado
corporate law permits horizontal veil piercing, under the traditional
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veil piercing test, between entities that share common ownership
through another entity, but only if the veil of each corporate entity
is also pierced.”
84. Of equal significance are the following observations as entered
by the Civil Court of the City of New York in Data Probe, Inc. vs.
34
575 Computer Services, Inc. :-
“One final fact of interest: ISA's exercise of dominion over the
performance at issue was so pervasive and so complete that, in its
dealings with plaintiff, it even meshed Computech's original
contract with a contract that had originated with ISA. Plaintiff's
president testified, and defendant ISA's former president
confirmed, that in December, 1970 plaintiff had called the
president of Computech to complain about the failure of its parent
company, ISA, to pay $ 450 owed plaintiff on another, unrelated
contract, referred to below. Computech's president thereupon
handed the telephone to ISA's comptroller, who was seated with
him; the latter then told plaintiff's president that ISA would not pay
the $ 450 it owed unless plaintiff paid the $ 200 owed to
Computech on a third contract involved herein, the one on which
defendants counterclaim, and as to which there is no dispute. In
this setting, the imprinted bottom line on all of the letters from
Computech to plaintiff, reading: "An International Systems
Associates, Ltd. Company", scarcely does justice to the full degree
to which ISA ruled every facet of the relationship with plaintiff.
In short, on this record, I find that the parent company, ISA, was
the most important actor at every critical stage of this transaction.
It exercised dominion over the performance of the contract, and
became the ultimate arbiter of the extent to which performance was
to be discharged. I conclude that, ISA having intruded its own
values, policy judgment, and edicts as to the conditions and extent
of performance, in every literal and pragmatic sense, ISA cannot
escape responsibility for the role that it played.
In such a situation, the law will not allow the corporate structure to
stand in the way of justice and equity. As Judge Cardozo long ago
said, in language that fits our factual fabric like a glove, this was
"Dominion * so complete, interference so obtrusive" that it
would be a perversion of justice to permit the dictatorial parent to
thumb its nose at the court. ( Berkey v. Third Ave. Rv. Co., 244 N. Y.
34
72 Misc. 2d 602
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84, 95 [1926].) And almost simultaneously, Judge Learned Hand
announced (Kingston Dry Dock Co. v. Lake Champlain Transp.
Co., 31 F. 2d 265, 267 [C. C. A. 2d, 1929]): HN "One corporation
may, however, become an actor in a given transaction, or in part of
a business, or in a whole business, and, when it has, will be legally
responsible."
Whether the second corporation is denominated "agent," "alter
ego," or "instrumentality," of the parent, the essential point is that
the courts will not allow "a perversion of the privilege to do
business in a corporate form" (Berkey v. Third Ave. Rv. Co., supra,
p. 95). Liability rests on the fact that the parent corporation has
directly intervened in the transaction ( Kingston Dry Dock Co. v.
Lake Champlain Transp. Co., supra, p. 267 ). Whatever the rubric
used, the courts in such a setting grant relief because there is "a
wrong for which the law must find a remedy." ( Lowendahl v.
Baltimore & Ohio R. R. Co., 247 App. Div. 144, 156 [1st Dept.,
1936], affd. 272 N. Y. 360 ).
Our situation meets the tests for application of the exception to the
general rule as formulated in Lowendahl and its progeny. There
was domination and control -- at least in regard to the contract with
plaintiff -- "not * in a manner normal and usual with
stockholders," but so complete as to policy and business practice
that the parent becomes the real actor in the transaction.
( Lowenthal, 247 App. Div. 144, 155, supra .) The proximate result
of that control was a clear legal wrong -- the breach of plaintiff's
contract -- and the parent corporation necessarily must bear the
responsibility therefor.”
85. Data Probe , as well, holds that the principle of lifting the
corporate veil may be deployed bearing in mind the imperatives of the
law sanctioning a remedy where a wrong may have occurred. It also
notices the significant words penned by the celebrated Judge Cardozo
of the said principle being invoked so as to prevent the perversion of
justice. It also adopts the “alter ego” and “instrumentality” precepts
holding that courts should verily step in where a corporate form is
used to pervert and sully the streams of justice.
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86. In yet another significant decision, the Supreme Court of
35
Kentucky in Inter-Tel Techs., Inc. vs. Linn Station Props. held as
follows:-
“ AFFIRMING
Piercing the corporate veil is an equitable doctrine invoked by
courts to allow a creditor recourse against the shareholders of a
corporation. In short, the limited liability which is the hallmark of a
corporation is disregarded and the debt of the pierced entity
becomes enforceable against those who have exercised dominion
over the corporation to the point that it has no real separate
existence. A successful veil-piercing claim requires both this
element of domination and circumstances in which continued
recognition of the corporation as a separate entity would sanction a
fraud or promote injustice. The leading Kentucky case on piercing,
White v. Winchester Land Development Corp.. 584 S.W.2d 56 (Ky.
App. 1979 ), like decisions from courts across the country, refers to
this two-part test as the "alter ego" test. In recent years, courts and
commentators have recognized piercing by using various tests and
formulations, most commonly the "alter ego" and "instrumentality"
tests, and by identifying common characteristics of corporations
which have forfeited the right to separate legal existence,
the "equities" assessment referenced in White, 584 S.W.2d at 61 .
This case requires us to consider this important doctrine in the
context of an increasingly common scenario, a creditor's attempt to
collect on debt incurred by a wholly-owned subsidiary where the
subsidiary has been deprived of all income and rendered asset-less
by the acts of its parent (and in this case also grandparent)
corporation. While piercing the corporate veil, as one leading
commentator has aptly noted, is a doctrine that can be
characterized by "frustrating fluidity," Stephen B. Presser, Piercing
the Corporate Veil 9 (2011), we have no doubt that the case before
us presents a clear example of circumstances under which
entitlement to the privilege of separate corporate existence should
be forfeited.
ANALYSIS
1. The Trial Court Properly Pierced the ITS Corporate Veil
A. Piercing the Corporate Veil Generally
35
LLC, 360 S.W.3d 152
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Limited liability for corporate entities is described by some
scholars as springing from both democratic and economic
principles in the early days of the United States. The "imposition of
limited liability was perceived as a means of encouraging the
small-scale entrepreneur, and of keeping entry into business
markets competitive and democratic," assuring that the corporate
world was not dominated by industrialists who had the immense
personal wealth to withstand any business risk. Presser, supra, at
19. The economic rationale was that the public would benefit from
investment by shareholders who would be willing to take risks in
industry, manufacturing and general commercial development if
personal liability could be avoided should their ventures not
succeed. Id. at 21. By the twentieth century, deliberate misuse of
the corporate form by shareholders who were either individuals or
other corporations had led courts to authorize piercing the
corporate veil.
One of the most notable early piercing cases, Berkey v. Third Ave.
Railway Co. 244 N.Y. 84, 155 N.E. 58 (1926), involved a parent-
subsidiary relationship and was authored by Judge Benjamin
Cardozo. Mrs. Berkey was injured on a street car operated by
Forty-Second Street Railway Co. but she sued Third Avenue
Railway Co., the parent which owned substantially all of the Forty-
Second Street stock. Among other factors that raised questions
about Forty-Second Street's separate existence were the
commonality of officers and directors between the two
corporations, the leasing of the streetcars by the subsidiary from
the parent with the parent's name prominently displayed on the
vehicles and the payment of the subsidiary's executives by the
parent. The Court ultimately declined to pierce the corporate veil
of Forty-Second Street, which had its own banks accounts and
employees as well as assets in excess of its debts and liabilities.
However, Judge Cardozo noted that "[w]e say at times that the
corporate entity will be ignored when the parent corporation
operates a business through a subsidiary which is characterized as
an 'alias' or 'dummy." Berkey, 155 N.E. at 61 .
In the ensuing years courts have invoked other, often colorful,
terms in an attempt to capture the concept of loss of separate
corporate existence including "dry shell," "puppet," "stooge,"
"conduit" and "marionette," among dozens of others. Peter B. Oh,
Veil-Piercing , 89 Tex. L. Rev. 81, 83 n.7 (2010). This Court, then
the Court of Appeals, joined in the vivid descriptions in one of the
Commonwealth's earliest piercing cases, Veterans Service Club v.
Sweeney, 252 S.W.2d 25 (Ky 1952), a case with somewhat curious
facts. Mrs. Sweeney apparently gambled $1,535.00 of family funds
in games of chance at the "veterans" club, causing her displeased
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husband to bring suit under a Kentucky anti-gaming statute that
allowed "the loser or his creditor" to recover treble damages
against gambling winners. Without extensive discussion, this Court
found the Chancellor correctly "swept aside the legal fiction of
separate corporate personality" to hold the three individual
incorporators of the Veterans Service Club liable for their
"unlawful acts." 252 S.W.2d at 27 . In so doing, the Court stated:
The incorporation was but a cloak or mask devised by the
incorporators to cover their illegal acts of gambling and to
shield them from the consequences of these acts. In such a
case the corporate form will be disregarded to the same
extent as if it were nonexistent and liability will be fixed
upon those who attempt to employ this type of
instrumentality as a protective measure for their unlawful
practices. It is a stern but just maxim of law that fraud vitiates
everything into which it enters.
Id. While Veterans Service Club referred to the pierced corporation
as an "instrumentality," the first extended discussion of veil-
piercing, including the leading "alter ego" and "instrumentality"
tests and the rationale for this equitable doctrine, came almost
thirty years later in what is still viewed as Kentucky's seminal and
leading case on the subject, White v. Winchester Land
Development Corp., 584 S.W.2d 56 (Ky. App. 1979).
B. White v. Winchester Land Development Co.
While the facts in White are not as colorful as those in Veterans
Service Club , they too are a bit different from those of a typical
piercing case. Mr. and Mrs. White signed a promissory note for a
personal loan with The Winchester Bank, a loan secured by shares
of Allied Stores stock owned by Mr. White's mother. Shortly after
their personal loan was paid off, the Whites incorporated The
White House, Inc., a card and gift shop which unfortunately failed
approximately two years later. The corporation also had borrowed
funds from The Winchester Bank, through two separate notes, so
after the corporate insolvency the bank filed suit, claiming
entitlement to the Allied Stores stock which had secured the
original personal loan. The bank maintained that The White House,
Inc. was a mere sham and the Whites should be held personally
liable despite having signed the second and third notes in their
corporate capacities as President and Secretary/Treasurer of the
corporation. 584 S.W.2d at 59.
Judge Boyce Martin, writing for the appellate panel, readily
distinguished the facts before the court from the fraudulent acts in
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Zanone Co. v. Standard Oil Co., 322 S.W.2d 710, 711 (Ky. 1959), a
case involving the transfer of assets from a debt-ridden partnership
to a new corporation for no consideration and, as one shareholder
frankly described it, "to be able to do business and not be entangled
with the past." While the Whites had engaged in no such fraudulent
conduct, Judge Martin noted that the protection of corporate s
limited liability could still be lost in "specific, unusual
circumstances." 584 S.W.2d at 61 (citing Zubik v. Zubik, 384 F.2d
267, 273 (3d Cir. 1967 )). The White Court relied upon a law
review article by Professor Rutheford Campbell that addressed
three basic approaches to veil-piercing, generally referred to as the
instrumentality theory, the alter ego theory and the equity
formulation. Rutheford Campbell, Limited Liability for Corporate
Shareholders: Myth or Matter-of-Fact , 63 Ky. L.J. 23, 33 (1975).
The Court examined each test min turn and we review them in
some detail because they remain common statements of veil-
piercing criteria. Judge Martin questioned whether the three
theories were "indeed... distinct," 584 S.W.2d at 61 , and, in most
ways, they are not.
The instrumentality theory requires the co-existence of three
elements: "(1) that the corporation was a mere instrumentality of
the shareholder; (2) that the shareholder exercised control over the
corporation in such a way as to defraud or to harm the plaintiff;
and (3) that a refusal to disregard the corporate entity would
subject the plaintiff to unjust loss." Id. While the Whites were
certainly the only shareholders there was no proof of misuse of the
corporation and, most importantly for the Court, there was no
evidence of fraud in the corporation's dealings with the bank and
the bank's loss was not unjust because the bank could have secured
itself by "requiring the Whites to sign those notes in their
individual and separate capacities." Id. Notably, the Court did not
address the "or to harm" language of the second element, which
obviously refers to something less than fraud.
The alter ego test was equally unavailing for the bank for
essentially the same reasons. This formulation involves two
elements: "(1) that the corporation is not only influenced by the
owners, but also that there is such unity of ownership and interest
that their separateness has ceased; and (2) that the facts are such
that an adherence to normal attributes, viz, treatment as a separate
entity, of separate corporate existence would sanction a fraud or
promote injustice." 584 S.W.2d at 61-62 . Once again the White
Court focused on the absence of fraudulent conduct without
addressing the non-fraud language, in this test the "promote
injustice" consideration. However, the facts also failed the alter ego
test because the Whites had observed "the strictures of proper
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corporate existence," going so far as to adopt a corporate resolution
that authorized borrowing from The Winchester Bank. Id. at 62 .
The final equity formulation reflected acknowledgment of those
factors which often appeared in a successful veil-piercing case,
factors that focus on "close-connectedness" as well as "unfair
dealings." Id. Citing William M. Fletcher, 1 Cyclopedia of the Law
of Private Corporations § 41 (1974), the White Court opined that
piercing should occur only in the presence of a combination of (1)
undercapitalization, (2) failure to observe corporate formalities, (3)
the corporation not paying or overpaying dividends, (4) siphoning
of corporate funds by a shareholder and (5) personal guarantees of
corporate debt by majority shareholders. Id. Finding absolutely no
evidence to support factors (2) through (5), the White Court
addressed the undercapitalization factor by noting that Kentucky
law does not require a minimum amount of paid-in capital and, in
any event, the bank "had knowledge of the financial status of the
corporation and could have protected itself." Id. at 63 . Because the
facts failed to satisfy any of the three tests for piercing the
corporate veil, the bank had no recourse under that doctrine,
although the case was remanded for further development of the
bank's claim that the corporate notes were a novation or renewal of
the Whites' original personal note.
C. Post-White in the Commonwealth and Beyond
Both before and since White, this Court has only focused on veil-
piercing in passing. E.g., Morgan v O'Neil 652 SW2d 83 (Ky 1983)
(declining to pierce where the plaintiff complained of questionable
acts by a sole shareholder but failed specifically to state a piercing
claim in the complaint); Natural Res and Envtl. Prot Cabinet v.
Williams, 768 SW2d 47 (Ky. 1989 ) (piercing the veil to hold a sole
shareholder of a mining corporation responsible for a mining
violation but relying on the individual liability language of the
penalty statute instead of the common. law doctrine): Lewis LP
Gas, Inc. v. Lambert, 113 SW3d 171, 176 (Ky. 2003) (disallowing
an alter ego theory to pierce the corporate veil in order to reach
corporate assets in a marital dissolution suit, noting that alter ego
requires use of the corporation "to invoke fraudulent protection
against personal liability"). Consequently, the trial courts and
federal courts applying Kentucky law have relied on White for
Kentucky's stance on veil-piercing.
In United States v. WRW Corp., 986 F.2d 138, 143 (6th Cir. 1993 ),
the Court pierced the corporate veil, focusing on the five factors in
the White equity formulation but most particularly the fact that
WRW was undercapitalized at the time of incorporation, $3000.00
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being "insufficient to pay normal expenses associated with the
operation of a coal mine." Additionally, WRW had not observed
corporate formalities, the individual shareholders had commingled
personal and corporate funds and some of WRW's debt was
guaranteed by the individual shareholders. With these three factors
present, the Sixth Circuit was unpersuaded that the absence of
evidence as to the other two factors, that the individual defendants
received dividends or siphoned corporate funds, precluded
piercing. More recently, in Sudamax Industria e Comercio de
Cigarros, LTDA v. Buttes & Ashes, Inc., 516 F. Supp. 2d 841, 847
(W.D. Ky, 2007 ), the federal district court declined to pierce the
veil of a limited liability company that the plaintiff insisted was
part of a "web" of organizations, each the alter ego of the other. As
to the separate entity existence factor, the LLC observed corporate
formalities, maintained its own bank accounts, filed corporate tax
returns and filed certain financial statements required by law.
There was no evidence of commingling of funds among the
entities, guarantees of the LLC debt by others or
undercapitalization. Interestingly, the district court employed the
two-part alter ego test from White and also construed the language
in the second factor, "would sanction a fraud or promote injustice,"
as requiring a showing of fraud. 516 F. Supp. 2d at 849 .
Beyond Kentucky, veil-piercing generally focuses on the same
instrumentality, alter ego and equities factors tests explored in
White , with the alter ego formulation appearing to be the most
common test, always employed in conjunction with consideration
of various equities factors. The Seventh Circuit Court of Appeals,
when applying Illinois law, uses the two-part alter ego test and
considers the following factors under the first prong of that test:
(1) inadequate capitalization; (2) failure to issue stock; (3)
failure to observe corporate formalities; (4) nonpayment of
dividends; (5) insolvency of the debtor corporation; (6)
nonfunctioning of the other officers or directors; (7) absence
of corporate records; (8) commingling of funds; (9) diversion
of assets from the corporation by or to a stockholder or other
person or entity to the detriment of creditors; (10) failure to
maintain arm's-length relationships among related entities;
and (11) whether, in fact, the corporation is a mere facade for
the operation of the dominant stockholders.
Judson Atkinson Candies, Inc. v. Latini-Hohberger Dhimantec.
529 F.3d 371, 379 (7th Cir. 2008) (citing Fontana v. TLD Builders,
Inc., 362 III. App. 3d 491, 840 N.E.2d 767 778, 298 III. Dec. 654
(Ill. App. Ct. 2005 )). This expanded list is more reflective of the
evolving considerations as to the so-called equities factors than the
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five simple factors in White. Perhaps the most straightforward
listing, employed in whole or part by various jurisdictions, is
derived from Fredrick J. Powell, Parent and Subsidiary
Corporations: Liability of a Parent Corporation for the
Obligations of its Subsidiaries (1931), a treatise discussed by
Professor Presser in Piercing the Corporate Veil, supra, at 41-42:
a) Does the parent own all or most of stock of the subsidiary?
b) Do the parent and subsidiary corporations have common
directors or officers?
c) Does the parent corporation finance the subsidiary?
d) Did the parent corporation subscribe to all of the capital
stock of the subsidiary or otherwise cause its incorporation?
e) Does the subsidiary have grossly inadequate capital?
f) Does the parent pay the salaries and other expenses or
losses of the subsidiary?
g) Does the subsidiary do no business except with the parent
or does the subsidiary have no assets except those conveyed
to it by the parent?
h) Is the subsidiary described by the parent (in papers or
statements) as a department or division of the parent or is the
business or financial responsibility of the subsidiary referred
to as the parent corporation's own?
i) Does the parent use the property of the subsidiary as its
own?
j) Do the directors or executives fail to act independently in
the interest of the subsidiary, and do they instead take orders
from the parent, and act in the parent's interest? k) Are the
formal legal requirements of the subsidiary not observed?
While some scholars are critical of the laundry list approach to
assessing corporate separateness, one referring to it as "piercing by
checklist," Blumberg, supra, § 11.03[A], courts and commentators
alike recognize that the checklist approach focuses on factors most
often bearing on the loss of separate entity existence. As Blumberg
notes, courts give the most emphasis to "grossly inadequate
capitalization, egregious failure to observe legal formalities and
disregard, of distinctions between parent and subsidiary, and a high
degree of control by the parent over the subsidiary's operations and
decisions, particularly those of a day-to-day nature." Id. We believe
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that these are the most critical factors and that Kentucky courts
should consider the aforementioned expanded lists instead of
focusing solely on the five factors identified more than thirty years
ago in White .
Seventh Circuit precedent is helpful in illustrating another way in
which White should be revised and updated. In the leading case of
Sea-Land Services, Inc. v. Pepper Source, 941 F.2d 519 (7th Cir.
1991 ), also applying Illinois law, the Court emphasized that either
sanctioning fraud or promoting injustice is sufficient to satisfy the
second prong of the alter ego test. However, the injustice must be
some wrong beyond the creditor's mere inability to collect from the
corporate debtor. Id. at 522-23. The Sea-Land Court's notable
examples of injustice include where "a party would be unjustly
enriched; [where] a parent corporation that caused a sub's liabilities
and its inability to pay for them would escape those liabilities; or
an intentional scheme to squirrel assets into a liability-free
corporation while heaping liabilities upon an asset-free corporation
would be successful." 941 F.2d at 524 .
Sea-Land is instructive because it typifies modern piercing
jurisprudence which almost uniformly dispenses with any
requirement of actual fraud. "A handful of jurisdictions, such as
New Mexico, still require actual fraud, and there are a few others
in which the courts still have not decided whether it is required, but
American jurisdictions today overwhelmingly accept that morally
culpable conduct short of actual fraud satisfies the second
element...." Blumberg, supra , § 11.01[C]. The alter ego test
language employed in White and by most jurisdictions expressly
refers to "promoting injustice" and, indeed, piercing should not be
limited to: instances where all the elements of a common law fraud
claim can be established. The examples identified in Sea-Land are
illustrative of schemes and circumstances that, while not
constituting fraud, merit piercing where there is also evidence that
the debtor corporation has lost its separate identity. There are other
scenarios which also qualify, as reflected in any survey of veil-
piercing cases. Thus, to the extent White can be read to require
evidence of actual fraud before an entity's veil is pierced, it is
overruled. We agree with the Seventh Circuit, however, that the
injustice must be something beyond the mere inability to collect a
debt from the corporation.
Finally, while the Kentucky General Assembly gave statutory
recognition to the veil-piercing doctrine in Kentucky Revised
Statute (KRS) 271B.6-220(2) , it remains an equitable doctrine to be
applied by the courts. Schultz v. GE Healthcare Fin, Servs, 2010-
SC-000183-DG, 360 S.W.3d 171, 2012 Ky. LEXIS 3 (February 23,
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2012 ). A Kentucky trial court may proceed under the traditional
alter ego formulation or the instrumentality theory because the tests
are essentially interchangeable. Each resolves to two dispositive
elements: 1) domination of the corporation resulting in a loss of
corporate separateness and (2) circumstances under which
continued recognition of the corporation would sanction fraud or
promote injustice. In assessing the first element, the courts should
look beyond the five factors enumerated in White to the more
expansive lists of factors discussed supra . As to the second
element, the trial court should state specifically the fraud or
injustice that would be sanctioned if the court declined to pierce
the corporate veil.”
87. The Court of Justice of the European Union in a recent decision
rendered in The Goldman Sachs Groups Inc. vs. European
36
Commission significantly observed as under:-
“32. It is also settled case-law that, in the particular case in which a
parent company holds, directly or indirectly, all or almost all of the
capital in a subsidiary which has committed an infringement of the
competition rules, the parent company is able to exercise decisive
influence over the conduct of the subsidiary and there is a
rebuttable presumption that the parent company does in fact
exercise such influence. In those circumstances, it is sufficient for
the Commission to prove that the entire capital, or virtually the
entire capital, of a subsidiary is held by its parent in order for it to
be presumed that the parent exercises decisive influence over the
commercial policy of that subsidiary. The Commission will then be
able to regard the parent company as jointly and severally liable for
the payment of the fine imposed on its subsidiary, unless the parent
company, which has the burden of rebutting that presumption,
adduces sufficient evidence to show that its subsidiary acts
independently on the market (judgment of 28 October 2020, Pirelli
& C. v Commission, C-611/18 P, not published, EU:C:2020:868,
paragraph 68 and the case-law cited).
33. Unless it is rebutted, such a presumption therefore implies that
the actual exercise of decisive influence by the parent company
over its subsidiary is considered to be established and entitles the
Commission to hold the parent company liable for the conduct of
the subsidiary without having to produce any additional evidence.
The implementation of the presumption of actual exercise of
36
Case C-595/18 P,
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decisive influence is thus not conditional upon the production of
additional indicia relating to the actual exercise of influence by the
parent company (judgment of 26 October 2017, Global Steel Wire
and Others v Commission , C-457/16 P and C-459/16 P to C-461/16
P, not published, EU:C:2017:819, paragraphs 85 and 86 and the
case-law cited).
34. It is true that it is common ground that, during the pre-IPO
period, the appellant did not hold all of Prysmian's capital, since
the GSCP V Funds' holding in Prysmian amounted, as is apparent
from paragraph 47 of the judgment under appeal, during that
period, and with the exception of the first 41 days, first, to
approximately 91% and then to approximately 84%. It is also
common ground that, in the decision at issue, the Commission did
not consider that that holding meant that the appellant had owned
almost all of Prysmian's capital.
35. It is apparent, however, from the case-law cited in paragraphs
31 to 33 above that it is not the mere holding of all or virtually all
the capital of the subsidiary in itself that gives rise to the
presumption of the actual exercise of decisive influence, but the
degree of control of the parent company over its subsidiary that
this holding implies. Consequently, the General Court was entitled,
without erring in law, to consider, in essence, in paragraph 50 of
the judgment under appeal, that a parent company which holds all
the voting rights associated with its subsidiary's shares is, in that
regard, in a similar situation to that of a company holding all or
virtually all the capital of the subsidiary, so that the parent
company is able to determine the subsidiary's economic and
commercial strategy. A parent company which holds all the voting
rights associated with its subsidiary's shares is able, like a parent
company holding all or virtually all the capital of its subsidiary, to
exercise decisive influence over the conduct of the subsidiary.”
88. As would be evident from the decisions rendered across
jurisdictions and noticed above, the doctrine of a separate legal
personality of a corporation and the situations where that veil could be
pierced or lifted is well embedded. While legal systems around the
world have evolved their own tests or grounds on the basis of which
that doctrine may be applied, it is manifest that the shield of a separate
legal personality is neither inviolable nor impenetrable. The Court is
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essentially called upon to ascertain and articulate the circumstances in
which that principle may be justifiably invoked in law. While the tests
of façade, sham, or where the corporate structure is set up to evade
legal obligations are well settled, the issue which arises is whether a
court would be justified in law to invoke the piercing principle absent
allegations of fraud, façade or evasion of taxes or any other
obligations.
89. On a review of the legal position as it prevails today across
various jurisdictions, it is manifest that the doctrine of lifting of the
corporate veil is no longer recognized to be applicable only in the
context of the facade and sham tests that have held the field for
centuries. The said principle may also in an appropriate case be liable
to be resorted to where equity and the ends of justice may sanction
such a recourse, where legal obligations are sought to be avoided as
also in a setting where public policy or public interest so demand and
require. A decree or judgment of a competent court must necessarily
be enforced. Courts of justice would be failing in their duty if a
decree were left to be a mere dead letter. If decrees and judgments of
courts were to be rendered inexecutable and courts were to simply be
forced to stand on the sideline, it would clearly shake the confidence
of the people in the legal system and its very efficacy. An obligation
which flows from a decree or an award must not only be duly
recognized but also enforced in accordance with law. Taking any
other view would render the entire adjudicatory process meaningless
and an exercise in futility.
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90. Prest and the other decisions rendered by courts in the United
Kingdom clearly evidence a hesitancy to jettison the Solomon
principle. While sticking to that line, the cases where the piercing
principle had been either alluded to or employed were sought to be
justified on the ground of the ultimate directions issued by courts
being otherwise justified on an independent, well recognised and
entrenched legal principle. Contrary to the position taken by courts in
the United Kingdom, our Supreme Court right from LIC and
Renusagar Power Co. understood the piercing principle as being
liable to be recognised to be one which must be left to evolve and to
be determined in the facts of a particular case. As was noticed above,
neither LIC nor Renusagar Power Co. were cases involving fraud or
sham. The Court also deems it apposite to notice the judgments of the
37
Supreme Court in Arcelor Mittal v. Satish Kumar Gupta and
38
State of Rajasthan v. Gotan Lime Stone Khanij Udyog (P) Ltd.,
which too dealt with lifting of the corporate veil in a context separated
from the fraud and façade grounds which have been consistently
noticed.
91. In Arcelor Mittal , the Supreme Court while construing Section
29 A of the Insolvency and Bankruptcy Code of India, 2016 on an
extensive review of the precedents rendered on the subject by our
courts as well as courts of other jurisdictions explained the legal
position as follows: -
“32. The opening lines of Section 29-A of the Amendment Act
refer to a de facto as opposed to a de jure position of the persons
37
(2019) 2 SCC 1
38
(2016) 4 SCC 469
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mentioned therein. This is a typical instance of a “see-through
provision”, so that one is able to arrive at persons who are actually
in “control”, whether jointly, or in concert, with other persons. A
wooden, literal, interpretation would obviously not permit a tearing
of the corporate veil when it comes to the “person” whose
eligibility is to be gone into. However, a purposeful and contextual
interpretation, such as is the felt necessity of interpretation of such
a provision as Section 29-A, alone governs. For example, it is well
settled that a shareholder is a separate legal entity from the
company in which he holds shares. This may be true generally
speaking, but when it comes to a corporate vehicle that is set up for
the purpose of submission of a resolution plan, it is not only
permissible but imperative for the competent authority to find out
as to who are the constituent elements that make up such a
company. In such cases, the principle laid down in Salomon v. A.
Salomon & Co. Ltd. [ Salomon v. A. Salomon & Co. Ltd. , 1897 AC
22 (HL)] will not apply. For it is important to discover in such
cases as to who are the real individuals or entities who are acting
jointly or in concert, and who have set up such a corporate vehicle
for the purpose of submission of a resolution plan.
33. The doctrine of piercing the corporate veil is as well settled
as the Salomon [ Salomon v. A. Salomon & Co. Ltd. , 1897 AC 22
(HL)] principle itself. In LIC v. Escorts Ltd. [ LIC v. Escorts Ltd. ,
(1986) 1 SCC 264], this Court held : (SCC pp. 334-36, para 90)
“ 90 . It was submitted that the thirteen Caparo companies
were thirteen companies in name only; they were but one and
that one was an individual, Mr Swraj Paul. One had only to
pierce the corporate veil to discover Mr Swraj Paul lurking
behind. It was submitted that thirteen applications were made
on behalf of thirteen companies in order to circumvent the
scheme which prescribed a ceiling of one per cent on behalf
of each non-resident of Indian nationality or origin, or each
company 60 per cent of whose shares were owned by non-
residents of Indian nationality/origin. Our attention was
drawn to the picturesque pronouncement of Lord Denning,
M.R. in Wallersteiner v. Moir [ Wallersteiner v. Moir , (1974)
1 WLR 991 : (1974) 3 All ER 217 (CA)] and the decisions of
this Court in T ELCO Ltd. v. State of Bihar [ T ELCO Ltd. v. State
of Bihar , (1964) 6 SCR 885 : AIR 1965 SC 40] , CIT v. Sri
Meenakshi Mills Ltd. [ CIT v. Sri Meenakshi Mills Ltd. ,
(1967) 1 SCR 934 : AIR 1967 SC 819]
and Workmen v. Associated Rubber Industry
Ltd. [ Workmen v. Associated Rubber Industry Ltd. , (1985) 4
SCC 114 : 1985 SCC (L&S) 957]. While it is firmly
established ever since Salomon v. A. Salomon & Co.
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Ltd. [ Salomon v. A. Salomon & Co. Ltd. , 1897 AC 22 (HL)]
was decided that a company has an independent and legal
personality distinct from the individuals who are its members,
it has since been held that the corporate veil may be lifted, the
corporate personality may be ignored and the individual
members recognised for who they are in certain exceptional
circumstances. Pennington in his Company Law (4th Edn.)
states:
„Four inroads have been made by the law on the
principle of the separate legal personality of
companies. By far the most extensive of these has
been made by legislation imposing taxation. The
government, naturally enough, does not willingly
suffer schemes for the avoidance of taxation which
depend for their success on the employment of the
principle of separate legal personality, and in fact
legislation has gone so far that in certain
circumstances taxation can be heavier if companies
are employed by the taxpayer in an attempt to
minimise his tax liability than if he uses other means
to give effect to his wishes. Taxation of companies is
a complex subject, and is outside the scope of this
book. The reader who wishes to pursue the subject is
referred to the many standard textbooks on
corporation tax, income tax, capital gains tax and
capital transfer tax.
The other inroads on the principle of separate
corporate personality have been made by two sections
of the Companies Act, 1948, by judicial disregard of
the principle where the protection of public interest is
of paramount importance, or where the company has
been formed to evade obligations imposed by the law ,
and by the courts implying in certain cases that a
company is an agent or trustee for its members.‟
In Palmer's Company Law (23rd Edn.), the present position in
England is stated and the occasions when the corporate veil may be
lifted have been enumerated and classified into fourteen categories.
Similarly in Gower's Company Law (4th Edn.), a chapter is devoted
to “lifting the veil” and the various occasions when that may be
ELCO ELCO
done are discussed. In T Ltd. [ T Ltd. v. State of Bihar ,
(1964) 6 SCR 885 : AIR 1965 SC 40] the company wanted the
corporate veil to be lifted so as to sustain the maintainability of the
petition, filed by the company under Article 32 of the Constitution,
by treating it as one filed by the shareholders of the company. The
request of the company was turned down on the ground that it was
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not possible to treat the company as a citizen for the purposes of
Article 19. In CIT v. Sri Meenakshi Mills Ltd. [ CIT v. Sri
Meenakshi Mills Ltd. , (1967) 1 SCR 934 : AIR 1967 SC 819] the
corporate veil was lifted and evasion of income tax prevented by
paying regard to the economic realities behind the legal facade.
In Workmen v. Associated Rubber Industry
Ltd. [ Workmen v. Associated Rubber Industry Ltd. , (1985) 4 SCC
114 : 1985 SCC (L&S) 957] resort was had to the principle of
lifting the veil to prevent devices to avoid welfare legislation. It
was emphasised that regard must be had to substance and not the
form of a transaction. Generally and broadly speaking, we may say
that the corporate veil may be lifted where a statute itself
contemplates lifting the veil, or fraud or improper conduct is
intended to be prevented, or a taxing statute or a beneficent statute
is sought to be evaded or where associated companies are
inextricably connected as to be, in reality, part of one concern . It is
neither necessary nor desirable to enumerate the classes of cases
where lifting the veil is permissible, since that must necessarily
depend on the relevant statutory or other provisions, the object
sought to be achieved, the impugned conduct, the involvement of
the element of the public interest, the effect on parties who may be
affected, etc.”
(emphasis supplied)
34. This statement of the law was followed in Union of
India v. ABN Amro Bank [ Union of India v. ABN Amro Bank ,
(2013) 16 SCC 490], at paras 43 and 44 as follows : (SCC pp. 519-
20)
“ 43 . We are of the view that in a given situation the
authorities functioning under FERA find that there are
attempts to overreach the provision of Section 29(1)( a ), the
authority can always lift the veil and examine whether the
parties have entered into any fraudulent, sham, circuitous
device so as to overcome statutory provisions like Section
29(1)( a ). It is trite law that any approval/permission
obtained by non-disclosure of all necessary information or
making a false representation tantamount to
approval/permission obtained by practising fraud and hence
a nullity. Reference may be made to the judgment of this
Court in Union of India v. Ramesh Gandhi [ Union of
India v. Ramesh Gandhi , (2012) 1 SCC 476 : (2012) 1 SCC
(Civ) 295 : (2012) 1 SCC (Cri) 467 : (2012) 2 SCC (L&S)
508].
44 . Even in Escorts case [ LIC v. Escorts Ltd. , (1986) 1
SCC 264], this Court has taken the view that it is neither
necessary nor desirable to enumerate the classes of cases
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where lifting the veil is permissible, since that must
necessarily depend on the relevant statutory or other
provisions, the object sought to be achieved, the impugned
conduct, the involvement of the element of the public
interest, the effect on parties who may be affected, etc.
In Escorts case [ LIC v. Escorts Ltd. , (1986) 1 SCC 264],
this Court held as follows : (SCC pp. 335-36, para 90)
„ 90 . … Generally and broadly speaking, we may
say that the corporate veil may be lifted where a
statute itself contemplates lifting the veil, or fraud or
improper conduct is intended to be prevented, or a
taxing statute or a beneficent statute is sought to be
evaded or where associated companies are
inextricably connected as to be, in reality, part of one
concern.‟”
35. Similarly in Balwant Rai Saluja v. Air India Ltd. [ Balwant
Rai Saluja v. Air India Ltd. , (2014) 9 SCC 407 : (2014) 2 SCC
(L&S) 804], this Court in following Escorts Ltd. [ LIC v. Escorts
Ltd. , (1986) 1 SCC 264], held : ( Balwant Rai case [ Balwant Rai
Saluja v. Air India Ltd. , (2014) 9 SCC 407 : (2014) 2 SCC (L&S)
804], SCC pp. 439-41, paras 70-73)
“ 70 . The doctrine of “piercing the corporate veil” stands
as an exception to the principle that a company is a legal
entity separate and distinct from its shareholders with its own
legal rights and obligations. It seeks to disregard the separate
personality of the company and attribute the acts of the
company to those who are allegedly in direct control of its
operation. The starting point of this doctrine was discussed in
the celebrated case of Salomon v. A. Salomon & Co.
Ltd. [ Salomon v. A. Salomon & Co. Ltd. , 1897 AC 22 (HL)]
Lord Halsbury, LC, negating the applicability of this doctrine
to the facts of the case, stated that : (AC pp. 30 & 31)
„[a company] must be treated like any other
independent person with its rights and liabilities
[legally] appropriate to itself … whatever may have
been the ideas or schemes of those who brought it into
existence.‟
Most of the cases subsequent to Salomon case [ Salomon v. A.
Salomon & Co. Ltd. , 1897 AC 22 (HL)], attributed the doctrine of
piercing the veil to the fact that the company was a “sham” or a
“façade”. However, there was yet to be any clarity on applicability
of the said doctrine.
71 . In recent times, the law has been crystallised around the
six principles formulated by Munby, J. in Ben Hashem v. Ali
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Shayif [ Ben Hashem v. Ali Shayif , 2008 EWHC 2380 (Fam) :
(2009) 1 FLR 115]. The six principles, as found at paras 159-
64 of the case are as follows:-
( i ) Ownership and control of a company were not enough
to justify piercing the corporate veil;
( ii ) The court cannot pierce the corporate veil, even in
the absence of third-party interests in the company,
merely because it is thought to be necessary in the
interests of justice;
( iii ) The corporate veil can be pierced only if there is
some impropriety;
( iv ) The impropriety in question must be linked to the
use of the company structure to avoid or conceal
liability;
( v ) To justify piercing the corporate veil, there must be
both control of the company by the wrongdoer(s) and
impropriety, that is use or misuse of the company by
them as a device or facade to conceal their wrongdoing;
and
( vi ) The company may be a “façade” even though it was
not originally incorporated with any deceptive intent,
provided that it is being used for the purpose of
deception at the time of the relevant transactions. The
court would, however, pierce the corporate veil only so
far as it was necessary in order to provide a remedy for
the particular wrong which those controlling the
company had done.
72 . The principles laid down by Ben Hashem case [ Ben
Hashem v. Ali Shayif , 2008 EWHC 2380 (Fam) : (2009) 1
FLR 115] have been reiterated by the UK Supreme Court by
Lord Neuberger in Prest v. Petrodel Resources
Ltd. [ Prest v. Petrodel Resources Ltd. , (2013) 2 AC 415 :
(2013) 3 WLR 1 : 2013 UKSC 34, para 64]. Lord Sumption,
in Prest case [ Prest v. Petrodel Resources Ltd. , (2013) 2 AC
415 : (2013) 3 WLR 1 : 2013 UKSC 34, para 64] , finally
observed as follows : (AC p. 488, para 35)
„ 35 . I conclude that there is a limited principle of
English law which applies when a person is under an
existing legal obligation or liability or subject to an
existing legal restriction which he deliberately evades
or whose enforcement he deliberately frustrates by
interposing a company under his control. The court
may then pierce the corporate veil for the purpose, and
only for the purpose, of depriving the company or its
controller of the advantage that they would otherwise
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have obtained by the company's separate legal
personality. The principle is properly described as a
limited one, because in almost every case where the test
is satisfied, the facts will in practice disclose a legal
relationship between the company and its controller
which will make it unnecessary to pierce the corporate
veil.‟
73 . The position of law regarding this principle in India
has been enumerated in various decisions. A Constitution
Bench of this Court in LIC v. Escorts Ltd. [ LIC v. Escorts
Ltd. , (1986) 1 SCC 264], while discussing the doctrine of
corporate veil, held that : (SCC pp. 335-36, para 90)
„ 90 . … Generally and broadly speaking, we may
say that the corporate veil may be lifted where a statute
itself contemplates lifting the veil, or fraud or improper
conduct is intended to be prevented, or a taxing statute
or a beneficent statute is sought to be evaded or where
associated companies are inextricably connected as to
be, in reality, part of one concern. It is neither
necessary nor desirable to enumerate the classes of
cases where lifting the veil is permissible, since that
must necessarily depend on the relevant statutory or
other provisions, the object sought to be achieved, the
impugned conduct, the involvement of the element of
the public interest, the effect on parties who may be
affected, etc.‟”
36. Similarly in DDA v. Skipper Construction Company (P)
Ltd. [ DDA v. Skipper Construction Company (P) Ltd. , (1996) 4
SCC 622], this Court held : (SCC pp. 637-39, paras 24-28)
“ 24 . In Salomon v. A. Salomon & Co. Ltd. [ Salomon v. A.
Salomon & Co. Ltd. , 1897 AC 22 (HL)] the House of Lords
had observed : (AC p. 51)
„[the] company is at law a different person altogether
from the subscribers …; and, though it may be that
after incorporation the business is precisely the same as
it was before, the same persons are managers, and the
same hands receive the profits, the company is not in
law the agent of the subscribers or trustee for them. Nor
are the subscribers as members liable, in any shape or
form, except to the extent and in the manner provided
by that Act.‟
Since then, however, the courts have come to recognise
several exceptions to the said rule. While it is not necessary
to refer to all of them, the one relevant to us is “when the
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corporate personality is being blatantly used as a cloak for
fraud or improper conduct”. [Gower : Modern Company
Law — 4th Edn. (1979) at p. 137.] Pennington (Company
Law — 5th Edn. 1985 at p. 53) also states that „where the
protection of public interests is of paramount importance or
where the company has been formed to evade obligations
imposed by the law‟, the court will disregard the corporate
veil . A Professor of Law, S. Ottolenghi in his article “From
peeping behind the Corporate Veil, to ignoring it completely”
[(1990) 53 Modern Law Review 338] says
„the concept of “piercing the veil” in the United
States is much more developed than in the UK. The
motto, which was laid down United
States v. Milwaukee Refrigerator Transit
Company [ United States v. Milwaukee Refrigerator
Transit Company , (1905) 142 Fed 247] by Sanborn, J.
and cited since then as the law, is that “when the notion
of legal entity is used to defeat public convenience,
justify wrong, protect fraud, or defend crime, the law
will regard the corporation as an association of
persons”. The same can be seen in various European
jurisdictions.‟
Indeed, as far back as 1912, another American Professor L.
Maurice Wormser examined the American decisions on the
subject in a brilliantly written article “Piercing the veil of
corporate entity” [(1912) 12 Columbia Law Review 496] and
summarised their central holding in the following words:
„The various classes of cases where the concept of
corporate entity should be ignored and the veil drawn
aside have now been briefly reviewed. What general
rule, if any, can be laid down? The nearest
approximation to generalisation which the present state
of the authorities would warrant is this : When the
conception of corporate entity is employed to defraud
creditors, to evade an existing obligation, to circumvent
a statute, to achieve or perpetuate monopoly, or to
protect knavery or crime, the courts will draw aside the
web of entity, will regard the corporate company as an
association of live, up-and-doing, men and women
shareholders, and will do justice between real persons.‟
25 . In Palmer's Company Law , this topic is discussed in
Part II of Vol. I. Several situations where the court will
disregard the corporate veil are set out. It would be sufficient
for our purposes to quote the eighth exception. It runs:
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„The courts have further shown themselves willing
to “lifting the veil” where the device of incorporation is
used for some illegal or improper purpose…. Where a
vendor of land sought to avoid the 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.‟
Similar views have been expressed by all the commentators
on the Company Law which we do not think necessary to
refer to.
26 . The law as stated by Palmer and Gower has been
approved by this Court in T ELCO Ltd. v. State of
ELCO
Bihar [ T Ltd. v. State of Bihar , (1964) 6 SCR 885 : AIR
1965 SC 40]. The following passage from the decision is
apposite : (AIR p. 47, para 27)
„ 27 . … Gower has classified seven categories
of cases where the veil of a corporate body has
been lifted. But, it would not be possible to evolve
a rational, consistent and inflexible principle which
can be invoked in determining the question as to
whether the veil of the corporation should be lifted
or not. Broadly stated, where fraud is intended to
be prevented, or trading with an enemy is sought to
be defeated, the veil of a corporation is lifted by
judicial decisions and the shareholders are held to
be the persons who actually work for the
corporation.‟
27 . In D.H.N. Food Distributors Ltd. v. Tower Hamlets
London Borough Council [ D.H.N. Food Distributors
Ltd. v. Tower Hamlets London Borough Council , (1976) 1
WLR 852 (2) : (1976) 3 All ER 462 (CA)] the Court of
Appeal dealt with a group of companies. Lord Denning
quoted with approval the statement in Gower's Company
Law that
„there is evidence of a general tendency to ignore
the separate legal entities of various companies
within a group, and to look instead at the economic
entity of the whole group‟.
The learned Master of Rolls observed that „this group is
virtually the same as a partnership in which all the three
companies are partners‟. He called it a case of “three in one”
— and, alternatively, as “one in three”.
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28 . The concept of corporate entity was evolved to
encourage and promote trade and commerce but not to
commit illegalities or to defraud people. Where, therefore, the
corporate character is employed for the purpose of
committing illegality or for defrauding others, the court
would ignore the corporate character and will look at the
reality behind the corporate veil so as to enable it to pass
appropriate orders to do justice between the parties
concerned. The fact that Tejwant Singh and members of his
family have created several corporate bodies does not prevent
this Court from treating all of them as one entity belonging to
and controlled by Tejwant Singh and family if it is found that
these corporate bodies are merely cloaks behind which lurks
Tejwant Singh and/or members of his family and [ Ed. : The
word “and” has been emphasised in original.] that the device
of incorporation was really a ploy adopted for committing
illegalities and/or to defraud people.”
(emphasis supplied)
37. It is thus clear that, where a statute itself lifts the corporate
veil, or where protection of public interest is of paramount
importance, or where a company has been formed to evade
obligations imposed by the law, the court will disregard the
corporate veil. Further, this principle is applied even to group
companies, so that one is able to look at the economic entity of the
group as a whole.”
92. In Gotan Lime Stone , the veil of corporate personality came to
be pierced in relation to the transfer of a mining lease by way of
acquisition of the shares of the company which was the lessee. While
holding that such a course would be violative of the statutory
restrictions which applied, the Supreme Court observed as under:-
“24. The principle of lifting the corporate veil as an exception
to the distinct corporate personality of a company or its members is
well recognised not only to unravel tax evasion [ CIT v. Sri
Meenakshi Mills Ltd. , AIR 1967 SC 819 : (1967) 1 SCR 934] but
also where protection of public interest is of paramount importance
and the corporate entity is an attempt to evade legal obligations and
lifting of veil is necessary to prevent a device to avoid welfare
legislation [ Workmen v. Associated Rubber Industry Ltd. , (1985) 4
SCC 114 : 1985 SCC (L&S) 957] . It is neither necessary nor
desirable to enumerate the classes of cases where lifting the veil is
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permissible, since that must necessarily depend on the relevant
statutory or other provisions, the object sought to be achieved, the
impugned conduct, the involvement of the element of the public
interest, the effect on parties who may be affected, etc.
[ LIC v. Escorts Ltd. , (1986) 1 SCC 264 which refers to Palmer's
Company Law (23rd Edn.) and Pennington Company Law (4th
Edn.) followed in New Horizons Ltd. v. Union of India , (1995) 1
SCC 478].
25. In State of U.P. v. Renusagar Power Co. [ State of
U.P. v. Renusagar Power Co. , (1988) 4 SCC 59] this Court
observed : (SCC pp. 94-95, paras 66-68)
“ 66 . It is high time to reiterate that in the expanding
horizon of modern jurisprudence, lifting of corporate veil
is permissible. Its frontiers are unlimited. It must,
however, 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 of corporate veil is
expanding. …
67 . In the aforesaid view of the matter we are of the
opinion that the corporate veil should be lifted and
Hindalco and Renusagar be treated as one concern and
Renusagar's power plant must be treated as the own source
of generation of Hindalco and should be liable to duty on
that basis. In the premises the consumption of such energy
by Hindalco will fall under Section 3(1)( c ) of the Act. The
learned Additional Advocate General for the State relied
on several decisions, some of which have been noted.
68 . The veil on corporate personality even though not
lifted sometimes, is becoming more and more transparent
in modern company jurisprudence. The ghost of Salomon
case [ Salomon v. Salomon and Co. Ltd. , 1897 AC 22 :
(1895-99) All ER Rep 33 (HL)] still visits frequently the
hounds of Company Law but the veil has been pierced in
many cases. Some of these have been noted by Justice
P.B. Mukharji in New Jurisprudence (Tagore Law
Lectures, p. 183).”
26. In DDA v. Skipper Construction Co. (P)
Ltd. [ DDA v. Skipper Construction Co. (P) Ltd. , (1996) 4 SCC
622], it was observed : (SCC pp. 637-38, paras 24-25)
“ Lifting the corporate veil
24 . In Salomon v. Salomon & Co.
Ltd. [ Salomon v. Salomon and Co. Ltd. , 1897 AC 22 :
(1895-99) All ER Rep 33 (HL)] , the House of Lords had
observed,
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„the company is at law a different person altogether
from the subscriber … and, though it may be that
after incorporation the business is precisely the same
as it was before, the same persons are managers and
the same hands received the profits, the company is
not in law the agent of the subscribers or trustee for
them. Nor are the subscribers as members liable, in
any shape or form, except to the extent and in the
manner provided by that Act‟.
Since then, however, the courts have come to recognise
several exceptions to the said rule. While it is not
necessary to refer to all of them, the one relevant to us is
„ when the corporate personality is being blatantly used as
a cloak for fraud or improper conduct ‟. [Gower : Modern
Company Law —4th Edn. (1979) at p. 137.] Pennington
( Company Law —5th Edn. 1985 at p. 53) also states that
„ where the protection of public interests is of paramount
importance or where the company has been formed to
evade obligations imposed by the law ‟, the court will
disregard the corporate veil. A Professor of Law, S.
Ottolenghi in his article „From Peeping Behind the
Corporate Veil, to Ignoring it Completely‟ [(1990) 53
Modern Law Review 338] says
„the concept of “piercing the veil” in the United
States is much more developed than in the UK. The
motto, which was laid down by Sanborn, J. and cited
since then as the law, is that “when the notion of
legal entity is used to defeat public convenience,
justify wrong, protect fraud, or defend crime, the law
will regard the corporation as an association of
persons”. The same can be seen in various European
jurisdictions'.
Indeed, as far back as in 1912, another American
Professor L. Maurice Wormser examined the American
decisions on the subject in a brilliantly written article
„Piercing the Veil of Corporate Entity‟ [(1912) 12
Columbia Law Review 496] and summarised their central
holding in the following words:
„The various classes of cases where the concept
of corporate entity should be ignored and the veil
drawn aside have now been briefly reviewed. What
general rule, if any, can be laid down? The nearest
approximation to generalisation which the present
state of the authorities would warrant is this : When
the conception of corporate entity is employed to
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defraud creditors, to evade an existing obligation, to
circumvent a statute, to achieve or perpetuate
monopoly , or to protect knavery or crime, the courts
will draw aside the web of entity, will regard the
corporate company as an association of live, up-and-
doing, men and women shareholders, and will do
justice between real persons.‟
25 . In Palmer's Company Law , this topic is discussed
in Part II of Vol. I. Several situations where the court will
disregard the corporate veil are set out. It would be
sufficient for our purposes to quote the eighth exception. It
runs:
„The courts have further shown themselves
willing to “lifting the veil” where the device of
incorporation is used for some illegal or improper
purpose .… Where a vendor of land sought to avoid
the 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.‟
Similar views have been expressed by all the
commentators on the Company Law which we do not
think it necessary to refer.”
(emphasis supplied)
27. It is thus clear that the doctrine of lifting the veil can be
invoked if the public interest so requires or if there is allegation of
violation of law by using the device of a corporate entity. In the
present case, the corporate entity has been used to conceal the real
transaction of transfer of mining lease to a third party for
consideration without statutory consent by terming it as two
separate transactions—the first of transforming a partnership into a
company and the second of sale of entire shareholding to another
company. The real transaction is sale of mining lease which is not
legally permitted. Thus, the doctrine of lifting the veil has to be
applied to give effect to law which is sought to be circumvented.”
93. Both Arcelor Mittal as well as Gotan Lime Stone assume
significance in light of the piercing principle having been employed
on grounds of public interest or policy, to strike at attempts to
circumvent the law as well as in the context of the imperatives of
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enforcement of legal obligations. This flexibility of approach also
seems to have been adopted by courts in the EU and the United States.
This is evident from the conclusions recorded in Dill where the
separate personality facet of a corporate entity was found to promote
injustice or lead to inequitable circumstances. Wm. Passalacqua had
traced the origins of the doctrine in the principles of equity and held
that the veil of corporate personality could be validly pierced where
public policy concerns so warranted. The said decision had pertinently
held that courts of equity would be well advised to reach at the
substance rather than being blinded by mere corporate form. In Inter-
Tel Techs , the instrumentality theory identified three crucial elements
justifying the veil being pierced- a corporation which was a mere
instrumentality of the shareholder, complete control exercised by that
shareholder to defraud the creditor and last but surely not the least,
where a refusal to disregard the corporate structure would subject the
plaintiff to unjust loss. The approach as struck in the aforesaid cases
clearly commends acceptance and further consideration for reasons
which follow.
94. As modern commerce and the regulatory regime in respect
thereof has evolved over the decades, courts have leaned towards
jettisoning a rigidity of approach or being tied down by principles
which may have lost relevancy. Law in any case must grow and
evolve bearing in mind the felt societal needs of the time and at the
same time taking into consideration technological and social changes.
It must keep abreast with the march of civilization itself. Commerce
today straddles borders and boundaries of regions and countries. That
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has indubitably thrown up its own share of original and novel
questions. These transformational and normative changes warrant this
Court to observe that the evolution of the laws cannot be tied down to
conventional creeds. The web of complex corporate structures and
which many a time spread across jurisdictions commands the courts to
develop and adapt. On a more foundational ground, this Court deems
it appropriate to recall the famous words of Cardozo and Hand both of
whom had commended for acceptance the basic principle that a
corporate structure should not frustrate the enforcement of an
obligation or leave a party remediless. Courts should desist from
becoming a mere mute spectator.
95. The decisions of our Supreme Court noticed above had
prophetically observed that the doctrine of lifting of the corporate veil
must be left to develop and evolve. Those decisions had in any case,
and in the considered opinion of this Court, deliberately and
consciously refrained from exhaustively chronicling or enumerating
the myriad circumstances in which that precept could be applied.
None of those decisions are liable to be read as recognizing fraud,
façade or sham as being the solitary tests for application of the lifting
doctrine. The power of the Court to peep behind the veil thus must be
recognised and held to be justifiably invoked where questions of
public policy, public interest or enforcement of settled legal
obligations arise. The aforesaid three factors must be recognised as
being the cornerstones of our judicial system itself. The precedents
noticed above had resorted to the lifting of the veil doctrine where to
overcome injustice and inequitable circumstances or results.
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96. Judgments and decrees handed down by a competent court
represent and symbolize declarations which bind parties to the lis . No
party should be permitted to wriggle out from the obligations which
flow therefrom. Taking any other view would result in a systemic
breakdown of the adjudicatory mechanism that has evolved over
centuries. It is in such situations that the issues of public policy and
public interest assume significance. A corporate veil in any case
should not come in the way of execution of a binding and well settled
legal obligation.
97. It would be relevant to note that when the corporate veil is
pierced in situations like the present, the action is not really one which
is aimed at the shareholder as ordinarily understood in law. The
shareholder is identified by the court principally since it represents the
body and the soul of the corporate entity itself. It is the absolute
control exercised by the shareholder over that corporate body which
would convince and justify a court to proceed further. The Court also
bears in mind the principle of “directing mind” as accepted by courts
in the United Kingdom. The House of Lords in Tesco Supermarkets
39
v. Nattrass alluded to this aspect as would be evident from the
following passages:-
“Due diligence is in law the converse of negligence and
negligence connotes a reprehensible state of mind-a lack of care for
the consequences of his physical acts on the part of the person
doing them. To establish a defence under s 24 (I) (b) of the Act, a
principal need only show that he personally acted without
negligence. Accordingly, where the principal who relies on this
defence is a corporation a question to be answered is: what natural
person or persons are to be treated as being the corporation itself,
39
(1971) 2 ALL ER 127
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and not merely its agents, for the purpose of taking precautions and
exercising diligence?
My Lords, a corporation incorporated under the Companies
Act 1948 owes its corporate personality and its powers to its
constitution, the memorandum and articles of association. The
obvious and the only place to look, to discover by what natural
persons its powers are exercisable, is in its constitution. The articles
of association, if they follow Table A, provide that the business of
the company shall be managed by the directors and that they may
'exercise all such powers of the company' as are not required by the
Act to be exercised in general meeting, Table A also vests in the
directors the right to entrust and confer on a managing director any
of the powers of the company which are exercisable by them. So it
may also be necessary to ascertain whether the directors have taken
any action under this provision or any other similar provision
providing for the co-ordinate exercise of the powers of the
company by executive directors or by committees of directors and
other persons, such as are frequently included in the articles of
association of companies in which the regulations contained in
Table A are modified or excluded in whole or in part.
In my view, therefore, the question: what natural persons
are to be treated in law as being the company for the purpose of
acts done in the course of its business, including the taking of
precautions and the exercise of due diligence to avoid the
commission of a criminal offence, is to be found by identifying
those natural persons who by the memorandum and articles of
association or as a result of action taken by the directors, or by the
company in general meeting pursuant to the articles, are entrusted
with the exercise of the powers of the company. This test is in
conformity with the classic statement of Viscount Haldane LC in
Lennard's Carrying Co Ltd v Asiatic Petroleum Co Ltd . The
relevant statute in that case, although not a criminal statute, was in
pari materia, for it provided for a defence to a civil liability which
excluded the concept, the vicarious liability, of a principal for the
physical acts and state of mind of his agent.
There has been in recent years a tendency to extract from
Denning LJ's judgment in H L Bolton (Engineering) Co Ltd v TJ
Graham & Sons Ltd. his vivid metaphor about the 'brains and
nerve centre‟ of a company as contrasted with its hands, and to
treat this dichotomy, and not the articles of association, as laying
down the test of whether or not a particular person is to be regarded
in law as being the company itself when performing duties which a
statute imposes on the company. In the case in which this metaphor
was first used Denning LJ was dealing with acts and intentions of
directors of the company in whom the powers of the company were
vested under its articles of association. The decision in that case is
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not authority for extending the class of persons whose acts are to be
regarded in law as the personal acts of the company itself, beyond
those who by, or by action taken under, its articles of association
are entitled to exercise the powers of the company. Insofar as there
are dicta to the contrary in The Lady Gwendolen they were not
necessary to the decision and, in my view, they were wrong.
But the only relevance of this to the appellants' defence
under s 24 (I) of the Trade Descriptions Act 1968, was, as the
justices rightly appreciated, whether the act or default of Mr
Clement was that of another person' than the appellants themselves
within the meaning of s 24 (I) (a). The fact that the principal in the
business transaction in the course of which an offence under s 11
(2) was committed was a corporation and not a natural person
cannot affect the principal's duty to take all reasonable precautions
and to exercise all due diligence under s 24 (I) (b). The articles of
association of the appellants were not produced in evidence.
Strictly speaking it may be that they should have been. But it is
sufficiently evident from the findings of the justices as to the
position held by Mr Clement in the appellants' organisation that it
was too lowly for him to have had confided in him by the board of
directors the co-ordinate exercise of any of the powers of the
company itself.
My Lords, there may be criminal statutes which on their
true construction ascribe to a corporation criminal responsibility for
the acts of servants and agents who would be excluded by the test
that I have stated to be appropriate in determining whether a
corporation has itself committed a criminal offence. The Trade
Descriptions Act 1968, however, so far from containing anything
which compels one to reject that test, recognises, by s 20, the
distinction between 'any director, manager, secretary or other
similar officer of a body corporate' and other persons who are
merely its servants or agents. Section 20 (I) provides as follows:
"Where an offence under this Act which has been committed
by a body corporate is proved to have been committed with
the consent and connivance of, or to be attributable to any
neglect on the part of, any director, manager, secretary or
other similar officer of the body corporate, or any person who
was purporting to act in any such capacity, he as well as the
body corporate shall be guilty of that offence and shall be
liable to be proceeded against and punished accordingly."
The natural persons described in this subsection correspond
with those who under the memorandum and articles of association
of a company exercise the powers of the company itself. From this
it follows that if any of them is guilty of neglect in the exercise of
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those powers such neglect is that of the company itself. That it
cannot be relied on as 'the act or default of another person', so as to
entitle the company to a defence under s 24 (I), is implicit in the
provision in s 20 (I) that a person in the described category shall be
guilty of an offence 'as well as the body corporate‟. Without s 20 it
would have been open to doubt whether persons whose acts were in
law the acts of the company itself would have been guilty in their
personal capacity also of the offence committed by the company.”
98. In Merchandise Transport Ltd. v. British Transport
40
Commission and Ors. , which again was not a fraud or a sham case,
the Queens Bench accepted that where it is imperative to identify the
persons who control a corporate body, courts could go behind the
mere status of the company and identify those who actually direct and
control its activities. The following passages are apt for the situation
which arises for consideration in the present case:-
“Furthermore, the question arises, whether in the circumstances
Harris Lebus ought to be treated as no more than genuine
customers of the applicants, “persons requiring facilities for
transport” who are given priority in the all-important provisions of
s. 174 (4) of the Road Traffic Act, 1960. Ought they not to be
treated rather as persons “providing facilities for transport” who are
relegated to secondary consideration under the provisions of that
subsection? Counsel for the applicants relied strongly on the
technical (and irrefutable) legal distinction between a company
formed under the Companies Acts and the persons who hold its
shares, as shown by Salomon v. Salomon & Co. (18), an income tax
case, in which sphere of the law technicality is no doubt of the
essence. But Daimler Co., Ltd. v. Continental Tyre& Rubber Co.
(Gt. Britain), Ltd. (19) (a trading with the enemy case) and Unit
Construction Co., Ltd. v. A Bullock (20) (an income tax case on the
residence of a company), and othercases, show that where the
character of a company, or the nature of the persons who control it,
is a relevant feature the court will go behind the mere status of the
company as a legal entity, and will consider who are the persons as
shareholders or even as agents who direct and control the activities
of a company which is incapable of doing anything without human
assistance. This is plainly whatthe authority had in mind when he
40
[1961] 3 ALL E.R. 516
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explained his doubts about precedents which might be created if a
licence were to be granted in the circumstances of the present case.
It appears to me that if a manufacturer, who holds a C licence for
vehicles for the carriage of his goods, has only to form a subsidiary
company in order to secure an A licence for the latter company to
carry the holding company's goods and enter into competition with
public hauliers, the whole scheme of the Act might thus be
evaded.”
99. Undoubtedly, both the Union Ministry and GNCTD are the
principal shareholders of the DMRC. The DMRC must necessarily be
recognised as being a mere alter ego of those two shareholders. The
two sovereign entities exercise control over the DMRC by virtue of
the composition of its Board. It is their equity and debt contributions
which enables the DMRC to carry out its functions and discharge its
statutory obligations. Both by virtue of the capital invested in the
corporation as well as the control vested and exercised by them over
its affairs, the Union Ministry and the GNCTD must be recognised in
law as being in absolute control and the directing mind. They cannot
hide behind the veil of corporate personality especially when it comes
to the discharge of binding obligations owed by the DMRC. In any
case public policy demands that the veil be lifted and they be
commanded to take appropriate steps to enable the DMRC to meet the
obligations flowing from the award.
100. In the facts of the present case, the rendering of the Award and
its executability against DMRC cannot possibly be questioned. The
provisions of the Act and its constitution clearly reveal and point to it
being controlled entirely by its principal shareholders, GNCTD and
the Union Ministry. The two shareholders are not mere individuals
having a business interest in a corporate venture but sovereign
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governments in their own right. Governments cannot shirk from their
liability to abide by binding judgments, decrees and awards. If such a
situation were permitted to hold, the very structure of the adjudicatory
and judicial system would falter and crumble. Neither the GNCTD
nor the Union Ministry disputes the liabilities that flow from the
Award. Apart from the pendency of a curative petition that Award
has for all practical purposes attained finality. In any case, the orders
that have been passed on the present execution petition operate and
bind both the GNCTD as well as the Union Ministry. The
circumstances of the present case thus clearly mandates and warrants
the corporate veil being lifted and torn apart and for the Court
recognising the GNCTD as well as the Union Ministry being in
complete and total control of the affairs of the DMRC.
101. At this stage, the Court proposes to frame directions which
stand set out hereinafter. In case those measures are found to be
insufficient or falling short of the obligation of DMRC flowing from
the Award, the Court reserves the right to frame further appropriate
measures against both the Union as well as the GNCTD for the
purposes of ensuring that the liabilities flowing from the Award are
duly discharged.
102. Before closing, it would appear appropriate to deal with the
submission of Mr. Vashisht based on the provisions of the Code. The
submission essentially was that the executing court cannot go behind
the decree. According to learned senior counsel, since GNCTD had
not been made a party to the arbitral proceedings, it could not at this
stage of the execution proceedings be joined or held liable. The Court
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finds itself unable to sustain this submission for the following reasons.
It must at the outset be noted that GNCTD has been joined in these
proceedings consequent to the Court having pierced the veil. Such a
course cannot possibly be construed as going beyond or behind the
decree. The Court in these proceedings is essentially concerned with
execution of the decree. For that purpose, it has for reasons
aforenoted, come to the conclusion that the veil of corporate
personality is liable to be lifted. It is in the aforesaid backdrop that
GNCTD has been joined in these proceedings. The submission noted
above is thus rejected.
103. Accordingly, and for all the aforesaid reasons, the Court issues
the following directions: -
A. The Union Ministry as well as the GNCTD shall
forthwith attend to the requests of the DMRC for
extension of sovereign guarantees/subordinate debt
enabling it to liquidate its liabilities under the Award. The
aforesaid decision be taken within a period of two weeks
from today. If permission be accorded to the DMRC in
respect of either of the two modes as suggested by it, it
shall proceed to deposit the entire amount payable under
the Award along with up-to-date interest in terms thereof
within a period of one month therefrom;
B. If the Union Ministry or the GNCTD decline the request
for providing sovereign guarantees or subordinate debt,
the Union Ministry shall forthwith and at the end of two
weeks, revert and repatriate all moneys received by it
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from DMRC post 10 March 2022 pursuant to its
directives so as to ensure that the credit balance in the
Total DMRC Funds, Total Project Funds and Total Other
Funds reflects the balance as it existed on 10 March
2022;
C. Upon receipt of the aforesaid moneys, DMRC shall
forthwith transfer to the escrow account, an amount
equivalent to the total amount payable in terms of the
Award along with interest;
D. In case of a failure on the part of parties to proceed in
terms of the above directions, the entire amount standing
to the credit of Total DMRC Funds, Total Project Funds
and Total Other Funds as of today shall stand attached
forthwith without reference to Court;
E. In case DMRC fails to clear all outstanding amounts
payable in terms of the Award despite the directions set
forth above, the Court reserves the right to frame further
appropriate directions against the Union Ministry and the
GNCTD consequent to the corporate veil having been
duly lifted as per the findings recorded hereinabove.
F. Parties are granted liberty to approach the Court for such
further directions/clarifications as may be warranted.
YASHWANT VARMA, J.
MARCH 17, 2023
neha/ SU /bh
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