Heard Sri Rohan Gupta, learned counsel for the petitioner in Writ Petition No. 33100 of 2019 and Shri Gagan Mehta learned counsel for the Petitioners in Writ Petition No. 32727 ...
No Acts & Articles mentioned in this case
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AFR
RESERVED
Court No. - 37
Case :- WRIT - C No. - 33100 of 2019
Petitioner :- Rakesh Mahajan
Respondent :- State Of U.P. And 4 Others
Counsel for Petitioner :- Rohan Gupta, Kali Azad
Counsel for Respondent :- C.S.C., Kaushalendra Nath Singh
Connected with
Case :- WRIT - C No. - 32727 of 2019
Petitioner :- M/S Nirala Buildcon Private Limited And Another
Respondent :- State Of U.P. And 4 Others
Counsel for Petitioner :- Gagan Mehta,Rahul Agarwal,Sri. Ravi Kant
(Sr. Adv.)
Counsel for Respondent :- C.S.C.,Kaushalendra Nath Singh
Hon'ble Abhinava Upadhya,J.
Hon'ble Pankaj Bhatia,J.
(Delivered by Hon'ble Pankaj Bhatia,J.)
Heard Sri Rohan Gupta, learned counsel for the petitioner in Writ
Petition No. 33100 of 2019 and Shri Gagan Mehta learned counsel for the
Petitioners in Writ Petition No. 32727 of 2019, learned Standing Counsel
for the State-respondent and Sri Kaushalendra Nath Singh, learned
counsel, on behalf of Noida Authority.
The above two petitions are filed challenging same recovery
certificate and on similar grounds and as such are being decided by this
common judgment
The Petition No. 33100 of 2019 has been filed challenging the acts
of the respondent authorities in trying to recover the amounts in default
against PAN Realtors Pvt. Limited from the petitioner being a Director in
the Company known as Nirala Developers Pvt. Limited which is a
shareholder in Pan Realtors Pvt Ltd.
The Petition No. 32727 of 2019 has been filed challenging the acts of
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the respondent authorities in trying to recover the amounts in default
against PAN Realtors Pvt. Limited from the petitioner company being a
sister concern of the Company known as Nirala Developers Pvt. Limited
which is a shareholder in Pan Realtors Pvt Ltd.
The brief facts leading to the filing of the present petitions are as
under:
The respondent no. 2, New Okhla Industrial Development
Authority (hereinafter referred to 'Authority') floated a Scheme of
allotment of plots for Group Housing at Noida for interested developers.
In pursuance of the said Scheme/announcement made by respondent-
Authority, one Consortium of Companies in the name of style of Pan
Ventures filed an application showing interest in allotment of the land for
Group Housing at Noida. In pursuance of the said application, a letter of
allotment dated 21.7.2009 was issued by the respondent no. 2-Authority
proposing to allot Group Housing Plot No. GH-01, Sector 70, Noida
under the Group Housing Scheme GH2009(ii). The said allotment letter is
on record as Annexure-1 and was issued in the name of Consortium
known as PAN Venture.
A perusal of the allotment letter dated 21.7.2009 shows that the said
allotment letter was issued to PAN Venture, a Consortium comprising of
Patel Engineering Limited (leading member), Advance Construction
Company (relevant member), Nirala Developers Pvt. Limited (relevant
members) at their office situate at H-13, First Floor, Main Market, Vijay
Chowk, Lakshmi Nagar, Delhi.
The said allotment letter envisaged the allotment of a plot for
Group Housing Rights and manner of payment specified in the letter of
allotment itself. Peculiar feature of the said allotment letter as under:
“You are also requested to form the SPC duly registered in
ROC and also submit the Memorandum of Article of
Association of SPC, List of Directors and Shareholders
duly certified by CA and Board of director's Resolution of
Constituted Special Purpose Company.”
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It was further specified that the Special Purpose Company to be
created would be comprised of following Company:
S.
No.
Name of Member Share
holding
Status
1 Patel Engineering Ltd. 51% Lead Member
2 Advance Construction Co. Pvt.
Ltd.
24% Relevant
Member
3 Nirala Developers Pvt. Ltd.25% Relevant
Member
It was further provided that in the event of default in payment the
allotment offer would be considered as cancelled and the registration
money shall be forfeited and no interest shall be paid to the proposed
allottee.
It was further specified that the proposed allottee shall issue an
indemnity bond indemnifying the Authority against all disputes arising
out of non-completion of project, quality of construction and any dispute
arising out of allotment/lease to the final purchaser. The other conditions
relevant for the purposes of the present case, as contained in the allotment
letter, were as under:
“In case the Lessee does not construct building within the
time provided including extension granted, if any, for
above, the allotment/lease deed as the case may be, shall
be liable to be cancelled. Leasee shall lose all rights to the
allotted land and buildings appurtenant thereto.
The Authority's right to the recovery of the unearned
increase and the preemptive right to purchase the property
as mentioned herein before shall apply equally to
involuntary sale or transfer, be it bid or through execution
of decree of insolvency/court.
The Lessee will not make, any alteration of additions to the
said building or other erections for the time being on the
demised premises, erect or permit to erect any new building
on the demised premises without the prior written consent
of the Lessor and in case of any deviation from such terms
of plan, shall immediately upon receipt of notice from the
Lessor requiring him to do so, correct such deviation as
aforesaid.
If the Lessee fails to correct such deviation within a
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specified period of time after the receipt of such notice,
then it will be lawful for the Lessor to cause such deviation
to be corrected at the expense of Lessee who hereby agrees
to reimburse by paying to the lessor such amounts as may
be fixed in that behalf.
In case of non-compliance of terms and directions of
Authority, the Authority shall have the right to impose such
penalty as the Chief Executive Officer may consider just
and expedient.”
Cancellation of lease deed
“In addition to the other specific clauses relating to
cancellation, the Authority/Lessor, as the case may be, will
be free to exercise its right of cancellation of
lease/allotment in the case of:
1.Allotment being obtained through
misrepresentation/suppression of material facts, mis-
statement and/or fraud.
2.Any violation of directions issued or rules and
regulation framed by any Authority or by any other
statutory body.
3.Default on the part of the Allottee/allottee for
breach/violation of terms and conditions of
registration/allotment/lease and/or non-deposit of
allotment amount.
4.If at the same time of cancellation, the plot is
occupied by the Lessee thereon, the amount equivalent to
25% of the total premium of the plot shall be forfeited and
possession of the plot will be resumed by the Authority
with structure thereon, if any, and the Lessee will have no
right to claim compensation thereof. The balance, if any
shall be refunded without any interest. The forfeited
amount shall not exceed the deposited amount with the
Authority and no separate notice shall be given in this
regard.
5.If the allotment is cancelled on the ground
mentioned in para S.1 above, the entire amount deposited
by the Lessee, till the date of cancellation shall be forfeited
by the Authority and no claim whatsoever shall be
entertained in this regard.”
Other Clauses
“The Authority/Lessor reserves the right to make such
additions/alternations or modifications in the terms and
conditions of allotment/lease deed from time to time, as
may be considered just and expedient.
Any dispute between the Authority and Lessee/Sub-Lessee
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shall be subject to the territorial jurisdiction of the Civil
Courts having jurisdiction over District Gautam Budh
Nagar or the Courts designated by the Hon'ble High Court
of Judicature at Allahabad.
The Lease agreement/allotment will be governed by the
provisions of the U.P. Industrial Area Development Act,
1976 (U.P. Act No. 6 of 1976) and by the rules and/or
regulations made or directions issued, under this act.”
In terms of the said allotment letter, a Company was incorporated
in the name and style of 'PAN Realtors Pvt. Limited' on 26.8.2009, as a
Special Purpose Company. The first Directors in the said Company i.e.
PAN Realtors Pvt. Limited were Shri Danish Mohd. Ali Merchant, Shri
Bhimsen Prabhudayal Batra, Shri Shitul Dhirajlal Patel, Sri Suresh
Kumar Garg and Sri Anil Kumar Sharma.
In terms of the allotment letter and on incorporation of the Special
Purpose Company, a lease deed was executed on 12.10.2009 in between
New Okhla Industrial Development Authority and PAN Realtors Pvt.
Limited in respect of Plot No. GH-01, Sector-70, Noida for a total
consideration of Rs. 155,06,27,787/-. The said lease deed detailed the
entire installment plan for payment of the consideration.
A perusal of the lease deed filed on record as Annexure-3 reveals
that the lease was to abide by the regulations bye-laws, direction and
guidelines of the lessor, framed under Sections 8, 9 and 10 or any other
provision of U.P. Industrial Area Development Act, 1976. It further
provides:
“In case of non-compliance of terms and directions of
Lessor, the Lessor shall have the right to impose such
penalty as the Chief Executive Officer may consider just
and expedient.”
The lease deed also provides for the eventuality in which the lease
deed should be cancelled and are as under:
Cancellation of lease deed
“In addition to the other specific clauses relating to
cancellation, the Lessor, as the case may be, will be free to
exercise its right of cancellation of lease in the case of:-
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1.Allotment being obtained through
misrepresentation/suppression of materials facts, mis-
statement and for fraud.
2.Any violation of directions issued or rules and
regulation framed by Lessor or by any other statutory
body.
3.Default on the part of the lessee for breach/violation
of terms and conditions of registration/allotment/lease
and/or non-deposit of allotment amount.
4.If at the same time of cancellation, the plot is
occupied by the Lessee thereon, the amount equivalent to
25% of the total premium of the plot shall be fortified and
possession of the plot will be resumed by the Lessor with
structure thereon, if any, and, the lessee will have no right
to claim compensation thereof. The balance, if any shall be
refunded without any interest. The forfeited amount shall
not exceed the deposited amount with the Lessor no
separate notice shall be given in this regard.
5.If the allotment is cancelled on the ground
mentioned in sub-clause 1 above, then the entire amount
deposited by the lessee, till the date of cancellation shall be
forfeited by the Lessor and no claim whatsoever shall be
entertained in this regard;.
In all cases of cancellation a proper show cause notice to the
lessee will be sent by the lessor.”
It has been submitted by learned counsel for the petitioner that
subsequently the share holding pattern was mutually shuffled and Nirala
Developers Pvt. Limited became a minority shareholder, subsequently, a
few of the Directors resigned from the Company, a chart showing change
of shareholding pattern of PAN Realtors Pvt. Limited over the years as
under:
Company Name 201520162917 2018
Patel Engineering Ltd.36%38%37.57%37.57%
Advance Cont. Co. 39%37%37.43%37.43%
Nirala Developers Pvt. Ltd.25%25%25% 25%
It is also stated that on 31.3.2007 the Directors of PAN Realtors
Pvt. Limited were Shri Pravin Arjunbhai Patel and Sri Dhirajlal Nathalal
Patel and no Director of Nirala Developers Pvt. Limited were on board.
On 28.9.2019, a recovery certificate dated 12.9.2019 was affixed on
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the rented premises of the petitioner Rakesh Mahajan i.e. House No. H-
121, Sector 63, Noida, Uttar Pradesh, a copy whereof has been filed as
Annexure-9 to the Writ Petition No. 33100/2019.
A perusal of the recovery certificate shows that the same was issued
in the name of “PAN Realtors Pvt. Limited, shareholder, Rakesh
Mahajan".
The petitioner Rakesh Mahajan claims that on coming to know of
the said recovery certificate petitioner moved a detailed representation on
4.10.2019 before the respondents no. 2, 3 and 4 seeking withdrawal of the
recovery certificate as against the petitioner, however, nothing was done
and no orders have been passed on the said representation.
The petitioner claims that in terms of the recovery certificate the
respondents no. 3 and 4 are threatening to adopt coercive measures
against the petitioner for the alleged dues of PAN Realtors Pvt. Limited
and thus approached this Court by filing the present petition seeking the
following reliefs:
“(i) To issue a suitable writ, order or direction nature of
certiorari quashing the impugned recovery certificate
dated 12.9.2019 (served on the petitioner on 28.9.2019)
(Anneure-7) issued by the Tehsildar Dadri, Gautam Budh
Nagar.
(ii) To issue a suitable writ, order or direction nature of
mandamus restraining the respondents no. 3 and 4 from
taking any coercive action against the petitioner in
pursuance of recovery certificate dated 12.9.2019
(Annexure-7).”
Similarly the said Recovery certificate was also pasted at the
Leased Registered office of Nirala Buildcon Pvt. Ltd. at H-121, sector 63,
Noida.
The said Nirala Buildcon Pvt. Limited have filed Petition No 32727
of 2019 for following reliefs;
“(i) To issue appropriate writ, order or direction nature of
certiorari quashing the Recovery/Demand Notice dated
12.9.2019 (Annex-2) issued by Tehsildar, Dadari, District
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Gautam Budh Nagar.”
“(ii) To issue appropriate writ, order or direction nature of
certiorari directing the respondents authorities not to seal
the premises of M/s Nirala Buildcon Private Limited,
Office-H-121, Sector-63, Noida”.
Sri Rohan Gupta and Shri Gagan Mehta, learned counsels
appearing for the petitioners, submit as under:
The dues of the Company PAN Realtors Pvt. Limited cannot be
recovered from the petitioner as the petitioners are neither a shareholders
nor stakeholders in the Company PAN Realtors Pvt. Limited.
No recovery can be initiated against the petitioners for the dues of
PAN Realtors Pvt. Limited as the petitioner Rakesh mahajan is only a
minority shareholder in the Company Nirala Developers Private Limited
which in turn is a minority shareholder of PAN Realtors Pvt. Limited. He
submits that PAN Realtors Pvt. Limited is a separate and distinct entity
in the eyes of law, distinct from its shareholders and it is well settled that
the amounts due against a Company cannot be recovered against its
shareholders/Directors and in the present case, the petitioner being neither
a shareholder nor a Director of PAN Realtors Pvt. Limited cannot be
proceeded against for the recovery of alleged dues against the PAN
Realtors Pvt. Limited.
No notice/opportunity was accorded to the petitioner in his personal
capacity prior to initiating the recovery proceedings against the petitioner
in his personal capacity and as such on that count also the steps being
taken against the petitioner are wholly arbitrary and illegal.
Counsel appearing for Nirala Buildcon Pvt Lts adds to the
submissions and argues that Nirala Buildcon is neither a share holder nor
a member of Pan Realtors Private Limited and is a seperate and distinct
legal entity even from Nirala Developers Pvt. Limited as such cannot be
proceeded against.
Sri Kaushalendra Nath Singh, learned counsel appearing on behalf
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of Noida Authority has filed a counter affidavit bringing on record the
fact that the Noida Authority had executed a lease deed in favour of PAN
Realtors Pvt. Limited. He further states that in terms of the lease deed an
amount of Rs. 15,50,62,778.78 being 10% of the total amounts was paid
by the Special Purpose Company PAN Realtors Pvt. Limited at the time
of execution of the lease deed and the remaining amount was to be paid in
installments along with interest at the rate of 11% per annum,
compounded half yearly, with a further provision for default penal interest
and as PAN Realtors Pvt. Limited defaulted in making the payments of
the installments on time, several letters were issued, which have been
collectively filed and marked as (CA1) to the counter affidavit.
A perusal of the said show cause notices (CA-1)reveals that all the
notices were sent to PAN Realtors Pvt. Limited, S-406 (LG), Greater
Kailash-II, New Delhi. None of the said notices filed as CA-1 have been
sent to both the petitioners.
Sri Kaushalendra Nath Singh, learned counsel for Noida Authority,
further states that as the amounts were not paid by PAN Realtors Pvt.
Limited, a letter was written to the Collector, Gautam Budh Nagar for
collecting the amounts as arrears of land revenue from the shareholders
and Directors of the lessee Company PAN Realtors Pvt. Limited. The said
letter dated 26.8.2009 is on record as CA-2, along with the said letter
details of the Directors of the lessee Company were disclosed which
included the names of the Directors of PAN Realtors Pvt. Limited,
Directors of Patel Engineering Pvt. Limited, Directors of Nirala
Developers Pvt. Limited (including the name of the petitioner) and the
names of the Directors of Advance Constructions Limited.The said letter
made no mention of Nirala Buildcon Pvt. Ltd.
Sri Kaushalendra Nath Singh also submits that all the companies,
who are the shareholders, have the entire share holding of PAN Realtors
Pvt. Limited and as such all are liable for payment of dues. He further
tried to justify as to how recovery was being processed against the
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petitioner Rakesh Mahajan and Nirala Buildcon Pvt. Limited, a sister
concern of Nirala Developers Pvt. Limited.Justifying the steps being
taken for recovery against Nirala Buildcon, Mr. Singh argued that the two
companies are one and the same and have similar shareholding and are in
control of Mr Rakesh Mahajan and his family.
Counter affidavit filed also states that the shareholding of Nirala
Developers Pvt. Limited and Nirala Buildcon Pvt. Limited show that they
are basically run/managed by similar set of people including the petitioner
Rakesh Mahajan. He further relied upon the orders of the Hon'ble
Supreme Court in the case of Dr. Subroto Roy vs. Union Of India &
Ors, 2014 (8) SCC 470 and in case of Amarpali and states that in view
of the said amounts can be recovered from the shareholders and Directors.
Thus, in sum and substance, the submission of Kaushalendra Nath Singh
is that the petitioner Rakesh mahajan being a Director in one of the
shareholding Company i.e. Nirala Developers Private Limtied is liable to
pay the outstanding dues of the Company PAN Developers (Pvt.) Ltd and
Nirala Buildcon being a sister concern of Nirala developers is also liable
for payment of dues of Pan Realtors Pvt. Ltd.
It is also admitted at the bar that the Lease granted to the lessee Pan
Realtors has not been determined and further that the Authority had
granted part completion certificate on the strength of which the lessee
company has sold certain plots and created third party rights.
In view of the submissions made at the bar, what is to be
considered is that :
a) Whether the dues of PAN Realtors Pvt. Limited can be
recovered against the petitioner Rakesh Mahajan being a Director
of the shareholding company Nirala Developers Private Limited
and from Nirala Buildcon being a sister concern of the
shareholding company Nirala Developers Private Limited,
And:
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b) Whether in the facts of the case corporate veil of Pan Realtors
Pvt Ltd and Nirala Developers Pvt Ltd can be pierced to hold the
shareholders and sister concern of a share holder liable for the
dues of a company.
Both the counsels for the Petitioners have extensively relied upon
the following judgements:
1.Gillete India Limited vs. Delhi Development Authority, 260 (2019)
DLT 416
2. Balwant Rai Saluja and another vs. Air India Limited and others,
(2014) 9 SCC 407
3. Bacha F. Gauzdar vs. Commissioner of Income Tax, Bombay, Air
1855 SC 74
4. Meekin Transmission Ltd. vs. State of Uttar Pradesh, 2008 4 All LJ
789 (DB)
5. The Tata Engineering and Locomotive Co. Ltd. And another vs.
State of Bihar and others, AIR 1965 SC 40
6. Arcelormittal India Private Limited vs. Satish Kumar Gupta and
others, (2019) 2 SCC 1
7. Vodafone International Holdings B.V vs Union of India (2012) 6
SCC 613
Sri Kaushalendra Nath Singh, learned counsel for the Noida
Authority, on the other hand, has relied upon an order of this Court dated
7.8.2019, passed in Writ C No. 25554 of 2019 (Ashish Gupta vs. State
of U.P. and 5 others) and the judgement of this Court in Writ Tax No.
1464 of 2005 (Jagbir Singh vs. State of U.P. and others) to argue that
the recovery against the petitioners is justified.
Coming to the judgements cited by the petitioners, the Delhi High
Court in the case of Gillete India Limited vs. Delhi Development
Authority (supra) was called upon to consider the question of demand of
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unearned increase and the consequential refund. The petitioner company
came into possession of certain lands in terms of the Scheme sanctioned
by BIFR and were called upon to pay the dues of a Company which was
declared as a sick Company by the Board of Industrial Financial
Reconstruction. The Delhi High Court observed as under:
39. It is trite law that an incorporated company is an
entity separate from its shareholders. In Bacha F. Guzdar
v. Commissioner of Income Tax: AIR 1955 SC 74, the
Constitution Bench of the Supreme Court had held that the
nature of income in the hands of a company was not the
nature of income in the hands of its shareholders. It held
that dividends in the hands of the shareholders of a
company declared from agricultural income received by
that company could not be considered as agricultural
income. The said decision rested on the fundamental
principle that a company is a separate juristic entity
distinct from its shareholders.
40. In the aforementioned case, the Supreme Court
referred to the Halsbury‟s Laws of England, Vol. 6
(3rdEdn.), p. 234 and set forth the following passage
regarding the attributes of shares:-
"A share is a right to a specified amount of the
share capital of a company carrying with it certain
rights and liabilities while the company is a going
concern and in its winding up. The shares or other
interest of any member in a company are personal
estate transferable in the manner provided by its
articles, and are not of the nature of real estate."
41. It is well settled that shares of a company are a
separate asset wholly distinct from the assets held by the
company.
42. In the present case, there was dilution of the share
capital of TGC as well as transfer of shares held by the
TGC in the petitioner company. The transfer of shares of
the petitioner company cannot be construed as transfer of
the assets of the petitioner company.
43. In Rustom Cavasjee Cooper vs. Union of India: (1970)
1 SCC 248, the constitution bench of the Supreme Court
reiterated the above settled principle in the following
words:
"11. A company registered under the Companies
Act is a legal person, separate, and distinct from
its individual members. Property of the Company
is not the property of the shareholders. A
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shareholder has merely an interest in the Company
arising under its Articles of Association, measured
by a sum of money for the purpose of liability, and
by a share in the distributed profit. Again a
director of a Company is merely its agent for the
purpose of management. The holder of a deposit
account in a Company is its creditor: he is not the
owner of any specific fund lying with the Company.
A shareholder, a depositor or a director may not
therefore be entitled to move a petition for
infringement of the rights of the Company, unless
by the action impugned by him, his rights are also
infringed."
44. In a recent decision of the Supreme Court in Vodafone
International Holdings B.V. v. Union of India and Anr.:
(2012) 6 SCC 613, the Supreme Court rejected the
contention that a transfer of shares of an overseas holding
company would amount to transfer of assets held by the
subsidiary in India. In the said case, the Supreme Court
applied the "look at" test to view the transaction relating
to transfer of shares by overseas holding companies. The
transaction must be viewed as it looks and a dissecting
approach is not warranted.
The next judgment cited by Sri Rohan Gupta is the case of
Balwant Rai Saluja and another vs. Air India Limited and others
(supra), wherein the Apex Court was considering whether the workman
engaged in statutory canteens through a Contractor should be treated as
employees of the principal establishment. The Supreme Court made the
following observations in para nos. 67 to 74 which is as under:
“67. The Companies Act in India and all over the world
have statutorily recognized subsidiary company as a
separate legal entity. Section 2(47) of the Companies Act,
1956 (for short “the Act, 1956”) defines ‘subsidiary
company’ or ‘subsidiary’, to mean a subsidiary company
within the meaning of Section 4 of the Act, 1956. For the
purpose of the Act, 1956, a company shall be, subject to
the provisions of sub-section (3) of Section 4, of the Act,
1956, deemed to be subsidiary of another. Clause (1) of
Section 4 of the Act, 1956 further imposes certain
preconditions for a company to be a subsidiary of another.
The other such company must exercise control over the
composition of the Board of Directors of the subsidiary
company, and have a controlling interest of over 50% of
the equity shares and voting rights of the given subsidiary
company.
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68. In a concurring judgment by K.S.P. Radhakrishnan, J.,
in the case of Vodafone International Holdings BV v.
Union of India, (2012) 6 SCC 613, the following was
observed:
“Holding company and subsidiary company ....
257. The legal relationship between a holding
company and WOS is that they are two distinct legal
persons and the holding company does not own the
assets of the subsidiary and, in law, the
management of the business of the subsidiary also
vests in its Board of Directors. ...
258. Holding company, of course, if the subsidiary
is a WOS, may appoint or remove any Director if it
so desires by a resolution in the general [pic]body
meeting of the subsidiary. Holding companies and
subsidiaries can be considered as single economic
entity and consolidated balance sheet is the
accounting relationship between the holding
company and subsidiary company, which shows the
status of the entire business enterprises. Shares of
stock in the subsidiary company are held as assets
on the books of the parent company and can be
issued as collateral for additional debt financing.
Holding company and subsidiary company are,
however, considered as separate legal entities, and
subsidiary is allowed decentralized management.
Each subsidiary can reform its own management
personnel and holding company may also provide
expert, efficient and competent services for the
benefit of the subsidiaries.”
69. The Vodafone case (supra), 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
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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., [1897] AC 22. Lord Halsbury LC
(paragraphs 31–33), negating the applicability of this
doctrine to the facts of the case, stated that:
“...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 the Salomon case
(supra), 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 crystallized around
the six principles formulated by Munby J. in Ben Hashem
v. Ali Shayif, [2008] EWHC 2380 (Fam). The six
principles, as found at paragraphs 159– 164 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.
The principles laid down by the Ben Hashem case
(supra) have been reiterated by UK Supreme Court by
Lord Neuberger in Prest v. Petrodel Resources Limited
and others, [2013] UKSC 34, at paragraph 64. Lord
Sumption, in the Prest case (supra), finally observed as
follows:
16
“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.”
The position of law regarding this principle in
India has been enumerated in various decisions. A
Constitution Bench of this Court in Life Insurance
Corporation of India v. Escorts Ltd. & Ors., (1986) 1 SCC
264, while discussing the doctrine of corporate veil, held
that:
“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
17
by the persons controlling the company. The application
would thus depend upon the peculiar facts and
circumstances of each case.”
The next judgement relied upon by Sri Rohan Gupta is the case of
Bacha F. Gauzdar vs. Commissioner of Income Tax, Bombay (supra),
wherein the Apex Court was called upon to decide the question of
exemption under section 4 (3)(viii) of the Income Tax Act the
Constitution Bench of the Supreme Court held that the nature of income
in the hands of a company was not the nature of income in the hands of
its shareholders. It held that dividends in the hands of the shareholders of
a company declared from agricultural income received by that company
could not be considered as agricultural income. The said decision rested
on the fundamental principle that a company is a separate juristic entity
distinct from its shareholders.
Referring to the leading pronouncement of the Constitution Bench
of the Apex court in the case of Tata Engineering and Locomotive Co.
Ltd. And another vs. State of Bihar and others (supra). The Apex
court following the cherished judgement of Salomon vs. Salomon &
Co., 1897 AC 22 observed held as under:
“24. 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 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., 1897
AC 22 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
18
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.
26. It is unnecessary to refer to the facts in these two
cases and the principles enunciated by them, because it is
not disputed by the respondents that some exceptions
have been recognised to the rule that a corporation or a
company has a juristic or legal separate entity. The
doctrine of the lifting of the veil has been applied in the
words of Palmer in five categories of cases : where
companies are in the 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 duties and stamps, particularly where the
question of the "controlling interest" is in issue; in the
law relating to exchange control; and in the law relating
to trading with the enemy where the test of control is
adopted (1). In some of these cases, judicial decisions
have no doubt lifted the veil and considered the substance
of the matter.
27. Gower has similarly summarised this position with
the observation that in a number of important respects,
the legislature has rent the veil woven by the Salomon
case. Particularly is this so, 'says Gower, in the sphere of
taxation and in the steps which have been taken towards
the recognition of enterprise-entity rather than
corporate-entity. It is significant, however, that according
to Gower, the courts have only construed 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 where the
legislative provision justifies the adoption of such a
19
course that the veil has been lifted. In exceptional cases
where courts have felt "themselves able to ignore the
corporate entity and to treat the individual shareholders
as liable for its acts", (2) the same course has been
adopted. Summarising his conclusions, 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.”
The Apex Court very recently in the case of Arcelormittal India
Private Limited vs. Satish Kumar Gupta and others (supra) while
deciding the validity of Section 29-A(c) of the IBC observed as under:
“35. Similarly in Balwant Rai Saluja & Anr. etc. etc. v. Air
India Ltd. & Ors., (2014) 9 SCC 407, this Court in
following Escorts Ltd. (supra.), held:
“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. Salomon & Co. Ltd. [1897 AC
22] 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], 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.
20
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], UKSC at para
64. Lord Sumption, in Prest case [(2013) 2 AC
415], 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
21
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.””
36. Similarly in Delhi Development Authority v. Skipper
Construction Company (P) Ltd. & Another, (1996) 4 SCC
622, this Court held:
“24. In Salomon v. Salomon & Co. Ltd. [1897
AC 22] the House of Lords had observed,
“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
22
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” 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 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” [published in (1912) XII
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
23
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 necessary to refer to.
26. The law as stated by Palmer and Gower has
been approved by this Court in TELCO v. State
of Bihar [(1964) 6 SCR 885]. The following
passage from the decision is apposite:
“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 DHN Food Distributors Ltd. v. London
Borough of Tower Hamlets [(1976) 3 All ER
462] 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
24
“three in one” — and, alternatively, as “one in
three”.
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 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.”
Now coming to the next judgment of this Court in the case of
Meekin Transmission Ltd. vs. State of Uttar Pradesh and others
(supra), this Court was considering the notice for recovery sent to the
Director of a Company for arrears of trade tax against the Company. This
Court considered the entire concept of Companies, the status of the
Directors and its shareholders and relying upon the cherished judgement
of Salomon vs. Salomon and Co., 1897 AC 22 held as under:
“71. The cardinal principle which has been laid down in
the aforesaid cases and expressly stated and reiterated in
Purshottam Das Beriwal (Supra) is as under:
"The cardinal principle of law is that when there is a
liability against a company, no recovery can be
made from personal assets of its Director, unless it is
specifically provided in the Statute or warranted by
25
law. It is not brought to brought to our notice that
there is any specific provision in the U.P. Sales Tax
Act, whereunder recovery of the liability outstanding
against a company can be made against the
personal assets of its Director."
72. The legal position as discerned from the above is that
in a case where the corporate personality has been
obtained by certain individuals as a cloak or a mask to
prevent tax liability or to divert the public funds or to
defraud public at large or for some illegal purposes etc.,
to find out as to who are those beneficiaries who have
proceeded to prevent such liability or to achieve an
impermissible objective by taking recourse to corporate
personality, the veil of the corporate personality shall be
lifted so that those persons who are so identified are made
responsible. However, this doctrine is not to be applied as
a matter of course, in a routine manner and as a day to
day affair so as to recover the dues of a company,
whenever and for whatever reason they are unrecoverable,
from the personal assets of the Directors. If such a course
is permitted, it would lead to not only disastrous results
but would also destroy completely the concept of juristic
personality conferred by various statutes like the Act in the
present case and would make several enactments and their
effect to be redundant and illusory. Moreover, the
shallowness of arguments in favour of making Directors
personally responsible can be considered from another
angle. In every case the Director may not be a shareholder
of the company. He may have been appointed as Director
for taking advantage of his expertise in his field of
vocation or profession, and for achieving goals for which
the company is incorporated. Such Director is paid
remuneration, if any, for the services he rendered.
Otherwise he is not at all a beneficiary of the business or
trade etc., as the case may be, in which the company is
engaged. Such benefit would be available only to the
shareholders as they would only be entitled to share the
profits earned by the company in the form of dividend as
decided by the Board of Directors. In such case such
Director, though is an agent of the company but he is more
in the nature of an officer of the company and not in the
capacity of limited ownership by way of shareholding.
Such a Director, in our view, unless is guilty of
misfeasance, fraud or acting ultra vires, we are not able to
understand as to how he can be made responsible
personally for the dues of the company even if we apply
the doctrine of piercing the veil. If in such a case the veil
is to be lifted, the persons behind the veil, at the best,
would be the promoters of the company or those who have
sought to obtain corporate personality as a sham or bogus
26
transaction. Similarly, in some of the companies the
financial institutions, who advances funds as loan etc.,
nominate their Director/s to keep some kind of monitoring
over the functions of the company so that it may not go on
liquidation on account of negligent and careless function
of the Board of Directors. Such Directors also, in our view,
cannot be included in the category of the persons who
would be responsible personally for the dues of the
company.
73. In order to find out as to who are the persons
responsible personally when the veil is lifted it would be
wholly irrelevant as to whether such person is a Director
or a promoter shareholder or otherwise of the company
since the purpose of lifting the veil is to find out the
person/s who is operating behind the corporate
personality for his personal gain. Such person may be
individual or group of persons belonging to a family or
relatives or otherwise a small group collected with a
common objective of achieving some illegal, immoral or
improper purpose etc. So long as no investigation is made
into various aspects, we are not able to understand as to
how and what manner a Director of a company can
straightway be proceeded personally for recovering dues
of a company unless it is so provided by some provision of
the statute.
74. Recently considering a similar controversy with
reference to the provisions of Payment of Wages Act, the
Apex Court in P.C. Agarwala Vs. Payment of Wages
Inspector, M.P. and others, AIR 2006 SC 3576 has held as
under:
"17. It is trite law that liability of a person is
dependent upon the Statutory prescriptions
governing such liability. Sections 5 and 291 of the
Companies Act, 1956 (in short 'Companies Act') are
to be noted in this regard. Section 5 refers to officer
who is in default. Section 291 on the other hand
relates to general powers of the Board of Directors.
In order to attract the liability under the Act, it has
to be seen as to on whom the Act fixes the liability.
Section 3 speaks of the responsibility for payment of
wages. It speaks of the "employer" which expression
is defined in Section 2(ia). Section 15 refers to the
claims arising out of deductions from wages or
delaying payment of wages and penalty for
malicious or vexatious claims. Statutorily no
liability has been fixed on the Directors.
75. Further in para 24 of the judgement also the Court
held as under:
27
"Therefore, on a plain reading of the language of the
governing statute, it cannot be held that the
Directors had any personal liability......"
76. In the said judgement with respect to applicability of
doctrine of lifting of veil, after referring to the learned
authors like Palmer and Gower, the Court has clearly said
that at present judicial approach in cracking upon the
corporate shell is somewhat cautious and circumspect. It
is only when the statute justifies adoption of such a course
or in exceptional cases, where Courts have felt themselves
satisfied to ignore the corporate entity and to treat the
individual shareholder(s) liable for its acts, such a course
has been adopted. Broadly, where fraud is intended to be
prevented, or trading with enemy is sought to be defeated,
the veil of corporation is lifted by judicial decision and the
shareholders are held to be "persons who actually work
for corporation".
77. This judgement also goes to show that normally when
the veil is lifted it is the promoters, shareholders or the
shareholders who are found to be working behind the veil,
responsible, and the Directors as such would not be taking
to be responsible for meeting the liabilities of the company
unless the statute so provides or it is found that the act of
the Directors is ultra vires resulting in extinction of assets
and funds of company making recovery from the company
impossible.
78. In brief, we can categories the cases in which the
corporate personality of the incorporate body can be
ignored and it would be better to refer the renowned
author Palmer's Company Law 23rd Edition where he has
categorised the cases, in which the principle of separate
entity of the Company has been discarded by adopting the
doctrine of lifting the veil, in 15 categories and some of
which are as under:
"(1) where companies are in relationship of holding
and subsidiary (or sub-subsidiary) companies; (2)
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; (3) in
certain matters pertaining to the law of taxes; death
duty and stamps, particularly where the question of
the "controlling interest" is in issue; (4) in the law
relating to exchange control; (5) in the law relating
to trading with the enemy where the test of control is
adopted; (6) where a holding company or a
subsidiary company were not working in an
28
autonomous manner and thus were treated as
forming an economic unit; (7) where the new
company was formed by the members of an existing
company holding 9/10 shares in the existing
company and only with an object of expropriating
the shares of minority share holders of the existing
company; (8) where the device of incorporation is
used for some illegal or improper purpose; (9)
where several companies promoted by the same
controlling share holders for defeating or misusing
the loss pertaining to labour welfare; (10) where the
facts or equitable considerations justify an
exemption from the strict rule in Salomon Vs.
Salomon and Co. Ltd."
79. Another learned author L.C.B. Gower in his
"Principles of Modern Company Law" 4th Edition, has
also given such illustration where the veil of a corporate
body has been pierced and has enumerated the same as
fraudulent trading, misdescription of company, and
taxation mattes where the statute require etc.
80. In the nutshell, the doctrine of lifting of veil or piercing
the veil is now a well established principle which has been
applied from time to time by the Courts in India also.
There is no doubt about the proposition that whenever the
circumstances so warrant, the corporate veil of the
company can be lifted to look into the fact as to whose
face is behind the corporate veil who is trying to play
fraud or taking advantage of the corporate personality for
immoral, illegal or other purpose which are against public
policy. Such lifting of veil is also has to implemented
whenever a statute so provided. However, it is not a matter
of routine affair. It needs a detailed investigation into the
facts and affairs of the company to find out as to whether
the veil of the corporate personality needs to be lifted in a
particular case. After lifting the veil, in a case where it is
so required, it is not always that the Directors would
automatically be responsible but again it is a matter of
investigation as to who is/are the person/s responsible and
liable who had occasioned for application of said
doctrine.
Initial burden for application of the doctrine of "Piercing
of Veil":
81. Whether in respect to tax dues or other public revenue
or in other cases, if one has to discard the corporate
personality, then the initial burden would lie upon it to
place on record relevant material and facts to justify
invocation of doctrine of lifting of veil and to plead that
the corporate shell be not made a ground of defence. A
personality conferred by the statute cannot be overlooked
29
or ignored lightly and in a routine manner or on a mere
asking. In fact whenever the veil is to be pierced, it would
mean that somebody, individual or group of individuals,
have obtained the shell of corporate personality as a
pretext or mask to cover up a transaction or intention of
those individual/individuals is neither legal nor otherwise
in public interest. In effect the attempt of those individuals
have to be shown akin to fraud or misrepresentation. The
legal personality of the corporate body thus can be
ignored in such cases since it is well settled that fraud
vitiates everything and, therefore, the benefit of legal
personality obtained by someone for purposes other than
those which are lawful or even if lawful but not otherwise
permissible, the corporate personality being the result of
such fraudulent activity would have to be discarded but
not otherwise. These are the things based on positive
factual material and cannot be presumed in the absence of
proper pleadings and material to be placed by the person
who is pleading to invoke the doctrine of piercing the veil
and to ignore the juristic personality of the corporate
body. Once relevant material is made available by the
authority or person concerned, thereafter it would be the
responsibility of the other side to place material to meet
the aforesaid facts but the mere fact that the company has
failed to pay the Government dues or pubic revenue, that
by itself would not invite the doctrine of piercing the veil
and is not sufficient to ignore the statutory corporate
personality conferred upon a company and make its
Directors or shareholders responsible personally.”
In the next judgment cited at the Bar the Apex Court in the case of
Vodafone International Holdings B.V vs Union of India (2012) 6 SCC
613 extensively dealt with the liability of the parent company for the dues
of its holding subsidiary company held:
“78. Holding structures are recognised in corporate as
well as tax laws. Special purpose vehicles (SPVs) and
holding companies have a place in legal structures in
India, be it in company law, the Takeover Code under
SEBI [Ed.: Securities and Exchange Board of India
(Substantial Acquisition of Shares and Takeovers)
Regulations, 2011] or even under the income tax law.
79. When it comes to taxation of a holding structure, at the
threshold, the burden is on the Revenue to allege and
establish abuse, in the sense of tax avoidance in the
creation and/or use of such structure(s). In the application
of a judicial anti-avoidance rule, the Revenue may invoke
the “substance over form” principle or “piercing the
corporate veil” test only after it is able to establish on the
30
basis of the facts and circumstances surrounding the
transaction that the impugned transaction is a sham or tax
avoidant. To give an example, if a structure is used for
circular trading or round tripping or to pay bribes then
such transactions, though having a legal form, should be
discarded by applying the test of fiscal nullity. Similarly, in
a case where the Revenue finds that in a holding structure
an entity which has no commercial/business substance has
been interposed only to avoid tax then in such cases
applying the test of fiscal nullity it would be open to the
Revenue to discard such interpositioning of that entity.
However, this has to be done at the threshold.
80. In this connection, we may reiterate the “look at”
principle enunciated in Ramsay [1982 AC 300 : (1981) 2
WLR 449 : (1981) 1 All ER 865 (HL)] in which it was held
that the Revenue or the Court must look at a document or
a transaction in a context to which it properly belongs to.
It is the task of the Revenue/Court to ascertain the legal
nature of the transaction and while doing so it has to look
at the entire transaction as a whole and not to adopt a
dissecting approach. The Revenue cannot start with the
question as to whether the impugned transaction is a tax
deferment/saving device but that it should apply the “look
at” test to ascertain its true legal nature [see Craven
v.White (Stephen) [1989 AC 398 : (1988) 3 WLR 423 :
(1988) 3 All ER 495 (HL)] which further observed that
genuine strategic tax planning has not been abandoned by
any decision of the English Courts till date].
81. Applying the above tests, we are of the view that every
strategic foreign direct investment coming to India, as an
investment destination, should be seen in a holistic
manner. While doing so, the Revenue/courts should keep
in mind the following factors: the concept of participation
in investment, the duration of time during which the
holding structure exists; the period of business operations
in India; the generation of taxable revenues in India; the
timing of the exit; the continuity of business on such exit.
82. In short, the onus will be on the Revenue to identify
the scheme and its dominant purpose. The corporate
business purpose of a transaction is evidence of the fact
that the impugned transaction is not undertaken as a
colourable or artificial device. The stronger the evidence
of a device, the stronger the corporate business purpose
must exist to overcome the evidence of a device.”
Now reverting to the judgement cited by Sri Kaushalendra Nath
Singh, the interim order dated 07.08.2019 passed in Writ - C No. 25554
of 2019 (Ashish Gupta vs. State of U.P. and 5 others), this Court while
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considering the case of the petitioner proceeded to pass an interim order
with the following conditions:
“List for admission/final disposal for adjudication of the
above question of law raised immediately after one month.
In the meantime, the petitioner who is under civil
imprisonment shall be released forthwith with the
following conditions-:
(i) that on release from civil imprisonment, he shall not
move out of the country without the leave of the Court;
(ii) that he will not deal with his shares which he is having
in the company Cloud Nine Project Pvt. Ltd. And any
company that is a member of the consortium;
(iii) his two residential houses situate in Meerut and the
land which he possesses in Panipat (particulars of which
shall be supplied by the counsel for the petitioner) shall be
under attachment and;
(iv) he is restrained with dealing with those properties in
any manner and would not transfer them.
The Sub-Registrar, Meerut and Panipat are directed not to
register any deed of transfer of any property in respect of
the above referred properties of the petitioner.
The Sub-Registrar, Gautam Buddh Nagar/Ghaziabad is
directed not to register any deed of transfer of any flat
constructed by the respondent No.6 company on the
property leased out by the NOIDA in connection with
which the present dues are being claimed.
A copy of this order may be sent to all the above Sub-
Registrars with the request to ensure strict compliance of
the same.”
We are afraid that no question of law has been considered or
decided in the said interim order. It is well settled that an interim order
cannot be a precedent as no question of law or fact is decided at the
interim stage. Further, a copy of the order itself reveals that the Court had
listed the matter for adjudication on the question of law as raised by the
parties.
Coming to the second judgement dated 20.9.2017 in case of Jagbir
Singh vs. State of U.P. and others (supra), this Court has refused to
interfere with the recovery against the Director as the Court was of the
view that the Directors of the Company had persuaded the BIFR for
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permission with fresh infusion of funds and the BIFR was used as
subterfuge to avoid the payment of taxes.
We are afraid that the said judgement also has no applicability to
the facts of the present case for two reasons: one that the said case related
to a Director of a Company which is not the present case and secondly the
matter arose out of proceedings from BIFR and related to default in
payment of taxes which again is not a case in the present case.
Thus, the legal position that can broadly culled out from the above
judgments are:
a) That a Company is a separate and distinct entity from its
shareholders and directors.
b) Corporate veil can be pierced
(i) only in exceptional circumstances by the courts with caution
and circumspection and in a restrictive manner.
(ii) For lifting of corporate veil it is essential that the case falls
within the exceptions as elaborated and crstalised by Munby J.
in Ben Hashem v Ali Shayif,[2008] EWHC 2380 and approved
by the Apex Court in Balwant Rai Saluja (supra) and
Arcelormittal India (supra)
(iii) Where the statute itself permits lifting of veil.
The facts of the present case demonstrate that the petitioner Rakesh
Mahajan was never a Director of PAN Realtors Pvt. Limited and is not
even a shareholder of PAN Realtors Pvt. Limited in his personal capacity.
Further, there is nothing on record to even suggest that PAN Realtors Pvt.
Limited was incorporated as a 'sham' or a 'facade' for execution of the
lease in question, in fact the Company was incorporated at the insistence
of Noida Authority which is clear from the allotment letter. The lease
deed executed in between Noida and PAN Realtors Pvt. Limited still
subsists and has not even been determined.
Further, there is no material to suggest that the petitioners herein
Rakesh Mahajan or Nirala Buildcon exercised pervasive control over Pan
Developers (Pvt.) Limited. The statute in question being U.P. Urban
Planning Development Act, 1973 does not have any provision for lifting
33
the corporate veil. The petitioners are not even a signatory to the lease
deed in question and thus no case is made out for piercing the veil for
recovery of alleged dues of PAN Realtors Pvt. Limited from the
petitioners.
It is well settled that any action of the “State” or “an
instrumentality of State” has to be in conformity with law and has to
satisfy the twin tests of having followed “substantive due process of law”
and “procedural due process of law” and failure on any of the twin tests
renders the action violative of Article 14 of the Constitution of India.
We have no hesitation in holding that the actions of the authority
against both the petitioner falls miserably short of the twin tests and are
thus violative of Article 14 of the Constitution of India.
Accordingly, the Recovery Certificate dated 26.8.2019, issued by
the respondent no. 2 and the Citation dated 12.9.2019, issued by the
respondent no. 4, insofar it relates to the petitioners, are hereby quashed.
We clarify that the question of non-grant of opportunity of hearing
prior to issuance of a recovery certificate has not been gone into in the
present case as we are satisfied that the recovery against the petitioners
for the alleged dues of PAN Realtors Pvt. Limited, is wholly illegal.
We clarify that the present case is confined only in respect of
Petitioners herein and the Authority is at liberty to take steps for recovery
of its dues against the persons liable to pay them.
The writ petitions are allowed.
Order Date :- 04.12.2019
Puspendra
(Pankaj Bhatia,J.) (Abhinava Upadhya,J.)
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