2014 (5) TMI 1149 - HC - Indian Laws

Appeal dismissed for failing to prove liability of shareholder in termination case.

The appeal challenged the deletion of a party from the suit under Order 1 Rule 10 CPC. The appellant alleged illegal termination by defendant companies ... Proper party to the suit - deleting the defendant / respondent no.2 from the array of defendants in the suit, holding the defendant / respondent no.2 to be neither a necessary nor a proper party to the suit - termination of the appellant / plaintiff’s service with the defendant no.1 by the defendant no.2 - whether because 100% of the shares of the defendant no.1 Company are held by the defendant no.2, the defendant no.2 is a necessary party? Held that:- First of the aforesaid argument is against the very grain of Company Law. A Company is a distinct legal entity from its shareholder, even if all the shares are held by one person only. Thus, merely because the defendant no.2 holds 100% of the shareholding of the defendant no.1 Company, would not make the defendant no.2 liable for the dues and acts of the defendant no.1. Admittedly both defendant no.1 and defendant no.2 are separate legal entities. No case for piercing of the corporate veil is made out. The Supreme Court in Vodafone International Holding B.V. Vs. Union of India (2012 (1) TMI 52 - SUPREME COURT OF INDIA ) has held that a Company is a separate legal persona and the fact that all its shares are owned by one person or by the parent Company has nothing to do with its separate legal existence. Whether the termination of the services of the appellant / plaintiff could have been done by the defendant no.1 Company only and not by the defendant no.2.? - Held that:- The second argument is equally ambiguous. Even if it is to be presumed that it is the defendant no.2 which has terminated the services of the plaintiff and which the defendant no.2 could not have done, being not the employer of the appellant / plaintiff, that would only make the termination to be illegal but would not make the defendant no.2 Company with whom the appellant / plaintiff had no privity, liable. The claim if any of the appellant / plaintiff for such illegal termination would remain against the defendant no.1 Company only and not against the defendant no.2. Plaintiff during the hearing has also argued that the appellant / plaintiff was reporting to the defendant no.2. Even if that be so, merely because an employee, in the course of employment, is required to report to another instead of to the employer, would not make such another liable for any claims arising from such employment. No cause of action against the defendant no.2 is disclosed. Appeal dismissed. Issues:Appeal against order deleting a party from the suit under Order 1 Rule 10 CPC.Analysis:The appeal challenged an order deleting a party from the suit under Order 1 Rule 10 of the Civil Procedure Code. The appellant alleged harassment and illegal termination by the defendant companies. The appellant claimed to have reported financial irregularities and corrupt practices to the defendant no.2. The termination was contested as illegal, seeking a declaration, injunction, and damages. The Single Judge found the defendant no.2 not a necessary or proper party to the suit as the appellant's employment was with defendant no.1 only. The appellant argued that defendant no.2, holding 100% shares of defendant no.1, was a necessary party. However, the Court disagreed, emphasizing the separate legal entity status of companies. The Supreme Court precedent was cited to support the distinct legal persona of a company, irrespective of shareholding. The appellant's argument that reporting to defendant no.2 made them liable was dismissed. The Court held that reporting structure does not impose liability on the reporting entity. Ultimately, the appeal was dismissed, finding no cause of action against defendant no.2 and no merit in the appeal.This judgment clarifies the legal principle that a company is a separate legal entity, even if wholly owned by another company. It highlights the distinction between the responsibilities of parent and subsidiary companies, emphasizing that shareholding does not automatically make the parent company liable for the subsidiary's actions. The judgment also underscores the importance of establishing a cause of action against a party in a legal dispute, emphasizing that mere reporting relationships do not create liability.