TaxTMI 
TaxTMI 
2016 (9) TMI 967
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....he name of BIIL was attached at Tuticorin Port at Tamilnadu. An international award was passed in favour of Respondent No.2 - Vitol S.A for an amount of Rs. 443 crores with interest and costs against Bhatia International Limited ("BIL"). Not a single penny has been recovered by Vitol - SA from BIL despite a lapse of five years from the date of the award. A precept was filed under section 46 of the CPC for attachment of cargo belonging to BIIL on the ground that BIIL and BIL was a single economic entity, though they were separate Companies registered under the Companies Act, 1956. It was contended that the Court should lift the corporate veil and if it is so done it would reveal that Surinder Singh Bhatia had established separate companies and they were known as Bhatia Group Companies. It was contended that since it was a single economic entity, the goods which were standing in the name of BIIL could be attached in execution of the international award. The learned Single Judge accepted the contention of Vitol - S.A. and after examining all the material on record, held that BIIL and BIL was a single economic entity. This was done by lifting the corporate veil of both the companies. ....
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....in 1993, it was a Group Company belonging to Bhatia Group and other Companies and it was under the control of Bhatia International Ltd ("BIL") and Shri S.S. Bhatia was the main person behind all those Companies and other Companies which were fraudulently siphoning off the funds from BIL to defeat execution of the International Award and therefore it was prayed that though the goods may be shown to be belonging to BIIL, in fact, they belonged to the Group Companies and therefore they were liable to be attached in execution of the International Award. 6. The learned Counsel appearing on behalf of the Respondent No.2 produced material to show that if the corporate veil of two Companies was lifted, it would show that it was a single entity and therefore the order of attachment may be passed in respect of the goods owned by the Appellant. 7. The learned Single Judge accepted the contention of the Respondent No.2 and issued an order of attachment and the precept was extended by further period of two months. 8. Mr. Mustafa Doctor the learned Senior Counsel appearing on behalf of the Appellant firstly submitted that Respondent No.2 had misled the Court. He submitted that the precept ord....
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....he rival submission, it would be relevant to take into consideration the settled legal position. 11. The first question is, in which cases corporate veil can be lifted by the Court and whether the concept of lifting of corporate veil is also available in execution proceedings? This concept has undergone a drastic change after the first judgment was delivered in Salomon vs. Salomon1897 AC 22. In order to trace the evolution of this doctrine, it would be profitable to refer to the judgments of the Apex Court viz State of UP vs. Renusagar Power Co. (1988) 4 SCC 59 : 1988 Supp (1) SCR 627 in which the concept has been elaborately discussed. It is now well settled that doctrine of piercing the veil has been applied by the Court in various diverse circumstances. Though, initially, this concept was primarily applied in cases of tax evasion, the Courts have expanded this concept and had applied it to the cases (A) where the Petitioner himself has invited the Court to look behind its own corporate personality. Reference can be made to the following judgments under this category: (i) State of U.P. & Ors vs. Renusagar Power Co. and Ors. (1988) 4 SCC 59 (ii) New Horizons vs. Union of In....
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....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 corporate veil and Shri Trivedi, learned Additional AdvocateGeneral, 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 c....
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....me 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, 3031, 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....
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....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 point. They should not be deprived of the compensation which should justly be payable for disturbance. The three companies should, for present purposes....
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....he 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 confi....
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....iary 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 & 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 ....
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....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 busi....
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....s, 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. 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 Shr....
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.... 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 daytoday 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 trea....
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....oceedings 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 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. vs. As....
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....mental 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 fail....
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....ies". 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. 20. 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. 21. The second question which falls for consideration is : whether the learned Single Judge was justified in lifting the corporate veil in this case and whether the learned Single Judge was further justified in coming to the conclusion that BIIL and BIL was a single economic entity? In order to answer this question, it is necessary to refer to brief facts and chronology of events. 22. Respondent No.2 - Vitol S.A. ("Vitol") had obtained a London arbitral award on 17/01/2011 against Asian Natural Resources (India) Ltd. (Formerly Bhatia International Limited) ("BIL") for a sum of US$ 68,435,250.00 towards damages for breach of the Master Agreement together with interest thereon and legal costs. ....
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....week after the award was allowed to be enforced as a decree by this Court and three weeks after the AGM of BIIL was held appointing him as the Managing Director of the Company for five years. She has noted that the explanatory note to the Resolution that was appended to the notice for convening AGM on 05/07/2014 showed that he was a top level corporate executive. It also showed his directorship in other Bhatia Group companies including BIL, the judgment debtor. (B) The learned Single Judge has also noted that he was Director of BIL from 2004 and ceased to be a Director from 27/08/2014, few days before the execution application was being filed. She has also noted that he ceased to be the Director of other Bhatia Group companies viz. Bhatia Coke and Energy Ltd., Bhatia Washery Ltd. (C ) The learned Single Judge has then noted the Articles of Association of BIIL and BIL in which Surinder Singh Bhatia has been one of the first Directors and also the subscriber to the Memorandum of Association of the company. The learned Single Judge also noted that other members of his family viz his brothers Gurvinder Singh Bhatia and Manjeet Singh Bhatia were also Directors in both the companies ....
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....d his members of his family had created several corporate bodies and they were controlled by Mr. S.S. Bhatia and his family and therefore the learned Single Judge has rightly come to the conclusion that they had to be treated as one single entity as they were being used as cloaks behind which Mr. Surinder Singh Bhatia and his family were using the devise of incorporation as ploy adopted for preventing execution of the international award which was passed against BIL and in favour of Respondent No.2 Vitol. 26. The Apex Court in Kapila Hingrorani vs. State of Bihar(2003) 6 SCC 1 also considered the circumstances under which the liability could be fastened both upon the owner and the operator of the company. The Apex Court in the said judgment in paras 26 and 27 has observed as under:- "26. The proposition that a company although may have only one shareholder will be a distinct juristic person as adumbrated in Salomon vs. Salomon and Co. [1897 AC 22: (189599) ALL ER Rep 33: 66 LJ Ch 35 (HL)], has time and again been visited by the application of doctrine of lifting the corporate veil in revenue and taxation matters (See Dal Chand and Sons vs. CIT [ (1944) 12 ITR 458 (Lah)] and Jugg....
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....ard against BIL. 28. In the affidavit which was filed in judges order No.215 of 2014, it was alleged that the Judgment Debtor BIL and BIIL was a single economic entity. It was submitted By the learned Senior Counsel appearing on behalf of the Appellant that there was no allegation in the affidavit to the effect that the cargo in question ever belonged to judgment debtor and/or that it was paid for by the judgment debtor and/or that the Appellant had acquired this cargo from the judgment debtor by any fraudulent means to defeat the award and/or claim of Vitol. It was further submitted that Vitol had made no attempt to explain why it had misled this Court in its previous affidavit by stating that the cargo in question belonged to judgment debtor. In short it was contended that in previous affidavit, it was stated that the cargo belonged to the judgment debtor whereas in the subsequent affidavit filed in judges order No.215 of 2014, it was contended that the cargo belonged to BIIL but both BIIL and BIL was a single entity and therefore the cargo could be attached. It is not possible to accept this contention. Perusal of the affidavit clearly discloses that in para 4 it is clearly sta....
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....e 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. 31. In our view, this submission also cannot be accepted. It has to be noted that the learned Single Judge proceeded to examine the 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. 32. It was then vehemently urged that the finding of the learned Single Judge that BIIL is an alterego 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 Bomb....
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....he observation made in DHN Food Distributors was in the context of a case where parent company owns all the shares of the subsidiaries so that it can control every movement of the subsidiaries and that the subsidiaries are bound hand and foot to the parent company. It was submitted that in the present case BILL was not a subsidiary company of BIL and no such case was either pleaded or made out in the present case. 33. We are of the view that the said submission cannot be accepted. It has to be noted that the learned Single Judge has taken into consideration the law as it has evolved over a period of years on the doctrine of lifting of corporate veil and in that context the observations in Adam vs. Cape and in DHN Food have been noted by the learned Single Judge. As we have noted hereinabove, this concept of lifting of corporate veil has been expanded by the English, US and Indian Courts and it has now been held that even in execution proceedings, it is possible to examine whether two Companies or group companies is a single entity or not and it is no longer restricted to the cases where principle of corporate veil is used to evade taxes or opposed to justice, convenience. 34. It ....
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....ring on behalf of the Appellant. It is well settled that the observations made in the judgment cannot be read as a statute and the ratio of the case applies with reference to facts of each case and even if there is slight difference in the facts of the case, ratio would not apply to the said case. The Apex Court in Zee Telefilms Ltd. and another vs. Union of India and others(2005) 4 SCC 649 has observed in paras 254, 255 & 256 as under:" Precedent 254. Are we bound hands and feet by Pradeep Kumar Biswas (2002) 5 SCC 111? The answer to the question must be found in the law of precedent. A decision, it is trite, should not be read as a statute. A decision is an authority for the questions of law determined by it. Such a question is determined having regard to the fact situation obtaining therein. While applying the ratio, the court may not pick out a word or a sentence from the judgment divorced from the context in which the said question arose for consideration. A judgment, as is well known, must be read in its entirety and the observations made therein should receive consideration in the light of the questions raised before it. (See Punjab National Bank v. R.L. Vaid (2004) 7 S....
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.... of Directors of Wescare granted approval to the agreement. No such approval was however granted by the Board of Directors of Indowind. Certain transactions took place between the two companies pursuant to the said agreement and thereafter dispute arose between the Wescare on the one hand and Subuthi on the other hand. Wescare filed a Petition under section 11 of the Arbitration and Conciliation Act against Subuthi and Indowind for appointment of a sole arbitrator to arbitrate upon the dispute between them in respect of agreement dated 24/02/2006. Indowind and Subuthi resisted the said Petition and alleged that there was no transaction between the Wescare and Indowind and therefore there was no cause of action nor any arbitrable dispute between them. The learned Chief Justice of Madras High Court allowed the application under section 11 and appointed a sole arbitrator. The learned Chief Justice held that Indowind was prima facie a party to the arbitration agreement and was bound by it even though it was not a signatory to the agreement dated 24/2/2006. The Apex Court framed two issues which are found in para 10 of the said judgment which reads as under:- "10 On the contentions ur....
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....al rule of limited liability of shareholders to the extent of holding of their share in the company. Secondly, these observations have been made by the Apex Court in an application which was filed under section 11(6) of the Arbitration & Conciliation Act in which a request was made by Indowind to appoint a common sole arbitrator for dispute between Indowind, Subuthi. In our view the learned Single Judge has rightly not relied on the observations made by the Apex Court in the said case. 42. In K.K. Modi Investment & Financial Services Private Limited (supra), again an application was made by the Petitioner K.K. Modi under section 9 of the Arbitration & Conciliation Act with a prayer that Respondent No.1 Apollo International Inc. and its affiliates viz Respondent Nos. 2, 3 and 4 be restrained from giving effect to the notice dated 22/04/2009 whereby the license agreement dated 06/09/2002 between Respondent Nos. 1 and 3 was terminated. The Petitioner in his application relied upon the arbitration clause contained in Article 11.14 of the shareholders agreement and pleaded that the agreement between Respondent Nos. 1 and 3 was a part of the contract entered into by the Petitioner with ....
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.....1 with respondent no.3, shows that the petitioner knew that respondents no. 1 & 3 were two different legal persons and he was entering into contract with respondent no.1 or not with respondents no.2, 3 or 4. The contract between respondent no.1 & 3 cannot be considered as contract between the petitioner and respondents no.1 & 3 on the ground of economic unity of respondents no.1 & 3. By the notice dated 22.4.2009 the respondent no.3 had terminated the license, which it granted to respondent no.1 under a separate contract which was entered into between respondents no.1 & 3. The person aggrieved can only be respondent no.1 who could have invoked arbitration clause contained in the license agreement against respondent no.3." 43. Again, facts in the said case were entirely different and in the context of the facts of that case, observations in para 5 have to be considered. Once it is held that it is open for the Court to lift the corporate veil and the Court has after examining the facts and circumstances on record has come to the conclusion that two companies are single entity then general rule of limited liability and separate entity of companies would not apply in such case. Relia....
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....annot be reduced to be puppets. The decisive criterion is whether the parent company's management has such steering interference with 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." What has to be noted is that in the last line of para 103, the Apex Court has observed as under: ".......The decisive criterion is whether the parent company's management has such steering interference with 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." The Apex Court therefore has clearly accepted the exception to the general rule of separate, legal existence of company even though it is a subsidiary company. It however has noted that if the former management has steering influence on the subsidiary's core activities then that would be an exception to the general rule. 44. Lastly, it needs to be seen whether there was sufficient material on record to come to the conclusion that the there were several cases which showed that the Appellant was in fact a single enti....