AI Drafter 
TaxTMI 
TaxTMI 
2016 (9) TMI 967
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.... cargo viz coal which was purchased in the 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 ....
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....Infrastructure Limited was a Company established under the Companies Act, 1956 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 s....
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.... execution of the Award passed in favour of Respondent No.2. 10. Before we deal with the 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)....
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....State of U.P. & Ors vs. Renusagar Power Co. and Ors. (1988) 4 SCC 59 This judgment noted the change in the concept of lifting of corporate veil. It has been observed in the said judgment that the concept of lifting of corporate veil is a changing concept and was permissible in the expanding horizon of modern jurisprudence. It will be relevant and useful to reproduce the relevant paragraphs of the said judgment in which evolution of this doctrine has been beautifully traced. Paras 51 to 72 of the said judgment are relevant and they read as under: "51. This naturally brings us to the question of lifting the corporate veil or piercing the corporate veil as we often call it. On behalf of the appellants, however, it was very strongly urged that in this case there was no ground for lifting the 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 urg....
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....on a principle of public policy, or on the principle that devices used to perpetrate frauds or evade obligations will be treated as nullities, or on a presumption of agency or trusteeship which at first sight Salomon case [1897 AC 22] seems to prohibit. Again at page 36 of the same book, the learned author notes a few cases where the courts have disregarded separate legal entity of a company and investigated the personal qualities of the shareholders or the persons in control of it because there were overriding public interests to be served by doing so. 54. Indubitably, in this case there was no question of evasion of taxes but the manner of treatment of the power plant of Renusagar as the power plant of Hindalco and the Government taking full advantage of the same in the case of power cuts and denial of supply of 100 per cent power to Hindalco, in our opinion, underline the facts and, as such, imply acceptance and waiver of the position that Renusagar was a power plant owned by Hindalco. Shri Trivedi naturally relied on several decisions which we shall briefly note in aid of the submission that Renusagar's power plant could not be treated as Hindalco's power plant. He ref....
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....1961 of England. Lord Denning at page 467 of the report has made certain interesting observations which are worth repeating in the context of the instant case. The Master of the Rolls said at page 467 as follows: Third, lifting the corporate veil. A further very interesting point was raised by counsel for the claimants on company law. We all know that in many respects a group of companies are treated together for the purpose of general accounts, balance sheet and profit and loss account. They are treated as one concern. Professor Gower in his book on company law says: 'there is evidence of a general tendency to ignore the separate legal entities of various companies within a group, and to look instead at the economic entity of the whole group'. This is especially the case when a parent company owns all the shares of the subsidiaries, so much so that it can control every movement of the subsidiaries. These subsidiaries are bound hand and foot to the parent company and must do just what the parent company says. A striking instance is the decision of the House of Lords in Harold Holdsworth & Co. (Wakefield) Ltd. v. Caddies [(1955) 1 ALL ER 725]. So here. This group is virtual....
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....ch duties to the respondent. My Lords, in my judgment, this is too technical an argument. This is an agreement in re mercatoria, and it must be construed in the light of the facts and realities of the situation. The appellant company owned the whole share capital of British Textile Mfg. Co. and, under the agreement of 1947, the directors of this company were to be the nominees of the appellant company. So, in fact, the appellant company could control the internal management of their subsidiary companies, and, in the unlikely event of there being any difficulty, it was only necessary to go through formal procedure in order to make the decision of the appellant company's board fully effective. That particular passage, is I think, especially cogent having regard to the fact that counsel for the local authority was constrained to admit that in this case, if they had thought of it soon enough, DHN could, as it were, by moving the pieces on their chess board, have put themselves in a position in which the question would have been wholly unarguable. I also refer to Scottish Cooperative Wholesale Society Ltd. v. Meyer [(1958) 3 ALL ER 66]. That was a case under S....
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....ld have had the business but no interest in the land." 58. In this connection it would be useful to refer to Harold Holdsworth & Co. (Wakefield) Ltd. v. Caddies [(1955) 1 ALL ER 725], where Lord Morton of Henryton in England, at page 734 of the report observed as follows: "My Lords, this clause refers to a group of companies consisting of the appellant company and their existing subsidiary companies. I cannot read the clause as compelling the board to assign duties to the respondent in relation to the business of every company in the group. Nor can I read it as compelling the board to assign him duties in relation to the business of the appellant company. That business is not treated as being on a different footing from the business of British Textile or of another subsidiary of the appellant company, Whalley & 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 leav....
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....ssible to separate the transactions of the society from those of the company. Every step taken by the latter was determined by the policy of the former. It will give an example of this. I observed that, in the course of the argument before the House, it was suggested that the company had only itself to blame if, through its neglect to get a contract with the society, it failed in a crisis to obtain from the Falkland Mill the supply of cloth that it needed. The short answer is that it was the policy of the society that the affairs of the company should be so conducted, and the minority shareholders were content that it should be so. They relied - how unwisely the event provided - on the good faith of the society, and in any case they were impotent to impose their own views. It is just because the society could not only use the ordinary and legitimate weapons of commercial warfare but could also control from within the operations of the company that it is illegitimate to regard the conduct of the company's affairs as a matter for which it had no responsibility. After much consideration of this question, I do not think that my own views could be stated better than in the late Lord Pre....
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....ever may be the other different legal consequences following on one or other of these forms of combination one result, in my opinion, followed in the present case from the method adopted, which is common to partnership, that there should be the utmost good faith between the constituent members. In partnership the position is clear. As stated in Lindley on Partnership (11th Edn.), p. 401: 'A partner cannot, without the consent of his copartners, 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 subsidiar....
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....l independent existence distinct from individual members. It has since been held that the corporate veil may be lifted and corporate personality may be looked in. Reference was made to Pennington and Palmer's Company Laws. 66. It is high time to reiterate that in the expanding horizon of modern jurisprudence, lifting of corporate veil is permissible. Its frontiers are unlimited. It must, however, depend primarily on the realities of the situation. The aim of the legislation is to do justice to all the parties. The horizon of the doctrine of lifting of corporate veil is expanding. Here, indubitably, we are of the opinion that it is correct that Renusagar was brought into existence by Hindalco in order to fulfil the condition of industrial licence of Hindalco through production of aluminium. It is also manifest from the facts that the model of the setting up of power station through the agency of Renusagar was adopted by Hindalco to avoid complications in case of take over of the power station by the State or the Electricity Board. As the facts make it abundantly clear that all the steps for establishing and expanding the power station were taken by Hindalco, Renusagar is wh....
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.... In the aforesaid view of the matter we are of the opinion that consumption of energy by Hindalco is clearly consumption by Hindalco from its own source of generation. Therefore, the rates of duty applicable to own source of generation have to be applied to such consumption, that is to say, 1 paisa per unit for the first two generating sets and nil rate in respect of third and fourth generating sets. It is appropriate to refer that having regard to the conduct of the State the power cuts matter and also the present proceedings the State should not be permitted to treat consumption of Renusagar's energy by Hindalco as anything other than (sic or) different from consumption of energy by Hindalco from its own source of generation. We are, therefore, of the opinion that in the facts of this case the corporate veil must be lifted and Hindalco and Renusagar should be treated as one concern and if that is taken the consumption of energy by Hindalco must be regarded as consumption by Hindalco from its own source of generation. 71. Inasmuch as the High Court upheld this contention of the respondent we are in respectful agreement of its views and the appeal directed against this fin....
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....r of lifting the corporate veil. 16. Punjab and Haryana High Court in Sai Sounds Private Limited vs. Kiran Contractors Private Limited (2016) 1822 PLR 518 has also taken a view that in execution proceedings corporate veil can be lifted. In para 10 of the said judgment, it has been observed as under:- "10. The issue of competency of the decreeholder to proceed against the assets of the Managing Director could be taken only if it is a circumstance when it is possible to tear the corporate veil. There is no difficulty in understanding the fundamental proposition that a company registered under the Companies Act is an independent entity and the liability of the company cannot be understood as constituting a personal liability for the Managing Director, except to the extent provided under the Income Tax Act. The known exceptions are exceptions which courts have accepted through judicial interpretation when the corporate veil could be lifted. The decision are abundant, which I do not feel constrained to cite that if in the suit a Managing Director is sought to be made as party along with the company when the liability is contracted by the Company, the Court will examine wheth....
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....company's management has steering influence on the subsidiary's core activities that the subsidiary can no longer be regarded to perform those activities on the authority of its own executive directors"; and (iii) where "the company is the creature of the group and the mask which is held before its face in an attempt to avoid recognition by the eye of equity or is a mere cloak or sham and in truth the business was being carried on by one person and not by the company as a separate entity". (iv) where "two companies are inextricably interlinked corporate entities". 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 just....
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....rate legal entities but were actually the same and were trading under different names through the same person in the same goods and businesses. The learned single Judge has firstly noted the website of the companies which indicated that BIIL and BIL were two of the companies in the group which was essentially trading under the name Bhatia. Secondly, she has noted that the Director of the group was Surinder Singh Bhatia. She has further noted that he was whole time Director of BIIL from 2009 and was originally appointed Director in BIIL on 08/07/1993. She has noted that he resigned on 22/09/2014, exactly a 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 fr....
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.... having common employees and common key personnel of their common relatives. She has further noted that Bhatia Group was also shown to be having huge property and assets interchangeably and which followed as a matter of corollary from their common post address and business office. On the basis of this material the learned Single Judge has observed that BIIL and BIL was one single economic entity which was being managed by Surinder Singh Bhatia and his close relatives. 25. We concur with the view taken by the learned Single Judge. The learned Single Judge has considered all the circumstances which indicate that Mr. Surinder Singh Bhatia and 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 Hingr....
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....opted for committing illegalities and/or to defraud people." In this case also the facts were that one Tejwant Singh and members of his family had created corporate bodies and the Court, after lifting the veil, held that all of these was one entity belonging to and controlled by Tejwant Singh and family. It further observed that these corporate bodies were merely cloaks and masks behind which Tejwant Singh and his family members were hiding. We concur with the view taken by the learned Single Judge that BIIL and BIL was part of the group companies and though they were incorporated at different times, these Companies have now been used to defeat the execution of the award 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 m....
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....oods which were purchased by entering into High Seas Sale Agreement. It was submitted that the Appellant had also produced High Seas Sale Invoice / Debit Note. It was submitted that the learned Single Judge had rejected the said evidence of ownership of BIIL by holding that BILL had not shown that payment, if any, was made by it to the seller of the cargo. It was submitted that Respondent No.2 - Vitol had never disputed the aforesaid agreement and invoice in any way and had not placed any material before this Court to show that High Seas Sale Agreement and High Seas Sale Invoice / Debit Note were either false or incorrect. It was submitted that the finding of the learned Single Judge was given firstly without giving an opportunity to the Appellant to produce proof of payment by BILL. It was submitted that the Appellant had prepared an additional affidavit to bring on record the proof of payment by BIIL. At this stage, the learned Counsel appearing on behalf of Respondent No.2 took an objection to the production of the additional affidavit at the hearing of the appeal. The objection raised by the learned Counsel for Respondent No.2 is sustained and the Appellant cannot be permitted ....
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....ontention that BIIL was incorporated with the fraudulent purpose and/or for the purpose of siphoning away the assets of BIL or for the purpose of perpetrating any fraud upon creditors of BIL. It was submitted that BILL was incorporated as far back in 1993 and was publicly listed company. It was submitted that the learned Single Judge wrongly relied on the case in Adam vs. Cape where, in fact, it was held that that the Court was not entitled to exercise its jurisdiction against U.K. Company merely because it was wholly owned subsidiary in the U.S. Capasco. It was further submitted that even reliance placed by the learned Single Judge on the ratio of the Judgment in DHN Food Distributors(supra) was incorrect. It was submitted that the 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 su....
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....s cited by BIIL's Counsel were not considered or dealt with in the said judgment viz the judgment in Indowind Energy Limited vs. Wescare (India) Ltd. [(2010) 5 SCC 306] and in K.K. Modi Investment & Financial Services Private Limited vs. Apollo International Inc. [(2009) SCC Online Del. 1995 : 2009 2 Arb. L.R. 499]. It was submitted that both the judgments were authorities for the proposition that two independent companies incorporated under the Companies Act were separate and distinct legal entities and the mere fact that two companies have common shareholders or common Board of Directors would not make the two companies a single entity. 37. Again, there is no substance in the said submission made by the learned Senior Counsel appearing 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:" ....
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....but ratio of the said judgments will certainly not apply to the facts of this case. The learned Single Judge in her judgment has noted these two judgments. It is true that reasons why these two judgments have not been relied upon are not mentioned. Perusal of the facts of these two cases clearly indicate those observations have been made in the facts of those cases. 39. In Indowind Energy Ltd (supra), the facts have been narrated in paras 17 and 18 of the judgment. Briefly stated, one Subudhi and Indowind were two independent Companies incorporated under the Companies Act, 1956. Both were in the business of setting up and operating/managing windfarms and generation of power from wind electric generators. An agreement dated 24/02/2006 was entered into between Wescare and Subuthi. The Board 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....
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....tity and mere fact that two companies have common shareholders or common Board of Directors will not make the two companies single entity. These observations therefore have been made by the Apex Court in the facts of the said case. Therefore ratio of the said judgment will not apply to the present case, firstly because in Indowind Energy Limited (supra), the issue was : whether Indowind Energy Limited, though was not a signatory to the agreement dated 24/2/2006, was bound by the agreement executed by Subuthi Limited and in this context the above observations were made by the Apex Court. 41. The facts in the present case are entirely different. An application was made by Respondent No.2, asking the Court to pierce the corporate veil on various grounds. The doctrine of lifting the corporate veil is an exception to the general 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, Sub....
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....nies as subsidiary companies or wholly owned companies would have no meaning and the Court would be effectively merging all subsidiary companies wholly or partly owned companies into one company. That is not the position under company law or any other law that a subsidiary company practically has no legal existence and it is only the main company which has legal existence. A contract with respondent no.1 cannot be considered as a contract with respondent nos. 2, 3 and 4. If respondent no. 2, 3 & 4 were to be considered one and the same person then there was no reason for the petitioner to enter into contract with only a subsidiary company. The petitioner should have entered into a contract with main company. The very fact that the petitioner entered into a contract with subsidiary company on the basis of an agreement of respondent no.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 economi....
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.... the country concerned except where the subsidiaries are created or used as a sham. Of course, in many cases the courts do lift up a corner of the veil but that does not mean that they alter the legal position between the companies." "103. The Directors of the subsidiary under their articles are the managers of the companies. If new Directors are appointed even at the request of the parent company and even if such Directors were removable by the parent company, such Directors of the subsidiary will owe their duty to their companies (subsidiaries). They are not to be dictated by the parent company if it is not in the interests of those companies (subsidiaries). The fact that the parent company exercises shareholders' influence on its subsidiaries cannot obliterate the decisionmaking power or authority of its (subsidiary's) Directors. They cannot 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 i....
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....l not reassess the material and seek to reach a conclusion different from the one reached by the court below if the one reached by that court was reasonably possible on the material. The appellate court would normally not be justified in interfering with the exercise of discretion under appeal solely on the ground that if it had considered the matter at the trial stage it would have come to a contrary conclusion. If the discretion has been exercised by the trial court reasonably and in a judicial manner the fact that the appellate court would have taken a different view may not justify interference with the trial court's exercise of discretion. After referring to these principles Gajendragadkar, J. in Printers (Mysore) Private Ltd vs. Pothan Joseph (1960) 3 SCR 713 : AIR 1960 SC 1156 : (SCR 721). "...... These principles are well established, but as has been observed by Viscount Simon in Charles Osenton & Co. v. Jhanaton [1942 AC 130) '....the law as to the reversal by a court of appeal of an order made by a judge below in the exercise of his discretion is well established, and any difficulty that arises is due only to the application of well settled principles in ....