Affixing Liability: Lifting the Corporate Veil Under Insolvency Law in India

Under corporate law, it is a well settled principle that a company has a juristic existence which is independent of its shareholders. An exception to this principle is the doctrine of lifting of corporate veil i.e., looking past the separate identity of the company and affixing liability on the actual perpetrators i.e., the management of the company.

Generally, Indian courts have employed this doctrine to avoid perpetuation of fraud [i], evasion of taxes [ii], or when the corporate personality is opposed to justice, convenience and interest of the revenue or against public interest [iii], or where it is a statutory provision [iv].The Indian insolvency courts have also pierced the ‘corporate veil’ in order to ascertain the identity of resolution applicant for a company undergoing insolvency to prevent back-door entry to erstwhile management [v].

In the recent case of Yaduvir Singh Sajwan & Ors. v. M/s. Som Resorts Pvt Ltd (Som Resorts Case), the National Company Law Tribunal (NCLT) lifted the corporate veil of the corporate debtor for determining the true parties at default in an insolvency proceeding under the Insolvency and Bankruptcy Code, 2016 (Code).

Facts of Som Resorts Case

Som Resorts Pvt. Ltd. (Som Resorts) launched a commercial-cum-residential project (Project), for which Cosmic Structures Ltd. (Cosmic) was appointed as the marketing and advertising agency. Several individuals (Homebuyers) made payments to Cosmic for booking units in the Project and they were assured possession within three years. This arrangement was also reduced in writing between Som Resorts and the Homebuyers in a Builder Buyer Agreement. Before the units could be delivered, the Delhi High Court ordered liquidation of Cosmic, and the official liquidator appointed by the High Court also sealed the Project considering it to be a property of Cosmic.

Eventually, a Memorandum of Settlement was executed between Cosmic, Som Resorts and the Homebuyers, wherein Som Resorts undertook to complete the Project and hand over possession to the Homebuyers within 18 months of de-sealing of the Project. Som Resorts also agreed to refund the entire amount received from the Homebuyers with 18% interest if it defaulted in completing the Project within the stipulated time. However, as Som Resorts not only failed to deliver possession of the units, but also neglected to repay the amounts as agreed in the Memorandum of Settlement, the Homebuyers approached the NCLT seeking insolvency of Som Resorts.In the NCLT, Som Resorts took a stand that:

a.  Payments by Homebuyers for booking units in the Project were done to Cosmic and not to Som Resorts;

b.  Som Resorts had only appointed Cosmic as a marketing agent, and it had no right to accept such payments from the Homebuyers;

c.  The payments made by the Homebuyers to Cosmic were without knowledge of or intimation to Som Resorts, and therefore no debt is due and payable by Som Resorts to the Homebuyers; and

d. Insolvency of Som Resorts cannot be initiated due to default by Cosmic.

NCLT’s ruling

NCLT noted that in the Builder Buyer Agreement, Som Resorts was identified as the developer while the Homebuyers were defined as the proposed space buyers, and therefore this very document established that units in the Project were being allotted and payments were being received with the knowledge of Som Resorts. The NCLT further noted that Som Resorts and Cosmic were being managed by the same person. Lifting the corporate veil, the NCLT took note that under the garb of a principal – agent relationship, the management of Som Resort had used Cosmic to collect money from the Homebuyers with an ulterior motive. The NCLT opined that the substance of the payments received by Cosmic from the Homebuyers was towards the Project being developed by Som Resorts, and it cannot escape its liability towards these units, otherwise this will be prejudicial to the Homebuyers.The NCLT held that Som Resorts was the ultimate beneficiary of all the transactions between Cosmic and the Homebuyers. As it had defaulted in completing the Project and making payments to the Homebuyers, insolvency proceedings were initiated against Som Resorts.

Our thoughts

Indian courts have pierced the corporate veil when they find that a corporate entity is being abused for committing fraud. Prior to the Som Resorts Case, piercing of the corporate veil in insolvency law has been extensively utilized to determine the actual beneficiaries behind a resolution plan submitted for a corporate debtor. The Som Resorts Case further widens the scope for the insolvency courts to lift the corporate veil and ensure that the corporate debtor does not escape its liability under the Code using the disguise of a corporate entity. The NCLT’s decision to disregard the corporate veil to affix liability on Som Resorts can be said to be in keeping with the spirit of the Code.It should be noted that in India, real estate developers launch specific projects under a Special Purpose Vehicle (SPV). The SPV structure is used to ring fence the parent company from genuine risks being taken by the specific project. We are of the view that the judgment in the Som Resorts Case has correctly used the fundamental principles of the law relating to ‘lifting of the corporate veil’ by admitting the ‘real’ developer into the rescue process, even if the default has occurred in the SPV. The judgment would be viewed favorably by homebuyers, in the event the parent company has used the SPV for the purpose of committing an illegality, as the parent company will still be liable for the default of the SPV.

Authors: Souvik Ganguly, Renjith Nair and Altamash Qureshi

The information contained in this document is not legal advice or legal opinion. The contents recorded in the said document are for informational purposes only and should not be used for commercial purposes. Acuity Law LLP disclaims all liability to any person for any loss or damage caused by errors or omissions, whether arising from negligence, accident, or any other cause.

[i] State of Gujarat v. Shri Ambica Mills Ltd.

[ii] Vodafone International Holdings BV v. Union of India

[iii] State of U.P. v. Renusagar Power Co.

[iv] Life Insurance Corporation of India v. Escorts Limited and Others

[v] ArcelorMittal India Pvt. Ltd. v. Satish Kumar Gupta; Argentium International Pvt. Ltd. v Utm Engineering Pvt. Ltd.