Justice, Equity and Lifting of the Corporate Veil

Posted On - 22 May, 2023 • By - Renjith Nair

One of the fundamental principles of company law is the principle of separate legal personality of a corporation. A company is regarded as a distinct person with its own rights and liabilities that are independent of its shareholders or management. The doctrine of piercing or lifting the corporate veil stands as an exception to the principle of separate legal personality of a corporation. It seeks to disregard the separate personality of the company and attributes the acts of the company to those who are in direct control of the operations of the company.

Traditionally, Indian courts have pierced the corporate veil only in instances of fraud or where the company is formed for the purpose of evasion of law. Recently, the Delhi High Court in Delhi Airport Metro Express Private Limited v. Delhi Metro Rail Corporation Limited[i] has expanded the scope of the doctrine of piercing of corporate veil by holding that corporate veil may be pierced on grounds of equity and to meet the ends of justice. The Delhi High Court further went on to hold that that the ends of justice being met also include the enforcement/execution of decrees.

Facts of the case

Delhi Metro Rail Corporation (DMRC) and Delhi Airport Metro Express Private Limited (Delhi Airport Metro) entered into an agreement for construction, operation, and maintenance of the Delhi Airport Metro Express Line. A dispute arose between the parties and consequently Delhi Airport Metro terminated the agreement by issuing a termination letter to DMRC. This led to arbitration proceedings, and on 11 May 2017, the arbitral tribunal issued an award (Arbitral Award) in favor of Delhi Airport Metro, affirming the validity of the termination due to DMRC’s failure to rectify defects within the specified timeframe. The Arbitral Award also determined that Delhi Airport Metro was entitled to receive termination payment of approximately INR 20.7 Billion and interest as per the agreement.

DMRC challenged the Arbitral Award, which attained finality when the Supreme Court of India reinstated the Arbitral Award. Once the Arbitral Award’s challenge by DMRC was concluded, Delhi Airport Metro initiated an execution petition before the Delhi High Court to enforce the Arbitral Award. On 10 March 2022, the Delhi High Court issued a detailed order regarding DMRC’s liability to make payments in accordance with the Arbitral Award. The Delhi High Court directed DMRC to fulfill its payment obligations from its internal corpus finances, i.e., total DMRC funds, total project funds, and total other funds (collectivity DMRC Funds) or by raising loans. DMRC challenged this order before the Supreme Court, but it was dismissed.

During the execution petition, DMRC approached its shareholders i.e., the Union Ministry of Housing and Urban Affairs (Union Ministry) and the Government of National Capital Territory of Delhi (Delhi Government), seeking ways to raise funds to fulfill its payment obligations to Delhi Airport Metro. However, the shareholders failed to take any action in raising the necessary funds. Additionally, DMRC’s affidavits indicated a decline in the available DMRC Funds, from INR 56.9 Billion to INR 9.6 Billion, due to the Union Ministry’s instructions in April 2022 to repatriate these funds for various other projects.

Given these exceptional circumstances, Delhi Airport Metro requested the lifting of the corporate veil and the inclusion of DMRC’s shareholders, namely the Union Ministry and Delhi Government to secure the payment owed to Delhi Airport Metro under the Arbitral Award.

One of the issues before the Delhi High Court was whether the execution court can lift the corporate veil of an entity in absence of any allegation of fraud or creation of corporate structure to commit fraud.

Delhi High Court’s ruling

The Court noted that there is a departure in the principle of lifting of corporate veil as applied in India and the United Kingdom. The Court found that the English courts are generally reluctant to lift the corporate veil, and the grounds to lift the corporate veil are reserved to instances of fraud and evasion of law. As opposed to this, the jurisprudence of doctrine of lifting the corporate veil in India is more evolved and its applicability is not restricted to fraud, evasion of law or where the corporate structure is found to be a sham or facade. The Court analyzed various judgments of the Supreme Court to state that the corporate veil may be lifted on the grounds of justice and equity:

(i)     State of Uttar Pradesh and Others v. Renusagar Power Corporation and Others: The Supreme Court held that the contours of lifting the corporate veil are unlimited, and it is dependent on the facts of specific situations.

(ii)    Life Insurance Corporation of India v. Escorts Limited and Others: The Supreme Court specified that the factors in which corporate veil may be lifted include the relevant statutory provisions, object sought to be achieved by lifting the veil, public interest, and conduct and effect on the parties involved.

(iii)   Arcelor Mittal India Private Limited v. Satish Kumar Gupta and Others: The Supreme Court noted that the corporate veil may be lifted where the protection of public interest is of paramount importance.

Relying on the above judgments, the Delhi High Court held that the principle of lifting the corporate veil is not restricted solely to instances of fraud or sham. It can also be applied when fairness and justice require so. The Court opined that a decree, judgment, or award should be enforced as a matter of necessity. Otherwise, such a decree, judgment, or award would have no real value and would be a “dead letter”. The Court further opined that the non-observance of a judgment or decree or award is against public interest as it raises grave concerns on the efficacy of the legal system.

The Court noted that in the present case, DMRC had on multiple occasions failed to discharge its liabilities under the Arbitral Award, which is against public interest. It was finally held that DMRC is an alter ego of the Union Ministry and Delhi Government, as the shareholding and board composition enable them to exercise control over DMRC. Therefore, the Union Ministry and Delhi Government cannot now seek to hide behind the corporate veil to seek amnesty from the liabilities of DMRC. Since DMRC is merely a reflection of its principal shareholder, the Court lifted the corporate veil and held that the obligations of DMRC under the arbitral award must flow to the Union Ministry and the Delhi Government.

Our thoughts

The Delhi High Court has upheld its pro-arbitration stand by emphasizing the enforcement of arbitral awards. However, in doing so, the Court has expanded the scope of the principle of lifting the corporate veil by introducing the grounds of justice and equity. The concept of limited liability of shareholders vis-à-vis the corporate entity is widely recognized as essential for ring fencing risks, thereby inducing flow of capital for growth of businesses. The ring fencing of risks using the corporate structure incentivizes investors to deploy cash in riskier opportunities which requires longer gestation periods to make such opportunities profitable. If the courts expand the grounds for lifting the corporate veil beyond fraud or avoidance of law, it could undermine the attractiveness of limited liability structures, which in turn may reduce risk appetite and thereby discourage investments. Therefore, without the certainty of limited liability, the costs and risks associated with investments may significantly increase.

In view of the above, it is sincerely submitted that there may be significant benefit in exercising utmost caution while justifying the lifting of corporate veil on the principles of justice and equity.

Authors: Souvik Ganguly, Altamash Qureshi and Shrishti Mishra

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] This judgment dated 17 March 2023 of the Delhi High Court is presently under challenge before the Hon’ble Supreme Court of India. We shall provide an update on these matters as and when the Hon’ble Supreme Court of India passes appropriate orders.