Government Co?

State Trading Corp. v CTO, AIR 1963 SC 1811 (To Quash Sales Tax Proceedings)

Bank Nationalisation Case, AIR 1970 Sc 564 Bennett Coleman & Co. v Union of India, AIR

1973 SC 106 Statesman v Fact Finding Committee, AIR 1975

Cal. 14 Godhra Electric Co v State of Gujarat, AIR 1975

SC 32 PTI v Union of India, AIR 1974 SC 1044

Kapila Hingorani v State of Bihar, (2003) 6 SCC 1

Justice S.B. Sinha

Government Co.’s/ PSU’s – Not paid salaries to their workmen & other

employees for a long time Resulted in death of several persons Miseries brought to a large number of families

Name of the PSU No. of Em.ee

Date from which salary is due

Nos. of Death

Bihar State Agro Industries Development Corp.

630 May-93 70

Bihar State Medicine & Chemical Development Corp.

265 Aug-93 11

Bihar State Handloom & Handicraft Corp.

429 Headquarter from May 1996 Unit from 1993

3

Bihar State Small Scale Indl. Development Corp.

141 Headquarter from April 1995. Unit from April 1993

36

Bihar State Sugar Corp. 9240 Headquarter - Jan. 2000

Unit from April 1992

467

Bihar State Leather Development Corp.

471 From March 1993 13

Bihar Finished Leathers - - 35Bihar State Industrial Development Corp.

1551 Headquarters from July 2001 Unit from Feb. 1993

125

Bihar State Electric Corporation 157 In Headquarter up to date. In Unit from April 1998 5

Bihar State Vastralaya Corp. 50 Nov.-96. Nil

Bihar State Film Development & Financial Corp.

8 Aug.-02 Nil

Bihar State Fruit & Vegetable Development Corp.

16 From Aug.-94 1

Bihar State Seed Development Corp.

137 From May 1999 5

Bihar State Fisheries Development 42 Before May 2000 due to 32 to 40 months 5

Bihar State Food & Civil Supplies Corp.

1716 Pending from till 40 months 325

Bihar State Panchayati Raj Financial Corp.

130 From March 1996 7

Bihar State Construction Corp. 657 Headquarter – Jan. 1995. Unit from January 1992

55

Bihar State Road Transport Corp. 5580 Headquarter + In sum units from Nov. 1998 Balance in from December 1993 Note: 205

Bihar State Khadi Gramdhoyog Board

75 Payment of Salaries 71 Staff in non-plan (upto date) due from April 94 Staff Salaries NA

Bihar Hill Area Lift Irrigation Corp. 684 - NA

State of Bihar – Did not deny the factual statement made in the WP

Its stand, however, is that salaries are being paid by the statutory authorities.

State of Bihar - Shanti Bhushan.

Liability of Co’s cannot be passed on to SOB - by taking recourse to the doctrine of “lifting the veil” or otherwise

Liability of Co’s cannot be passed on to SOB - by taking recourse to the doctrine of “lifting the veil” or otherwise

Undertakings/Co’s are registered or incorporated U/T CA - Rights & liabilities - Governed by the provisions CA

Undertakings/Co’s are registered or incorporated U/T CA - Rights & liabilities - Governed by the provisions CA

Just & proper – Liability - Directed to be met to the extent of 80 % - UOI

10 % - State Government 10 % - Realised from the sale of properties belonging to the

respective co’s.

Just & proper – Liability - Directed to be met to the extent of 80 % - UOI

10 % - State Government 10 % - Realised from the sale of properties belonging to the

respective co’s.

Co. registered U/T/CA is a juristic person - Its rights & liabilities must be determined in terms thereof & not de’hors the same

Co. registered U/T/CA is a juristic person - Its rights & liabilities must be determined in terms thereof & not de’hors the same

In law nor in equity - UIO can be fastened with any liability of SOB.

Direct - OL be appointed & to dispose of WU applications as expeditiously as possible

Sec. 529 A, CA - Dues of employees will have primacy.

Co. Judge may also be directed to look into the Human Right aspect of the matter.

Union of India - Mr. Soli J. Sorabjee Attorney GeneralUnion of India - Mr. Soli J. Sorabjee Attorney General

Whether - Court would take a sheer legalistic approach in holding that the corporate veil would not be lifted?

Although its conscience stands satisfied that there has been violations of citizens’ right to life & liberty as adumbrated U/A 21 of the Constitution of India?;

Whether - Court would take a sheer legalistic approach in holding that the corporate veil would not be lifted?

Although its conscience stands satisfied that there has been violations of citizens’ right to life & liberty as adumbrated U/A 21 of the Constitution of India?;

2. Whether - Govt. Co’s /Corp’s… are States within the meaning of Art. 12?

SOB having deep & pervasive control over the affairs thereof can be held to be liable to render all assistance to the said Co’s? ….

To fulfill its own &/or the Corp.’s obligations to comply with the citizens’ right U/A’s. 21 & 23?

2. Whether - Govt. Co’s /Corp’s… are States within the meaning of Art. 12?

SOB having deep & pervasive control over the affairs thereof can be held to be liable to render all assistance to the said Co’s? ….

To fulfill its own &/or the Corp.’s obligations to comply with the citizens’ right U/A’s. 21 & 23?

Complex questions? Complex questions?

3. Whether - SOB can escape its liability having regard to the human rights problem involved in the matter?

3. Whether - SOB can escape its liability having regard to the human rights problem involved in the matter?

4. Whether - liability of the SOB, if any, can be shifted to UOI?

4. Whether - liability of the SOB, if any, can be shifted to UOI?

Electronics Corporation of India Ltd.’s case, 1999 Indlaw SC 1147 (supra) opined:

“A clear distinction must be drawn between a Co. & its SH, even though that SH may be only one & that CG/SG - in the eye of the law, a Co. registered U/T/CA is a distinct legal entity other than the legal entity / entities that hold its shares.”

RD Shetty v International Airport of India, (1979) 3 SCC 489 MD, U.P. Warehousing Corpn. v Vijay Narayan Vajpayee,

(1980) 3 SCC 459 Som Prakash Rekhi v Union of India, (1981) 1 SCC 449 Central Inland Water Transport Corp. Ltd. v Brojo Nath Ganjuly

(1986) 3 SCC 156

RD Shetty v International Airport of India (1979) 3 SCC 489

“Corp’s created by the Govt. for setting up & management of public enterprises & carrying out public functions, act as instrumentalities of the Govt.… would be subject to the same limitations in the field of constitutional & administrative laws as the Govt. itself, though in the eye of the law they would be distinct & independent legal entities. (Enforcing the mandate of Art. 14 - against the - Central Govt. Corp.)

MD, U.P. Warehousing Corpn. v Vijay Narayan Vajpayee, (1980) 3 SCC 459 (Para 27)

Dismissal in violation of the principles of natural justice. - Court held the Corp. to be an instrumentality of the State & extended protection of Arts. 14 & 16 to the employee –

When the Govt. is bound to observe the equality clause in the matter of employment the Corp’s set up & owned by the Govt. are equally bound by the same discipline.

Judgment? Para 30We wish to clear the air that the principle, while

discharging public functions & duties the govt. Co’s / Corp’s / Societies which are instrumentalities / agencies of the Govt. must be subjected to the same limitations in the field of Public Law, Constitutional or Administrative Law as the Govt. itself, does not lead to the inference that they become agents of the CG/SG for all purposes so as to bind such Govt. for all their acts, liabilities & obligations under various Central Acts and/or State Acts or under Private Law.

Para 32… Corporate veil can in certain situations be pierced or lifted…

Principles behind the doctrine is a changing concept & it is expanding its horizon..(State of U.P. and Ors. v. Renusagar Power Co) - Ratio of the said decision clearly suggests that whenever a corporate entity is abused for an unjust & inequitable purpose... Court would not hesitate to lift the veil & look into the realities so as to identify the persons who are guilty & liable therefor.

Para 33 - Proposition that a Co. although may have only one SH will be distinct juristic person as adumbrated in Salomon Case - Has time & again been visited the application of doctrine of lifting the corporate veil in revenue & taxation matters.

(Dal Chand and Ors. v. CIT, Punjab, (1944) 12 ITR 458 & Juggilal Kamlapat v. CIT, U.P., (1969) 1 SCR 988

Para - 34Corporate veil indisputably can be pierced

when the corporate personality is found to be opposed to justice, convenience & interest of the revenue or workman or against public interest.

C.I.T. Madras v Meenakshi Mills Ltd and Ors., (1967) 1 SCR 934; Workmen, Assn. Rubber Industry Ltd., v Associated Rubber

Industry Ltd., (1985) 4 SCC 11; New Horizons Ltd. v UOI (1995) 1 SCC 478; State of U.P. v Renusagar Power Co. (1988) 4 SCC 59; Hussainbhai, Calicut v. The Hath Factory Thezhilali Union,

Kozhikode (1978) 4 SCC 257; Secretary H.S.E.B. v. Suresh (1999) 3 SCC 601

Para 37 Govt. Co’s/PSU being “State” would be constitutionally

liable to respect life & liberty of all persons in terms of Art. 21… They, therefore, must do so in cases of their own employees. .

SOB for all intent & purport is the sole SH. Although in law, its liability towards the debtors of the Co. may be confined to the shares held by it but, having regard to the deep & pervasive control it exercises over the Govt. Co’s; in the matter of enforcement of human rights &/ or rights of the citizen of life & liberty, the State has also an additional duty to see that the rights of employees of such Corp.’s are not infringed.

Para 38…Right to exercise deep & pervasive control

would in its turn make SOB liable to see that the life & liberty clause in respect of the employees is fully safeguarded.

…SOB, thus, had a constitutional obligation to protect life & liberty of the employees of the Govt. owned Co’/Corp’s who are the citizens of India… had an additional liability having regard to its right of extensive supervision over the affairs of the Co.

Para 41 State may not be liable in relation to the day to day

functioning of the Co’s, but its liability would arise on its failure to perform the Constitutional duties & functions - By the PSU’s, as in relation thereto the State’s Constitutional obligations.

State acts in a fiduciary capacity. Failure on the part of the State in a case of this nature must also

be viewed from the angle that the statutory authorities have failed &/or neglected to enforce the social welfare legislations enacted in this behalf e.g. Payment of Wages Act, Minimum Wages Act etc.

Such welfare activities as adumbrated in Part IV… indisputably would cast a duty upon the State being a welfare State & its statutory authorities to do all things which they are statutorily obligated to perform.

Referring to the National Textile Workers’ Union v P.R. Ramakrishnan, (1983) 1 SCR 922

Justice Bhagwati.

“We cannot allow the dead hand of the past to stifle the growth of the living present. Law cannot stand still:

It must change with the changing social concepts & values. If the bark that protects the tree fails to grow & expand along with the tree, it will either choke the tree or if it is a living tree, it will shed that bark & grow a new living bark for itself.

Similarly, if the law fails to respond to the needs of changing society, then either it will stifle the growth of the society & choke its progress or if the society is vigorous enough, it will cast away the law which stands in the way of its growth.

Law must therefore Constantly be on the move adapting itself to the fast changing society & not lag behind.”

Law must therefore Constantly be on the move adapting itself to the fast changing society & not lag behind.”

Para 77 The court in a situation of this nature is obligated to

issue necessary directions to mitigate the extreme hardship of the employees involving violation of human rights of the citizens of India at the hands of SOB & Govt. Co’ & Corp’s fully owned or controlled by it.

A right to carry on business is subject to compliance of constitutional obligations as also limitations provided for in the Constitution.

Para 78 - Financial stringency may not be a ground for not issuing requisite directions when a question of violation of fundamental right arises….Rural Litigation and Entitlement Kendra & Ors. v

State of UP & Ors., AIR (1987) SC 359; Ratlam Municipality v Vardi Chand, (1980) 4 SCC 162

Para 87 ?We, however, hasten to add that we do not

intend to lay down a law, as at present advised, that the State is directly or vicariously liable to pay salaries / remunerations of the employees of PSU’s or the G.C’s in all situations.

We, as explained hereinbefore, only say that State cannot escape its liability when a human rights problem of such magnitude involving the starvation deaths &/or suicide by the employees has taken place by reason of non payment of salary to the employees of PSU for such a long time…”

Mysore Paper Mills Limited v Association and another(2002) 2 SCC 167

(1)Whether the Mysore Paper Mills which is a Co. incorporated U/T/CA & which is a Govt. Co. as defined in S. 617 falls within the meaning of the word “State”, as defined in Art. 12?

(2) Where the financial assistance of the State is so much as to meet almost entire expenditure of the Corp., it would afford some indication of the Corp. being impregnated with govt.al character.

(2) Where the financial assistance of the State is so much as to meet almost entire expenditure of the Corp., it would afford some indication of the Corp. being impregnated with govt.al character.

(3) It may also be a relevant factor whether the Corp. enjoys monopoly status which is State conferred or State protected.

(3) It may also be a relevant factor whether the Corp. enjoys monopoly status which is State conferred or State protected.

(1) One thing is clear that if the entire SC of the Corp. is held by Govt., it would go a long way towards indicating that the Corp. is an instrumentality / agency of Govt.

(1) One thing is clear that if the entire SC of the Corp. is held by Govt., it would go a long way towards indicating that the Corp. is an instrumentality / agency of Govt.

International Airport Authority

(4) Existence of deep & pervasive State control may afford an indication that the corp. is a State agency or instrumentality.

(4) Existence of deep & pervasive State control may afford an indication that the corp. is a State agency or instrumentality.

(5) If the functions of the corp. are of public importance & closely related to govt.al functions, it would be a relevant factor in classifying the Corp. as an instrumentality or agency of Govt.

(5) If the functions of the corp. are of public importance & closely related to govt.al functions, it would be a relevant factor in classifying the Corp. as an instrumentality or agency of Govt.

(6) “Specifically, if a department of Govt. is transferred to a corp., it would be a strong factor supportive of this inference” of the corp. being an instrumentality or agency of Govt.

(6) “Specifically, if a department of Govt. is transferred to a corp., it would be a strong factor supportive of this inference” of the corp. being an instrumentality or agency of Govt.

Steel Authority of India Ltd. & Others v National Union Waterfront Workers & Others, (2001) 7 SCC 1

Central Govt. undertakings which fall within the meaning of “other authorities” in Art. 12 - are agents / instrumentalities of the State functioning under the “authority” of CG to constitute such Govt. to be the “Appropriate Govt.” for purposes of Contract Labour (Regulation and Abolition) Act, 1970 & S. 2(a) of the Industrial Disputes Act, 1947.

“…Indisputable fact that… Co. is a Govt. Co. as envisaged in S. 617 attracting S. 619, CA, More than 97% of the SC has been contributed by the SG & the financial institutions controlled & belonging to the Govt. of India on the security & undertaking of the SG…”

Steel Authority of India Ltd

That the amendments introduced to the MOA… in 1994 introducing Articles 5A & 5B, entrusts.. Co. with important public duties obligating to undertake, permit, sponsor rural development & for social & economic welfare of the people in rural areas by undertaking programmes to assist & promote activities for the growth of national economy which are akin & related to the public duties of the State,

that out of 12 directors 5 are Govt. & departmental persons, besides other elected directors also are to be with the concurrence & nomination of the Govt. & the various other form of supervision & control, …go to show that the SG has deep & pervasive control of the Co. & its day-to-day administration, & consequently confirm the position that the Co. is nothing but an instrumentality & agency of the SG. &

The physical form of Co. is merely a cloak / cover for the Govt. Despite best & serious efforts made on behalf of the Co., the decision under challenge has not been shown to suffer any infirmity whatsoever to call for interference in our hands.

Life Insurance Corporation of India v Escorts Ltd. (1986) 59 Comp Cases 548: 1986 (1) SCC 264

The corporate veil may be lifted where: A statute itself contemplates lifting the veil, or Fraud or improper conduct is intended to be prevented, or A lasting statute or a beneficent statute is sought to be evaded

or Where associated Co’s are inextricably connected as to be, in

reality, part of one concern. It is neither necessary nor desirable to enumerate the

classes where lifting the veil is permissible, since that must necessarily depend on theRelevant statutory or other provisions Object sought to be achieved Impugned conduct Involvement of the element of the public interest Effect on parties who may be affected, etc.

LIC CASE Individuals - No difficulty in identifying their

nationality or origin. Which of such NR Co’s or legal personalities may then

be permitted to invest in shares of Indian Co’s? Scheme - Provides for “lifting the corporate veil” to

find out - If at least 60 % of the shares are held by NRI Nationality or origin.

Lifting the veil is necessary to discover the nationality or origin of the SH’s & not to find out the individual identity of each of the SH’s. The corporate veil may be lifted to that extent only and no more”

In the present case, we do not think “lifting the veil” is necessary or permissible beyond the essential requirement of the FERA & the Portfolio Investment Scheme.

…object of the Act is to conserve & regulate the flow of foreign exchange & the object of the scheme is to attract NR investors of Indian nationality or origin to invest in shares of Indian Co’s.

Vodafone International Holdings B.V. v. Union of India & Anr., (2012) 6 SCC 613

“Control” is a mixed question of law & fact. The control of a Co. resides in the voting power of its SH’s & shares represent an interest of a SH which is made up of various rights contained in the contract embedded in the AOA.

The question is, what is the nature of the “control” that a PC has over its SC? It is not suggested that a PC never has control over the SC.

For E.g. - In a proper case of “Lifting of corporate veil”, it would be proper to say that the PC & the SC form one entity. But barring such case, the legal position of any Co. incorporated abroad is that its powers, functions & responsibilities are governed by the law of its incorporation.

Control, in our view, is an interest arising from holding a particular No. of shares & the same cannot be separately acquired or transferred. Each share represents a vote in the management of the Co. & such a vote can be utilized to control the Co.”

MNC’s having large volume of business nationally / or internationally will have to depend upon their SC’s in the national & international level for better returns for the investors & for the growth of the Co.

When a HC owns all of the voting stock of another Co., the Co is said to be a WOS of the PC. HC’s & their SC’s can create pyramids, whereby subsidiary owns a controlling interest in another Co, thus becoming its PC.

Para 150 - Legal relationship between a HC & WOS is that they are two distinct legal persons & the holding Co. does not own the assets of the SC and, in law, the management of the business of the SC also vests in its BOD’s.

HC, of course, if the SC is a WOS, may appoint or remove any director if it so desires by a resolution in the General Body Meeting of the SC.

HC’s & SC’s can be considered as single economic entity & consolidated balance sheet is the accounting relationship between the HC & SC’s Co, which shows the status of the entire business enterprises.

Shares of stock in the SC are held as assets on the books of the PC & can be issued as collateral for additional debt financing.

HC & SC are, however, considered as separate legal entities, & subsidiary are allowed decentralized management.

Each subsidiary can reform its own management personnel & HC may also provide expert, efficient & competent services for the benefit of the subsidiaries.

HC controls a No. of SC & respective businesses of Co’s within the group & manage & integrate as whole as though they are merely departments of one large undertaking owned by the HC.

But, the business of a SC is not the business of the HC (See Gramophone & Typewriter Ltd. v. Stanley, (1908-10) All ER Rep 833).

Courts, however, will not allow the separate corporate entities to be used as a means to carry out fraud or to evade tax.

PC of a WOS, is not responsible, legally for the unlawful activities of the SC

Save in exceptional circumstances, such as a Co. is a sham / the agent of the SH, the PC is regarded as a SH.

MNC’s, by setting up complex vertical pyramid like structures, would be able to distance themselves & separate the PC from operating Co’s, thereby protecting the MNC’s from legal liabilities.

United States v Bestfoods (1998) 524 US 51

…Explained that it is a general principle of corporate law & legal systems that a PC is not liable for the acts of its SC, but the Court went on to explain that corporate veil can be pierced & the PC can be held liable for the conduct of its SC, if the corporal form is misused to accomplish certain wrongful purposes, when the PC is directly a participant in the wrong complained of.

Mere ownership, parental control, management etc. of a SC is not sufficient to pierce the status of their relationship &, to hold PC liable.

In Adams v Cape Industries Plc., (1991) 1 All ER 929; [1990] Ch. 433 - Court of Appeal emphasized that it is appropriate to pierce the corporate veil where special circumstances exist indicating that it is mere fagade concealing true facts

Singer India Limited v Chander Mohan Chadha and others, (2004) 7 SCC 1

1966 – Tenancy agreement with SIL 1982 - Eviction petition - Sub-tenancy without written

consent of the LL – Indian Sewing Machine Co. Ltd. (Now Singer India Ltd)

14(1)(b) of the Delhi Rent Control Act Tenant (American Co.) - Pursuant to scheme of

amalgamation transferred to an Indian Co. Whether it is open to the Co. itself to efface itself / lift

its own corporate veil so as to examine as to who are the directors & SH’s & who are in reality controlling the affairs of the Co.?

M/s. General Radio & Appliances Co. Ltd & others v M.A. Khader 1986 (2) SCC 656

Cox & Kings Ltd. & another v Chander Malhotra 1997 (2) SCC 687

Tata Engineering and Locomotive Co. Ltd etc. vs. The State of Bihar and others AIR 1965 SC 40 (Constitutional Bench)

It has nowhere been held that such a course of action is open to the co. itself. It is not open to the Co. to ask for unveiling its own cloak & examine as to who are the directors & SH’s who are in reality controlling the affairs of the Co.

It is not open to the appellant to contend that for the purpose of FERA, the American Co. has effaced itself & has ceased to exist but for the purpose of Delhi Rent Control Act.

Littlewoods Mail Order Stores v Inland Revenue Commissioners (1969) 1 W.L.R. at 1254

“The doctrine laid down in Salomon v Salomon & Co. (1897) A.C. 22, has to be watched very carefully. It has often been supposed to cast a veil over the personality of a limited Co. through which the courts cannot see. But that is not true. The courts can & often do draw aside the veil. They can, & often do, pull off the mask. They look to see what really lies behind. The legislature has shown the way with group accounts & the rest. And the courts should follow suit.

Merchandise Transport v British Transport Commission(1962) 2 Q.B

Scottish Cooperative Wholesale Society v. Meyer; (1959) A.C. 324 (H.L.)

Wallersteiner v. Moir, (1974) 1 W.L.R. 991 (A.C.)

Beckett Investment Management Group v Hall Court of Appeal pierced the veil between PC & its SC’s to give effect

to a covenant not to compete in an employment contract. The significance of this case for the corporate veil doctrine is

underscored by a number of statements in Lord Justice Kay’s Stone & Rolls v Moore Stephens Sole SH & director of a Co. had set up a fraudulent scheme Its external auditors failed to detect, & Swindled huge sums of money from some banks Co. in liquidation Liquidator brought claims against the auditors for professional

negligence. Question: Whether the culpable SH’s intentions should be attributed

to the Co., which would prevent it from pursuing its claims against the auditors. – HL - set aside its separate legal personality & imputed the SH’s fraudulent intentions to the Co.

Co’s claims against the auditors were barred.

• Corporate veil doctrine arguably reached its nadir in Adams v Cape Industries plc, [1990] Ch. 433 (A.C.) in which the English Court of Appeal declared that the use of the corporate structure to limit future liabilities is an inherent feature of English Co. law & practically ruled out veil piercing in tort cases.

• Creasey v Breachwood Motors Ltd. [1992] B.C.C. 638 (Q.B.) at 647-48 pierced the veil between two Co’s after their common owners had transferred the assets of the first Co. to the second in order to avoid an impending judgment.

• “Tjaskeinolen” (Now Named “Visviet”), [1997] 2 Lloyd’s Rep. 465 (Q.B.)

• Five years later, in a case involving very similar facts, the Admiralty Court, after explicitly endorsing the reasoning in Creasey, invalidated the sale of a vessel by one member of a corporate group to another.

• Unfortunately, Creasey was subsequently overruled

• In Ord & Another v Belhaven Pubs [1998] B.C.C. 607 (A.C.) at 616 (Eng.).

• Although the Belhaven court did not overrule Tjaskemolen, the continued validity of that case is now in doubt.