The sanctity of the corporate veil is among the most important pillars of certainty in commercial law today. English Courts, we have seen earlier, have given great respect to independent personality, refusing to lift the veil on grounds of economic ‘reality’ such as “single economic entity”, or subjective notions such as “public interest”. This tendency has been in existence since Adams v. Cape; an important example is seen in Hashem v. Shayif (discussed here and here). The approach in Hashem v. Shayif has been approved by the Court of Appeal, and has also been applied in subsequent judgments in England. One notable exception – Antonio Gramsci – was founded on the particularly egregious facts of that case. In India, as we had noted previously, the grounds for lifting the corporate veil are broader. An example of this broader approach is seen in the decision of a Division Bench of the Bombay High Court in Great Pacific Navigation v. M.V. Tongli Yantai.
Great Pacific appealed against an order of a Single Judge directing release of an arrested ship, ‘Tongli Yantai’. The Appellant, entered into an agreement with Tongli Samoa is respect of a ship called the ‘Nasco Diamond’. There were disputes under this agreement. The agreement contained an arbitration clause. In order to secure the award which may be passed in arbitration proceedings, the Appellant sued the Respondent for arrest of the ship. The arrested ship was of the registered ownership of Halycon. The ‘Nasco Diamond’ was of the registered ownership of Tongli Samoa. The case of the Appellant was that the respondent ship as well as the ship Nasco Diamond were beneficially owned by the same entity, i.e Tongli China.
Tongli China (the alleged beneficial owner) entered into an agreement with one Shipyard for the purchase of Tongli Yantai. Tongli China paid 10% of the price. 60% of the price was paid by FEHL. Halycon, the registered owner of the ship, was a subsidiary of the subsidiary of FEHL. Halycon entered into a charterparty agreement with Eastshine. Eastshine paid the balance 30% price. On these facts, the Appellant claimed that the ship was of the beneficial ownership of Tongli China.
The Single Judge refused to lift the veil of Halcyon; and refused to consider Halycon as being the alter ego of Tongli China. In doing so, the Appellant argued, the Single Judge fell into error. It argued, “It may be rather myopic not to consider the true position of the parties behind legal and juristic façade…”
The issue, thus, was whether the Court could go behind the registered owner Halycon, to determine the “true owner” of the ship – either as a matter of admiralty law or as a matter of lifting the corporate veil. The following facts, inter alia, weighed with the Division bench:
- The original purchaser of the arrested ship was Tongli China.
- 10% of the purchase price was paid by Tongli China. FEHL financed Halcyon to the extent of 60% of the value of the ship payable to the shipyard. Halcyon entered into an agreement with Eastshine, also a Tongli group company. Eastshine had to pay Halcyon 30% of the value of the ship as advance charter. Tongli China guaranteed the payment by Eastshine to the shipyard.
- The addresses, telephone numbers and emails of all the companies in the group was shown in certain filings to be the same.
- The charterparty arrangement was a unique one, in that “… the only relationship between the two contracting parties is of Halcyon having been nominated by Tongli China under its corporate guarantee… Once that is through, Eastshine, the other sister concern of Tongli China as reflected in the aforesaid evidence, would be entitled to the rights of ownership as also the difference of amount keeping intact its position free from encumbrances such as transfer by mortgage or otherwise by Halcyon to any other party.”
On these facts, the Respondents argued that where there was no fraud made out, lifting the veil would not be possible. In other words, absent fraud, economic and commercial unity is no ground to lift the veil. It is worth noting that the Single Judge had not recorded any finding that there was a fraud involved. The Division Bench however held, “Mr. Dwarkadas’ contention that only in cases of fraud the corporate veil may be lifted to see which company other than Tongli Samoa would incur liability upon the charterparty signed by Tongli Samoa would be rather inaccurate given the precedents that govern this issue and this is even from the British Courts…”
On the detailed facts, if a finding of fraud were reached, there would not be much quarrel with lifting the veil. However, the observations of the Division Bench are extremely broad. The statement that such a broad reading is also supported by British Courts, is entirely untenable. For instance, the Division Bench extensively relied on DHN Food Distributors [1976] 1 WLR 852. In England, DHN has been substantially watered down in a number of judgments; prominent amongst them being Adams v. Cape Industries [1990] Ch 433. This was not taken into account by the Division Bench at all; the Court makes a bland reference [“see Adams v. Cape Industries”] without considering the import of Adams at all.
In further comments, the Court stated, “As the financial and economic situations become more and more complex in the commercial and business world, the ambit of the employment and application of the doctrine would grow commensurately. It would be required to be more frequently invoked upon present day considerations when such situations arise oftener enjoining courts to use their discretion to do complete justice upon equitable consideration…”
Again, these remarks were not required on the facts; the decision could have rested simply on the documentary evidence between the parties and by coming to a conclusion that there was a fraud involved. (Whether the facts were sufficient to reach a finding of fraud or not is a separate issue: the Court’s observations go much beyond that; indicating that lifting the veil even in the absence of such a finding may be justified.) These assertions of the Court are, with great respect, unwarranted.
The Court relied on Antonio Gramsci, but did not refer to Hashem v. Shayif. Had Hashem also been referred to, the clear conclusion would be that Gramsci was a case which can be explained on the basis of a finding of fraud. It was open to the Bombay High Court to record such a finding; instead, the decision makes further inroads into the doctrine of independent personality by rather sweeping obiter. The suggestion that more complex commercial arrangements require greater latitude in lifting the veil even in the absence of fraud, does not appear justified. If the law specifically permits complex arrangements, there does not seem to be a reason why complex arrangements should be automatically viewed with suspicion.
Interestingly, a somewhat analoguous decision in England, after considering Gramsci, lifts the veil only in respect of the specific fraud: interested readers may refer to Linsen International v. Humpuss Sea Transport. This was a case where a freezing order (as opposed to arrest of a ship) was sought in relation to some maritime claims. The judge (Flaux J.) observed, “Closeness of companies in a group in this fashion and control of management from the true place of business are not enough to justify the court disregarding the corporate structure. A contrary conclusion would involve giving effect to the “single economic unit” argument which, as I set out in more detail hereafter, English courts have consistently resisted… The claimants make a number of allegations to the effect that companies within the group have received payments from other companies in the group or made payments on behalf of such companies. However, as Mr Kendrick points out, it is quite normal for companies in a group to use intra-group finance or even a central treasury”. On this basis, the Court refused to lift the veil at the time when the relevant contracts were entered. (Subsequently, there was a fraudulent transfer of assets in the group: this was held to be material in lifting the veil qua those transactions.)
These decisions again serve to illustrate that the approach to the issue in India and England has grown to be completely disparate.
Very helpful post. Just one question: why is it wrong for the Court to say that "fraud" is not essential? In particular, when the companies in the modern world operate through layers and layers of subsidiaries but effective power is in one hand, why should that not be enough to lift the veil and to fix responsibility on the ultimate power-holder?
If usual principles of the law of agency are not attracted, then there does not seem to be any reason in principle why the parent should be affixed with responsibility. In other words, if the facts and/or the control exercised by the parent is not sufficient to come to a conclusion that there is an agency relationship between the parent and the subsidiary, there does not seem to be any other reason to lift the veil.
As ever, a crisp analysis, which has become the hallmark of the authors of this blog. A slightly off-topic suggestion: would all the authors consider publishing a book on Indian private/commercial law, similar to the "English Private Law" series? Understandably, the blog authors may not feel up to the task of replicating the work of people like Prof. Birks, but quite frankly, some of the best of current Indian commercial law writing is found on this blog. It would be helpful if there were an easily accessible "Indian Private Law" edition, even if that edition did not match English Private Law (matching that, I assume, will take years of work)