The Indian Supreme Court on Lifting the Corporate Veil

In
its recent judgment in Balwant Rai
Saluja
, a three-judge Bench of the Supreme Court has considered a
number of important questions relating to when, if ever, it is appropriate to
lift the corporate veil. Readers may recall that we had previously discussed Lord
Sumption’s
magisterial judgment on this point in Petrodel
v Prest
: Although the Supreme Court has not endorsed precisely the same
criteria as did Lord Sumption, its recognition that the corporate veil should
rarely be lifted is welcome.

In
Balwant Rai Saluja, the question was
whether workers in a statutory canteen maintained at Air India’s premises were
to be treated as employees of Air India or as employees of the contractor running
the canteen. The contractor, HCL, was a wholly owned subsidiary of Air India. The
workers made two arguments. First, that the fact that Air India was required by statute (the Factories Act
1948) to run a canteen meant that those working in it were ‘deemed employees’;
and secondly, on the assumption that they were in fact employees of HCL, it was
appropriate to lift the corporate veil because HCL was a ‘sham’ company
entirely controlled by Air India. The Supreme Court, it is submitted correctly,
rejected both of these contentions. This post deals largely only with the
second, but it may be helpful to briefly describe the Court’s findings on the
first point.

The
question whether X is an employee of Y can arise in a number of contexts: taxation
(is X’s income salary or income from business), labour law (is X entitled to
raise an industrial dispute), vicarious liability (is Y liable for X’s wrongful
acts) and so on. The key point—and Dattu J, giving the judgment of the
Court, accepts this—is that there need not be a uniform answer to these
questions. That is, the fact that X is an ‘employee’ for tax purposes does not (of
itself) mean that Y is vicariously liable for a tort committed by X. Dattu J recognises
this in holding that the fact that workers at a facility which the employer is obliged to maintain are treated as
employees under that Act does not
mean they are employees generally. Where, however, there is no special
statutory context of this kind, the courts normally ask whether the contract
that the worker has entered into is a contract of service or a contract for
services. But this does no more than restate the problem: how does one
distinguish between a contract of service and a contract for services? In
English law, the consensus appears to be that the ‘control’ test, which was
previously thought to be decisive, is only one element in the analysis: in the
context of vicarious liability, the courts have even recognised the possibility
of two employers being liable for the
same wrongful act (see Viasystems v Thermal Transfer). In Balwant Rai Saluja, the Supreme Court holds
that the appropriate test ‘complete administrative control’ which, with
respect, is questionable. The point must ultimately turn—in the absence of any
special statutory test—on the intention of the parties, and control (although
important) is not decisive. As Lord Wright famously pointed out, the master of
a chartered vessel is an employee of the shipowner, not the charterer, even
though the charterer is entitled to give him orders.

The
second point—about the corporate veil—is more significant for our purposes. The
Supreme Court, correctly, holds that the law on the point has in recent times
crystallised around the six requirements set out by Munby J in Ben Hashem (approved by Lord Sumption in
Prest). This is to be welcomed
because it means that the Supreme Court is implicitly questioning the far wider
grounds on which it had previously
lifted the veil. The Court notes the narrow test accepted by Lord Sumption at
[35] of his judgment in Prest
(the ‘evasion principle’) but, crucially, its own formulation of the test
is wider:

Thus,  on 
relying  upon  the 
aforesaid  decisions, the  doctrine 
of  piercing  the 
veil  allows  the 
Court  to disregard the separate
legal personality of a company and impose liability upon the persons exercising
real control over the said company. However, this principle has been and should
be applied in a restrictive manner, that is, only in scenarios wherein it is
evident that the company was a mere camouflage or sham deliberately
created by the persons exercising control over the said company for the purpose
of avoiding liability.

This
formulation is wider than Lord Sumption’s in two respects: first, it suggests
that ‘mere camouflage or sham’ is a separate
ground for piercing the veil which, with respect, is questionable because
it invites the obvious question ‘what is a sham’ to which the only conceivable
answer is either ‘economic reality’ (which the Supreme Court correctly rejects)
or impropriety (which is the second limb of its test and therefore
unnecessary). The second limb is also wider than the Prest test because ‘avoiding liability’ is not confined to avoiding
liability that exists independently of
the interposition of the company. If that condition is omitted, it becomes
relatively easy to lift the veil because one is only asking whether some
conceivable benefit that could have been lost without a company has now been
obtained because of its interposition. This is perhaps why the Supreme Court,
in applying the principle to the facts, examined the content of the Memorandum
and Articles of Association of HCL, and relied on the fact (see [77]) that its objects were
different to those of Air India. On the ‘evasion principle’ set out in Prest,
this probably does not matter: one is not asking whether the parent ‘controls’ the
subsidiary or whether the subsidiary is the ‘alter ego’ (as one would have done
before Prest)
but simply whether the claimant’s right against
the controller, which existed independently of any company, is now being
defeated or frustrated because of the interposition. But the Supreme Court’s
ultimate conclusion in Balwant Rai
Saluja
—that it is not appropriate to lift the veil on these facts—is,
it is submitted, clearly correct. Its observations at [80], in particular, are
important:

The
present facts would not be a fit case to pierce the veil, which as enumerated
above, must be exercised sparingly by the Courts. Further, for piercing the
veil of incorporation, mere ownership and control is not a sufficient ground.
It should be established that the control and impropriety by the Air India
resulted in depriving the Appellants-workmen herein of their legal rights.

It
is submitted that this is correct and should be followed in preference to older
authority suggesting a far wider jurisdiction to lift the veil. Those cases
have not been formally overruled or even questioned because it was unnecessary
to do so in Saluja but the underlying
principle the Supreme Court has accepted is an open invitation to counsel to challenge
those cases in the future.

About the author

V. Niranjan

1 comment

  • What is the Indian position on shareholders who use a company to commit illegal act – without a statutory basis? Does that fall under the corporate veil jurisprudence in India?

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