The Vague Concept of Public Interest as a Ground for Lifting the Corporate Veil.
[Shivang Agarwal]
The author is a third-year student at NALSAR University of Law, Hyderabad. He may be reached at shivangagarwal1597@gmail.com.
The post seeks to assess the application of the ground of public interest by the judiciary in India by commenting on the case of State of Rajasthan & Ors. v. Gotan Lime Stone Khanji Udyog Pvt. Ltd. & Ors., which was decided by a two-judge bench of the Supreme Court of India on January 20, 2016. The primary question that would be addressed by this post through a comparative analysis of English and Indian jurisprudence on lifting the corporate veil is whether the bench was justified in invoking the ground of public interest in order to lift the corporate veil.
Facts
The Government of Rajasthan had granted a mining lease for extraction of lime stone to the Respondent, M/s. Gotan Lime Stone Khanji Udyog (GLKU), which was a partnership firm. The Respondents moved an application for transfer of the mining lease to a private limited company. The application was allowed as it was a mere change in the form of business of the Respondents and involved no premium, price etc.; further, the partners and the directors were the same. Subsequently, GLKU sold all of its shares to Ultra Tech Cement Limited and became a wholly owned subsidiary of the latter. It was alleged by the state government that the share price which came to be around Rs. 160 crores was nothing but a consideration for the sale of the mining lease.
Judgement
The bench quashed the impugned transfer of shareholdings. They disregarded the corporate veil by looking through the entire series of transactions. It was established that there were two transactions in the present case. When viewed in isolation, these transactions seemed perfectly legal. However, when viewed as a whole, the illegality became manifest. After a perusal of the “combined effects and real substance of two transactions,” the bench came to the conclusion that GLKU had successfully transferred the mining lease to UTCL by disguising the price charged for transfer of mining lease as the share price for the transaction. The transaction was void because it was in contravention to Rule 15 of the Rajasthan Minor Mineral Concession Rules, 1986, for the mining lease was transferred to UTCL without taking permission from the requisite government authorities.
The Court also employed the ground of public interest to lift the corporate veil. The ownership mining rights, which constituted the subject matter of the lease in question, vested with the state and was to be regulated in pursuance of the public trust doctrine.
Tracing the English and the Indian Jurisprudence
In 2013, the Supreme Court of the United Kingdom delivered a landmark judgement in Prest v. Petrodel. Lord Sumption engaged in a masterful analysis of past cases wherein the doctrine was applied. He came to a conclusion that the doctrine had more often than not been applied for the wrong reasons by the judges. He established the principle of concealment and that of evasion and called for the corporate veil to be lifted in the latter case only. The opinion of Lord Munby in Ben Hashem v. Ali Shayif that the corporate veil need not be lifted unless its absolutely necessary to do so, because there are no public policy imperatives underlying the course, was affirmed. Moreover, it was also held by Lord Sumption and Lord Neuberger that courts should not take recourse to veil piercing even if the evasion principle applies as long as other remedies are available. Ultimately, Lord Sumption came to the conclusion that lifting of the corporate veil should be confined to situations where “a person is under an existing legal obligation or liability or subject to an existing legal restriction which he deliberately evades or whose enforcement he deliberately frustrates by interposing a company under his control.”
Henceforth, public interest is not employed as an independent ground to lift the corporate veil in England. Courts have adopted a narrow approach wherein they have limited the application of doctrine to certain grounds only. The philosophical underpinning of this judicial stance is the sacrosance of the independent corporate personality and the treatment of incorporation as a business facilitating activity in England.
The Indian position largely differs from the English position as the former is more concerned with balancing the interests of all the stakeholders including third parties which would be affected if the corporate veil is lifted to reveal the persons controlling the company. Thus, Indian courts have been more amenable to lifting the corporate veil and have invoked extensive grounds, one of which is public interest. Each case has evoked different grounds which would suit the peculiar facts which are at issue and cited English authorities without application of mind in order to the buttress their findings.[1]. The ground of public interest has been used here and there by the judiciary without any specific pronouncement as to what would constitute public interest. In many cases, the ground has been employed to lift the corporate veil despite the test for establishing a façade or a sham not being satisfied.
Dubious Application of the Doctrine in the Present Case
Herein, the bench categorically held that GLKU was formed with the intention of avoiding the statutory requirement of obtaining consent of the government for the transfer of the mining lease to a third party. The underlying motive was to accrue private benefit at the cost of public interest. After a perusal of the judgement, it becomes evident that the bench had lifted the corporate veil rather haphazardly. It is argued that the bench need not have gone into the question of public interest when there was a prima facie violation of the impugned rules. It is also argued that in the absence of any statutory definition of public interest or a judicial pronouncement on its scope and import could mean anything and the ground itself could be molded as per the whims and fancies of the judge. The invocation of the public interest doctrine also militates against the juridical observation that the courts should be generally reluctant to lift the corporate veil.
A more prudent approach could have been application of the test laid down in Prest v. Petrodel which was approved by the Supreme Court in the Balwant Rai Saluja v. Air India. Herein, GLKU by transferring its entire shareholding to UTCL was deliberately evading a legal restriction by disguising the consideration for the lease transfer as price of the shareholdings in order to suppress the fact that they had not obtained the requisite consent for transfer of mining lease from the competent authorities. Thus, the court by unnecessarily going into public interest has set a dangerous precedent which could be detrimental to the integrity of the independent corporate personality in the future.
Conclusion
The ambiguity and uncertainty of public interest in the Indian juridical context makes it a ground which is only floating in the air rather than being anchored by a definitive set of factors that determine the same. Henceforth, its importation would be fatal to concept of limited liability which enables the economic upliftment of citizens by allowing them to engage in small business operations without being impeded by the travails of unlimited liability. The lack of predictability of judicial outcomes which would emanate from the usage of public interest as a valid ground to lift the corporate veil would hamper investment and discourage entrepreneurs from incorporation of their ventures.
Thus, courts should only rely on public interest in the rarest of the rare cases when other definitive grounds cannot be invoked and it is prima facie evident that the corporate form of a company is being used to commit fraud or evade liability.
[1] Commissioner of Income Tax, Madras v. Sri Meenakshi Mills Ltd, AIR 1967 SC 819; Workmen Employed in Associated Rubber Industry, Bhavnagar Ltd. v. Associate Rubber Industry, Bhavnagar Ltd., (1985) 4 SCC 114; Life Insurance Corporation v. Escorts Ltd., (1986) 1 SCC 264; New Horizons Ltd. V. Union of India, (1995) 1 SCC 478; BALCO Emloyees Union v. Union of India, AIR 2002 SC 350; Vodafone International Holdings B.V. v. Union of India, (2012) 6 SCC 613, Balwant Rai Saluja v. Air India, AIR 2015 SC 37; Walnut Packaging Pvt. Ltd. v. Sirpur Paper Mills Ltd., MANU/AP/0802/2008.