Monday, September 29, 2014

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.

1 comment:

Anonymous said...

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?