Lifting of corporate veil to assign liability to parent company
Anuraag Radhakrishna
(Querist) 06 August 2012
This query is : Resolved
If a foreign company is a wholly owned subsidiary of an indian company under what circumstances will lifting of the corporate veil be allowed to impose liability on the parent company??
Caselaws referred to will be helpful.
ajay sethi
(Expert) 06 August 2012
The Supreme Court in State of U.P. v. Renusagar Power Co., , while relying upon the decision in Life Insurance Corporation of India v. Escorts Ltd., lifted the veil of Renusagar Power Company, a subsidiary company generating power for Hindalco, for allowing the claim of Hindalco for reduced rate of electricity bill on the basis that Renusagar Power Plant has its own source of generation under section 3(1)(c) of the U.P. Electricity (Duty) Act, 1952, and the bills should have been made by the electricity board on that basis. In this regard the Supreme Court observed as follows (page 158) :
"Mr. Justice O. Chinnappa Reddy, speaking for this court in Life Insurance Corporation of India v. Escorts Ltd. had emphasized that the corporate veil should be lifted where the associated companies are inextricably connected as to be, in reality, part of one concern. It is neither necessary nor desirable to enumerate the classes of cases where lifting the veil is permissible, since that must necessarily depend on the relevant statutory or other provisions, the object sought to be achieved, the impugned conduct, the involvement of the element of the public interest and the effect on the parties who may be affected. After referring to several English and Indian cases, this court observed that ever since A. Salomon and Co. Ltd.'s case [1897] AC 22 (HL), a company has a legal independent existence distinct from its individual members. It has since been held that the corporate veil may be lifted and the corporate personality may be looked into. Reference was made to Pennington and Palmer's Company Law.
It is high time to reiterate that, in the expanding horizon of modern jurisprudence, the lifting of the corporate veil is permissible. Its frontiers are unlimited. It must, however, depend primarily on the realities of the situation. The aim of the legislation is to do justice to all the parties. The horizon of the doctrine of lifting of the corporate veil is expanding. Here, indubitably, we are of the opinion that it is correct that Renusagar was brought into existence by Hindalco in order to fulfill the condition of industrial license of Hindalco through production of aluminium. It is also manifest from the facts that the model of the setting up of a power station through the agency of Renusagar was adopted by Hindalco to avoid complications in case of take over of the power station by the State or the Electricity Board. As the facts make it abundantly clear that all the steps for establishing and expanding the power station were taken by Hindalco, Renusagar is a wholly owned subsidiary of Hindalco and is completely controlled by Hindalco. Even the day-to-day affairs of Renusagar are controlled by Hindalco. Renusagar has, at no point of time, indicated any independent volition. Whenever felt necessary, the State or the Board have themselves lifted the corporate veil and have treated Renusagar and Hindalco as one concern and the generation in Renusagar as the own source of generation of Hindalco. In the impugned order, the profits of Renusagar have been treated as the profits of Hindalco.
In the aforesaid view of the matter, we are of the opinion that the corporate veil should be lifted and Hindalco and Renusagar be treated as one concern and Renusagar's power plant must be treated as the own source of generation of Hindalco and should be liable to duty on that basis. In the premises, the consumption of such energy by Hindalco will fall under section 3(1)(c) of the Act . . ."
