The Ambiguous Nature Of ‘Public Interest’
Author: LawSphereX
Category: General Law
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THE AMBIGUOUS NATURE OF ‘PUBLIC INTEREST’
Yashashvi Agrawal, Jindal Global Law School
1. Introduction
Corporate Veil refers to the separation of actions between that of the shareholders and the company as a juristic entity. It is an imaginary barrier that draws the line between the two. This feature heavily depends on the separate entity characteristic of companies. This doctrine is made use of to ‘avoid the perpetration of fraud, evasion of tax or eliminate the possibility of subtle means being adopted for circumventing one particular statue’1. It is a fundamental principle of Company law, and this doctrine exists to protect the shareholders’ liability in case the company defaults. The corporate veil is very rarely ‘pierced’ or ‘lifted’, because it is of the utmost importance to adhere to this veil because a company is considered to be a legal person as well. Since the company is an artificial person, it is impossible for the company to physically run operations.
It delegates its work to directors and shareholders who undertake the work on the company’s behalf. There may be instances where this corporate veil is abused. This veil can be used to evade taxes and carry out various frauds under the façade of the corporate identity. In scenarios like these, the corporate veil is lifted to identity the person or people behind the fraud. It must be kept in mind though; corporate veil is lifted in very extreme scenarios where it becomes absolutely necessary. In fact, it was held in the case of Hare v. Commissioner of Customs and Excise, that. The veil mut be lifted in cases where the company behaved as a vehicle to avoid detection of fraudulent activities. Though it must be kept in mind that the doctrine is sacrosanct to companies and protects it from the acts of the shareholders.
In India, the corporate veil was lifted by the Supreme Court in a limited number of cases such as State of U. P v. Renusagar Power Co. , State of Rajasthan v Gotan Limestone, etc. It is one that originated from common law in the case of Salomon v. Salomon. Given the importance of corporate veil, it is only lifted or pierced in very limited circumstances, where it becomes necessary to hold shareholders liable for their malpractices. The concept of corporate veil
1 Biswas LC, ‘Approach of the UK Court in Piercing Corporate Veil’ [2011] SSRN Electronic Journal
evolved through various cases in India. Since it is such a nascent concept, it is not formally mentioned in The Companies Act, 2013. There have been a handful of cases where people have tried to abuse this concept and use it to shield shareholders from the consequences of their actions. Therefore, the courts have had no other option but to pierce the corporate veil to determine who the culprits are. Despite lifting the veil being recognized as a valid legal action, it is done in very limited cases. There is no exhaustive list of circumstances but through various judgements in Indian judiciary, it can be inferred that the veil may be lifted for: Fraud of wrongful conduct2, Tax evasion3, Law in case of war4, shell companies5 or public interest6. Given that the list is not solidified, the definition of these is open to interpretation, specifically ‘public interest’.
There are certain facts which define the scope of the rest, but the latter is still ambiguous. Public interest was discussed in cases like State of U. P v. Renusagar Power Co. and State of Rajasthan v Gotan Limestone, et. In this paper, four prominent case laws will be analyzed to bring out the ambiguous nature of ‘public policy’.
2. Case Analysis
2.1 State of U.P v. Renusagar Power Co.7
The first case which introduced the piercing of the corporate veil for the purpose of Public Interest was State of U.P v. Renusagar Power Co. The case revolved around determining whether the veil must be pierced to consider Hindalco and Renusagar as one company since the latter was solely established to provide electricity to the former. It was done in furtherance of a legislation passed by the U.P state government which allowed a tax exemption to industries that dealt in non-ferrous metals and alloys. They were exempted from paying duty, if their electricity provider was wholly owned by them. However, later this amendment was taken away. In an attempt to continue saving taxes, Hindalco wanted to establish that Renusagar and Hindalco were the same company, for which they argued the lifting of the corporate veil.
2 Salomon v. Salomon (1897) A.C. 22, [1896] UKHL 1
3 In RE: Sir Dinshaw Maneckjee Petit v. Unknown AIR 1927 Bom. 371 51
4 Daimler Co. v. Continental Tyre and Rubber Co. (1916) 2 A.C 307
5 Vodafone International Holdings BV v. Union of India (2012) 6 SCC 613
6 State of U.P v. Renusagar Power Co (1988) 4 SCC 59
7 State of U.P v. Renusagar Power Co (1988) 4 SCC 59
The Supreme Court in their decision decided to lift the corporate veil on the pretext of public policy in the case. Here, the Supreme Court was tasked with clarifying the meaning of ‘public policy’ under S7 of the Foreign Awards (Recognition and Enforcement) Act, 1961 with respect to a decree passed by the International Chamber of Commerce. The court interpreted the phrase in conformity with the doctrine of public policy in international law. Thereby implying that anything which is contrary to public policy including (i) fundamental policy of Indian law; or (ii) the interests of India; or (iii) justice or morality. 8 Despite this clarification, there is no definitive answer as to what any of these criteria mean.
The rationale behind the doctrine of public policy remains that if public interest outweighs the contractual interest of the parties, then the government may refuse to enforce the contract. 9 Hence, while this case expanded the scope of corporate veil, it also allowed room for ambiguity and arbitrary action. The definition of public policy is not very cohesive.
2.2 State of Rajasthan & Ors. V. Gotan Limestone Khanji Udyog Pvt. Ltd & Ors.10
Secondly, The Supreme Court further defined the scope of ‘public interest’ in the case of State of Rajasthan & Ors. V. Gotan Limestone Khanji Udyog Pvt. Ltd & Ors. In this case, the government of Rajasthan had granted a mining lease for the extraction of Limestone to Gotan Limestone Khanji, which was initially a partnership company. Later, the company was restructured into a private limited company with government approval. The application was allowed since it was a mere restructuring of the company, and the partners remained the same. And therefore, they continued to possess a mining license. Shortly after the restructuring, all shares of Gotan Limestone Khanji Udyog Pvt. Ltd were bought by Ultra Tech Cement Limited, which gave Gotan Limestone the state of a wholly owned subsidiary company.
The government of India had an issue with this transaction and alleged that the share price of 160 crores was nothing but a quid pro quo for the mining lease. The court in their judgement clearly stated that shareholders or directors may come and go, but that has nothing to do with the licenses and leases, licenses and assets that are held by the company. The court also stated that had the facts of the second transaction been disclosed to 8 Editor_4, Indulia B and Panganti R, ‘Setting aside of Domestic Arbitral Award in Conflict with Public Policy of India’ (SCC Blog, 3 August 2021) accessed 30 September 2023
9 Bahadur K, ‘PERSONALITY OF PUBLIC CORPORATION AND LIFTING THE CORPORATE VEIL ’
(1972) 14 Journal of Indian Law Institute
10 State of Rajasthan & Ors. V. Gotan Limestone Khanji Udyog Pvt. Ltd & Or (2016) 4 SCC 469
the government, the second transaction wouldn’t have been allowed since the transfer of mining rights is prohibited. It was reasoned that since the limestones belong to the government of India and the mining rights are simply a lease, the lessee had no rights to transfer them. The only rights that the lessee has is to mine on that property or to surrender the lease. Article 39(b) of the Indian Constitution states that “The ownership and control of material resources of the community are so distributed as the best to subserve the common good”. In this case, limestone mines fall under this definition and therefore, transfer of the lease wasn’t allowed. Hence, the court concluded that the company was formed to evade the legal process of transfer, thereby lifting the corporate veil.
It must be kept in mind here that the Supreme Court decided to life the corporate veil for public interest despite there being a clear statutory violation where the company did not adhere to its obligation to take prior permission from the government before transferring the lease. This has set a dangerous precedent in the sphere of corporate personality. This reasoning does not provide a clear-cut understanding as to what exactly constitutes as public interest and where can it be applicable.
2.3 Kapila Hingorani v. State of Bihar.11
Thirdly, in the case of Kapila Hingorani v. State of Bihar, a distinguished Supreme court lawyer, Kapila Hingornai filed a writ petition against the state of Bihar for the non-payment of salaries to employees of government owned company, corporation, and public sector undertakings for extended periods. This was also after news of many suicides and death due to starvation was circulated. The state, it its affidavit argued that they are not directly or vicariously liable to pay for their salaries of employees of government-owned enterprises. The main legal issue arisen in this was whether the government was liable to pay for salaries of their enterprises.
The petitioner contended the lifting of corporate veil on the grounds of public interest where government-owned industrial houses and corporation were expected to provide for citizens and look out for their welfare as a part of Article 21 of the Indian constitution. The court acknowledged the fact that while the government wasn’t always vicariously liable to pay for arrears, they weren’t allowed to escape liability when it came to scenarios like suicide and starvation. The court held that financial troubles could not justify the non-adherence of
11 Kapila Hingorani v. State of Bihar (2003) 6 SCC 1
fundamental rights. Further, it held that ‘justice’, ‘convenience’, ‘interest of workers’, ‘public interest’ or ‘revenue’ were enough grounds to lift the corporate veil. The court reaffirmed that financial constraints were not enough grounds for the non-payment of salaries, especially for the state government whose duty is to provide for its citizen’s well-being.
2.4 Delhi Airport Metro Express v. Delhi Metro Rail Corporation.12
Finally, this is the most recent judgment from the Delhi High Court which addressed the lifting of corporate veil in the interest of public. This case was a dispute regarding an arbitral award granted to the Delhi Airport Metro. In furtherance of the arbitral award, the Delhi Metro Rail Corporation (DMRC) attempted to raise funds through shareholders (Union Ministry) to pay damages. However, the shareholders failed to take any action regarding this and the DMRC defaulted in its payment. Keeping this in mind, the Delhi airport metro asked the Supreme Court to lift the corporate veil and include the Union Ministry to secure the damages earned in the Arbitral Award. The Delhi High Court in its decision, discussed extensively the difference between Indian and UK courts when it came to the lifting of corporate veil.
The bench acknowledged that India was more evolved when it came to the piercing of the veil in comparison to the UK. After referring to various Indian judgements, the court reaffirmed that lifting of the veil is not just limited to fraud or sham. The court noted that it is necessary to enforce a decree, judgment, or arbitral award. Otherwise, it would be a ‘dead letter’ and hold no value. Therefore, in this case, the court noted that the DMRC failed to discharge its obligations on multiple occasions and the enforcement of this arbitral award is of public interest. The four aforementioned cases demonstrate the different set of facts which may fall under the scope of public interest. None of these gave a concrete understanding of what the phrase ‘public interest’ means. Neither did it provide a test to see whether it satisfied the requirements to lift the veil.
The only thing common amongst these cases was the fact that the government was always involved in them. Surely, this could be a starting point in formulating a more concrete understanding of scenarios where the veil may be pierced.
12 Delhi Airport Metro Express v. Delhi Metro Rail Corporation (2022) 1 SCC 131
3. Comparative analysis between Indian and English Jurisprudence
In the UK, piercing of the corporate veil is not a very usual event. Judges often hesitate to lift the veil. In England, public interest is not applied as an independent ground towards lifting the veil. Throughout various landmark judgements such as Prest v. Petrodel and Hashem v. Ali Shayef, it was held that the corporate veil must not be lifted unless necessary. Further, in the former case, Lord Sumption concluded 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. ”13 Hence, the ambiguous remedy of public interest would not be applicable here, given the narrow room for the piercing of corporate veil.
The Indian view very evidently varies from the English view. India’s aim is to maintain a balance of interests amongst all stakeholders. Though narrow, Indian courts have tried to lift the veil in scenarios with unusual facts. As mentioned previously, this sets a very dangerous precedent for cases that may be tried in the future.
4. Conclusion
Therefore, from the above discussed cases, it can be gathered that there is no straight jacket formula to lift the corporate veil. However, until now the various Indian courts have applied this concept in different scenarios with peculiar facts. The courts should provide a more cohesive test to apply this doctrine, otherwise it would be detrimental to the credibility of the corporate veil itself. It is an extremely important doctrine which protects the rights of shareholders and lifting it too often, as per convenience would set an extremely dangerous precedent.
13 Biswas LC, ‘Approach of the UK Court in Piercing Corporate Veil’ [2011] SSRN Electronic Journal