• Home
  • High Court of Delhi expanding the contours of the doctrine of lifting the corporate veil

High Court of Delhi expanding the contours of the doctrine of lifting the corporate veil

Apr 3, 2023
  • Author(s) : Abhay Chattopadhyay , Arpan Behl , Kustubh Singh

    • Expanding the Contours of the Doctrine of Lifting the Corporate Veil – An Examination of the Recent Judgment of the Hon’ble High Court of Delhi

    Delhi Airport Metro Express Private Limited v. Delhi Metro Rail Corporation Ltd.[1]

    INTRODUCTION

    In an interesting decision, the Hon’ble High Court of Delhi has recently pierced/ lifted the corporate veil of the Delhi Metro Rail Corporation (DMRC). The Court held that DMRC’s two principal shareholders, i.e., the Union Ministry of Housing and Urban Affairs and the Government of the National Capital Territory of Delhi (Union Government and GNCTD, respectively), are liable to discharge the liability of the DMRC which has arisen on account of an arbitral award that had been rendered against it. The Union Government and the GNCTD, directed by the Hon’ble High Court of Delhi,  accede to the DMRC’s request for extending sovereign guarantees so as to allow the DMRC to satisfy its obligations qua the aforesaid arbitral award.

    FACTS

    In 2017, the DMRC suffered an arbitral award whereby, it was directed to make a payment of approximately INR 2782.33 crores, along with further interest (Arbitral Award), to Delhi Airport Metro Express Private Limited, the special purpose vehicle formed by Reliance Infrastructure Limited and M/s. Construcciones y Auxiliar de Ferrocarriles, S.A, (DAMEPL). The DMRC challenged the Arbitral Award before the Hon’ble High Court of Delhi under Section 34 of the Arbitration and Conciliation Act, 1996 (Act), which was dismissed vide judgment dated 06.03.2018[2] (2018 SJ Judgment). The DMRC subsequently filed an appeal against the 2018 SJ Judgment under Section 37 of the Act read with Section 13 of the Commercial Courts Act, 2015, which was partly allowed by the Ld. Division Bench of the Hon’ble High Court of Delhi vide judgment dated 15.01.2019[3] (2019 DB Judgment). While dismissing the 2018 Judgment, the Arbitral Award was partly set aside by the Ld. Division Bench of the Hon’ble High Court of Delhi with the parties being left to invoke the arbitration clause for adjudication of the issues that were not decided vide the 2019 DB Judgment. Thereafter, DAMEPL was successful in its challenge against the 2019 DB Judgment before the Hon’ble Supreme Court of India[4], which decision also withstood a review challenge by the DMRC.

    In lieu of the aforesaid decision of the Hon’ble Supreme Court of India[5] whereby, the Arbitral Award was upheld, and the 2019 DB Judgment was set aside, DAMPEL sought execution of the Arbitral Award before the Hon’ble High Court of Delhi[6] (Execution Petition). The Hon’ble High Court of Delhi, vide order dated 10.03.2022 in the Execution Petition, made its determination on the question of interest as well as the liability of the DMRC to make payments in terms of the Arbitral Award (March 2022 Order). Further the Hon’ble High Court of Delhi also decided the various objections which were raised by the DMRC with respect to computation of interest in terms of the provisions of Section 89 of the Metro Railways (Operation and Maintenance) Act, 2002 read with Section 60 of the Code of Civil Procedure, 1908 (2002 Metro Act and CPC, respectively). Towards this end, vide the March 2022 Order, the Hon’ble High Court of Delhi directed the DMRC to fulfil its obligations to make payment to DAMEPL pursuant to the Arbitral Award by liquidating funds from its internal corpus finances, i.e., Total DMRC Funds, Total Project Funds, and Total Other Funds (DMRC Funds). A challenge to the March 2022 Order[7] was dismissed by the Hon’ble Supreme Court of India[8], with the Hon’ble High Court of Delhi also dismissing a review petition filed against the March 2022 Order[9].

    During the hearing of the Execution Petition, the Hon’ble High Court of Delhi came to be aware that there had been a substantial reduction of funds held by the DMRC since the rendering of the March 2022 Order. Indeed, the Hon’ble High Court of Delhi observed that such a reduction in the DMRC funds seemed to have taken place after the passing of the March 2022 Order and appeared to have been effected on account of the directions of the Union Government. The Union Government was of the opinion that the DRMC Funds could only be put towards for the purposes for which the same were sanctioned and could not be utilized for any other purpose[10]. This was in addition to the fact that neither the Union Government nor the GNCTD had provided any response to the DMRC’s request for extending it sovereign guarantees so as to allow the DMRC to avail of loans from banks/financial institutions[11]. On account of the DMRC’s plea that it had taken all reasonable recourse available to it, the Hon’ble High Court of Delhi impleaded both the Union Government and the GNCTD as parties to the Execution Petition.

    ANALYSIS

    In this regard, the Union Government and the GNCTD vehemently contested the lifting of the corporate veil and contended that there had been no basis made out by  DAMPEL to substantiate the invocation of the doctrine. The Union Government and GNCTD argued that the doctrine of piercing / lifting of the corporate veil would only be attracted in cases of fraud or where it had been established that the corporate structure was a façade, and that it was legally impermissible for the same to be applied in cases merely because the same was in the interest of justice.

    As such, the Hon’ble High Court of Delhi was required to opine as to whether the doctrine of piercing the corporate veil was required to be invoked in order to ensure that the DMRC would be in a position to discharge its liabilities, which had arisen on it suffering an arbitral award. Further, the Hon’ble High Court of Delhi determined whether in an execution proceeding, relief can be sought against a party that was not a party in the original award/decree.

    After thoroughly examining the applicable precedent, the Hon’ble High Court of Delhi proceeded to opine on the situation (s) wherein, it justified the need to invoke the principle of lifting the corporate veil sans any “allegations of fraud, façade, or evasion of taxes or any other obligations”[12]. The Hon’ble High Court of Delhi found that the doctrine of piercing the corporate veil was not only applicable in the aforesaid circumstances and could also be relied upon where equity and the ends of justice are required. Indeed, the Hon’ble High Court of Delhi has found that the ends of justice being met, also include the enforcement/execution of decrees.

    In order to distinguish the common law precedent cited by Union Government and the GNCTD, the Hon’ble High Court of Delhi observed that the ratio laid down by the Hon’ble Supreme Court of India in its earlier decisions of Life Insurance Corporation of India v. Escorts Limited & Ors.[13] (Escorts Judgment) and State of Uttar Pradesh & Ors. v. Renusagar Power Co. & Ors.[14], (Renusagar Judgment), stipulated that the principle of piercing the corporate veil was not to be straightjacketed, must be permitted to evolve, and could even apply when the principles of public policy demanded. Further, the Hon’ble High Court of Delhi relied upon judgments rendered by the Hon’ble Supreme Court of India in Arcelor Mittal v. Satish Kumar Gupta[15] (Arcelor Mittal Judgment) and State of Rajasthan v. Gotan Lime Stone Khanij Udyog (P) Limited[16] (Gotan Lime Stone Judgment), wherein, it was held that the doctrine of the piercing of the corporate veil could be applied even in cases where there was no allegation of fraud or sham on part of the shareholders, but rather the doctrine was applied to meet the ends of justice, which included a violation of the law by using the device of a corporate entity. As such, the Hon’ble High Court of Delhi has recognized that the doctrine of lifting the corporate veil can take into account any public interest and should not confined within the archaic views- that  of a separate legal personality that imbues upon a company/corporation. The Hon’ble High Court of Delhi has held that the aforesaid precedent allows for the doctrine of lifting of the corporate veil to “strike at attempts to circumvent the law as well as in the context of imperatives of enforcement of legal obligations”[17], which also appears to be employed by the European Union courts[18] as well as in American[19] jurisprudence.

    To summarize, the Hon’ble High Court of Delhi has held that the doctrine of piercing the corporate veil can be legitimately invoked when there are issues concerning public policy, public interest, or enforcement of settled legal obligations, which are required to be addressed/determined by a court. As such, these considerations are of the utmost importance and the settled law on the subject mandates that the doctrine can be applied to overcome injustice and inequitable circumstances or results.

    Pursuant to the aforesaid observations, the Hon’ble High Court of Delhi has opined that in terms of the Section 89 of the 2002 Metro Act, the Union Government and the GNCTD are the principal shareholders of the DMRC and that these shareholders are sovereign entities that exercise control over the DMRC, which in turn allows the DMRC to carry out its functions and discharge its statutory obligations. Hence, the Hon’ble High Court of Delhi has held that the Union Government and the GNTCD, on account of their capital investments in the DMRC and the power exercised by them over the DMRC’s affairs by virtue of the composition of the DMRC’s board, must be recognized in law as being in absolute control of the DMRC and the directing mind. Therefore, the Hon’ble High Court of Delhi held that the Union Government and the GNTCD cannot hide behind the veil of corporate personality.

    As a result, the Hon’ble High Court of Delhi emphasized that the basic principle of a corporate structure should not frustrate the enforcement of a legal obligation, such as the DMRC’s obligations to discharge its liabilities in terms of the Arbitral Award on account of being the Judgment Debtor. Accordingly, the Hon’ble High Court of Delhi has directed the Union Government and the GNCTD to attend to the DMRC’s requests qua extension of sovereign guarantees and subordinate debt as to as enable it to liquidate its liabilities under the Arbitral Award, failing which, the Union Government would be required to revert and repatriate the DMRC Funds.

    It is extremely pertinent to mention that this decision of the Hon’ble High Court of Delhi has been challenged by both the Union Government and the GNCTD before the Hon’ble Supreme Court of India vide Diary No. 12777 of 2023 and Diary No. 12850 of 2023, respectively. We shall provide an update on these matters as and when the Hon’ble Supreme Court of India passes appropriate orders.

    ELP Comments
    Indeed, vide this decision, the Hon’ble High Court of Delhi has expanded the doctrine of lifting of the corporate veil by holding the Union Government along with the GNCTD liable to discharge liabilities of DMRC that have arisen on account of the Arbitral Award.

    Traditionally, Indian courts have applied the doctrine of lifting of the corporate veil upon the allegations or discovery of some fraud/impropriety which is linked to the company structure and employed to avoid or conceal liability. However, the Hon’ble High Court of Delhi has expanded the doctrine of lifting of the corporate veil. The Hon’ble High Court of Delhi has held that an obligation which flows from a decree, or an award must not only be duly recognized but also be enforced in accordance with law by applying and widening the already existing principles of law to deliver justice.

    As corporate governance has evolved over the decades, courts have leaned towards jettisoning a rigidity of approach or being tied down by principles which may have lost relevancy. Hence, it is essential for the Courts to dispense justice bearing in mind the societal needs of time while in parallel, taking into consideration technological and corporate changes. This is imperative considering that trade and commerce continues to evolve both domestically and globally, with the manner in which entities are structured and are continuing to become more complicated and opaque. As such, it is necessary that such transformational and normative changes warrant that the judiciary not be tied down to conventional creeds, and instead, allow for the law on this subject to keep place with corporate governance evolution.

    The rationale underpinning the decision of the Hon’ble High Court of Delhi was that if the arguments of the Union Government and the GNCTD were to be accepted, the Court would be rendered a mere mute spectator. Thus, the Hon’ble High Court of Delhi found it necessary that the power of the Court to peep behind the veil must be recognized and held to be justifiably invoked where questions of public policy, public interest, or enforcement of settled legal obligations arise.

    In today’s world of multi – layered corporate holdings and structures, the decision of the Hon’ble High Court of Delhi allows for parties to have a significant arrow in their quiver to effectively enforce their claims. This approach employed by the Hon’ble High Court of Delhi potentially allows for the levelling of the playing field as the same affords parties the ability to strip away artificial and opaque corporate structures. Effectively Dorothy can, by relying upon this decision of the Hon’ble High Court of Delhi, find out who Oz is without being bound by the narrow confines of proving “allegations of fraud, façade, or evasion of taxes or any other obligations”[20].

    As aforesaid, the decision of the Hon’ble High Court of Delhi has been challenged before the Hon’ble Supreme Court of India. It will be interesting to see whether the Apex Court allows for the extension and expansion of the doctrine, or if the aforesaid stringent tests will be reaffirmed.

    We trust you will find this an interesting read. For any queries or comments on this update, please feel free to contact us at insights@elp-in.com or write to our authors:
     Arpan Behl, Associate Partner – Email – arpanbehl@elp-in.com
    Abhay Chattopadhyay, Associate Partner – Email – abhaychattopadhyay@elp-in.com
    Kustubh Singh, Associate – Email – kustubhsingh@elp-in.com

    References:
    [1] OMP (ENF.) (COMM.) No. 145 of 2021 (DHC
    [2] Delhi Metro Rail Corporation Limited v. Delhi Airport Metro Express Private Limited, 2018 SCC Online Del 7549.
    [3] Delhi Metro Rail Corporation Limited v. Delhi Airport Metro Express Private Limited, 2019 SCC Online Del 6562.
    [4] Delhi Airport Metro Express Private Limited v. Delhi Metro Rail Corporation Limited, (2022) 1 SCC 131.
    [5] Ibid.
    [6] OMP (ENF.) (COMM.) No. 145 of 2021 (DHC).
    [7] Delhi Airport Metro Express Private Limited v. Delhi Metro Rail Corporation Limited, Civil Appeal No. 3657 of 2022.
    [8] Delhi Airport Metro Express Private Limited v. Delhi Metro Rail Corporation Limited, (2022) 9 SCC 286.
    [9] Delhi Airport Metro Express Private Limited v. Delhi Metro Rail Corporation Limited, Review Petition No. 107 of 2022 in OMP (ENF.) (COMM.) No. 145 of 2021, decided on 20.05.2022 (DHC).
    [10] Delhi Airport Metro Express Private Limited v. Delhi Metro Rail Corporation Limited, OMP (ENF.) (COMM.) No. 145 of 2021, paragraphs 24, 27, and 28, decided on 17.03.2023, (DHC).
    [11] Delhi Airport Metro Express Private Limited v. Delhi Metro Rail Corporation Limited, OMP (ENF.) (COMM.) No. 145 of 2021, paragraph 31, decided on 17.03.2023, (DHC).
    [12] Delhi Airport Metro Express Private Limited v. Delhi Metro Rail Corporation Limited, OMP (ENF.) (COMM.) No. 145 of 2021, paragraph 88, decided on 17.03.2023, (DHC).
    [13] (1986) 1 SCC 264
    [14] (1988) 4 SCC 59
    [15] (2019) 2 SCC 1
    [16] (2016) 4 SCC 469
    [17] Delhi Airport Metro Express Private Limited v. Delhi Metro Rail Corporation Limited, OMP (ENF.) (COMM.) No. 145 of 2021, paragraph 93, decided on 17.03.2023, (DHC).
    [18] The Goldman Sachs Groups Inc. vs. European Commission, Case C-595/18 P
    [19] Dill v. Rembrandt Grp., Inc., 2020 WL 1881062
    [20] Delhi Airport Metro Express Private Limited v. Delhi Metro Rail Corporation Limited, OMP (ENF.) (COMM.) No. 145 of 2021, paragraph 88, decided on 17.03.2023, (DHC).

    Disclaimer: The information contained in this document is intended for informational purposes only and does not constitute legal opinion or advice. This document is not intended to address the circumstances of any individual or corporate body. Readers should not act on the information provided herein without appropriate professional advice after a thorough examination of the facts and circumstances of a situation. There can be no assurance that the judicial/quasi-judicial authorities may not take a position contrary to the views mentioned herein