The doctrine of “piercing the corporate veil” stands as an exception to the principle that a company is a legal entity separate and distinct from its shareholders with its own legal rights and obligations.
| Case name: | Balwant Rai Saluja & Anr Etc vs Air India Ltd |
| Case number: | CIVIL APPEAL Nos.10264-10266 OF 2013 |
| Court: | THE SUPREME COURT OF INDIA |
| Bench: | Chandramauli Kr. Prasad, V. Gopala Gowda |
| Decided on: | 13 November, 2013 |
| Relevant Act/Sections: | The Factories act, 1948 The Companies act, 2013 |
- BRIEF FACTS AND PROCEDURAL HISTORY:
Procedural History
- The present set of appeals came before a two-Judge Bench of this Court against a judgment and order dated 2-5-2011 of a Division Bench of the High Court of Delhi in Balwant Rai Saluja v. Air India Ltd. [Balwant Rai Saluja v. Air India Ltd., (2011) 180 DLT 396] The present dispute finds origin in an industrial dispute which arose between the appellant workmen herein of the statutory canteen and Respondent 1 herein. The said industrial dispute was referred by the Central Government, by its order dated 23-10-1996 to the Central Government Industrial Tribunal-cum-Labour Court (for short “CGIT”).
- The question referred was whether the workmen as employed by Respondent 3 herein, to provide canteen services at the establishment of Respondent 1 herein, could be treated as deemed employees of the said Respondent 1. Vide order dated 5-5-2004, CGIT held that the workmen were employees of Respondent 1 Air India and therefore their claim was justified. Furthermore, the termination of services of the workmen during the pendency of the dispute was held to be illegal.
- By judgment and order dated 8-4-2010 [Air India Ltd. v. Rakesh Kumar, (2010) 116 DRJ 302 : (2010) 126 FLR 614], the learned Single Judge of the High Court of Delhi set aside and quashed CGIT’s award and held that the said workmen would not be entitled to be treated as or deemed to be the employees of Air India. The Division Bench of the High Court of Delhi vide impugned order dated 2-5-2011 [Balwant Rai Saluja v. Air India Ltd., (2011) 180 DLT 396] found no error in the order passed by the learned Single Judge of the High Court. The appeal was dismissed by the Division Bench confirming the order of the learned Single Judge who observed that the responsibility to run the canteen was absolutely with HCI and that Air India and HCI shared an entirely contractual relationship. Therefore, the claim of the appellants to be treated as employees of Air India and to be regularised was rejected by the learned Single Judge.
Facts
- In the present set of appeals, the appellants are workers who claim to be the deemed employees of the management of Air India on the grounds, inter alia, that they work in a canteen established on the premises of Respondent 1 Air India and that too, for the benefit of the employees of the said respondent. It is urged that since the canteen is maintained as a consequence of a statutory obligation under Section 46 of the 1948 Act, and that since by virtue of Notification dated 21-1-1991, Rules 65 to 70 of the Delhi Factory Rules, 1950 (for short “the 1950 Rules”) have become applicable to Respondent 1, the said workers should be held to be the employees of the management of the corporation, on which such statutory obligation is placed, that is, Air India.
- Respondent 1 is a company incorporated under the Companies Act, 1956 and is owned by the Government of India. The primary object of the said respondent is to provide international air transport/travel services. It has Ground Services Department at Indira Gandhi International Airport, Delhi. The Labour Department vide its Notification dated 20-1-1991 under sub-rule (1) of Rule 65 of the 1950 Rules, has enlisted the said M/s Air India Ground Services Department, thereby making Rules 65 to 70, of the 1950 Rules applicable to the same.
- Respondent 2 HCI is also a company incorporated under the Companies Act, 1956 and is a separate legal entity from Air India. As per the memorandum of association of Respondent 2, the same is a wholly-owned subsidiary of Air India. The main objects of the said respondent, inter alia, are to establish refreshment rooms, canteens, etc. for the sale of food, beverages, etc.
- Respondent 2 has various units and Respondent 3, being Chefair Flight Catering (for short “Chefair”), provides flight catering services to various airlines, including Air India. It is this Chefair unit of HCI that operates and runs the canteen. It requires to be noticed that the appellant workmen are engaged on a casual or temporary basis by Respondents 2 and 3 to render canteen services on the premises of Respondent 1 Air India.
- ISSUE BEFORE THE COURT:
- Whether workers, engaged on a casual or temporary basis by a contractor (HCI) to operate and run a statutory canteen, under the provisions of the 1948 Act, on the premises of a factory Air India, can be said to be the workmen of the said factory or corporation?
- Whether the Court should pierce the veil and declare that HCI is a sham and a camouflage as contested by the learned counsel?
- RATIO OF THE COURT
- In context of the second main issue, it is an admitted fact that HCI is a wholly-owned subsidiary of Air India.
- The Companies Act in India and all over the world have statutorily recognised subsidiary company as a separate legal entity. Section 2(47) of the Companies Act, 1956 (for short “the 1956 Act”) defines “subsidiary company” or “subsidiary”, to mean a subsidiary company within the meaning of Section 4 of the 1956 Act. For the purpose of the 1956 Act, a company shall be, subject to the provisions of sub-section (3) of Section 4, of the 1956 Act, deemed to be subsidiary of another. Sub-section (1) of Section 4 of the 1956 Act further imposes certain preconditions for a company to be a subsidiary of another. The other such company must exercise control over the composition of the Board of Directors of the subsidiary company, and have a controlling interest of over 50% of the equity shares and voting rights of the given subsidiary company.
- In a concurring judgment by K.S.P. Radhakrishnan, J., in Vodafone International Holdings BV v. Union of India [Vodafone International Holdings BV v. Union of India, (2012) 6 SCC 613 : (2012) 3 SCC (Civ) 867] , the following was observed: (SCC pp. 712-13, paras 257-58)
“Holding company and subsidiary company
- 257. The legal relationship between a holding company and WOS is that they are two distinct legal persons and the holding company does not own the assets of the subsidiary and, in law, the management of the business of the subsidiary also vests in its Board of Directors. …
- 258. Holding company, of course, if the subsidiary is a WOS, may appoint or remove any Director if it so desires by a resolution in the general body meeting of the subsidiary. Holding companies and subsidiaries can be considered as single economic entity and consolidated balance sheet is the accounting relationship between the holding company and subsidiary company, which shows the status of the entire business enterprises. Shares of stock in the subsidiary company are held as assets on the books of the parent company and can be issued as collateral for additional debt financing. Holding company and subsidiary company are, however, considered as separate legal entities, and subsidiary is allowed decentralised management. Each subsidiary can reform its own management personnel and holding company may also provide expert, efficient and competent services for the benefit of the subsidiaries.”
- The doctrine of “piercing the corporate veil” stands as an exception to the principle that a company is a legal entity separate and distinct from its shareholders with its own legal rights and obligations. It seeks to disregard the separate personality of the company and attribute the acts of the company to those who are allegedly in direct control of its operation.
- The position of law regarding this principle in India has been enumerated in a Constitution Bench of this Court in LIC v. Escorts Ltd. [(1986) 1 SCC 264] , while discussing the doctrine of corporate veil, held that: (SCC pp. 335-36, para 90)
“90. … Generally and broadly speaking, we may say that the corporate veil may be lifted where a statute itself contemplates lifting the veil, or fraud or improper conduct is intended to be prevented, or a taxing statute or a beneficent statute is sought to be evaded or where 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, the effect on parties who may be affected, etc.”
- The primary objects of HCI have no direct relation with Air India. It is only one of the many incidental or ancillary objects of HCI that make a direct reference to assisting Air India. HCI has several primary objects, which include the running of hotels, motels, etc., in addition to establishing shops, kitchens, canteens and refreshment rooms. Air India only finds mention under HCI’s ancillary objects. It cannot be said that the memorandum of association of HCI provides that HCI functions only for Air India. Nor can it be said that the fundamental activity of HCI is to run and operate the said statutory canteen for Air India.
- As regards HCI’s articles of association, it is stated therein that HCI shall be a wholly-owned subsidiary of Air India and that its share capital shall be held by Air India and/or its nominees. Furthermore, the said articles included provisions whereby Air India controls the composition of the Board of Directors of HCI, including the power to remove any such Director or even the Chairman of the Board. Further, Air India has the right to issue directions to HCI, which the latter is bound to comply with. In this regard, it may be contended that Air India has effective and absolute control over HCI and that therefore the latter is merely a veil between the appellant workmen and Air India. We do not agree with this contention.
- It courts considered opinion that the doctrine of piercing the veil cannot be applied in the given factual scenario. Despite being a wholly-owned subsidiary of Air India, Respondent 1 and Respondent 2 are distinct legal entities. The management of business of HCI is under its own Board of Directors. The issue relating to the appointment of the Board of Directors of HCI by Air India would be a consequence of statutory obligations of a wholly-owned subsidiary under the 1956 Act.
- 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 Air India resulted in depriving the appellant workmen herein of their legal rights.
- In the present case, HCI is a separate legal entity incorporated under the 1956 Act and is carrying out the activity of operating and running of the given canteen. The said articles of association of HCI, in no way give control of running the said canteen to Air India. The functions of appointment, dismissal, disciplinary action, etc. of the canteen staff, are retained with HCI. Thus, the exercise of control by HCI clearly indicated that the said Respondent 2 is not a sham or camouflage created by Respondent 1 to avoid certain statutory liabilities.
DECISION HELD BY COURT:
The court dismissed these appeals. No order as to costs. Ordered accordingly.