I. Introduction
The Supreme Court in Alpha Corp Development Private Limited v Greater Noida Industrial Development Authority (GNIDA) (‘Alpha Corp case’) permitted piercing of the corporate veil. And allowed assets of subsidiary companies to be included in corporate insolvency resolution process (‘CIRP’) of the parent company. The principle of separate legal personality is not absolute and exceptions to it are either prescribed in the relevant statutory provisions or created through judicial pronouncements. Alpha Corp case is an instance of judicially created exception and needs to be contextualized to determine its impact on future disputes of similar nature.
This article examines Alpha Corp case and refers to existing jurisprudence for piercing the corporate veil under the Insolvency and Bankruptcy Code, 2016 (‘IBC’). Prior to Alpha Corp case, most notable instance of the Supreme Court endorsing piercing of the corporate veil was in Arcelor Mittal Private Limited v Satish Kumar Gupta & Ors (‘Arcelor Mittal case’). I argue that in Alpha Corp case, Supreme Court’s reliance on Arcelor Mittal case ignores the context in which the latter was pronounced. Arcelor Mittal case was pronounced in reference to Section 29A. The language deployed in Section 29A led the Supreme Court to correctly hold that the provision itself permits piercing of the corporate veil. While in Alpha Corp case the Supreme Court permitted piercing of the corporate veil without anchoring it in any specific provision. Instead, in Alpha Corp case the Supreme Court permitted piercing of the corporate veil by almost exclusively relying on facts of the case. The exclusive reliance on facts and no exposition of any legal doctrine should limit precedential value of Alpha Corp case. In the end, I concur with a post elsewhere: Alpha Corp case leaves us with more questions than answers and reveals little about permissible grounds for piercing the corporate veil under the IBC.
II. Brief Facts
CIRP was initiated against Earth Infrastructures Limited (‘EIL’) by one of its financial creditors under Section 7 of the IBC. EIL was undertaking development on three plots of land which were leased to it by GNIDA. On one plot of land EIL was undertaking development through a Special Purpose Company – Earth Towne Infrastructures Private Limited (‘ETIPL’) – in which it held 78% shares and was a lead member. On the other two plots of land, EIL was undertaking development through its subsidiary companies.
As regards piercing of the corporate veil, the resolution applicant’s argument before the National Company Law Appellate Tribunal (‘NCLAT’) was that GNIDA was fully aware that the projects were being executed by EIL. And that ETIPL was nothing but an alter ego of EIL making it a fit case for piercing of the corporate veil. Some of the factors that were underlined were common directors and promoters of EIL and ETIPL, ETIPL not indulging in a separate business of its own, and that under the lease deed it was EIL and not ETIPL that made the requisite payments to GNIDA. The resolution applicant’s interest was to include assets of ETIPL in CIRP because assets of EIL as a parent company, were negligible. The NCLAT refused to lift the corporate veil by relying on Vodafone International Holdings BV v Union of India as well as Jaypee Kensington Boulevard Apartments Welfare Association and others v NBCC (India) Limited and others. In both cases, the Supreme Court had underlined the principle of separate legal personality and held that piercing of corporate veil is permissible only in exceptional circumstances.
Finally, as far GNIDA was concerned it challenged the National Company Law Tribunal’s (‘NCLT’) approval of the resolution plan. GNIDA argued that it had not been informed of CIRP by the resolution professional. The NCLAT refused to accept any of GNIDA’s arguments about lack of information about the resolution plan and non-payment of dues by EIL by remarking that it had not been diligent in seeking recovery of dues. And that GNIDA was mandated to oversee development of plots it had leased to EIL; implying it should have been diligent and demanded its lease payments in a timely manner. Instead GNIDA was negligent and was making delayed demands for pending dues.
III. Relevance of Corporate Veil in Alpha Corp case
GNIDA made the argument that assets of subsidiary companies cannot be made part of assets of the holding company. GNIDA’s arguments for respecting separate legal personalities of parent company and its subsidiaries were based on two pillars:
Firstly, that subsidiary company is a separate legal entity, and its assets are separate under Section 18 of the IBC. Explanation to Section 18 clearly states that assets of the corporate debtor do not include assets of any Indian or foreign subsidiary of the corporate debtor.
Secondly, GNIDA cited the Supreme Court’s observations in BRS Ventures Investments Limited v SREI Infrastructure Finance Limited (‘BRS Ventures case’) where the Supreme Court had clarified that:
A holding company and its subsidiary are always distinct legal entities. The holding company would own shares of the subsidiary company. That does not make the holding company the owner of the subsidiary’s assets. (para 21)
In BRS Ventures cases the Supreme Court was categorical that assets of subsidiary company cannot be included in liquidation estate of the holding company. And this observation stems from a plain reading of Section 18 of the IBC.
However, the Supreme Court in Alpha Corp was not convinced of the need to respect separate legal personality. The Supreme Court noted that while sanctity of independent legal entity must be maintained some circumstances can require piercing of the corporate veil. And it concluded that the facts of Alpha Corp case demanded piercing of the corporate veil because:
… EIL was the main driving force in the development of the projects and in payment of GNIDA’s dues. The subsidiary companies were only a front. (para 56)
Since facts of the case were fit for piercing the corporate veil, the Supreme Court ‘found it unnecessary to deal with’ scope of the term ‘assets’ under Section 18 of the IBC. In my view, this wasn’t an ideal approach. Instead of dismissing relevance of Section 18 of the IBC, the Supreme Court should have engaged with it and asserted that the statutory mandate – wherein assets of a holding and subsidiary companies are separate – is not absolute, and specific facts can permit reading exceptions into the provision. This would have grounded the exception of piercing the corporate veil to a specific provision. And could have informed future decisions where scope of the term ‘assets’ may be under scrutiny. Instead, the Supreme Court relied on a sweeping irrelevance of Section 18.
The Supreme Court also relied on Life Insurance Corporation v Escorts Ltd (‘LIC case’) and Arcelor Mittal case to justify that Alpha Corp case was fit for piercing of the corporate veil. The former laid down a general proposition that piercing the corporate veil should only take place when contemplated by the statute itself, to prevent fraud, prevent tax evasion, and the object sought to be achieved. The Supreme Court in LIC case did not enumerate an exhaustive list of situations where the corporate veil can be pierced, it only laid down the general proposition that piercing of corporate veil should be in exceptional circumstances. And piercing of the corporate veil must ‘depend on the relevant statutory or other provisions.’ And, thus, it is necessary to examine if circumstances in Alpha Corp case justified piercing of the corporate veil in the context of various provisions of the IBC.
IV. Piercing of Corporate Veil: Arcelor Mittal Case to Alpha Corp Case
The Supreme Court, in Alpha Corp case, relied on Arcelor Mittal case for piercing the corporate veil. In Arcelor Mittal case, the Supreme Court held that where a company had been formed to evade legal obligations – to circumvent disqualifications imposed under Section 29A of the IBC – the courts can pierce the corporate veil. However, it is important to underline the factors that contextualize the Supreme Court’s observations.
To begin with, Arcelor Mittal case was pronounced in the context of Section 29A of the IBC. Section 29A which provides for disqualifications for a resolution applicant and itself permits piercing of the corporate veil by disqualifying persons. This is because Section 29A disqualifies persons who act jointly or in concert with persons who suffers from disqualifications. Thus, to ensure that the objective of Section 29A is met, the Supreme Court held that piercing of corporate veil is necessary to determine persons who are acting as resolution applicants. And whether the disqualified persons are not using corporate form to circumvent the disqualifications.
Also, in Arcelor Mittal case the applicant itself had permitted the relevant authorities – the resolution professional and the Committee of Creditors (‘CoC’) – to pierce the corporate veil and determine its eligibility by including the net worth of its shareholders. Thus, when the resolution applicant was determined as ineligible based on its proximity to erstwhile promoter of the corporate debtor, the Supreme Court denied the applicant cover of a separate legal personality. The Supreme Court, in effect, denied the resolution applicant to conveniently support piercing of the corporate veil to become eligible to submit a resolution plan and then use separate legal personality to hide behind the corporate form to avoid disqualification. It was in this context that the Supreme Court pierced the corporate veil, by grounding it in purpose of Section 29A, its scope, and intent. And noted that the principle of piercing of corporate veil can be:
applied even to group companies, so that one is able to look at the economic entity of the group as a whole. (para 34)
Doctrinally, in Alpha Corp case, the Supreme Court’s reliance on Arcelor Mittal case to pierce a corporate veil can be defended by arguing that it is the only way to respect legislative intent. However, legislative intent is an elusive metric if the underlying provision is not examined. The most proximate provisions was Section 18 of the IBC which clearly states that assets of a subsidiary are not assets of the corporate debtor. Legislative intent of respecting separate legal personality is clear from a plain reading of the provision. In fact, one can claim that reading an exception to the rule laid down in Section 18 is deviating from the legislative intent and not adhering to it. All these questions and analyses are absent in Alpha Corp case.
Nonetheless, if one argues that facts of the case necessitated piercing of the corporate veil – and provisions of the IBC are irrelevant – even then grounds for piercing are not sufficiently persuasive.
Two land leases were awarded to subsidiaries of EIL is a matter of fact. And whether they were mere fronts for EIL to secure the said leases is a matter of factual determination and the Supreme Court was of the view that the subsidiaries were alter egos of EIL. Even if one concedes that the above conclusion is justified on facts. But the third lease in favor of ETIPL should have ideally attracted a differentiated approach from the Supreme Court. ETIPL was constituted as a special purpose company because it was one of the conditions of lessor/GNIDA’s scheme. To classify a special purpose company – incorporated to meet conditions of lessor/GNIDA – as a front of EIL and club it with subsidiaries of EIL was not ideal. Unless one can establish that creation of a special purpose company was a way to disguise EIL’s role. The Supreme Court referred to GNIDA’s letter to police authorities acknowledging EIL’s role in development. Even if one accepts that EIL, as a holding company, was the real developer even for land leased to ETIPL, is the GNIDA’s mandatory condition to incorporate ETIPL irrelevant? Yes, if we look at the Supreme Court’s approach but it results in pointing fingers at a corporate for adhering to the prescribed lease conditions. And doesn’t establish that the special purpose company was incorporated to evade any legal or statutory obligations.
Further, if one also admits that, in view of the facts, a conclusion to pierce or not pierce the corporate veil of EIL could have gone either way. But lack of engagement with Section 18, oversight in assessing the context of Arcelor Mittal case resulted in Alpha Corp case being sensitive to facts of the case. Resultantly, the Supreme Court was unable to provide sound parameters or factors that can be invoked to pierce the corporate veil under the IBC. We do not know the grounds that can be invoked to pierce the corporate veil under in a CIRP or liquidation proceedings. Thus, it will be ideal if Alpha Corp case is treated as a decision that was solely based on facts of the case and is not used as a precedent to sidestep scope of assets as provided under Section 18. Not unless the requisite details relating to group insolvencies are included in the IBC and the secondary legislation.
V. Way Forward
One can argue that parent companies operate in an ‘asset-light’ fashion and tend to hold assets through their subsidiary companies. And thus, a CIRP against a holding company may not be fruitful if all its assets are owned by its closely held companies. Necessitating piercing of the corporate veil. There is credibility in the above line of argument. Except that any piercing of the corporate veil is an exception that should be based on interpretation of a statutory provision or carefully delineated judicial parameters. Permitting piercing of the corporate veil solely on facts, without interpreting the provisions in question, and using cryptic mention of judicial precedents does not augur well for a cohesive and coherent jurisprudence. Alpha Corp case does not articulate the parameters well enough for it to be used as a precedent for any subsequent cases. And, it may be ideal if its conclusion is restricted to facts of the specific case.
