Government Co?

State Trading Corp. v CTO, AIR 1963 SC 1811

(To Quash Sales Tax Proceedings)
Bank Nationalisation Case, AIR 1970 Sc 564
Bennett Coleman & Co. v Union of India, AIR
1973 SC 106
Statesman v Fact Finding Committee, AIR 1975
Cal. 14
Godhra Electric Co v State of Gujarat, AIR 1975
SC 32
PTI v Union of India, AIR 1974 SC 1044

Kapila Hingorani v State of Bihar,

(2003) 6 SCC 1
Justice S.B. Sinha
Government Co.s/ PSUs
Not paid salaries to their workmen & other
employees for a long time
Resulted in death of several persons
Miseries brought to a large number of families

Name of the PSU

No. of Date from which salary is Nos. of

Em.ee due
Death

Bihar State Agro Industries 630

Development Corp.

May-93

70

Bihar State Medicine & 265

Chemical Development Corp.

Aug-93

11

Bihar State Handloom & 429

Handicraft Corp.

Headquarter from May 1996

Unit from 1993

Bihar State Small Scale Indl. 141

Development Corp.

Headquarter from April 1995.

Unit from April 1993

36

Bihar State Sugar Corp.

Headquarter - Jan. 2000

467

9240

Unit from April 1992

Bihar
State
Leather 471
Development Corp.

From March 1993

Bihar Finished Leathers

Bihar
State
Industrial 1551
Development Corp.

13

35
Headquarters from July 2001 125
Unit from Feb. 1993

Bihar State Electric Corporation

157

In Headquarter up to date. In Unit from April

1998

Bihar State Vastralaya Corp.

50

Nov.-96.

Nil

Bihar State Film Development & 8

Financial Corp.

Aug.-02

Nil

Bihar State Fruit & Vegetable 16

Development Corp.

From Aug.-94

Bihar
Corp.

From May 1999

Before May 2000 due to 32 to 40 months

Bihar State Food & Civil Supplies 1716

Corp.

Pending from till 40 months

325

Bihar State Panchayati

Financial Corp.

From March 1996

State

Seed

Development 137

Bihar State Fisheries Development

42

Raj 130

Bihar State Construction Corp.

657

Headquarter Jan. 1995.

Unit from January 1992

55

Bihar State Road Transport Corp.

5580

Headquarter + In sum units from Nov. 1998

Balance in from December 1993 Note:

205

Bihar State Khadi Gramdhoyog 75

Board

Payment of Salaries 71 Staff in non-plan (upto

date) due from April 94 Staff Salaries

NA

Bihar Hill Area Lift Irrigation Corp.

NA

684

State of Bihar Did not deny the factual

statement made in the WP
Its stand, however, is that salaries are
being paid by the statutory authorities.

State of Bihar - Shanti Bhushan

are registered or incorporated U/T CA - Rights

Undertakings/Cos
.
& liabilities - Governed by the provisions CA

Liability of Cos cannot be passed on to SOB - by taking

recourse to the doctrine of lifting the veil or otherwise
Just & proper Liability - Directed to be met to the extent of 80 %
- UOI
10 % - State Government
10 % - Realised from the sale of properties belonging to the
respective cos.

Co. registered U/T/CA is a juristic person - Its rights &

liabilities must be determined in terms thereof & not
dehors the same

Union of India - Mr. Soli J. Sorabjee Attorney General

In law nor in equity - UIO can be fastened

with any liability of SOB.
Direct - OL be appointed & to dispose of
WU applications as expeditiously as
possible
Sec. 529 A, CA - Dues of employees will
have primacy.
Co. Judge may also be directed to look into
the Human Right aspect of the matter.

Complex questions?
Whether - Court would take a sheer legalistic approach
in holding that the corporate veil would not be lifted?
Although its conscience stands satisfied that there has
been violations of citizens right to life & liberty as
adumbrated U/A 21 of the Constitution of India?;
2. Whether - Govt. Cos /Corps are States within the
meaning of Art. 12?
SOB having deep & pervasive control over the affairs
thereof can be held to be liable to render all assistance to
the said Cos? .
To fulfill its own &/or the Corp.s obligations to comply
with the citizens right U/As. 21 & 23?

3. Whether - SOB can escape its liability

having regard to the human rights
problem involved in the matter?

4. Whether - liability of the SOB, if

any, can be shifted to UOI?

Electronics Corporation of India Ltd.s case, 1999 Indlaw

SC 1147 (supra) opined:

A clear distinction must be drawn between a

Co. & its SH, even though that SH may be only
one & that CG/SG - in the eye of the law, a Co.
registered U/T/CA is a distinct legal entity other
than the legal entity / entities that hold its
shares.
RD Shetty v International Airport of India, (1979) 3 SCC 489
MD, U.P. Warehousing Corpn. v Vijay Narayan Vajpayee, (1980)
3 SCC 459
Som Prakash Rekhi v Union of India, (1981) 1 SCC 449
Central Inland Water Transport Corp. Ltd. v Brojo Nath Ganjuly
(1986) 3 SCC 156

RD Shetty v International Airport of India (1979) 3 SCC 489

Corps created by the Govt. for setting up &

management of public enterprises & carrying
out public functions, act as instrumentalities of
the Govt. would be subject to the same
limitations in the field of constitutional &
administrative laws as the Govt. itself, though in
the eye of the law they would be distinct &
independent legal entities. (Enforcing the
mandate of Art. 14 - against the - Central Govt.
Corp.)

MD, U.P. Warehousing Corpn. v Vijay Narayan Vajpayee,

(1980) 3 SCC 459 (Para 27)

Dismissal in violation of the principles of

natural justice. - Court held the Corp. to
be an instrumentality of the State &
extended protection of Arts. 14 & 16 to the
employee
When the Govt. is bound to observe the
equality clause in the matter of
employment the Corps set up & owned by
the Govt. are equally bound by the same
discipline.

Judgment? Para 30
We wish to clear the air that the principle, while
discharging public functions & duties the govt.
Cos / Corps / Societies which are
instrumentalities / agencies of the Govt. must be
subjected to the same limitations in the field of
Public Law, Constitutional or Administrative
Law as the Govt. itself, does not lead to the
inference that they become agents of the CG/SG
for all purposes so as to bind such Govt. for all
their acts, liabilities & obligations under various
Central Acts and/or State Acts or under Private
Law.

Para 32
Corporate veil can in certain situations be pierced or lifted
Principles behind the doctrine is a changing concept & it is
expanding its horizon..(State of U.P. and Ors. v. Renusagar Power
Co) - Ratio of the said decision clearly suggests that

whenever a corporate entity is abused for an unjust &

inequitable purpose... Court would not hesitate to lift the
veil & look into the realities so as to identify the persons
who are guilty & liable therefor.
Para 33 - Proposition that a Co. although may have only
one SH will be distinct juristic person as adumbrated in
Salomon Case - Has time & again been visited the
application of doctrine of lifting the corporate veil in
revenue & taxation matters.
(Dal Chand and Ors. v. CIT, Punjab, (1944) 12 ITR 458 & Juggilal Kamlapat v.
CIT, U.P., (1969) 1 SCR 988

Para - 34
Corporate veil indisputably can be pierced
when the corporate personality is found to
be opposed to justice, convenience &
interest of the revenue or workman or
against public interest.
C.I.T. Madras v Meenakshi Mills Ltd and Ors., (1967) 1 SCR 934;
Workmen, Assn. Rubber Industry Ltd., v Associated Rubber
Industry Ltd., (1985) 4 SCC 11;
New Horizons Ltd. v UOI (1995) 1 SCC 478;
State of U.P. v Renusagar Power Co. (1988) 4 SCC 59;
Hussainbhai, Calicut v. The Hath Factory Thezhilali Union,
Kozhikode (1978) 4 SCC 257;
Secretary H.S.E.B. v. Suresh (1999) 3 SCC 601

Para 37
Govt. Cos/PSU being State would be constitutionally
liable to respect life & liberty of all persons in terms of
Art. 21 They, therefore, must do so in cases of their
own employees. .
SOB for all intent & purport is the sole SH. Although in
law, its liability towards the debtors of the Co. may be
confined to the shares held by it but, having regard

to the deep & pervasive control it exercises over

the Govt. Cos; in the matter of enforcement of
human rights &/ or rights of the citizen of life &
liberty, the State has also an additional duty to
see that the rights of employees of such Corp.s
are not infringed.

Para 38
Right to exercise deep & pervasive control
would in its turn make SOB liable to see that the
life & liberty clause in respect of the employees
is fully safeguarded.
SOB, thus, had a constitutional obligation to
protect life & liberty of the employees of the
Govt. owned Co/Corps who are the citizens of
India had an additional liability having
regard to its right of extensive supervision over
the affairs of the Co.

Para 41
State may not be liable in relation to the day to day
functioning of the Cos, but its liability would arise on
its failure to perform the Constitutional duties &
functions - By the PSUs, as in relation thereto the
States Constitutional obligations.

State acts in a fiduciary capacity.

Failure on the part of the State in a case of this nature must also
be viewed from the angle that the statutory authorities have
failed &/or neglected to enforce the social welfare legislations
enacted in this behalf e.g. Payment of Wages Act, Minimum
Wages Act etc.
Such welfare activities as adumbrated in Part IV indisputably
would cast a duty upon the State being a welfare State & its
statutory authorities to do all things which they are statutorily
obligated to perform.

Referring to the National Textile Workers Union v P.R.

Ramakrishnan, (1983) 1 SCR 922

Justice Bhagwati.
We cannot allow the dead hand of the past to stifle the
growth of the living present. Law cannot stand still:
It must change with the changing social concepts &
values. If the bark that protects the tree fails to grow &
expand along with the tree, it will either choke the tree
or if it is a living tree, it will shed that bark & grow a
new living bark for itself.
Similarly, if the law fails to respond to the needs of
society, then either it will stifle the growth of
changing
Law must therefore Constantly be on the move
the society & choke its progress or if the society is
adapting itself to the fast changing society & not lag
vigorous enough, it will cast away the law which stands
behind.
in the way of its growth.

Para 77
The court in a situation of this nature is obligated to issue
necessary directions to mitigate the extreme hardship of
the employees involving violation of human rights of the
citizens of India at the hands of SOB & Govt. Co &
Corps fully owned or controlled by it.
A right to carry on business is subject to compliance of
constitutional obligations as also limitations provided for
in the Constitution.
Para 78 - Financial stringency may not be a ground for
not issuing requisite directions when a question of
violation of fundamental right arises.
Rural Litigation and Entitlement Kendra & Ors. v State
of UP & Ors., AIR (1987) SC 359;
Ratlam Municipality v Vardi Chand, (1980) 4 SCC 162

Para 87 ?
We, however, hasten to add that we do not intend
to lay down a law, as at present advised, that the
State is directly or vicariously liable to pay
salaries / remunerations of the employees of
PSUs or the G.Cs in all situations.
We, as explained hereinbefore, only say that State
cannot escape its liability when a human rights
problem of such magnitude involving the
starvation deaths &/or suicide by the employees
has taken place by reason of non payment of
salary to the employees of PSU for such a long
time

Mysore Paper Mills Limited v Association and another

(2002) 2 SCC 167

(1)Whether the Mysore Paper Mills which

is a Co. incorporated U/T/CA & which is a
Govt. Co. as defined in S. 617 falls within
the meaning of the word State, as
defined in Art. 12?

International Airport Authority

(1) One thing is clear that if the entire SC of the Corp. is held by Govt., it would
go a long way towards indicating that the Corp. is an instrumentality / agency of
Govt.
(2) Where the financial assistance of the State is so much as to meet almost
entire expenditure of the Corp., it would afford some indication of the Corp. being
impregnated with govt.al character.

(3) It may also be a relevant factor whether the Corp. enjoys

monopoly status which is State conferred or State protected.
(4) Existence of deep & pervasive State control may afford an
indication that the corp. is a State agency or instrumentality.
(5) If the functions of the corp. are of public importance & closely related to
govt.al functions, it would be a relevant factor in classifying the Corp. as an
instrumentality or agency of Govt.
(6) Specifically, if a department of Govt. is transferred to a corp., it would be a
strong factor supportive of this inference of the corp. being an instrumentality or
agency of Govt.

Steel Authority of India Ltd. & Others v National Union Waterfront

Workers & Others, (2001) 7 SCC 1

Central Govt. undertakings which fall within the

meaning of other authorities in Art. 12 - are agents /
instrumentalities of the State functioning under the
authority of CG to constitute such Govt. to be the
Appropriate Govt. for purposes of Contract Labour
(Regulation and Abolition) Act, 1970 & S. 2(a) of the
Industrial Disputes Act, 1947.
Indisputable fact that Co. is a Govt. Co. as
envisaged in S. 617 attracting S. 619, CA, More than
97% of the SC has been contributed by the SG & the
financial institutions controlled & belonging to the
Govt. of India on the security & undertaking of the
SG

Steel Authority of India Ltd

That the amendments introduced to the MOA in 1994 introducing Articles
5A & 5B, entrusts.. Co. with important public duties obligating to undertake,
permit, sponsor rural development & for social & economic welfare of the
people in rural areas by undertaking programmes to assist & promote
activities for the growth of national economy which are akin & related to the
public duties of the State,

that out of 12 directors 5 are Govt. & departmental persons,

besides other elected directors also are to be with the
concurrence & nomination of the Govt. & the various other form
of supervision & control, go to show that the SG has deep &
pervasive control of the Co. & its day-to-day administration, &
consequently confirm the position that the Co. is nothing but an
instrumentality & agency of the SG. &
The physical form of Co. is merely a cloak / cover for the Govt.
Despite best & serious efforts made on behalf of the Co., the
decision under challenge has not been shown to suffer any
infirmity whatsoever to call for interference in our hands.

Life Insurance Corporation of India v Escorts Ltd.

(1986) 59 Comp Cases 548: 1986 (1) SCC 264

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 lasting statute or a beneficent statute is sought to be evaded
or
Where associated Cos are inextricably connected as to be, in
reality, part of one concern.

It is neither necessary nor desirable to enumerate the

classes where lifting the veil is permissible, since that
must necessarily depend on the
Relevant statutory or other provisions
Object sought to be achieved
Impugned conduct
Involvement of the element of the public interest
Effect on parties who may be affected, etc.

LIC CASE
Individuals - No difficulty in identifying their
nationality or origin.
Which of such NR Cos or legal personalities may then
be permitted to invest in shares of Indian Cos?
Scheme - Provides for lifting the corporate veil to
find out - If at least 60 % of the shares are held by NRI
Nationality or origin.
Lifting the veil is necessary to discover the nationality
or origin of the SHs & not to find out the individual
identity of each of the SHs. The corporate veil may be
lifted to that extent only and no more

In the present case, we do not think lifting

the veil is necessary or permissible
beyond the essential requirement of the
FERA & the Portfolio Investment Scheme.
object of the Act is to conserve &
regulate the flow of foreign exchange & the
object of the scheme is to attract NR
investors of Indian nationality or origin to
invest in shares of Indian Cos.

Vodafone International Holdings B.V. v. Union of India & Anr.,

(2012) 6 SCC 613
Control is a mixed question of law & fact. The control of a Co.
resides in the voting power of its SHs & shares represent an
interest of a SH which is made up of various rights contained in
the contract embedded in the AOA.
The question is, what is the nature of the control that a PC has
over its SC? It is not suggested that a PC never has control over
the SC.
For E.g. - In a proper case of Lifting of corporate veil, it would be proper to
say that the PC & the SC form one entity. But barring such case, the legal
position of any Co. incorporated abroad is that its powers, functions &
responsibilities are governed by the law of its incorporation.

Control, in our view, is an interest arising from holding a

particular No. of shares & the same cannot be separately
acquired or transferred. Each share represents a vote in the
management of the Co. & such a vote can be utilized to control
the Co.

 MNCs having large volume of business nationally /

or internationally will have to depend upon their
SCs in the national & international level for better
returns for the investors & for the growth of the
Co.
When a HC owns all of the voting stock of another
Co., the Co is said to be a WOS of the PC. HCs &
their SCs can create pyramids, whereby subsidiary
owns a controlling interest in another Co, thus
becoming its PC.
Para 150 - Legal relationship between a HC &
WOS is that they are two distinct legal persons &
the holding Co. does not own the assets of the SC
and, in law, the management of the business of the
SC also vests in its BODs.

 HC, of course, if the SC is a WOS, may appoint or

remove any director if it so desires by a resolution in the
General Body Meeting of the SC.
HCs & SCs can be considered as single economic entity
& consolidated balance sheet is the accounting
relationship between the HC & SCs Co, which shows the
status of the entire business enterprises.
Shares of stock in the SC are held as assets on the books
of the PC & can be issued as collateral for additional
debt financing.
HC & SC are, however, considered as separate legal
entities, & subsidiary are allowed decentralized
management.
Each subsidiary can reform its own management
personnel & HC may also provide expert, efficient &
competent services for the benefit of the subsidiaries.

HC controls a No. of SC & respective

businesses of Cos within the group &
manage & integrate as whole as though
they are merely departments of one large
undertaking owned by the HC.
But, the business of a SC is not the
business of the HC (See Gramophone &
Typewriter Ltd. v. Stanley, (1908-10) All
ER Rep 833).

 Courts, however, will not allow the separate

corporate entities to be used as a means to carry out
fraud or to evade tax.
PC of a WOS, is not responsible, legally for the
unlawful activities of the SC
Save in exceptional circumstances, such as a Co. is a
sham / the agent of the SH, the PC is regarded as a
SH.
MNCs, by setting up complex vertical pyramid like
structures, would be able to distance themselves &
separate the PC from operating Cos, thereby
protecting the MNCs from legal liabilities.

United States v Bestfoods (1998) 524 US 51

Explained that it is a general principle of corporate law &
legal systems that a PC is not liable for the acts of its SC, but the
Court went on to explain that corporate veil can be pierced &
the PC can be held liable for the conduct of its SC, if the
corporal form is misused to accomplish certain wrongful
purposes, when the PC is directly a participant in the wrong
complained of.
Mere ownership, parental control, management etc. of a SC is
not sufficient to pierce the status of their relationship &, to hold
PC liable.
In Adams v Cape Industries Plc., (1991) 1 All ER 929; [1990]
Ch. 433 - Court of Appeal emphasized that it is appropriate to
pierce the corporate veil where special circumstances exist
indicating that it is mere fagade concealing true facts

Singer India Limited v Chander Mohan Chadha and others,

(2004) 7 SCC 1

1966 Tenancy agreement with SIL

1982 - Eviction petition - Sub-tenancy without written
consent of the LL Indian Sewing Machine Co. Ltd.
(Now Singer India Ltd)
14(1)(b) of the Delhi Rent Control Act
Tenant (American Co.) - Pursuant to scheme of
amalgamation transferred to an Indian Co.
Whether it is open to the Co. itself to efface itself / lift
its own corporate veil so as to examine as to who are
the directors & SHs & who are in reality controlling
the affairs of the Co.?

 M/s. General Radio & Appliances Co. Ltd & others v M.A. Khader
1986 (2) SCC 656
Cox & Kings Ltd. & another v Chander Malhotra 1997 (2) SCC
687
Tata Engineering and Locomotive Co. Ltd etc. vs. The State of
Bihar and others AIR 1965 SC 40 (Constitutional Bench)

It has nowhere been held that such a course of action is

open to the co. itself. It is not open to the Co. to ask for
unveiling its own cloak & examine as to who are the
directors & SHs who are in reality controlling the
affairs of the Co.
It is not open to the appellant to contend that for the purpose of
FERA, the American Co. has effaced itself & has ceased to exist
but for the purpose of Delhi Rent Control Act.

Littlewoods Mail Order Stores v Inland Revenue Commissioners

(1969) 1 W.L.R. at 1254

The doctrine laid down in Salomon v Salomon & Co.

(1897) A.C. 22, has to be watched very carefully. It has
often been supposed to cast a veil over the personality of
a limited Co. through which the courts cannot see. But
that is not true. The courts can & often do draw aside
the veil. They can, & often do, pull off the mask. They
look to see what really lies behind. The legislature has
shown the way with group accounts & the rest. And the
courts should follow suit.
Merchandise Transport v British Transport Commission(1962) 2
Q.B
Scottish Cooperative Wholesale Society v. Meyer; (1959) A.C. 324
(H.L.)
Wallersteiner v. Moir, (1974) 1 W.L.R. 991 (A.C.)

 Beckett Investment Management Group v Hall

Court of Appeal pierced the veil between PC & its SCs to give effect to
a covenant not to compete in an employment contract.
The significance of this case for the corporate veil doctrine is
underscored by a number of statements in Lord Justice Kays
Stone & Rolls v Moore Stephens
Sole SH & director of a Co. had set up a fraudulent scheme
Its external auditors failed to detect, &
Swindled huge sums of money from some banks
Co. in liquidation
Liquidator brought claims against the auditors for professional
negligence.
Question: Whether the culpable SHs intentions should be attributed
to the Co., which would prevent it from pursuing its claims against the
auditors. HL - set aside its separate legal personality & imputed the
SHs fraudulent intentions to the Co.
Cos claims against the auditors were barred.

Corporate veil doctrine arguably reached its nadir in Adams v Cape Industries
plc, [1990] Ch. 433 (A.C.) in which the English Court of Appeal declared that
the use of the corporate structure to limit future liabilities is an inherent
feature of English Co. law & practically ruled out veil piercing in tort cases.
Creasey v Breachwood Motors Ltd. [1992] B.C.C. 638 (Q.B.) at 647-48 pierced
the veil between two Cos after their common owners had transferred the assets
of the first Co. to the second in order to avoid an impending judgment.
Tjaskeinolen (Now Named Visviet), [1997] 2 Lloyds Rep. 465 (Q.B.)
Five years later, in a case involving very similar facts, the Admiralty Court,
after explicitly endorsing the reasoning in Creasey, invalidated the sale of a
vessel by one member of a corporate group to another.
Unfortunately, Creasey was subsequently overruled
In Ord & Another v Belhaven Pubs [1998] B.C.C. 607 (A.C.) at 616 (Eng.).
Although the Belhaven court did not overrule Tjaskemolen, the continued
validity of that case is now in doubt.