Latest Article

An Arbitral Tribunal's Power to Lift the Corporate Veil

Courtesy/By: Niharika Shukla | 2020-03-20 19:57

An Arbitral Tribunal's Power to Lift the Corporate Veil

The question of whether an arbitrator can lift the corporate veil and, thus, transgress the notion of limited liability of the shareholders, is crucial to the many stakeholders standing in the intersection between company law and arbitration law. With conflicting case law from the Delhi High Court, the High Court of Judicature at Bombay and the Supreme Court on the issue, the proper legal position remains behind a veil of uncertainty.

In coming to a proper conclusion as to the powers of the arbitrator, the concepts of lifting the corporate veil, binding non-signatories to the arbitration agreement, subject-matter arbitrability, as well as prevailing public policy play a pivotal role. The article will explore the theoretical considerations, analyse case law, and refer to international trends and try to suggest that arbitrators must be given the power to lift the corporate veil, in keeping with international trends.

  • The Veil of Incorporation

A distinct corporate personality, independent of its shareholders, is the pillar on which modern company law rests. This independent personality also serves to limit the liability of its shareholders. A company is, at law, a different legal person altogether from the members, directors, subscribers, shareholders or employees. The doctrine is now well settled in Indian jurisprudence and has been repeatedly recognised and reaffirmed by the courts and has been codified into statute as well.

The principle evolved in Salomon has, however, found exceptions over time, and the corporate personality has been disregarded by courts to find shareholders personally liable. This has been true especially in cases of fraud, tax evasion, criminal matters. Taking cue from English common law and Indian cases, the Companies Act also codifies certain instances of piercing the corporate veil. Briefly stated, a corporate identity may be disregarded when it is used as a facade to mask wrongful or illegal ends.

The foregoing leaves no doubt as to two facts: an independent corporate personality is a well-established principle in law, and the court reserves the power, in certain situations, to disregard this independence. This article makes no attempt to delve further into the specifics of company law with regard to the corporate personality or disregard of such; it seeks to explore the interface of the aforementioned with the law on arbitration in India. The primary consideration of this article can be, thus, stated as follows: whether an Arbitral Tribunal, in arbitrations seated in India, reserves the power to lift the corporate veil, given that the requisites for doing so are met?

  • Non-Arbitrability of Disputes

The Arbitration and Conciliation Act, 1996 does not directly address or list down the categories of disputes resolvable via arbitration. It only lays down that an arbitral award can be challenged if “the subject-matter of the dispute is not capable of settlement by arbitration under the law”. The courts have, thus, on a case-to-case basis, decided the ambit and scope of arbitrability and pronounced the category of disputes not “capable of settlement by arbitration”. The leading case law on the subject is Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd., which lays down that a dispute that creates or affects rights in rem is inarbitrable, while disputes relating to rights in personam remain amenable to the jurisdiction of an Arbitral Tribunal.

  • The Problem with Binding Non-Signatories

The judgment in Sudhir Gopi v. Indira Gandhi National Open University quotes Prof. William M. Park and states that “Like consummated romance, arbitration rests on consent.” The statement stands true in arbitrations emerging out of an agreement to arbitrate. Since party autonomy is the key advantage, and one of the basic underlying principles of arbitration, consent is vital to any arbitral proceeding. This creates special problem where the corporate veil needs to be lifted. If a company is a party to an arbitration agreement, it is the company, in its independent self that has consented to be subject to the Arbitral Tribunal's jurisdiction. Lifting the corporate veil and making the shareholder liable, essentially decides upon the rights and liabilities of a third party.

  • The Judicial Position in India

Over the past decade, various cases of the High Courts of Bombay and Delhi, and the Supreme Court have dealt with the question of the arbitrator's power to lift the corporate veil. The case law has, however, been inconsistent in dealing with the question, in the absence of any judgment by a Full or a Constitutional Bench of the Supreme Court.

To give ground to the conclusion restricting the Arbitral Tribunal's power, the case cites ONGC v. Jindal Drilling & Industries Ltd., which also concurred in concluding that a court and not an Arbitral Tribunal has a power to lift the corporate veil. Balmer Lawrie & Co. Ltd. v. Balmer Lawrie Employees' Union and Great Pacific Navigation (Holdings) Corpn. Ltd. v. M.V. Tongli Yantai are also cited in support. The court then proceeded to differentiate the facts of the present case from some of the other on similar points before reaffirming that the Arbitral Tribunal would not have the power to lift the veil. In the author's humble opinion, the judgment dealt with the issue in a manner that no previous case did. Case law holding precedential value were appropriately used and analysed. However, the international and emerging trends were disregarded in coming to the decision. The Arbitration Act is based on the United Nations Commission on International Trade Law (UNCITRAL) model law and thus there is an onus on the judiciary to interpret it in a way which supports the intention of the drafters of the international statutes. While the debate in most other countries and developed jurisdictions is upon the conditions and criteria that limit the arbitrator's power to lift the corporate veil, India sits a step behind, fixating on the question of whether the arbitrator possesses such power or not.

  • Conclusion:

As has been noted, the international trends have indicated a pro-arbitration shift across commercial cases, and only a very few categories remain fully inarbitrable today. When most developed jurisdictions, which also function on legislation akin to the UNCITRAL model law, have allowed arbitrators to look beyond the corporate facade, India retains an anomalous and an uncertain position on this.

Courtesy/By: Niharika Shukla | 2020-03-20 19:57