LIC V. ESCORTS AND BEYOND – LIFTING THE CORPORATE VEIL

One of the first cases in India which dealt with the issue of a company as an independent legal personality and the removal of the veil, known almost as Salomon, is the decision of the Supreme Court in the case of Life Insurance Corporation of India v. Escorts Ltd. & Ors. The case concerned a non-resident portfolio investment scheme that existed under the former Foreign Exchange Regulation Act, 1973 (FERA). The scheme allowed non-resident companies that were owned by or in which the beneficial interest vested in non-resident individuals of Indian nationality/origin was at least 60%, to invest in the shares of Indian companies. 

The investment was permitted to the extent of 1 per cent of Indian companies' paid-up equity capital and could not reach a 5 per cent limit. Under the scheme thirteen companies, all owned by Caparo Group Limited, invested in the Indian company Escorts Limited. Importantly, 60 per cent of Caparo Group Limited 's shares were owned by a trust whose beneficiaries were Swraj Paul and family members. The investment by the 13 companies of the Caparo Group was challenged on the ground that it was an attempt to circumvent the prescribed investment ceiling of 1 per cent under the Scheme, and that, "One only had to pierce the corporate veil to discover Mr Swraj Paul lurking behind."

First, the Supreme Court noted the Salomon judgment and then it was firmly established that once a company has been incorporated, it has an independent and legal personality distinct from its members. It also noted that the corporate veil can only be lifted in certain exceptional circumstances, the corporate personality ignored and the individual members recognized for who they are.

Finally, however, the Supreme Court held that the removal of the veil would be appropriate to a restricted degree, i.e. to ascertain the nationality or ethnicity of the shareholders, in the facts of this case and only to ascertain the ownership of the investment. The actual identity of each of them was not to be decided. Just because more than 60 per cent of the shares of foreign investor companies were held by a trust to which Mr Swraj Paul and his family members were beneficiaries, the companies could not deny the establishment of the scheme on the ground that the authorisation granted was unlawful. As such, the Court overlooked the fact that the identity of the shareholders may be generic, while acknowledging that each corporation has an individual legal entity, looking only at nationality to comply with the requirements of the scheme. The Supreme Court also took the chance to set out the basic conditions and values to adhere, and the specific situations under which a company's corporate veil could be pierced, i.e. to cast liability or responsibility for a company-led act. Such actions may include fraud or corruption, the avoidance of taxes or a charitable statute, or where related entities are inextricably connected as being, in fact, part of one concern and should, therefore, be regarded as such.