Piercing the Corporate Veil of subsidiary or holding company for assessing the eligibility of bidder

Introduction

The law governing Companies globally and in India recognizes a company to be a personality, distinct from its shareholders. In the celebrated case of Salomon v. Salomon & Co. Ltd. [1]  Lord Halsbury LC, stated:

“[a company] must be treated like any other independent person with its rights and liabilities [legally] appropriate to itself … whatever may have been the ideas or schemes of those who brought it into existence.”

Legal status of subsidiary qua its parent

A “holding company”, in relation to one or more other companies, means a company of which such companies are subsidiary companies.[2] A“subsidiary”, in relation to any other company (that is to say the holding company), is a company in which the holding company either:

(i) controls the composition of the Board of Directors; or

(ii) exercises or controls more than one-half of the total share capital either at its own or together with one or more of its subsidiary companies.[3]

As a rule, a subsidiary remains as a separate legal entity, distinct from its holding /parent company. The position holds good even in case of Wholly Owned Subsidiary (WOS) i.e. when 100% of stake in subsidiary is held by the parent. The decision of Supreme Court in International Holdings BV v. Union of India[4] succinctly captures the position in following words:

“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. …Holding company and subsidiary company are, however, considered as separate legal entities, and subsidiary is allowed decentralized management. ….”

The concept of piercing the corporate veil

The doctrine of “piercing the corporate veil” is an exception to the rule that a company is a legal entity separate from its shareholders. It enables disregarding of the separate personality of a company so as to treat the company and its constituents/those controlling it, as one and the same.

Supreme Court in LIC v. Escorts Ltd.[5], adverting to circumstances wherein corporate veil could be pierced, stated:

“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.”

Piercing the corporate veil for commercial expediency

There are cases where to achieve commercial expediency, the courts have allowed piercing of corporate veil to treat a subsidiary and its parent as one entity.

For instance, in State of U.P. v. Renusagar Power Co.[6]  Supreme Court lifted the corporate veil to hold that Hindustan Aluminium Corporation Ltd. (Hindalco), the holding company and Renusagar Power Co. Ltd.( Renusagar), its subsidiary, should be treated as one concern and the power plant of Renusagar must be treated as source of generation of Hindalco. The court’s reasoning on the point is as below:

“It is high time to reiterate that in the expanding horizon of modern jurisprudence, lifting of corporate veil is permissible. … As the facts make it abundantly clear that all the steps for establishing and expanding the power station were taken by Hindalco, Renusagar is wholly owned subsidiary of Hindalco and is completely controlled by Hindalco. Even the day-to-day affairs of Renusagar are controlled by Hindalco. Renusagar has at no point of time indicated any independent volition. Whenever felt necessary, the State or the Board have themselves lifted the corporate veil and have treated Renusagar and Hindalco as one concern and the generation in Renusagar as the own source of generation of Hindalco. In the impugned order the profits of Renusagar have been treated as the profits of Hindalco….We think that the appellant was in error in not treating Renusagar's power plant as the power plant of Hindalco and not treating it as the own source of energy. …. The persons generating and consuming energy were the same and the corporate veil should be lifted. In the facts of this case Hindalco and Renusagar were inextricably linked up together. Renusagar had in reality no separate and independent existence apart from and independent of Hindalco.”

Piecing of corporate veil to take into account credentials of holding/subsidiary of bidder

In several cases, for assessing the eligibility of bidder made pursuant to notice issued by public authorities inviting tenders for commercial transactions, courts have allowed taking into account the experience of bidder entity’s constituents or the subsidiaries. Such approach is based on the plain logic that, stipulation as to experience while inviting bids for a commercial transaction are required to be considered from the standpoint of prudent businessman whose intent is to be assured about the credentials of the bidder; and such credentials need to be examined from commercial perspective.

For instance, the Supreme Court in New Horizons Vs. Union of India[7], held  that the requirement regarding experience could not be construed to mean that the said experience should be of the tenderer in his name only. In said case the court for reckoning the eligibility of a joint venture company named NHL, took into account the resources and strength of its parent/owning companies. Applying the doctrine of piercing the veil, the court held:

“38. Seeing through the veil covering the face of NHL it will be found that as a result of reorganisation in 1992 the Company is functioning as a joint venture wherein the Indian group (TPI, LMI and WML) and Mr AroonPurie hold 60% shares and the Singapore-based company (IIPL) holds 40% shares. Both the groups have contributed towards the resources of the joint venture in the form of machines, equipment and expertise in the field. The Company is in the nature of a partnership between the Indian group of companies and the Singapore-based company who have jointly undertaken this commercial enterprise wherein they will contribute to the assets and share the risks. In respect of such a joint venture company the experience of the company can only mean the experience of the constituents of the joint venture, i.e., the Indian group of companies (TPI, LMI and WML) and the Singapore-based company (IIPL).”

The above ruling was followed in Ganpati RV-TalleresAlegria Track (P) Ltd. v. Union of India[8].

The Calcutta High Court in Triveni EngiconsPvt. Ltd. &Anr. V. RITES Ltd. &Ors.[9] permitted the credentials of a subsidiary to be considered for assessing the eligibility of its holding company. It held:

“… in ascertaining whether a condition in a NIT has been complied with, one has to take a commercial point of view. It is not in dispute that KSK Mahanadi which issued the credential certificate to Jhajharia is a subsidiary of KSK Energy Ventures. In fact, KSK Energy Ventures holds approximately 84 per cent of the shares in KSK Mahanadi. KSK Energy Ventures in its annual report referred to itself and its subsidiaries as a 'Group' i.e. a single economic entity. KSK Energy Ventures appears to be in complete control of the management and administration of the affairs of KSK Mahanadi and this is a commercial reality which cannot be lost sight of. Although KSK Ventures and KSK Mahanadi may be separate legal entities in the eye of law, from a practical and pragmatic point of view KSK Energy Ventures operates through KSK Mahanadi being 84 per cent shareholder thereof. The Directors of the two companies are also common. Hence, in our opinion, there is substantial compliance of Note 5 under Clause 2(a) of the NIT since KSK Energy Ventures is undisputedly a listed company.”

In Dhanpat Prasad  v. State of Jharkhand[10], the Jharkhand High Court following the ratio in New Horizons Vs. Union of India, held:

“The ratio of the aforesaid judgment rendered by the Hon'ble Supreme Court, as borne out from the opinion quoted herein above, therefore leaves no doubt that such requirement regarding experience could not only be construed to mean that such experience could be of the tenderer in his name only. If the respondent no. 6 has entered into an arrangement with a Partnership Firm by taking it over, and the tender has been submitted in the name of the company now, the experience gathered by the Partnership Firm cannot be discounted to disentitle the respondent no. 6 company from participating in the tender under Clause-4.3(C) of the tender document.”

In Shree Pacetronix Ltd. v. State of Assam[11], the Guwahati High Court   held:

“…when a subsidiary is an alter ego of its principal or holding company, because of the fact that the activities of the subsidiary are controlled by the holding company, the court may regard, in public interest or as a matter of public policy, the two separate legal entities as one either for the purpose of imposing legal obligations on them or for the purpose of giving them legally due benefit. In the present case, when respondent No. 4 is, admittedly, a wholly owned subsidiary of its holding company, namely, the parent American company and all that the NIT needs is a lifetime warranty from the principal company in respect of the pacemakers, which may be supplied by a subsidiary, such as, respondent No. 4, there can be no escape from the conclusion that in the facts and circumstances of the present case, the Court will not be wrong in looking into the realities of the situation and in treating the respondent No. 4 eligible to supply the products manufactured by its holding company in terms of the NIT.”

The Andhra Pradesh High Court in Prasad Sushee Joint Venture v. The Singareni Collieries Company Ltd.[12] allowed treating the Holding Company as the bidder, while considering the bid submitted by its subsidiary. The court allowed taking into consideration the experience and financial capacity of the Holding Company, while assessing the bid of the subsidiary.

In a recent decision in Smart Chip Ltd. and Ors. vs. Secretary to Government Transport Department and Ors.[13], the Chennai High Court summarised the position thus:

“…The completeness of the identity of the various companies coupled with the Directors in-charge of the affairs of the company and the common interest between the various companies in the group and the shareholding pattern are all considerations that had weighed in the mind of the courts to lift the corporate veil to treat the different business entities as a single economic entity. Therefore, where the parent holding and its WOS company are so intricately cob-webbed with each other so that the identity of the parent holding is that of the WOS company and where the interest are so common and so also the Directors in-charge of the company, and in essence the parent holding could control the internal management of the subsidiary company and in the unlikely event of there being any difficulty, necessity to go through the formal procedure of merger/amalgamation rests with the said Directors, then in that scenario, the business realities of the situation does not confine giving a narrow legalistic view. Therefore, where the associated companies are inextricably connected as to be in reality part of one concern, lifting of corporate veil in such a scenario is permissible.”

Conclusion

From the above discussion it emerges that for assessing eligibility of a bidder, recourse to doctrine of piercing of corporate veil may be available to take into account the credentials of its parent or subsidiary. The stipulation in notice inviting tenders regarding experience may not be confined to the experience of the bidding entity alone. Having regard to the objective of the document inviting offers for a commercial transaction and by adopting a prudent business standpoint, the experience / resources of the constituents or the subsidiary of the bidder to which the bidder has access or over which bidder has control, can also be considered.