Examining the Doctrine of Veil-Piercing vis-à-vis Environmental Parent Company Liability in India
– Gayathri Gireesh,* Pradnesh Kamat** & Viraj Thakur***
A corporate veil essentially grants companies a separate legal personality,[1] implying that the rights and obligations of a company are distinct from that of its members.[2] This limits the liability of the members and insulates them from the actions of the company, thus incentivizing investments and leading to overall economic growth.[3] However, with an evolving economy, exceptions to the limited liability rule have arisen through statutory intervention and judicial interpretation. This often results in a director, shareholder, etc. of a company being held liable for the actions of the company and is most commonly referred to as piercing the corporate veil. In the landmark Cox & Kings II (2024)[4] judgement, a 5-judge bench of the Supreme Court of India while deciding on the applicability of the Group of Companies doctrine in the context of arbitration, also considered the doctrine of piercing the corporate veil. This doctrine has fundamental bearing on the liability of parent companies, particularly environmental conglomerates. With the rapid increase in foreign investment in India’s environment economy ($12.7 billion as of December 2022[5]), priority must be drawn to the legal framework that governs the pursuant parent-subsidiary relationships.
Thus, it is necessary to solidify the governing framework of the parent-subsidiary relationships, with regards to holding the parent company liable and therefore in this writing the considerations are;
- first, it is important explore the Indian position on veil-piercing through statutes concerned with protecting the environment which are progressive in nature and are primarily concerned with, holding the natural persons in charge of companies liable for offences.
- Second, it is important to elaborate on the judicial position on veil-piercing in India.
- Third, it is important to consider the doctrine of veil-piercing based on common law jurisprudence.
- Fourth, it is argued that in the case of environmental claims against a company for the actions of its subsidiaries, Indian jurisprudence falls short when compared with recent developments in common law. Thus, Cox & Kings II might have missed an opportunity to chart a more equitable course for piercing the corporate veil in the context of parent-subsidiary relationships.
Piercing the Veil to Protect the Environment: Statutory Enactments
- 15-F(2) of the Environment (Protection) Act, 1986 (‘EPA’) prescribes that if any offence is committed under the EPA by a company, anyone who was directly in charge of and was responsible to the company for conducting its business shall also pay the penalty for such a violation. The proviso to this section states that the only way to discharge this burden is to prove a lack of knowledge as to the offence or to demonstrate that such a person had exercised all due diligence to prevent the commission of such an offence.[6] This section intends to clearly contemplate piercing the corporate veil for actors such as directors or occupiers[7] of a company. Notably, the default assumption is that if the veil is to be pierced, no overt act is required and such persons become automatically guilty of the offences committed by the company.[8] The burden to prevent such a piercing is on the director or like person, who must meet a very high standard of showing a lack of knowledge or that he exercised all due diligence in preventing the commission of this offence.
- 15-F(3) contains a non-obstante clause, however, stating that notwithstanding §15-F(2), if it is proved that an offence committed by a company has been committed with the consent or connivance or due to the neglect of any director, manager, secretary or other officer of the company, such a person will also be liable for the offence. This creates a lower bar for piercing the corporate veil. Demonstrating direct control or responsibility towards a company is not necessary. Consenting to the offence, conniving to commit it, or being negligent in preventing it are also sufficient grounds to hold an officer of a company liable. To understand the broader principle animating these sections i.e. that strict control over the day-to-day affairs of a company is not necessary to pierce the corporate veil and hold officers behind a company liable.
These provisions are identical across statutes professing to protect the environment,[9] such as §47 of The Water (Prevention and Control of Pollution) Act, 1974, §40 of The Air (Prevention and Control of Pollution) Act, 1981, and §57 of The Biological Diversity Act, 2002. Hence, the statutory schema seeking to protect the environment in India encapsulates a progressive understanding of piercing the veil. In fact, it is pertinent to note that the corporate veil under §48 of the Water Act is pierced so as to be “deemed guilty”, any person in charge of a company that has committed offences under this act. This has been upheld by the SC in various cases mainly in C. Chinnappa Goudar and Ors. v KSPCB (2015).[10]
Such statutory enactments are not alien to other prominent jurisdictions such as the United States of America (‘USA’). The Deepwater Horizon oil spill (‘BP Oil’) was the result of a catastrophic fire at the said oil rig in 2010. It was concerned with, inter alia, the Comprehensive Environmental Response, Compensation and Liability Act (‘CERCLA’). The standard for the same has been laid down in US v. Jon-T Chemicals[11] (‘Jon-T Chemicals’). To pierce the corporate veil, it was held that the following must be satisfied:[12]
- Corporation has been established for fraudulent purpose
- Corporation is the “alter ego” of the parent corporation i.e. the parent corporation exercises effective control over the workings of the subsidiary. As the next section demonstrates, this has been seen in Indian jurisprudence as well.
Judicial Veil-Piercing in India
The most prominent instance of veil-piercing can be seen in the Bhopal Gas Tragedy case, wherein a parent corporation was held absolutely liable for the actions of its subsidiary in India–however, the judgement was decided with clear reference to its facts and the nature of damage caused as tortious, and particularly due to the imposition of absolute liability.[13] Additionally, as Gonsalves notes, much of the judgement was compromised due to the ongoing politics at the time.[14] However, the court does delve into the piercing of a corporate veil for tortious actions. In fact, it observes that while a corporate veil may encourage risk-taking, personal liability may be necessary in some cases (though it notes that this would be a radical change). Hence, outside of the realm of absolute liability and tort law, it is pertinent to refer to other cases dealing with veil-piercing as a matter of law, evaluating the importance of a potentially necessary “radical” changes in veil-piercing. This is especially in light of the statutes highlighted in the previous section.
Largely, Indian jurisprudence on the topic has split into two strands. The first strand of jurisprudence has concerned itself with piercing the corporate veil on account of fraudulent transactions and conduct. In the landmark case of TELCO v State of Bihar (1964), it was held that veil-piercing is done when “fraud is to be prevented or trading with the enemy is to be prevented.”[15]
The second trend hugs the “effective control” logic, mirroring §15-F(2) of the EPA, but not just in the context of environmental offences. Judicially, it is also not restricted to piercing the veil to hold officers liable–it applies in case of parent-subsidiary relationships between companies. State of Uttar Pradesh v Renusagar Power (2012), for instance, cited the complete ownership of the subsidiary by the principal and high degree of control exercised by the principal (they were “inextricably linked together”) as reasons to pierce the veil.[16] In consonance with this line of argumentation, the SC in Vodafone International Holdings BV v Union of India (2016)[17] focused on the nature of control of the parent over the subsidiary alongside the “parent’s steering interference with the subsidiary’s core activities”
The landmark judgement of LIC v Escorts (1985) additionally laid down that piercing the veil was necessarily dependent on the relevant statutory provisions (if any) for the same, object sought by piercing, conduct of the parties, public interest and the effect of veil-piercing on parties.[18] The five-judge bench of the SC in Cox & Kings II[19] posits an even narrower scope for veil-piercing. The court highlights the “overriding considerations of justice and equity” behind this doctrine. Yet, paradoxically, it circumscribes the ambit of the doctrine to two main scenarios: fraud[20] and complete domination of subsidiary affairs by the parent company.[21] Considering the strength of the bench herein, it is pertinent to note that this case forms the law of the land in India and effectively qualifies the decision in TELCO.
Hence, it can be sufficiently argued that Cox & Kings hinders equitable veil piercing in cases of environmental damage by subsidiary companies. LIC v Escorts is still good law and, read with the EPA and other such acts, posits that directors/occupiers of a company can be held liable for offences by the companies under the relevant statutory provisions. However, no alternatives to the strict approach can be seen with respect to parent-subsidiary relationships. Thus, we find it pertinent to shift to the discussion to the approach of other jurisdictions, demonstrating the shortcomings of the strict approach adopted by Indian courts.
The Common Law Position: Until “Prest”
Adams v Cape (1990)[22] is a landmark common-law case that lays down stringent criteria to determine whether piercing the corporate veil would be justified. It essentially prescribes three alternate situations[23] in which veil-piercing would be justified:
1. In case the company was set up for reason of fraud or impropriety.[24]
These refer to situations wherein the incorporation of a company was manifestly fraudulent i.e. the company is the device through which the impropriety takes place.[25] For example, in Jones v Lipman, the defendant created a company to transfer his land to, in order to escape an obligation to transfer the same to another person.[26] The court pierced the corporate veil in this case, observing that the company was formed for the sole purpose of committing fraud. Hence, both the defendant and the company were held liable.[27] This can also be referred to as “reverse piercing” or holding the company liable for the actions of its owner, controller, etc.[28] This reflects the doctrine in TELCO, explained in the previous section.
2. In case of day-to-day control.
If a parent and subsidiary company have an express agency agreement, the parent can be held liable for the subsidiary’s actions.[29] However, it is unlikely that a parent and subsidiary would have an explicit agreement of this nature in reality–after all, a subsidiary is set up for reasons of autonomy and ease of business.[30] Inferring agency, in absence of such an agreement, would require evidence of the parent exercising day-to-day control over the subsidiary, which is a very high standard.[31] This mirrors the “effective control” logic seen in Renusagar.
3. In case a legislative instrument must be given effect to by piercing the veil.
The court also observed that it would pierce the veil in case a statute prescribes so.[32] This is similar to the holding in LIC. The landmark case of Prest v Petrodel (2013)[33] elaborates further on the doctrine of veil-piercing, and has been explicitly upheld by the SC of India in Balwant Rai Saluja v Air India Ltd.[34] Hence, the rest of this section critically engages with Prest. The Prest classified the ‘fraud situation’ as being an example of the “evasion principle.”[35] This is contrasted against the “concealment principle”, which involves the incorporation of several companies to conceal the identity of the actors behind them.[36] Lord Sumption in Prest does not consider the latter to be an example of ‘piercing’ the corporate veil, but merely “looking behind it.”[37] The distinction is rather vague and ambiguous. Despite this, a corporate veil, according to Lord Sumption, may only be pierced due to a public policy imperative.[38] In other words, as in Adams, a company must be set up for reason of fraud to justify piercing a corporate veil–the fraud must not be merely incidental.[39] The court relies on Ben Hashem v Al Shayif (2008)[40] to hold that piercing the corporate veil is a remedy to be used only when no other is available.[41] Herein, the defendant transferred his land to a company (of which he was the Director), in an attempt to avoid his obligation to transfer the same to his wife due to divorce proceedings. The court distinguished this case from Jones v Lipman, observing that the company wasn’t formed for the reason of committing fraud, as it predated any conflicts between the defendant and his wife.[42] Hence, the veil was not pierced. It may be noted that the ratio decidendi in Prest can be extended to include parent-subsidiary companies as well, given the reliance on cases positing principles with respect to such relations between companies.[43] The critique of Prest rests primarily on three grounds. By extension, these criticisms also extend to Indian jurisprudence, due to the concurrence between common law and Indian law at this juncture.
First, this manifestly creates an extremely strict standard for piercing the corporate veil–nothing in Ben Hashem suggest that a corporate veil must be used as a remedy of last resort.[44] Ben Hashem merely held that the corporate veil must only be pierced to the extent it is necessary to hold the controllers of a company liable for the particular wrong under consideration.[45] This cannot be construed as being equivalent to “last resort.” However, the SC in Balwant Rai Saluja did not take note of the same.
Second, the condition precedent of a company being formed for the purpose of impropriety to qualify for veil-piercing excludes companies that commit fraud despite being incorporated for a legitimate purpose.[46] However, liabilities may arise that were not envisioned by the creator of the sham companies–is the creator only to be responsible for liabilities that he foresaw and sought to avoid, then?[47] The judgement is not very clear in this regard.
Third, the “effective control” logic has loopholes. A subsidiary may be set up for waste disposal and left largely autonomous in this regard. This would mean that a parent company would not be liable if the negligence of the subsidiary led to personal injury or environmental harm, as it does not exercise effective control over the subsidiary.[48]
Hence, Prest, though authoritative, has significant lacunae. After Prest, a host of decisions have displayed greater willingness to pierce the corporate veil in common law, in the context of a parent-subsidiary relationship.
Thus, the Indian doctrines of veil-piercing must move in a similar direction–as of now, clear rules do not exist for parent-subsidiary companies beyond the decisions elucidated above. This is especially important given the narrow grounds (i.e. effective control, fraud, and statutory rules) that characterize parent-subsidiary liability in India. In the final section, particularly, we focus on the effective control rule, and demonstrate that it has perhaps lost its relevance.
Moving beyond Prest
In Vedanta v Lungowe (2019), the UKSC agreed to pierce the corporate veil.[49] It allowed proceedings against a parent company in England due to the negligence of its subsidiary in Zambia which caused pollution and environmental damage due to the discharge of harmful effluents from the Nchanga copper mine. This led to the loss of property, amenity, income, and personal injury. The UKSC pierced the veil despite the fact that the subsidiary was not set up for fraud and the parent company did not exercise “day-to-day control” over its subsidiary. It was held that a parent holds a common law duty of care to those harmed by its subsidiaries, depending on not just the control it exercised, but also the supervision exercised or advice tendered towards its subsidiary.[50]
Vedanta has been upheld in Okpabi v Royal Dutch Company (2021).[51] In this case, 40,000 citizens of the Niger Delta attempted to sue the respondents for the negligence of their subsidiaries, which had led to oil spills, environmental damage, and the contamination of water sources.[52] The UKSC observed that direct control was not required to establish direct responsibility for environmental damage and personal injury.[53] Such a test would be self-defeating as it would be nearly impossible to prove such a relationship–a subsidiary, after all, is opened for ease of business and to avoid having to exercise direct control in a different region.[54] This holding goes against Adams and by extension, Renusagar. Upholding Vedanta, the UK Supreme Court clarified that control is not the central consideration in establishing a duty of care–management is, evidenced via group-wide policies among other things.[55] Herein, Lord Hamblen remarkably notes the distinction between control and de facto management of the subsidiary. Holding the latter to be the key trigger to pierce the veil, the UKSC suggested looking at the policies promulgated by the parent, advice tendered, and degree of supervision by the parent. If these were proved defective and led to environmental harm or personal injury, the duty of care is breached, and the parent can be liable for the acts of its subsidiary.[56]
In contrast, the Indian SC has chosen to adopt a rather narrow understanding of parent liability for subsidiary action through Cox & Kings II. Through this writing it is argued that multinational conglomerates (especially foreign) are faced with an inequitably low threshold to skirt liability for environmental damage caused by its subsidiaries. Instead of control or complete domination, therefore, that an approach which focusses on management of the subsidiary by the parent company would create stronger vigilance mechanisms.
Conclusion
Through this discussion, an effort has been made to detect and rectify the inequitable and strict standard laid down by the Indian Supreme Court in Cox & Kings II. The consequence of this decision could be, for instance, that foreign mining conglomerates could avoid liability by merely showing that (1) there was no fraud in the conception of the parent-subsidiary relationship therein, and (2) they do not completely dominate the affairs of the subsidiary company. Necessarily, this would exclude a multitude of parent-subsidiary transactions (and consequent relationships) that would otherwise attract liability through veil-piercing. This article has critically analyzed the Common Law approach to piercing the veil as an equitable way forward, with particular focus on Prest, Vedanta and Okpabi. This becomes of greater importance given that Indian jurisprudence has relied on common law, particularly Prest. If the legislature has enacted laws to pierce the veil and hold natural persons liable for environmental offences, a similar course must be charted for parent companies committing offences.
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* Gayathri Gireesh, Advocate, Bengaluru
** Pradnesh Kamat, Student, BA. LL.B., NLSIU
*** Viraj Thakur, Student, BA. LL.B., NLSIU
[1] Alan Dignam & John Lowry, Company Law (11th edn, Oxford University Press 2020) para 3.1.
[2] Carsten Gerner-Beuerle & Michael Anderson Schillig, Comparative Company Law (Oxford University Press 2019) 29. This term originates from the case of Salomon v A. Salomon & Co. Ltd. 1897 AC 22.
[3] Alan Dignam & John Lowry, Company Law (11th edn, Oxford University Press 2020) para 3.49.
[4] Cox & Kings Ltd. v. SAP India (P) Ltd. (Cox & Kings II) (2024) 4 SCC.
[5]https://www.india-briefing.com/news/the-scope-for-foreign-investment-in-indias-green-economy-30785.html/#:~:text=Renewable%20energy,-In%20India%2C%20FDI&text=As%20of%20December%202022%2C%20total,%2C%20The%20Netherlands%2C%20and%20Japan.
[6] Proviso to §15-F(2), Environment (Protection) Act, 1986. Earlier, the same provisions were found in §16–they have been rearranged by Act 18 of 2023.
[7] Under §2(f) of the EPA, ‘occupier’ refers to a person who has control over the affairs of a factor or its premises.
[8] South Eastern Coal Fields Ltd v CG. Environment Protection Board 2019 SCC OnLine Chh 309 [14].
[9] Ravi Khaitan v State of Jharkhand 2023 SCC OnLine Jhar 3499 [12].
[10] (2015) 14 SCC 535.
[11] United States v. Jon-T Chemicals, Inc., 768 F.2d 686 (5th Cir. 1985)
[12] Jay Angle et al, ‘Legal Developments Since the Enactment of the Oil Spill Liability Act of 1990’ (2011) 19(3) PSELR 400, 418.
[13] Union Carbide Corporation v Union of India 1989 SCC 2 540.
[14] Gonsalves, Colin. “The Bhopal catastrophe: politics, conspiracy and betrayal.” Economic and Political Weekly (2010): 68-75.
[15] 1964 SCC OnLine SC 111 Para 27, page 12 of pdf
[16] Pg 94, [64]-[68].
[17] (2012) 6 SCC 613.
[18] ibid. [90].
[19] (2024) 4 SCC 1
[20] ibid. [90], [94]
[21] ibid. [94].
[22] [1990] Ch 433.
[23] Alan Dignam & John Lowry, Company Law (11th edn, Oxford University Press 2020) para 3.23.
[24] Adams v Cape [1990] Ch 433 at 543.
[25] R v K (2006) EWCA Crim 619 [19].
[26] Jones v Lipman [1962] 1 WLR 832 at 833-5.
[27] Jones v Lipman [1962] 1 WLR 832 at 837.
[28] Hurstwood v Rosenfeld [2021] UKSC 16 [68], [69].
[29] Adams v Cape [1990] Ch 433 at 484.
[30] Alan Dignam & John Lowry, Company Law (11th edn, Oxford University Press 2020) para 3.24.
[31] Alan Dignam & John Lowry, Company Law (11th edn, Oxford University Press 2020) para 3.24.
[32] Adams v Cape [1990] Ch 433 at 536.
[33] [2013] UKSC 34.
[34] (2014) 9 SCC 407 [70]-[74].
[35] Prest v Petrodel Resources Ltd. [2013] UKSC 34 [27], [28].
[36] Prest v Petrodel Resources Ltd. [2013] UKSC 34 [28].
[37] Prest v Petrodel Resources Ltd. [2013] UKSC 34 [28].
[38] Prest v Petrodel Resources Ltd. [2013] UKSC 34 [34], [35].
[39] R v K (2006) EWCA Crim 619 [19].
[40] [2008] EWHC 2380 (Fam).
[41] Prest v Petrodel Resources Ltd. [2013] UKSC 34 [35], [62].
[42] Prest v Petrodel Resources Ltd. [2013] UKSC 34 [36].
[43] For example: [124], [21]-[23].
[44] Ho May Kim, ‘Piercing the Corporate Veil as a Last Resort: Prest v Petrodel Resources Ltd.’ (2014) 26 SAcLJ 249, 252-3.
[45] Ben Hashem v Al Shayif [2008] EWHC 2380 (Fam) [164].
[46] Alan Dignam & John Lowry, Company Law (11th edn, Oxford University Press 2020) para 3.33.
[47] Alan Dignam & John Lowry, Company Law (11th edn, Oxford University Press 2020) para 3.33.
[48] Nina Mendelson, ‘A Control-Based Approach to Shareholder Liability for Corporate Torts’ (2002) 102(5) Colum. L. Rev. 102 1203, 1268.
[49] Vedanta Resources Plc & Anor v Lungowe & Ors [2019] UKSC 20.
[50] Vedanta Resources Plc & Anor v Lungowe & Ors [2019] UKSC 20 [49].
[51] Okpabi v Royal Dutch Company [2021] UKSC 3.
[52] Okpabi v Royal Dutch Company [2021] UKSC 3 [3], [4].
[53] Okpabi v Royal Dutch Company [2021] UKSC 3 [81].
[54] Okpabi v Royal Dutch Company [2021] UKSC 3 [86].
[55] Okpabi v Royal Dutch Company [2021] UKSC 3 [147].
[56] Okpabi v Royal Dutch Company [2021] UKSC 3 [148].
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