The
agreement between parties to resolve their disputes by arbitration is the
cornerstone of arbitration. The arbitral tribunal derives its jurisdiction from
the consent of parties (other than statutory arbitrations). In absence of such
consent, the arbitral tribunal would have no jurisdiction to make an award
and the award so rendered would, plainly, be of no value.
In the present case, admittedly, the Agreement is not signed by Mr
Sudhir Gopi in his personal capacity. None of the communications
produced provides a record of an agreement between Mr Sudhir Gopi and
IGNOU to arbitrate. The arbitral tribunal has also not proceeded on the
basis of any such agreement.
The jurisdiction of the arbitrator is circumscribed by the agreement
between the parties and it is obvious that such limited jurisdiction cannot
be used to bring within its ambit, persons that are outside the circle of
consent. The arbitral tribunal, being a creature of limited jurisdiction, has
no power to extend the scope of the arbitral proceedings to include persons
who have not consented to arbitrate. Thus, an arbitrator would not have the
power to pierce the corporate veil so as to bind other parties who have not
agreed to arbitrate.
IN THE HIGH COURT OF DELHI AT NEW DELHI
Judgment delivered on:16.05.2017
O.M.P. (COMM) 22/2016
SUDHIR GOPI V INDIRA GANDHI NATIONAL OPEN
UNIVERSITY AND ANR.
CORAM
HON’BLE MR JUSTICE VIBHU BAKHRU
1. For the reasons stated in the application, the delay in re-filing the
present petition is condoned.
2. The application stands disposed of.
3. Shri Sudhir Gopi, Chairman and Managing Director of Universal
Empire Institute of Technology (UEIT) has filed the present petition under
Section 34 of the Arbitration and Conciliation Act, 1996 (hereafter „the
Act‟) for setting aside the arbitral award dated 20.07.2015 (hereafter „the
impugned award‟) delivered by the sole arbitrator.
4. By the impugned award, a sum of USD 664,070 along with pre
award and future interest at the rate of 12% per annum has been awarded in
favour of respondent no.1 (hereafter „IGNOU‟) and against Shri Sudhir
Gopi (the petitioner) and UEIT (respondent No.2), jointly and severally.
5. The impugned award was rendered in the context of the disputes that
had arisen in relation to an agreement dated 16.11.2005 as renewed by an
agreement dated 01.05.2009 entered into between IGNOU and UEIT.
6. UEIT had also made an application under Section 34 of the Act
challenging the impugned award (O.M.P. (COMM) 25/2016), which was
rejected by this Court by an order dated 14.09.2016. The limited
controversy involved in the present petition is whether the impugned award
to the extent that it makes Mr Sudhir Gopi jointly and severally liable
along with UEIT for the amount awarded in favour of IGNOU, is
sustainable considering that Mr Sudhir Gopi was not a signatory to the
agreement in question. UEIT is a limited liability company and it is Mr
Gopi's case that although he is the principal shareholder as well as the
Chairman and Managing Director of UEIT, he is not personally liable for
the contractual liability of UEIT. Further, that he is not a party to the
arbitration agreement and, therefore, the impugned award inasmuch as it
holds him liable, is without jurisdiction.
7. Briefly stated, the relevant facts necessary to address the aforesaid
controversy are as under:-
7.1 IGNOU is a statutory university established under the Indira Gandhi
National Open University Act, 1985. It is stated that IGNOU has
developed educational programmes for distant learning, which are offered
in over 35 countries across the globe.
7.2 UEIT is company incorporated under the applicable laws in Dubai,
United Arab Emirates (UAE). UEIT and IGNOU agreed to collaborate for
a distant educational project in Dubai, UAE. For the aforesaid purpose,
IGNOU and UEIT entered into an agreement dated 16.11.2005 whereby
UEIT agreed to act as a Partner Institute (PI) of IGNOU on the terms and
conditions as indicated in the said agreement. Essentially, UEIT was to run
a centre in Dubai for implementing IGNOU‟s distant learning programme
and enrol students in different programmes offered by IGNOU. UEIT was
to advertise the programmes at its own cost and admit students conforming
to the eligibility criteria as prescribed by IGNOU. In terms of the
agreement, the parties thereto - that is, UEIT and IGNOU - agreed to share
the fees collected from the students enrolled under the various programmes
run by IGNOU. The initial term of the said agreement was for three years.
However, IGNOU and UEIT entered into another agreement dated
01.05.2009 on similar terms, thus, effectively renewing the earlier
agreement for a further period (The contract between the parties is
hereafter referred to as „the Agreement‟).
7.3 Disputes arose between the parties in connection with the
Agreement. It is IGNOU‟s case that it was entitled to receive its share of
fee within a period of four weeks of the same being collected, which UEIT
failed and neglected to remit. The invoices raised by IGNOU for the initial
years were paid but invoices raised for admissions, re-admission and re-
registration of students after July 2008 remained outstanding and only
certain ad hoc payments were made.
7.4 UEIT has its own tale of woe. UEIT, inter alia, claimed that IGNOU
had enrolled students from other institutes that were operating illegally
outside the trade free zone. It was contended that the expenditure incurred
to run a centre in a trade free zone was higher than that required to operate
such institutes outside the trade free zones. Thus, UEIT was adversely
affected by IGNOU enrolling students from such illegal institutes. It was
also claimed that IGNOU withheld the certificates and mark sheets and
informed the students that the operations at centre had been temporarily
suspended. This caused severe harm to UEIT and other institutions run by
the same management.
7.5 IGNOU terminated the Agreement with UEIT and encouraged the
enrolled students to migrate to other PIs.
7.6 IGNOU also invoked the arbitration clause. Before the arbitral
tribunal, IGNOU filed its statement of claims inter alia claiming an
aggregate sum of USD 14,48,046, which included a sum of USD 6,63,653
on account of unpaid invoices; a sum of USD 417 on account of demand
drafts which were not encashed; an amount of USD 1,60,000 on account of
loss of earning; and USD 5,00,001 on account of loss of goodwill.
7.7 Mr Gopi and UEIT filed a reply to the statement of claims before the
arbitral tribunal on 30.04.2012. Simultaneously, they also filed counter
claims claiming a sum of USD 66,15,498 which included compensation for
business loss quantified at USD 44,91,671 and compensation for loss of
reputation quantified at USD 20,00,000.
7.8 The arbitral tribunal passed an order on 30.04.2012 directing UEIT
to file a statement inter alia clarifying the nature and character of UEIT
and whether the signatory of the reply (Mr Gopi) was authorised to
represent UEIT.
7.9 In compliance with the aforesaid order, UEIT filed an additional
statement on 15.05.2012 inter alia stating that UEIT was a Limited
Liability Company (LLC) and was incorporated on 20.05.2003 under
United Arab Emirates Law (Private Companies Regulation). It was also
disclosed that its shareholders were Universal Empire Institute of Medical
Sciences Pvt. Ltd. and Mr Nader Mohammed Abdulla Fikri. It was further
disclosed that Universal Empire Institute of Medical Sciences Pvt. Ltd.
transferred its shareholding in UEIT - 99 shares out of a total of 100 shares
issued as on 19.03.2007 - to Mr Sudhir Gopi and the balance single share
was retained by Mr Fikri. The resolution of UEIT approving the share
transfer was also produced before the arbitral tribunal. It was further
asserted that the change in the constitution of UEIT was recognised and
approved by the Registration and Licensing Department, Dubai
Technology and Media Free Zone Authority and a certificate dated
13.05.2007 issued by the said authority, which reflected Mr Sudhir Gopi
and Mr Nader Mohammed Abdulla Fikri as a shareholder of UEIT, was
also produced. It was further disclosed that Mr Sudhir Gopi was the
Manager (Managing Director) of UEIT and his wife, Mrs Rashmi Sudhir
Gopi was also a director of UEIT. It was confirmed by UEIT that Mr Gopi
was representing the said company as its Managing Director and in terms
of resolution passed by UEIT authorising him to do so. It was also clarified
that the reply to the statement of claims and the counter claims was filed by
Mr Sudhir Gopi on behalf of UEIT in his capacity as a Managing Director
and not in his personal capacity.
7.10 UEIT claimed that the statement of claims filed by IGNOU was bad
for mis-joinder of parties as Mr Sudhir Gopi was not a party to the
Agreement/or the arbitration agreement (clause). UEIT also prayed that the
issue of mis-joinder of parties be considered as a preliminary issue.
7.11 Mr Gopi also filed a separate application confirming the above and
inter alia contending that the claim petition filed by IGNOU was not
maintainable against him and the issue of mis-joinder of parties be
considered as a preliminary issue.
7.12 During the course of proceedings, the parties agreed that without
prejudice to their respective contentions, the issue to mis-joinder of Mr
Sudhir Gopi be considered alongwith other issues framed by the arbitral
tribunal. Accordingly, an additional issue, “whether the arbitration
proceedings are bad for mis-joinder of respondent no.2 [Sudhir Gopi]?”
was framed.
7.13 The arbitral tribunal awarded a sum of USD 664,070 (comprising of
claims for unpaid invoices and demand drafts) in favour of IGNOU against
Mr Gopi and UEIT, jointly and severally. In addition, the arbitral tribunal
also awarded interest at the rate of 12% per annum on the awarded amount
from 03.01.2012 to the date of the award and from the date of the award till
full realisation of the amount. The arbitral tribunal also awarded the cost of
proceedings quantified at ₹1,00,000/-.
Submissions
8. Mr Ashish Dholakia, learned counsel appearing for Mr Gopi
contended that the impugned award was without jurisdiction to the extent
that Mr Gopi was also made liable for the awarded amounts. He contended
that an arbitral tribunal does not have the power to proceed against any
person who was not a signatory/party to the arbitration agreement (nonsignatories).
He relied upon the decisions of this Court in Prakash
Industries Ltd. v. Space Capital Services Ltd.: 2016 SCC OnLine Del
6140 and Balmer Lawrie & Company Ltd. v. Saraswathi Chemicals
Proprietors Saraswathi Leather Chemicals (P) Ltd.: EA(OS) No.
340/2013 in Ex.P.280/2012, decided on 17.03.2017 as well as the decision
of the Bombay High Court in Oil and Natural Gas Corporation Ltd. v.
Jindal Drilling and Industries Ltd.: (2015) SCC OnLine Bom 1707 and
Great Pacific Navigation (Holdings) Corporation Limited v. M V Tongli
Yantai: 2011 LawSuit (Bom) 2095 in support of his contention.
9. Mr Aly Mirza, learned counsel appearing for IGNOU countered the
aforesaid submissions. He submitted that Mr Gopi held 99 shares out of
the 100 shares issued by UEIT and was the sole in-charge of running its
affairs. He contended that it was plainly evident from the conduct of Mr
Gopi that he had made no distinction between himself and UEIT. He
pointed out that certain cheques issued to IGNOU (which were
subsequently dishonoured) in discharge of the obligations under the
Agreement were issued by Mr Sudhir Gopi. He contended that Mr Gopi
was running the business under the façade of UEIT and essentially there
was no difference between Mr Sudhir Gopi and UEIT. For all intents and
purposes, they were one and the same. He submitted that in the given facts,
the decision of the arbitral tribunal to hold Mr Sudhir Gopi an alter ego of
UEIT, could not be faulted.
10. He next contended that prior to commencement of arbitral
proceedings IGNOU had issued a notice dated 19.10.2011 to UEIT and Mr
Sudhir Gopi and the same was responded to by Mr Gopi without taking
any objection as to the notice being addressed to him. Similarly, Mr Gopi
and UEIT had filed a common reply to the statement of claims and had
also jointly filed counter claims. He submitted that the counter claims were
largely based on loss of goodwill allegedly suffered by Mr Gopi and other
institutions run by him. Thus, Mr Gopi could not now contend that he was
not a party to the arbitration agreement. He submitted that even in the
present petition, Mr Gopi has prayed that the counter claims made be
allowed. He relied on the decision of the Supreme Court in Union of India
(UOI) v. M/s. Pam Development Pvt. Ltd.: (2014) 1 SCR 1069 in support
of his contention that Mr Gopi having participated in the arbitration
proceedings, was precluded from challenging the jurisdiction of the arbitral
tribunal at a subsequent stage. He also relied upon the decision of the
Supreme Court in Purple Medical Solutions Pvt. Ltd. v. MIV
Therapeutics Inc. and Ors.: 2015 (2) SCALE 127 wherein the court had
allowed an application under Section 11(6) of the Act and appointed the
arbitrator by lifting the corporate veil. He also referred to the decision of a
Coordinate Bench of this Court in Ram Kishan and Sons v. Freeway
Marketing (India) (P) Ltd. and Anr.: 2004 (2) ArbLR 508 (Delhi)
whereby this Court had found fault with the arbitral tribunal in not lifting
the corporate veil and had, therefore, allowed the application for setting
aside the arbitral award as being opposed to public policy.
Reasons and Conclusion
11. “Like consummated romance, arbitration rests on consent”
1
. The
agreement between parties to resolve their disputes by arbitration is the
cornerstone of arbitration. The arbitral tribunal derives its jurisdiction from
the consent of parties (other than statutory arbitrations). In absence of such
consent, the arbitral tribunal would have no jurisdiction to make an award
and the award so rendered would, plainly, be of no value. Thus, the first
and foremost question to be addressed is whether there existed any
arbitration agreement between Mr Sudhir Gopi and IGNOU.
12. In terms of Section 7(3) of the Act, an arbitration agreement must be
in writing. By virtue of Section 7(4) of the Act, an arbitration agreement is
in writing if it is contained in “(a) a document signed by parties; (b) an
exchange of letters, telex, telegrams or other means of telecommunication
including communication through electric means which provide a record
of the agreement; or (c) an exchange of statements of claim and defence in
which existence of an agreement is alleged by one party and not denied by
the other”. The term “party” is defined under Section 2(1)(h) of the Act to
mean a party to an arbitration agreement.
13. In the present case, admittedly, the Agreement is not signed by Mr
Sudhir Gopi in his personal capacity. None of the communications
produced provides a record of an agreement between Mr Sudhir Gopi and
IGNOU to arbitrate. The arbitral tribunal has also not proceeded on the
basis of any such agreement.
1. “NON-SIGNATORIES AND INTERNATIONAL CONTRACTS: AN ARBITRATOR’S
DILEMMA” By Prof. William W. Park.
14. It was contended on behalf of IGNOU that since Mr Sudhir Gopi
had filed counter claims jointly with UEIT, his consent to arbitrate must be
inferred. However, that is not the basis on which the arbitral tribunal has
proceeded against Mr Sudhir Gopi. The contention that Mr Gopi's consent
to arbitrate must be inferred from his preferring counter claims, is also
unmerited. This is so because, in compliance with the directions of the
arbitral tribunal issued on 30.04.2015, both UEIT and Mr Gopi had
clarified that Mr Gopi had preferred the counter claims on behalf of UEIT
and not in his personal capacity. Further, both UEIT and Mr Gopi had
resisted the claims on the ground that there was mis-joinder of parties to
the extent that Mr Gopi had been arrayed as a respondent in the arbitral
proceedings.
15. The jurisdiction of the arbitrator is circumscribed by the agreement
between the parties and it is obvious that such limited jurisdiction cannot
be used to bring within its ambit, persons that are outside the circle of
consent. The arbitral tribunal, being a creature of limited jurisdiction, has
no power to extend the scope of the arbitral proceedings to include persons
who have not consented to arbitrate. Thus, an arbitrator would not have the
power to pierce the corporate veil so as to bind other parties who have not
agreed to arbitrate.
16. There may be cases where courts can compel non signatory(ies) to
arbitrate. These may be on grounds of (a) implied consent and/or (b)
disregard of corporate personality. In cases of implied consent, the consent
of non signatory(ies) to arbitrate is inferred from the conduct and intention
of the parties. Thus, in cases where it is apparent that the non-
signatory(ies) intended to be bound by the arbitration agreements, the
courts have referred such non-signatories to arbitration.
17. The second class of cases, is where a corporate form is used to
perpetuate a fraud, to circumvent a statute or for other misdeeds. In such
cases, the courts have disregarded the corporate façade and held the
shareholders/directors (the alter egos) accountable for the obligations of the
corporate entity.
18. In Chloro Controls India Private Limited v. Severn Trent Water
Purifications Inc. & Others: 2013(1) SCC 641, the Supreme Court had
explained the above principle in the following words:
"Various legal basis may be applied to bind a nonsignatory
to an arbitration agreement. The first theory is
that of implied consent, third party beneficiaries,
guarantors, assignment and other transfer mechanisms of
contractual rights. This theory relies on the discernible
intentions of the parties and, to a large extent, on good
faith principle. They apply to private as well as public
legal entities. The second theory includes the legal
doctrines of agent- principal relations, apparent
authority, piercing of veil (also called the “alter ego”),
joint venture relations, succession and estoppel. They do
not rely on the parties‟ intention but rather on the force
of the applicable law."
19. It is also necessary to emphasize that whether a court will compel
any person to arbitrate would have to be examined in the context of the
specific provisions of the applicable statute. It is almost universally
accepted that dispute resolution by arbitration must be encouraged;
however, the courts determine the question whether an individual or an
entity can be compelled to arbitrate, guided by the domestic law and the
judicial standards of their country. In this respect, the laws of most
countries are not identical and the case law emanating from courts in other
countries, cannot be readily followed.
20. The courts would, undoubtedly, have the power to determine
whether in a given case the corporate veil should be pierced and the
persons behind the corporate façade be held accountable for the obligations
of the corporate entity. However as stated earlier, an arbitral tribunal, has
no jurisdiction to lift the corporate veil; its jurisdiction is confined by the
arbitration agreement - which includes the parties to arbitration - and it
would not be permissible for the arbitral tribunal to expand or extend the
same to other persons.
21. A similar view was also expressed by the Bombay High Court in Oil
and Natural Gas Corporation Ltd. v. Jindal Drilling and Industries
Limited: 2015 SCC OnLine Bom 1707 in the following words:
“47. The petitioners had canvassed before the arbitral
tribunal that the arbitral tribunal shall lift the corporate
veil to find out that the said DEPL and the respondents
herein were forming part of the said Jindal Group and
were one and the same entity and thus the respondents
were liable for the liabilities of the said DEPL. In my
view, the arbitral tribunal has no power to lift the
corporate veil. Only a Court can lift the corporate veil of
a company if the strongest case is made out. In my view,
the prayer of the petitioners for lifting the corporate veil
of the said DEPL was itself not maintainable in the
arbitration proceedings.”
22. In MV Tongli Yantai (supra), Vazifdar J sitting as a single judge of
the Bombay High Court had observed that:
“ ..In whatever other circumstances the corporate veil
may be lifted, it ought not to be in arbitration
proceedings even in principle. To permit such course
would be contrary to the 1996 Act….The mere fact that
a party is an alter ego of another would not predicate an
agreement to refer disputes to arbitration by the one
which is not a party to the arbitration agreement. Courts
have lifted the corporate veil to confer benefit or to foist
liability upon a party. An arbitration reference stands
upon a different footing. It is a mode of adjudication of
disputes dependent upon an agreement between parties”.
This decision in MV Tongli Yantai (supra) was overturned by the division
bench of the Bombay High Court, albeit, on another point. And the
Supreme Court, by consent of parties, set aside both the decision of the
Single Judge as well as the Division Bench. Thus, this decision does not
have any precedent value, but this court respectfully concurs with the view
expressed therein.
23. This court has also held that an arbitral tribunal cannot lift the
corporate veil in the case of Balmer Laurie (supra).
24. It is also relevant to refer to the decision of the Supreme in
Indowind Energy Limited v. Wescare (India) Limited: 2010 (5) SCC 306.
25. In that case Subuthi Finance Ltd. (Subuthi) the promoter of appellant
company (Indowind) entered into an agreement with Wescare (India) Ltd.
(Wescare) for sale and purchase of certain equipments. Wescare and its
subsidiary (RCI Power Ltd.) were described as "seller/wescare" and
Subuthi and its nominee were described as "buyer". The agreement also
disclosed Subuthi to be the promoter of Indowind. The agreement between
Subuthi and Wescare included an arbitration clause.
26. Wescare sold certain Wind Electric Generators (WEGs) to
Indowind, which was paid by Indowind partly in cash and partly by
allotment of shares. Certain disputes arose between Wescare on one hand
and Subuthi and Indowind on the other. Wescare filed petitions under
Section 9 of the Act for interim measures before Madras High Court,
which were dismissed on the ground that Indowind had neither signed nor
ratified the agreement between Subuthi and Wescare. Thereafter, Wescare
filed a petition under Section 11(6) of the Act for appointment of a sole
arbitrator to adjudicate the disputes that had arisen in respect of the
agreement. Both Subuthi and Indowind resisted the petition. Subuthi
claimed that the agreement did not contemplate any transaction between
Wescare and itself and no transaction had taken place between them and,
therefore, there was no cause of action or any arbitrable dispute between
them. Indowind resisted the said petition on the ground that it was not a
party to the agreement in question. The Chief Justice of Madras High Court
allowed the application under Section 11 of the Act and appointed a sole
arbitrator. Indowind challenged the same before the Supreme Court. In
this case, there was no dispute that the parties were closely related. Both
Indowind and Subuthi had common shareholders and common board of
directors. It was also not in dispute that the equipment was purchased by
Indowind and not Subuthi. However, the Supreme Court allowed the
Indowind's appeal and set aside the order of the Madras High Court
appointing an arbitrator in respect of the claims of Wescare against
Indowind, for the reason that Indowind was not a party to the Agreement.
27. The Supreme Court explained that “It is fundamental that a
provision for arbitration to constitute an arbitration agreement for the
purpose of Section 7 should satisfy two conditions: (i) it should be between
the parties to the dispute; and (ii) it should relate to or be applicable to the
dispute." The Court further held that Subuthi and Indowind were two
independent companies and "each company is a separate and distinct legal
entity and the mere fact that two companies have common shareholders or
common Board of Directors, will not make the two companies a single
entity. Nor will existence of common shareholders or Directors lead to an
inference that one company will be bound by the acts of the other.”
28. The decision of the Supreme Court in the case of M/s. Pam
Development Pvt. Ltd. (supra), has no application in the facts of the
present case. In that case, there was no dispute as to the existence of the
arbitration agreement. The only dispute raised by the appellant (Union of
India) was that the arbitrator was not appointed in accordance with the
agreement and the disputes entertained were excepted matters and thus, not
arbitrable. It is material to mention that the arbitrator was appointed by the
High Court under Section 11(6) of the Act and the said decision was not
challenged. No objection as to the jurisdiction was taken before the arbitral
tribunal. The appellant (Union of India) participated in the arbitration
proceedings. It also preferred counter claims and led evidence in defence.
It is in these facts that the Supreme Court concluded that the appellant had
waived its right to object to the jurisdiction of the arbitrator.
29. The decision in Purple Medical Solutions Pvt. Ltd. (supra) was
rendered by the Supreme Court in an application filed under Section 11(6)
of the Act. In that case, serious allegations of fraud were made against
respondent no.2 (therein), who was not a party to the agreements in
question. The said allegations remained uncontroverted. Thus, the Supreme
Court found that the relevant facts justified lifting of corporate veil and
referring respondent no. 2 to arbitration. There is no quarrel with the
proposition that a court could, in given cases, lift the corporate veil. This
decision is not an authority for the proposition that such power could be
exercised by an arbitral tribunal.
30. The decision in the case of Freeway Marketing (India) (P) Ltd and
Anr. (supra) turned on its own facts. In that case, respondent no.2 was not
a party to the arbitration agreement but had consented for reference of
disputes to arbitration, in proceedings filed before this court and had also
undertaken to this court for being liable for any payment that may be found
due against respondent no.1. However, the arbitrator held that respondent
no.2 was not a party to the agreement and was not personally liable for the
claims made by the petitioner. Noting the facts of the case and finding the
decision of the arbitrator to be unsustainable, the Hon‟ble single judge
(who is coincidently also the sole arbitrator in this case) set aside the
arbitral award under Section 34 of the Act. This court has some
reservations as to this decision, however notwithstanding such
reservations, it is apparent that it is not applicable on the facts of this case
as indicated above.
31. In view of the above, it is not necessary to examine, whether the
decision of the arbitral tribunal to lift the corporate veil falls foul of Section
34 of the Act on merits as well. Nonetheless, for the sake of completeness,
this court has also examined whether the decision to lift corporate veil is
otherwise sustainable.
32. The solitary reason for the arbitral tribunal to hold that Mr Sudhir
Gopi was a party to the Agreement is that he held almost entire shares of
UEIT; thus, exercising absolute control over the affairs of UEIT. The entire
business of UEIT was run by Mr Sudhir Gopi. The arbitral tribunal held
that Mr Sudhir Gopi was the “face and a cloak” of UEIT for running the
business and, therefore, was a party to the arbitration agreement.
Consequently, the arbitral tribunal held that Mr Gopi and UEIT were
jointly and severally liable for the liabilities of UEIT.
33. As stated above, arbitration is founded on consent between the
parties to refer the disputes to arbitration. The fact that an individual or a
few individuals hold controlling interest in a company and are in-charge of
running its business does not ipso jure render them personally bound by all
agreements entered into by the company.
34. Arbitration agreement can be extended to non-signatories in limited
circumstances; first, where the Court comes to the conclusion that there is
an implied consent and second, where there are reasons to disregard the
corporate personality of a party, thus, making the shareholder(s)
answerable for the obligations of the company. In the present case, the
arbitral tribunal has proceeded to disregard the corporate personality of
UEIT. The arbitral tribunal has lifted the corporate veil only for the reason
that UEIT's business was being conducted by Mr Sudhir Gopi who was
also the beneficiary of its business being the absolute shareholder (barring
a single share held by Mr Fikri) of UEIT. This is clearly impermissible
and militates against the law settled since the nineteenth century. Any party
dealing with the limited liability company is fully aware of the limitations
of corporate liability. Business are organised on the fundamental premise
that a company is an independent juristic entity notwithstanding that its
shareholders and directors exercise the ultimate control on the affairs of the
company. In law, the corporate personality cannot be disregarded.
Undisputedly, there are exceptions to this rule and the question is whether
this case falls within the scope of any of the exceptions.
35. A corporate veil can be pierced only in rare cases where the Court
comes to the conclusion that the conduct of the shareholder is abusive and
the corporate façade is used for an improper purpose, for perpetuating a
fraud, or for circumventing a statute.
36. It is only in exceptional cases that a court would lift the corporate
veil. In Life Insurance Corporation of India v. Escorts Ltd. and Ors.:
(1986) 1 SCC 264, the constitution bench of the Supreme Court explained
that a corporate veil may be lifted where a statute itself requires lifting of
corporate veil or in cases of fraud or where a taxing statute or a beneficent
statute is sought to be circumvented.
37. Courts have the power to pierce the corporate veil if the corporate
structure has been built only to evade taxes. (See: In Re: Sir Dinshaw
Maneckjee Petit Bart: AIR 1927 Bombay 371). In the case of Juggi Lal
Kamlapat v. Commissioner of Income Tax, U.P.: AIR 1969 SC 932, the
Supreme Court held that “in certain exceptional cases the Court is entitled
to lift the veil of corporate entity and to pay regard to the economic
realities behind the legal facade. For example, the Court has power to
disregard the corporate entity if it is used for tax evasion or to circumvent
tax obligation or to perpetrate fraud”.
38. In Delhi Development Authority v. Skiper Construction Company
(P) Ltd. and another: (1996) 4 SCC 622 the Supreme Court observed as
under:
"28. The concept of corporate entity was evolved to
encourage and promote trade and commerce but not to
commit illegalities or to defraud people. Where,
therefore, the corporate character is employed for the
purpose of committing illegality or for defrauding
others, the court would ignore the corporate character
and will look at the reality behind the corporate veil so
as to enable it to pass appropriate orders to do justice
between the parties concerned. The fact that Tejwant
Singh and members of his family have created several
corporate bodies does not prevent this Court from
treating all of them as one entity belonging to and
controlled by Tejwant Singh and Family if it is found
that these corporate bodies are merely cloaks behind
which lurks Tejwant Singh and/or members of his
family and that the device of incorporation was really a
ploy adopted for committing illegalities and/or to
defraud people."
39. An abuse of corporate form is the bare minimum pre-condition that
must be met before the corporate entity can be disregarded to impose the
obligations of such entity on its shareholders/directors.
40. As stated earlier, in the present case, there is no foundation that the
corporate façade of UEIT was used by Mr Sudhir Gopi to perpetuate a
fraud. Mere failure of a corporate entity to meet its contractual obligations
is no ground for piercing the corporate veil. Although the arbitral tribunal
has mentioned in the passing that UEIT was used for improper purpose,
however, there is no foundation for such observation. It was never
IGNOU's case that UEIT was set up or used to perpetuate a fraud on
IGNOU and at any rate, no particulars - that are required to be pleaded to
set up a case of fraud - to indicate that a fraud had been perpetuated were
pleaded by IGNOU. Thus, the decision of the arbitral tribunal to pierce the
corporate veil is fundamentally flawed. It falls foul of the fundamental
policy of Indian law that recognises that a company is an independent
juristic person.
41. Mr Mirza had earnestly contended that the alter ego doctrine would
be applicable and the arbitral tribunal had proceeded on the basis of the
said doctrine. This contention is bereft of any merit. The alter ego doctrine
is conceptually no different from the concept of piercing of corporate veil.
These doctrines are applied to disregard corporate personality only in cases
where it is found that corporate form is being used to perpetuate a fraud,
circumvent statute or for a wrongful purpose. The alter ego doctrine is
essentially to prevent shareholders from misusing corporate laws by a
device of a sham corporate entity for committing fraud.
42. In cases where it is established that an individual(s) and/or other
entities have used a corporate form for a wrongful purpose; to perpetuate a
fraud; circumvent a statute; or some other misdeeds, the Courts may decide
to ignore the corporate personality and hold the directors, shareholders
and/or officers (alter egos) responsible for the obligations of the corporate
entity. However, as stated earlier, in the facts of the present case, there is
no ground to disregard the corporate form of UEIT.
43. In view of the above, the petition is allowed and the impugned
award to the extent that the petitioner is held liable for the awarded
amounts, is set aside.
44. The parties are left to bear their own costs.
VIBHU BAKHRU, J
MAY 16, 2017
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