The Pursuit of Enforcement – Can the Corporate Cloaks be Unravelled? – By Rishabh Malaviya, Gathi Prakash & Indranil Deshmukh

Introduction

It is trite that a company is a separate legal entity, and is distinct from its members.^[1] As Lord Sumption observed in Prest v Petrodel Resources Ltd.^[2], “The separate personality and property of a company is sometimes described as a fiction, and in a sense it is. But the fiction is the whole foundation of English company and insolvency law.” Equally sacrosanct is the principle that arbitration proceeds on the basis of an agreement between parties. After all, “like consummated romance, arbitration rests on consent”.^[3] However, practical considerations have led to the marginal dilution of these otherwise fundamental principles.

There are instances where a company and its members are not treated as separate legal entities (i.e. where the corporate ‘veil’ is pierced). Similarly, there are cases where arbitral proceedings enjoin non-signatories.[4] A unique amalgam of these exceptions is found in cases where an arbitral award is sought to be executed against an entity that was never a party to the arbitral proceedings. For example, in Cheran Properties Limited v. Kasturi and Sons Limited and Ors.[5] (“Cheran Properties”), applying the ‘group of companies’ doctrine expounded in Chloro Controls,[6] and analysing Section 35 of the Arbitration and Conciliation Act, 1996 (“Act”) to ascertain who “persons claiming under them” would be for the purpose of binding such persons to the arbitral award, the Supreme Court permitted enforcement of an arbitral award against a third party/non-signatory. In this post, however, our focus is on whether Indian courts have pierced the corporate veil to execute an arbitral award against a third party to the arbitral proceedings when such third party’s unique relationship with the award debtor has been exploited to fraudulently circumvent or frustrate execution of the arbitral award.

Indian Judiciary’s Approach

In a recent judgment passed on February 7, 2020, in the case of Mitsui OSK Lines Ltd. (Japan) v Orient Ship Agency Pvt. Ltd. & Ors.[7] (“Mitsui”), the Bombay High Court has essentially held that the corporate veil cannot be lifted to implead individuals who were neither party to the arbitration agreement nor the Foreign Award. In this case, for execution of a Foreign Award as a decree of the court, a Chamber Summons was filed seeking impleadment of associate companies and common directors of the award debtor as additional respondents. These proposed additional respondents allegedly siphoned-off monies from the award debtor with a view to frustrate execution of the Foreign Award and were sought to be made personally liable for satisfaction of the decree in execution proceedings. In arriving at his conclusion, the Ld. Single Judge of the Bombay High Court inter alia observed as follows:

(a) lifting the corporate veil in this case would amount to proceeding behind and/or beyond the decree;

(b) the application is a desperate attempt by the award holder to enjoy the fruits of the Foreign Award passed in its favour by going against entities which were neither parties to the arbitration agreement, nor to the Foreign Award;

(c) the proposed additional respondents against whom the Foreign Award is sought to be executed ought to have been afforded an opportunity under Section 48 of the Act, to show cause as to why the Foreign Award should not be enforced against it;

(d) the question of whether the corporate veil can be lifted is an issue of trial and cannot be decided in a summary manner in a chamber summons; it would have to be decided in a substantial suit; and

(e) in any event, no case on facts is made out for lifting of the corporate veil.

The Bombay High Court analysed and distinguished several High Court judgments which held that the corporate veil may be lifted in the right circumstances even in execution proceedings. The following may be relevant to note in this regard:

Conclusion

On a combined reading of the judgments rendered by the Apex Court in the cases of Chloro Controls and Cheran Properties, it emerges that the Courts do have the power in appropriate cases to enjoin non-signatories in the enforcement of an arbitral award. However, in view of the judgments discussed in this post and those passed by various other High Courts, it remains to be seen how the Supreme Court will deal with a situation where the ‘group of companies’ doctrine does not apply, but where a fraudulent device is created using a non-signatory to the arbitration agreement so as to frustrate execution of the arbitral award/decree.

(This article was originally published on the Cyril Amarchand Mangaldas Corporate Blog)

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Indranil Deshmukh is Partner in the Dispute Resolution Practice Area at the Mumbai office of Cyril Amarchand Mangaldas. Indranil has extensive experience in a wide range of disputes, both of a general commercial litigation nature as well as public and regulatory disputes. His experience is diversified across numerous sectors including financial regulation, health, sports, local government, planning and environment and public sector projects. Indranil also routinely advises the Board of Control for Cricket in India (BCCI) in relation to their contracts and tenders.

Gathi Prakash is Principal Associate in the Dispute Resolution Practice at the Mumbai office of Cyril Amarchand Mangaldas. Gathi focuses on arbitration and corporate, commercial and regulatory litigation involving media rights, promoter/shareholder disputes, FEMA violations, offshore construction projects, healthcare and banking.

Rishabh Malaviya is Associate in the Dispute Resolution Practice at the Mumbai office of Cyril Amarchand Mangaldas.

[1] Saloman v A Saloman & Co. Ltd., [1896] UKHL 1.

[2] [2013] UKSC 34.

[3] William W. Park, “Non-Signatories and International Contracts: An Arbitrator’s Dilemma”, in Multiple Party Actions in International Arbitration 1 (2009).

[4] Section 8(1) of the Arbitration and Conciliation Act, 1996 (as amended by the 2015 amendment) which provides as follows: “A judicial authority, before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party to the arbitration agreement or any person claiming through or under him, so applies not later than the date of submitting his first statement on the substance of the dispute, then, notwithstanding any judgment, decree or order of the Supreme Court or any Court, refer the parties to arbitration unless it finds that prima facie no valid arbitration agreement exists”; Chloro Controls India Pvt. Ltd. v. Severn Trent Water Purification Inc. & Ors., (2013) 1 SCC 641 at para 43 held as follows: “A non-signatory or third party could be subjected to arbitration without their prior consent, but this would only be in exceptional cases. The court will examine these exceptions from the touchstone of direct relationship to the party signatory to the arbitration agreement, direct commonality of the subject-matter, and the agreement between the parties being a composite transaction.” (followed in Ameet Lalchand Shah and Ors. v. Rishabh Enterprises and Anr., AIR 2018 SC 3041).

[5] (2018) 16 SCC 413

[6] (2013) 1 SCC 641

[7] Mitsui OSK Lines Ltd. (Japan) v Orient Ship Agency Pvt. Ltd. and Ors., 2020

[8] [2017] 201 CompCas 46 (Bom)

[9] 76 (1998) DLT 817

[10] [2016] 199 CompCas 636 (P&H).

[11] Section 47(1) of the Code of Civil Procedure provides as follows: “All questions arising between the parties to the suit in which the decree was passed, or their representatives, and relating to the execution, discharge or satisfaction of the decree, shall be determined by the Court executing the decree and not by a separate suit”.

[12] AIR 2017 SC 3756

[13] (2017) DLT 217

Disclaimer: The views or opinions expressed are solely of the author.