Arbitrator cannot pierce corporate veil…rules the Delhi High Court

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Sudhir Gopi v. IGNOU & Ors (MANU/DE/1339/2017)

The case emanates from a contract entered into between IGNOU and UEIT, a Dubai based limited liability company. UEIT was headed by an individual called ‘SG’, who held held 99 % shareholding in UEIT and was also its Chairman and Managing Director. However, SG was not a party to the arbitration agreement between UEIT and IGNOU. A dispute arose between UEIT and IGNOU over UEIT’s failure to remit fees to IGNOU, which led to initiation of Arbitration, which was initiated not only against UEIT but also SG. Arbitral Tribunal (“AT”) held both UEIT and SG jointly and severally liable. This led to a challenge u/s 34 of the Arbitration Act (Section 34 of the Arbitration Act provides for setting aside of an Award under certain situations) and the court was faced with a question as to whether an Arbitral Tribunal has the power to pierce the corporate veil or not ? 

The Court held that it cannot. An Arbitral Tribunal is a creature of a contract, and therefore, cannot pierce the corporate veil and proceed against third parties, who are not signatories to the Arbitration Agreement. In this case, the Tribunal had proceeded against SG on the singular premise that he held almost entire share capital in UEIT.  The Court held that the principle of limited liability are too established since the 19th century. (See Solomon v. Solomon and a long line of other decisions). Any person dealing with a limited liability company is fully aware of the limitations of corporate liability. Businesses are organised on the fundamental premise that a company is an independent juristic entity notwithstanding the fact its shareholders and directors exercise the ultimate control on the affairs of the company. However, the identity remains separate. Such is the magic of limited liability.

The Court held that it is only in exceptional cases that a Court (as opposed to an Arbitrator) that corporate veil if lifted where the corporate facade is used for an improper purpose, for perpetuating a fraud, or for circumventing a statute or evading a penal or taxing provision. The Court held that extension of Arbitration Agreements to non-signatories is possible only in certain exceptional situations. Drawing strength from earlier decisions such as Chrolo Control. v. Severn Trent Water Purification Inc., (2013) SC, the court held that non-signatories can be made to Arbitrate in cases where there an entity has given implied consent, third party beneficiaries, guarantors, assignment and other transfer mechanisms of contractual rights. Agent-principal relation cases may also entail extension of Arbitration to non-signatories, besides operation of well established principles such : piercing of corporate veil, joint venture relations, succession and estoppel. However, what needs to be borne in mind is that it is for the Court to embark on such an exercise and not the Arbitrator, the very basis of whose authority lies in parties’ consent.

The Court set aside the Arbitral Award holding :

“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.” 

 

 

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