J.B. Exports Ltd. And Anr. vs Bses Rajdhani Power Ltd.
2006 Latest Caselaw 374 Del

JUDGMENT

Markandeya Katju, C.J.

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1. This writ appeal has been filed against the impugned judgment of the learned Single Judge dated 14.11.2005.

2. Heard learned counsel for the parties and perused the record.

3.The facts in details have been set out in the judgment of the learned Single Judge and hence we are not repeating the same except where necessary.

4. It appears that M/s BVM Engineering Industry (P) Limited was the registered consumer of electricity connection granted at the factory premises A-20, Mohan Co-operative Industrial Estate, Mathura Road, New Delhi. Petitioner No. 1, M/s J.B. Exports Limited owns the entire share capital of M/s BVM Engineering Industry (P) Limited.

5. In the inspection carried out in the premises in question on 8.8.1991 it is alleged that it was found that electricity was being consumed by Page 883 M/s J.B. Exports Limited. On these facts a show cause notice was issued and thereafter the impugned order dated 25.3.1995 was passed demanding subletting charges and load violation charges retrospectively from M/s BVM Engineering Industry (P) Ltd.

6. The learned Single Judge by the impugned judgment has quashed the impugned order dated 23.5.1995 in so far as it included the rating of the spare switches and sockets while determining the connected load. However, the learned Single Judge upheld the impugned order so far it related to the issue of subletting.

7. The respondents have not alleged that there was any loss caused to them by the alleged breach of the agreement and have also not denied that the payment has been made by the petitioners as per the electricity bills in respect of the power connection.

8. In para 2 of the counter affidavit in the writ petition the respondent submitted that the word 'misuse' in the tariff includes subletting to any person/concern by any registered consumer in whose favor the industrial load has been sanctioned. It is consequently stated that petitioner No. 1 was misusing the electricity supply which was granted to petitioner No. 2.

9. It appears that appellant No. 2, M/s BVM Engineering Industry (P) Ltd was incorporated in the year 1972 and was allotted Plot No. A-20, Mohan Co-operative Industrial Estate, Mathura Road, New Delhi by the Delhi Development Authority in 1975. In the year 1980 the appellant No. 2 entered into an agreement with appellant No. 1, M/s J.B. Exports Limited which acquired the shares of appellant No. 2. The appellant No. 1 acquired 1210 shares of Rs. 100 each of appellant No. 2 company. Out of the total paid up capital of Rs. 1,22,000, shares worth Rs. 1,21,000/- were acquired by appellant No. 1 M/s J.B. Exports Ltd. Thus, almost the entire share capital was acquired by appellant No. 1 which became the holding company.

10. Although appellant No. 2 had been sanctioned the electricity load for the said premises and was technically the registered consumer, but after almost its entire share capital was acquired by appellant No. 1, the appellant No. 2 company has not been carrying on any regular business or commercial activity of its own. In fact, from the beginning all the property taxes, water and electricity charges with respect to the said premises constructed on Plot No. A-20, Mohan Co-operative Industrial Estate, Mathura Estate, New Delhi have been borne by appellant No. 1 as is reflected in its books of account.

11. Admittedly from the year 2002 even the electricity connection in question has been transferred in the name of appellant No. 1, but we are concerned in this case for the period prior to 2002 when formally the load was in the name of appellant No. 2, but the electricity was being used by appellant No. 1.

12. Mr. Jayant Bhushan, learned Senior Counsel for the appellants has relied on the doctrine of piercing of the corporate veil. The concept that a company is a distinct legal entity apart from its shareholders, vide Salomon v. Salomon and Co. 1897 AC 22 (HL) had a historical purpose. Its main purpose was to encourage entrepreneurs to start new business ventures and thus help in the process of industrialisation.

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13. In every business there is a risk that the business may fail due to recession, competition etc. Hence, businessmen were reluctant to set up new industrial ventures out of fear that if it failed, recovery would be issued in respect of the loans they had taken and thereupon even their household and personal effects may be sold in connection with the recovery. Hence, businessmen were reluctant to take risks and start new industrial ventures. To get over this hurdle and to encourage industrialisation the legal principle was created that if a company is incorporated under the Companies Act, the liability of the shareholders becomes limited because the shareholders, directors etc. are legally treated as being different from the company. A company was held to be a distinct legal entity separate from its shareholders and directors. This legal principle gave protection to businessmen who were otherwise reluctant to start new industrial ventures due to the risk involved. Thus this legal principle was of great help to industrialization in Europe (where industrialization first began during the Industrial Revolution) and thereafter all over the world.

14. Subsequently, however, an exception was carved out to the above principle, viz. the doctrine of piercing the veil of corporate personality.

15. In a very recent Division Bench decision of this Court in Mrs. Prem Lata Bhatia v. Union of India and Ors. LPA No. 756/2003 dated 30.1.2006, we have considered the entire case law on the point. This principle has been applied by the Supreme Court in Singer India Ltd. v. Chander Mohan Chadha and Ors. ; Kapila Hingorani v. State of Bihar, ; Delhi Development Authority v. Skipper Construction Company (P) Ltd and Anr. ; Subhra Mukherjee & Anr v. Bharat Coking Coal Ltd and Anr. ; Calcutta Chromotype Ltd v. Collector of Central Excise, Calcutta, ; Delhi Development Authority v. Skipper Construction Co (P) Ltd ; and New Horizons Limited and Anr. v. Union of India and Ors. .

16. Learned counsel for the respondents submitted that the principle of piercing the veil of corporate personality can only be applied where a company Page 885 was formed to facilitate an evasion of legal obligations or to commit some fraud. We do not agree.

17. In State of U.P and Ors. v. Renusagar Power Co. and Ors. , there was no allegation that the company was formed to evade legal obligation or commit fraud, but yet the principle of piercing the veil of corporate personality was applied. Thus it cannot be said that the principle of piercing the veil of corporate personality applies only when there are allegations of fraud or evasion of legal obligations.

18. Similarly in Kapila Hingorani v. State of Bihar the Supreme Court applied the aforesaid principle although there was no allegation of fraud or evasion. In that case the principle was applied to mitigate the sufferings of the employees of public sector undertaking. In that case the employees of public sector undertakings and government companies had not been paid salaries for a long time which caused hardship to them and their families. The State submitted that it cannot be made liable since these undertakings were registered as companies under the Companies Act and were, therefore, distinct entities. The Supreme Court rejected this submission and further observed in para 25 of the judgment that the principle behind the doctrine is a changing concept and it is expanding its horizon.

19. The same view was taken in State of U.P and Ors. v. Renusagar Power Co. and Ors. (supra), vide para 66 where it was observed:-

It appears to us, however, that as mentioned the concept of lifting the corporate veil is a changing concept and is of expanding horizons. 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 respondent is liable to duty on the same and on that footing alone; this is evident in view of the principles enunciated and the doctrine now established by way of decision of this court in Life Insurance Corpn. Of India (supra) that in the facts of this case Sections 3(1)(c) and 4(1)(c) of the Act are to be interpreted accordingly. The person 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.

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20. In State of U.P and Ors. v. Renusagar Power Co. and Ors. (supra), the Supreme Court also observed, vide para 65:-

The veil on corporate personality even though not lifted sometimes is becoming more and more transparent in modern company jurisprudence. The ghost of Salomon's case (1897 AC 22) still visits frequently the hounds of Company Law but the veil has been pierced in many cases. Some of these have been noted by Justice P.B. Mukharji in the New Jurisprudence. (Tagore Law Lecture 183).

21. In Calcutta Chromotype Ltd. v. Collector of Central Excise, Calcutta , the Supreme Court quoted the following observation from its earlier decision in Tata Engineering and Locomotive Company Ltd v. State of Bihar and Ors. :-

The doctrine of the lifting of the veil thus marks a change in the attitude that law had originally adopted towards the concept of the separate entity or personality of the corporation. As a result of the impact of the complexity of economic factors, judicial decisions have sometimes recognised exceptions to the rule about the juristic personality of the corporation. It may be that in course of time these exceptions may grow in number and to meet the requirements of different economic problems, the theory about the personality of the corporation may be confined more and more.

22. In recent decisions the trend is of expanding the scope of the doctrine of piercing the veil of corporate personality. This principle, as noted by the Supreme Court in the aforesaid decisions, is of an expanding nature and new situations can be brought within its scope. Hence, it cannot be said that it is limited to cases of fraud or evasion of legal obligations.

23.The important question therefore arises is as to in what manner, and in what direction, can the Courts expand the principle?

To answer this question correctly we have to go back again to the historical reason why the legal principle was created that a company is a distinct legal entity separate from its shareholders and directors. As already mentioned above, this legal principle was created (initially in Western Europe, where industrialization first began) in order to encourage and facilitate industrialization. In the absence of this legal principle businessmen were reluctant to start new industrial ventures out of fear that if the venture failed (due to recession, competition, etc.) even their household goods and personal effects may be sold. Hence the legal principle of corporate personality was created, without which industrialization may not have been possible, or at least not at the speed at which it was done in Europe, and thereafter in other countries.

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Keeping this historical background in mind we can immediately see that the purpose of the principle of separate corporate personality is to encourage and facilitate industrialization, not to obstruct it. Hence a mechanical interpretation of the principle of corporate personality is to be avoided, as it may frustrate the very purpose for which it was made viz. to promote growth of industries. Consequently, the exception to the principle, namely, the doctrine of piercing the veil of corporate personality should be adopted not merely in cases of fraud or evasion of legal obligations but also in a large number of cases where it would promote the growth of industry. In this way, both the principle of corporate personality as well as its exception, viz. the doctrine of piercing the veil of corporate personality will serve a common complementary purpose, namely, to promote industrialization. Such an interpretation would serve the main national objective of our country which is rapid industrialization.

24. In the present case we have noted that almost the entire share holding of appellant No. 2 belongs to appellant No. 1. In fact, appellant No. 2 is not doing any business at all. It is not the case of the respondent that its bills are not being paid or that any fraud has been committed. It is only appellant No. 1 who conducts its operations and business in the premises in question. In fact in 2002 even formally the electricity connection has been transferred in its name.

25. Under these circumstances, we are of the opinion that the principle of piercing the veil of corporate personality should be applied in this case.

26. Learned counsel for the respondent submitted that it is a case of subletting. We do not agree. A subletting can be done by A in favor of B, but when A & B are both treated as the same entity by applying the principle of piercing the veil of corporate personality, there is no question of subletting.

27. For the reasons given above this appeal is allowed and the impugned order in so far as it upheld the impugned order dated 23.5.1995 on the issue of subletting is quashed. The aforesaid order dated 23.5.1995 is set aside.