Doctrine of Alter Ego: Recent expansion in India

Introduction:
A company in the usual course of law and business is considered to be a separate legal entity from its
shareholders i.e. the company may sue and be sued under its own name, separate from its owners. On
the contrary, the doctrine of alter ego is a principle of law that treats a corporation and those who own
its shares to be identical by annulling the privileges of a separate legal entity (under special
circumstances). Hence, it is referred to as the Doctrine of lifting of corporate veil, also.
The doctrine came into being (arguably) as a result of Solomon v. Solomon & Co. 1 when Courts only
used to hold individual shareholders personally liable for the debts of the corporation so as to prevent
injustice to the corporation’s other stakeholders but has since then garnered a wider scope through
judicial pronouncements.
What is the stance of the judiciary on the doctrine with regards to arbitration in India? This is the
question we hope to answer as the application of this doctrine in proceedings is completely determined
by the courts with due considerations to the specific facts and circumstances of the case.

Scope of the doctrine with regards to arbitration:

In the realm of arbitration, the doctrine has had profound implications. Certain cases have been
recognised by the Courts where even non-signatories to arbitration agreements can be subjected to
arbitration proceedings. Such instances are rare and arise with special facts of the case and such
instances are an exception to the rule that only a signatory to the arbitration agreement can be
compelled to submit to the jurisdiction of the arbitral tribunal. Corporate veil could be pierced to hold
a corporation legally accountable for the actions of the other keeping in mind a mere corporate
relationship doesn’t furnish grounds sufficient enough to bind a non-signatory to an arbitration
agreement.

Recent important judicial pronouncements:

The increasing ambit of the Doctrine of alter ego with regards to arbitration is a direct result of the
Higher Courts of the country setting new precedents. Prima facie, some of the verdicts passed may
seem incoherent and contradictory to the others painting a picture of a doctrine riddled with lacunae
though the corporate veil is lifted only in some cases and the results may differ based on the facts and
circumstances of the case due to which the judgements passed in one case may not be binding on a
similar yet factually different case (similar circumstances but slightly different core facts). The
following cases have played an instrumental role in the development of the doctrine in terms of its
application to the field of arbitration:

1. Chloro Controls India Private Limited v. Severen Trent Water Purifications Inc. & Ors.2
The Apex Court in this case opined that the 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.

1Solomon v. Solomon & Co., [1897] A.C. 22, HL.

2Chloro Controls India Private Limited v. Severen Trent Water Purifications Inc. & Ors., 2013 (1) SCC 641.
 2. IVRCL Ltd. v. Gujarat State Petroleum3
The Gujarat High Court held that on the grounds of piercing corporate veil where one entity is
found to be the alter ego of another, even a non-signatory entity to an arbitration agreement can
be joined in the arbitration proceedings.

3. Integrated Sales Services v. Arun Dev4

Applying the doctrine of alter ego, the Bombay High Court upheld an award in foreign
arbitration proceedings where the parties were joined to the proceedings after piercing the
corporate veil. The same was considered by the arbitral tribunal and reaffirmed by the Bombay
High Court.

4. Sudhir Gopi v. Indira Gandhi National Open University & Ors.5

The Delhi High Court held the following:
i) Mere failure of a corporate entity to meet its contractual obligations is no ground for piercing
the corporate veil.
ii) An arbitral tribunal being the creation of a contract does not hold the power to lift the
corporate veil as it may lead to abuse in the form that every party would pray for the lifting of
the corporate veil and only the Courts have the power to pierce the corporate veil.

Delhi High Court: GMR Energy Limited v. Doosan Power Systems India6
It was a matter regarding the ongoing arbitration between GMR Chhattisgarh Energy Limited
(“GCEL”), GMR Infrastructure Limited (“GIL”), GMR Energy and Doosan India. The matter
surrounded the arbitration arising out of the development of a 1350 MW Coal Fired Thermal Power
Plant at Raikheda in Chhattisgarh.
Justice Mukta Gupta of Delhi High Court initially granted an ex-parte injunction in favour of GMR
Energy. GMR Energy then brought a suit and sought a decree of permanent injunction against Doosan
India in a bid to restrain it from resorting to arbitration proceedings against GMR Energy in Singapore.
Singapore was agreed upon as the seat for the arbitration proceedings between Doosan India and
GCEL. It was then submitted by GMR Energy that it was not a signatory to the arbitration agreement
entered into by GCEL and GIL with Doosan. Although the agreements were signed between GCEL,
GIL and Doosan, GMR Energy had signed MoU’s with Doosan bearing the responsibility of paying
money liable to Doosan effectively being the guarantor for GCEL.
The court had 3 core issues in this case to deliberate upon pertaining to lifting of the corporate
veil:
1) Whether based on the pleas in the notice of arbitration issued by Doosan India a case is made out
by Doosan India to subject GMR Energy to arbitration with GCEL and GIL.
The Court answered the question in affirmative based on the following:

3IVRCL Limited v. Gujarat State Petroleum Corporation Limited, Letters Patent Appe/ 462 of 2017 Judgement dated 18 th
August 2017 (Gujarat High Court)

4Integrated Sales Services v. Shri. Arun Dev S/O. Govindvishnu, 2016 SCC OnLine Bom 8828.
5Sudhir Gopi v. Indira Gandhi National Open University & Ors., O.M.P. (Comm) 22/2016, Judgement dated 16th May 2017
(Delhi High Court)

6GMR Energy Limited v. Doosan Power Systems India, 2017 SCC OnLine Del 11625.
 1. GCEL was a joint venture of the GMR group.
2. By the 2 MoU’s entered into by Doosan with GMR energy where it took up the role of a
guarantor on behalf of GCEL.
3. When the 2 MoU’s were entered into GMR Energy had acquired GCEL.
4. The group of companies did not observe separate corporate formalities and commingled
corporate funds.

2) Whether the Arbitral Tribunal has jurisdiction to pierce the corporate veil.

With regards to this, the court held that since a) The arbitration efforts were initiated without any
role of the court b) The issue of alter ego does not fall within the category of non-arbitrable
disputes as provided in A. Ayyasamy v. A Paramasivam7, the issue of alter ego can be decided by
arbitral tribunals.
3) Whether the court would form a prima facie opinion on the issue of alter ego or provide a finding?

The court states that owing to the fact that the arbitration was not one referred to by the court and
also considering the fact that the court had passed an interim injunction they deem it sufficient to
return findings based on the pleadings supported by affidavits rather than a trial.

Important Observations:
1) Non signatories to an arbitration agreement may through implied consent be roped in to submit to
arbitration proceedings.
In this particular case even though GMR Energy was not a signatory to the arbitration agreement
entered by GCEL and GIL with Doosan, it had several MoU’s with Doosan wherein GMR took up
the role of a guarantor for GCEL vouching for its liability to pay. It is also pertinent to note that at
the time of the dealings between the parties GMR held a 100% stake in GCEL.

2) Arbitral tribunals do indeed possess the power to pierce the corporate veil
The Court noted that the issue of ‘alter-ego’ does not fall within the categories of non-arbitrable
disputes as was specified in A. Ayyasamy v. A Paramasivam8 and thus even a foreign seated
arbitration tribunal can delve into this issue.

3) Upheld the freedom of two Indian domiciled parties to choose a foreign seat of arbitration
The Court made this decision by placing reliance on cases previously decided by the Supreme
Court and the High Court of Madhya Pradesh 9 which is paramount due to the differences in the
facts of these cases.

During the High Court’s effort to elucidate the laws surrounding the doctrine that eventually culminated
in the aforementioned judgment it laid emphasis and drew inspiration from statements and observations
made by the courts in the past, which are worth mentioning as it gives us insight into the base created by
previous judges upon which this judgment has been built.

7A. Ayyasamy v. A Paramasivam, 2016 (10) SCC 386.

8A. Ayyasamy v. A Paramasivam, 2016 (10) SCC 386.
9Sasan Power Limited v. North American Coal Corporation, 2016 SCC Online SC 855.
The Delhi High Court laid great emphasis on the findings of the Supreme Court in Renusagar Power
Co.10 noting that the concept of lifting the corporate veil is a changing concept and is of expanding
horizons while saying “It is high time to reiterate that in the expanding horizon of modern
jurisprudence, lifting of corporate veil is permissible. Its frontiers are unlimited.”

The Court also takes note of the observations of the Court of appeal in DHN Food Distributors Ltd. v.
London Borough of Tower Hamlets11 wherein Lord Denning at p. 467 of the report has made certain
interesting observations which are worth repeating in the context of the instant case. “Third, lifting the
corporate veil. A further very interesting point was raised by counsel for the claimants on company law.
We all know that in many respects a group of companies are treated together for the purpose of general
accounts, balance sheet and profit and loss account. They are treated as one concern. Professor Gower
in his book on company law [ Principles of Modern Company Law, 3rd Edn., p. 216 (1969)] says: 'there
is evidence of a general tendency to ignore the separate legal entities of various companies within a
group, and to look instead at the economic entity of the whole group'. This is especially the case when a
parent company owns all the shares of the subsidiaries, so much so that it can control every movement
of the subsidiaries. These subsidiaries are bound hand and foot to the parent company and must do just
what the parent company says. A striking instance is the decision of the House of Lords in Harold
Holdsworth & Co. (Wakefield) Ltd. v. Caddies [(1955) 1 All ER 725]. So here. This group is virtually
the same as a partnership in which all the three companies are partners. They should not be treated
separately so as to be defeated on a technical point. They should not be deprived of the compensation
which should justly be payable for disturbance. The three companies should, for present purposes, be
treated as one, and the parent company, DHN, should be treated as that one. So that DHN are entitled
to claim compensation accordingly. It was not necessary for them to go through a conveyancing device
to get it.”
The inclusion of this in the Delhi High Court judgment has profound impact when it comes to the issue
of effects of magnifying the scope of the doctrine of alter ego as it provides a clear and reasonable
situational explanation on how some group of entities may and must be treated as one entity and may be
subjected to or must submit to arbitration proceedings after the piercing of the corporate veil while also
indirectly strengthening India’s commitment towards cultivating a pro arbitration culture.

Conclusion:
Although there has been great doubt in the working and understanding of the Indian judiciary pertaining
to piercing of the corporate veil, it is well understood that the courts have taken a liberal approach
towards it. We can see that the seemingly contradictory judgments delivered by different courts in
various cases regarding lifting of corporate veil in arbitration proceedings are dealt with on a case to
case basis in a manner so meticulous so as to be able to strike a balance between protecting the rights of
a corporate legal entity, its owners, company law itself and the administration of justice along with
creating safeguards to discourage and prevent unfair use of the concept of a separate legal entity.

10State of U.P. & Ors v. Renusagar Power Co. & Ors., 1988 AIR 1737
11DHN Food Distributors Ltd. v. London Borough of Tower Hamlets, (1976) 3 All ER 462.
REFERENCES:
1. Monu, Doctrine of Alter Ego and Attribution, available at: https://goo.gl/CM8Jky
2. Apoorva Mandhani, Delhi HC permits Arbitral Tribunal to decide on issue of Alter Ego,
available at: https://goo.gl/ekUunQ
3. GMR v. Doosan case: DHC passes comprehensive judgment, available at:
https://goo.gl/BSyRRA
4. Mohammad Kamran, Alipak Banerjee & Vyapak Desai, Delhi High Court: Failure to meet the
contractual obligations is no ground for lifting the Corporate Veil, available at:
https://goo.gl/n2jb9j