[Shikhar is a graduate from National Law University Delhi.]
Upon incorporation, a company becomes a separate legal entity. At times, its promoters may misuse this feature to evade personal accountability and statutory liability. In such a scenario, courts may ignore a company’s separate legal status and hold the promoters liable for activities conducted under the ‘veil’ of artificial personality. The doctrine promotes better corporate governance and also establishes the boundaries of external control to which a company may be subject.
In recent years, the Supreme Court (SC) has upheld the relevance of corporate law doctrines in labour jurisprudence. In this context, 'piercing the veil' has permitted a holistic determination of the existence of an industrial dispute: the court has invoked the contours of control as understood by this doctrine while interpreting the definition of ‘workman’ under the Industrial Disputes Act 1947. This has also become relevant in the context of contract labour agreements declared to be ‘camouflage’, intending to conceal the true nature of personnel engagement. This article explores the contours of the doctrine of ‘piercing the corporate veil’ and assesses its significance in various employment contexts, arguing that the courts have been worker-centric in their approach in its application.
Why Separate Legal Personality Matters: The Why/How of Piercing the Veil
Section 9 of the Companies Act 2013 enshrines the concept of a company being a ‘separate legal entity’, the genesis of which can be traced to the 1897 House of Lords’ judgment in Salomon v. A Salomon & Company (Salomon). The SC has upheld this principle in numerous situations involving claims against a company for its members’ acts.[1] However, when (mis)utilised to swindle lenders or to avoid subsisting legal duties and compliances, courts may “draw aside the web of entity”.
The doctrine holds relevance in the context of parent-subsidiary relations too. In LIC v. Escorts Limited, the SC ruled that the corporate veil should be pierced where associated companies are “inextricably connected as to be, in reality, part of one concern”. This question, in turn, depends on factors such as the texts of relevant provisions, purposes to be achieved, the conduct complained of, implication of the ‘public interest’ element, and the impact on affected parties.
Similarly, in US v. Bestfoods, the US Supreme Court held that a parent company can be held liable for its subsidiary’s acts only when it is shown that the business structure was misused for accomplishing wrongful purposes, and that the holding company directly participated in these wrongs. Further, courts in India have pierced the veil for tackling issues arising out of a company’s distinct legal responsibility with respect to avoidance/evasion of regulatory and legal compliances.
For example, in Workmen v. Associated Rubber Industry (Associated Rubber), the apex court held, on facts, that the parent company had formed a subsidiary only in order to reduce its own gross profits; the latter had no business of its own, except for receiving dividends from shares transferred by the former. Accordingly, it pierced the veil and held that this arrangement was a device only to reduce the bonus payable to workers under the Payment of Bonus Act 1965. Thus, in State of UP v. Renusagar Power, the SC iterated that in modern corporate jurisprudence, the veil may be lifted in order to do justice to all parties.
Pierced Veils and the Curious Case of Contract Labour
Contract labour emerged as a cost-effective method of employing workers, whereby an entity engages workers’ services under a third-party contractor. These contractual workers are covered by the inclusive definition of ‘workman’, thereby being entitled to benefits available under protective labour legislation such as the Contract Labour (Regulation and Abolition) Act 1970 (CLRA Act), which makes contractors and principal employers responsible for statutory compliances in workers’ interest.
That said, certain situations may necessitate an examination of the relationship between the principal employer and contract workers. In SAIL v. National Union Waterfront Workers, the SC looked at the effects of a ‘sham contract’, ruling that an adjudicator shall decide whether a contractor has been engaged for supplying contract workers under a genuine contract, or as a ruse for dodging legal compliances.
Notably, in Hussainbhai v. Alath Factory Thezhilali Union (Hussainbhai), the SC lifted this veil of a sham contract and ruled that an employer generally exercises economic control over the workers’ skill/livelihood. The existence of a contractor would be immaterial when the court discerns that the employer is the principal employer, taking an overview of all factors governing the workers’ employment.
Proceeding further, in Balwant Rai Saluja v. Air India (Saluja), the SC was concerned with contract workers employed by a unit of Hotel Corporation of India (HCI), which was a wholly-owned subsidiary of Air India (AI). The workmen, staffed in a canteen, argued that AI had contracted with HCI to deny them their legitimate rights by circumventing the CLRA Act and paying them lesser wages. The industrial dispute concerned whether these workmen employed to provide services in the canteen could be treated as AI’s employees (as the principal employer).
A division bench of the SC delivered separate opinions in 2013. Justice Prasad categorically reiterated the Hussainbhai dicta, stating that HCI’s identity shall not be merged with AI, even if it was involved in managing its business/finances and issuing directions under its memorandum/articles. On the other hand, Justice Gowda relied on Hussainbhai and discussed the Salomon test; he noted how applying any other test for determining the legal status of HCI as an independent contractor/separate legal entity would be irrelevant.
Hence, while both judges approved the applicable legal framework, they differed in their final adjudication. While Justice Prasad concluded that HCI was a separate legal entity, Justice Gowda just steps short of piercing the veil to hold that HCI was not a separate entity, ruling in favour of the workmen for different reasons. Upon reference, the three-judge bench of the SC ruled in AI’s favour, stating that the facts of this case were not fit to pierce the corporate veil. It was ruled that to lift the veil, the workmen had to prove that AI’s control and impropriety deprived them of their legal rights.
Labour-Centrism at the Forefront: Analyzing Implications of the Court’s Approach in Saluja
Amongst the most significant takeaways from the final judgment is that the issue of whether a person is an employee under an employer can arise in several contexts, such as the determination of vicarious liability under tort, taxation, and labour laws. Proceeding further, the apex court noted how the law on piercing the corporate veil was crystallized in the six requirements laid by Justice Munby in Ben Hashem v. Ali Shayif; significantly, it was ruled that the corporate veil may be lifted only upon some impropriety linked to the use of the company’s structure to escape liability. A court would pierce the corporate veil only to the extent necessary for remedying the particular wrong committed by entities/persons in actual control over a company. Alluding to the standards laid down by the United Kingdom Supreme Court in Prest v. Petrodel Resources, Justice Dattu opined that this test should be applied only where it is evident that:
“…the company was a mere camouflage or sham deliberately created by the persons exercising control over the said company for the purpose of avoiding liability.”
It is argued that the ultimate adjudication was made on the case’s peculiar facts, which inter alia was influenced by how HCI’s board of directors was responsible for managing its business. HCI’s primary objects did not have any direct relation with AI, since only one of its ancillary objectives referred to assisting AI. To that end, it is contended that the ruling in Saluja should not be viewed with skepticism only because it was not decided in the workers’ favour. The court has laid down fairly comprehensive tests, whose principles apply not just to industrial disputes, but also to corporate law cases involving ‘camouflage’ companies.
In fact, the judgment furthers the worker-centric approach that the SC has undertaken in such matters. While the court (and some High Courts) emphasised on the need for ‘functional integrality’ to establish unity of identity between two industrial units, it has also expressed its inability to evolve an absolute and ‘rational, consistent and inflexible principle’ to determine whether the veil should be lifted. To that extent, the SC ruled in Associated Rubber that it can “get behind the smoke-screen and discover the true state of affairs” in such cases, concerning itself with the substance of a transaction (beyond its mere form).
In a similar vein, in Gurmail Singh v. State of Punjab, the SC referred to jurisprudence under Section 25FF of the Industrial Disputes Act 1947 for the purposes of compensation for notional retrenchment upon transfer of undertaking. It recognised that a worker is entitled to continuity of service with the transferee, when it is virtually the same as the transferor (i.e., when management remains in the same hands). It specifically precluded firms from frustrating the purpose of the law by drawing a corporate veil in such cases.
Interestingly, the SC has also extended this approach to the public sector. In Indian Oil v Chief Inspector, the Court held that a factory owned by Indian Oil shall be deemed to be “owned or controlled by the Central Government”, applying the test of ‘ultimate control’ under Section 2(n) of the Factories Act. It categorically held that the Government ran its petroleum industry by acting through the Corporation only as a method therefor, with all its activities being “really carried on by the Central Government with a corporate mask”. Further, in Kapila Hingorani v. State of Bihar, the SC lifted the veil and held the state liable for payment of wages’ arrears. Upon the case’s peculiar facts, it rejected the state’s arguments that statutory corporations’ liability could not be passed on to their sole shareholder (i.e. the state itself), whilst invoking Article 21 and the role of a welfare state in upholding Part IV of the Constitution.
The Path Ahead: Ensuring Rights Beyond Equity
Therefore, courts in India have affirmed the need for beneficial legislation to protect workers from exploitation, bearing in mind the disparity in their bargaining powers and of their employers. In GB Pant University v. State of UP, the SC reiterated how corporate jurisprudence was being inculcated in its industrial jurisprudence. The court dismissed the contentions of a statutorily-established University on treating a canteen’s employees as its own, referring to regulations showing the University’s pervasive control in all matters concerning its operations and directing regularization of the workers’ services. In so doing, the court considered how the employees’ livelihood was at stake, and did not let them continue “half-fed and half-clad”, in furtherance of socialism envisaged by the Indian Constitution.
One way of doing so, as this article has demonstrated, is by lifting the corporate veil to establish unity of identity and direct relationships between principal employers and workers, in areas such as payment of wages, bonus, contract labour, and so on. The SC judgment in Saluja strikes an effective balance between workers’ interests and the need to pierce the corporate veil in exceptional circumstances only. As Prof (Dr) BT Kaul has argued, cases of judicial activism and the interplay between corporate and labour laws in India have gone a long way in ensuring that workers’ rights are firmly grounded in normative foundations beyond just equity.
[1] See, Kanpur Suraksha Karamchari Union v Union of India (1988) 4 SCC 478.
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