[Rikhil and Tanya are students at Jindal Global Law School.]
The doctrine of separate legal entity (SLE) is one that is crucial to the existence of companies and is enshrined both in statute and pronouncements by courts. By virtue of this doctrine, a company gains the status of a separate legal entity on its incorporation. On attaining this independent corporate personality, a corporate veil is established between the company and its shareholders. Thus, the actions of the shareholders cannot be attributed to the company and vice versa. The apex court, on many instances has held that the veil can only be lifted under grave circumstances such as claims of tax evasion, fraud and in public interest. However, this veil was recently lifted in Kirloskar Industries v. Kirloskar Brothers to hold that internal and informal family disputes were undoubtedly effecting the working and management of the Company leading to oppression and mismanagement of its shareholders.
The National Company Law Tribunal (NCLT) judgment highlights an expanded understanding of the corporate veil, especially the instances in which it can be lifted. However, on a perusal of jurisprudence, it is seen that Indian courts and tribunals have undertaken differing approaches to lifting this veil in the context of family disputes. Thus, this article seeks to critically analyze prevailing jurisprudence and explore the necessity of raising the corporate veil when family disputes lead to oppression and mismanagement in family-run companies.
Private or Professional? The Blurred Distinction in Family-Run Companies
In Needle Industries v. Needle Industries, the Supreme Court of India recognized that Family-run Companies have different business realities and characteristics than what is deemed in statute. Ownership and governance of such companies is often dictated by pre-existing family arrangements or settlements, reflecting the founder’s wishes and vision. Predominantly, shareholding can only be acquired either by inheritance or through gratuitous transfers. In such closed setups, corporate governance norms, decision-making processes, and ownership/ management are triumphed by familial influences. Thus, any disparities or disagreements within the private familial realm inevitably influence and color the other otherwise “separate personality” of the companies. Some scholars are of the opinion that, disagreements or disputes in the family directly affect the stability and working of such companies. This blurs the distinction between private and professional spheres, leading to a two-fold effect: (1) it aggravates existing family disputes by involving the company, and (2) severely impacts the legitimate expectations and rights of minority shareholders. When private disputes are deeply connected to professional management, mismanagement and prejudicial treatment of other shareholders often result.
The statutory recourse for such issues is found in Sections 241 and 242 of the Companies Act 2013 (Act), which address oppression and mismanagement. A plain reading of the Act shows that familial disputes indirectly affecting professional behavior do not constitute oppression or mismanagement. Tribunals like the NCLT reiterate this view and refrain from adjudicating familial matters. However, given the prevalence of concentrated family ownership in India, there is potential for family members managing companies to hide behind the corporate veil. Such disputes are not uncommon in India.
Oppression and Mismanagement: A Series of Contradictory Judgements
The difference between a formal and informal dispute is elucidated in Aruna Oswal v. Pankaj Oswal. The case is related to a family dispute regarding entitlement of shares, during an ongoing partition suit. In adjudication of the same, the apex court barred the NCLT from entertaining any claims of oppression and mismanagement, in the existence of a pending civil dispute. They deemed this to be an abuse of the process of law and stated that there existed no locus standi to file such a claim in NCLT unless the civil suit is resolved. This indicates that when familial disputes become formalized in law, the NCLT does not have the required jurisdiction and is barred from lifting the corporate veil. However, the maintainability of oppression and mismanagement petitions vis-à-vis informal family disputes remains a grey area.
In Shankaram Sundaram v. Amalgamations Limited, the National Company Law Appellate Tribunal (NCLAT) dismissed the claim of oppression and mismanagement, deeming the issue to be a family dispute, rather than an act of oppression. Shankaram argued that the majority shareholders of Amalgamations, appointed themselves as directors and received significant remuneration, leading to his oppression as a minority shareholder. He also alleged serious misappropriations, such as funding the education and expenses of the director’s children, undervaluation of transferred properties and misuse of company funds for personal events. However, NCLAT noted that these discrepancies and claims of oppression arose from family disputes, for which NCLAT would not be the appropriate forum. The court maintained a very clear distinction between the family and the company in this case and refused to lift the veil.
On the other hand, the recent order of Kirloskar Industries v. Kirloskar Brothers depicts a shift in NCLT’s stance. The case probed on whether family agreements, specifically a deed of family settlement (DFS), established control of a family over the affairs of the company, with significant implications for the distinct legal personality of Kirloskar Brothers Limited. The shareholders of the company argued that the DFS does not support exclusive control of the family as had been alleged by the Kirloskar family. They also highlighted that the same led misuse of company resources and oppressive actions against minority shareholders. The court along the same lines held that the scheme of arrangements, specifically the DFS, did not make the issue one of familial concerns as had been alleged by the family in question. Moreover, the court explicitly acknowledged that companies can “definitely be influenced and coloured by the aspirations of family members in their running.” In this case, the court lifted the veil and acknowledged the influence of the family dispute which created an impasse in the company leading to oppression of its shareholders.
To Lift or to Not? Assessing the Necessity of Lifting the Veil
While the general approach taken by adjudicating authorities entails limiting their jurisdiction in familial disputes, it fails to account for the complex nature of Family-run Companies. Therefore, it would be a relevant consideration, for both courts and tribunals to expand the scope of lifting the corporate veil. This would prove to be especially effective in cases pertaining to family-run companies, as it would allow for a holistic understanding of the overall scheme of the dispute. The same has also been acknowledged by the Supreme Court in State of UP and Others v. Renusagar Power Company, wherein the scope of lifting the veil was deemed to be unlimited. Cases like Kirloskar, demonstrate a judicial recognition of the interconnectedness between family dynamics and corporate governance, and represent a shift in the stance taken towards the lifting of the veil.
The role of the NCLT, as a specialized tribunal, should be to strike a balance between respecting the doctrine of SLE and addressing the realities of family-owned businesses. The existing cautious approach in extending its jurisdiction must evolve, to consider the broader implications of family disputes on corporate governance. This evolution is crucial to prevent the misuse of the corporate structure and to protect the legitimate expectations and rights of minority shareholders. Moreover, accounting for such familial factors, is not a novel concept for Indian courts. For instance, the case of Bajranj Prasad Jalan v. Mahabir Prasad Jalan, explicitly noted that if it is evident, that individuals behind companies were allegedly manipulating the company's affairs to exclude others, the rights, expectations, and obligations of family members, their nominees, and relations must be considered in light of these events. It cannot be asserted that, despite these facts, the corporate veil cannot be lifted. The authors believe that courts and tribunals must favor a liberal application of lifting.
While mechanisms for greater transparency and accountability in family-owned companies deserve more consideration in policy debates, they also raise concerns of increased compliance burden. An example would be the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations 2015, which calls for family-related disclosures. As these are only imposed on public listed companies, a case can be made for similar disclosures in related party transactions. However, the authors believe that this will only lead to increased compliances and not effectively address the primary issue. Therefore, instead of additional disclosure mechanisms, less hostile, time consuming and more efficient dispute resolution processes must be adopted. The authors suggest corporate mediation as a solution for family business disputes, as it accommodates family complexities, provides a forum for amicable resolution, and eases court burdens. In light of the Mediation Act 2023, this also becomes a more favourable and approachable solution.
Conclusion
The NCLT must evolve to address the complexities of family-owned businesses, recognizing the impact of family dynamics on corporate governance. Balancing the doctrine of SLE with the realities of familial influence will better protect minority shareholders' rights. Alternative dispute resolution practices must also be considered while dealing with the same. Ultimately, lifting the corporate veil in appropriate cases is crucial for ensuring fair and just corporate practices in India’s unique business landscape.
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