Liability of a Parent Company

Introduction:

A company in law is a separate legal entity. Independent corporate existence is a company’s most prominent feature. As soon as a company is incorporated it becomes a separate legal personality which means it is independent from its members which was determined in the case of Salomon vs. Salomon & Co. Ltd.[1] Principle of distinct personality allows the company to exercise all its function as an individual by law even if bulk of its capital is issued by one-person. A Company as an individual gains right to transfer of property, hold and dispose property, right to sue or to be sued and right to contract in its own name. Furthermore, In Salomon vs Salomon & Co. Ltd,[2] it was clearly established that a parent company and a subsidiary company are distinct legal entities including a 100 percent subsidiary or Wholly Owned Subsidiary (WOS). Position of WOS as separate legal entity was made clear by the decision of Supreme Court in Vodafone International Holdings BV v. Union of India.[3]

Need for piercing the veil for parent company:

In case of Subsidiary and holding company, it can be observed that big holding companies use the principle of separate legal entity as a shield to get away with their liabilities. This principle in many instances provide members of the company with an opportunity to indulge in illegal and fraudulent activities in the name of company to escape their liabilities. As it was observed in Gallagher vs. Germania Brewing co[4]“For a while, by fiction of law, a corporation is indeed a distinct personality however in reality, it is an association of members who are eventually the beneficiaries of all the corporate property and decisions.”[5] Thus, in order to protect the company from fraudulent acts of its beneficiaries, the doctrine of piercing the veil was established. Piercing of the veil restricts members of the company to take shelter under the principle of separate legal entity for their fraudulent acts and allows the court to take a peek at the activities carried out behind the metaphorical curtain which separates its members from the corporate personality. Piercing of veil is seen as an exception to the principle of separate legal entity. In Cotton Corporation of India Ltd. v. G.C. Odusumathd[6]court held that “Lifting of veil is unacceptable unless it is expressly provided by the statute or when it satisfies the court that lifting of corporate veil is important in order to prevent fraudulent acts or improper conduct.”[7]

Statutory provision:

Taking into account the above-mentioned discussion, statutory provision is one of the way to determine whether the court can pierce the veil. In India, According to Section 129 (3) of The Companies Act[8], Court can view parent company and its subsidiary as one entity to understand the financial position of the group as well as get better information about the accounts of the group. This provision does not primarily talks about ‘piercing the veil’ doctrine, however at a broader note the provision does view both the companies as one single entity instead of two distinct entities. 

Judiciary interpretations:

Another way to determine whether or not to apply ‘pierce the veil’ doctrine is through judicial interpretations. Statutory provisions at times fail to take into account all the circumstances that can affect the interest of public at large, thus to protect the interest of public and to reach an unjust decision, courts examine facts of the individual circumstances.

At numerous occasions courts have held the principles of justice and lifted the corporate veil to look behind the curtain for the purpose of punishing the wrongdoer. In case of parent company and subsidiary relations courts have determined instances to lift the veil and held principle company liable for the activities of its subsidiary. 

Supreme Court in LIC vs Escorts Ltd[9] stated that “a veil can be pierced if it is seen that associated companies are inextricably connected as to be in reality, part of one concern.”[10] Similarly in Wallersteiner vs. Moir[11], Lord Dennings, MR portrays that where a parent company controls every action of the companies under it and acts as one-man company, under such situations, the veil should be pierced and the one in control must be held liable for the inappropriate activity. 

Furthermore, in Smith, Stone and Knight v Birmingham Corporation[12]corporate veil was allowed to be lifted. Herein, the court held that for the parent company to receive compensation it is necessary to prove that subsidiary company was an agent of the parent company. 

Another well-recognized illustration is DHN food distributors’ Ltd v Tower Hamlets LBC[13], wherein, courts held that “veil could be pierced, keeping in mind the degree of control held by parent company over its subsidiary which denies the owner to enjoy its possession and rights.” Similarly, in State of U.P vs Renusagar Power Co.[14]courts held that profits of the subsidiary Renusagar were being treated as profits of parent company Hindalco, as if they were one entity, thus it is justified to lift the veil in order to examine the situation and hold the wrongdoer liable for its acts. 

Conclusion:

From the above analysis of the case laws, it is observed that whether or not to lift the corporate veil lies in the discretion of the court. Major instances where a court lifts the veil of a parent company are

  • When it is established by the legislature
  • When the profits of the subsidiary company are being treated as the profits of parent company.[15]
  • When control and conduct of the subsidiary is in hands of its parent company.[16]
  • When situation indicates that subsidiary is a mere alter ego of parent company.[17]

In MC Mehta vs Union of India[18]courts have prioritised principle of justice and equity over the principles of separate legal entity by holding parent company liable to pay compensation for the damage to the victims.


[1] Salomon vs. Salomon & Co. Ltd, , AC 22 (1897).

[2] Id.

[3] Vodafone International Holdings BV v. Union of India., , MANU 0051 (2012).

[4] Gallagher vs. Germania Brewing co, , 54 NW 1115 (1893).

[5] Id.

[6] Cotton Corporation of India Ltd. v. G.C. Odusumathd, , 76 Comp Cas 637 (1993).

[7] Id.

[8] The Companies Act, (2013).

[9] LIC vs Escorts Ltd, , 1 SCC 264 (1986).

[10] Id.

[11] Wallersteiner vs. Moir, , 1 WLR 991 (1974).

[12] Smith, Stone and Knight v Birmingham Corporation, , 4 ALL ER 116 (1939).

[13] DHN food distributors’ Ltd v Tower Hamlets LBC, , 1 WLR 852 (1976).

[14] State of U.P vs Renusagar Power Co, , 4 SCC 59 (1988).

[15] Id.

[16] Wallersteiner vs. Moir, supra note 11.

[17] Shree Pacetronix Ltd. v. State of Assam[, , SCC OnLineGau 1004 (2008).

[18] M.C. Mehta v. Union of India (UOI) and Ors., , 1 SCR 819 (1987).

Aishwarya Says:

I have always been against Glorifying Over Work and therefore, in the year 2021, I have decided to launch this campaign “Balancing Life”and talk about this wrong practice, that we have been following since last few years. I will be talking to and interviewing around 1 lakh people in the coming 2021 and publish their interview regarding their opinion on glamourising Over Work.

If you are interested in participating in the same, do let me know.

Do follow me on FacebookTwitter  Youtube and Instagram.

The copyright of this Article belongs exclusively to Ms. Aishwarya Sandeep. Reproduction of the same, without permission will amount to Copyright Infringement. Appropriate Legal Action under the Indian Laws will be taken.

If you would also like to contribute to my website, then do share your articles or poems at secondinnings.hr@gmail.com

In the year 2021, we wrote about 1000 Inspirational Women In India, in the year 2022, we would be featuring 5000 Start Up Stories.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.