An Analysis On Recent Developments Of Piercing Of Corporate Veil Vis-a-Vis Digital Radio (Mumbai) Broadcasting Ltd V Union Of India.

Introduction

The present case stems from two similar writ petitions filed by Digital Radio (Mumbai) Company and Digital radio (Delhi) Company (hereinafter, “Mumbai and Delhi company”), both in the business of running entertainment channel cum broadcasting songs. Both the companies are running Red FM 93.5 channels for Mumbai and Delhi, respectively, under the Phase-II licensing granted by the Ministry of Information & Broadcasting (hereinafter, “Respondents”).

Digital Radio

[Image Sources : Shutterstock]

In July 2015, both the petitioners applied for security clearance and application for pre-qualification for participating in e-auction of private channels (airwaves). The details about eligibility criteria for the E-auction were provided vide a set of clauses under the “Notice Inviting Applications” (hereinafter, N.I.A.), which clearly sets out that if any person who is in control of any company is involved in money laundering or moral turpitude, then the company shall not be eligible for the clearance [clause 2.2(b)]

The clearance was denied by the Respondents on the ground that Mumbai company is a part of the “Sun group” owned and managed by the “Maran family” and that CBI has leveled charges against Shri D. Maran and Shri K. Maran in the Aircel-Marxis case and investigating against them for the alleged setting up of telephone lines, while ED had brought a case against them under the PMLA.[i]

Background To The Case

The respondents have previously called for the bids in the year 2000 for the FM channel. Both the petitioner companies had submitted the bids and were subsequently granted an initial license for Phase-I.  Further, in 2005, both the companies migrated to Phase-II as per the policy notified by the Respondents for the existing broadcasters. In 2015, the companies were granted six months to continue under the Phase-II license or until Phase-III licenses were granted. It is pertinent to note that before this extension was granted, the charges had already been levelled by the CBI against Shri D. Maran and K. Maran; still, the Respondents raised no security concerns.

Issues framed

  1. Whether clause 3.8 of the N.I.A. implicitly include shareholders along with “Company and board of directors” to be security cleared?
  2. Could a Corporate veil be pierced to show an indirect interest of the shareholders in the company to deny clearance effectively?

Arguments Presented by the Petitioners

The learned counsel submitted on behalf of the petitioners that:

The respondents denied the clearance unjustly and arbitrarily as clause 3.8 only speaks of “company and board of directors” and not “person in control of the company.” Thus, Marans, who were not on the board of the company, could in no manner be brought into examination for security clearance purposes. In arguendo, it was also submitted that clause 3.8 must be read along with clause 3.2.1(b), which only places the bar when the conviction is affirmed and in the present case out of the three cases, only in the Aircel-marxis case the CBI has submitted charge-sheet and rest two are in investigation stage only. Thus in none of the impugned cases anyone has been convicted.

There is no allegation against the Mumbai company that it has indulged in any activities that would raise security concerns or threats to the economic integrity of the country. Neither the Marans, as mentioned above, is on the board of the Mumbai company or are its shareholders. The denial of clearance is a violation of Article 19(1)(a) and for the state (Respondents here) to be able to restrict this right has to abide by the “test of reasonability,” and the denial of clearance does not pass the test and thus is unjust and arbitrary.

Clause 3.8 cannot be said to include shareholders implicitly as several other clauses like clause 3.9 of the policy guidelines specifically mention the word “shareholders.” Thus, where it is absent, it would be construed to have been omitted on purpose, and the court cannot read any word/phrase into the provisions.

A company is a separate legal entity and which is distinct from its shareholders. The counsels have cited several landmark judgments of this court and the apex court to emphasize that piercing the corporate veil should be restricted to remedy the wrongs done by those controlling the company. Here, no one has been wrong by any shareholder or person interested in the company; thus, no question of piercing the veil should come into being.

Arguments presented by the Respondents

The Additional Solicitor General of India submitted on behalf of the respondents that:

Clause 3.8 provides for the “term and condition” of the auction and is not a statutory provision; thus, the respondents are well within their power to prescribe any condition and deal with the bidders. The court should not exercise its judicial review in cases where Agencies of the Government having expertise and vested with the powers to take a decision have concluded. The said conclusion is found to have been reached based on material available on record.

 The petitioners took part in the auction being well informed about the documents and the procedure and willingly accepted the terms of the N.I.A.; resultantly, clause 3.8 of the N.I.A. cannot be contested.

Under clause 3.8, the term “company and its directors” is used to refer to “the ultimate ownership, control, and management of the company,” including the identities of shareholders, promoters, and subsidiaries.

Analysis

The court refused to analyse the validity of clause 3.8 because the petitioners have already participated in the e-auction with complete knowledge about the clause; thus, it cannot be challenged subsequently.

The court kept the judicial review limited to the question of whether clause 3.8 is germane to the security assessment of Shri D. Maran and Shri K. Maran.

The court refuted the submission of respondents on the point that clause 3.8 also implicitly includes shareholders, and not roping them in would defeat the foundational purpose of having the requirement of clearance. The court held that since there is no explicit mention of shareholders, unlike other clauses, they cannot be roped in and noted that arbitrarily denying the clearance would entail severe consequences for the petitioners.

The court, agreeing with the petitioners, held that piercing of corporate veil must be limited to the cases where the company is sham or a mere camouflage for people having the control to avoid legal liabilities or facilitating fraud. Since no such allegation has been levelled against Shri D. Maran or K. Maran, or the company is a vehicle for fraud; thus no question of piercing the veil comes into the picture.

Commentary on the Case

The Bombay High Court took a very intricate and nuanced stance while explicitly endorsing the safeguards for the company form of business which, in my opinion, forms the core of the judgment. The court had rightly pointed out that the corporate veil cannot be pierced arbitrarily without any explicit mention or presence of foul play. This judgment reiterates and upholds the foundational tenets of company law by endorsing the company as a separate legal personality different from its directors and shareholders. The mention of the word “company” could not reflect “shareholders” merely because they have an interest in the company or are its members. The company, a corporate personality bearing its own name, owns its assets and acts under its own name, does not hinge on the people who constitute it.

From the respondent’s perspective, the intent behind the broader interpretation of the clause was to include ultimate ownership, promoters and shareholders’ identities, associate and inter-connected companies to avoid what has been said to be a threat to the economic integrity of the country as the charges levelled against the said persons are profound, including money laundering. However, with no stretch of the imagination could a company unjustly denied security clearance impinging on the members even before conviction, which are not even on the board of the company. Economic integrity is an undeniable security concern under Article 19(2),

 however, any restriction on the fundamental right [Article 19(1)(a) here] has to have a nexus with the restriction imposed, and the objective sought to be achieved.  In the present case, denying security clearance to the company with a separate identity would serve no actual purpose in furtherance the nation’s economic integrity.

However, one issue which I thought was appropriately raised but was not dealt with properly in the case was that of “reading words into the provision.” Although the court correctly refused to read into clause 3.8 to rope in the shareholders, however, a discussion was lacking on this issue. To make the issue amply clear, it was held in the London Graving Dock case, [ii]The court cannot add or substitute any word of the statute if there is no ambiguity regarding the provision.

Author: Shivansh Singh, a 3rd year Law student perusing B.A. LL.B. Hons. from KIIIT School Of Law, in case of any queries please contact/write back to us via email to chhavi@khuranaandkhurana.com or at Khurana & Khurana, Advocates and IP Attorney.

REFRENCES

https://articles.manupatra.com/article-details/Pardey-ke-Peechey-kya-hai-A-Comprehensive-Analysis-of-the-Evolution-of-the-Corporate-Veil-Doctrine-in-India

§166(3) of the Companies Act, 2013: Filling the Gaps of an Incomplete Provision

[i]  Prevention of Money Laundering Act, 2002

[ii]  London Graving Dock Co. Ltd. v. Horton 1951 AC 737 P. 761.

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