NATIONAL LAW UNIVERSITY ODISHA CORPORATE LAW I

NATIONAL LAW UNIVERSITY ODISHA

CORPORATE LAW I ( Semester 4)

The Doctrine Of Single Economic Entity And Corporate

Separateness: A Juxtaposition

SUBMITTED TO:

MR. MAYANK TIWARI [ASST. PROFESSOR OF LAW]

KAPIL SHARMA [RESEARCH ASSOCIATE CUM TEACHING ASST.]

SUBMITTED BY:

ABHISHEK SINGH [2018/BALLB/003]

AMIYA KRISHNA UPADHYAY [2018/BALLB/011]
KIRTI TALREJA [2018/BALLB051]
NATIONAL LAW UNIVERSITY ODISHA CORPORATE LAW I

ACKNOWLEDGEMENT

This project is an outcome of the guidance of and support of some people who if we don’t
acknowledge we would be committing a sin. Firstly, we would like to thank the almighty
without whose blessings; this project could not have been completed.

We convey our heartfelt thanks to Assistant Professor of Law, Mr. Mayank Tiwari and Mr.
Kapil Sharma whose constant encouragement and being constantly available to clear any
doubts regarding the subject matter, showed us the right direction to go ahead in.

We would like to thank the librarian and other staff for providing us the required sources and
materials without which this project would have not been possible. We would like to
acknowledge our seniors and friends for their enthusiasm and belief in us which encouraged
us to strive forward.

Lastly, we would like to thank our parents without whose constant support and being by our
side by thick and thin, this project could not have been completed.
NATIONAL LAW UNIVERSITY ODISHA CORPORATE LAW I

TABLE OF CONTENTS

RESEARCH METHODOLOGY……………………………………………………………4

Scope and Objectives ............................................................................................................ 4

Research Questions .............................................................................................................. 4

Hypothesis ............................................................................................................................ 4

Method of Research ............................................................................................................. 5

Sources of data ..................................................................................................................... 5

Mode of citation ................................................................................................................... 5

INTRODUCTION ............................................................................................................... 6

THE DOCTRINE OF CORPORATE SEPARATENESS ENVISAGED UNDER

COMPANY LAW ............................................................................................................... 8

EVOLUTION OF THE DOCTRINE OF SINGLE ECONOMIC ENTITY DOCTRINE

WITH REFERENCE TO US AND EU CASES LAWS IN THE ANTI-TRUST

REGIME ........................................................................................................................... 13

JUDICIAL APPROACH OF THE APPLICABILITY OF THE SEE DOCTRINE IN

INDIAN JURISPRUDENCE ............................................................................................ 16

JUDICIAL APPOROACH TOWARDS SINGLE ECONOMIC ENTITY IN

ANTITRUST ..................................................................................................................... 20

CONCLUSION ................................................................................................................. 23

BIBLIOGRAPHY ............................................................................................................. 24
NATIONAL LAW UNIVERSITY ODISHA CORPORATE LAW I

SCOPE AND OBJECTIVES

The scope of the project is restricted to the doctrine of “separate legal entity” and the
“doctrine of single economic entity” by its application in the antitrust laws.
This main objective of this research project is to discuss the concept of separate entity and to
find out how the SEE Doctrine has evolved all over the world especially by referring to
European cases and the US cases. Further the project will discuss upon how the SEE Doctrine
evolved in India and it will also state as to the present scenario of the applicability of the
Doctrine in various situations. This project aims to provide a brief overview as to the
interplay between the applicability of the SEE Doctrine vis-a-vis the corporate separateness
doctrine (piercing the corporate veil), which has not been discussed by any court in India.

RESEARCH QUESTIONS

1. What are the concepts of corporate doctrine of separate legal entity and lifting of
corporate veil?
2. To what extent has court, in company law, accepted the doctrine of single economic
entity?
3. What is the concept of the doctrine of single economic entity in the EU jurisdiction?
4. What are the judicial trends in the Indian jurisdiction in this regard?
5. What is the Parent- subsidiary relation under single economic entity doctrine?

HYPOTHESIS

Researching on an issue we should be clear about the issues concerning the topic. While
doing so we came across the certain issues that arose while dealing with concept of separate
legal entity of a company in relation to the doctrine of single economic entity. The
relationship of parent subsidiary was also analysed through judicial pronouncements and
decisions.
NATIONAL LAW UNIVERSITY ODISHA CORPORATE LAW I

METHOD OF RESEARCH

The research work will be completed in adherence to the doctrinal method of research and
relies on both primary and secondary sources. It shall be descriptive in nature and follows an
analytical approach, i.e. use the analysis of the facts to reach out the conclusion based on
logical reasoning. This research shall endeavour to review the existing format and establish a
relationship with the subject format. Also, it would be an empirical and qualitative research.

SOURCES OF DATA

Both primary and secondary sources of data have been used for the research. Primary sources
of data include case laws and Secondary sources include online sources like articles, blogs,
books, case laws and other relevant materials.

MODE OF CITATION

Mode of citation is in Oxford Standard for Citation of Legal Authorities (OSCOLA) format.
.
NATIONAL LAW UNIVERSITY ODISHA CORPORATE LAW I

INTRODUCTION

The cornerstone of modern company law is the doctrine of “separate legal personality”. It is
an established principle of law that “an incorporated company is separate entity and is distinct
from its shareholders and directors. However it is not fully free from their existence.

The landmark case of Salomon v. Salomon & Co Ltd.1is recognised universally all around
the world and is an authority for this principle of corporate separateness. This landmark
judgement brought the idea that a company operates behind a “metaphoric veil of
incorporation” that separates the members of the company from the company itself and
allows the latter to be entirely independent, with its duties and the rights separate and distinct
from that which its shareholders, employees and directors possess. A company is therefore
considered as an “artificial legal person” that exists independently. 2

In this case, Lord Macnaghten states that: “The company is at law a different person
altogether from the subscribers.”

Lord Halsbury LC states that: “A company must be treated like any other independent person
with its rights and liabilities [legally] appropriate to itself whatever may have been the ideas
or schemes of those who brought it into existence.”

It is also an established rule of law that “a subsidiary is considered as a separate legal entity
and is different and distinct from its holding/parent company.” But the most celebrated
doctrine of “piercing the corporate veil” is an exception to the rule of the company being a
separate legal entity from that of its shareholders and directors.

In the case of Life Insurance Corporation v. Escorts Ltd. &Ors.3, the Apex Court of India
held that “the corporate veil may be lifted where the statute itself contemplates lifting the veil,
or fraud or improper conduct is intended to be prevented, or a taxing statute or a beneficent
statute is sought to be evaded or where associated companies are inextricably connected as
to be, in reality, part of one concern.”

1
Salomon v Salomon & Co Ltd [1897] AC 22 HL.
2
Dr. G.K.Kapoor, Company Law and Practice, (20th edn. Taxman’s 2019).
3
Life Insurance Corporation v Escorts Ltd & Ors (1986) 1 SCC 264.
NATIONAL LAW UNIVERSITY ODISHA CORPORATE LAW I

Thus, it is established that the Courts may lift the “corporate veil” in the event when the
device of incorporation has been utilised for purposes that are improper and illegal improper
purpose.4 For example cases that involve defrauding creditors, circumvention of law or a
statute or the evasion of an existing obligation for that matter.

The “Doctrine of Single Economic Entity doctrine (SEE Doctrine)”, however, exists
beyond this very concept of the laws governing companies that considers companies have a
“separate legal personality”.5 This doctrine of single economic entity recognises that even
distinct and entirely different juristic persons may, in some cases, act and behave as one unit
and are therefore considered the part of a single economic unit.

The objective of this research project is to provide a brief overview about the applicability of
the separate legal entity doctrine and the SEE Doctrine. It also aims to provide the
applicability of the SEE doctrine of company law in the antitrust laws thus protecting
companies from the ambit of Sec 3dealing with anti-competitive agreements.

4
Branda Hannigan, Company Law, (2nd edn. Oxford 2014).
5
Ibid.
NATIONAL LAW UNIVERSITY ODISHA CORPORATE LAW I

THE DOCTRINE OF CORPORATE SEPARATENESS ENVISAGED UNDER THE

COMPANY LAW

SEPARATE LEGAL ENTITIES:

The judgment of the Court in the landmark case of Salomon v Salomon Co Ltd.6legitimated
the “one-man company” and then the evolution of the modern phenomena of the corporate
group consisting of its subsidiaries owned by the corporate shareholders, each one also being
a distinct “separate legal entity” from that of its shareholders began.

The concept of shareholding in itself does not hold an entity as an agent of its shareholder,
whether that shareholder is an individual or another company. 7 The Courts in the English
Jurisdiction have been robust in applying the “Salomon principle” in the context of Group.

It was stated by the Court of Appeal in the case of Adams v Cape Industries plc.8 that:

“save in cases which turn on the wording of particular statutes or contracts, the court is not
free to disregard the principle of Salomon v Salomon Co Ltd9 merely because it considers
that justice so requires”

It was further opined that:

“Our law, for better or worse, recognises the creation of subsidiary companies, which though
in one sense the creatures of their parent companies, will nevertheless under the general law
fall to be treated as separate legal entities with all the rights and liabilities which would
normally attach to separate legal entities.”

The crystal position in the jurisdiction is that “companies in a group of companies are
separate legal entities and are not the agents of their controlling shareholders.” However,
there exist exceptions to this general principle. They are “agency” and the idea of “piercing
the corporate veil.” It is possible that there exists an agency relationship between a parent
company and its subsidiary company such that the subsidiary company acts like an agent for

6
Salomon v Salomon & Co Ltd [1897] AC 22 HL.
7
M.C.Bhandari, Company Law Procedures, (23rd edn. LexisNexis Vol 3 2016).
8
Adams v Cape Industries plc [1990] BCLC 479.
9
Salomon v Salomon & Co Ltd [1897] AC 22 HL.
NATIONAL LAW UNIVERSITY ODISHA CORPORATE LAW I

its parent company. 10Consequently, the lifting of corporate veil may be done and the
corporate veil can be pierced in cases where the subsidiary is a mere facade hiding the true
facts of the case.11However, the sole fact that the shareholder controls the whole shares is not
sufficient to make the company a facade nor is a group structure considered as a facade where
it is set up with an objective to minimize the liabilities that might come in the future.12

Sometimes, it is however, argued that this adherence to a stringent approach laid down by
Salomon giving the status of separate legal entity to each entity is not appropriate in the
modern world of business where major commercial activities are taken on in corporate
groups in ways that reasonably could not have been encapsulated during the year of 1897.
Various other alternative approaches have been brought and proposed from time to time such
as, for instance, that the courts must pierce the corporate veil more freely in the context of
group. Furthermore, it is also suggested by some that the law must try to develop a
mechanism whereby responsibilities and obligation can be attached to a group and not to
individual separate existing companies. In this manner, the law can strive to reflect the
economic realities that these companies are trading as a group, are raising capital existing as a
group, and are considered by those dealing with them to be a group.13

While a ray of hope arose when some support regarding the development of a group
enterprise law was given by Lord Denning in the case of DHN Food Distributors Ltd v.
Tower Hamlets LBC,14on the other hand, it was blatantly rejected by the House of Lords in
the case of Woofson v. Strathclyde Regional Council15 which doubted the aspect of the
Court’s application of the principle in the DHN case. Generally, the courts in the English
jurisdiction have shown a stringent determination of not embarking any such development in
this area.

In the case of Adams v Cape Industries plc16,it was noted by Slade LJthat:

“There is no general principle that all companies in a group of companies are to be regarded
as one. On the contrary, the fundamental principle is that each company in isa separate legal
entity possessed of separate legal rights and liabilities.”

10
Knight Ltd v Birmingham Corp [1939] 4 All ER 116.
11
Woolfson v Strathclyde Regional Council [1979] 38 P & CR 521 HL.
12
Adams v Cape Industries plc [1990] BCLC 479.
13
Supra 7.
14
DHN Food Distributors Ltd v Tower Hamlets LBC [1976] 3 All ER 462 at 467 CA.
15
Woofson v Strathclyde Regional Council [1979] 38 P & CR 521.
16
Adams v Cape Industries plc [1990] BCLC 479 at 508.
NATIONAL LAW UNIVERSITY ODISHA CORPORATE LAW I

“Counsel suggested beguilingly that it would be technical for us to distinguish between

parent and subsidiary company in this context; economically, he said, they were one. But we
are concerned not with economics but with law. The distinction between the two is, in law,
fundamental and cannot here be bridged.”

The Challenges to the famous doctrines of “separate legal personality” and “limited liability”
at common law tend to raise more fundamental challenges to these doctrines, because they
are formulated on the basis of reasons for not applying them, such as fraud, the Company
being a “sham” or “facade”, that the company is the agent of the holder, that the companies
are part of a “Single economic unit”17. However, the courts seem, if anything, more reluctant
to accept arguments against the doctrines than arguments based on particular statutes or the
terms of particular contracts.

The landmark case in this regard is Adams v Cape Industries Plc.18This case brought up the
issues in a sharp fashion. It was concerned with the liability in a group of companies and the
very objective of the claim to ignore the distinct and separate legal personality of the
subsidiary was to conclude the parent company liable for the acts of the subsidiaries towards
involuntary tort victims.

The main question before the Court to decide was “whether judgments obtained In the United
States against Cape that was an English registered company who was involved in the business
of mining asbestos in South Africa and marketing it worldwide, would be recognised and
enforced by the English courts.”

As there was no presence of any submission to the foreign jurisdiction on Cape’s part, this
solely depended on whether Cape could be said to have been “present” in the United States.
On the facts of the case, the answer to this question was based upon whether Cape could be
said to be present in the United States through a company (CPC) with which it had close
business links or through its wholly owned Subsidiaries. All the arguments of Cape were
rejected by the Court and thus sought to hold Cape liable. One of the arguments was that of a
Single economic unit.

The “single economic unit” argument:

17
Gower and Davies, Principles of Modern Company law, (09th edn. Sweet and Maxwell 2015).
18
Adams v Cape Industries plc [1990] BCLC 479.
NATIONAL LAW UNIVERSITY ODISHA CORPORATE LAW I

This argument proceeded as follows: “Admittedly there is no general principle that all
companies in a group of companies are to be regarded as one; on the contrary, the
fundamental principle is unquestionably that each company in a group of companies is a
separate legal entity possessed of separate rights and liabilities.”

Nevertheless, it was argued that “the court will, in appropriate circumstances, ignore the
distinction between them, treating them as one.” For this claim, many authorities were laid
down and cited, but the court distinguished them all as turning on the interpretation of
particular statutory or contractual provisions. 19 After hearing and reviewing these arguments
and the authorities cited by the Claimant, the Cape Court showed some sympathy with the
same and stated that:

“To the layman at least the distinction between the case where a company trades itself in a
foreign country and the case where it trades in a foreign country through a subsidiary, whose
activities it has power to control, may seem a slender one.”

It also went on to accept “that the wording of a particular statute or document may justify the
court in interpreting it so that a parent and subsidiary are treated as one unit at any rate for
some purposes.” But however, the court was not willing to go beyond this. It therefore
suggests that in presence of interpretation (by the aid of a contract or a statute), the court may
consider the economic realities with respect to the concerned companies. But this now seems
to be the threshold up to which this argument of “single economic unit” can succeed.

Another case regarding a group of companies as a separate economic unit was that of Re
Polly Peck Internationalplc20 in which Robert Walker J concluded that “he could not accede
to that submission for it would create a new exception to the Salomon principle unrecognised
by the Court of appeal in Adams v Cape Industries, something which was not open to the
court.”

A further rejection of the concept that a group of companies can be termed as a single
economic unit can be witnessed in the case of Ord v. Belhaven Pubs Ltd.21

Ord v. Belhaven Pubs Ltd.

19
Holdsworth & Co v Caddies [1955] l WLR 352 HL.
20
Re Polly Peck International plc [1996] 1 BCLC 428.
21
Ord v Belhaven Pubs Ltd [1998] 2 BCLC 447 CA.
NATIONAL LAW UNIVERSITY ODISHA CORPORATE LAW I

This case concerned an attempt made by the plaintiff in order to substitute the original
defendant subsidiary company with either of the two: another wholly-owned subsidiary or its
parent company in the group as, following a restructuring of the group, the original defendant
no longer had substantial assets.

The Court of Appeal noted that “the trial judge, who had permitted the substitution of the
defendant, appeared to have viewed the whole group as an economic entity and therefore
thought substitution, was appropriate.” This approach was emphatically rejected by
Hobhouse LJ who stated that:

“The approach of the judge in the present case was simply to look at the economic unit, to
disregard the distinction between the legal entities which were involved and to say; since the
company cannot pay, the shareholders who are the people financially interested should be
made to pay instead. That of course is radically at odds with the whole concept of corporate
personality and limited liability and the decision of the House of Lords in Salomon v Salomon
Co. Ltd.”

Hobhouse LJ further said that “the true position is that companies are entitled to organise
their affairs in group structures and to expect the courts to apply the principles of Salomon v.
Salomon Co Ltd. in the ordinary way.”
NATIONAL LAW UNIVERSITY ODISHA CORPORATE LAW I

EVOLUTION OF THE DOCTRINE OF SINGLE ECONOMIC ENTITY DOCTRINE

WITH REFERENCE TO US AND EU CASES LAWS IN THE ANTI-TRUST
REGIME

The evolution of the concept of “single economic entity” in European Union can be traced
back to the European Commission (EC) case of Mausegatt v. Haute Autorite22, where it was
observed that “affiliation to the group deprives the subsidiary company of the ability to act
according to an economic scheme of its own.” The given conditions of such a subsidiary’s
operations are prescribednot by the market but by the instructions of the principle company.

It is an accepted concept that they form a single economic entity whenever a company exerts
a dominant control or decisive influence over another company and are therefore part of the
same undertaking. The same principle is applicable for sister companies.

This practice of treating two or more legal entities within European law as one single
economic entity stems from the landmark case of Continental Can v. Commission23, where
the European Court of law observed “the circumstances that this subsidiary company has its
own legal personality does not suffice to exclude the possibility that its conduct might be
attributed to the parent company. This is particularly true in cases where the subsidiary
company does not determine its course of business autonomously but essentially follows the
direction of its parent company.” 24

The following conditions must be satisfied in considering whether two companies belong to
the same economic entity.

1. Ownership (where a company owns all or large part of another company).

2. Economic Independence (a company which is completely financially dependent on
another would most likely have to obey the other company's instructions).
3. Degree of instructions given and the obedience of those instructions (whether the
degree of instructions given is partial or absolute in nature).

In the European Union, the Court has clarified that a presumption exists that decisive
influence is exercised for wholly owned or nearly owned subsidiaries and therefore single

22
Mausegatt v Haute Autorite [1996] ECR 22 EU.
23
Continental Can v Commission [1973] ECR 215 EU.
24
Mausegatt v Haute Autorite [1996] ECR 22 EU.
NATIONAL LAW UNIVERSITY ODISHA CORPORATE LAW I

economic entity can be used.25 However, the mere ability to exercise decisive influence is not
sufficient for partially owned entities; instead, evidence must be adduced to demonstrate that
that power has actually been used. While the parent company and its wholly-owned
subsidiary are independent for incorporation or formal title purposes, they are managed by a
common decision-making centre and share a single economic power aggregation.

Parent- Subsidiary Relation under the SEE Doctrine:

Generally, this doctrine of SEE gets invoked in the cases which involve the relationship
between a parent company/holding and a subsidiary. The cases which involve sister
companies and relationship between agencies are still preladious. This doctrine first evolved
in Viho v. Commission26, and subsequently it was first adopted in Indian regime in the case
of Shamsher Kataria v. Honda27, wherein there was a formation of an agreement between
Hyundai Motor Company and subsidiary company Hyundai Motor India Limited.
A subsidiary company although can be separate legal entity yet it does not have the powers
to freely decide its lead and say in the market and it is bound to act as per the order of its
parent company, and therefore any deal between the subsidiary and the parent company can
not therefore be considered anticompetitive.
A rebuttable assumption of the activity of unequivocal impact by the parent is brought up in
instances of entirely or about completely owned subsidiary. In the case of Hydrotherm28, the
doctrine was applied to legal businesses having a common owner. Similarly, AEK Athens
and Slavia Prague were not allowed to compete together during the 1998 and 1999 UEFA
Cup because of the common ownership of the English National Investment Company. “For
sister entities who have a common owner, or partly owned subsidiaries, the single economic
entity doctrine may be invoked if it is shown that there is a unity of economic interest
between the enterprises. This entails a scrutiny of any evidence of a coordinated strategy,
organisational linkages and economic synergy.”
This justification for raising the curtain is for companies within a corporate community. The
basis of this argument is that, given the separate legal identities of the entity within the
corporation, they actually represent a single unit for economic purposes and therefore should
be regarded as one legal unit. Therefore the liabilities should be attached to the entire group,

25
Michelin v Commission of the European Communities [1983] ECR 110 (EU).
26
Case C-73/95 Viho Europe BV v Commissionn of the European Communities [1996] ECR I-5457 (EU).
27
Shamsher Kataria v Honda Seil Cars India Ltd And Ors 2014 Comp LR 1 (CCI).
28
Case C- 170/83 Hydrotherm Gereatebau GmbH v Compact del Dott [1984] ECR I- 271 (EU).
NATIONAL LAW UNIVERSITY ODISHA CORPORATE LAW I

since companies aim to achieve a single economic objective. This argument was presented
successfully in DHN Food Distributors v Tower Hamlets29 the 1976 case where the veil was
lifted in order to benefit the parent company in a group situation. It was observed that DHN
owned the land of its subsidiaries and was entitled to compensation for the Tower Hamlets
corporate torts committed.

In Viho Europe BV30 case, the ECJ observed that “one of the companies involved (Parker)
used to hold one hundred per cent of the shares of its subsidiaries in Germany, Belgium,
Spain, France and the Netherlands and that the sales and marketing activities of the
subsidiaries were directed by an area team appointed by the parent company and which
controlled sales targets, gross margins, sales costs, cash flows and stocks.” This team also set
out the product range to be sold, tracked advertising and issued price and discount directives.
The ECJ therefore concluded that “Parker and its subsidiaries formed a single economic unit
where the subsidiaries did not enjoy real autonomy in determining their course of action in
the market, but carried out the instructions issued by the parent company.”

The “Enterprise Liability” Theory

In any case, the principle of “enterprise liability” may instead base parental liability. The
former has been formulated primarily in the sense of tort law in response to the ramifications
of the doctrine of separate legal identity and the concept of restricted shareholder liability–
particularly in the case of corporate groupings.

In short, the principle of “enterprise liability” encapsulates the idea that, insofar as parent
companies reap the benefits of their subsidiaries ' operations, they will bear the corresponding
risks faced as well.

Accordingly, this theory sees the organization as a single "enterprise" and eventually allows
the corporate veil to be lifted, to the extent that it catalyses third parties to go after the parent
company/holding company while seeking compensation for the damage they have suffered as
a consequence of the actions of the subsidiary.

29
DHN Food Distributors Ltd v Tower Hamlets LBC [1976] 3 All ER 462 at 467 CA.
30
Case C-73/95 Viho Europe BV v Commissionn of the European Communities [1996] ECR I-5457 (EU).
NATIONAL LAW UNIVERSITY ODISHA CORPORATE LAW I

JUDICIAL APPROACH OF THE APPLICABILITY OF THE SEE DOCTRINE IN

INDIAN JURISPRUDENCE

HOLDING AND SUBSIDIARY COMPANIES

Holding and subsidiary companies are relative terms. Generally speaking, if one company
controls another company, the controlling company may be termed as the ‘Holding
Company’ and the company so controlled as a ‘Subsidiary’.
According to Section 2(87) “subsidiary company” or subsidiary, in relation to any other
company, means a company in which the holding company-

1. Controls the composition of board of directors.

2. Exercises or controls more than one-half of the total share capital either at its own or
together with one or more of its subsidiary companies.

It is an established rule that a subsidiary is considered as a separate legal entity and is distinct
from its parent company. The position holds good even in the case of Wholly Owned
Subsidiaries i.e when 100% of stake in subsidiary is held by the parent company. The
decision of Supreme Court in Vodafone International Holdings BV v. Union of
India31succinctly captures the position in following words:

“The legal relationship between a holding company and Wholly Owned Subsidiary is that
they are two distinct legal persons and the holding company does not own assets of the
subsidiary and, in law, the management of the business of the subsidiary also vests in the
Board of Directors, holding company and subsidiary company are, however, considered as
separate legal entities, and subsidiary is allowed decentralized management.”

Use of complex corporate structures is an ordinary activity which involves a huge number of
companies as a vehicle to do business. Commercial, regulatory and tax considerations drive
the form of these structures. Due to the limitations of the conventional principles of privity
and separateness of corporate identity, a potent challenge to contract enforcement is raised by
these complex structures.

It is a fundamental principal of company law that the shareholders and the company are taken
as two different entities. The fundamental rule of contract law holds liable only those persons

31
Vodafone International Holdings BV v Union of India (2012) 1 Comp LJ 225(SC).
NATIONAL LAW UNIVERSITY ODISHA CORPORATE LAW I

for the breach who are parties to an agreement. Hence, financially sound parent companies
enter and execute the contract under the veil of shell subsidiary companies to skip liability. It
is to solve this problem that the group-company doctrine was enacted.

To impose liability on a group of companies, the Indian courts have relied on the doctrine of
piercing the corporate veil and privity by conduct. Applying the group company doctrine, the
SC in the case of Mahanagar telecom vs. Canara Bank32 held that in Arbitration matters, the
subsidiaries should be bound by the agreement which is entered by the parent company.
However no hard and fast rule was adopted that would bind all group companies to an
arbitration agreement entered into by one of the companies in the group.

To bind the non-signatory group companies, it was not considered to be adequate, the
principles of common ownership and control. Certain additional or other elements which
would bind the non-signatory group companies were taken into account by the Indian Courts.
These elements contained a common intention, negotiation or performance of the contract in
question by non-signatory group companies. The non-signatory group companies which are
getting an advantage from the contract should also be bound by the arbitration agreement it
contains, the Court held.

The parent company in Mahanagar Nigam case, however, expands the scope postulated in
Chloro Controls India v. Severn Trent Water Purification33 Hence, only in the case of
composite transactions, the non-signatory group companies were held to be bound. The
decision of Mahanagar case, the court held that “the non-signatory group companies are
bound by arbitration agreements in an increased number of fact situations, in addition to
composite transactions. The doctrine of piercing the corporate veil is another means by which
courts have sought to determine liability in the context of layered corporate structures. In
substance, the doctrine permits a court to disregard the separate character of a company to
discover its shareholders and impose liability in appropriate cases.””

The SC in the case of Life Insurance Corporation of India v. Escorts34, held that, “only if
contemplated by statute or in the cases where the corporate identity can be used to protect a
fraud, the veil of different identity between a company and its shareholders may be lifted.
Also, while giving the aforesaid grounds for lifting the corporate veil, the court held that it is

32
Mahanagar Telephone Nigam v Canara Bank AIR 2019 SC 4449.
33
Chloro Controls India v Severn Trent Water Purification (2013) 1 SCC 64.
34
Life Insurance Corporation of India v Escorts (1986) 1 SCC 264.
NATIONAL LAW UNIVERSITY ODISHA CORPORATE LAW I

neither necessary nor desirable to enumerate the classes of cases where lifting the veil is
permissible, since that must necessarily depend on the relevant statutory or other provisions,
the object sought to be achieved, the impugned conduct, the involvement of the element of
the public interest, the effect on parties who may be affected, etc. The Court therefore
contemplated enumeration of further circumstances where the lifting of the corporate veil
would be justified”.

The SC following the directions in the Escorts Case widened the grounds to lift the corporate
veil in Balwant Rai Saluja v. Air India35 and Arcelor Mittal India v. Satish Kumar Gupta36.
The ratios in these cases most importantly diluted the earlier standing making it necessary to
be a case of fraud or statutory requirement for piercing of the veil. “It was held as a
proposition of law that the corporate veil may be pierced when separate corporate identity is
employed to obscure liability for improper conduct.”

Therefore, on the basis of the above mentioned cases, it can be observed that there has been
an uncertainty and inconsistency in the approach of the CCI while dealing with the issues of
single economic entity and such application differs on a case to case basis. In light to the
cases that have been decided by the Court, in the application of this doctrine, these factors
seem to hold prime significance and consideration:

1. Whether the entities constitute a “group” within the meaning of Section 5;

2. Legal control – for this, the regulator considers:

(a) The Parent / subsidiary relationships;

(b) The pattern of the shareholding i.e whether the shares are held directly or indirectly.

(c) The negative and the positive voting rights held by the company.

(d) Control in the appointment and removal of board members/ senior management
employees.

(e) Compliance of directives by subsidiaries.

35
Balwant Rai Saluja v Air India (2019) 2 SCC 1.
36
Arcelormittal India v Satish Kumar Gupta (2014) 9 SCC 407.
NATIONAL LAW UNIVERSITY ODISHA CORPORATE LAW I

(f) The Control of the parent over the affairs and the operations of the subsidiary company.

(g) Whether the parent entity is in charge of preparing rules that govern the subsidiaries;

(h) Siblings - A sibling relationship exists when two distinct legal entities have a common
owner; etc.

3. Inseparability of the economic interest of the parties - The regulator considers the
following factors in this regard:

(i) Whether the subsidiaries are economically dependent on the parent entity;

(ii) Identity of Interests i.e. whether the parent and subsidiaries' interests are common or
different;

(iii) Absence of actual or potential competition or 'complementarity' among the products /

services of the concerned entities, give the presumption of a single entity.

4. The influence of the parent in the pricing policy, the distribution activities and the
production, cash flow, stocks, etc.
NATIONAL LAW UNIVERSITY ODISHA CORPORATE LAW I

JUDICIAL APPOROACH TOWARDS SINGLE ECONOMIC ENTITY IN

ANTITRUST

In the case of Exclusive Motors Pvt. Ltd. v. Automobile Lamborghini37, the Competition
CCI observed that for the application of sec. 3, an agreement must be shown between 2 or
more enterprises. It held that “the agreement between M/s. Lamborghini, the opposite party
and its Group Company Volkswagen India could not be considered to be an agreement
between the two enterprises as envisaged under section 2(h) of the Act”. According to the
Commission, the agreements between entities constituting one enterprise, could not be
assessed under the Act 38.

The Commission relied on the internationally accepted doctrine of “single economic entity”.
The Commission referred to the European case of Viho v. Commission39, 1995 ECR, where
the Court went on to observe, “firstly, the facts in the complaint by Viho, which complained
that Parker was prohibiting the export of its product by its distributors, dividing the common
market into national markets of the Member States, and maintaining artificially high prices
for Parker products on those national markets”.

The Commission held that the complaint was not entertain able on the ground that Parker’s
subsidiary companies were wholly dependent upon Parker Pen UK and enjoyed no real
autonomy. It was also held by the Commission that “an integrated distribution system was set
up by Parker to sell its products in Germany. France, Belgium, Spain and the Netherlands
through subsidiary companies and that these subsidiary companies and the parent company
formed one economic unit within which the subsidiaries did not enjoy the real autonomy in
determining their course of action in the market”.

The Commission also referred to the judgment of the Court of the First Instance and also
relied upon the observation in the case of Ahmed Saeed Flugereisen40 wherein it was held
that “Art 85 does not apply where the concerted practice in question is between undertakings
belonging to a single group as parent company and subsidiary, if those undertakings form an

37
Exclusive Motors Pvt Ltd v Automobili Lamborghini [2014] 121 CLA 230 (CAT).
38
Sodhi Transport Co v State of Uttar Pradesh AIR 1986 SC 1099.
39
Case C-73/95 Viho Europe BV v Commissionn of the European Communities [1996] ECR I-5457 (EU).
40
Case 66/86 Ahmed Saeed Flugreisenand Silver Line Reisebüro GmbH v Zentrale zur Bekämpfung unlauteren
Wettbewerbs [1989] ECR I-140 (EU).
NATIONAL LAW UNIVERSITY ODISHA CORPORATE LAW I

economic unit within which the subsidiary had no real freedom to determine its course of
action on the market 41”.

The Competition Commission of India in the case of Shamsher Kataria42held that “an
internal agreement/arrangement between an enterprise and its group, parent company is not
within the purview of the mischief of section 3(4) of the Act”. The Commission noted that
the exemption of single economic entity stems from the doctrine of inseparability of the
economic interest of the parties to the agreement. It held thus “generally, entities belonging to
the same group e.g. holding-subsidiaries are presumed to be part of a ‘single economic entity’
incapable of entering into an agreement.”43

In the case of National Insurance Co. Ltd44, one of the issues decided by the Commission
was whether the public sector insurance companies constituted a “single economic entity”. It
was argued that until 2002, all National insurance companies were owned by General
Insurance Company and pursuant to the enactment of the General Insurance Business
(Nationalization) Amendment Act, 2002, Government of India held 100% shares of each of
the insurance companies and controlled the management and affairs of the companies through
Department of Financial Services (Insurance Division), Ministry of Finance.

It was finally held by the Commission that “pursuant to the recommendations of the Malhotra
Committee, two major regulatory changes will be introduced in 1993, including, ending the
monopoly of General Insurance Company in the general insurance business and ending the
control exercised by General Insurance Company over its four wholly owned subsidiaries,
i.e., the four public sector insurance companies.”

Furthermore, it was observed that “These regulatory changes will usher in to allow the public
sector insurance companies to act independently and to compete with the private players to
offer better services to consumers.” Further, even though the public sector insurance
companies are presently under the overall supervision of the Central Government, all
decisions relating to submission of bids, determination of bid amounts, business sharing
arrangements, etc. will be taken internally at company level without any ex ante
approval/directions from Ministry of Finance.

41
Voltas Limited v Union of India AIR 1995 SC 881.
42
Shamsher Kataria v Honda Seil Cars India Ltd And Ors 2014 Comp LR 1 (CCI).
43
Shamsher Kataria v Honda Seil Cars India Ltd And Ors 2014 Comp LR 1 (CCI).
44
Government of Kerela v National Insurance Co Ltd 2012 Comp LR 2 (CCI).
NATIONAL LAW UNIVERSITY ODISHA CORPORATE LAW I

The Commission, (in a slight deviation from its own stand in Exclusive Motors-Lamborghini)
held that “the conduct of the insurance companies in relation to the RSB Y/CHIS tenders
issued by the Government of Kerala during the period between 2010-11 and 2012-13 were
based on their own volition and the Ministry of Finance had no role to play”. On this basis,
the Commission held that the Ministry of Finance did not exercise any de facto or de-jure
control over their business decisions. As such, they cannot be said to constitute a single
economic unit.

In the case of Arshiya Rail v. Ministry of railways45and container corporation economic

oneness or single economic entity was used in the context in deciding the dominance of the
company in the relevant market. In the case, the commission held that for determining
dominance in the relevant market, the strength or the market share of the parent company
which is working in different markets will not be used to determine the strength of its
subsidiary in another relevant market. Hence, this case cleared the juxtaposition of parent-
subsidiary relationship in relation to the strengthening of relevant market.

45
Arshiya Rail Infrastructure Ltd v Ministry of Railways [2013] 119 SCL 364 (CAT).
NATIONAL LAW UNIVERSITY ODISHA CORPORATE LAW I

CONCLUSION

In light of the above, it can be observed that it is very common for companies within a group
to be closely associated. In some cases, there may exist some form of overlapping in the
management or the unity in operations of the companies. However, this very fact in itself
cannot lead to the conclusion that they may be considered as one single legal entity. Instead,
each and every company is considered in law to have its own separate legal existence and
personality.

The position in the jurisdiction of Singapore, a colonial jurisdiction, that has evolved into one
of the most modern and progressive jurisdictions provides some clarity in this regard. In
2014, the High Court of Singapore in its decision in a case addressed the exact issue being a
question as to whether there is a legal principle that treats some companies as having the
same corporate personality on the grounds of being a “single economic entity.” In the said
case, the Singapore Court indulged in an analysis of international cases and analysed the
single economic entity concept to a multidirectional version of the “piercing the corporate
veil” doctrine.

Thus, under the laws governing companies “a company is considered to be a separate legal
entity distinct from its holding / parent company. However, the doctrine of “piercing the
corporate veil” provides an exception to the rule and the courts use this exception in order to
“penalise” companies.

On the other hand, the antitrust laws validate the “single economic entity” doctrine where
entities within the same “group” may be considered as one for the purposes of claiming
advantage from scrutiny of competition regulators.

Therefore, in conclusion , it is stated that the application of the doctrine of single economic
entity vis-à-vis the corporate separateness doctrine is a grey area yet and it is still a question
of law as to whether one or both of these doctrines can be applicable to a given set of facts.
NATIONAL LAW UNIVERSITY ODISHA CORPORATE LAW I

BIBLIOGRAPHY

CASES

Adams v Cape Industries plc [1990] BCLC 479 at 508. ------------------------------------------- 9

Arcelormittal India v Satish Kumar Gupta (2014) 9 SCC 407. ---------------------------------- 18
Arshiya Rail Infrastructure Ltd v Ministry of Railways [2013] 119 SCL 364 (CAT).--------- 22
Balwant Rai Saluja v Air India (2019) 2 SCC 1.--------------------------------------------------- 18
Case 66/86 Ahmed Saeed Flugreisenand Silver Line Reisebüro GmbH v Zentrale zur
Bekämpfung unlauteren Wettbewerbs [1989] ECR I-140 (EU).------------------------------- 20
Case C- 170/83 Hydrotherm Gereatebau GmbH v Compact del Dott [1984] ECR I- 271 (EU).
-------------------------------------------------------------------------------------------------------- 14
Case C-73/95 Viho Europe BV v Commissionn of the European Communities [1996] ECR I-
5457 (EU). -------------------------------------------------------------------------------------- 14, 15
Chloro Controls India v Severn Trent Water Purification (2013) 1 SCC 64. ------------------ 17
Continental Can v Commission [1973] ECR 215 EU. -------------------------------------------- 13
DHN Food Distributors Ltd v Tower Hamlets LBC [1976] 3 All ER 462 at 467 CA.------ 9, 15
Exclusive Motors Pvt Ltd v Automobili Lamborghini [2014] 121 CLA 230 (CAT). ---------- 20
Government of Kerela v National Insurance Co Ltd 2012 Comp LR 2 (CCI).----------------- 21
Holdsworth & Co v Caddies [1955] l WLR 352 HL. --------------------------------------------- 11
Knight Ltd v Birmingham Corp [1939] 4 All ER 116. --------------------------------------------- 9
Life Insurance Corporation v Escorts Ltd & Ors (1986) 1 SCC 264. ---------------------------- 6
Mahanagar Telephone Nigam v Canara Bank AIR 2019 SC 4449. ----------------------------- 17
Mausegatt v Haute Autorite [1996] ECR 22 EU. -------------------------------------------------- 13
Michelin v Commission of the European Communities [1983] ECR 110 (EU). ---------------- 14
Ord v Belhaven Pubs Ltd [1998] 2 BCLC 447 CA. ----------------------------------------------- 11
Re Polly Peck International plc [1996] 1 BCLC 428. --------------------------------------------- 11
Salomon v Salomon & Co Ltd [1897] AC 22 HL. -------------------------------------------------- 6
Shamsher Kataria v Honda Seil Cars India Ltd And Ors 2014 Comp LR 1 (CCI). ----------- 21
Sodhi Transport Co v State of Uttar Pradesh AIR 1986 SC 1099. ------------------------------ 20
Vodafone International Holdings BV v Union of India (2012) 1 Comp LJ 225(SC). ---------- 16
Voltas Limited v Union of India AIR 1995 SC 881. ----------------------------------------------- 21
Woofson v Strathclyde Regional Council [1979] 38 P & CR 521. -------------------------------- 9
NATIONAL LAW UNIVERSITY ODISHA CORPORATE LAW I

BOOKS

Branda Hannigan, Company Law, (2nd edn. Oxford 2014). --------------------------------------- 7

Dr. G.K.Kapoor, Company Law and Practice, (20th edn. Taxman’s 2019). --------------------- 6
Gower and Davies, Principles of Modern Company law, (09th edn. Sweet and Maxwell 2015).
-------------------------------------------------------------------------------------------------------- 10
M.C.Bhandari, Company Law Procedures, (23rd edn. LexisNexis Vol 3 2016). ---------------- 8