Vodafone International Holdings B.V.

v Union of India & Anr

CASE ANALYSIS

DOCTRINE OF LIFTING OR PIERCING THE CORPORATE VEIL

The separate personality of a company is a statutory privilege and it must be used for
legitimate business purposes only. Where a fraudulent or dishonest use is made of the legal
entity, the individuals concerned will not be allowed to take shelter behind the corporate
personality. The court will break through the corporate shell and apply the principle of what
is called as “lifting of or piercing the corporate veil”. The court will look behind the corporate
entity and take action as though no entity separates from the members existed and make the
members or the controlling persons liable for debts and obligations of the company.

Re. Sir Dinshaw Maneckjee Petit1

The facts of the case are that the assessee was a wealthy man enjoying large dividend and
interest income. He formed four private companies and agreed with each to hold a block of
investment as an agent for it. Income received was credited in the accounts of the company
but the company handed back the amount to him as a pretended loan. This way he divided his
income in four parts in a bid to reduce his tax liability. But it was held “the company was
formed by the assessee purely and simply as a means of avoiding super-tax and the company
was nothing more than the assessee himself. It did no business, but was created simply as a
legal entity to ostensibly receive the dividends and interests and to hand them over to the
assessee as pretended loans”. The Court decided to disregard the corporate entity as it was
being used for tax evasion.

Vodafone International Holdings B.V. v Union of India & Anr2

Case Summary
The Supreme Court of India pronounced the landmark judgment in Vodafone International
Holding (VIH) v. Union of India (UOI). The Bench consisting of Chief Justice S.H Kapadia,
K. S. Radha krishnan and Swatanter Kumar quashed the order of High Court of demand of Rs
12000 crores as capital gain tax and absolved VIH from liability of payment of Rs 12000
crores as capital gain tax in the transaction dated 11.2.2007 between VIH and Hutchinson
Telecommunication International Limited or HTIL( non-resident company for tax purposes)

1
A.I.R. 1927 Bombay 371
2
S.L.P. (C) No. 26529 of 2010
The court held that in Indian revenue authorities do not have jurisdiction to impose tax on an
offshore transaction between two non-residents companies where in controlling interest in a
(Indian) resident company is acquired by the non-resident company in the transaction.

Facts leading to the Dispute

Vodafone International Holding (VIH) and Hutchison telecommunication international
limited or HTIL are two non-resident companies. These companies entered into transaction
by which HTIL transferred the share capital of its subsidiary company based in Cayman
Island i.e. CGP international or CGP to VIH.
VIH or Vodafone by virtue of this transaction acquired a controlling interest of 67 percent in
Hutch is on Essar Limited or HEL that was an Indian Joint venture company (between
Hutchinson and Essar) because CGP was holding the above 67 percent interest prior to the
above deal.
The Indian Revenue authorities issued a show cause notice to VIH as to why it should not be
considered as “assesse in default” and thereby sought an explanation as to why the tax was
not deducted on the sale consideration of this transaction.
The Indian revenue authorities thereby through this sought to tax capital gain arising from
sale of share capital of CGP on the ground that CGP had underlying Indian Assets.

VIH filed a writ petition in the High Court challenging the jurisdiction of Indian revenue
authorities. This writ petition was dismissed by the High Court and VIH appealed to the
Supreme Court which sent the matter to Revenue authorities to decide whether the revenue
had the jurisdiction over the matter. The revenue authorities decided that it had the
jurisdiction over the matter and then matter went to High Court which was also decided in
favour of Revenue and then finally Special Leave petition was filed in the Supreme Court.

Issue before the Supreme Court

The issue before the Apex court was whether the Indian revenue authorities had the
jurisdiction to tax an offshore transaction of transfer of shares between two non-resident
companies whereby the controlling interest of an Indian resident company is acquired by
virtue of this transaction.
Arguments of Revenue
The revenue submitted that this entire transaction of sale of CGP by HTIL to VIH was in
substance transfer of capital assets in India and thus attracted capital gain taxes transaction
led to transferring of all direct/indirect rights in HEL to VIH and this entire sale of CGP was
a tax avoidance scheme and the court must use a dissecting approach and look into the
substance and not at “look at” form of transaction as a whole.

Observations made by the Supreme Court-

Tax planning/ tax evasion/tax avoidance

1. It is cornerstone law that a tax payer is enabled to arrange his affairs so as to reduce the
liability of tax and the fact that the motive for the transaction is to avoid tax does not
invalidate it unless a particular enactment so provided.
2. It is essential that the transaction should have some economic or commercial substance in
order to be effective.
3. The revenue cannot tax a subject without a statute to support and every tax payer is
entitled to arrange his affairs so that his taxes shall be as low as possible and he is not
bound to choose that pattern which will replenish the treasury.
4. All tax planning is not illegitimate and observed that the majority in McDowell case held
that tax planning is legitimate provided it is within the framework of law and colourable
devices cannot be part of tax planning.

Decision of the Court

Sale of CGP share by HTIL to Vodafone or VIH does not amount to transfer of capital assets
within the meaning of Section 2 (14) of the Income Tax Act and thereby all the rights and
entitlements that flow from shareholder agreement etc. that form integral part of share of
CGP do not attract capital gains tax.
The Court recognised the fundamental principle of the corporate veil by noting that, “The
approach of both the corporate and tax laws, particularly in the matter of corporate taxation,
generally is founded on the abovementioned separate entity principle, i.e., treat a company as
a separate person.
The order of High Court of the demand of nearly Rs.12, 000 crores by way of capital gains
tax would amount to imposing capital punishment for capital investment and it lacks
authority of law and therefore is quashed.

Conclusion

The apex court pronounced a landmark judgment in Vodafone International Holding v. Union
of India and cleared the uncertainty with respect to imposition of taxes. The apex court
through this judgment recognized:

 The principles of tax planning.

 Business entities or individual may arrange the affairs 0of their business so as to
reduce their tax liability in absence of any statutory stipulation prohibiting the same.
 The multinational companies often establish corporate structures and all these
structures should be established for business and commercial purposes only.
 The corporate veil may be lifted in case facts and circumstances reveal that the
transaction or corporate structure is sham and intended to evade taxes.
 The transactions should be looked holistic manner and not in a dissecting manner and
the presence of corporate structures in tax neutral/investor friendly nations should not
lead to the conclusion that these are meant to avoid taxes.

The judgment was not only important in the context of taxation, but also covers other issues
of corporate law. One of these is in the context of the principle of the corporate veil, and the
circumstances under which it may be lifted, particularly in the context of commercial cross-
border transactions and tax avoidance.
STANDARD CHARTERED BANK & ORS. V DIRECTORATE OF ENFORCEMENT

CASE ANALYSIS

CORPORATE CRIMINAL LIABILITY

Corporations have a separate legal entity and they are treated as a separate personality in law.
This doctrine states that a corporation can be made criminally liable and convicted for the
unlawful acts of any of its agents, provided those agents were acting within the scope of their
actual or apparent authority.

Pre-Standard Bank Case Scenario

Before the Standard Bank case the companies in India were considered as juristic persons and
therefore, could not be criminally prosecuted for offences due to the absence of requisite
intention to commit a crime i.e. mens rea couldn’t be established and also due to the physical
impossibility of imposing punishment over the company.

Before this case the court interpreted the Statute in literal sense and there was no purposive
interpretation and as a result the companies escaped from the criminal liability.

The question that whether a company can be held liable for criminal offences was discussed
by the courts in certain cases.

In the case of A. K. Khosla v. S. Venkatesan3, two corporations were charged with having
committed fraud under the IPC. The Magistrate issued legal proceedings against the
corporations but the court held that the due to the absence of requisite features i.e. mens rea
and the inability to impose punishment over the corporations, as them not being a physical
body, they cannot be held liable. “The courts opined that a company cannot be held
criminally liable until and unless the necessary changes are made in the legislative text with
amendments to the relevant statutes.”4

In Zee Tele films Ltd. v. Sahara India Co. Corp. Ltd.5, a complain was filed against Zee
under Section 500 of IPC. Zee was alleged to have telecasted a program based on falsehood
and thereby defamed Sahara India. But the company was discharged from the liability arising

3
A. K. Khosla v. S. Venkatesan (1992) Cr.L.J. 1448
4
The Assistant Commissioner, Assessment-II, Bangalore and Ors. v. Velliappa Textiles Ltd., (2004) 1 Comp. L.J.
21.
5
Zee Telefilms Ltd. v. Sahara India Co. Corp. Ltd., (2001) 3 Recent Criminal Reports 292
out of defamation because of the absence of mens rea which is an essential requisite element
to prove the charges.

In another case, Motorola Inc. v. Union of India6, where the corporation was charged under
Section 420 of IPC but wasn’t held liable for the offence because of the impossibility to
prove mens rea in the case which is sine qua non in a criminal offence.

STANDARD CHARTERED BANK & ORS. V DIRECTORATE OF ENFORCEMENT

In this landmark the court overruled all the other previous provisions and held that
irrespective of the mandatory punishment required under the certain provisions, a company
can be held liable and punished for violation of the respective provisions of a Statute. Here in
this case, the Standard Chartered Bank was alleged to have violated certain provisions of
Foreign Exchange Regulations Act, 1973. The court did the purposive interpretation of the
provisions rather than interpreting it in the literal sense and thereby imposing fine on the
corporate.

The Court looked into the interpretation rule that that all penal statutes are to be strictly
construed in the sense that the Court must see that the thing charged as an offence is within
the plain meaning of the words used and must not strain the words on any notion that there
has been a slip that the thing is so clearly within the mischief that it must have been intended
to be included and would have included if thought of.7

POST STANDARD BANK CASE

It can be said that post Standard Chartered decision, corporations are capable of possessing
the requisite mens rea. As in prosecution of other economic crimes, intention could very well
be imputed to a corporation and may be gathered from the acts and/or omissions of a
corporation.

In another landmark case: IRIDIUM INDIA TELECOM LTD. V MOTOROLA

INCORPORATED & ORS., Motorola Incorporation was alleging of committing offence
under section 420 (cheating) an section 120B (conspiracy) of the Indian Penal Code.

6
Motorola Inc. v. Union of India,(2004) Cri.L.J. 1576
7
Tolaram Relumal and Anr. v. The State of Bombay MANU/SC/0057/1954 and Girdhari Lal Gupta v. D.H. Mehta
and Anr. MANU/SC/0487/1971.
The court again dealt with the question of whether can be held liable for the offence for
which the requisite element is mens rea. It was held in this case that corporations are virtually
in the same position as any individual and can be held liable under law which requires mens
rea. Therefore, companies can no longer claim immunity from the criminal prosecution
merely on the ground that they don’t have the capability to hold mens rea.

The Supreme Court held:

“The criminal liability of a corporation would arise when an offence is committed in relation
to the business of the corporation by a person or body of persons in control of its affairs. In
such circumstances, it would be necessary to ascertain that the degree and control of the
person or body of persons is so intense that a corporation may be said to think and act
through the person or the body of persons.8”

The two main points on which the court gave its ruling were: first that a company is capable
of possessing the requisite mens rea and secondly that the rigid test of identification of the
directing mind of the company has to be followed in determining the requisite metal element.

The court had relied on the case of Tesco Ltd.9 wherein it was laid down that the people who
are specifically entrusted with the powers and duties towards the company and are mentioned
in the Memorandum of Association, Articles of Association, named by the directors or
approved of such powers in the general meetings of the company will be held liable and their
acts will be instrumental in attributing criminal liability of the company. Iridium goes one
step ahead by holding any natural person accountable and attributing liability to the company
on behalf of their actions. The only requirement is that the person should be in charge of the
affairs of the company. The court further held that non-disclosure of proper information
would be treated as mis-representation thereby constituting the criminal offence of cheating
for which the company can be held liable. The court finally ruled that criminal liability can be
attributed to the company since it is capable of possessing the requisite men rea for
commission of the offence.

8
Iridium India Telecom Ltd. v. Motorola Incorporated and Ors, AIR 2011 SC 20
9
Tesco Supermarkets Ltd. .v. Nattrass (1971) 2 All E.R. 127
RAJAHMUNDRY ELECTRIC SUPPLY CORPORATION LTD V. A.NAGESWARA
RAO- CASE ANALYSIS

Oppression and Mismanagement

CA 1956 provides for protection of the minority shareholders from oppression and
mismanagement by the majority under:

Section 397 (Application to Company Law Board for relief in cases of oppression)

Oppression as per Section 397(1) of CA 1956 has been defined as 'when affairs of the
company are being conducted in a manner prejudicial to public interest or in a manner
oppressive to any member or members'

Section 398 (Application to Company Law Board for relief in cases of mismanagement).

The term mismanagement has been defined under Section 398 (1) as 'conducting the affairs
of the company in a manner prejudicial to public interest or in a manner prejudicial to the
interests of the company or there has been a material change in the management and control
of the company, and by reason of such change it is likely that affairs of the company will be
conducted in a manner prejudicial to public interest or interest of the company'.

The Companies Act 2013 provides for provisions relating to oppression and mismanagement
under Sections 241-246.

 Section 241 provides that an application for relief can be made to the Tribunal in case of
oppression and mismanagement.
 Section 244(1) provides for the right to apply to Tribunal under Section 241, wherein the
minority limit is same as that mentioned in CA 1956.

Under CA 2013, the Tribunal may also waive any or all of the requirements of Section 244(1)
and allow any number of shareholders and/or members to apply for relief. This is a huge
departure from the provisions of CA 1956 as the discretion which was provided to the Central
Government to allow any number of shareholders to be considered as minority is, under the
new CA 2013 been given to the Tribunal and therefore is more likely to be exercised.
Prevention of Oppression

Under Section 242(1) of Companies Act, 2013 the Tribunal is empowered to make any order
as it may think fit to with a view to end the matters complained off in Section 241. Before
passing an order, the Tribunal needs to satisfy itself that-

(a) the company's affairs have been or are being conducted in a manner prejudicial to public
prejudicial or oppressive to any member or members or pre interest or in a manner prejudicial
to the interests of the company; and

(b) to wind up the company would unfairly prejudice such member or members, but that
otherwise the facts would justify the making of a ding-up order on the ground that it was just
and equitable that the company should be wound up.

Winding up on the basis of ‘just and equitable’ clause in cases of Oppression

The Indian Companies Act, 2013 is S.241 which confers a right on the minority shareholders
to apply to the court for relief in cases of oppression. If any member of a company complains
that the affairs of the company are conducted in a manner prejudicial to public interest or the
shareholders interests or in manner oppressive to them. It is just and equitable to wind up a
company where the principal shareholders have adopted an aggressive or oppressive or
squeezing policy towards the minority10.

RAJAHMUNDRY ELECTRIC SUPPLY CORPORATION LTD V. A.NAGESWARA

RAO

FACTS

An application was filed by the first respondent under section 162, clauses (v) and (vi) 11, of
the Indian Companies Act, 1913 for an order that the Rajahmundry Electric Supply
Corporation Ltd., be wound up. The grounds on which the relief was claimed were that the

10
‘Prevention of Oppression and mismanagement’, Legal Service India available at
http://www.legalservicesindia.com/article/article/prevention-of-oppression-&-mismanagement-482-1.html
accessed on 29.4.16.
11
SECTION 162: Circumstances in which company may be wound up by Court:

A company may be wound up by the Court--...................

(v) if the company is unable to pay its debts :

(vi) if the Court is of opinion that is it just and equitable that the company should be wound up.
affairs of the Company were being grossly mismanaged, that large amounts were owing to
the Government for charges for electric energy supplied by them, that the directors had
misappropriated the funds of the Company, and that the directorate which had the majority in
voting strength was "riding roughshod" over the rights of the shareholders.

In the alternative, it was prayed that action might be taken under section 153-C and
appropriate orders passed to protect the rights of the shareholders. The only effective
opposition to the application came from the Chairman of the Company, Appanna Ranga Rao,
who contested it on the ground that it was the Vice-Chairman, Devata Ramamohanrao, who
was responsible for the maladministration of the Company, that he had been removed from
the directorate, and steps were being taken to call him to account, and that there was
accordingly no ground either for passing an order under section 162, or for taking action
under section 153-C.

The Andhra Pradesh High Court before which the application came up for hearing, held that
the charges set out therein had been substantially proved, and that it was a fit case for an
order for winding up being made under section 162(vi). It was also held that under the
circumstances action could be taken under section 153-C, and accordingly two administrators
was appointed for the management of the company for a period of six months vesting in them
all the powers of the directorate and authorising them to take the necessary steps for
recovering the amounts due, paying the debts and for convening a meeting of the
shareholders for the purpose of ascertaining their wishes whether the administration should
continue, or whether a new Board of Directors should be constituted for the management of
the Company.

Against this order, the Company preferred appeal by special leave.

LEGAL ISSUE OF THE CASE

1) The first issue in this case was regarding maintainability of the suit, in this regard the
appellant contended that there was no proof to depict that the applicant(respondent) had
obtained the consent of the requisite number of shareholders as provided in sub-clause (3)
(a)(i) to section 153-C. That clause provides that a member is entitled to apply for relief
only if he has obtained the consent in writing of not less than one hundred in number of
the members of the company or not less than one-tenth in number of the members,
whichever is less. The first respondent stated in his application that he had obtained the
 consent of 80 shareholders, which was more than one-tenth of the total number of
members, and had thus satisfied the condition laid down in section 153-C, sub-clause (3)
(a)(i). To this, an objection was taken in one of the written statements filed on behalf of
the respondents that out of the 80 persons who had consented to the institution of the
application, 13 were not shareholders at all, and that two members had signed twice. It
was further alleged that 13 of the persons who had given their consent to the filing of the
application had subsequently withdrawn their consent. In the result, excluding these 28
members, it was pleaded, the number of persons who had consented would be reduced to
52, and therefore the condition laid down in section 153-C, sub-clause (3)(a)(i), was not
satisfied.

Thus, the question of law before the apex court was to determine whether the requisite
requirement under section 153-C sub clause (3)(a)(i) was to be satisfied at the
commencement of suit or throughout the action.

2) Secondly it was alleged that the allegations in the application were not sufficient to
support a winding up order under section 162, and that therefore no action could be taken
under section 153-C. As per the Act before taking action under section 153-C, the court
must be satisfied that circumstances exist on which an order for winding up could be
made under section 162. Where, therefore, the facts proved do not make out a case for
winding up under section 162, no order could be passed under section 153-C. The
question therefore to be determined is whether the facts found make out a case for passing
a winding up order under section 162.

The respondent contended that the present action of directors constitutes sufficient ground for
winding up company under just and equitable clause.

3) Thirdly, the court was left with question of law that on the basis of facts established
whether it was just and equitable to make an order for winding up under section 162(vi).

JUDGMENT OF APEX COURT

Question of Maintainability- For an application under Section 153(c) the applicant need to
obtained the consent of requisite number of shareholders as provided in sub-clause (3)(a)(i).
In the present case it was alleged that thirteen members who had given their consent to the
filing of the application had subsequently withdrawn their consent. In this regard court held
that the validity of a petition must be judged on the facts as they were at the time of its
presentation, and a petition which was valid when presented cannot, in the absence of a
provision to that effect in the statute, cease to be maintainable by reason of events
subsequent to its presentation. The withdrawal of consent by thirteen of the members, even
if true, could not affect either the right of the applicant to proceed with the application or the
jurisdiction of the court to dispose of it on its own merits.

Just and equitable clause not to be constructed ejusdem generis-The court rejecting the
argued of appellant held that the words "just and equitable" are not to be construed ejusdem
generis with the matter mentioned in clause (i) to (v) of s. 162. Further court opined that it is
well established principle that "..... mere misconduct or mismanagement on the part of the
directors, even although it might be such as to justify a suit against them in respect of such
misconduct or mismanagement, is not of itself sufficient to justify a winding-up order" 12.
Where nothing more is established than that the directors have misappropriated the funds of
the company, an order for winding up would not be just or equitable, because if it is a sound
concern, such an order must operate harshly on the rights of the shareholders. But if, in
addition to such misconduct, circumstances exist which render it desirable in the interests of
the shareholders that the Company should be wound up, there is nothing in section 162(vi)
which bars the jurisdiction of the court to make such an order. Thus whether mismanagement
of directors is a ground for a winding up order under section 162(vi) becomes a question to
be decided on the facts of each case.

Circumstance of Winding up on just and equitable ground exist- Answering the present
question court relied on the finding of Loch v. John Blackwood Ld.13 was itself a case in
which the order for winding up was asked for on the ground of mismanagement by the
directors: "It is undoubtedly true that at the foundation of applications for winding up, on the
'just and equitable' rule, there must lie a justifiable lack of confidence in the conduct and
management of the company's affairs. But this lack of confidence must be grounded on
conduct of the directors, not in regard to their private life or affairs, but in regard to the
company's business. Furthermore the lack of confidence must spring not from dissatisfaction
at being out voted on the business affairs or on what is called the domestic policy of the
company. On the other hand, whenever the lack of confidence is rested on a lack of probity in

12
re Diamond Fuel Company [1879] 13 Ch. D. 400
13
[1924] A.C. 783
the conduct of the company's affairs, then the former is justified by the latter, and it is under
the statute just and equitable that the company be wound up."

In the present case the facts as found by the courts below are that the Vice-Chairman grossly
mismanaged the affairs of the Company, and had drawn considerable amounts for his
personal purposes, that arrears due to the Government for supply of electric energy as on 25-
6-1955, was Rs. 3,10,175-3-6, that large collections had to be made, that the machinery was
in a state of disrepair, that by reason of death and other causes the directorate had become
greatly attenuated and "a powerful local junta was ruling the roost", and that the shareholders
outside the group of the Chairman were apathetic and powerless to set matters right. On these
findings, the courts below had the power to direct the winding up of the Company under
section 162(vi), and no grounds have been shown for our interfering with their order.

JUDGMENT ANALYSIS

The following analysis can be made in respect of the above discussed case:

The validity of a petition14 must be judged on the facts as they were at the time of its
presentation, and a petition which was valid when presented cannot, in the absence of a
provision to that effect in the statute, cease to be maintainable by reason of events
subsequent to its presentation.

Secondly, mere misconduct or mismanagement on the part of the directors, even although it
might be such as to justify a suit against them in respect of such misconduct or
mismanagement, is not of itself sufficient to justify a winding-up order. The question whether
something more than a mere misconduct exist shall be determined on the basis of facts and
circumstance of each individual case.

The courts have thus held the words ‘just and equitable’ to be words of the widest
significance and as not limiting the jurisdiction of the court to any case. It is a question of fact
and each case must depend on its own circumstances 15. No general classification can be made
to show under what circumstances the court can invoke the ‘just and equitable clause’.
However, the courts have taken the assistance of this clause wherever it was of the opinion
that the running of the company was not viable or beneficial to the shareholders.

14
For example the requirement under section 244 of 2013 Act must be satisfied at the time of inception of the
action before Tribunal.
15
Bleriot manufacturing Aircraft Co. Ltd., In Re, [1961] 12 TLR 253.
The court does not get jurisdiction only because of the provisions of law mentioned by the
applicant. At the foundation of applications for winding up, on the just and equitable rule,
there must lie a justifiable lack of confidence in the conduct and management of the
company's affairs. This lack of confidence must be based on the conduct of the directors, not
in regard to the private life or affairs, but with regard to the company's business. Furthermore,
the lack of confidence must spring, not from dissatisfaction at being outvoted on the business
affairs or on what is called the domestic policy of the company. On the other hand, wherever
the lack of confidence is rested on the lack of probity in the conduct of the company's affairs,
the former is justified by the latter, and ‘just and equitable’ that the company be wound up16.

16
Loch v. John Blackwood Ltd., [1924] AC 783 (PC).