Lifting of corporate veil in Related Party Transaction u/s 29A of IBC, 2016.

Introduction: 

The term “Company” is very comprehensive in nature which may include individuals,
partnerships, and corporations. A company is considered as a different legal entity under the
Companies Act, 20136. Being an independent entity, it allows the people of the company to
take certain advantages like holding properties in the name of a company, being able to sue
anyone, and even holding an intellectual property. But with all the pros comes its ownhas
cons. From time- to- time people have taken undue advantage of their company’s separate
legal entity to avoid obligations and liabilities imposed on them through an Act. To deal with
such irregularity, the concept of Lifting/Piercing of the Corporate Vveil was introduced. The
jurisprudence of ‘separate legal entity’ was the centre of discussion inof various landmark
cases like Salomon v. Salomon & Co. Ltd. 1 and Lee v. Bee’s Air Farming Ltd. 2 which gave
rise to the concept of “Piercing the veil”.
In simple terms, Lifting of Corporate Veil is an exception to the status of ‘Separate Legal
Entity’ of a company. Thus, the Court can lift the veil of a corporation to see who is
responsible for the omission of obligations and duties. 

In Cotton Corporation of India Limited, Bangalore v. G.C. Odusumath and Ors. itIt was held
that, T the Lifting of Corporate Veil shall not be a rule unless it is clearly provided by a
statute or where a case of fraud has been established. It is thus clear that the Indian Judicial
System recognizes two types of lifting i.e., Statutory and Judicial.
While, Company Act, 20136 provides for certain provisions to lift the corporate veil, there is
no express provision given under the Insolvency and Bankruptcy Code, 2016 (“Code”) and
thus Court has to interfere to lift the veil to safeguard the objective sought by the Code. 

The Doctrine finds its implementation under Section 29A of the IBC, 2016 3. Article 29A was
inserted in IBC, 2016 through the Insolvency and Bankruptcy Code (Amendment) Act, 2017
and was later amended in 2018 through Insolvency and Bankruptcy Code (2nd Amendment)
Act, 2018. 

1 Lee v. Lee’s Air Farming Ltd. ([1961)] AC 12 (PC).

2Salomon v. Salomon Co. Ltd. (1897) AC 22.
3Insolvency and Bankruptcy Code, 2016 § 29A, No. 31, Acts of Parliament, 2016 (India).
Article 29A of the Code gives a list of people, who by themselves or with any other person
acting jointly or in concert with such person, shall not be eligible to file for a resolution
application. This obviated any related party transactions taking place amid Corporate
Insolvency Resolution ProcessCorporate Resolution Insolvency Proceedings (“CIRP”) to
ensure smooth functioning and implementation of the Code. 

Lifting of Corporate Veil u/s 29A of IBC, 2016: With Special Reference to
ArcelorMittalArcelormittal India Pvt. Ltd. v. Satishsatish Kumarkumar Guptagupta.4 

BeforePrior to the enactment of the Insolvency and Bankruptcy (Amendment) Act, 2017
there werewas no eligibility criteria to submit a resolution and bid for a stressed asset in
CIRPPR. This paved a path for promoters, who influencedhad influence over more than one
company to make a default on loans in one company and then bid for the stressed asset
through another, over which they had control, for a much cheaper rate. This deprived other
creditors offrom their rights to participate in the Corporate Insolvency Resolution
Proceesdings. Such loopholes were nullifying the object sought by the Code.

The ArcelorMmittal's case (Popularly known as the “Essar Steel Case”) was perhaps the most
important judgment which dealt with Llifting of Vveil in related party transactions u/s 29A of
the Code. The case revolves around insolvency petition filed by Financial Creditors of Essar
Steel India Limited (“ESIL”) for repayment of Rs. 45000 crore debts. Both ArcelorMittal
India Pvt. Ltd. and Numetal submitted their Expression of Interest (EOI) for the revival of
ESIL.

On the one hand, ArcelorMittal India (“AM India”) Pvt. Ltd. is a subsidiary company to
ArcelorMittal Netherlands B.V (“AM Netherland”) which held 29.05% shares in Uttam
Galva Steel Limited. In pursuant to their shareholding in Uttam Galva Steel Limited, AM
Netherlands becames their promoters. The accounts of Uttam Galva Steel Limited was
declared as a Non-Performing Asset (NPA) by Canara Bank and Punjab National Bank.
While on other hand, Numetal was a Joint Venture Entity newly incorporated by Shri
Rewant Ruia (Son of Shri Ravi Ruia, Promoter of Corporate Debtor ESIL) 7 days beforeprior
to EOI. Aurora Enterprise Limited (“AEL”) held 100% shareholdings of Numetal, which was

4ArcelorMittal India Pvt. Ltd. v. Satish Kumar Gupta Civil Appeal Nos 9402-9405 of 2018.
a Ruia Group Company. And shares of AEL were in turn held by Aurora Holding Limited,
100% of whose shares were held by Shri Rewant Ruia (Former director of Corporate Debtor
i.e. ESIL). 

The Resolution Plan of both the companies wasere found to be ineligible under
subsectionsub-section (c), (f), (i), (g) & (f) of Article 29A of the Code. The Court took a
purposive interpretation while defining terms like “Control” and “Under Management”. The
SCHC rightly stated that a wooden and literal interpretation would not help the court to lift
the corporate veil to see through the real person behind a company. The Court also took help
of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulation to interpret
“Acting jointly” and “In Concert” as these terms wereas not defined in IBC, 2016.

The account of Uttam Galva was declared as NPA one year prior to the commencement of
CIRPPR by Canara Bank and PNB and thus AM India Pvt. Ltd.’s resolution plan was found
ineligible under sub-section (c) of 29A and thus rejected ionhenceforth. While Numetal was
also found to be ineligible for both the resolution plan submitted by them under various sub-
sections of 29A. Firstly in 2017, when the first plan was submitted, it was rejected on the
grounds that Ravi Ruia had controlling stakes in AEL which was a shareholder of Numetal.
At this stage, there wasere no doubt whatsoever that Shri Rewant Ruia (son of Ravi Ruia)
was acting in concert with his father. 

Prior to the filing of the second resolution plan, AEL sold all of its shareholdings and exited
from Numetal in order to be eligible u/s 29A of the Code. But the SC stressed on the fact that
the amount of Rs. 500 crore was given by AEL to Numetal so that it could deposit the
required earnest money along with the Resolution Plan furnished by Numetal. The said
amount remained with the Resolution Professional even after AEL divested its shareholding
in Numetal. This gave rise to the rebuttal permission of connection of Ruia Group to
Resolution Application. 

Since both the parties took undue advantage of lacunas left behind in the Code, the Court had
to apply creative interpretation to Article 29A of the code.  The SupremeHigh Court
combined the Literal Interpretation of various sub-provisions of Article 29A while keeping
the object of the Code upfront. This shaped the implementation of Article 29A positivelyin a
positive way. 

What Lies Aahead? 

To remove the irregularity under article 29A of the Code, The Government of India brought
the Insolvency and Bankruptcy (Second Amendment) Act of 2018. The term “Related Party”
was inserted in the Code via sub-section 24A which gave an exhaustive list of people/entities
coming under the ambit of a related party. The Supreme Court in Swiss Ribbons Pvt. Ltd &
Ors v. The Union of India5 (“Swiss Case”) upheld the constitutional validity of Section
29A(jJ) read with Section 5(24A). The Court held that persons who act jointly or in concert
with others are connected with the business activity of the resolution.

The Court further held that, the person mentioned in the definition of “Relative” will have a
connection to the business of the resolution applicant and hence the term “Related Party” &
“Relative” shall be read noscitur a sociis.

Conclusion:
While the jurisprudence of IBC, 20163 is evolving, there have been some crucial changes
brought to uphold the objective sought by the CodeAct. In cases pertaining to the Llifting of
the Ccorporate Vveil, the Court will have to go beyond the literal interpretation of various
definitions. The Court in the Swiss Case took a comprehensive view, including both, natural
and artificial persons under the ambit of Article 29A. Such wider connotation applied to
Article 29A will give greater flexibility to Court/Tribunals for interpreting important terms
depending upon facts of each case for adjudicating such matters in the future.

5 Swiss Ribbons Pvt. Ltd & Ors v. The Union of India Writ Petition (Civil) No. 99 of 2018.