ENVIRONMENT LAW

SEMESTER VIII

A RESEARCH PAPER ON:

Piercing the Corporate veil for Environmental Crimes

SUBMITTED TO:

Dr. Priya Kumari

Assistant Professor,

Environment Law,

NMIMS Kirit P Mehta School of Law

SUBMITTED BY:

Name: Prakshal Bhargatiya

Roll No.: A018

BA LLB (Hons) Division A

(2019-24)

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Table of Contents
Abstract.....................................................................................................................................2

Introduction..............................................................................................................................3

Research Objective...................................................................................................................4

Literature Review.....................................................................................................................4

The Corporate Veil Doctrine...................................................................................................5

Salmon v Salmon..................................................................................................................5

A brief overview of the impact of the judgement...............................................................5

Piercing the corporate veil...................................................................................................6

CRITICAL ANALYSIS...........................................................................................................6

Subsidiary companies & parent companies.......................................................................6

Cases relevant to enterprise liability...................................................................................7

Directing mind theory..........................................................................................................8

Vedanta Resources – A case Analysis......................................................................................8

Conclusion.................................................................................................................................9

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Abstract
A notable exception to the generally acknowledged rule of separating a firm from its
members has been lifting the corporate veil. It creates a gap in the bulletproof armour of
limited liability and offers the chance to hold members personally liable for the actions they
do while acting on behalf of the company. Such a law is required to control the behaviour of
well-known and strong corporations that have indirectly hurt or threatened numerous groups
inside society. This research paper will focus on businesses that engage in extensive
environmental degradation and cases where courts have recognised that it is not enough to
hold these businesses' subsidiaries accountable for their actions; the loss must be made up for
by holding those in positions of power accountable. It is essential to use this approach and
hold parent corporations accountable for any environmental harm that results from their
subsidiaries operating in India, as globalisation has widened the window for expansion and
international reach. The purpose of this article is to provide background information on the
veil theory, corporate criminal culpability, and enterprise liability with respect to
environmental law in India through an analysis of judicial cases.

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Introduction
The idea that a company is a Separate Legal Entity is the cornerstone of company law. It is a
fictitious or legal person with the ability to bring or receive lawsuits in its own name. This
generally established concept, also referred to as the separate legal personality principle,
limits the liability of a company's shareholders, directors, owners, and members by separating
them from the firm. A corporation is a creation of the law, hence this is the most important
idea in company law because it explains why individuals create businesses in the first place.
The British House of Lords first used this idea in the Salomon v. Salomon and Co. Ltd 1.
decision. Businesses started off as ways to make money. Globalization and digitization
helped them gradually exert more and more control over individuals by influencing societies2.

Via their subsidiaries, businesses began operating across national lines and in every continent.
This industrialization had a noticeable effect on the environment in addition to directly
affecting humans. These included unstable and unpredictable meteorological conditions as
well as air, water, and land contamination. As a result, environmental laws came under
scrutiny and an effort was made to severely penalise the wrongdoers. Companies began to
abuse the advantage granted to them in the form of Separate Legal Personalities at this point.
The defence of being a different legal entity was used to conveniently brush off blame
whenever the law assigned parent companies with responsibility for the extensive
environmental destruction caused by their subsidiaries. Because they were unable to obtain
enough recompense, victims suffered equally. When the law ultimately had to develop the
Theory of Piercing the Corporate Veil, this problem also became pervasive in other corporate
crimes. When it is fair to do so, the Company Act of 2013 outlines a few criteria on which the
curtain protecting parent businesses and executives may be lifted. Yet, when it came to the
environment, judges had the authority to determine whether or not piercing the veil is
permitted by the law based on the facts of the case because there was no particular, codified
legislation with guidelines. Corporations continued to harm the environment despite rules and
statutory laws as if it were just another cost of doing business in the nation. Examples like the
Bhopal Gas Disaster and the Oleum Gas Leak in India brought to light the horrors that
resulted from small mistakes on their part, placing a great deal of blame on their acts. Courts
have finally recognised the necessity to hold parent firms accountable for the actions of its
subsidiaries. The piercing of the corporate veil may therefore be appropriate in such
circumstances.
1
Salomon v. Salomon and Co. Ltd. (1897) AC 22.
2
Supra

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Research Objective
The paper's main research issue is: How much corporate culpability is attached in the event
that one of its subsidiaries causes significant environmental damage? So, using case studies
and judicial analyses of famous instances like Salomon v. Salomon, the Bhopal Gas Disaster,
The Mauritius Oil Spill, etc., the study will explore enterprise accountability with regard to
environmental degradation.

Literature Review
Winestone examines the legal framework for holding parent firms accountable for
environmental damage brought on by their subsidiaries in this article. She talks on the
shortcomings of the existing legal systems, like the doctrine of separate legal personality, and
makes the case for the creation of new legal systems that are capable of effectively addressing
environmental harm. The legal systems in India and the UK for holding parent firms
accountable for environmental damage brought on by their subsidiaries are compared by
Mishra. She evaluates the limitations of existing legal frameworks and recommends new
legal frameworks that can more effectively address environmental harm. Boyle talks on the
advantages and disadvantages of tearing down the corporate wall to make parent businesses
accountable for environmental damage done by their subsidiaries. He contends that although
putting in place such a legislative framework presents difficulties, it is essential to protect the
environment and ensure that businesses are held accountable for their deeds. The potential
drawbacks of breaching the corporate veil in order to hold parent businesses accountable for
environmental damage brought on by their subsidiaries are discussed by Millar. He contends
that while it is crucial to hold parent businesses accountable, it is also crucial to carefully
evaluate any unexpected repercussions, such as the possibility of deterring investment and
entrepreneurship. In this article, Farber examines the legal system for holding parent firms
accountable for environmental damage brought on by their subsidiaries and discusses its
shortcomings. In order to address environmental degradation more effectively and guarantee
that businesses are held responsible for their activities, he suggests new legislative
frameworks.

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The Corporate Veil Doctrine
Salmon v Salmon
The case involves Mr. Aaron Salomon, a businessman who made boots and leather goods.
After operating as a lone proprietor for many years, he ultimately made the decision to
incorporate Salomon & Co. Ltd. with him and a small number of family members as
stockholders. Unfortunately, the company shortly entered liquidation as a result of its
inability to pay its debenture holders, among which Mr. Salomon was both a key creditor and
shareholder. Due to the company's lack of independence and its function as Mr. Salomon's
agent, the creditors claimed in their court filing that the debentures should be revoked. The
House of Lords rejected this argument, arguing that a corporation is established to gain
individual identity and limit responsibility, in contrast to the lower courts, which accepted it.
This 1897 ruling, which shielded numerous stakeholders and directors as a result, has
subsequently been cited as the foundation for the veil concept3.

A brief overview of the impact of the judgement

Salomon v. Salomon garnered significant public attention and was incorporated into the
Companies Act of 1956 as well as company law. Later, when the same principle was
vigorously defended by several courts, the impact of this ruling could be recognised. The
separation between a company's contractual and other non-proprietary rights and obligations
from those of its directors or members was the focus of the case Lee v. Lee's Air Farming
Ltd4. Mr. Lee, the only owner of the respondent company, passed away in an accident, and as
a result, his widow filed a lawsuit against the business. The court recognised Lee's status as a
worker within the meaning of the Act due to the separate character of the corporation adopted
from Salomon's case, and as a result, his widow's claim was successful. Another case,
Macaura v. Northern Assurance Co. Ltd., had a prominent shareholder who had insured
company assets in his own name. When the company sought insurance, the courts denied the
request, citing the differences between the parties' holdings.

3
Macaura v. Northern Assurance Co. Ltd [1925] AC 619
4
Lee v. Lee's Air Farming Ltd., 1961 AC 12.

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Piercing the corporate veil
In light of dishonest actions committed by individuals, including utilising the firm as a
vehicle for fraudulent activities, the notion of piercing or removing the veil started to be
disfavored by the courts between 1989 and the present. The regional council courts declared
an exception to the veil theory in the case of Woolfsan v. Strathclyde 5; if unique
circumstances showing that the corporation is a "mere facade concealing the truth" can be
identified. Similarly, the courts have reaffirmed in Gilford Motor Company Ltd v. Horne 6 and
Jones v. Lipman7 that the veil must be penetrated and appropriate liability must be assigned to
the relevant parties if the principal goal of creating a corporation is to evade legal obligations
or to commit fraud. Even Indian law recognised the notion and developed in accordance by
establishing criteria for lifting the corporate veil.

CRITICAL ANALYSIS
Subsidiary companies & parent companies
Section 2 (87) of the Companies Act of 2013 specifies the conditions under which a company
may be recognised as a subsidiary of another. "A company where the holding company
exercises or controls more than 50% of the entire share capital, either alone or together with
one or more of its subsidiary firms; or c. controls the makeup of the Board of Directors". As
long as it/they don't have more layers of subsidiary than necessary. A subsidiary business has
its own unique personality and cannot be referred to be the agent of the parent business. A
holding company may own a majority of the shares in a subsidiary firm, but it also may run
an entirely other business8. Its subsidiaries, which are run by these transnational parent firms,
are dispersed over the globe in today's world, which is characterised by globalisation and
digitization. Being a developing country that is rapidly expanding, India is home to many of
these subsidiary businesses.

The Bhopal Gas Disaster case has placed things in perspective and drawn attention to
subsidiary corporations in India that seriously harm the environment but are unable to be held
accountable since their parent companies claim they are different from the subsidiaries. Thus,
it is important to address the question of whether the corporate veil can be breached
specifically in these situations. The Indian Courts have noted in numerous rulings that it is
5
Woolfsan v. Strathclyde, 1978 SLT 159.
6
Gilford Motor Company Ltd v. Horne, 1933 Ch. 935 C.A. Horne.
7
Jones v. Lipman, 1962 1 WLR 832 L
8
Jonathan Macey & Joshua Mitts, The three justifications for piercing the Corporate Veil The Harvard Law
School Forum on Corporate Governance (2014), https://corpgov.law.harvard.edu/2014/03/27/the-three-
justifications-for-piercing-the-corporate-veil/ (last visited Mar 19, 2023).

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very difficult to categorise in what situations the corporate veil would be pierced because it
depends on a number of elements that need to be looked into.

Cases relevant to enterprise liability

In Life Insurance Corporation of India v. Escorts Limited and Others 9, it was decided that the
veil might be breached if connected entities were inextricably tied to one another and were
therefore a part of a single enterprise. Similar to this, in State of Uttar Pradesh v. Renusagara
Power Company10, the Hon'ble Supreme Court proceeded to open the lid of the subsidiary
named Renusagar, which was fully owned by Hindalco for an electricity sale-purchase
agreement. Renusagar was a subsidiary of Hindalco.

As per an agreement between both the corporations, Renusagar produces electricity which
Hindalco uses and at the same time enjoys certain benefits under the State Law for doing the
same. In this case, the court ruled that Renusagar was only Hindalco's alter ego and that the
two did not exist independently of one another. It is crucial to keep in mind that courts have
broad discretion in deciding whether or not to pierce the veil. Instead of utilising this
authority arbitrarily, courts often do not hold the parent firm liable for environmental harm
brought on by its subsidiary. Due to the fact that the majority of these subsidiaries have their
parent firms located in entirely different regions of the world, it consequently becomes a
completely new legal battle for the victims to obtain adequate compensation. Similar to the
vicarious liability theory, the main goal of holding parent firms accountable for the
ecologically damaging actions of their subsidiaries is to give victims more access to
compensation that a company might not be able to offer. The "Declaration on International
Investment and Multinational Enterprises," adopted by the Organisation for Economic Co-
operation and Development (OECD) in 1976, offers guidelines for multinational enterprises.
Despite not being enforceable, this code addresses the piercing of the corporate veil for
multinational firms11. The US Supreme Court ruled in United States v. Bestfoods12 that the
parent business can be held liable for the wrongdoing of its subsidiary. Yet, it must meet the
requirement that the parent firm must be closely linked to this improper behaviour. To be held
accountable, it must control it and use that control. The Indian Law has recognised this as
well. 15 Given that avoiding punishment is the primary goal of the veil in the first place, such

9
Life Insurance Corporation of India v. Escorts Limited and Others, 1986 1 SCC 264.
10
State of Uttar Pradesh v. Renusagara Power Company, 1988 AIR 1737.
11
Arturo Oropeza García, China and BRICS Project: General reflections, 5 Transnational Corporations Review
60–78 (2013).
12
United States v. Bestfoods, 524 U.S. 51 1998

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reasoning might make sense and be justified. In circumstances of severe environmental
deterioration, it surely defeats the objective of breaching the corporate veil.

1. because such degradation is frequently irreversible, and 2. because businesses start

negotiating it as an expense they must pay for creating this harm rather than seeing the small
compensation as a disincentive to stop such activities.

Directing mind theory

The "directing mind" approach has been developed by courts to impose criminal or civil
culpability13. This hypothesis complements the "degree of control" test since it seeks to
identify the person who was in control or held the reins at the time the wrongdoing occurred.
Parent firms delegate their responsibilities to their numerous subsidiaries worldwide in order
to avoid any penalties. They do, however, gain a variety of benefits and profits from them. 17
This left a sizable number of victims with little recourse or inadequate compensation for the
atrocities committed by the subsidiary. The Bhopal Gas Disaster, which left the entire nation
in shock, is a typical illustration of such a situation.

Vedanta Resources – A case Analysis

The Vedanta Resources case is a significant example of the increasing pressure on Indian
courts to hold parent companies liable for environmental damage caused by their subsidiaries.
The case involved the closure of the Sterlite Copper plant in Tamil Nadu, which was accused
of contaminating the groundwater and soil, leading to health problems for local residents. The
TNPCB shut down the plant after protests erupted over environmental and health concerns.

The NGT had earlier allowed the reopening of the Sterlite plant, but the Indian Supreme
Court overruled this decision and upheld the TNPCB’s decision to close the plant. The
Supreme Court also ordered Vedanta Resources to pay a penalty of Rs. 100 crore for
polluting the environment. This decision was significant because it recognized the importance
of protecting the environment and the health of local communities, and it also demonstrated
that the courts were willing to hold large corporations accountable for their actions.

The Vedanta Resources case also highlights the role of public protests and activism in
drawing attention to environmental issues and holding companies accountable for their
actions. The closure of the Sterlite plant was the result of sustained protests by local residents

13
James Gobert, The evolving legal test of corporate criminal liability, Corporate and White-Collar Crime 61–80
(2008).

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and environmental activists who highlighted the environmental and health concerns
associated with the plant's operations.

Overall, the Vedanta Resources case is an important example of the growing importance of
corporate social responsibility and the need to hold companies accountable for their
environmental impact. It demonstrates that the Indian courts are willing to take a firm stance
on environmental issues and that public pressure can be an effective tool for holding
companies accountable for their actions.

Conclusion
It should be noted that the corporate veil serves more as a shield than a veil when it comes to
holding parent companies accountable for the environmental crimes committed by their
subsidiaries, especially when they are multinational. The concept of a separate legal entity is
significant because it serves the purpose of establishing a business. India is already making
strides in this area compared to other countries, but if enterprise liability is properly created
and codified in law with clear rules that courts must abide by while retaining certain latitude,
the rights of many victims will be safeguarded. Enterprise Liability should become the new
standard in cases of environmental damage up till that is implemented. As the focus is more
on providing compensation to those who have been hurt and less on penalising corporations,
this shouldn't be too difficult. It is a notion with foundational elements in equity and public
policy. The world is witnessing extraordinarily volatile weather circumstances exacerbated by
man-made environmental calamities. The most recent incident was a Japanese ship's oil spill
off the coast of Mauritius, which prompted the country to declare an environmental
emergency29. As it has an exacerbated impact on future generations who are already
burdened to correct the environmental degradation created over time, it has become even
more necessary to dissuade multinational giants from committing such environmental crimes
and negligence.

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