'Lifting of corporate veil' applies to transfer of mining lease if found against public interest: SC [Read Judgment]

A two judge bench of the Supreme Court comprising of Dave & Goel JJ in State of Rajasthan & Ors v Gotan lime stone khanji udyog pvt. Ltd. & anr. Today held that lifting of corporate veil shall also apply to cases where transactions relating to transfer of mining leases are involved. The bench speaking through Goel J held that even where the transactions separately viewed are prima facie legal, the Court shall lift the veil to test their true nature.

The bench was engaged in an appeal from Rajasthan High Court by the State of Rajasthan. M/s. Gotan Limestone Khanji Udhyog (GLKU), a partnership firm, held a mining lease for mining limestone. The lessee applied for transfer of the lease in favour of M/s. Gotan Limestone Khanji Udhyog Pvt. Ltd. (GLKUPL). The application stated that the lessee was a partnership firm and wished to transfer the lease to a private limited company which was mere change of form of its own business by converting itself from a partnership firm into a private limited company. The partners of the firm and Directors of the company were the same and on transfer, no illegal benefit, price or premium was taken from the transferee. The transfer was allowed on that basis. After seeking the said permission, the newly formed private limited company instead of operating the mining lease itself sold its entire shareholding to another company allegedly for Rs.160 crores which is alleged to be the sale price of mining lease.  On this development, a show cause notice was issued proposing to cancel the transfer order on the ground that contrary to the statement in the application for transfer that the partners of the partnership firm will be Directors of the private limited company, the Directors of the private limited company who were partners of the firm were replaced by new Directors and the private limited company was listed as subsidiary of Ultra Tech Cement Limited Company (UTCL). The respondents contested the show cause notice by saying that transfer of shareholding and change of Directors did not amount to transfer of mining lease nor it affected validity of permission for transfer from GLKU to GLKUPL.

The main issue framed by learned Single Judge of Rajasthan High Court for consideration was as follows: "Whether the action of shareholders of the Company in transferring its shares to Ultra Tech Cement Limited and consequently, the Company becoming wholly owned subsidiary of Ultra Tech Cement Limited amounts to violation of Rule 15(1) (b) of the Rules is the issue which requires consideration." And held that as per inter-se relationship between holding and subsidiary Companies and fundamental principles regarding distinction between a shareholder and the Company, it is apparent that merely on account of the Company becoming a subsidiary of Ultra Tech Cement Limited on account of certain action of the shareholders of the Company, it cannot be said that the Company is being directly or indirectly financed to a substantial extent or the Company's operations or undertakings are substantially controlled by Ultra Tech Cement Limited, regarding which there are absolutely no allegations or material whatsoever. Therefore, on account of the petitioner-Company becoming subsidiary of Ultra Tech Cement Limited, in view of the law laid down by the Hon'ble Supreme Court as noticed hereinbefore, it cannot be said that ipso facto the provisions of Rule 15(1) (b) of the Rules have been violated by the lessee i.e. petitioner Company. This was affirmed by the Division Bench of the High Court.

In para 22 of the judgment, Justice A.K.Goel summarised the factual matrix as -

22…In the present case there are two transactions. Viewed separately, there may be nothing wrong with either or both but if real nature of transaction is seen, the illegality is patent. In first transaction of transfer of lease from the firm to the company, with the permission of the competent authority, only disclosure made while seeking permission for transfer is of transforming partnership business into a private limited company with same partners as directors without there being any financial consideration for the transfer and without there being any third party. There is perhaps nothing wrong in such transfer by itself. In the second transaction, the entire Page 15 15 shareholding is transferred for share price and control of mining lease is acquired by the holding company without any apparent price for lease. Technically lease rights are not sold, only shares are sold. No permission for transfer of lease hold rights may be required.

The bench held that the doctrine of lifting the veil can be invoked if the public interest so requires or if there is allegation of violation of law by using the device of a corporate entity. In the present case, the corporate entity had been used to conceal the real transaction of transfer of mining lease to a third party for consideration without statutory consent by terming it as two separate transactions – the first of transforming a partnership into a company and the second of sale of entire shareholding to another company. The real transaction was sale of mining lease which is not legally permitted. The bench went on to hold that constitutional principles and the regulatory regime in relation to the mining leases of minerals which vest in the State cannot be defeated by the abstract doctrine of corporate personality being separate from the entire body of shareholders without having regard to the real nature of transaction and the well known exceptions to this abstract doctrine.

It was also reiterated that mining rights belong to the State and not to the lessee and the lessee had no right to profiteer by trading such rights while evoking the public trust doctrine. It was emphasized that while discerning true nature of the entire transaction, court has not to merely see the form of the transaction which is of sale of shares but also the substance which is the private sale of mining rights avoiding legal bar against transfer of sale rights circumventing the mandatory consent of the competent authority. Consent of competent authority is not a formality and transfer without consent is void. The minerals vest in the State and mining lease can be operated strictly within the statutory framework.

Conclusively, the appeal was allowed and the judgment of the High Court was set aside and the state was to frame and notify its policy in the matter within one month while ordering status quo.