'Governments Can’t Shirk From Liability To Abide By Judgments, Decrees & Awards': Delhi High Court Lifts Corporate Veil In DAMEPL-DMRC Dispute

Lifting the corporate veil, Justice Yashwant Varma observed that the governments cannot shirk from their liability to abide by binding judgments, decrees and awards. 

The court added that if such a situation were permitted to hold, the very structure of the adjudicatory and judicial system would falter and crumble.

“Both by virtue of the capital invested in the corporation as well as the control vested and exercised by them over its affairs, the Union Ministry and the GNCTD must be recognised in law as being in absolute control and the directing mind. They cannot hide behind the veil of corporate personality especially when it comes to the discharge of binding obligations owed by the DMRC. In any case public policy demands that the veil be lifted and they be commanded to take appropriate steps to enable the DMRC to meet the obligations flowing from the award,” the court said.

It thus directed both the principal shareholders to forthwith attend to DMRC’s request for extension of sovereign guarantee or subordinate debt to enable the corporation to make payment of unpaid dues.

How the court lifted the Corporate Veil?

Observing that a corporate veil should not come in the way of execution of a binding and well settled legal obligation, Justice Varma said that DMRC must necessarily be recognised as being a “mere alter ego of the two shareholders.”

“The two sovereign entities exercise control over the DMRC by virtue of the composition of its Board. It is their equity and debt contributions which enables the DMRC to carry out its functions and discharge its statutory obligations,” the court said.

Observing that the Union of India and Delhi Government are not mere individuals having a business interest in a corporate venture but sovereign governments in their own right, the court said:

“The circumstances of the present case thus clearly mandates and warrants the corporate veil being lifted and torn apart and for the Court recognising the GNCTD as well as the Union Ministry being in complete and total control of the affairs of the DMRC.”

The court said the proceedings for execution have been instituted in respect of an Award which had been rendered way back in 2017 but despite various orders passed, DMRC is yet to liquidate the liability flowing from and under that Award.

It said while legal systems around the world have evolved their own tests or grounds on the basis of which that doctrine may be applied, it is manifest that the shield of a separate legal personality is neither inviolable nor impenetrable.

Referring to various judicial precedents, the court said that the doctrine of lifting of the corporate veil is no longer recognized to be applicable only in the context of the “facade and sham tests that have held the field for centuries” but may also be applied in a case where public policy or public interest so demand and require.

It added that if decrees and judgments of courts were to be rendered inexecutable and courts were to simply be forced to stand on the sideline, it would clearly shake people’s confidence in the legal system and its very efficacy.

“Commerce today straddles borders and boundaries of regions and countries. That has indubitably thrown up its own share of original and novel questions. These transformational and normative changes warrant this Court to observe that the evolution of the laws cannot be tied down to conventional creeds. The web of complex corporate structures and which many a time spread across jurisdictions commands the courts to develop and adapt,” the court said.

It added that the court’s power to peep behind the corporate veil must be recognised and held to be justifiably invoked where questions of public policy, public interest or enforcement of settled legal obligations arise.

“Judgments and decrees handed down by a competent court represent and symbolize declarations which bind parties to the lis. No party should be permitted to wriggle out from the obligations which flow therefrom. Taking any other view would result in a systemic breakdown of the adjudicatory mechanism that has evolved over centuries. It is in such situations that the issues of public policy and public interest assume significance. A corporate veil in any case should not come in the way of execution of a binding and well settled legal obligation,” it said.

Justice Varma also observed that the Supreme Court in various decisions has prophetically observed that the doctrine of lifting of the corporate veil must be left to develop and evolve.

"Those decisions had in any case, and in the considered opinion of this Court, deliberately and consciously refrained from exhaustively chronicling or enumerating the myriad circumstances in which that precept could be applied. None of those decisions are liable to be read as recognizing fraud, façade or sham as being the solitary tests for application of the lifting doctrine. The power of the Court to peep behind the veil thus must be recognised and held to be justifiably invoked where questions of public policy, public interest or enforcement of settled legal obligations arise. The aforesaid three factors must be recognised as being the cornerstones of our judicial system itself. The precedents noticed above had resorted to the lifting of the veil doctrine where to overcome injustice and inequitable circumstances or results."

The court said judgments and decrees handed down by a competent court represent and symbolize declarations which bind parties to the lis.

"No party should be permitted to wriggle out from the obligations which flow therefrom. Taking any other view would result in a systemic breakdown of the adjudicatory mechanism that has evolved over centuries. It is in such situations that the issues of public policy and public interest assume significance. A corporate veil in any case should not come in the way of execution of a binding and well settled legal obligation," it added.

Union of India and GNCTD had earlier argued that they could not be held liable to bear the liabilities flowing from the Award since they were merely shareholders in the Corporation.

The court passed the directions in its decision on execution petition filed by DAMEPL seeking enforcement of the arbitration award dated May 11, 2017 which attained finality in 2021. Read about the directions of the court and entire factual background of the case here

Also Read: Explained: Why Is There No End In Sight For DMRC-Reliance Infra Dispute Despite Court Orders?

Title: DELHI AIRPORT METRO EXPRESS PRIVATE LIMITED vs DELHI METRO RAIL CORPORATION LTD

Citation: 2023 LiveLaw (Del) 245

Click Here To Read Judgment