Delhi High Court Lifts Corporate Veil in DAMEPL vs. DMRC: Governments Cannot Shirk from Liability to Abide by Judgments, Decrees, and Award

Delhi High Court Lifts Corporate Veil in DAMEPL vs. DMRC: Governments Cannot Shirk from Liability to Abide by Judgments, Decrees, and Award

The Delhi High Court observed that Union Ministry and Government of National Capital Territory of Delhi, (GNCTD), being the principal shareholders of the Delhi Metro Rail Corporation (DMRC), they cannot hide behind the veil of corporate personality especially when it comes to the discharge of binding obligations owed by the DMRC, hence, governments cannot shirk from their liability to abide by binding judgments, decrees and awards and must be commanded to take appropriate steps to enable the DMRC to meet the obligations flowing from the award.

The Delhi Airport Metro Express Private Ltd. (DAMEPL), a subsidiary of Reliance Infrastructure, had filed an execution petition seeking payment of the money owed by the DMRC as part of an arbitral award.

The execution petition relates to an award dated 11 May 2017. The challenge under Section 34 of the Arbitration and Conciliation Act, 19961 which was mounted by the Delhi Metro Rail Corporation came to be dismissed on 6 March 2018. DMRC was thereafter stated to have preferred an intra-court appeal which came to be partly allowed by the Division Bench in terms of its judgement dated 15 January 2019.

Aggrieved by the aforesaid, the execution petitioner preferred a Special Leave Petition before the Supreme Court which was allowed in terms of the judgement rendered on 9 September 2021.

The said decision stands reported as Delhi Airport Metro Express (P) Ltd. v. Delhi Metro Rail Corporation Ltd. The review petition preferred by DMRC seeking review of the aforesaid order also came to be dismissed by the Supreme Court on 23 November 2021.

DAMEPL claimed that the total arbitral award amount along with interest in its favor stands at over Rs. 8,000 crore, of which over Rs. 6,300 crore is yet to be paid.

The Central and Delhi governments each hold 50% shares in the DMRC. However, both refused to pay the money.

The award under consideration arose out of an agreement signed between the DMRC and DAMEPL in 2008 to develop and operate the orange line of the Delhi Metro that connects Indira Gandhi International Airport's Terminal-3 to Dwarka Sector-21.

In March 2022, the High Court had directed DMRC to pay the entire balance amount to the DAMEPL along with interest in two equal instalments, by 31 May. This order was upheld by the Supreme Court on 5 May.

In December 2022, the Supreme Court asked the High Court to proceed with the matter expeditiously and decide it in three months.

The stand taken up by the 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.

In this regard, the single judge Justice Varma, highlighted that these two sovereign entities exercise control over the DMRC by virtue of the composition of its Board and it is their equity and debt contributions which enables the DMRC to carry out its functions and discharge its statutory obligations.

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

The Court on records found that the said 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.

Justice Varma disagreed with the English courts which have been reluctant in expanding the applicability of the doctrine.

The judge opined that the doctrine is no longer recognized to be applicable only in the context of the facade and sham tests, and that the courts can employ the principle even in absence of these. The said principle may also, in an appropriate case, be liable to be resorted to where equity and the ends of justice may sanction such recourse, where legal obligations are sought to be avoided, as also in a setting where public policy or public interest so demand and require.

“A decree or judgment of a competent court must necessarily be enforced. Courts of justice would be failing in their duty if a decree were left to be a mere dead letter. 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 the confidence of the people in the legal system and its very efficacy.”

The Court was of the view that the Courts in United States and the European Union have adopted flexibility in their approach, and applied the principle on grounds of public interest or policy.

The judge emphasized that the Court’s power to peep behind the corporate veil must be recognized and held to be justifiably invoked where questions of public policy, public interest or enforcement of settled legal obligations arise.

The Court observed that, “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.”

The Court found it relevant to note that when the corporate veil is pierced, the action is not really one which is aimed at the shareholder as ordinarily understood in law. The shareholder is identified by the court principally since it represents the body and the soul of the corporate entity itself. It is the absolute control exercised by the shareholder over that corporate body which would convince and justify a court to proceed further.

Justice Varma after referring to catena of judgments passed by the Supreme Court in various decisions expressed 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 recognized 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 recognized 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,” observed the Court.

Lastly, the Court concluded that the veil of corporate personality was liable to be lifted.

In this backdrop, Court issued the following guidelines:

1. The Union Ministry as well as the GNCTD shall attend to the requests of the DMRC for extension of sovereign guarantees/subordinate debt enabling it to liquidate its liabilities under the Award;

2. If the Union Ministry or the GNCTD decline the request for providing sovereign guarantees or subordinate debt, the Union Ministry shall forthwith and at the end of two weeks, revert and repatriate all moneys received by it from DMRC post 10 March 2022 pursuant to its directives so as to ensure that the credit balance in the Total DMRC Funds, Total Project Funds and Total Other Funds reflects the balance as it existed on 10 March 2022;

3. Upon receipt of the aforesaid moneys, DMRC shall forthwith transfer to the escrow account, along with interest.