In the captioned matter Justice A.K. Menon of the Special Court at the Hon’ble Bombay High Court formed under the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992 discussed the issue of lifting of corporate veil, while deciding execution proceedings.

Facts:

Respondent No. 1 in the Execution Application is a Company incorporated under the provisions of the Companies Act, 1956. Respondent Nos 2,3 and 5 were the then directors of the Respondent No. 1 Company, who had later resigned. Subsequently, Respondent No. 6 was the notified party on whose behalf the Applicant filed the miscellaneous application for recovery of a sum of Rs. 85,18,676.18/- together with further interest. Initially, in the year 1992, M/s. Aishwarya Traders (P) Ltd. (“Aishwarya Traders”) took a loan of Rs. 85,18,676.18 from Fairgrowth Financial Services Ltd (“Fairgrowth Financial”) for a period of six months. There being a default in making payment, a miscellaneous application was filed by the Custodian on behalf of Fairgrowth Financial. The court decreed a sum of Rs. 34,85,000/- with interest to be paid by Aishwarya Traders. There was non-compliance of the decree and subsequently execution proceedings were perused. It transpired in the course of the execution proceeding that Aishwarya Traders was directed to disclose details of its Directors at the relevant time along with their addresses.

It was contended by the counsel of the Applicant that the concerned directors held directorship in other companies as well. Suspicion was raised on few transactions of loans believed to have taken place between the companies including Mid East Engg. Co. (Bombay) Ltd. i.e. the Respondent No. 1 herein and ICD Kaushalya Marketing (P) Ltd.. He contended that disclosure of director’s details were necessary in order to facilitate lifting of corporate veil of the companies.

Counsels for the respondents opposed the argument of the applicant regarding lifting of corporate veil. The counsels contended that there was no connection to prove the necessity for lifting of corporate veil. 

Ruling and Analysis:

In relation to the issue of lifting of corporate veil, the Court  relied on Indowind Energy Limited v. Wescare (India) Limited (2010) 5 SCC 306 wherein the Court observed that each company is a separate and distinct legal entity and the mere fact that two companies have common shareholders or common board of directors will not make the two companies a single entity nor will existence of common shareholders or directors lead to inference that one company will be bound by the acts of the other.

The Court finally denied the application for lifting of the corporate veil by noting the following:

The question which falls for consideration is whether in the instant case there is any justification in directing lifting of the corporate veil. There is no substance in the allegation of fraud and nothing has been shown to me which will amount tofraudulent conduct. There is substance in Mr. Ghogare argument that save and except for Shri Balakrishna Tribhovandas Rajgor all other directors have come on board several years after the transaction in question. It is not possible to attribute to them fraudulent conduct.