It is well settled that, in most cases, the arbitral tribunal, being a creature of the arbitration agreement between signatory parties, cannot pass orders against third-parties/ non-signatories. However, recently, the Indian Judiciary has begun to apply the ‘Doctrine of Piercing the Corporate Veil’ or ‘Alter Ego Doctrine’ to arbitration proceedings in order to bind non-signatories to the arbitration agreement in certain circumstances.

The said doctrine may provide an effective solution to a party in situations where such parties are unable to procure an effective remedy against a signatory to the arbitration agreement for reasons such as the illiquidity of the signatory or fraud. This doctrine may be of particular use to investors/ creditors involved in disputes with investee/debtor companies who are signatories, where there has been an intentional secretion of funds, from the signatory investee/debtor companies to third-parties who are non-signatories to the arbitration agreement, for the purpose of defeating the rights of the investors/creditors.

Given the occurrence of several unprecedented corporate frauds in recent times, the doctrine of lifting the corporate veil has become an increasing important tool which may be used by investors/creditors to affix liability on non-signatories to whom funds of the signatories have been diverted.

This paper analyses the evolution of the judgments of the Indian judiciary relating to the doctrine of piercing the corporate veil (alter ego doctrine). From this analysis we determine whether the said doctrine may be applied at different stages of arbitration proceedings for seeking relief against non-signatory/third-parties.

Doctrine of piercing the corporate veil

What is the doctrine of piercing the corporate veil?

The doctrine of piercing the corporate veil is a legal doctrine that essentially provides that while a company has an independent and separate legal personality, in certain exceptional circumstances this corporate façade may be pierced disregarding the separation between entities organized in corporate form with limited liability of shareholders. The doctrine has been applied to fasten liability on the ‘alter ego’, being an entity, whether a promoter, subsidiary entity, parent entity, etc., separated by the corporate façade. It is generally applied in situations where prevailing circumstances warrant that the company’s legal personality is disregarded in the interest of fairness and equity.

Judicial recognition of the doctrine of piercing the corporate veil

The doctrine of piercing the corporate veil is well recognized by the Indian Judiciary which has applied the doctrine as an exception to the theory that a company has a legal and separate entity and may be applied to extend liability to the shareholders/affiliates of the company in certain circumstances. In the landmark judgment in Life Insurance Corporation of India vs. Escorts Limited2 the Supreme Court laid down certain general circumstances where the doctrine may apply including where a statute itself contemplates lifting the veil, where fraud is intended to be prevented and where a taxing statute is sought to be evaded. However, the Supreme Court also noted that applicability of the doctrine cannot be constrained to a particular set of circumstances, it is dependent on the realities of each case and the requirement of doing justice on all the parties.

Contributed by: Nitesh Jain, Partner; Aditya Malhotra, Senior Associate

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