Affixation of Liability: Lifting the corporate veil under India’s insolvency law

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In company law, it is a well-established principle that a company has a legal existence independent of its shareholders. An exception to this principle is the doctrine of lifting the corporate veil, i.e. looking beyond the separate corporate identity and placing responsibility on the actual perpetrators, i.e. the company’s management. Generally, Indian courts have used this doctrine to avoid the perpetuation of fraud[i]tax evasion[ii]or where the body corporate is contrary to justice, convenience and the interest of revenue or the public interest[iii]or when it is a legal provision[iv].

Indian insolvency courts have also pierced the “corporate veil” to verify the identity of the resolution seeker of a company undergoing insolvency to prevent backdoor access to corporate management. in the old days.[v]. In the recent case of Yaduvir Singh Sajwan & Ors. v. M/s. Som Resorts Pvt Ltd (Som Resorts case), the National Company Law Court (NCLT) lifted the corporate debtor corporate veil to determine the true defaulting parties in insolvency proceedings under the Insolvency and Bankruptcy Code, 2016 (Coded).

Som Resorts Case Facts

Som Resorts Pvt. ltd. (Som Resort) launched a commercial-residential project (Project), for which Cosmic Structures Ltd. (Cosmic) was named a marketing and advertising agency. Several individuals (home buyers) made payments to Cosmic for the reservation of units under the project and secured possession within three years. This arrangement has also been reduced to writing between Som Resorts and home buyers in a builder-buyer agreement. Before the units could be delivered, the Delhi High Court ordered Cosmic to be liquidated, and the High Court-appointed official liquidator also sealed the project as Cosmic property.

Eventually, a memorandum of understanding was signed between Cosmic, Som Resorts and the homebuyers, in which Som Resorts committed to complete the project and return possession to the homebuyers within 18 months of unsealing. of the project. Som Resorts has also agreed to refund the full amount received from the homebuyers with 18% interest if it fails to complete the project within the stipulated time. However, because Som Resorts not only failed to deliver possession of the units, but also neglected to repay the amounts agreed upon in the Memorandum of Understanding, the homebuyers approached the NCLT to seek Som Resorts’ insolvency.

In the NCLT, Som Resorts has taken a position as follows:

a. Payments by homebuyers for booking units in the project were made to Cosmic and not Som Resorts;

b. Som Resorts had appointed Cosmic only as a marketing agent and had no right to accept such payments from homebuyers;

vs. The payments made by the Buyers to Cosmic were made without the knowledge of Som Resorts and, consequently, no debt is due and payable by Som Resorts towards the Buyers; and

D. The insolvency of Som Resorts cannot be initiated due to a default by Cosmic.

The NCLT decision

NCLT noted that in the Builder Buyer Agreement, Som Resorts was identified as the developer while homebuyers were defined as proposed space buyers, and therefore this very document established that the project units were allocated and payments were received with the knowledge of Som Resorts. The NCLT further noted that Som Resorts and Cosmic were run by the same person. Lifting the corporate veil, the NCLT noted that under the guise of a principal-agent relationship, Som Resort management had used Cosmic to collect money from homebuyers with an ulterior motive. The NCLT found that the substance of the payments Cosmic received from the homebuyers was for the project being developed by Som Resorts, and it cannot escape its liability to these units or it would be detrimental to the homebuyers.

The NCLT determined that Som Resorts was the ultimate beneficiary of all transactions between Cosmic and homebuyers. As he had not completed the project and made payments to the homebuyers, insolvency proceedings were initiated against Som Resorts.

Our thoughts

Indian courts have pierced the corporate veil when they find that a corporate body is being abused for committing fraud. Prior to the Som Resorts case, the lifting of the corporate veil in insolvency law was widely used to determine the true beneficiaries of a resolution plan submitted for a corporate debtor. The Som Resorts case further expands the ability of insolvency courts to lift the corporate veil and ensure that the debtor company does not escape liability under the Code by using the disguise of a corporate entity. . The NCLT’s decision to disregard the corporate veil in assigning liability to Som Resorts can be said to be in keeping with the spirit of the Code.

It should be noted that in India, real estate developers launch specific projects within the framework of a Special Purpose Vehicle (VSP). The SPV structure is used to protect the parent company from the real risks taken by the specific project. We are of the view that the judgment in the Som Resorts case correctly used the fundamental principles of the law relating to the “lifting of the corporate veil” by admitting the “true” promoter into the salvage process, even if the default s is produced in the SPV. The judgment would be viewed favorably by homebuyers, in the event that the parent company used the SPV for the purpose of committing an illegality, as the parent company would still be responsible for the failure of the SPV.

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