CENTRAL UNIVERSITY OF SOUTH

BIHAR
GAYA

SCHOOL OF LAW & GOVERNANCE

Assignment

TOPIC: Life Insurance Corporation of India Vs. Escorts Ltd.

Under the supervision of – Dr. P. K. Das

Submitted By- Saloni Kumari

Course: B.A. LLb(Hons)

Enrollment no.:CUSB1512135040

1
 ACKNOWLEDGEMENT

It is a great pleasure for me to present the final draft of the project

topic. I am very much obliged to my revered teacher Dr. Deo Narayan
Singh (Assistant Professor) of Central University of South Bihar,
Gaya who has given me a task to complete the project work. I am very
much helped by him regarding the formation of this final project. I
express my heartfelt indebtedness to Dr. Deo Narayan Singh who
showed me the path and helped me to understand the project topic. It
was not possible for me to make the final project if I was not being
helped by him. He acted as my mentor and also a guide to help me to
understand the whole of the provision and provided me with the proper
synopsis of the project work. I would like to express my gratitude
towards my parents for their kind co-operation and encouragement
which help me in completion of this final draft. I would like to express
my special gratitude and thanks to the computer lab assistant who
provided me all the facilities regarding the conditioned computer with
a good wi-fi net. My thanks and appreciations also go to my colleague
in developing the project and people who have willingly helped me out
with their abilities.

Thanks

2
 INDEX
S. No. Topic Pg. No.

1. Introduction 4

2. LIC India Vs. Escort 5-8

Ltd.
3. Fact of the case 6

4. Issue of the case 7-8

5. Development of the 8-10

law
6. Conclusion 11

3
INTRODUCTION

The world is becoming corporatised, and the time of the business owner living over his
little shop are well-nigh over. The world is also becoming smaller and, as it does, a
business’s reach spreads across multiple jurisdictions and through multiple subsidiary or
group companies.

In this age of corporatization, most jurisdictions recognize the concept of a company as a

separate juristic person, with an identity distinct and independent of its shareholders,
members or directors. This corporate existence separates a company’s identity from that
of its promoters or shareholders. It enables the company to contract in its own name, with
its shareholders and third parties, to acquire and hold property in its own name, and to sue
and be sued in its own name. A company has perpetual succession; its life is not co-
dependent with that of its shareholders and it remains in existence irrespective of any
change in its members, until it is dissolved by liquidation. The shareholders of a company
are not identified with the company and cannot be held personally liable for acts
undertaken by, or liabilities of, the company.

This independence or distinction is not a new concept. In the late 19 th Century, the
judgment in the classic case of Salomon v. Salomon[1] was passed, ruling that a company
is a separate legal entity distinct from its members and so insulating Mr. Salomon, the
founder of A. Salomon and Company, Ltd., from personal liability to the creditors of the
company he founded.

This is a fiction created by law and enables an organization of multiple owners to

function as a single identity. It also enables company longevity – by having its own
distinct personality, it can far outlive its body of owners. This legal fiction is integral to
the functioning of companies and is the fundamental basis or rationale for incorporation.
Such is the line, or the veil in place, between the corporate legal personality of a company
and its shareholders, that it cannot be crossed or lifted except in exigent circumstances.
Decisions of courts of several jurisdictions have followed and quoted the ruling

4
in Salomon, fine-tuning the principle of the corporate veil and circumstances under which
it may be lifted.

In certain situations, a court may lift or look beyond the façade of this fictional identity to
penetrate the inner-workings of the company or the shareholders behind the entity. An
offshoot of this is that these exceptions also allow a group of companies consisting of
otherwise independent and distinct companies, to be either treated as a single economic
unit, or to treat holding-subsidiary companies as one. By so doing, a court pierces or lifts,
the corporate veil.

The corporate identity of the company can be pierced in situations where this separate
identity is used as a shield masking wrongful or illegal ends, or used to conceal or defend
the persons in actual control of the company. Some of these exceptions have been
explicitly identified in statutes. Some others have been developed through judicial
precedents, which have developed the law and the principles for piercing the corporate
veil of companies, over time.

Life Insurance Corporation of India Vs. Escort Ltd.

One of the first Indian cases that dealt with the issue of a company as an independent
juristic personality and the lifting of the veil, known almost as well as Salomon, is the
ruling of the Supreme Court in the case of Life Insurance Corporation of India v. Escorts
Ltd. & Ors.

This case dealt with a non-resident portfolio investment scheme, which existed under the
erstwhile Foreign Exchange Regulation Act, 1973 (FERA). The scheme allowed non-
resident companies, which were owned by or in which the beneficial interest vested in
non-resident individuals of Indian nationality / origin was at least 60%, to invest in the
shares of Indian companies. Investment was allowed to the extent of 1% of the paid-up
equity capital of such Indian companies, and could not exceed a ceiling of 5%. Under the
scheme, 13 companies, all owned by Caparo Group Limited, invested in Escorts Limited

5
– an Indian company. Importantly, 60% of the shares of Caparo Group Limited were held
by a trust, whose beneficiaries were Swraj Paul and members of his family (all non-
resident individuals of Indian origin).

The investment by the 13 Caparo Group companies was challenged on the ground that it
was an attempt at circumventing the prescribed ceiling of investment of 1% under the
Scheme, and that, “One had only to pierce the corporate veil to discover Mr. Swraj Paul
lurking behind.”

The Supreme Court firstly noted the judgment in Salomon, and that it was firmly
established that a company once incorporated, has an independent and legal personality
distinct from the individuals who are its members. It also noted that only in certain
exceptional circumstances may the corporate veil be lifted, the corporate personality
ignored and the individual members recognised for who they are.

Eventually, however, the Supreme Court ruled that in the facts of this case, and only for
the purposes of ascertaining the ownership in the investment, lifting of the veil would be
necessary to a limited extent, i.e. to ascertain the nationality or origin of the shareholders.
It was not necessary to ascertain the individual identity of each of them. Merely because
more than 60% of the shares of the foreign investor companies were held by a trust of
which Mr. Swraj Paul and the members of his family were beneficiaries, could not deny
the companies the facility of the scheme on the basis that the permission granted was
illegal. As such, the Court ignored that the identity of the shareholders may be common,
thus recognising that each company was an independent juristic entity, looking only at
nationality for compliance with the requirements of the scheme.

The Supreme Court also took the opportunity to set out the basic conditions and
principles to be applied and the various circumstances under which the corporate veil of a
company could be pierced, i.e. to cast responsibility or liability for an act carried out by
the company. Such acts would include fraud or improper conduct, the evasion of a taxing

6
or a beneficent statute or where associated companies are inextricably connected as to be,
in reality, part of one concern and should therefore, be treated as such.

Facts of the case

With an intention to earn foreign exchange by attracting non-resident individuals of

Indian nationality or origin to invest in shares of Indian companies, the Government of
India decided to provide incentives to such individuas With prior permission of RBI.

Desiring to take advantage of the Non-Resident Portfolio Investment Scheme and to

invest in the shares of Escorts Ltd., (an Indian company), thirteen overseas companies,
twelve out of whose shares was owned 100% and the thirteenth out of whose shares was
owned 98 per cent by Caparo Group Ltd. designated the Punjab National Bank as their
banker (authorized dealer) and M/s. Raja Ram Bhasin & Co. as their broker for the
purpose of such investment.

Escorts Ltd. sought detailed information from Punjab National Bank and the brokers
about the names of investors and also whether the Reserve Bank of India has given
permission to them and Escorts didn’t register the transfer of share.

Life Insurance Corporation of India who along with other financial institutions
held/ as many as 52% of the total number of shares in the company, issued a
requisition dated 11.2.84 to the company to hold an extra ordinary general meeting for
the purpose of removing nine of the part-time Directors of the
company and for nominating nine others in their place.

Union of India, the Reserve Bank of India and the Caparo Group Ltd. claimed that the
requisition to hold the meeting was arbitrary, illegal, ultra vires etc

7
Issue of the case
Whether LIC has right of issuing requisition notice to hold extra ordinary
general meeting?

Judgement passed by the Supreme Court

1. New directors to continue as Managing Directors until the Board of Directors . take a
decision in the matter.

2. The action of the Life Insurance Corporation of india in issuing the requisition notice
to hold an extra ordinary general meeting of the Escorts Company Ltd. for the purpose of
removing nine of the part time Directors of the company and for nominating nine others
in their place is neither contrary to the provisions of section 284 of the Companies Act,
1956 nor ultra vires to the powers vested in the Life Insurance Corporation under section
6 of the Life insurance Corporation of India Act.

3. The holders of the majority of the stock of a Corporation have the power to appoint, by
election, Directors of their choice and the power to regulate them by a resolution for their
removal. This is the essence of corporate democracy.

4. Every shareholder of a company has the right, subject to statutorily prescribed

procedural and numerical requirements to call an extra ordinary general meeting in
accordance with the provisions of the Companies Act, 1956. He cannot be restrained
from calling a meeting and he is not bound to disclose the 918 reasons for the resolution
proposed to be moved at the meeting. Nor are the reasons for the resolutions subject to
judicial review.

5. When a requisition is made by a shareholder calling for a general meeting of the

8
company under the provisions of the companies Act validly to remove a directbr and
appoint another, an injunction cannot be granted by the Court to restrain the holding of a
general meeting.

6. When the State or an instrumentality of the State ventures into the corporate
world and purchases shares of a company it assumes to itself the ordinary role of a
shareholder and dons the robes of a shareholder, with all the rights available to such a
shareholder Therefore, the State as a shareholder should not
be expected to state its reasons when it seeks to change the management by a resolution
of the company, like any other shareholder.

7. The rights of a shareholder are;

(i) to elect directors and thus to participate in the management through them;
(ii) to vote on resolutions at meetings of the company;
(iii) to enjoy the profits of the company in the shape of dividends;
(iv) to apply to the court for relief in the case of oppression;
(v) to apply to the court for relief in the case of mismanagement,
(vi) to apply to the court to winding up of the company;
(vii) to share in the surplus on winding up.

8. The Reserve Bank of India alone that has to decide whether permission may or
may not be granted. The Act makes it its exclusive privilege and function. No other
authority is vested with any power nor may it assume to itself the power to decide the
question whether permission may or may not be granted or whether it ought or ought not
to have been granted. The question may not be permitted to be raised either directly or
collaterally before any court. The Reserve Bank af India was not guilty of any malafides
in granting permission to the caparo group of companies. Nor was it guilty of non-
application of mind.

9
9. There was a total and signal failure on the part of punjab national bank in the discharge
of their duties as authorised dealers.

Development of the law

Over the next several years, courts in India curtailed, amplified (where required), and
clarified the circumstances in which an independent corporate personality may be
ignored, and the veil lifted, to look at, and hold responsible or liable, the entities in actual
control. Often a litigant demanded that the veil be lifted in respect of parent / subsidiary
companies or associated / affiliated companies. Each company upon incorporation, is
treated as a separate legal entity, unless two or more companies function as a single
economic entity, in which case the corporate veil may be lifted. So, for instance, where
the subsidiary does not in fact act autonomously and essentially only carries out
instructions given to it by its parent, it is possible to say that the subsidiary and the parent
are really one and the same, thus ignoring their separate legal status and lifting the veil.
Among the factors a court would consider in this regard, are whether the companies were
“guided by the same head and brain” and whether the parent controlled the actions of its
subsidiary.[3] Courts have also lifted the corporate veil if it is found that a subsidiary
company has been constituted with the sole intention of concealing the true facts, to act
as a façade and thereby perpetrate a fraud, or to “look at the realities of the situation and
to know the real state of affairs“.

It is not always a bad thing that the veil be lifted, and this worked to the advantage of
Hindalco Industries Limited. In the case of State of U.P v. Renusagar Power Co.,
Hindalco used the electricity produced by its wholly-owned subsidiary Renusagar Power
Company Limited, and was able to avail of the benefit granted under the Uttar Pradesh
Electricity (Duty) Act, 1952, which provided for a reduced rate of duty on electricity
generated from a company’s own source of energy. The Supreme Court found the two
companies – Hindalco and Renusagar, to be inextricably linked such that the electricity
generated by Renusagar was considered to be generated by Hindalco from its own

10
sources. By lifting the veil and ignoring the separate identity of the two companies
Hindalco was granted the benefit of the reduced rate of duty.

In another landmark decision of the Supreme Court in New Horizons Ltd. v. Union of
India,[7] the court observed that the corporate veil may be lifted and the independence of
the corporate entity disregarded, in cases where the principle of corporate personality is
flagrantly opposed to justice, convenience, or in the interest of revenue.

This exception to what is a fundamental premise of corporate law, has enabled the courts
to come down on individuals/entities who have tried circumventing laws or perpetrating
fraud by hiding behind the veil. An example of this is the case of State of
Rajasthan v. Gotan Lime Stone Khanji Udhyog,[8] where a partnership firm attempted to
transfer a mining lease allotted to it, by first converting the firm into a private company.
The shareholders of the company so formed, subsequently sold their shareholding to a
subsidiary of Ultra Tech Cement Company Limited, effectively giving rise to a sale of
the mining lease. The relevant governmental authorities were neither informed of this
transfer nor was their permission taken. Under the law the lessees were not permitted to
profit from the sale of the mining rights. The court held that this transaction was an
attempt by the respondents at doing something through the medium of companies, which
they were not otherwise allowed to do. The court further recognised that mining rights
are vested in the State and are held in public trust. It stated that even ‘public interest’ is a
consideration in piercing the corporate veil of an entity. The court noted that in isolation
both these transactions were within the bounds of law, but seen together in view of other
facts and circumstances were patently illegal and ought to be set aside.

11
 Conclusion
The principle of the juristic and legal independence of companies and the corporate veil,
that is drawn between a company and its shareholders, is a fundamental but not
sacrosanct principle of modern corporate law. As explained in LIC v. Escorts and
beyond, this veil can, in exceptional circumstance, be lifted or pierced, to look at and take
into account, the shareholders or entities in actual control of the company concerned.
Considerations such as the economic reality, substance of the transaction, and viewing
the transaction as a whole, are critically evaluated, but unless there are compelling
circumstances, Indian law demands that courts respect the sanctity of the corporate veil
and the independent corporate personality that comes into existence immediately upon
incorporation of a company.

12