Piercing the Corporate Veil in the Age of Global Supply Chains: A Case for Harmonization

This article examines the doctrine of piercing the corporate veil in India within the complex landscape of global supply chains. It argues that the current legal framework in India does not sufficiently address the challenges posed by the multinational nature of corporate structures that often use subsidiaries and intricate supply chains to obscure liability. The article analyses the Indian jurisprudence regarding piercing the corporate veil and compares them to approaches in other jurisdictions. Ultimately, it calls for a harmonization of Indian law with international best practices to ensure greater accountability for parent companies, especially in cases of human rights abuses, environmental damage, and other negative externalities within their supply chains.

  1. Introduction

The principle of limited liability is a cornerstone of corporate law. A company, as a separate legal entity, offers a shield for its shareholders, protecting them from personal liability for the company’s debts and obligations. However, the concept of piercing the corporate veil provides an exception to this principle. It allows courts, under specific circumstances, to disregard the separate legal personality of a company and hold its shareholders or parent companies liable.

Globalized trade and the increasing complexity of supply chains have created a challenge for the application of this doctrine. Multi-National Corporations (MNCs) often operate through a complex network of subsidiaries and suppliers located in various jurisdictions. This structure can make it difficult to determine where liability lies in instances of harm arising from their operations. The question becomes whether and how the corporate veil can be pierced to hold parent companies responsible for the actions of their subsidiaries or suppliers, especially when these actions occur in jurisdictions with weaker regulatory frameworks or limited access to justice.

This article focuses on the state of the corporate veil jurisprudence in India and the need to harmonize Indian law with evolving international principles. It advocates for a more robust legal framework enabling courts to pierce the corporate veil and ensure that MNCs are held accountable for harm arising throughout their global supply chains.

  1. The Doctrine of Piercing the Corporate Veil in India

The Indian legal framework regarding piercing the corporate veil is primarily derived from judicial precedents. While the Companies Act, 2013 (Section 339 of the Companies Act 2013 is a significant clause that addresses India’s unscrupulous business practices. Any shareholder, officer, or employee of a firm who engages in fraudulent activity that is detrimental to the interests of the company is subject to this clause) provides some instances where liability may extend to directors or shareholders, it does not explicitly codify a general doctrine of piercing the corporate veil. Indian courts have exercised the power to pierce the corporate veil in various circumstances, including:

  1. Fraud or Improper Conduct: When the corporate form is used for fraudulent purposes or to evade legal obligations.
  2. Evasion of Tax Liabilities: If a company is formed solely to avoid paying taxes.
  3. Protecting Public Interest: In cases where the corporate structure is used to circumvent public interest or public policy.
  4. Company as a Façade or Sham: When the company is merely a shell or an alter ego of its shareholders.

However, the Indian legal framework remains inconsistent on the circumstances under which the corporate veil can be pierced. Further, the focus remains on holding individuals within the company accountable, rather than addressing the problem of parent company liability in the context of global supply chains.

  1. Several landmark Indian cases demonstrate the courts’ evolving jurisprudence on this topic. In the case of State of U.P. vs Renusagar Power Co. Ltd. (1988 AIR 1737), the Supreme Court pierced the corporate veil to hold shareholders liable for unpaid taxes. 
  2. In Life Insurance Corporation of India v Escorts Ltd (1986 AIR 1370), the court emphasized the high threshold to be met before the corporate veil is pierced. However, case law does not yet provide sufficient clarity on how the concept will be applied in the complex and fast-changing world of global supply chains.
  1. An International Perspective

Other jurisdictions like the United Kingdom, United States, and Canada have taken a more proactive approach towards parent company liability in supply chain-related harm. For example, the UK Bribery Act 2010 and the UK Modern Slavery Act 2015 allow for parent company liability if a subsidiary engages in bribery or modern slavery within their supply chains.

  1. The Need for Harmonization in India

Given the increasing integration of India into the global economy, a harmonization of Indian law with international best practices is necessary. This would provide greater clarity for companies, improve access to justice for victims of supply chain-related harm, and help deter misconduct by MNCs. A harmonized framework could include the following principles:

  1. Broader grounds for piercing the corporate veil: Specific factors, such as the degree of control exercised by a parent company, potential for knowledge of harmful activities, and lack of due diligence, should be taken into account.
  2. Presumption of liability: In specific cases of severe harm, a presumption of liability against parent companies could be considered, with the burden shifting to them to demonstrate a lack of control or knowledge.
  • Conclusion:

The article concludes by emphasizing the need for harmonization of Indian law with international best practices regarding piercing the corporate veil in the context of global supply chains. This harmonization is crucial for:

  1. Clarity: Providing clear guidelines for companies operating in India, reducing uncertainty and promoting responsible business practices.
  2. Access to Justice: Enabling victims of human rights abuses, environmental damage, and other negative externalities within global supply chains to seek effective remedies.
  3. Deterrence: Discouraging misconduct by multinational corporations (MNCs) by holding them accountable for the actions of their subsidiaries and suppliers throughout their supply chains.

The proposed framework for harmonization suggests broader grounds for piercing the veil based on factors like parent company control and knowledge, alongside considering a presumption of liability in specific cases with the burden of proof shifting to the parent company. By embracing these changes, India can strengthen its legal framework and contribute to a more accountable and sustainable global business environment.

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