Subhra Mukherjee v. Bharat Coking Coal Ltd. (2000)

Most veil-lifting cases ask whether the members should answer for the company. This one asks the reverse question: whether a transfer by the company was a genuine transfer at all, or a family arrangement wearing the company's clothes. It is the clearest modern Indian authority for lifting the veil to test a transaction rather than to fix liability, and it comes with a valuable rider on who must prove what.

It is also the case that shows what happens when Salomon is pleaded as a slogan. Counsel "repeatedly referred to the oft-quoted decision in Salomon v. Salomon & Co" and lost, because separate personality answers the question who owns the property, not the question whether a sale ever really happened.

The suit property was owned by M/s Nichitpur Coal Company Private Limited, a registered company. The sequence of documents was:

| Date | Event | |---|---| | 21 September 1970 | Board resolution to sell the suit property to the appellants for Rs 5000 | | 30 December 1970 | Appellants paid Rs 7000 to one of the directors, under a receipt | | 3 January 1971 | Agreement to sell executed by the company for Rs 7000 — Rs 5000 for the bungalow, Rs 2000 for the land | | 20 March 1972 | Sale deed executed by the company in the appellants' favour |

The appellants were the wives of the directors of the company, who were real brothers.

The Coal Mines (Nationalisation) Act, 1973 came into force on 1 May 1973. From that date the right, title and interest of owners in the coal mines specified in the Schedule vested in the Central Government; the company appears at Serial No. 133 of the Schedule. The vested properties were then transferred to the government company Bharat Coking Coal Ltd. (BCCL). The appellants did not hand over possession, and on 15 October 1976 BCCL began eviction proceedings under the Public Premises (Eviction of Unauthorised Occupants) Act, 1971.

Facing eviction, the appellants sued for a declaration of their title. BCCL resisted on the ground that the property had vested in it and that the sale was "sham, collusive, without any consideration and was brought into existence to avoid the effect of vesting" under the 1973 Act.

The litigation ran a long course — trial court against the appellants, District Judge for them, second appeal dismissed by the High Court, and in 1993 the Supreme Court remitting two questions: whether the transaction was bona fide and genuine or sham, bogus and fictitious; and whether the property vested in the Central Government. The second answer was made to depend on the first. On remand the High Court held the sale sham and bogus, and that judgment came up in this appeal.

The High Court accepted that the appellants had proved the resolution, the receipt and the sale deed. The Supreme Court nevertheless upheld its conclusion, because of the circumstances that surrounded those documents:

1. The resolution of 21 September 1970 was ante-dated. It is mentioned nowhere — not in the receipt, not in the agreement of 3 January 1971, not in the sale deed. On that intrinsic evidence "the conclusion that the resolution was an ante-dated document, appears to be irresistible." The appellants complained that the government held the company's records; the court answered that they had taken no steps to summon them.
2. The price was unexplained. The resolution says Rs 5000; the receipt is for Rs 7000; nothing explains the increase.
3. The purchasers never behaved as purchasers. They did not exercise their rights over the property until the suit was filed; water and electricity connections were obtained only during its pendency; and until vesting the property "was maintained by the Company for the use of the Directors."
4. The documents did not match each other. The agreement for sale was unregistered, it recited that the property will be sold for Rs 7000 although Rs 7000 had already been paid on 30 December 1970, and neither the agreement nor the sale deed was in terms of the resolution.
5. The parties. The sale was between husbands and wives, and the wives had no independent source of income.

Appeal dismissed. The sale was neither bona fide nor genuine and conferred no right on the appellants. The property therefore remained the property of the company and vested in the Central Government under s. 3(1) of the 1973 Act.

Separate legal personality does not prevent a court from inquiring into the reality of a company's transaction. Where a sale of a company's immovable property to the wives of its directors is alleged to be sham and collusive, the court is justified in piercing the veil of incorporation to ascertain the true nature of the transaction — who the real parties to the sale were, and whether it was genuine or was in truth a transaction between the husbands and the wives behind the facade of the company's separate entity.

The court's statement of principle

Quadri J takes Salomon at full strength before displacing it. The principle laid down in 1897, "that the company is at law a different person altogether from the subscribers who have limited liability, is the foundation of joint stock company and a basic incidence of incorporation both under English law and Indian law." Immediately afterwards: "Lifting the veil of incorporation under statutes and decisions of the courts is an equally settled position of law."

The purpose of lifting is then stated in terms that travel well beyond these facts: it is done "To look at the realities of the situation and to know the real state of affairs behind the façade of the principle of the corporate personality". Note that the judgment observes this is done more readily under American law — a useful comparative aside if a question asks how far Indian courts will go.

The burden of proof — the practical lesson

There is a rule that a person who attacks a transaction as sham, bogus and fictitious must prove it, and the appellants relied on it. The court accepted the rule and then read the remitted question in two parts. The first part — whether the transaction is bona fide and genuine — had to be proved by the appellants. Only when they had done that did the burden shift to the respondent to dislodge it. Where the circumstances and the intrinsic evidence themselves show the transaction is not bona fide, the court need not ask whether the challenger led any evidence of sham at all.

That is a point worth carrying into any answer on sham transactions: the party asserting title under the document carries the first burden, and internal inconsistencies in the documents can discharge the challenger's case without a witness.

What the case does not decide

The company's separate existence was never in doubt, and no one was made personally liable. The veil was lifted for one purpose only — to characterise a transaction. That is why the case belongs with Dinshaw Petit and Gilford Motor under the head of fraud, sham or improper conduct, and not with the statutory exceptions to limited liability.