[The Viewpoint] Id vs Ego – Alter Ego’ vs The Group of Companies Doctrine – Are they the same?

Arbitration rests on the foundation of consent and normally, binds only the signatories. However, modern demands of increasingly complex multi-party business transactions have led the Indian judiciary to create exceptions to the requirement of seeking formal consent. In conjunction with the Group of Companies Doctrine, several other theories such as the piercing of corporate veil/Alter Ego (See Ameet Lal Chand.Shah v Rishabh Enterprises), implied consent, and estoppel (See Mahanagar Telephone Nigam Ltd. v. Canara Bank,) have been applied to join non-signatories to arbitrations. But can Alter Ego be applied synonymously in place of the Group of Companies Doctrine?

The ‘Alter Ego’, a well-accepted doctrine in commercial jurisprudence, is applied to pierce the veil of a corporate entity. Globally and in India, the theory has been applied in very unusual or limited circumstances, where, based on the facts there is an abuse of the corporate veil structure used to frustrate the law. As the UK Supreme Court recently held, in Hurstwood Properties (A) Ltd & Ors v Rossendale Borough Council, it is typically applied in circumstances where, “a person is under an existing legal obligation or liability or subject to an existing legal restriction which he deliberately evades or whose enforcement he deliberately frustrates by interposing a company under his control. The court may then pierce the corporate veil for the purpose, and only for the purpose, of depriving the company or its controller of the advantage that they would otherwise have obtained by the company’s separate legal personality.”

In India, in LIC v Escort, 1986 AIR 1370, the Supreme Court (SC) observed that the veil of a corporate entity may be lifted where a statute expressly permits it, when improper conduct or fraud is intended to be prevented, when a tax statute is attempted to be circumvented, or when related entities are intimately associated where in reality, are part of one concern.

In Balwant Rai Saluja & Anr. v. Air India Ltd., the SC laid down the following factors necessary for lifting corporate veil:

1. There is impropriety;

2. The impropriety in question must be linked to the use of the company structure to conceal liability;

3. There must be both control of the company by the wrongdoer(s) and impropriety, that is use or misuse of the company by them as a device or façade to conceal their wrongdoing; and

4. The company may be a “façade” even though it was not originally incorporated with any deceptive intent, provided that it is being used for the purpose of deception at the time of the relevant transactions

In Sudhir Gopi v. Indira Gandhi National Open University, the Delhi High Court categorically held that mere failure on part of a corporate entity to fulfil its contractual obligations is not grounds to pierce corporate veil and join the shareholders/directors to arbitration. In the absence of fraud, the Court held “The fact that an individual or a few individuals hold controlling interest in a company and are in-charge of running its business does not ipso jure render them personally bound by all agreements entered into by the company”.

Similarly, the Bombay High Court in Nod Bearings Pvt Ltd vs M/S. Bhairav Bearing Corporation, refused to lift the corporate veil to bind a non-signatory in the absence of a case of fraud.

While citing Gary Born, the DHC in Shapoorji Pallonji Co. Pvt. Ltd. v. Rattan India Power Ltd.,, held that joining a non-signatory basis the "Alter Ego" doctrine typically requires:

(i) convincing evidence that one entity dominates the daily affairs of another and/or

(ii) this power is exercised to work fraud or other injustices or to evade statutory or other legal obligations.

Simply put, ‘Alter Ego’ may be invoked to bind a non-signatory corporate entity if the following conditions are met:

a. Presence of a high degree of control such that one entity dominates the day-to-day affairs of the corporate entity; and 

b. The corporate veil of a company is being used to perpetuate a fraud, circumvent statutes or commit an impropriety. Notably, mere breach of contractual obligation by one entity, without anything more, is not sufficient to pierce the corporate veil of an entity.

However, in Shapoorji, the Delhi High Court, though referring to the requirement of ‘fraud’ for invoking ‘Alter Ego’, applied the said doctrine to bind a non-signatory, absent any allegations of fraud or impropriety.

The GCD, originated in Dow Chemical Co. v. Isover Saint Gobain, wherein non-signatories were bound to arbitration, based on the concept of ‘single economic reality’ and owing to their essential role in the performance of the contract.

In India, GCD was introduced by the Supreme Court (SC) in the case of Chloro Controls (India) (P) Ltd. v. Severn Trent Water Purification Inc. In the terms of GCD, an arbitration agreement entered into by a company, within a group of companies, can bind its non-signatory affiliate, sister, or parent concern, if the circumstances of the case demonstrate that it was the mutual intention of all parties to bind both the signatories and the non-signatory affiliates in the group.

To ascertain the mutual intention of the parties, the following factors were laid down for joining a non-signatory:

a. Direct relationship (of the non-signatory) to the parties’ signatory to the arbitration agreement;

b. Direct commonality of the subject matter;

c. Agreement between the parties being a composite transaction. The composite nature of transactions should be such that the performance of the mother agreement may not be feasible without the aid, execution and performance of the ancillary agreements, for achieving the common object; and

d. Composite reference of such parties would serve the ends of justice.

Recently, the Supreme Court in ONGC v. Discovery Enterprises Pvt. Ltd. & Ors has also endorsed the aforesaid factors as laid down in Chloro Control to join a non-signatory.

While the aforesaid factors were evolved in the context of composite transactions, the Supreme Court, in Mahanagar Telephone Nigam Ltd. v. Canara Bank, introduced another facet of the GCD i.e., the ‘single economic reality’ test as laid down in Dow Chemicals (supra). It held that GCD can be invoked in case of a tight group structure with strong organizational and financial links such as to constitute a ‘single economic reality’. It held that the ‘single economic reality’ principle would apply particularly when the funds of one company are used to support other member companies.

Considering the various judicial authorities, the following factors are now indicative for invoking GCD:

i. Requirement of two or more companies such that the companies form part of a corporate group i.e., one company is the parent /affiliate /sister entity of the other.

ii. There is mutual intention of all parties to bind the non-signatories to arbitration. Such intent can be inferred from indicative factors such as:

• direct relationship (of the non-signatory) to the parties’ signatory to the arbitration agreement;

• direct commonality of the subject matter;

• agreement between the parties being a composite transaction;

• the non-signatory playing a role in the negotiation or performance of the contract.

While the object of both these doctrines is common i.e., to bind a non-signatory, the GCD differs in its nature and application from ‘Alter Ego’.

a) Consensual vs Non-consensual

Gary Born, cited with authority in Chloro Control, classifies GCD as a consensual theory based on implied consent, which relies on the discernible intentions of the parties. On the other hand, he pegs ‘Alter Ego’ as a non-consensual theory, which does not rely on the intentions of the parties, but rather on the force of law.

b) Lifting of Corporate Veil

 ‘Alter Ego’ pierces the corporate veil of parties and disregards the separate legal personality, whereas the GCD is a means of identifying the intent of parties and does not disturb the distinct corporate personality of the entities. This marked difference has been emphasised by the Supreme Court in Cheran Properties Limited v Kasturi and Sons Limited,.

Intriguingly, J Surya Kant, in its concurring reference, in Cox and Kings Ltd v SAP, whereby the correctness of the GCD laid down in Chloro and subsequent decisions has been doubted and referred to a constitutional bench, attempts to link the two doctrines by calling 'Alter Ego’ as a means to invoke the GCD. It, accordingly, refers to the larger bench the question of ‘whether, the principles of alter ego and/or piercing the corporate veil, can alone justify pressing the Group of Companies Doctrine even in the absence of implied consent?’

c) Degree of Control

 For the GCD, the non-signatory is required to be part of a corporate group either as a parent, subsidiary, affiliate, or sister entity. However, for ‘Alter Ego’ to sustain, one entity must be in a position to dominate the day-to-day affairs of the other entity. Therefore, a high degree of control such that one entity dominates the day-to-day affairs of another, may not necessarily be required while invoking the GCD.

d) Impropriety/Fraud

For invoking ‘Alter Ego’, the corporate veil must be used as a façade to commit a fraud or ‘impropriety’, which is not a pre-requisite for the GCD.

The authors opine that the GCD and ‘Alter Ego’ are fundamentally different doctrines. Any party bringing a motion for joining non-signatories through these two doctrines must separately establish a case for invocation of the GCD as well as ‘Alter-Ego’, even though factors for invoking the GCD may be comparable to those required for invoking Alter Ego (See Gary B. Born's, International Commercial Arbitration, 3rd Edition, Volume I, Page 1558-1559).

Legal Practitioners and Corporations, while negotiating and drafting commercial deals, should key-in these factors for structuring these transactions and determining the extent of liability of not just the signatories but non-signatory entities as well.

Authored by Rohan Batra is a Partner and Sonali Malik is a Senior Associate at Anagram Partners.