A company comes into an existence upon incorporation, and has perpetual succession, powers to acquire, hold and dispose property, to contract, sue and be sued, by and in its own name. A company is a distinct legal entity, separate from its shareholders. Upon incorporation, a corporate veil comes into an existence which separates the company from its shareholders. These have been very basic principles of law taught in law schools and followed all over.

However, time and again, courts have held the company to be a mere device formed by the shareholders to hide behind the veil to defy the law or regulations or to perpetrate a fraud or commit any evasion and have lifted the corporate veil.

The Hon’ble Supreme Court of India in a recent judicial pronouncement in the matter of ‘Estate Officer UT Chandigarh & Ors. v/s Esys Information Technologies Pvt. Ltd’ has lifted the corporate veil to identify the actual transaction being executed by the shareholders of a company in the garb of transferring the shares of a company. The facts of the case are as follows:

In the year 2002, Chandigarh Administration notified the Allotment of Small Campus Sites in Chandigarh Information Services Park Rules, 2002 (“Rules”). Esys Information Technologies Private Limited, India (“Esys India”), a subsidiary of Esys Information Technologies Private Limited, Singapore (“Esys Singapore”), was allotted a plot of land admeasuring 6 (six) acres vide allotment letter dated June 01, 2006 (“Allotment Letter”). Rule 9 of the Rules provided that transfer of the campus site by an allottee shall not be allowed for the later of: (i) 10 (ten) years from the date of allotment; or (ii) till all dues are fully paid. Clause 15 of the Allotment Letter contained a similar condition.

It came to the notice of the Director, Information Technology that Esys Singapore has transferred a major portion of its shareholding in Esys India to Esys Global Holdings, Dubai (“Esys Dubai”) without informing the Estate Officer or seeking necessary permission as required under Rule 9 of the Rules and Clause 15 of the Allotment Letter. Consequently, on January 02, 2008, the Director, Information Technology sought clarifications in this regard from Esys India. Not being satisfied with replies, a show cause notice was issued on January 18, 2008, by the Estate Officer asking as to why, due to the violation of Rule 9 of the Rules, and Clause 15 of the Allotment Letter, action should not be taken and allotment should not be cancelled and the whole or part of the premium and the EDC calculated till the date of cancellation be not forfeited. The Estate Officer vide its order dated September 09, 2008 cancelled the allotment and ordered resumption of the site and forfeiture of 10% (ten per cent) of the total premium, interest earned and other dues payable in respect of the site. Esys India filed appeals before the appellate authorities and the same were dismissed. Aggrieved by the same Esys India filed a writ petition before the Hon’ble Punjab and Haryana High Court. Hon’ble Punjab and Haryana High Court allowed the writ and set aside the order of resumption and all subsequent orders of the appellate authorities. Further, Hon’ble Punjab and Haryana High Court did not feel the necessity to apply the principle of lifting the corporate veil as there was no change in the name of the allottee.

Aggrieved by the order, the Estate Officer filed a special leave petition before the Hon’ble Supreme Court of India. The Hon’ble Supreme Court of India, while entertaining the special leave petition, passed an order on July 16, 2015 asking Esys India to file a counter affidavit, inter-alia providing the details of transfer of shareholding from Esys Singapore to Esys Dubai and further transfer from Esys Dubai to Tele Data Informatics Limited, Chennai (“Tele Data”).

In the counter affidavit filed by Esys India, it was stated that: (i) Esys Singapore transferred 1,97,55,188 (one crore ninety seven lakh fifty five thousand one hundred eighty eight) shares to Esys Dubai owned by Mr. Niraj Goel; (ii) Esys Dubai has not further transferred the shares to Tele Data; and (iii) on November 29, 2006 a shareholders’ agreement was executed amongst Mr. Vikas Goel, Esys Singapore and Tele Data, which however, could not be implemented due to the fraud perpetrated by Tele Data upon Mr. Vikas Goel and Esys Singapore and certain cases are pending before various courts with respect to their inter-se disputes. It was further contended by Esys India that Rule 9 of the Rules has not been technically violated.

The appellant filed copies of 2 (two) affidavits filed by Mr. Vikas Goel in the High Court of Republic of Singapore. Further, the appellant submitted that the stake of Esys Dubai in Esys India was raised from 3% (three per cent) to 98% (ninety eight per cent) and further, Esys Dubai sold its shareholding to Tele Data. It was also contended that the actual facts regarding the transfer of shares by Esys Dubai to Tele Data were being suppressed. The affidavit filed by Mr. Vikas Goel indicated that he had signed an agreement to sell 51% (fifty one per cent) stake to Tele Data and it was further submitted that Tele Data is claiming to have acquired Esys Singapore, showing the plot as its assets. Esys India submitted that there was no violation of Allotment Letter as the allottee remains the same. The shareholding of Esys India was transferred to Esys Dubai, a company owned by Mr. Niraj Goel, brother of Mr. Vikas Goel, and there was no transfer of shares by Esys Dubai to Tele Data.

The Hon’ble Supreme Court of India held that as per the affidavit of Mr. Vikas Goel the sale of Esys Singapore subsidiaries to Esys Dubai meant that the liabilities were transferred to the buyer. It further held that there was sale of the assets and subsidiaries and denial that there is no sale is an incorrect statement. Under the garb of transfer of shares, Esys has completed the sale of land and is now creating a screen to conceal it. Consequently, the Hon’ble Supreme Court of India concluded that the provision of Rule 9 of the Rules and Clause 15 of the Allotment Letter has been violated. Therefore, the Hon’ble Supreme Court set aside the order passed by the High Court.

This judgment has brought back the old debate on issues that require consideration on the aspect of any share sale involving land/ property sale in a real estate transaction. Since if one follows this judgement, then in every case of sale of shares of a company, where the company’s only asset is land or property, one will have to look at the terms and conditions attached to vesting, lease hold rights or ownership of such land or property. Further, where will one draw the line in these arguments, so one may argue that stamp duty for conveyance/sale of property will apply in such cases of sale of shares (even if the shares are in de-mat form and are exempted from any stamp duty).