2014 (2) TMI 1382 - HC - Indian Laws

Seeking return of security on the basis that the suit was filed and security obtained for the plaintiff s claim in arbitration - Lifting of Corporate Veil - HELD THAT - It is trite law that a company is a separate juristic entity distinct from the shareholders; its assets are separate and distinct from those of its members; it can sue and be sued exclusively for its own purpose; its creditors cannot obtain satisfaction from the assets of its members; the liability of the members or shareholders is limited to the capital invested by them; similarly the creditors of the members have no right to the assets of the corporation and unless fraud is asserted or at least alleged in the plaint as required under Order VI Rule 4 and in such a way that it will be sustained at the time of trial the question of lifting a corporate veil does not arise. To accept the plaintiff s submissions that there need not be any fraud or underlying element of dishonesty in formation of corporate entities would amount to violating and shaking these fundamental tenets of corporate law. Simply because the shareholders the Directors (in this case were not common) the addresses of the two companies that own the two ships are common or the constituted attorney who was appointed to buy the vessel is the same or that both the ships were purchased pursuant to the board meeting on the same day does not mean that the efforts of the subscribers were to conceal that fact and does not automatically mean that the intention to register the two ships in different names was to play a fraud. There is no bar in purchasing ships in different names if that is the way a person wants to do his business. There is of course an exception that the intention was to mask the true owners and the companies are a sham - Under order VI Rule 4 of Code of Civil Procedure it is provided that if party pleading relies on any fraud then particulars with dates and time and the nature of fraud has to be stated in the pleading i.e. the plaint. There are no particulars as required under Order VI Rule 4 of CPC of fraud stated in the plaint. Moreover all these factors were known to the plaintiff or the plaintiff is deemed to have known prior to entering into the management agreement with the plaintiff. It is not the plaintiff s case that they would not have entered into the management agreement otherwise. The plaintiff has not made out a case for lifting or piercing the corporate veil and hence defendant no. 1 cannot be a sister of M.V. Eastern Light. The foundation of the plaintiff s case that defendant no. 1 and M.V. Eastern Light are sister ships itself is not sustainable let alone security to be continued till the suit is heard and disposed. The notice of motion is allowed.

Summary

Issues Involved:
1. Return of security deposit with interest.
2. Determination of whether defendant vessels are sister ships.
3. Examination of corporate veil piercing.
4. Existence of an arbitration agreement.
5. Allegations of fraud and alter-ego theory.
6. Compliance with undertaking to commence arbitration.

Detailed Analysis:

1. Return of Security Deposit with Interest:
The applicant (defendant Nos. 1 and 2) sought the return of the security deposit of Rs. 65,71,141/- along with accumulated interest. The argument was based on the claim that the security was obtained for the plaintiff's arbitration claim, and since the vessels in question were not sister ships, the arrest of the first defendant vessel was unjustified.

2. Determination of Whether Defendant Vessels Are Sister Ships:
The applicant contended that the defendant no. 1 vessel and M.V. Eastern Light were not sister ships as they were owned by different legal entities. The court referenced the case of M/s. Universal Marine and Ramanand Padiyar Vs. M.T. Hartati & Anr., which established that for ships to be considered sister ships, they must be registered under the same ownership. The court noted that piercing the corporate veil to determine common beneficial ownership required allegations of fraud, which were not sufficiently made by the plaintiff.

3. Examination of Corporate Veil Piercing:
The court examined whether the corporate veil should be pierced to treat the vessels as sister ships. The plaintiff argued that both vessels had common shareholders, addresses, and other similarities, suggesting they were alter-egos of one another. However, the court held that the plaintiff failed to allege fraud or dishonesty with sufficient material to justify piercing the corporate veil. The court emphasized that without allegations of fraud, the corporate veil could not be pierced.

4. Existence of an Arbitration Agreement:
The plaintiff had no arbitration agreement with the applicant (defendant no. 2). The purported management agreement was between the plaintiff and defendant no. 3, not the applicant. Consequently, the plaintiff could not seek security against the applicant, and the arrest of the first defendant vessel was not justified.

5. Allegations of Fraud and Alter-Ego Theory:
The plaintiff's counsel argued that the two companies owning the vessels were alter-egos of each other, enjoying common ownership and functional integrality. However, the court found that the plaintiff did not allege fraud in the formation of the companies or provide sufficient material to support the alter-ego theory. The court cited various judgments emphasizing that fraud or dishonesty must be proven to pierce the corporate veil.

6. Compliance with Undertaking to Commence Arbitration:
The plaintiff failed to commence arbitration as undertaken in the plaint. The court noted that the plaintiff did not take steps to appoint an arbitrator or seek an order from the court to appoint one, despite the undertaking. The plaintiff's attempt to show compliance through a late email was not accepted by the court as genuine.

Conclusion:
The court concluded that the plaintiff did not make out a case for lifting the corporate veil or for the arrest of the first defendant vessel. The plaintiff failed to fulfill its undertaking to commence arbitration, and the allegations of common ownership and alter-ego were insufficient without proof of fraud. Consequently, the notice of motion was allowed, and the security furnished by the applicant was ordered to be returned. The plaintiff was also directed to pay costs to the defendant. The judgment was stayed for two weeks.