* HON’BLE SRI JUSTICE V.V.S.RAO + WRIT PETITION No.16713 of 2005 %Dated 15-09-2006 # M/s.Yella Constructions Limited … Petitioners. VERSUS $ The East Coast Railway, Rail Vihar, Chandrasekharpur, Bhubaneswar, rep.by its General Manager and others. … Respondents. ! Counsel for Petitioners: Sri D.V.Sitarama Murthy ^Counsel for Respondents: Sri S.R.Ashok <GIST: >HEAD NOTE: ? Cases referred 1. 2003 (2) ALD 392 1. AIR 1996 SC 2005 3. (2003) 6 SCC 1 4. AIR 1986 SC 1370 5. (1988) 3 Comp.LJ 1 (SC) 6. 1897 Appeal Cases 22 = (1895-1899) All ER 33 7. (1995) 1 SCC 478 8. (1947) 2 All ER 640 9. (2001) 2 SCC 386 = AIR 2000 SC 3689 THE HON’BLE SRI JUSTICE V.V.S.RAO WRIT PETITION NO.16713 OF 2005 DATED 15TH SEPTEMBER, 2006 BETWEEN: M/s.Yella Constructions Limited … Petitioner AND The East Coast Railway, Rail Vihar, Chandrasekharpur, Bhubaneswar, rep.by its General Manager and others. … Respondents THE HON’BLE SRI JUSTICE V.V.S.RAO WRIT PETITION No.16713 OF 2005 ORDER: INTRODUCTION M/s.Annapurna Rail S&T Construction Limited is a company registered on 11.06.1998 under Indian Companies Act, 1956. It was incorporated with the main object of carrying on business of undertaking contract works especially Signalling and Telecommunications (S&T) works with Indian Railways. On 10.02.2004, the name of the said company was changed as M/s.Yella Construction Limited (the petitioner herein). As per the Memorandum and Articles of Association, there are six shareholders including M/s.Y.Raghavaiah and Y.Venkata Lakshmi. There are four Directors in the Board of Directors of the company including Y.Raghavaiah. The company filed the instant writ petition seeking a writ of Mandamus declaring the order/letter, dated 21.07.2005 issued by the Chief Signal and Telecom Engineer (Projects), East Coast Railway, Bhubaneswar – the third respondent herein. By the said letter, M/s.Annapurna Rail S&T Construction Limited, Visakhapatnam (as the petitioner company was known earlier) was informed that the Ministry of Railways (Railway Board) by letter No.2002/SIG/B/8, dated 12.06.2003, decided that the business dealings with M/s.Annapurna Construction, Vijayawada and also their sister concerns and partners/shareholders should be banned on all Indian Railways and organizations for a period of five years with effect from 28.05.2003 and therefore, the business dealings with the petitioners are banned for a period of five years as “some of the partners of M/s.Annapurna Construction, Vijayawada are appearing in the Memorandum and Articles of Association of the petitioner company”. This writ petition is filed mainly contending that the petitioner company being an independent entity has its own identity different from Annapurna Construction, Vijayawada and that it has nothing to do with Annapurna Construction, Vijayawada. BACK GROUND FACTS The pleadings on record are aplenty by way of affidavits, counter, reply and rejoinder affidavits. There is, however, not much dispute about the constitution and functioning of three firms/concerns and business they were concentrating on. Therefore, it is necessary to notice this aspect of the matter having regard to the allegation made by the respondents that the firm at Visakhapatnam is sister concern of the firm at Vijayawada. This is necessary because the opposite parties agree that the axe of ban can only fall on the petitioner company if it is indeed the sister concern of Vijayawada firm and not otherwise. If the petitioner or its precursor is not a sister concern of Vijayawada firm, the whole exercise leading to the issue of impugned letter by the third respondent would be irrational, illegal and arbitrary. (i) Annapurna Constructions, Vijayawada M/s.Annapurna Constructions, Vijayawada (hereafter called, Vijayawada firm) is a partnership firm started from 01.04.1990 but a formal partnership deed was executed on 21.02.1991. This firm was started by two families, namely, Yella family and Idulapati family. Idulapati Srinivasa Rao as Managing Partner and his father Radhakrishna Murthy represented Idulapati family. Yella Koteswara Rao and Yella Annapurna represented Yella family. Be it noted, these two are younger brother and mother of one Yella Raghavaiah. The two families have a major share in the firm besides two other partners. The partnership was at Will. It was to operate from premises bearing door No.60-17-8, Navodaya colony, Vijayawada-10 “to do business in contracting works in Government Departments as well as private parties and to do any other business as may be decided by the partners advantageous to the firm”. The Managing Partner, who was authorised to file tenders and enter/sign agreements and books on behalf of the firm. This firm was reconstituted under partnership deed, dated 21.03.1992 with effect from 01.04.1991 with nine partners. These include three members from Idulapati family, namely, SrinivasaRao, S/o Radhakrishna Murthy; Radhakrishna Murthy and Padma Latha, D/o Radhakrishna Murthy. The re-constituted firm also included three members of Yella family – Koteswara Rao, Annapurna, W/o Mallikarjuna Rao and Venkata Lakshmi, W/o Raghavaiah. There are three other partners not relating to either of the two families. In this arrangement Yella family had 3/9th share and Idulapati family had 3/9th share. There is no dispute or denial that this firm was registered by the Registrar of Firms, Government of Andhra Pradesh, with Registration No.09033. Be it also noted that this firm was in existence and was doing business with Indian Railway as contractors for supplying and executing various S&T work. It is brought to this Court that recently this firm has been dissolved, which has, however, no bearing on the issue in this writ petition. (ii) M/s. Annapurna Constructions, Visakhapatnam (M/s.Annapurna Constructions, Visakhapatnam (hereafter called, Vizag firm) was constituted under a partnership deed, dated 04.07.1995, with six partners. M/s.Raghavaiah, Koteswara Rao and Annapurna, sons and wife of Yella Mallikarjuna Rao and Venkata Lakshmi, wife of Raghavaiah had major share whereas Idulapati Srinivasa Rao and Idulapati Radhakrishna Murthy are the two other partners. Yella family had 70% and Idulapati family had 30% share in Vizag firm, which was incidentally constituted for the same purpose, for which Vijayawada firm was constituted, namely, execution of all types of works contracts i.e., Civil/Electrical/Mechanical and was to function from the premises with door No.30-5-9, Krishna Gardens (later from door No.49-27-60, Madura Nagar, Visakhapatnam). Yella Raghavaiah was the Managing Partner of the firm. The firm was re-constituted on 17.12.1996, 16.10.1999, 10.09.1999 and 28.04.2003 either by reason of the death or retirement of one or other partner/partners. There was transfer, re-transfer and/or relinquishment of the shares of some of the partners and the details of the same are not necessary here. (iii) M/s.Annapurna Rail S&T Contract Limited (M/s.Yella Constructions Limited – petitioner) M/s.Annapurna Rail S&T Construction Limited (hereafter called, Vizag company) is a company incorporated as noticed supra. Yella Raghavaiah, his wife – Venkata Lakshmi, and mother Annapurna as well as Idulapati Srinivasa Rao and his father Radhakrishna Murthy besides five others are initial subscribers of the company when the Memorandum of Association was submitted to Registrar of Companies, wherein Yella Raghavaiah was the Managing Director. The company was incorporated on 12.05.1998 and commenced its operations with the same business, namely, execution of signal and telecommunication contracts for Railways. Subsequently, in October, 1999, the two parties to Idulapati family, who are signatories to Memorandum of Asociation transferred their shares to Raghavaiah and resigned from the company. By that date, Vizag firm had works on their hand and therefore, a Memorandum of Understanding (MoU) was entered into on 07.12.2002 between Vizag firm and the petitioner company for taking over certain works from the former to the latter in 2002. Venkata Lakshmi and Annapurna transferred their shares in favour of Raghavaiah and be it also noted that as seen from a number of documents, Vizag firm also used the firm Registration No.09033 on their letter pads and in their correspondence employers. The respondents filed a detailed counter affidavit sworn to by the third respondent asserting that Vijayawada firm and Vizag firm are one and the same, that both were using registration Number, that Yella Raghavaiah was mainly conducting business on behalf of both the firms, and that both the firms are family concern of Yella Raghavaiah. Elaborate reference is made in the counter affidavit to different partnership deeds and other aspects of the matter to bring out that both the firms are one and the same. SUBMISSIONS The learned counsel for the petitioner company Mr.D.V.Sitarama Murthy argued that when the impugned order was issued in July, 2005, by the third respondent based on the decision of the Railway Board in June, 2003, the petitioner company was incorporated entity having its own identity, perpetual succession and nature as a juristic person, and therefore, the same cannot be treated as a sister concern of either Vijayawada firm or Vizag firm. According to the learned counsel, even if negligible number of partners in Vijayawada and Vizag firms as well as the subscribers to Memorandum of Association of petitioner company (on its inception) are same, the same does not lead to any conclusion that the petitioner company and its predecessor firm are sister concerns of Vijayawada firm. A strenuous submission is made that the alleged misconduct of Vijayawada firm in supplying goods to Railways through dubious means, cannot be the basis for banning business dealings with the petitioner company. Such decision is arbitrary and violative of Articles 14 and 19(1)(g) of Constitution of India. Nextly, it is the submission of the learned counsel for the petitioner, after the formation of the company in 1998, with the approval of the Railways, the petitioner company entered into MoU with its predecessor firm, that it has completed all the works to the satisfaction of the employer and was also awarded S&T works continuously, which would mitigate against any allegations of misconduct by the Vizag firm. Learned counsel placed reliance on the decision of this Court in Krishi Foundry Employees Union v Krishi Engines Limited[1] in support of the contention that the principle of lifting the veil cannot be applied when a concern is an incorporated company regulated by company law. Learned Senior Counsel for respondents, Sri S.R.Ashok, submits that Vijayawada firm and Vizag firm are not two firms but only one firm, the latter being the branch of the former. He would like this Court to draw an inference from the events that followed the constitution of Vizag firm in 1995 and later converted into a private limited company only to avoid disciplinary action against Vijayawada firm for resorting to dubious means in execution of the works. The enquiry was initiated immediately after the Railways found out the fraud committed by Vijayawada firm and when the action was in the pipeline, the other partners led by Yella Raghavaiah started Vizag firm. According to the learned senior counsel, lifting the veil, one can find that there are business practices scrupulously followed by Vijayawada and Vizag firms to show that both the firms are one and the same though for various purposes, there was different combination of partners in each of the firm. He placed reliance on the correspondence addressed by Raghavaiah showing the registration number of Vijayawada firm and the certificates filed by Vizag firm claiming the experience of Vijayawada firm as its own experience for the purpose of eligibility to tender. Learned senior counsel placed reliance on the decisions of the Supreme Court in Delhi Development Authority v Skipper Construction Company (Private) Limited[2] and Kapila Hingorani v State of Bihar[3]. POINT FOR CONSIDERATION The point for consideration is whether the Railway Board and Chief S&T Engineer (Projects) were not justified in treating the petitioner company as a sister concern of M/s.Annapurna Constructions, Vijayawada. Before considering this question, it is necessary to notice the allegations made against Vijayawada firm and the gravity of such allegations. The Deputy Chief Signal and Telecom Engineer, Vijayawada of South Central Railway entered into agreement with Vijayawada firm for supply of Siemens Point Contractor Relay Units, which are proprietary articles of M/s.Seimens Limited to the Railways. During the years 1993- 1994 Vijayawada firm supplied seven (7) numbers of Relay Units under agreement No.B/SG/CN/Agt.6/90-91, dated 28.06.1990 vide delivery challan No.Nil, dated 07.12.1993. Subsequently, the employer found that Vijayawada firm had obtained used Point Contractor Relay Units by dubious means from Railways and had supplied the same to the Railways as if genuinely procured from M/s.Seimens Limited. Government of India in Ministry of Railways (Railway Board) issued a statement of imputations against Vijayawada firm vide Memorandum No.2002/SIG/B/8, dated 19.9.2002. The said firm was required to submit an explanation/representation as to why Government of India should not ban business dealings with the firm and also with their allied/sister concerns/partners on all Indian Railways for a period of five years. Vijayawada firm did not submit any explanation to memorandum of imputations and, therefore, Government of India came to conclusion that the firm supplied Relay Units through dubious means and decided to ban business dealings with Vijayawada firm and its sister concerns/partners for a period of five years with effect from 28.5.2003. Consequent thereupon, third respondent issued impugned letter to M/s.Annapurna Rail S&T Construction Limited, Visakhapatnam, the petitioner company herein. A reading of the memorandum of imputations and the orders passed by the Railway Board as well as the third respondent would show that Vijayawada firm adopted dubious means in supplying Seimens Relay Units. They procured old units from Railways presumably by clandestine means and again supplied them to the Railways as if they were procured from M/s.Seimens Limited. Therefore, there can be no mitigating circumstances to exonerate Vijayawada firm nor can it extricate itself from bad reputation it earned by adopting dubious means. The question however remains as to whether any other firm having partners of Vijayawada firm as partners or shareholders can be treated as allied/sister concern of Vijayawada firm and for that reason, can it be banned from having business dealings with the Railways. Here the learned senior counsel would urge that piercing/lifting the corporate veil of the three concerns must be treated as sister concerns and, therefore, for misconduct on the part of one firm/ concern others should also be banned from having business dealings with Railways. Learned counsel for the petitioner however contends that the petitioner being an independent corporate entity can never be treated as sister concern of Vijayawada firm or Vizag firm. The controversy can be appreciated by making reference to settled principles of piercing/lifting corporate veil as applied in business law. In Volume 32A of Words and Phrases (West Publishing Company – third reprint 1989 p.84) the term “piercing the corporate veil” is described as, “the Court’s unwillingness to permit corporate presence and action to divert judicial course of applying law to ascertain facts”. When this principle is invoked, it is permissible to show that the individual hiding behind the corporation is liable to discharge the obligations ignoring the concept of corporation as a separate entity. Generally, an incorporated company is liable as a juristic person. It is different from its shareholders and directors of the Board of Company. The acts of malfeasance and misfeasance and acts of misdemeanor by the shareholders and directors of a corporation (company), do not always bind the company as such. However so as to apply law to ascertained facts, judicial process can ignore juristic personality of the company and haul-up the directors and in certain cases even shareholders to discharge the legal obligations. When the corporate veil is lifted/pierced, it only means that the Court is assuming that the corporate entity of a concern is a sham to perpetuate the fraud, to avoid liability, to avoid effect of statute and to avoid obligations under a contract. But enter a caveat; almost always the incorporated company cannot be equated into shareholders/directors and it is only occasionally the corporate veil of the company is pierced “in order to find out the substance only where it is permitted by the statute or in exceptional cases of fraud”. In Life Insurance Corporation of India v Escorts Limited[4], the Supreme Court laid down that, “the corporate veil may be lifted where a statute contemplates or fraud or improper conduct is intended to be prevented or a taxing statute or a beneficent statute is sought to be evaded or where associated companies are inextricably connected as to be, in reality, part of one concern.” In State of U.P. v Renusagar Power Company[5] the Supreme Court after referring to Life Insurance Corporation of India (supra), declared the law thus; “it is high time to reiterate that in the expanding horizon of modern jurisprudence, lifting of corporate veil is permissible. Its frontiers are unlimited. It must, however, depend primarily on the realities of the situation.” I n Skipper Construction Company (Private) Limited (supra), the Supreme Court referred to the principle of lifting corporate veil. After referring Palmer’s Company Law as well as Modern Company Law by Gower, it was observed as under. The concept of corporate entity was evolved to encourage and promote trade and commerce but not to commit illegalities or to defraud people. Where, therefore, the corporate character is employed for the purpose of committing illegality or for defrauding others, the court would ignore the corporate character and will look at the reality behind the corporate veil so as to enable it to pass appropriate orders to do justice between the parties concerned. The fact that Tejwant Singh and members of his family have created several corporate bodies does not prevent this Court from treating all of them as one entity belonging to and controlled by Tejwant Singh and family if it is found that these corporate bodies are merely cloaks behind which lurks Tejwant Singh and/or members of his family and that the device of incorporation was really a ploy adopted for committing illegalities and/or to defraud people. In Kapila Hingorani (supra), the Supreme Court was concerned with the vicarious liability of Government of Bihar for payment of arrears of salaries to the employees of State owned Corporation/public sector undertakings/statutory bodies, who were not paid salaries for periods ranging from 3 to 12 years. The opposition from the State of Bihar came in the contention that all the State owned Corporations being juristic persons, their rights and liabilities must be determined thereof and not de hors the same. The State undertakings are not agents of the State Government. That was the theme of the argument. The Supreme Court indeed accepted the same by referring to the earlier case law. In considering this aspect, the Supreme Court then adverted to piercing/lifting of corporate veil. A reference was made to Renusagar Power Company (supra), wherein it was held that whenever a corporate entity is opposed in an unjust and inequitable purpose, the Court would not hesitate to lift the veil and look into the realities so as to identify the persons who are guilty and liable thereof. Then the Supreme Court observed that the State may not be liable in relation to the day-to-day functioning of the companies but its liability would arise on its failure to perform the constitutional duties and functions of public sector undertakings as in relation thereto lie the State’s constitutional obligations as, “State acts in a fiduciary capacity.” The observations relevant are as follows. It is now well settled that the corporate veil can in certain situations be pierced or lifted. The principle behind the doctrine is a changing concept and it is expanding its horizon as was held in State of U.P. v. Renusagar Power Co. The ratio of the said decision clearly suggests that whenever a corporate entity is abused for an unjust and inequitable purpose, the court would not hesitate to lift the veil and look into the realities so as to identify the persons who are guilty and liable therefor. … … … …The corporate veil indisputably can be pierced when the corporate personality is found to be opposed to justice, convenience and interest of the revenue or workman or against public interest. (See CIT v. Sri Meenakshi Mills Ltd.28, Workmen v . Associated Rubber Industry Ltd.29, New Horizons Ltd. v. Union of India30, State of U.P. v. Renusagar Power Co., Hussainbhai v. Alath Factory Thezhilali Union31 and Secy., H.S.E.B. v. Suresh32.) Thus, the “frontiers of lifting corporate veil” are unlimited (See Renusagar Power Company [supra]). It can always be pressed into service by the Court to see that no person defeats equity by resorting to fraud or misrepresentation. Corporate veil can be pierced when behind the mask of the juristic person, there are human agents, who by many permutations and combinations in business establishment get wrongful gain, which ultimately heckles rule of law. The Court can even lift the corporate veil to identify those persons behind the corporate personality, who by their manipulation tend to demean the principles of justice and ethical business practices. The principle of “piercing or lifting corporate veil” in ways more than one, has diluted classical statement of law in Aron Salomon v. Salomon and Co. Ltd.,[6] to the effect that, “the company is at law a different person altogether from the subscriber … … and the company is not agent of the subscribers nor are the subscribers as members liable in any shape or form.” Among several exceptions to this rule in corporate law, piercing corporate veil is extraordinary exception used in exceptional cases where persons behind the mask of juristic person use the corporate entity for unethical ends. BASIS AND JUSTIFICATION FOR IMPUGNED ACTION There is no challenge to the decision of the Railway Board to disqualify Vijayawada firm from tendering for railway works for quinquennium. The respondents issued a notice by way of memorandum of imputations and having failed to receive any explanation from the firm came to the conclusion that Vijayawada firm played fraud in supplying seven (7) Nos. of Point Contractor Relay Units of Seimens make during 1993-1994 under agreement dated 28.6.1990. While doing so, respondents also banned Vizag company from tendering for railway works on the ground that it is a sister concern. Hence, it becomes necessary to know who are the persons that promoted Vizag company and whether such persons had any relationship with Vizag firm as well as Vijayawada firm. Whether these persons behind the corporate mask of Vizag company should face serious consequences that befallen on Vijayawada firm – whatever the shape and colour and mode, such persons project for their business dealings? That is the incidental question, which would be almost a natural corollary. Vizag company was incorporated on 12.5.1998 with Registration No.01-29389 and commenced its business with effect from 11.6.1998 as per the certificate of commencement of business issued by the Registrar of Companies, Hyderabad (RoC), pursuant to Section 149(3) of Companies Act, 1956. The company changed its name to L.R. Constructions as per the fresh certificate of incorporation issued by RoC on 10.2.2004. The Chartered Company Secretary has given a certificate giving details of the shareholders, first Directors, Subsequent Directors etc, which is filed by the respondents before this Court. As per the certificate, when the company was incorporated on 12.5.1998, there were nine subscribers to Memorandum of Association (MoA) including Y.Raghavaiah, his wife Venkata Lakshmi and his mother Y.Annapurna apart from I.Radha Krishna Murthy and his son I.Srinivasa Rao. Y.Raghavaiah, Venkata Lakshmi and I.Srinivasa Rao were first Directors at the time of incorporation as per the Article 85C of Articles of Association and subsequently M/s.Annapurna, Venkata Lakshmi, R.L.N.Rao, Ch.Vijaya Lakshmi and D.N.S.Venkata Ramana Gupta were appointed to the Board of Directors. By September 2004, Annapurna, Srinivasa Rao and Venkata Lakshmi ceased to be the Directors. By that time, the authorized share capital of the company which stood at Rs.5,00,000/- divided into 5000 equity shares of Rs.100/- each was increased to Rs.2.00 Crores divided into two lakh shares of Rs.100/- each. Raghavaiah held 54430 shares and his son held 350 shares. Thus more than 25% of the Company’s share capital was held by Y.Raghavaiah and his son. Therefore, it can be presumed that the petitioner company was entirely the corporate face of Raghaviah. There cannot be any dispute on this. As noticed when the company was initially incorporated in 1998, I.Radhakrishna Murthy, his son Srinivasa Rao, who was also partner in Vizag firm were shareholders and indeed I.Srinivasa Rao was Director from May 1998 till September, 2001. So to say the