Arbitral tribunal cannot lift corporate veil: Madras High Court

The Madras High Court has ruled that an arbitral tribunal does not have the power to lift the corporate veil of companies or attribute the obligations of one company to another [Sugesan Transport Vs EC Bose & Company Limited]..The lifting of a company's corporate veil refers to an exercise where a company's status as a separate legal person with limited liability is disregarded to examine who actually controls the company, in order to fix personal liability on such controlling persons. Justice N Anand Venkatesh held that such an exercise lies outside an arbitral tribunal's jurisdiction and violates the consent-based framework under Section 7 of the Arbitration and Conciliation Act, 1996."The Arbitral Tribunal certainly does not have the jurisdiction to lift the corporate veil since its jurisdiction is confined by the arbitration agreement. Even in a case of determining as to whether one entity is the alter ego of the other, this is conceptually the same like lifting the corporate veil. This exercise can never be done by the Arbitral Tribunal, which is a creature under an agreement with a limited jurisdiction to decide the dispute between the parties to the agreement as per the terms and conditions of the agreement," the Court held. .The Court delivered the judgment on November 26, while partly setting aside an arbitral award passed in a financial dispute between two companies, namely Sugesan Transport and EC Bose & Company. The two entities entered into a Memorandum of Understanding (MoU) on December 11, 2015, under which Sugesan advanced ₹2.5 crore to enable EC Bose to furnish a ₹3.52-crore performance bank guarantee required for a Kolkata Port Trust shore-handling contract. The amount was to be returned within 30 to 89 days, against a promissory note and a post-dated cheque. The money was not repaid, and the cheque was dishonoured.Sugesan then initiated arbitration proceedings, seeking the recovery of ₹2.5 crores with interest. EC Bose countered that the MoU was not a standalone financial transaction but part of a broader arrangement under which both parties agreed to execute the port contract together through a Special Purpose Vehicle (SPV) and share profits and losses. EC Bose also alleged that Sugesan was responsible for arranging equipment essential for the work.Notably, two MoUs, dated January 9 and February 9, 2016, were executed between EC Bose and an entity named Collate Consultants Pvt Ltd. concerning equipment supply. During the arbitral proceedings, the arbitrator treated Collate as an entity that was connected to Sugesan..The port contract was terminated on February 10, 2016, for a failure to mobilise equipment, and the bank guarantee was encashed. EC Bose then filed a counterclaim for ₹75 crores for an alleged loss of earnings.Before the arbitral tribunal, Sugesan maintained that the 2015 MoU was purely a short-term financial arrangement and imposed no equipment-supply obligations on it. The tribunal, however, treated Collate Consultants (which was responsible for equipment supply) as effectively connected to Sugesan. It, therefore, held Sugesan responsible for the failure to supply equipment and awarded EC Bose ₹3.52 crore as damages. It also directed EC Bose to repay ₹2.5 crore without interest.Sugesan moved the High Court, challenging the arbitrator's directive to pay EC Bose damages.The Court held that the arbitrator had erred in treating Collate as being connected to Sugesan and fixing liability on Sugesan on such a ground. The Court noted that the arbitrator had no power to engage in lifting Collate's "corporate veil" to conclude that it was Sugesan's alter ego or to hold that its liabilities were actually liabilities that could be imposed on Sugesan. .The High Court found:The 2015 MoU between EC Bose and Sugesan did not impose any equipment-supply obligation on Sugesan; Collate Consultants was not a party to the arbitration agreement; and Both NCLAT and the Supreme Court had already held that the MoU was a standalone financial transaction..“This Court has to reiterate the finding that the MoU dated 11.12.2015 constituted an independent financial arrangement between the parties de hors the other terms of the MoU.” the Court said..Finding the invalid portion of the arbitral award severable, the Court modified the award rather than setting it aside in full. It directed EC Bose to repay ₹2.5 crores to Sugesan Transport along with 12 per cent interest per annum from December 11, 2015, until actual payment.However, the award of ₹3.52 crore damages in favour of EC Bose was set aside. The petition was partly allowed on these terms..Advocates Nithyaesh Natraj, briefed by M/s.Nithyaesh & Vaibhav, appeared for Sugesan Transport Private Ltd.Advocate J Ravikumar appeared for EC Bose & Company Pvt. Ltd..[Read Judgment].Follow Bar and Bench channel on WhatsAppDownload the Bar and Bench Mobile app for instant access to the latest legal news.