Group of Companies doctrine - Indian Laws - General

Group of Companies Doctrine i. Separate legal personality The phenomenon of group companies is the modern reality of economic life and business organisation. Group companies are a set of separate firms linked together in formal or informal structures under the control of a parent company. The group companies can be defined in the Indian context as an agglomeration of privately held and publicly traded firms operating in different lines of business, each of which is incorporated as a separate legal entity, but which are collectively under the entrepreneurial, financial, and strategic control of a common authority, typically a family, and are linked by trust-based relationships forged around a similar persona, ethnicity, or community. , Jayati Sarkar, Business Groups in India in Asli Coplan, Takashi Hikino, and James Lincoln (eds) The Oxford Handbook of Business Groups (2010) 299 A group company involving the parent and subsidiary companies are created for myriad purposes such as limiting the liability of the parent corporation, facilitating international trade, entering into business ventures with investors, establishing domestic corporate residence, and avoiding tax liability. The principle of separate legal personality has been the cornerstone of corporate law. In Salomon v. Salomon, [1897] AC 22 the House of Lords famously observed that a company is at law a different person altogether from the promoters, directors, shareholders, and employees. The principle of separate legal personality equally applies to corporate groups. A parent company is not generally held to be liable for the actions of the subsidiary company of which it is a direct or indirect shareholder. The Companies Act, 2013, 2013 Act has statutorily recognized a subsidiary company as a separate legal entity., Balwant Rai Saluja v. Air India, (2014) 9 SCC 407 Section 2(46) of the 2013 Act defines a holding company as a company of which one or more other companies are subsidiary companies. Section 2(87) defines subsidiary company to mean a company in which the holding company exercises control over the composition of the Board of Directors and has a controlling interest of at least 50 percent over the voting rights. Although a holding company owns a controlling interest in the subsidiary company, they are considered as separate legal entities. Group companies structures allow multinational corporations to structure their businesses at both the national and international level to leverage better returns for the investors and ensure business growth of the corporation. The group of companies doctrine has an independent existence as a principle of law which stems from a harmonious reading of Section 2(1)(h) along with Section 7 of the Arbitration Act; ii. Adopting a pragmatic approach to consent In the context of arbitration law, the intention of the parties has to be derived from the words used in the arbitration agreement. While construing the arbitration agreement, it is the duty of the court to not delve deep into the intricacies of the human mind, but only consider the expressed intentions of the parties., Kamla Devi v. Takhatmal Land, AIR 1964 SC 859; Bangalore Electricity Supply Co Ltd v. E S Solar Power (P) Ltd, (2021) 6 SCC 718 The words used in the contract reflect the commercial understanding between the parties. The intention of the parties has to be ascertained from the words used in the contract, considered in light of the surrounding circumstances and the object of such contract., Bank of India v. K Mohandas, (2009) 5 SCC 313; M Dayanand Reddy v. A P Industrial Infrastructure Corporation Ltd, (1993) 3 SCC 137. iii. Group of companies doctrine a fact based doctrine The group of companies doctrine is used in the context of companies which are related to each other by virtue of their being a part of the same corporate group. Since every company in a group has a separate legal personality, a contract formally entered by one member of a group will not be binding on the other members by virtue of the limited liability principle . The group of companies doctrine is used to bind a non-signatory company within a group to an arbitration agreement which has been signed by other member of the group., UNCITRAL, Settlement of Commercial Disputes: Possible uniform rules on certain issues concerning settlement of commercial disputes: conciliation, interim measures of protection, written form of arbitration agreement: Report of the Secretary General A/CN.9/WG.II/WP.108/Add.1 (26 January 2000) The underlying basis of the group of companies doctrine rests on maintaining the corporate separateness of the group companies while determining the common intention of the parties to bind the non-signatory party to the arbitration agreement. In other words, the group of companies doctrine is a means of identifying the common intention of the parties to bind a non-signatory to arbitration agreement by emphasizing and analysing the corporate affiliation of the distinct legal entities., Gary Born (n 44) 1563 The group of companies doctrine has been a subject of rigorous academic debate among practitioners of arbitration law and academics with domain expertise. The first view questions the necessity of adopting the doctrine by suggesting that the determination of consent in complex multi-party arbitration can be done on the basis of traditional contractual and commercial law theories. Professor Bernard Hanotiau suggests that the group of companies doctrine should be discarded because it has been used as a shortcut to avoid legal reasoning leading to a distorted approach by courts and arbitral tribunals., Hanotiau (n 85) 546. However, Professor Hanotiau does concede that the existence of a group of companies may be a relevant factual element to determine whether the conduct of a non-signatory party amounts to consent. iv. The determination of mutual intention In multi-party agreements, the courts or tribunals will have to examine the corporate structure to determine whether both the signatory and nonsignatory parties belong to the same group. This evaluation is fact specific and must be carried out in accordance with the appropriate principles of company law. Once the existence of the corporate group is established, the next step is the determination of whether there was a mutual intention of all the parties to bind the non-signatory to the arbitration agreement. The group of companies doctrine requires the courts and tribunals to consider the commercial circumstances and the conduct of the parties to evince the common intention of the parties to arbitrate. It is important to note that the group of companies doctrine concerns only the parties to the arbitration agreement and not the underlying commercial contract., Gary Born (n 44) 1567 Consequently, a non-signatory could be held to be a party to the arbitration agreement without becoming a formal party to the underlying contract. The existence of a group companies is one of the essential factors to determine whether the conduct amounts to consent but membership of a group is not sufficient in itself. This has been the consistent position of law, starting from the Dow Chemicals (supra) award, where it was observed that the common intention of the parties to bind the non-signatory party to the arbitration can be inferred from the circumstances that surround the conclusion and characterize the performance and later the termination of the contracts. In other words, it was held that a non-signatory party could be considered as a true party to the arbitration agreement on the basis of their role in the conclusion, performance, or termination of the underlying contract containing the arbitration agreement. Since the group of companies doctrine is a consent based theory, its application depends upon the consideration of a variety of factual elements to establish the mutual intention of all the parties involved. In other words, the group of companies doctrine is a means to infer the mutual intentions of both the signatory and non-signatory parties to be bound by the arbitration agreement. The relationship between and among the legal entities within the corporate group structure and the involvement of the parties in the performance of the underlying contractual obligations are indicators to determine the mutual intentions of the parties. The other factors such as the commonality of the subject matter, composite nature of the transactions, and the performance of the contract ought to be cumulatively considered and analysed by courts and tribunals to identify the intention of the parties to bind the non-signatory party to the arbitration agreement. The party seeking joinder of a non-signatory bears the burden of proof of satisfying the above factors to the satisfaction of the court or tribunal, as the case may be. COX AND KINGS LTD. VERSUS SAP INDIA PVT. LTD. ANR. - [ 2023 (12) TMI 427 - SUPREME COURT (LB) ]