Enforcement of Judgements and Awards Against Non-Parties

Over a century and a half ago, the Privy Council lamented that "the difficulties of a litigant in India begin when he has obtained a decree" (The General Manager of the Raj Durbhunga, under the Court of Wards v Maharajah Coomar Ramaput Sing, (1871-72) 14 MIA 605). Since then, this observation has become a recurring refrain in orders issued by executing courts across India. Courts frequently cite the Privy Council’s remark to underscore their own inability to aid decree-holders in pursuing judgment-debtors who employ innovative methods to evade enforcement proceedings.

Successful parties in legal battles often face the daunting challenge of recovering their dues from counterparties who have strategically rendered themselves nearly insolvent, or devoid of unencumbered assets. This predicament occurs frequently, even when the promoters, shareholders or directors of the judgment debtor control substantial financial resources elsewhere.

Challenges to enforcement against third parties

The doctrines of "separate corporate personality" and "limited liability" are entrenched in India’s jurisprudence (Commissioner of Income Tax, Calcutta v Messrs Associated Clothiers Ltd., Calcutta, AIR 1963 Cal 629). These doctrines have historically prevented executing courts from enforcing claims against the shareholders, directors, or promoters of a debtor incorporated with limited liability.

Furthermore, in cases where debtors, regardless of their corporate structure, engage in fraudulent transactions to shield their assets from the reach of creditors, decree-holders often find little relief in Order XXI of the Civil Procedure Code, 1908 (CPC). Unfortunately, Order XXI of the CPC which primarily governs execution proceedings, does not contain a direct provision to seek claw-back assets of the judgment-debtor that have been dissipated to avoid execution.

How have litigants sought to overcome these challenges?

To address these challenges, litigants have asked executing courts to adopt new doctrines and precepts that would assist them in:

• piercing the corporate "veil" of corporate judgement-debtors, thereby holding their directors, shareholders, promoters (or even their managers) jointly and severally liable for the company’s debts – even if this claim arises only during execution proceedings; and
• tracing assets held by third parties who appear to have acquired them without bona fide intentions or at non-market rates from the judgement-debtor. This includes recovering properties deliberately diverted to such parties, or transferred by the judgment-debtor at undervalued rates, during or in anticipation of litigation.

This Article will explore recent trends in India concerning the pursuit of third parties in enforcement proceedings, considering both the above scenarios.

Piercing the corporate veil in execution proceedings

The separate legal character of a limited liability company, noted most famously in Salomon v Salomon and Co. (1897 AC 22), was recognised in India even earlier (In re: Kondoli Tea Co. Ltd., ILR (1886) 13 Cal 43). However, as noted by the Bombay High Court in Bhatia Industries & Infrastructure Limited v Asian Natural Resources (India) Limited and others ([2017] 201 Comp Cas 46 (Bom)), the doctrine of "lifting of the corporate veil" is both expanding and unlimited, its applicability being dependent "on the realities of the situation".

Lifting the corporate veil to achieve "complete justice"

The Supreme Court of India has the power to do "complete justice" between parties, by invoking Article 142 of the Constitution of India, 1950. The Court has exercised this extraordinary jurisdiction on occasion, to lift the corporate veil of a debtor-company before it.

In Delhi Development Authority v Skipper Construction Company ((1996) 4 SCC 622), the Supreme Court invoked its powers under Article 142 to attach a valuable property in the Lutyens zone of Delhi held in the name of one Tej Properties Pvt. Ltd. The purpose was to enforce fines against a former Director of Tej, who was also closely involved with Skipper Construction Company, which was the contemnor in the case. Although the fines were payable by Skipper, the Court observed that:

"[t]he 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 to enable it to pass appropriate orders to do justice between the parties concerned".

Citing the above precedent, in Formosa Plastic Corporation Ltd. v Ashok Chauhan and others (76 (1998) DLT 817), the Delhi High Court ruled that an Indian executing court has the authority to require parties to present evidence to determine whether assets held by respondents who are newly impleaded in execution proceedings, and who claim to be "independent trusts, foundations, and companies associated with the defendants", can be attached and sold to satisfy a decree against the original defendant. The court emphasised the relevance of examining whether assets were acquired by the judgment-debtor under fictitious or fraudulent names to evade creditors. However, though it observed that it possesses the power to lift the corporate veil to achieve "complete justice" (citing the Supreme Court’s precedent in DDA v Skipper Construction Company (supra)), the High Court did not discuss how such powers – which were exercised by the Supreme Court by invoking its extraordinary jurisdiction under Article 142 of the Constitution – could also be exercised by the High Court.

Enforcement against directors, promoters and shareholders under the authority of the CPC

Even under Order XXI of the CPC, courts have on occasion looked beyond the distinct legal character of the corporate entity in question. In doing so, courts have in specific circumstances allowed decrees and arbitral awards to be executed against directors, promoters and shareholders of a corporate judgment debtor.

In Jawahar Lal Nehru Hockey Tournament Society v Radiant Sports Management Pvt. Ltd. (2008 SCC OnLine Del 1798), a Division Bench of the Delhi High Court authorised the auction sale of a director’s private property in execution proceedings. This decision was based on the director having previously offered the property as security to the court, and not objecting to its attachment during a prior stage in the legal dispute.

In v K. Uppal v Akshay International Pvt. Ltd. (MANU/DE/0320/2010), the Delhi High Court held that piercing the corporate veil is not permissible unless there are specific allegations of fraud or improper conduct in the incorporation of the corporate entity to evade legal obligations. The court also ruled that a voluntary part-payment made by an individual director of a debtor company from personal funds to satisfy a portion of a decree against the corporation would not entitle the decree-holder to demand similar relief from other directors.

However, in Sai Sounds Pvt. Ltd. v Kiran Contractors Pvt. Ltd. ([2016]199 Comp Cas 636 (P&H)), the High Court of Punjab and Haryana ruled that the corporate veil could be pierced in the case of a closely-held company during execution proceedings, especially if there was evidence of fraud by the judgment-debtor aimed at circumventing court processes. The court was persuaded by the fact that the company was the sole entity pursuing legal remedies on behalf of its purportedly aggrieved director, suggesting that the distinction between them had become indistinct or "effaced". The Court was also swayed by personal undertakings that the managing director had offered the appellate court, when seeking stay of the decree on behalf of the Company at an earlier stage in the dispute. These factors were held to justify lifting the corporate veil to enforce the decree against him personally.

In Bhatia Industries (supra), a Division Bench of the Bombay High Court identified eight scenarios where a company’s separate corporate personality could be disregarded by courts – including, when warranted by circumstances, in execution proceedings. In this case, the Court determined that piercing the corporate veil was appropriate, as the appellant entity was operating as a "single economic entity" with the award-debtor and was promoted by the same corporate group. The finding that parties constituted a single economic entity was based on their common registered addresses, common email IDs, common brand and logos, intermingling of assets, multitude of related-party transactions (including inter-corporate deposits), common employees and personnel, and so on.

In Balmer Lawrie and Co. Ltd. v Saraswathi Chemicals (Proprietors: Saraswathi Leather Chemicals Pvt. Ltd.), 2017 DHC 1587, the Delhi High Court observed that while an executing court could pierce the veil of the judgment-debtor, it would do so only to recover the debtor’s own assets that had been "secreted, siphoned off, or by a fraudulent device ostensibly placed outside the control of the judgment debtor, in an endeavour to frustrate the enforcement of the decree." The court noted that if no fraud was established and if allegations of asset-siphoning by the Directors were vague and unsupported, the executing court would be reluctant to proceed against third parties.

The approach adopted in Balmer Lawrie was followed by the Bombay High Court in Custodian v Mid-East Engineering Co. Bombay Ltd. and others (2019 SCC OnLine Bom 156), where the Court found the allegations of fraudulent conduct against the Directors of the Company to be superficial.

Conversely, however, in Mitsui OSK Lines Ltd. v Orient Ship Agency Pvt. Ltd. and others (2020 SCC OnLine Bom 217), a Single Judge of the Bombay High Court held that it is altogether impermissible in execution proceedings to lift the corporate veil to add parties who were not involved in the arbitration agreement or in the foreign award being enforced. Despite extensive allegations by the award-creditor of questionable asset transfers by the award-debtor to associate companies and promoters, the Court ruled that these were disputed facts requiring trial in a separate proceeding.

In Delhi Airport Metro Express Private Limited v Delhi Metro Rail Corporation Ltd. (2023 SCC OnLine Del 1619), the Delhi High Court noted that since the two principal shareholders of the debtor undertaking were sovereign entities (governments), the debtor must be recognised as a mere alter-ego of its shareholders. The Court emphasised that "fraud, façade, or sham" are not the sole criteria for lifting the corporate veil; the court may also do so in cases involving "public policy, public interest, or enforcement of settled legal obligations." The Court found that the decision to lift the veil was justified by the fact that the two shareholder entities exercised "absolute control" over the debtor corporation and were its "directing minds." However, the underlying award in this case has since been set aside by the Supreme Court.

In sum, notwithstanding the absence of a specific power under Order XXI of the CPC, based on the circumstances involved, executing courts have been open to lift the corporate veil in cases where:

• fraud by the judgment debtor is apparent;
• where the judgment debtor has actively conspired to keep its assets outside the creditor’s reach;
• where the judgment debtor has unity of economic interest with solvent related parties; or
• where it is deemed necessary in the public interest (as in the case of claims against government-controlled undertakings).

Tracing assets suspected to have been transferred fraudulently or for insufficient value to third parties

Order XXI of the CPC is intended to operate as a comprehensive procedural code for civil courts in enforcing decrees and awards in civil disputes. However, the CPC lacks explicit provisions for asset tracing or adjudicating whether judgment-debtor entities have engaged in undervalued or fraudulent transactions with third parties so to defeat creditors’ claims. Traditionally, such allegations have been addressed under criminal law, a practice that continues under Sections 320 to 323 of the Bharatiya Nyaya Sanhita, 2023 – India’s new penal code ("Sanhita").

The Sanhita provides for criminal prosecution for offenses including:

• dishonestly or fraudulently removing or concealing property to prevent distribution among creditors;
• dishonestly or fraudulently preventing debts from being available to creditors;
• dishonest or fraudulent execution of deeds of transfer with false statements of consideration; and
• dishonest or fraudulent removal or concealment of property.

However, criminal courts require a standard of proof that is significantly higher than that needed to establish a civil wrong, and a conviction before a criminal court does not necessarily guarantee recovery for the complainant. Given these limitations of the criminal law, and the lack of provisions in the CPC to address asset-dissipation, there is a growing trend of successful decree-holders turning to India’s new bankruptcy law – the Insolvency and Bankruptcy Code, 2016 (IBC). This allows them to leverage the more robust powers of the National Company Law Tribunals (NCLTs) to set aside preferential, fraudulent and undervalued transactions in insolvent companies.

Remedies under the IBC are available only in respect of corporate debtor entities which are:

• amenable to the jurisdiction of the IBC; and
• where the debt owed is more than the prescribed monetary threshold (presently INR10 million).

However, when these conditions are met, decree-holders may prefer initiating insolvency resolution proceedings against defaulting debtor entities, rather than pursuing them in the execution courts – especially in cases involving asset-stripping and dissipation of funds. This is because the NCLTs have the authority to scrutinise questionable transactions that contributed to insolvency, which executing courts do not.

Example of use of the IBC by decree-holders

In Dena Bank (now Bank of Baroda) v C. Shivakumar Reddy and another ((2021) 10 SCC 330), the Supreme Court held that a judgment or decree for money obtained by a financial creditor from a Debt Recovery Tribunal or any other tribunal or court constitutes a "financial debt", providing a fresh cause of action that allows the creditor to initiate proceedings under the IBC.

However, in Jai Balaji Industries v D. K. Mohanty and another (2021 SCC OnLine SC 3104), it was noted that where an arbitral award had been duly challenged by a corporate debtor before a competent court, the creditor could not initiate insolvency proceedings, as his claim would not be free from "pre-existing disputes" (which disentitles "operational creditors" – ie, suppliers of goods or services to the corporate debtor – from initiating actions under the IBC).

The Supreme Court has permitted homebuyers who receive decrees from the Real Estate Regulatory Authority (affirming their entitlement to refunds or damages due to project delays) to claim equality in status as "creditors" alongside homebuyers who choose to pursue claims for unit allotments, and to thus equally seek recourse under the IBC (Vishal Chelani v Debashis Nanda, (2023) 10 SCC 395).

Recently, the Delhi High Court in Tata Steel BSL Limited v Venus Recruiter Private Limited (2023/DHC/000257) has held that the adjudication of an "avoidance application" can survive the conclusion of the corporate insolvency resolution process, as it is aimed at swelling the asset pool of the corporate debtor. It noted that if additional funds are made available for distribution to creditors, it would prevent the unjust enrichment of one party at the expense of other creditors – and thus advance the goals of the IBC. As such, asset-tracing under the IBC remains possible even where a resolution plan for an insolvent company has been successfully adopted.

The NCLTs are wary of allowing the IBC process to substitute ordinary execution actions, and hence creditors are required to assess whether the financial situation of the corporate debtor truly calls for an "insolvency resolution process" to be commenced. The decision to pursue remedies under the IBC is usually predicated on factors such as:

• the maintainability of a claim before the NCLT, given the threshold value of claim prescribed under the IBC;
• the convenience of litigating at the jurisdictional NCLT where the debtor has its registered office;
• the number of other potential claimants against the debtor company;
• the chances of making an actual recovery if an avalanche of claims is triggered by the commencement of an insolvency action; and
• the imperative for the decree-holder to seek setting aside of questionable transactions to make any meaningful recovery.

Conclusion

Remedies evolved under judicial precedent offer less confidence to litigants than statutory remedies. Over the past 30 years, through precedent, India’s higher courts have offered differing yardsticks to examine whether third parties can be pursued in enforcement actions, and whether the corporate structure of a judgment debtor can be disregarded so as to enable enforcement of claims against its stakeholders.

As seen in Mitsui OSK Lines Ltd. (2017), the executing court at Bombay was not convinced about its own jurisdiction to examine claims against non-parties to an arbitral award – even when presented with material to suggest that the debtor had engaged in questionable transactions with related parties. Its ruling requiring the successful award-creditor to once again establish its case against the third parties in a separate trial is a noticeable setback, in the broader trend of cases that have otherwise expanded the executing court’s powers to lift the corporate veil. Amendments to the CPC, or to the Companies Act, to set out exactly when the corporate veil can be pierced (in enforcement proceedings and otherwise) will give some welcome clarity to the legal position.

The CPC also requires urgent amendments to expressly empower executing courts to embark on asset-tracing enquiries, and to implead third parties and claw-back assets from them which have been diverted to them by the judgment-debtor under fraudulent or sham transactions. At present, if the IBC cannot be invoked, these remedies are not available in India’s civil jurisprudence, while a higher threshold needs to be met to trigger criminal action (whose eventual result may also only be a pyrrhic victory).