Environmental Piercing of Corporate Veil: Assessing the Liability of Directors and Parent Companies
Tanmay Gupta and Prerna Sengupta are third-year students at NALSAR University of Law.
In Australia, the New South Wales Parliament recently approved certain amendments to its key environmental legislation. These amendments will substantially augment the liability of the directors and related corporate bodies of corporations convicted of environmental offences. On such a conviction, the company’s directors and/or associated corporate entities can now be ordered to pay to the Environment Protection Authority an amount representing the monetary benefit that the individual/entity obtained as a result of the offence. The general trend in Australia has been to attribute liability for such offences only when the director/entity is unable to demonstrate the performance of due diligence on their part, a claim that was already subjected to deep scrutiny by courts (1). By eliminating this defence of due diligence as well, these amendments mark a momentous step towards guaranteeing adequate compensation for the environmental harm caused by these corporations. In light of this development, the authors critically examine the Indian framework pertaining to the imposition of liability on directors and parent companies of corporations convicted for environmental offences by calling for a stricter approach to appositely address such offences.
In cases of environmental law violations by companies, two principal stakeholders must be considered while imposing liability – the company directors and the parent company when the violation is committed by its subsidiary. Jurisprudence in this area points towards various theories used by courts to impose liability on companies. In this article, the authors attempt to assess this liability by considering the use of the ‘piercing the corporate veil’ theory.
The doctrine of the corporate veil states that the status of a company as a juristic person is separated from the role played by its shareholders and officers for the purpose of granting rights and imposing liabilities. This was first laid down in the English case of Salomon v. Salomon in 1897. In environmental law cases, this doctrine has been used time and again to ascertain the liability of directors and parent companies.
Lacunae in the Current Indian Legal Framework
With respect to directors, even though Indian law imposes both civil and criminal liabilities under various statutes such as the National Green Tribunal Act, Water (Prevention and Control of Pollution) Act, 1974, Environment (Protection) Act, 1986, and Air (Prevention and Control of Pollution) Act, 1981, their lack of thorough consideration of all issues and ineffective enforcement have largely restricted their potency. These statutes impose liability on any person who was responsible for the conduct of business of the company, at the time of the offence. However, if the offence was committed without their knowledge or if they exercised all due diligence to prevent the commission of that offence, they will not be held liable.
This standard of liability has been reinforced in cases such as S.B. Mittal v. CBI where the Supreme Court held that persons responsible for the conduct of a company can be held criminally liable for the actions of a company if there is a statute to back the same. This cannot be extended to independent or non-executive directors, unless there is sufficient evidence against them, as they are not responsible for the day-to-day management of the company.
Apart from statutory liability, absolute liability can be imposed on a company when harm is caused by the escape of any hazardous or inherently dangerous material. As seen in the LG Polymers ‘gas leak’ case, this liability was extended to the directors and senior officers of the company who were not allowed to enter the company premises and were ordered to surrender their passports to the court.
In India, liability is attached to corporate officers only if the commission of the offence took place on account of their negligence, or with their consent or connivance. Hence, the relevant environmental statutes mentioned above essentially adopt a fault-based approach. This is in contrast to the general trend of inclination towards attributing strict liability by legislations of other countries such as the US and Canada. In the US, there is virtually no condition of the establishment of criminal intent for the culpable corporate officers to be held liable (2). As regards the environmental legislation in Canada, it does not even entail a proper mens rea requirement (3). In fact, it imposes a positive obligation on the directors to ensure compliance with the provisions of the legislation so as to minimize the possibility of inflicting any environmental harm.
In addition to these countries, it is pertinent to note the relevant environmental legislations in the UK that have provisions similar to those of India with regard to the liability of directors for corporate environmental offences. Although these provisions ostensibly attribute fault-based liability, they are complemented by a very stringent attitude of the UK courts towards corporate compliance with environmental regulations. The courts practically allow no scope for negligence from the corporate officers and are highly averse to finding that environmental harm was caused without any involvement of the concerned directors. A stricter approach that does not afford the directors any room for complacence would compel them to not only conform to their mere formal obligations but also actively make effort towards ensuring the company does not indulge in activities contributing to environmental deterioration. Hence, the corporate environmental offence landscape in India must espouse the principle of integration at the boardroom level, and change the basis of attributing liability to directors from a fault-based approach to a relatively stricter approach that is now being embraced by a multitude of developed nations.
The corporate veil can also be lifted to hold the parent company liable if the violation is done by a subsidiary company. However, the jurisprudence concerning the piercing of the corporate veil in this sense appears to be lost “in the mists of metaphor”. In LIC v. Escorts Ltd., the court held that liability can be imposed where the associated companies are “inextricably connected as to be, in reality, part of one concern.” This test was used by the Supreme Court in State of U.P. v. Renusagar Power Co. where they held that the subsidiary company did not have any existence independent of the parent company, and the corporate veil was hence lifted. While this test was fundamentally based on the premise of the degree of control exercised by the parent company, in Balwant Rai v. Air India, the apex court pronounced that simply demonstrating control of the parent company is not sufficient to compel it to pierce the corporate veil. Moreover, although Union Carbide Corporation, the parent company of Union Carbide India Limited, was directed to pay $470 million in the Bhopal gas leaks case, no explicit rule of lifting the corporate veil was laid down in this case.
Need to Alter the Status Quo of Indian Laws
Clearly, there exists an exigent need for the formulation of a basic framework comprising the essential considerations that courts must take into account before lifting the corporate veil, as was done by the English Supreme Court in Vedanta v. Lungowe. In this case, the Court had highlighted the following grounds in determining the liability of the concerned parent company towards its subsidiary: single or joint control over the subsidiary’s operations; promulgation of inadequate safety regulations for the subsidiary to execute; subsidiary’s adherence to the regulations formulated by the parent company; and, the parent company’s own admission that it exercised a certain degree of control and supervision over the subsidiary. Although the factors delineated by the Court cannot be deemed to be exhaustive, they are suggestive enough to at least provide some clarity that is absent in the Indian jurisprudence in this regard.
Furthermore, it is crucial that such a framework does not simplistically regard factors such as degree of control as conclusive, as has been done in most of the veil-piercing cases such as Adams v. Cape, Prest v. Petrodel, and Amoco Cadiz. Such a facile framework allows parent companies to avoid liability by willfully relinquishing control and delegating dangerous operations to the subsidiary while having awareness and failing to perform due care. For instance, establishing a subsidiary to handle rubbish disposal without the parent company actively overseeing or regulating the company's waste disposal system is a well-known approach for avoiding corporate environmental liabilities. Liability for any adverse effects of the subsidiary's activities on the environment cannot then be imputed to the parent company on account of the absence of active control as per the veil-piercing requirements. Therefore, a lucid framework formulated in the Indian scenario must also give due consideration to the de facto management of the parent. This would allow the employment of the doctrine even when the parent companies have deliberately circumvented direct auditing or supervision of the subsidiary.
(1) Taberner and Gibb, Emerging Trends in Environmental Law – Non-fault Liability 179 (Reuter 1991).
(2) Calland and Schltessner, Trends and Developments in Corporate Environmental Liability and Responsibility: A United States/European Union Comparison 75 (H. Enmarch-Williams 1996).
(3) Horton and Ritchie, Liability of Company Directors 137 (Campbell & Campbell 1993).